<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1997
REGISTRATION STATEMENT NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HYSEQ, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 2835 36-3855489
<CAPTION>
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
670 ALMANOR AVENUE, SUNNYVALE, CALIFORNIA 94086 (408) 524-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
LEWIS S. GRUBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
670 ALMANOR AVENUE, SUNNYVALE, CALIFORNIA 94086 (408) 524-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
WILLIAM N. WEAVER, JR. DAVID J. SEGRE
SACHNOFF & WEAVER, LTD. WILSON SONSINI GOODRICH & ROSATI
30 S. WACKER DRIVE, 29TH FLOOR 650 PAGE MILL ROAD
CHICAGO, ILLINOIS 60606-7484 PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE NO. (312) 207-1000 TELEPHONE NO. (415) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF OFFERING AGGREGATE
SECURITIES AMOUNT TO BE PRICE PER SHARE OFFERING PRICE AMOUNT OF
TO BE REGISTERED REGISTERED (1) (2) (2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value 3,162,500 shares $14.00 $44,275,000 $13,417
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 412,500 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457 solely for the purposes of computing the
registration fee.
----------------
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, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 12, 1997
PROSPECTUS
2,750,000 SHARES
[LOGO OF HYSEQ INC. APPEARS HERE]
COMMON STOCK
------------
All of the 2,750,000 shares of Common Stock offered hereby are being sold by
Hyseq, Inc. ("Hyseq" or the "Company"). Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made for
inclusion of the Common Stock for quotation on the Nasdaq National Market under
the symbol "HYSQ."
Concurrent with this offering, Chiron Corporation ("Chiron") and The Perkin-
Elmer Corporation ("Perkin-Elmer") have agreed to purchase shares of Common
Stock directly from the Company at a price per share equal to the price to
public less one-half of the underwriting discounts and commissions applicable
to the shares of Common Stock being offered to the public hereby, for an
aggregate purchase price of approximately $2.5 million and $5.0 million,
respectively, pursuant to an existing agreement with the Company (the "Private
Placement"). See "Business--Collaborative and Other Arrangements."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $750,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
412,500 additional shares of Common Stock on the same terms and conditions
set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
------------
The shares of Common Stock offered by this Prospectus are being offered by
the Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
certificates representing the shares of Common Stock will be made at the
offices of Lehman Brothers Inc., New York, New York, on or about , 1997.
------------
LEHMAN BROTHERS
SMITH BARNEY INC.
FAHNESTOCK & CO. INC.
, 1997
<PAGE>
[GRAPHICS APPEARS HERE]
This Prospectus contains certain forward-looking statements (within the
meaning of the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results and performance could
differ materially from the results expressed in or implied by these forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON
STOCK FOLLOWING THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR MAINTAIN THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY
BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
----------------
Hyseq(R) is a registered trade and service mark of the Company; HyChip(TM),
HyGenomics(TM), HyGnostics(TM) and HyX(SM) are trade and service marks of the
Company. All other trademarks, service marks and trade names referred to in
this Prospectus are the property of their respective owners.
2
<PAGE>
[GRAPHICS APPEAR HERE]
A color schematic diagram entitled "Hyseq HyX Platform Technology". Five
photographs are arranged in a circle, connected by arrows in a counterclockwise
direction, beginning from the photograph in the top left corner. Moving
counterclockwise, the photograph in the top left corner is of a Hyseq pipetting
robot and the caption reads "Pipetting Robot - Sample Preparation". The next
photograph is of a Hyseq spotting robot and the caption reads "Spotting Robot -
DNA Array Manufacture". The next photograph is of a Hyseq hybridization robot
and the caption reads "Hybridization Robot - Hybridization Probing". The next
photograph is of a sample Hyseq HyGnostics Array and the caption reads "Computer
Image of HyGnostics Array - Imaging of Results". The next photograph is of a
sample Hyseq sequence image and the caption reads "Computer Image of Sequence -
Analysis of Results".
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Prospectus. Unless indicated otherwise, the information contained in
this Prospectus: (i) assumes that the Underwriters' over-allotment option is
not exercised; (ii) assumes completion of the proposed sale of shares of Series
B Preferred Stock on or about June 20, 1997, subject to approval by The Perkin-
Elmer Corporation board of directors; (iii) gives retroactive effect to the
conversion of the Company's Series A Preferred Stock and Series B Preferred
Stock to Common Stock, par value $.001 per share (the "Common Stock"),
immediately prior to the completion of this offering; and (iv) gives
retroactive effect to a subsequent 1.92-for-1 split of the Company's shares of
Common Stock, to be effected before the completion of this offering. Unless
otherwise indicated, all references to the "Company" or "Hyseq" include Hyseq,
Inc. and its subsidiary.
THE COMPANY
Hyseq, Inc. ("Hyseq" or the "Company") applies the proprietary DNA array
technology of its integrated HyX genomics platform (the "HyX Platform") to
develop gene-based therapeutic product candidates and diagnostic products and
tests. The Company believes that its HyX Platform, which utilizes the Company's
proprietary sequencing by hybridization ("SBH") technology as its foundation,
generates higher gene sequence throughput with greater analytical flexibility
and accuracy and lower cost than prevailing technologies. The HyX Platform's
Gene Discovery Module presently is analyzing human DNA samples at a rate of
approximately 400,000 partial sequences per month, representing approximately
50% of a module's current capacity. Based in part on this rate of analysis and
on published industry information, the Company believes that its HyGenomics
Database of partial gene sequences is one of the largest proprietary human gene
databases in the world. The Company has collaborative agreements with Chiron
Corporation ("Chiron") in gene discovery and The Perkin-Elmer Corporation
("Perkin-Elmer") regarding commercialization of its HyChip products, and
initial agreements with SmithKline Beecham Clinical Laboratories, Inc.
("SmithKline Beecham") and Quest Diagnostics Incorporated ("Quest") regarding
evaluation of its HyGnostics Module for commercial-scale diagnostic testing.
In 1996, sales of human gene-based products (e.g., therapeutic proteins),
including erythropoietin, human insulin, granulocyte colony stimulating factor
and tissue plasminogen activator, totaled over $6 billion. The large market
potential for gene-based products has led to a worldwide effort to discover and
sequence the estimated 150,000 genes in the human genome. Industry experts
believe that after genes are discovered and sequenced, many additional years of
research will be required to determine their functions and roles in disease. To
date, genomics companies have relied primarily on gel-sequencing technology and
expressed sequence tags ("ESTs") to identify genes and obtain sequence
information.
The Company believes that the ability of its HyX Platform to process millions
of samples per year and sequence billions of bases per year represents a
fundamental advance in performing genomic experimentation, gene discovery, gene
function analyses and diagnostic testing in commercial-scale volumes. The HyX
Platform includes (i) a comprehensive set of labeled DNA probes; (ii) DNA
arrays of samples and probes; (iii) three software-driven modules (Gene
Discovery, HyGnostics and HyChip Modules), which enable user-driven DNA probe
selection to customize the level and type of analysis; (iv) industrial robotics
systems for screening DNA probes against DNA samples; and (v) bioinformatics to
manage and analyze genetic information. These combined technologies enable
Hyseq to conduct a range of genomic applications, including gene
identification, expression level determination, gene interaction studies,
polymorphism screening, diagnostic testing and genetic mapping on one
integrated platform.
3
<PAGE>
The HyX Platform's software-driven modules include:
. Gene Discovery Module. Designed to screen or sequence large numbers of
human DNA samples (typically, 30,000 to 50,000 samples per batch) for
gene discovery, gene function analysis and genomic experimentation. Hyseq
uses the Gene Discovery Module internally to identify proprietary gene-
based therapeutic candidates in the central nervous system,
cardiovascular and infectious disease areas and therapeutic product
candidates which impact cell receptors. The Company has an exclusive
collaboration with Chiron to develop therapeutics, diagnostic molecules
and vaccines relating to a specified disease area.
. HyGnostics Module. Designed to screen or sequence small to medium numbers
of DNA samples (typically, 10 to 1,000 samples per batch) for diagnostic
applications, including DNA testing of genetic and infectious disease and
cancer. The Company is currently marketing its HyGnostics Module to major
clinical reference laboratories. The Company has entered into initial
agreements with SmithKline Beecham and Quest, two of the three largest
clinical reference laboratories in the United States, relating to
evaluation of the HyGnostics Module for commercial-scale diagnostic
testing.
. HyChip Module. Designed to screen or sequence DNA samples in a single
reaction with a capacity ranging in size from the detection of single
base mutations to the sequencing of entire viral genomes. Hyseq is
presently using the HyChip Module internally for research applications.
The Company has an exclusive collaboration with Perkin-Elmer to co-
develop and commercialize gene-sequencing systems targeted at specific
DNA research and diagnostic applications utilizing HyChip products and
Perkin-Elmer's life science system capabilities.
Hyseq's strategy is to engage in large-scale gene discovery and to establish
collaborations to facilitate development and commercialization activities.
Hyseq believes that this research- and partner-driven approach may create
significant operational and financial advantages for the Company and accelerate
commercial development of new therapeutic and diagnostic products. In
therapeutics, Hyseq's strategy is to (i) discover candidates and then
collaborate to develop gene-based pharmaceuticals, including therapeutic
proteins, small molecules, gene therapy, antisense and other products, which
can be used to impact cell receptor targets and treat central nervous system,
cardiovascular and infectious diseases; (ii) develop disease-related programs,
such as the Company's program with Chiron, in conjunction with collaboration
partners; and (iii) perform genomic experimentation in commercial-scale volumes
by screening large numbers of DNA samples for expression levels under various
conditions and by large-scale partial sequencing of samples to find disease-
related polymorphisms. In diagnostics, Hyseq's strategy is to (i) expand its
HyGnostics Module licensing program to leading clinical reference laboratories
for multiple DNA analyses, including sequencing diagnostics, point mutation,
detection, population screening and confirmatory assays; (ii) market the
HyGnostics Module to pharmaceutical and biotechnology companies and clinical
research organizations as a resource for potentially accelerating clinical
trials; and (iii) commercialize HyChip products through its collaboration with
Perkin-Elmer.
Hyseq intends to patent commercially relevant genes and gene-based products
obtained through application of its HyX Platform. The Company believes that
information about the biological function of genes is critical to obtaining
such patents. Further, the Company believes that the HyX Platform's ability to
perform complete sequencing rapidly and cost effectively may accelerate the
characterization of gene function and enhance the discovery and development of
new therapeutic product candidates and diagnostic products and tests. The
Company has three issued U.S. patents and several pending patent applications
covering SBH technology and the use of its proprietary DNA array technology.
Several other pending patent applications cover apparatus and applications of
its technology and a number of partial gene sequences identified in its gene
discovery program.
4
<PAGE>
THE OFFERING
Common Stock offered by the 2,750,000 shares
Company........................
Common Stock to be outstanding
after the offering............. 12,127,418 shares(1)
Use of Proceeds................. Development of potential therapeutic product
candidates and diagnostic tests, expansion of
the HyGenomics Database, further development
of the HyChip Module, investments in capital
equipment and leasing of additional space to
increase capacity and general corporate
purposes, including working capital. See "Use
of Proceeds."
Proposed Nasdaq National Market HYSQ
symbol.........................
- --------
(1) Includes an aggregate of 597,849 shares of Common Stock (based on an
assumed initial public offering price of $13.00 per share in this offering)
to be issued to Chiron and Perkin-Elmer in the Private Placement. Excludes:
(i) 645,619 shares of Common Stock issuable upon exercise of vested options
outstanding at a weighted average exercise price of $2.27 per share; (ii)
692,847 shares of Common Stock issuable upon exercise of warrants
outstanding at a weighted average exercise price of $3.81; (iii) 747,848
shares of Common Stock issuable upon exercise of options outstanding but
not vested; and (iv) 501,765 shares reserved for issuance upon exercise of
options that may be granted in the future under the Company's Stock Option
Plan and Non-Employee Director Stock Option Plan. See "Management and
Scientific Advisory Board--Stock Option Plans and Agreements," "Description
of Capital Stock" and Note 7 of Notes to Consolidated Financial Statements.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
AUGUST 14, 1992 ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------ ------------------------
1993 1994 1995 1996 1996 1997
--------------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Contract revenues....... $ -- $ 50,000 $2,127,000 $ 426,099 $ 78,327 $ 272,373
Operating expenses:
Research and develop-
ment.................. -- 850,707 1,811,212 3,735,925 946,324 1,306,233
General and administra-
tive.................. 511,755 1,477,664 937,656 1,749,086 400,670 931,298
--------- ----------- ---------- ----------- ----------- -----------
Total operating ex-
penses............... 511,755 2,328,371 2,748,868 5,485,011 1,346,994 2,237,531
--------- ----------- ---------- ----------- ----------- -----------
Loss from operations.... (511,755) (2,278,371) (621,868) (5,058,912) (1,268,667) (1,965,158)
Interest income (ex-
pense), net............ 2,473 15,926 20,604 219,977 (5,840) 49,093
--------- ----------- ---------- ----------- ----------- -----------
Net loss................ $(509,282) $(2,262,445) $(601,264) $(4,838,935) $(1,274,507) $(1,916,065)
========= =========== ========== =========== =========== ===========
Pro forma net loss per $(0.52) $(0.21)
share(1)............... =========== ===========
Shares used in computing
pro forma net 9,403,000 9,067,000
loss per share......... =========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 4,743,260 $14,743,260 $54,740,760
Total assets........................ 7,549,233 17,549,233 57,546,733
Noncurrent portion of capital lease
and loan obligations............... 718,973 718,973 718,973
Deficit accumulated during the
development stage.................. (10,127,991) (10,127,991) (10,127,991)
Total stockholders' equity.......... 5,574,824 15,574,824 55,572,324
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(2) Pro forma to give effect to: (i) the exercise of warrants and options to
purchase 243,894 shares of Common Stock in June 1997 and (ii) the issuance
of an aggregate of $10.0 million of Series B Preferred Stock to Chiron and
Perkin-Elmer in May and June, 1997. See "Use of Proceeds," "Capitalization"
and "Certain Transactions."
(3) Adjusted to give effect to: (i) the sale of 2,750,000 shares of Common
Stock by the Company offered hereby at an assumed initial public offering
price of $13.00 per share and the receipt of the estimated net proceeds
therefrom and (ii) the sale of 597,849 shares of Common Stock (based on an
assumed initial public offering price of $13.00 per share in this offering)
to be issued to Chiron and Perkin-Elmer in the Private Placement and the
receipt of the net proceeds therefrom.
5
<PAGE>
RISK FACTORS
An investment in the Common Stock involves a high degree of risk. In
evaluating the Company and its business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained herein.
Unproven Ability to Commercialize Gene-Based Products. The Company's
strategy of using its Gene Discovery Module to rapidly identify and
characterize the function of a substantial number of genes and then selecting
from those genes promising candidates to be used to develop therapeutic
products and diagnostic products and tests is unproven. While other companies
have adopted a similar strategy, the application of this strategy is in too
early a stage to determine whether it can be successfully implemented. The
Company's development efforts with respect to therapeutic product candidates
and diagnostic tests are still in an early stage. Collaborations with the
Company's current and future collaboration partners will require significant
further research, development, testing and regulatory approvals by the Company
and any such collaboration partners prior to market release of any therapeutic
products or diagnostic tests developed. Even if the Company completely
sequences a substantial number of genes, its success in marketing potential
gene-based therapeutic product candidates and diagnostic tests will depend
upon its ability to determine which of those genes have potential value and to
select an appropriate commercialization strategy for each potential product it
chooses to pursue. To select those genes that are suitable for further
research and development, the Company will need to expend significant time and
resources isolating and sequencing the genes and analyzing them to determine
their function. There can be no assurance that the Company will be able to
successfully develop therapeutic product candidates that will be of commercial
interest to current or future collaboration partners, nor can there be any
assurance that therapeutic product candidates or diagnostic tests identified
for any such collaboration partners would result in the development of
commercially viable products.
To date, only a limited number of gene-based products have been developed
and commercialized, and none have been developed or commercialized by the
Company. Even if the Company identifies a gene and determines its function,
the Company or a collaboration partner may not be able to develop a
commercially feasible product based on the gene. The development of
therapeutic product candidates and diagnostic tests will be subject to risks
of failure inherent in the development of products based on new technologies,
including the possibilities that therapeutic product candidates will be found
toxic, defective, unreliable or otherwise fail to receive necessary regulatory
clearance; such products will be difficult to manufacture on a large scale or
uneconomical to market; proprietary rights of others will preclude marketing
of the Company's products; or products of third parties will be superior.
Certain areas of gene-based discovery that may be pursued by the Company under
current and future collaborative arrangements, including gene therapy, involve
new technologies, and existing data on the safety and efficacy of these
technologies is very limited. At present, no commercial products have been
developed from these technologies. Several significant scientific challenges
must be addressed before the therapeutic potential of these technologies can
be realized. Even if the Company and its collaboration partners are successful
in developing a therapeutic product, it would be a number of years before such
products could reach the market. The failure to successfully commercialize
products based on Company-discovered genes would have a material adverse
effect on the Company's business, financial condition and operating results.
See "Business--Competition."
Dependence upon Collaborative Arrangements. The Company presently plans to
develop therapeutic product candidates and diagnostic products and tests only
through collaborative arrangements with collaboration partners who would be
responsible for obtaining regulatory approval or clearance. As a result, the
Company's strategy for commercialization of such products relies substantially
upon arrangements with current and future collaboration partners and
licensees. There can be no assurance that the Company will be able to maintain
existing collaborations or obtain additional collaboration partners, or that
they will be on terms favorable to the Company. The Company will have only a
limited internal sales and marketing organization, and, with the exception of
the HyGnostics Module, which the Company markets directly, Hyseq will rely
primarily on collaboration partners or licensees or on arrangements with
others to market its products domestically and internationally. To the extent
the Company can establish additional collaborations, the Company will be
partially
6
<PAGE>
dependent upon the subsequent success of these collaboration partners in
performing their responsibilities. There can be no assurance that any current
or future collaborations will ultimately succeed in obtaining commercially
viable products. There can be no assurance that these efforts or any products,
if approved, will gain market acceptance. Significant time may be required to
secure additional collaboration partners because of the need to effectively
sell the benefits of the Company's technology to a variety of constituencies
within future collaboration partners, including research and development
personnel and top management. In addition, each collaborative arrangement will
involve the negotiation of terms that may be unique to each collaboration
partner. The Company may expend substantial funds and management effort with
no assurance that a collaboration will result. Finally, there can be no
assurance that the Company's collaboration partners will not adopt alternative
technologies or develop alternative products either on their own or in
collaboration with others including the Company's competitors. The failure to
enter into and successfully maintain collaborative arrangements would have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Collaborative and Other Arrangements."
Uncertainties Related to Certain Technological Approaches. The Company's
HyGnostics Module, which is used for DNA testing of genetic and infectious
diseases and cancer, has been marketed for only a short period of time. There
can be no assurance that additional improvements or modifications will not be
necessary before the HyGnostics Module gains market acceptance, if at all. In
addition, the Company's HyChip Module, which is being used internally for
research applications in genomics and DNA testing, is under development for
commercial applications. As the HyChip Module undergoes further development,
there can be no assurance that previously unknown problems will not emerge or
that, if they do emerge, they can be solved. There also can be no assurance
that improvements in the HyChip Module or related products necessary for
successful commercialization will be achieved by the Company or by its
collaboration partner, Perkin-Elmer, which is developing the overall system
with the Company. Further, the HyChip Module and related products and the
Company's Gene Discovery and HyGnostics Modules will need to compete against
well-established technologies and enhancements to such technologies for
analyzing genes and performing diagnostics. The impact of these uncertainties
is difficult to predict and could have a material adverse effect on the
Company's business, financial condition and operating results.
Limited History of Operations, History of Losses and Uncertainty of Future
Profitability. The Company commenced operations in the fourth quarter of 1994.
As a development-stage company, there is limited historical information
available upon which an investor can base an evaluation of an investment in
the Company. For the three months ended March 31, 1997 and for the years ended
December 31, 1996, 1995 and 1994, the Company had net losses of $1.9 million,
$4.8 million, $601,000 and $2.3 million, respectively, and as of March 31,
1997, the Company had an accumulated deficit of $10.1 million. Expansion of
the Company's HyGenomics Database and marketing activities with respect to its
HyGnostics Module, together with the development of therapeutic product
candidates and diagnostic products and tests and development of the HyChip
Module and related products, will require substantial increases in
expenditures over the next several years. As a result, the Company currently
expects to incur operating losses at least through 1999, and the Company may
never achieve significant revenues or profitable operations. The likelihood of
success of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays, many of which are beyond the Company's
control, frequently encountered in connection with the formation of a new
business, development and commercialization of new products, and the
utilization of new technology.
Competition. There is a finite number of genes (estimated by the Company to
be approximately 150,000 genes) in the human genome. A significant number of
such genes have been identified by the Company and others conducting genomic
research, and the Company believes that virtually all genes will be identified
within the next several years. To date, relatively few gene-based products
with significant commercial potential have been announced. While the Company's
goal has been to identify, establish the utility of and ultimately patent as
many genes as it can as rapidly as possible, the Company continues to face
substantial competition in these efforts from entities using gel sequencers
and other methods to discover genes. The Company believes that its primary
competitors in genomics are Human Genome Sciences, Inc. and Incyte
Pharmaceuticals, Inc., which are
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using gel sequencers as part of their gene sequencing efforts. Research to
identify genes is also being conducted by various institutes and by United
States and foreign government-financed programs, which in some cases may be
competitive with the Company. A number of other companies also have announced
plans to engage in gene discovery using gel sequencers and may develop other
procedures for automated sequencing of genes. In addition, certain of the
Company's collaboration partners could, in the future, become competitors. As
a result, any one or more of these companies or other entities may discover
and establish, before the Company, a patent position in one or more genes that
the Company has identified. Any potential therapeutic products or diagnostic
products or tests based on genes identified by the Company may face
competition both from companies developing gene-based products and from
companies developing other forms of treatment for diseases that may be caused
by, or related to, genes identified by the Company. There can be no assurance
that the Company will compete successfully with its existing competitors or
with any new competitors.
The market for diagnostic products such as the HyGnostics Module and
diagnostic tests derived from the Company's gene discovery efforts is
currently limited and is expected to be highly competitive. In the area of
diagnostics, the Company competes primarily with Affymetrix, Inc.
("Affymetrix"). Additionally, the Applied Biosystems division of Perkin-Elmer
presently markets gel sequencers that are used by third parties to compete
with the Company in gene discovery and diagnostics. Many companies are
developing and marketing DNA probe tests for genetic and other diseases. Other
companies are conducting research on new technologies for diagnostic tests
based on advances in genetic information. Established diagnostic companies
have advantages over Hyseq, including greater financial and other resources to
invest in new technologies, substantial intellectual property portfolios,
substantial experience in new product development, regulatory expertise,
manufacturing capabilities and the distribution channels to deliver products
to customers. Potential customers for the HyGnostics Module, including
clinical reference laboratories, may have an existing base of instruments in
several markets and therefore be unwilling to adopt the HyGnostics Module in
lieu of existing instruments. Similarly, potential customers for HyChip
products, when introduced commercially, may already have existing instruments
and therefore be unwilling to adopt HyChip products. In addition, some of
these companies have formed alliances with genomics companies which provide
them access to genetic information that may be incorporated into their
diagnostic tests.
Several of the Company's existing and potential competitors have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than the Company. These
competitors may succeed in identifying genes or developing products earlier
than the Company or its collaboration partners, obtaining approvals from the
United States Food and Drug Administration (the "FDA") or other regulatory
agencies for such products more rapidly than the Company or its collaboration
partners, or developing products that are more effective than those proposed
to be developed by the Company or its collaboration partners. Certain of these
competitors may be further advanced than the Company in developing potential
products that may compete with potential products of the Company. There can be
no assurance that research and development by others will not render obsolete
or non-competitive the products that the Company or its collaboration partners
may seek to develop. In addition, loss of the Company's patent rights to SBH
technology as a result of successful legal challenges could remove a legal
obstacle to competitors in designing platforms with similar competitive
advantages. The Company expects that competition in this field will intensify.
A failure of the Company to adequately compete in its markets would have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Competition" and "--Litigation."
Fluctuations in Operating Results. The Company's operating results may
fluctuate significantly in the future as a result of a variety of factors,
including, but not limited to, changes in the demand for the Company's
products; the nature, size and timing of collaborative arrangements and
products provided to or developed with the Company's current and future
collaboration partners; changes in the research and development budgets of the
Company's current and future collaboration partners; capital expenditures and
other costs related to the expansion of the Company's operations; litigation
and other costs associated with defending its proprietary rights; changes in
government regulations; and the introduction of competitive technologies.
Changes in the number of collaboration partners could have a significant
effect on the Company's revenues and results of
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operations. If revenues in a particular period do not meet expectations, the
Company may not be able to adjust significantly its level of expenditures in
such period, which would have an adverse effect on the Company's operating
results. The timing of revenues is difficult to forecast because the Company's
revenue generation cycle could be relatively long and may depend on factors
such as the size and scope of assignments and general economic conditions. The
need for continued investment in development of the Company's products and for
extensive ongoing support capabilities results in a high percentage of the
Company's expenses being fixed. Accordingly, fluctuations in revenues and
expenses due to a variation in the nature, number and timing of collaborative
arrangements, particularly at or near the end of a quarter, can cause
significant variations in operating results from quarter to quarter and could
result in continued losses to the Company. Although the Company can adjust
overhead expenditures to correspond to the number of active projects, it must
maintain a certain level of overhead expenditures to continue operations.
Quarterly comparisons of the Company's financial results may not necessarily
be meaningful and should not be relied upon as an indication of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence upon Proprietary Rights; Risks of Infringement. The Company owns
certain proprietary information and expects to acquire additional proprietary
information in the course of its research and development activities. There
can be no assurance as to the breadth or the degree of protection that such
proprietary information or patents or pending patent applications, if issued,
will afford the Company. There also can be no assurance that issued patents
and any future issued patents will ultimately be found valid and enforceable.
There can be no assurance that any issued patents will provide protection
against any competitors or will provide the Company with competitive
advantages, nor can there be assurance that such patents will not be
challenged by others. Furthermore, there can be no assurance that others will
not independently develop similar products or, if patents are issued to the
Company, will not design around such patents.
Although the Company has sought or intends to timely seek international
coverage for all patent applications filed since its inception in August 1992,
the Company's rights in and to its three currently issued patents covering SBH
technology extend only to the United States. Therefore, the Company is not
currently able to prevent others from practicing the SBH process disclosed in
the currently issued SBH patents outside of the United States. Although the
Company intends to defend its patent rights to SBH technology, there can be no
assurance that it will be successful in such endeavor. Two of the patents
covering the Company's SBH technology are currently the subject of a
counterclaim by Affymetrix seeking declaratory relief that such patents are
invalid or that Affymetrix does not infringe them. See "--Certain Litigation"
and "Business--Litigation." Loss of its patent rights to SBH technology could
remove a legal obstacle to competitors in designing platforms with similar
competitive advantages. There can be no assurance that others will not develop
substantially equivalent know-how or otherwise obtain access to Company know-
how, or that others will not infringe the Company's patents, causing the
Company to incur substantial costs and expend substantial personnel time in
asserting the Company's patent rights.
The Company's long-term commercial success may depend in part on the ability
of the Company or its collaboration partners to obtain patent protection on
genes that the Company discovers. The Company intends to seek patent
protection on genes that it completely sequences as well as patent protection
of selected partial gene sequences. The patent positions of biotechnology
companies generally are highly uncertain and involve complex legal and factual
questions. There is a substantial backlog of biotechnology patent applications
at the United States Patent and Trademark Office (the "Patent Office"). No
consistent legislative or other policy has yet emerged regarding the breadth
of claims covered in biotechnology patents, and there also have been proposals
for review of the appropriateness of patents on genes and partial gene
sequences.
The Company's ability to obtain patent protection based on genes or partial
gene sequences will depend, in part, upon identification of a function for the
gene or gene sequences sufficient to meet the statutory requirement that an
invention have utility, which is a question of fact. Clinical data may be
required for issuance of patents for human therapeutics, which, if required,
could delay, add substantial costs to or affect the ability to obtain patent
protection. There can be no assurance that the Company's disclosures in its
current or future patent applications will be sufficient to meet these
requirements. Even if patents are issued, there may be current or
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future uncertainty as to the scope of the coverage or protection provided by
any such patents. The Company cannot predict what issues may arise in
connection with the Company's patent applications or the timing of the grant,
if any, of patents with respect to genes or partial gene sequences covered by
such patent applications.
The Company also relies on trade secret protection for its confidential and
proprietary information. Although the Company's policy is to enforce security
measures to protect its assets, trade secrets are difficult to protect. While
the Company requires all employees to enter into confidentiality agreements,
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or
that the Company can meaningfully protect its trade secrets.
The Company may be required to obtain licenses to patents or other
proprietary rights of others. There can be no assurance that any licenses
required under any such patents or proprietary rights would be made available
on terms acceptable to the Company or at all. If the Company does not obtain
such licenses, it could encounter delays in product market introductions and
incur substantial costs while it attempts to design around such patents, or
could find that the development, manufacture or sale of products requiring
such licenses could be foreclosed. Moreover, the Company could incur
substantial costs and expend substantial personnel time in defending itself in
any suits brought against the Company claiming infringement of the patent
rights of others or in asserting the Company's patent rights in a suit against
another party. Any of these factors could have a material adverse effect on
the Company's business, financial condition and operating results. See
"Business--Patents and Proprietary Technology" and "--Litigation."
Unproven Market for Genetic Testing. The Company's success in diagnostics
will depend in large part upon its ability to obtain customers and the ability
of these customers to properly market genetic tests performed with the
Company's technology. Genetic tests, including those performed using the
HyGnostics Module, may be difficult to interpret and may lead to
misinformation or misdiagnosis. Even when a genetic test identifies the
existence of a mutation in an individual, the interpretation of the result is
often limited to the identification of a statistical probability that the
tested individual will develop the disease or condition for which the test is
performed. The prospect of broadly available genetic predisposition testing
has raised societal and governmental concerns regarding the appropriate
utilization and the confidentiality of information provided by such testing.
Government authorities could, for social or other purposes, limit the use of
genetic testing or prohibit testing for genetic predisposition to certain
conditions that could adversely effect the use of the Company's products.
There can be no assurance that ethical concerns about genetic testing will not
materially adversely effect market acceptance of the Company's technology for
diagnostic applications, which could materially and adversely effect the
Company's business, financial condition and operating results. See "Business--
Government Regulation."
Certain Litigation. On March 3, 1997, the Company brought suit against
Affymetrix in the U.S. District Court for the Northern District of California,
San Jose Division, alleging infringement by Affymetrix of the Company's U.S.
Patents Nos. 5,202,231 and 5,525,464 (Hyseq, Inc. v. Affymetrix, Inc., Case
No. C 97-20188 RMW ENE, U.S. District Court). The suit alleges that Affymetrix
willfully infringed, and continues to infringe, upon these patents covering
SBH technology. Through the lawsuit, the Company seeks both to enjoin
Affymetrix from infringing upon the patents covering SBH technology and an
award of monetary damages for Affymetrix's past infringement. On April 23,
1997, Affymetrix filed a motion to dismiss or, in the alternative, for a more
definite statement. On May 19, 1997, Affymetrix filed an Answer and
Affirmative Defenses to the First Amended Complaint and Counterclaim. The
counterclaim seeks a declaratory judgment of invalidity and non-infringement
with respect to these patents covering SBH technology. On June 9, 1997, the
Company filed a reply to the counterclaim in which it denied the allegation of
invalidity and non-infringement. By order of the court, an initial case
management conference is scheduled for August 1, 1997. While the Company
believes that it has a meritorious defense to the counterclaim, this
litigation is at an early stage and there can be no assurance that the Company
will prevail in the claim. The Company may incur substantial costs and expend
substantial personnel time in asserting the Company's patent rights against
Affymetrix or others and there can be no assurance that the Company will be
successful in asserting its patent rights. Failure to successfully enforce its
patent rights or the loss of these patent rights covering SBH technology also
could remove a legal obstacle to competitors in designing platforms with
similar competitive advantages, which could have a material adverse effect on
the Company's business, financial condition and operating results.
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Management of Growth. The Company has recently experienced, and expects to
continue to experience, significant growth in the number of its employees and
the scope of its operations. Continued growth may place a significant strain
on the Company's management and operations. In order to significantly increase
capacity to remain competitive or satisfy the needs of current and future
collaboration partners, the Company will be required to acquire additional
equipment and supplies, upgrade software and adapt robotics and bioinformatics
resources to meet increased sequencing rates. The Company's ability to manage
such growth effectively will depend upon its ability to broaden its management
team and to attract, hire and retain skilled employees. The Company's success
also will depend on the ability of its officers and key employees to continue
to implement and improve its operational, management information and financial
control systems and to expand, train and manage its employee base. Inability
to manage growth effectively could have a material adverse effect on the
Company's business, financial condition and operating results.
Dependence on Key Personnel. Recruiting and retaining qualified scientific
and other management personnel to perform research and development work is
critical to Hyseq's success, and there can be no assurance that the Company
will be able to attract and retain such qualified personnel. The Company
employs and expects to rely heavily, for the foreseeable future, upon Dr.
Radoje T. Drmanac and Dr. Radomir B. Crkvenjakov for their SBH technology
expertise. Loss of the services of either Dr. Drmanac or Dr. Crkvenjakov would
impede the achievement of its business and scientific objectives and could
have a material adverse effect on the Company's business, financial condition
and operating results. The Company's projected growth and expansion into
activities requiring additional expertise, production and marketing also are
expected to place increased demands upon the Company's resources and
organization. These demands are expected to require the addition of new
management and scientific personnel in the near term as well as over time.
There can be no assurance that the Company will be able to attract and retain
such qualified personnel. See "Management and Scientific Advisory Board."
Uncertainty of Third-Party Reimbursement. The Company's ability to receive
significant royalties from its products may depend on the ability of its
collaboration partners or customers to obtain adequate levels of third-party
reimbursement. Currently, availability of third-party reimbursement is limited
and uncertain for genetic predisposition tests. In the United States, the cost
of medical care is funded by government insurance programs, such as Medicare
and Medicaid, and private and corporate health insurance plans. Third-party
payors may deny reimbursement if they determine that a prescribed device or
diagnostic test has not received appropriate clearances from the FDA or other
government regulators, is not used in accordance with cost-effective treatment
methods as determined by the payor, or is experimental, unnecessary or
inappropriate. The Company's ability to commercialize certain of its products
successfully may depend on the extent to which appropriate reimbursement
levels are obtained from authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). Third-party
payors are increasingly challenging the prices charged for medical products
and services. The trend towards managed health care in the United States and
the concurrent growth of organizations such as HMOs, which could control or
significantly influence purchases of health care services and products, as
well as legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices for certain of the
Company's diagnostics products. The cost containment measures that health care
providers are instituting and the results of any health care reform may have a
material adverse effect on the Company's business, financial condition and
operating results.
No Assurance of FDA Regulatory Approval; Government Regulation. The Company
initially plans to collaborate on, manufacture and sell products through
collaborative arrangements with third parties who will be responsible for
obtaining regulatory approval or clearance. However, the Company may
ultimately determine to pursue directly the development of certain therapeutic
or diagnostic products requiring regulatory approval or clearance. Products
such as those proposed to be developed by the Company or with collaboration
partners typically will be subject to an extensive regulatory process by the
FDA and comparable agencies in other countries. In order to obtain regulatory
approval of a drug product, the Company or its collaboration partners must
demonstrate to the satisfaction of the applicable regulatory agency, among
other things, that such product is safe and effective for its intended uses
and that the manufacturing facilities are in compliance with current Good
Manufacturing Practice ("cGMP") requirements. Although the Company does not
need to comply with
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cGMP with respect to the HyGnostics Module under current law, it may need to
comply with cGMP if currently proposed legislative changes are adopted, and it
will need to comply with cGMP with respect to its HyChip Module once HyChip
products are available for commercial sale, if sold for clinical diagnostics.
The Company or its collaboration partners also must demonstrate the
approvability of a Biological License Application or a Product License
Application and an Establishment License Application for any biological
products. In order to market its HyGnostics Module and other diagnostic
products, which may be considered to be medical devices, the Company or its
collaboration partners will be required to receive 510(k) marketing clearance
or Premarket Approval ("PMA") from the FDA for such products among other
regulatory requirements. To obtain 510(k) marketing clearance, the Company
must show that the diagnostic product is substantially equivalent to a legally
marketed product not requiring FDA approval. In addition, the Company must
demonstrate that it is capable of manufacturing the product to the relevant
standards. To obtain a PMA, the Company or its collaboration partners must
submit extensive data, including pre-clinical and clinical trial data to prove
the safety and efficacy of the device. Clinical trials are normally done in
three phases over two to five years, but may take longer to complete as a
result of many factors, including slower than anticipated patient enrollment,
difficulty in finding a sufficient number of patients fitting the appropriate
trial profile, difficulty in the acquisition of sufficient supply of clinical
trial materials or adverse events occurring during the trials. In the event
the Company or its collaborators develop products classified as drugs, the
Company and its collaborators will be required to obtain additional approvals.
Moreover, several areas in which the Company or its collaboration partners
may develop therapeutic products involve relatively new technology and have
not been subject to extensive product testing in patients. Accordingly, the
regulatory requirements governing such products and related clinical
procedures are uncertain and such products may be subject to substantial
additional review by various governmental regulatory authorities, which could
prevent or delay regulatory approval. Regulatory requirements ultimately
imposed in these areas could adversely affect the Company's ability to
clinically test, manufacture or market products. No assurance can be given
that any applicable regulations will not be amended, or that the Company will
be able to comply with any new or modified regulations.
The process of obtaining FDA and other required regulatory approvals and
clearances is lengthy and will require the expenditure of substantial capital
and resources. There can be no assurance that the Company will be able to
obtain the necessary approvals and clearances. Moreover, if and when such
approval or clearances are obtained, the marketing, distribution and
manufacture of such products would remain subject to extensive regulatory
requirements administered by the FDA and other regulatory bodies. Failure to
comply with applicable regulatory requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant approvals, premarket clearance or premarket approval,
withdrawal of approvals and criminal prosecution. If marketed outside the
United States, the Company's therapeutic and diagnostic products will be
subject to foreign regulatory requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement, which vary from country
to country and are becoming more restrictive throughout the European Union.
The process of obtaining foreign regulatory approvals can be lengthy and
require the expenditure of substantial capital and resources, and there can be
no assurance that the Company or its collaboration partners will be successful
in obtaining the necessary approvals. Any delay or failure by the Company or
its collaboration partners to obtain regulatory approvals for its products
would adversely affect the Company's ability to generate product and royalty
revenues, which could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--Government
Regulation."
Need for Future Capital; Uncertainty of Additional Funding. While the
Company believes that estimated net proceeds from this offering and the
Private Placement, together with existing capital resources, will be
sufficient to support the Company's operations through 1999, depending upon
the ability of the Company to develop additional collaborative arrangements,
meet its budgeted expenditures for expansion of operations and market its
HyGnostics Module, additional funds may be necessary sooner. There can be no
assurance that additional funds will be available when needed or on terms
acceptable to the Company. If adequate additional funds are not available, the
Company may have to reduce substantially or eliminate expenditures for the
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development, production and marketing of certain of its proposed products, or
obtain funds through arrangements with collaboration partners that require the
Company to relinquish rights to certain of its technologies or products, which
could have a material adverse effect on the Company's business, financial
condition and operating results. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock. The initial
public offering price per share of the Common Stock will be determined by
negotiations between management of the Company and the representatives of the
Underwriters (the "Representatives"). See "Underwriting" for factors to be
considered in determining the initial public offering price per share.
Application has been made for the Common Stock to be quoted on the Nasdaq
National Market; however, there can be no assurance that an active trading
market will develop and be sustained subsequent to this offering. The market
price of the Common Stock may fluctuate substantially because of a variety of
factors, including quarterly fluctuations in results of operations, adverse
circumstances affecting the introduction or market acceptance of new products
offered by the Company, announcements by competitors, developments in the
Company's litigation proceedings, changes in earnings estimates by analysts,
changes in accounting principles, sales of Common Stock by existing holders,
loss of key personnel and other factors. In addition, the stock market in
general, and the market for biotechnology and other life science stocks in
particular, has historically been 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, class action
securities litigation has often been instituted against such a company. Any
such litigation instigated against the Company could result in substantial
costs and a diversion of management's attention and resources, which could
have a material adverse effect on the Company's business, financial condition
and operating results.
Use and Disposal of Hazardous Materials. The Company's operations require
the controlled use of hazardous and radioactive materials. Although the
Company believes that its safety procedures for handling such materials comply
with the standards prescribed by federal, state and local regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result, which could have a material adverse
effect on the Company's business, financial condition and operating results.
Risk of Natural Disaster. The Company's sole facility is located in
Sunnyvale, California. In the event that a fire or other natural disaster
(such as an earthquake) prevents the Company from operating its production
line, the Company's business, financial condition and operating results would
be materially, adversely affected. The Company maintains earthquake coverage
for its facility, but does not maintain such coverage for personal property or
resulting business interruption.
Immediate and Substantial Dilution. The initial public offering price per
share of Common Stock is substantially higher than the net tangible book value
per share of the Common Stock. Purchasers of shares of Common Stock in this
offering will experience immediate and substantial dilution of $8.46 in the
pro forma net tangible book value per share of Common Stock. To the extent
outstanding options and warrants to purchase Common Stock are exercised, there
will be further dilution. See "Dilution."
Shares Eligible for Future Sale. Immediately after completion of this
offering and the Private Placement, the Company will have 12,127,418 shares of
Common Stock outstanding (assuming no exercise of outstanding options or
warrants). Of these shares, the 2,750,000 shares sold pursuant to this
offering will be freely tradable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except
those shares acquired by affiliates of the Company. The remaining 9,377,418
shares (including the 597,849 shares of Common Stock, based on an assumed
initial public offering price of $13.00 per share in this offering, sold in
the Private Placement) will be restricted securities within the meaning of
Rule 144 under the Securities Act. The Company intends to register the shares
sold in the Private Placement following the expiration of the 180 day lock-up
agreements covering these shares, as described below. Chiron and Perkin-Elmer
have no present intentions to dispose of any shares of Common Stock which will
be owned by them at the completion of
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1 this offering. However, there can be no assurance that such intentions will
not change in the future. The Company, executive officers and directors and
certain stockholders (including Chiron and Perkin-Elmer) have agreed not to
(1) offer, pledge, sell, contract to sell, engage in any short sale, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2) enter
into any swap or similar agreement that transfers, in whole or in part, the
economic risk of ownership of the Common Stock, until 180 days after the
effective date of this Prospectus (the "Lock-Up Period"), without the prior
consent of Lehman Brothers Inc. However, Lehman Brothers Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements.
Of the 9,377,418 Restricted Shares, 1,612,339 shares will be freely
transferable pursuant to Rule 144 at the end of the Lock-Up Period and
2,262,778 shares will be held by affiliates and transferable pursuant to Rules
144 and 701, subject to the volume limitations of Rule 144, at the end of the
Lock-Up Period. Additional Restricted Shares, which will be transferable at
the end of the Lock-Up Period subject to the volume limitations of Rule 144,
will become freely transferable pursuant to Rule 144(k) as follows: 66,960
shares at various times during February and March 1998; 2,585,280 at various
times during April and May 1998; and 81,600 at various times during December
1998 and January 1999. An additional 1,462,132 Restricted Shares will not be
transferable pursuant to Rule 144 until the expiration of their one-year
holding periods, beginning at various times following the end of the Lock-Up
Period. An additional 708,480 shares are held in a blocked account and
therefore may not be voted or transferred pursuant to restrictions imposed by
the U.S. Department of Treasury. The 597,849 shares of Common Stock (based on
an assumed initial public offering price of $13.00 per share in this offering)
sold in the Private Placement will be freely transferable following the
effectiveness of a registration statement which the Company intends to file at
the end of the Lock-Up Period. There can be no assurance as to how long such
restrictions will remain in effect. The Company has granted to certain
securities holders demand and piggyback registration rights covering an
aggregate of 3,892,140 shares of Common Stock upon conversion of Series A and
Series B Preferred Stock and 216,422 shares of Common Stock issuable upon the
exercise of warrants (registration rights covering 227,760 of such shares will
expire prior to the end of the Lock-Up Period and registration rights covering
an additional 2,729,040 of such shares will expire at various times between
the end of the Lock-Up Period and January 1999). Sales of substantial amounts
of such shares in the public market or the availability of such shares for
future sale could adversely affect the market price of these shares of Common
Stock and the Company's ability to raise additional capital at a price
favorable to the Company. Within approximately 180 days after the date of this
Prospectus, the Company expects to file a Registration Statement on Form S-8
registering 1,895,232 shares of Common Stock reserved for issuance under the
Company's stock option agreements, Stock Option Plan and Non-Employee Director
Stock Option Plan. See "Shares Eligible for Future Sale" and "Underwriting."
Anti-Takeover Provisions. Certain provisions of the Company's Amended and
Restated Articles of Incorporation, as amended ("Articles"), and By-Laws ("By-
Laws") and the Nevada General Corporation Law (the "NGCL") will effectively
make it more difficult for a third party to acquire control of the Company by
means of a tender offer through a proxy contest for the election of directors
or otherwise. The Articles contain provisions which: (i) classify the Board of
Directors into three classes, with one class being elected each year; (ii)
require that stockholder action be taken only at a duly called meeting and not
by written consent; (iii) permit the Company's stockholders to call a special
meeting of the stockholders only upon request of stockholders owning at least
50% of the Company's capital stock; and (iv) do not provide for cumulative
voting. The Company may issue shares of Preferred Stock without stockholder
approval and upon such terms as the Board of Directors may determine. The
rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. These provisions may have the effect of
lengthening the time required for a person to acquire control of the Company
through a proxy contest for the election of a majority of the Board of
Directors, may discourage bids for the Common Stock at a premium over market
price and may deter efforts to obtain control of the Company. See "Description
of Capital Stock--Preferred Stock" and "--Anti-Takeover Effects of Provisions
of the Articles and By-Laws and Nevada Law."
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THE COMPANY
Hyseq, Inc. was incorporated in August 1992 as an Illinois corporation and
was merged into a newly formed Nevada corporation in November 1993, with the
Nevada corporation being the survivor. References in this Prospectus to
"Hyseq" and the "Company" include the Nevada corporation, its predecessors and
its subsidiary, Hyseq Diagnostics, Inc., a Nevada corporation, unless
otherwise stated or indicated by the context. The Company maintains its
principal executive offices at 670 Almanor Avenue, Sunnyvale, California
94086. Its telephone number is (408) 524-8100.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $13.00 per share, and after deducting underwriting discounts
and commissions and other estimated offering expenses, are estimated to be
approximately $32,497,500 ($37,484,625 if the Underwriters' over-allotment
option is exercised in full). Concurrent with this offering, Chiron and
Perkin-Elmer have agreed to purchase shares of Common Stock directly from the
Company at a price per share equal to the price to public less one-half of the
underwriting discounts and commissions applicable to the shares of Common
Stock being offered to the public hereby, for an aggregate purchase price of
approximately $2.5 million and $5.0 million, respectively. Total net proceeds
from this offering and the Private Placement are estimated to be approximately
$39,997,500 ($44,984,625 if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use the net proceeds from this offering and the
Private Placement primarily to develop potential therapeutic product
candidates and diagnostic tests while continuing to expand its HyGenomics
Database. The Company also expects to use a portion of the proceeds to further
develop its HyChip Module and related products, to fund expanded research into
new applications of its technologies, to expand marketing capabilities with
respect to its HyGnostics Module and collaborations, and to invest in capital
equipment and lease additional space to increase sequencing capacity. The
Company intends to use the balance of the net proceeds for working capital and
other general capital purposes. Pending such uses, the Company intends to
invest the net proceeds of this offering in short-term, investment-grade,
interest-bearing securities. The amounts actually expended for each purpose
and the timing of such expenditures will depend upon numerous factors,
including but not limited to payments received under current and possible
future collaborative arrangements; the progress of the Company's collaborative
and independent research and development projects; the prosecution, defense
and enforcement of patent claims and other intellectual property rights; and
the expansion of marketing capabilities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that any future earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions, if any, and such other factors as the Board of Directors may
deem relevant.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997; (ii) on a pro forma basis to reflect the exercise of a warrant
and options to purchase an aggregate of 243,894 shares of Common Stock in June
1997, the automatic conversion of all outstanding Series A Preferred Stock
into Common Stock on a 1-for-1 basis concurrently with the closing of this
offering and the issuance of an aggregate of 854,700 shares of Common Stock
upon conversion of shares of Series B Preferred Stock sold to Chiron and
Perkin-Elmer in May and June, 1997; and (iii) pro forma as adjusted to reflect
the sale of 2,750,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $13.00 per share and the receipt
of estimated net proceeds therefrom and the Private Placement and the receipt
of the net proceeds therefrom. The following table should be read in
conjunction with "Business," and the Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------------ ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents........... $ 4,743,260 $ 14,743,260 $ 54,740,760
============ ============ ============
Current maturities of capital lease
and loan obligations............... $ 274,893 $ 274,893 $ 274,893
============ ============ ============
Non-current portion of capital lease
and loan obligations (1)........... $ 718,973 $ 718,973 $ 718,973
Stockholders' equity:
Preferred stock, $.001 par value;
8,000,000 shares authorized,
2,170,460 shares issued and
outstanding, actual; no shares
issued and outstanding, pro
forma; no shares issued and
outstanding, pro forma as
adjusted......................... 14,780,013 -- --
Common stock, $.001 par value;
20,000,000 shares authorized;
2,329,540 shares issued and
outstanding, actual; 50,000,000
shares authorized, 8,779,569
shares issued and outstanding,
pro forma; 12,127,418 shares
issued and outstanding, pro forma
as adjusted (4).................. 5,396,571 30,176,584 70,174,084
Notes receivable (5).............. (3,905,705) (3,905,705) (3,905,705)
Deferred compensation............. (568,064) (568,064) (568,064)
Deficit accumulated during the
development stage................ (10,127,991) (10,127,991) (10,127,991)
------------ ------------ ------------
Total stockholders' equity...... 5,574,824 15,574,824 55,572,324
------------ ------------ ------------
Total capitalization.......... $ 6,293,797 $ 16,293,797 $ 56,291,297
============ ============ ============
</TABLE>
- --------
(1) See Notes 4 and 5 of Notes to Consolidated Financial Statements for a
description of the Company's obligations.
(2) Gives effect to: (i) the exercise of a warrant and options to purchase an
aggregate of 243,894 shares of Common Stock in June 1997; (ii) the
automatic conversion of all outstanding Series A Preferred Stock into
Common Stock on a 1-for-1 basis concurrently with the closing of this
offering; and (iii) the issuance of an aggregate of 854,700 shares of
Common Stock upon conversion of shares of Series B Preferred Stock sold to
Chiron and Perkin-Elmer in May and June, 1997.
(3) Reflects the sale of 2,750,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $13.00 per
share and the receipt of estimated net proceeds therefrom and the sale of
597,849 shares of Common Stock (based on an assumed initial public
offering price of $13.00 per share in this offering) sold in the Private
Placement and the receipt of the net proceeds therefrom.
(4) Excludes: (i) 645,619 shares of Common Stock issuable upon exercise of
vested options outstanding at a weighted average exercise price of $2.27
per share; (ii) 692,847 shares of Common Stock issuable upon exercise of
warrants outstanding at a weighted average exercise price of $3.81; (iii)
747,848 shares of Common Stock issuable upon exercise of options
outstanding but not vested and (iv) 501,765 shares reserved for issuance
upon exercise of options that may be granted in the future under the
Company's Stock Option Plan and Non-Employee Director Stock Option Plan.
See "Management and Scientific Advisory Board--Stock Option Plans and
Agreements," "Description of Capital Stock" and Note 7 of Notes to
Consolidated Financial Statements.
(5) Notes receivable includes loans with outstanding principal balances at
March 31, 1997 of $1,662,000, $1,842,000 and $4,120 to three officers in
connection with their purchases of Common Stock. Also includes a loan with
an outstanding principal balance at March 31, 1997 of $397,585 to Sachnoff
& Weaver, Ltd. in connection with its purchase of Common Stock. See
"Certain Transactions."
16
<PAGE>
DILUTION
As of March 31, 1997, the pro forma net tangible book value of the Company
was $15,101,120 or $1.72 per share. "Pro forma net tangible book value per
share" represents the amount of tangible net assets of the Company, less total
liabilities, divided by the pro forma number of shares of Common Stock
outstanding as of March 31, 1997. After giving effect to the sale by the
Company of 2,750,000 shares of its Common Stock offered hereby at an assumed
initial public offering price of $13.00 per share and the receipt of the net
proceeds therefrom and the sale of 597,849 shares of Common Stock (based on an
assumed initial public offering price of $13.00 per share in this offering) by
the Company in the Private Placement and the receipt of the net proceeds
therefrom, the pro forma net tangible adjusted book value of the Company at
March 31, 1997 would have been $55,098,620 or $4.54 per share. This amount
represents an immediate increase in pro forma net tangible book value of $2.82
per share to existing owners of the Company and an immediate dilution in net
tangible book value per share of $8.46 per share to purchasers of Common Stock
in this offering. The following table illustrates this per share dilution,
without giving effect to any exercise of the Underwriters' over-allotment
options:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $13.00
Pro forma net tangible book value per share at March 31, 1997.. $ 1.72
Increase attributable to new investors (1)..................... 2.82
------
Pro forma net tangible book value per share after this offering
and the Private Placement....................................... 4.54
------
Dilution per share to new investors.............................. $ 8.46
======
</TABLE>
- --------
(1) Includes increase attributable to the Private Placement and the sale of
shares in this offering.
The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences in the number of shares of capital stock purchased from the
Company, the total cash consideration paid and the average price paid per
share by existing stockholders and by new investors before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company at the assumed initial public offering price of $13.00 per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
------------------ ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1). 8,779,569 72.4% $30,788,289 41.6% $ 3.51
New investors (1)(2)...... 3,347,849 27.6 43,250,000 58.4 12.92
---------- ----- ----------- -----
Total................... 12,127,418 100.0% $74,038,289 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) If exercised, the Underwriters' over-allotment option to purchase 412,500
additional shares will further reduce the percentage held by existing
stockholders to 69.6% and increase the percentage held by new investors to
30.4%.
(2) Includes shares sold in the Private Placement and this offering.
The foregoing tables (i) include the issuance of an aggregate of 845,700
shares of Common Stock upon the conversion of shares of Series B Preferred
Stock issued in May and June, 1997 and the exercise of warrants and options to
purchase an aggregate of 243,894 shares of Common Stock in June 1997; and (ii)
assume no exercise of outstanding options or warrants. As of June 30, 1997,
there were options and warrants outstanding to purchase a total of 2,086,314
shares of Common Stock at a weighted average exercise price of $3.72 per
share. Assuming that all of these options and warrants were exercised and
proceeds were received therefrom, net tangible book value dilution per share
to new investors would be $8.46. See "Management and Scientific Advisory
Board--Stock Option Plans and Agreements" and Note 7 of Notes to Consolidated
Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996 have
been derived from the Company's consolidated financial statements, which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere herein. The selected consolidated financial data as set forth below
as of December 31, 1993 and 1994 and for the period from August 14, 1992
(inception) to December 31, 1993 have been derived from the Company's audited
consolidated financial statements not included herein. The selected
consolidated financial data as set forth below as of March 31, 1997--actual,
and for the three months ended March 31, 1996 and 1997 and the period from
August 14, 1992 (inception) to March 31, 1997, have been derived from the
Company's unaudited financial statements which are included elsewhere herein.
The unaudited financial statements have been prepared by the Company on a
basis consistent with the Company's audited financial statements and, in the
opinion of management, include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
results of operations and financial condition for such periods. Operating
results for the three months ended March 31, 1997 are not necessarily
indicative of results that may be expected for the entire year ending December
31, 1997. The selected consolidated financial data set forth below should be
read in conjunction with the Consolidated Financial Statements and related
Notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS PERIOD FROM
AUGUST 14, 1992 ENDED AUGUST 14, 1992
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31, (INCEPTION) TO
DECEMBER 31, ----------------------------------- ------------------------ MARCH 31,
1993 1994 1995 1996 1996 1997 1997
--------------- ----------- --------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Contract revenues....... $ -- $ 50,000 $2,127,00 $ 426,099 $ 78,327 $ 272,373 $ 2,875,472
Operating expenses:
Research and
development........... -- 850,707 1,811,212 3,735,925 946,324 1,306,233 7,704,077
General and
administrative........ 511,755 1,477,664 937,656 1,749,086 400,670 931,298 5,607,459
---------- ----------- --------- ----------- ----------- ----------- ------------
Total operating
expenses.............. 511,755 2,328,371 2,748,868 5,485,011 1,346,994 2,237,531 13,311,536
---------- ----------- --------- ----------- ----------- ----------- ------------
Loss from operations.... (511,755) (2,278,371) (621,868) (5,058,912) (1,268,667) (1,965,158) (10,436,064)
Interest income
(expense), net......... 2,473 15,926 20,604 219,977 (5,840) 49,093 308,073
---------- ----------- --------- ----------- ----------- ----------- ------------
Net loss................ $(509,282) $(2,262,445) $(601,264) $(4,838,935) $(1,274,507) $(1,916,065) $(10,127,991)
========== =========== ========= =========== =========== =========== ============
Pro forma net loss per
share(1)............... $(0.52) $(0.21)
=========== ===========
Shares used in computing
pro forma net loss per
share(1)............... 9,403,000 9,067,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
----------------------------------------------- --------------------------------------
PRO FORMA
AS
1993 1994 1995 1996 ACTUAL PRO FORMA(2) ADJUSTED(3)
---------- ----------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $1,009,563 $ 1,196,044 $ 750,291 $6,707,288 $ 4,743,260 $ 14,743,260 $54,740,760
Working capital......... 886,272 429,995 331,251 5,954,671 4,051,350 14,051,350 54,048,850
Total assets............ 1,539,393 2,455,508 2,739,679 9,365,814 7,549,233 17,549,233 57,546,733
Noncurrent portion of
capital lease and loan
obligations............ -- -- 32,360 791,405 718,973 718,973 718,973
Deficit accumulated
during the development
stage.................. (509,282) (2,771,727) (3,372,991) (8,211,926) (10,127,991) (10,127,991) (10,127,991)
Total stockholders'
equity................. $1,416,102 $ 1,625,203 $1,976,557 $7,363,537 $ 5,574,824 $ 15,574,824 $55,572,324
</TABLE>
- -------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(2) Pro forma to give effect to: (i) the exercise of warrants and options to
purchase an aggregate of 243,894 shares of Common Stock in June 1997 and
(ii) the issuance of an aggregate of $10.0 million of Series B Preferred
Stock to Chiron and Perkin-Elmer in May and June, 1997.
(3) Adjusted to give effect to: (i) the sale of 2,750,000 shares of Common
Stock by the Company offered hereby and (ii) the receipt of the net
proceeds therefrom and the sale of 597,849 shares of Common Stock (based
on an assumed initial public offering price of $13.00 per share in this
offering) to Chiron and Perkin-Elmer in the Private Placement and the
receipt of the net proceeds therefrom.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements contained herein, including statements concerning
potential collaboration arrangements, royalties and other payments under
potential collaboration arrangements, and product development and sales and
other statements, are forward-looking statements, which statements involve
risks and uncertainties. Actual results and performance could differ
materially from those projected in the forward-looking statements as a result
of many factors, including but not limited to, the following: the scientific
progress of the Company's programs; the ability of the Company to establish
additional collaborative and licensing arrangements; the extent to which the
Company engages in development of products without collaboration partners; the
time and cost involved in obtaining regulatory approvals for its diagnostics
products; the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims; competing technological and market developments;
and whether conditions to milestone payments are met and the timing of such
payment or payments. Prospective investors are also directed to the other
risks discussed under "Risk Factors."
OVERVIEW
The Company applies the proprietary DNA array technology of its HyX Platform
to develop gene-based therapeutic product candidates and diagnostic products
and tests. The Company believes that its HyGenomics Database of partial gene
sequences is one of the largest proprietary human gene databases in the world.
The Company presently is collaborating with Chiron to develop therapeutics,
diagnostic molecules and vaccines relating to a specified disease area and
with Perkin-Elmer to commercialize HyChip products for commercial
applications. The Company intends to form additional collaborations in
targeted disease categories. The Company is marketing its HyGnostics Module
for DNA testing of genetic and infectious disease and cancer to clinical
reference laboratories. The Company has initial agreements with SmithKline
Beecham and Quest relating to evaluation of the HyGnostics Module for
commercial-scale diagnostic testing.
Subsequent to March 31, 1997, Chiron and Perkin-Elmer invested $5.0 million
each in connection with collaboration agreements with the Company. The
majority of revenues received by the Company through March 31, 1997 related to
agreements with pharmaceutical companies and a clinical reference laboratory
entered into in 1995 and to a three-year, $2 million grant awarded in November
1994 from the National Institute of Standards and Technology ("NIST"), the
proceeds of which are being applied to development of the Company's super chip
technology. The Company expects to receive the remainder of the NIST grant and
to begin earning revenues under its collaboration with Chiron in 1997. The
Company has incurred operating losses since inception and expects to incur
operating losses at least through 1999 and possibly longer. The Company may
never achieve significant revenues or profitable operations. There can be no
assurance that the Company will be able to obtain licensees of its HyGnostics
Module, customers for HyChip products, additional collaboration partners on
acceptable terms or that its collaborative arrangements or products will
produce revenues adequate to fund the Company's operations.
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, including, but not limited to, changes in
the demand for the Company's products; the nature, size and timing of
collaborative arrangements and products provided to or developed with the
Company's current and future collaboration partners; changes in the research
and development budgets of the Company's current and future collaboration
partners; capital expenditures and other costs related to the expansion of the
Company's operations; litigation and other costs associated with defending its
proprietary rights; changes in government regulations; and the introduction of
competitive technologies.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Contract Revenues. Contract revenues were $272,000 and $78,000 for the
quarters ended March 31, 1997 and 1996, respectively. Contract revenues earned
in both periods related to the Company's NIST grant. The Company recognizes
revenues under the grant as research is performed. The Company expects to
receive the
19
<PAGE>
remaining balance of the NIST grant in 1997. The recognition of revenues will
vary from quarter to quarter and may result in significant fluctuations in
operating results from year to year. There can be no assurance that the
Company will be able to maintain existing collaborations and obtain additional
collaboration partners. The failure to maintain existing collaboration
partners or the inability to enter into additional collaborative arrangements
could have a material effect on the Company's revenues and operating results.
Operating Expenses. Total operating expenses, consisting of research and
development expenses and general and administrative expenses, were $2.2
million in the quarter ended March 31, 1997 compared to $1.3 million in the
same period of 1996. As the Company expands its commercialization efforts,
operating expenses are expected to increase as a result of several factors
including: (i) the planned expansion of sequencing operations, software
development and enhancements and increased work on gene discovery in
connection with development of potential therapeutic product candidates and
diagnostic tests; (ii) the continued expansion of its HyGenomics Database;
(iii) expanded research into new applications of its technologies; (iv) the
expansion of marketing capabilities with respect to its HyGnostics Module and
collaborations; and (v) new technology development expenses relating to the
HyChip Module and related products.
The magnitude of the increases in the Company's operating expenses will be
significantly affected by the Company's ability to secure new collaboration
partners. At times, the Company may choose to increase sequencing production
and analysis capabilities in order to support its efforts to recruit new
collaboration partners. However, if the Company does not obtain additional
collaboration partners in a timely manner, it may not be able to adjust
significantly its level of expenditures in any such period, which could have
an adverse effect on the Company's operating results.
Research and development expenses increased to $1.3 million in the quarter
ended March 31, 1997 from $946,000 in the same period of 1996. This increase
resulted primarily from expanded sequencing production, software and database
development, the addition of scientific personnel and costs associated with
prosecuting and defending the Company's intellectual property. The Company
expects research and development spending to increase in the future as the
Company further expands research and product development efforts in support of
its gene sequencing and database development programs. The Company is also
obligated to commit an aggregate of $5.0 million over the next two years for
the development of the chip component of the HyChip system.
General and administrative expenses were $931,000 in the quarter ended March
31, 1997 compared to $401,000 in the same period of 1996. This increase
resulted primarily from increased marketing and business development expenses,
and the addition of management personnel and administrative staff to support
the continued expansion of the Company's sequencing production and data
analysis capabilities. In addition, during the period ended March 31, 1997,
the Company incurred legal expenses associated with its suit filed against
Affymetrix in March 1997. As the Company expands operations, general and
administrative expenses in support of such expansion are expected to increase.
Interest Income (Expense), Net. Net interest income increased to $49,000 in
the quarter ended March 31, 1997 from an expense of $6,000 in the same period
of 1996. The increase in interest income for the first quarter of 1997 as
compared to the first quarter of 1996 results from larger cash and investment
balances held by the Company primarily due to the realization of $9.9 million
in net proceeds from its private placement of Series A Preferred Stock in the
second quarter of 1996.
Net Loss. The Company incurred a net loss for the three months ended March
31, 1997 of $1.9 million compared to $1.3 million in the same period of 1996.
Since inception, the Company has incurred operating losses, and as of March
31, 1997, had an accumulated deficit of $10.1 million. As of December 31,
1996, the Company had a net operating loss carryover for federal income tax
purposes of approximately $7.4 million, the majority of which expires, if
unused, in the year 2011. Utilization of the net operating loss carryover is
expected to be subject to a substantial annual limitation because of the
"change in ownership" provisions of the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
losses before utilization. See Note 8 of Notes to Consolidated Financial
Statements.
20
<PAGE>
Years Ended December 31, 1996, 1995 and 1994
Contract Revenues. Contract revenues were $426,000 and $2.1 million in 1996
and 1995, respectively. The Company did not lease and begin build-out of a
facility until May 1994, and did not commence operations until the fourth
quarter of 1994. As a result, the Company did not recognize any significant
revenues in 1994. Contract revenues recognized in 1996 related to the
Company's NIST grant, and in 1995 related to the NIST grant and agreements
with a pharmaceutical company and with SmithKline Beecham. The Company
recognized revenues under those agreements as milestones were achieved.
Operating Expenses. Total operating expenses, consisting of research and
development expenses and general and administrative expenses, were $5.5
million in 1996 compared to $2.7 million in 1995 and $2.3 million in 1994.
Research and development expenses increased to $3.7 million in 1996 from
$1.8 million in 1995 and $851,000 in 1994. Increases in expenses from 1995 to
1996 resulted primarily from expanded sequencing production, software and
database development, addition of scientific personnel and intellectual
property protection. Increases from 1994 to 1995 were the result of the
addition of scientific personnel, growth of research activities and increased
legal costs associated with prosecuting the Company's patent portfolio, all
primarily related to the expansion and improvements in sequencing production.
General and administrative expense were $1.7 million in 1996 compared to
$938,000 in 1995 and $1.5 million in 1994. The increase from 1995 to 1996 was
due primarily to increased marketing and business development expenses and the
addition of management personnel and administrative staff to support the
continued expansion of the Company's sequencing production and data analysis
capabilities. The decrease from 1994 to 1995 was primarily the result of the
reduction in non-recurring start-up expenses.
Interest Income (Expense), Net. Net interest income increased to $220,000 in
1996 from $21,000 in 1995 and $16,000 in 1994. The increase in interest income
for 1996 resulted from larger cash and investment balances held by the Company
primarily due to the realization of approximately $9.9 million in net proceeds
from its private placement of Series A Preferred Stock in 1996. The increase
from 1994 to 1995 is primarily due to the interest income on higher average
investment balances resulting from approximately $1.0 million of net proceeds
received in 1995 from its private placement of Series A Preferred Stock.
Net Loss. Since inception the Company has incurred operating losses, and as
of December 31, 1996 had an accumulated deficit of $8.2 million. The Company
incurred a net loss for the year ended December 31, 1996 of $4.8 million
compared to a loss of $601,000 and $2.3 million in 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had $4.7 million in cash, cash equivalents
and marketable securities, compared to $6.7 million as of December 31, 1996.
This decrease reflects net cash used in operations of $1.7 million and for
capital expenditures of $208,000 during the three months ended March 31, 1997,
partially offset by payments received under the Company's NIST grant.
Subsequent to March 31, 1997, Chiron and Perkin-Elmer invested $5.0 million
each in connection with collaboration agreements with the Company. The Company
has classified all of its investments as short-term at March 31, 1997, as the
Company may hold its investments until maturity in order to take advantage of
favorable market conditions. Cash and investments are held currently in U.S.
Treasury and government agency obligations, investment-grade commercial paper
and interest-bearing securities and are invested in accordance with the
Company's investment policy with primary objectives of liquidity, safety of
principal and diversity of investments.
Cash used in operating activities increased from $510,000 in 1995 to $4.3
million in 1996 due to costs associated with the expansion of the Company's
sequencing production and data analysis capabilities. The
21
<PAGE>
increases in cash used in operating activities for the year ended December 31,
1996 as compared to 1995 were offset in part by payments received in those
periods pursuant to collaborative arrangements and receipt of revenues from
the Company's NIST grant.
The Company's investing activities, other than purchase and sales of cash
equivalent investments, have consisted of capital expenditures, which totaled
$943,000, $679,000 and $415,000 for the years ended December 31, 1996, 1995
and 1994, respectively. Capital expenditures increased in 1996 and 1995
primarily due to leasehold improvements in the Company's facilities and the
purchase of new equipment and workstations required in conjunction with the
Company's expanded sequencing production and software development activities.
Capital expenditures increased in 1994 related primarily to leasehold
improvements and as a result of purchases of new equipment to commence
operations.
Net cash provided by financing activities increased to $11.2 million for the
year ended December 31, 1996 from $1.0 million in 1995. Net cash provided by
financing activities in 1996 reflects primarily the $9.9 million in net
proceeds from the private offering as well as a $750,000 equipment loan. Net
cash provided by financing activities of $1.0 million in 1995 reflects
primarily the $949,000 in net proceeds from the sale of Series A Preferred
Stock to investors, partially offset by principal payments on capital lease
obligations.
The Company expects its cash requirements to increase significantly in
future periods because of the planned expansion of sequencing operations and
software development and improvement efforts and increased work on gene
discovery and new technology development expenses relating to the HyChip
Module and related products. In addition, the Company expects to expend
additional cash in 1998 and beyond for capital improvements to acquire a
larger facility and the associated lease expenses related thereto. The Company
expects to continue to fund future operations with revenues from existing
collaborations in addition to using its current cash, cash equivalents and
investments when necessary. The Company intends to fund development of HyChip
products with funds received under its NIST grant and the proceeds of its
$5.0 million private placement of Series B Preferred Stock with Perkin-Elmer,
which will be completed on or about June 20, 1997, subject to approval by the
Perkin-Elmer board of directors.
The Company expects that the estimated net proceeds from this offering and
the Private Placement, together with existing capital resources, will be
sufficient to support the Company's operations through 1999. The Company's
estimate of the time period for which cash funds will be adequate to fund its
operations is a forward-looking estimate subject to risks and uncertainty, and
actual results may differ materially. The Company's future capital
requirements and the adequacy of its available funds will depend on many
factors, including, but not limited to, scientific progress in its research
and development programs and the magnitude of those programs, the ability of
the Company to establish collaborative and licensing arrangements and the
financial commitments involved in such arrangements.
There can be no assurance that the Company will be able to establish
additional collaborations or that such collaborations will produce revenues,
which together with the Company's cash, cash equivalents and marketable
securities, will be adequate to fund the Company's operations. The Company's
cash requirements depend on numerous factors, including the ability of the
Company to attract collaboration partners; the Company's research and
development activities; competing technological and market developments; the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; and the purchase of additional capital
equipment, including capital equipment necessary to insure that the Company's
sequencing operation remains competitive. There can be no assurance that
additional funding, if necessary, will be available on favorable terms, if at
all. See "Risk Factors--Need for Future Capital; Uncertainty of Additional
Funding."
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BUSINESS
OVERVIEW
Hyseq, Inc. ("Hyseq" or the "Company") applies the proprietary DNA array
technology of its integrated HyX genomic platform (the "HyX Platform") to
develop gene-based therapeutic product candidates and diagnostic products and
tests. The Company believes that its HyX Platform, which utilizes the
Company's proprietary sequencing by hybridization ("SBH") technology as its
foundation, generates higher gene sequence throughput with greater analytical
flexibility and accuracy and lower cost than prevailing technologies. The HyX
Platform's Gene Discovery Module presently is analyzing human DNA samples at a
rate of approximately 400,000 partial sequences per month, representing
approximately 50% of the Module's current capacity. Based in part on this rate
of analysis and on published industry information, the Company believes that
its HyGenomics Database of partial gene sequences is one of the largest
proprietary human gene databases in the world.
The Company believes the ability of its HyX Platform to process millions of
samples per year and sequence billions of bases per year represents a
fundamental advance in performing genomic experimentation, gene discovery,
gene function analyses and diagnostic testing in commercial-scale volumes. The
HyX Platform includes (i) a comprehensive set of labeled DNA probes; (ii) DNA
arrays of samples and probes; (iii) three software-driven modules (Gene
Discovery, HyGnostics and HyChip Modules), which provide flexible DNA probe
selection to customize the level and type of analysis; (iv) industrial
robotics systems for screening DNA probes against DNA samples; and (v)
bioinformatics to manage and analyze genetic information. These combined
technologies enable the Company to conduct a range of genomic applications,
including gene identification, expression level determination, gene
interaction studies, polymorphism screening, diagnostic testing and genetic
mapping, on one integrated platform.
Hyseq's strategy is to engage in large-scale gene discovery and to establish
collaborations to facilitate development and commercialization activities.
Hyseq believes that this research- and partner-driven approach creates
significant operational and financial advantages for the Company and may
accelerate commercial development of new therapeutic and diagnostic products.
The Company has an exclusive collaboration with Chiron Corporation ("Chiron")
to develop therapeutics, diagnostic molecules and vaccines relating to a
specified disease area. The Company has entered into initial agreements with
SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline Beecham") and
Quest Diagnostics Incorporated ("Quest"), two of the three largest clinical
reference laboratories in the United States, relating to evaluation of the
HyGnostics Module for commercial-scale diagnostic testing. The Company is
collaborating with The Perkin-Elmer Corporation ("Perkin-Elmer") to
commercialize HyChip products.
Hyseq intends to patent commercially relevant genes and gene-based products
obtained through application of its HyX Platform. The Company believes that
information about the biological function of genes is critical to obtaining
such patents. Further, the Company believes that the HyX Platform's ability to
perform complete sequencing rapidly and cost effectively may accelerate the
characterization of gene function and enhance the discovery and development of
new therapeutic product candidates and diagnostic products and tests. The
Company has three issued U.S. patents and several pending patent applications
covering SBH technology and the use of its proprietary DNA array technology.
Several other pending patent applications cover apparatus and applications of
its technology and a number of partial gene sequences identified in its gene
discovery program.
BACKGROUND
Genes are the hereditary units that control the structure, health and
function of all organisms. The study of genes and their functions has led to
the development of products and services for diverse markets ranging from
health care to agriculture. In 1996, sales of human gene-based products,
including erythropoietin, human insulin, granulocyte colony stimulating factor
and tissue plasminogen activator, totaled over $6 billion. Genomics, the study
of all genetic information of organisms, is a growing field that is expected
to lead to the development of additional gene-based therapeutics like
erythropoietin ("EPO"), small molecules and other drugs and diagnostic tests
for detection of genetic conditions.
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The Genetic Code
The entire genetic content of each organism, known as its genome, is encoded
in deoxyribonucleic acid ("DNA"). DNA, which is found in cells, is a molecule
comprising two single strands entwined in the form of a double helix. Various
combinations of four chemical building blocks or "bases" of DNA, adenine
("A"), thymine ("T"), cytosine ("C") and guanine ("G"), are linked together in
series to form each DNA strand. The bases of one DNA strand bind to the bases
of the other strand in a specific fashion to form "base pairs": A pairs with T
and G pairs with C. In humans, there are approximately six billion base pairs
organized into 23 pairs of DNA structures called "chromosomes."
A gene comprises a series of groupings of three bases on a DNA strand that
encodes specific amino acids which, in turn, combine to form proteins. Gene
"sequencing" is the process of determining the order in which these bases are
linked together to form a gene. Scientists believe that approximately 10% of
human DNA comprises genes, with most of the remaining 90% being of unknown
function. The human genome has been estimated to contain approximately 150,000
genes which encode proteins. Proteins are essential to cellular structure,
growth and function and, thus, are the principal determinants of an organism's
characteristics.
Scientists believe that each gene has two basic regions, a structural region
and a regulatory region. The structural region of a gene encodes a specific
protein. The process by which the structural region of a gene directs the
production of a protein is known as gene expression. In that process, the
sequence of bases in a gene is copied into a related molecule called messenger
ribonucleic acid ("mRNA"). The mRNA instructs the cell to combine amino acids
together in a particular order to form a protein. The regulatory region of a
gene is responsible for the rate of gene expression and the resultant amount
of a given protein produced in specific cells of the body.
THE HUMAN GENOME
[GRAPHICS APPEARS HERE]
Figure 1 is a black and white schematic diagram entitled "The Human Genome"
which illustrates protein formation. At the top left corner of the diagram are
pictures of five human cells. An arrow points from the cells to a karyotype of
chromosomes. An arrow points from this picture to an enlarged figure of double
stranded DNA. An arrow points from the DNA picture to a figure representing
messenger RNA ("mRNA"). Lastly, an arrow points from the mRNA to a molecule
representing protein.
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The Relationship Between Genes and Disease
Because genes encode proteins, which govern substantially all functions of
the human body, the sequences of genes and their levels of expression
determine when, where and how well essential functions are performed. The
addition, deletion or substitution of one or more bases in a gene, known as a
"mutation," can alter a protein or a gene's level of expression and result in
a disease condition. For example, whether a cell is cancerous or normal may
depend upon the presence or absence of a mutation in the "p53" human cancer
suppressor gene. Similarly, scientists believe that whether an individual
develops acquired immune deficiency syndrome ("AIDS") upon infection with the
human immunodeficiency virus ("HIV") is, in part, a function of at least one
human gene sequence. Moreover, the susceptibility of a particular strain of
HIV to drug treatment may depend upon the sequence of the viral strain's
genome. Most diseases are believed to be polygenic, in that multiple genes
interact to cause or affect a disease condition. In developing a drug for a
polygenic disease like diabetes, the most effective target may be best
selected when all genes which interact to cause or affect the disease are
known.
Applications of Genomics to Understanding Disease
Detailed knowledge of gene sequences that encode missing, defective or
abnormally expressed proteins and an understanding of gene interactions in
disease conditions offer the potential to develop novel therapeutic products
and diagnostic tests. Genomics provides the basis for developing drugs
designed to replace missing or defective proteins or to deactivate or limit
the effect of proteins that are present at excessive levels. Drugs also may be
designed to supplement proteins produced by normal genes. For example, anemia
can be treated by injecting a patient with EPO, a protein that stimulates the
production of red blood cells. Drugs also may be designed to remedy the
effects of defective genes by affecting their expression. In addition,
diagnostic tests for diseases can be developed by determining gene sequences
that predispose individuals to gene-related diseases.
Several genomic applications, including (i) polymorphism screening, (ii)
gene expression level studies, (iii) motif searches, and (iv) gene
identification, can provide critical insight into understanding disease and
developing therapeutic products and diagnostic tests. Polymorphism screening
involves sequencing the same gene in each member of a population of healthy
and diseased individuals to find naturally occurring variations or
"polymorphisms" in the gene sequence and correlating those polymorphisms with
the disease condition. Expression level studies compare the levels at which
genes are expressed in healthy and diseased individuals to correlate
differences with the disease condition. Motif searches, the screening of DNA
samples for short DNA segments that are associated with a specific function,
can be used to identify families of genes having similar functions as
potential therapeutic product candidates. Gene identification can be used to
find genes expressed at low levels. Such genes are said to be "rarely"
expressed because their corresponding mRNA is rarely found in tissue samples.
Because proteins expressed by rarely expressed genes, such as EPO, are more
effective in small quantities than proteins expressed by highly expressed
genes, they represent attractive candidates for potential therapeutic
products.
Limitations of Prevailing Technologies
Many biotechnology companies historically have been involved in the search
for genes that encode proteins with functions known to have commercial value.
Information from traditional genetics and molecular biology provides clues
about where to look for these genes, but the rate at which these genes can be
identified from this information is limited. The large market potential for
gene products led to the initiation of the Human Genome Project by the United
States government and to the formation of genomic companies. Given the volume
of sequence information in the human genome, genomics companies have focused
on partially sequencing human DNA that contains genes that encode proteins
(approximately 10% of all human DNA).
To date, genomics companies have relied primarily on gel-sequencing
technology to identify genes and obtain sequence information. Gel sequencing
involves the production of multiple DNA copies, each of which is successively
shorter by one base. The last base of each copy is labeled with a fluorescent
tag to identify it as an
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A, T, C or G. The copies are then introduced into a gel sequencer that uses an
electrical field to move the labeled copies through a gel. The copies move
through the gel at different rates, with shorter copies moving faster than
longer copies. The gel must be run for several hours to separate the copies
sufficiently to be read by a detector which identifies the end base as an A,
T, C or G as the copies move through the detector. The sequence of the
successive readouts represents the sequence of the DNA sample. Because the
readouts generated by this process may yield ambiguous information, the gel
may be run several times to ensure complete accuracy. If a technician cannot
resolve an ambiguity, the process is repeated and may require additional
treatment of the DNA sample.
Genomics companies use gel sequencing primarily to generate short sequences,
known as expressed sequence tags ("ESTs"), which assist in gene
identification. In producing ESTs, portions of mRNA sequences from tissue
samples are first copied into a form of DNA called complementary DNA ("cDNA").
An EST is then obtained by sequencing an end of the cDNA, thereby "tagging"
the cDNA. As a result, the EST is only a partial sequence of one end of a
partial copy of an mRNA. To identify new genes, genomics companies produce
large numbers of ESTs and collect them into databases. The ESTs are then
compared to sequences of known genes to determine whether a new gene may have
been identified. While gel sequencing and ESTs have generated higher volumes
of gene sequence information than other prevailing technologies. These
technologies are relatively labor intensive and time consuming, creating
limitations in throughput, flexibility of applications, accuracy and cost.
THE HYSEQ DNA ARRAY SOLUTION
The Company believes that the ability of its HyX Platform to process
millions of samples per year and sequence billions of bases per year
represents a fundamental advance in performing genomic experimentation, gene
discovery, gene function analyses and diagnostic testing in commercial-scale
volumes. The Company believes that its HyX Platform, which utilizes the
Company's proprietary SBH technology as its foundation, generates higher gene
sequence throughput with greater analytical flexibility and accuracy and lower
cost than prevailing technologies. The HyX Platform includes (i) a
comprehensive set of labeled DNA probes; (ii) DNA arrays of samples and
probes; (iii) three software-driven modules, which enable user-driven DNA
probe selection to customize the level and type of analysis; (iv) industrial
robotics systems for screening DNA probes against DNA samples; and (v)
bioinformatics to manage and analyze genetic information. The HyX Platform's
software-driven modules include:
Gene Discovery Module: The Company's Gene Discovery Module is designed to
screen or sequence large numbers of human DNA samples (typically, 30,000 to
50,000 samples per batch) for correlation and comparison of such sequences
in gene discovery and genomic experimentation. The information generated by
the Gene Discovery Module is stored in the Company's HyGenomics Database,
which the Company believes is one of the largest human gene databases in
the world. This module is being used internally to identify proprietary
gene-based therapeutic candidates in the central nervous system,
cardiovascular and infectious disease areas and therapeutic product
candidates that impact cell receptors. The Company has an exclusive
collaboration with Chiron to develop therapeutics, diagnostic molecules and
vaccines relating to a specified disease area.
HyGnostics Module: The Company's HyGnostics Module is designed to
sequence small to medium numbers of DNA samples (typically, 10 to 1,000
samples per batch) for diagnostic applications, including DNA testing of
genetic and infectious disease and cancer. The Company is currently
marketing its HyGnostics Module to major clinical reference laboratories,
and has entered into initial agreements with SmithKline Beecham and Quest
relating to evaluation of the HyGnostics Module for commercial-scale
diagnostic testing. In a recent blind test conducted by SmithKline Beecham,
the HyGnostics Module was 100% accurate and met or exceeded all
requirements for sensitivity, cost, speed, correct heterozygote sequencing,
reproducibility and temperature range.
HyChip Module: The Company's HyChip Module is designed to sequence, in a
single reaction, DNA samples ranging in size from the detection of single
base mutations to the sequencing of entire viral genomes. The HyChip Module
is being used internally for research applications. The Company has an
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exclusive collaboration with Perkin-Elmer to co-develop and commercialize
gene-sequencing systems targeted at specific DNA research and diagnostic
applications utilizing HyChip products and Perkin-Elmer's life science
system capabilities. The Company has conducted tests on its HyChip Module
in which a set of probes capable of complete sequencing of all mutations
was applied to samples of the HIV genome, which the Company believes is the
first time such capacity has been demonstrated. The HyChip Module also has
the capacity to sequence 64,000 bases in one reaction, which the Company
believes is the greatest amount of DNA sequencing capacity demonstrated to
date.
The Company believes that its HyX Platform represents a significant advance
in analyses such as gene identification, expression level determination, gene
interaction studies, polymorphism screening, diagnostic testing and genetic
mapping. As indicated in the chart below, the analyses performed on the
modules of the HyX Platform generate information for the HyGenomics Database,
which the Company intends to utilize independently and with collaboration
partners to develop potential therapeutic product candidates and diagnostics
tests.
HYX PLATFORM APPLICATIONS IN GENOMICS
[GRAPHIC APPEARS HERE]
Figure 2 is a black and white schematic diagram entitled "HyX Platform
Applications in Genomics". From top to bottom, the diagram reads across five
tiers of boxes. At the top of the diagram is a small box labeled "Tissue
Samples". An arrow extends from this box and points to a large box labeled
"Hyseq's Fully Integrated, Industrial Scale Genomics Platform" with three
subheadings listed as follows: "Gene Discovery Module, "HyGnostics Module" and
HyChip Module". Six arrows extend from this box and each point to one of six
boxes, all located on the same tier. The six boxes are labeled as follows:
"Motif Searching", "Gene Identification", "Expression Level Determination",
"Gene Interaction Studies", "Polymorphism Analysis' Diagnostics" and Genetic
Mapping". Each of these six boxes has a doubled headed arrow which points to one
box situated at the next tier below the six boxes and this box is labeled
"HyGenomics Database". Two arrows point down from the "HyGenomics Database" box
to one of two boxes situated on the last tier; one box is labeled "Therapeutic
Target and Product Opportunities" and the other box is labeled "Diagnostic Test
Opportunities".
ADVANTAGES OF THE HYX PLATFORM
Higher Throughput
Ability to Obtain More Gene Targets for Monogenic and Polygenic
Diseases. Researchers have focused primarily on identifying single genes that
may be involved in a disease due to throughput limitations of prevailing
technologies. While this may be an effective approach to understanding
monogenic disorders in which one gene is the predominant cause of a disease,
most diseases are believed to be polygenic. The Company believes that the
Hyseq gene sequencing approach provides researchers with the first industrial-
scale tool for comprehensively analyzing gene identities and expression levels
in a cell or tissue. Similarly, effective gene interaction studies that
identify genes involved in polygenic disease under various conditions require
the ability to process millions
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of cDNAs. The HyX Platform's Gene Discovery Module presently is analyzing
human tissue samples at a rate of approximately 400,000 partial gene sequences
per month, representing approximately 50% of a module's current capacity. The
Company believes that this high capacity gives it an advantage in performing
effective gene identification and gene interaction studies, which are required
to obtain gene targets on an industrial scale. The Company believes that these
capabilities enhance the ability of researchers to focus on multiple genes
involved in a disease.
Ability to Effectively Conduct Polymorphism Screening. Genes correlated with
disease may be sequenced to identify polymorphisms in an attempt to understand
what significance, if any, mutations may have. Polymorphism screening for such
polygenic diseases typically involves sequencing many genes, some or all of
which may be thousands of bases in length, from thousands of healthy and
diseased individuals. An understanding of polygenic disease also requires
analysis of gene interactions that cause or affect the disease. The Company
believes that effective polymorphism screening, which is an element of genomic
experimentation and diagnostic testing, requires the ability to sequence
billions of bases per year. The Hyseq Gene Discovery Module presently can
analyze batches of approximately 30,000 to 50,000 DNA samples that can be
1,000 bases in length each (up to approximately 50,000,000 total bases per
batch). By comparison, gel sequencers presently can analyze batches of
approximately 75 DNA samples that each can be up to 500 bases in length (up to
approximately 37,500 total bases per batch).
Identification of Rarely Expressed Genes. Scientists believe that rarely
expressed genes encode regulatory proteins of all kinds, including receptors
and hormones. Because rarely expressed genes are represented by far fewer
copies of mRNA in a given tissue sample than highly expressed genes, large
numbers of cDNAs may have to be analyzed before the cDNA of a rarely expressed
gene is found. The Company believes that its high throughput significantly
enhances its ability to analyze the large number of cDNAs necessary to find
rarely expressed genes. Out of the hundreds of thousands of mRNAs present in a
typical tissue sample, only a few copies of mRNA for rarely expressed genes
are present. The Hyseq Gene Discovery Module is capable of identifying a copy
of mRNA that appears only once per cell in such a tissue sample.
Diagnostics. A gene involved in a disease like cystic fibrosis may be
thousands of bases long and can contain disease-causing mutations at any one
or more of hundreds of locations. Accurately diagnosing such a disease can
often depend upon complete sequencing of the gene. Moreover, accurately
diagnosing polygenic diseases such as diabetes may require sequencing of
several genes. The Company's HyGnostics Module can completely sequence genes
such that all mutations are identified. The high throughput of the HyGnostics
Module also allows many genes from the same sample to be sequenced in a single
batch, thereby facilitating diagnosis of polygenic disorders. The Company
believes that these features make the HyGnostics Module particularly useful in
commercial-scale diagnostic applications.
Greater Flexibility
Functional Analyses. The Company believes that determining a gene's function
is a critical step in patenting and commercializing a gene or gene product.
The Company believes that the flexibility of the Hyseq Gene Discovery Module,
which allows researchers to obtain the appropriate level of functional
information from motifs, gene expression studies and complete sequences, is
expected to accelerate the characterization of function. Unlike prevailing
technologies, the HyX Platform's ability to sequence genes at multiple levels
of completeness makes it appropriate for a large number of therapeutic and
diagnostic applications. Using software commands, the level of completeness
can be adjusted from intermittent sequencing for gene identification and
expression level determination to partial sequencing for motif searches to
complete sequencing for diagnostics. For example, in scanning sequences
associated with a growth factor function, the Company can screen millions of
DNA samples for the presence of a growth factor motif without completely
sequencing the samples.
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Expansion of Diagnostics Applications. The flexibility of the HyGnostics
Module is derived from simple software commands that allow the user to rapidly
add new DNA tests or new mutations to existing tests on one platform with one
set of supplies, rather than using systems supplied by multiple vendors. This
one-platform approach enables the user to screen for mutations and sequence
the identified mutation on a single platform and enables the user to introduce
new tests in response to market demand. Unlike biochip approaches which are
test-specific and require development of a new biochip for each modification
or for each new test, the HyGnostics Module's software allows the user to
perform multiple tests for multiple targets (e.g., both the CF gene and HIV)
in one batch without any hardware or biochip modifications.
High Degree of Accuracy
The Company believes that SBH is highly accurate because SBH technology
compiles multiple overlapping sequences of bases for each DNA sample, thereby
providing multiple verifications of each base in a sequence in one run as
opposed to the three to eight runs typically required for comparable accuracy
in gel sequencing. Accuracy is critical in patenting genes because a patent
claim containing inaccurate sequence information can nullify the protection
intended by the patent. In diagnostics, accuracy is critical to avoiding
misdiagnoses and possible injury to patients. Based in part upon a blind test
conducted by SmithKline Beecham, the Company believes that its Gene Discovery
and HyGnostics Modules produce complete sequences with significantly better
accuracy per run than gel sequencing. Additionally, the Company's HyGnostics
and HyChip Modules can accurately sequence mutations in the form of insertions
or deletions of bases. See "--Technology."
Greater Cost Effectiveness
Based on the Company's cost and cost information for gel sequencing reported
in commercial and scientific publications, the Company believes that it can
identify genes and produce complete DNA sequences at a lower cost than gel
sequencing. Overall, the Hyseq modules require less labor than gel sequencing,
in part because of the elimination of multiple steps involved in sample
preparation and interpretation. Hyseq can analyze approximately twice the
amount of DNA bases per sample in batches containing, on average, over 1,000
times the total number of bases per batch as gel sequencing. Moreover, the
Company's modules can sequence DNA samples significantly faster per batch than
current gel sequencers.
STRATEGY
Hyseq's strategy is to engage in large-scale gene discovery and to establish
collaborations to facilitate development and commercialization activities.
Hyseq believes that this research- and partner-driven approach may create
significant operational and financial advantages for the Company and
accelerate commercial development of new therapeutic and diagnostic products.
The following are key elements of the Company's strategy.
Therapeutics
Discover Gene-Based Pharmaceutical Candidates and Commercialize Them Through
Collaboration Partners. Hyseq presently is concentrating on generating
proprietary product candidates in areas where a gene sequence can be directly
used in manufacturing pharmaceuticals. Products may include therapeutic
proteins and gene therapy and diagnostic product candidates that the Company
intends to transfer to collaboration partners for bioassays, protein
expression, regulatory review, manufacturing and marketing. The Company is
focusing initially on candidates that affect cell receptors and certain
central nervous system, cardiovascular and infectious diseases.
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Establish Collaborations for Disease-Specific Programs. The Company is
pursuing selected collaborations with pharmaceutical and biotechnology
companies to discover, develop and commercialize new product candidates in
narrowly defined disease categories. The Company seeks collaboration partners
with expertise in expression, bioassays, preclinical and clinical regulatory
review and marketing. To enhance profitability in the near term, the Company
intends to seek revenues in the form of up-front and milestone payments and
database access fees. To enhance revenues in the long term, the Company
intends to seek royalties on sales of products resulting from the
collaborations. The Company has an exclusive collaboration with Chiron to
develop therapeutics, diagnostic molecules and vaccines relating to a
specified disease area.
Implement Commercial-Scale Genomic Experimentation. The Company believes
that the ability of its HyX Platform to process millions of samples per year
and sequence billions of bases per year represents a fundamental advance in
DNA sequencing analysis that enables genomic experimentation in commercial-
scale volumes. Hyseq's strategy is to leverage this genomic experimentation
capacity by screening large numbers of samples for expression levels from
cells under various conditions in order to correlate disease conditions with
genetic changes and by large-scale partial sequencing of samples to find
disease-related polymorphisms. The Company believes that the resultant rapid
expansion of its HyGenomics Database will provide the Company and its
collaboration partners a competitive advantage in patenting and
commercializing gene-based pharmaceutical products.
Diagnostics
Expand Marketing of the HyGnostics Module for Diagnostic Testing. The
Company seeks to become a leader in the field of DNA sequence diagnostics by
expanding its HyGnostics Module licensing program for clinical reference
laboratories. The HyGnostics Module permits multiple DNA analyses, including
sequencing diagnostics, point mutation detection, population screening, gene
sequencing and confirmatory assays on an integrated platform, which the
Company believes can replace proprietary technologies from multiple vendors.
The Company believes that licensing of the HyGnostics Module and diagnostic
tests may offer near-term and intermediate sources of product revenues. The
independent clinical reference laboratory market is highly concentrated in
three companies, LabCorps, Quest and SmithKline Beecham, which account for
approximately 42% of that market. The Company believes that in the near and
intermediate term such genetic tests will be predominately performed by large
clinical reference laboratories which have the resources to introduce, market
and support such tests. The Company presently has initial agreements with
SmithKline Beecham and Quest relating to evaluation of its HyGnostics Module
for commercial-scale diagnostic testing.
Market HyGnostics Module for Accelerating Clinical Trials. As part of its
HyGnostics licensing program, the Company intends to design and market
diagnostic tests for use by companies in qualifying participants for clinical
trials. In the pharmaceutical industry, the availability of diagnostic tests
which allow patients to be genetically profiled for response to a therapeutic
product and to proactively profile patients at risk for major diseases offers
the potential to dramatically reduce the cost and time of the pharmaceutical
development cycle. Such diagnostic tests also can be effective in diagnosing
and monitoring patients once the drugs are approved. The Company believes that
tests for accelerating clinical trials may provide near-term and intermediate-
term sources of revenue.
Commercialize HyChip Products Through Collaborations. Hyseq presently is
using the HyChip Module internally for a variety of research applications. The
Company has identified numerous diagnostic and research applications that
require sequencing large amounts of DNA per sample, including sequencing of
entire viral genomes. The Company is collaborating with Perkin-Elmer to
commercialize HyChip products targeted at specific DNA research and diagnostic
applications. The Company believes Perkin-Elmer's expertise in the design,
manufacture and marketing of scientific instruments for research and
diagnostics will allow the Company to significantly accelerate HyChip product
development. The Company and Perkin-Elmer intend to market HyChip products so
as to receive revenues from sales of HyChip systems and from royalties on
products discovered using HyChip products. See "--Collaborative and Other
Arrangements."
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TECHNOLOGY
The HyX Platform
The HyX Platform combines the Company's DNA array technology with software-
driven flexibility for therapeutic candidate discovery and diagnostic testing.
The HyX Platform, which utilizes the Company's proprietary SBH technology as
its foundation, provides a range of genomic applications on one integrated
platform, including gene identification, expression level determination, gene
interaction studies, polymorphism screening, diagnostic testing and genetic
mapping. The HyX Platform includes (i) a comprehensive set of labeled DNA
probes; (ii) DNA arrays of samples and probes; (iii) three software-driven
modules, which enable user-driven probe selection to customize the level and
type of analysis; (iv) industrial robotics systems for screening DNA probes
against DNA samples; and (v) bioinformatics to manage and analyze genetic
information. The Company's Gene Discovery Module is designed for discovery and
functional analysis of potential therapeutic product candidates. The Company's
HyGnostics Module is designed for use by clinical reference laboratories for
diagnostic testing of genetic and infectious diseases and cancer. The
Company's HyChip Module is being used internally for research applications and
is being developed for commercial applications targeted at specific DNA
research and diagnostic applications.
SBH Technology
In the versions of SBH technology presently used by the Company, DNA
sequences are determined by "hybridizing" or binding labeled DNA probes (short
fragments of chemically tagged DNA which have known sequences) to DNA samples.
Using Hyseq's proprietary software, labeled DNA probes are selected from the
Company's comprehensive set of DNA probes and screened against DNA samples.
The labeled probes used on a given DNA array are selected and applied in a
highly automated and proprietary software-controlled process, giving users
flexibility in directing the type and level of analysis to be performed. Each
labeled probe binds to segments of a DNA sample that have matching or
"complementary" sequences. Upon completion of the hybridization process, the
sequences of the labeled probes that bind to the sample are overlapped to form
columns of identical bases. Reading the base in each column, Hyseq's
proprietary bioinformatics then assembles a DNA sample's sequence. The
redundancy created by overlapping multiple DNA probes generates highly
accurate DNA sequence information. The DNA sequence information from the
sample enables the Company to track a gene's role and activity in disease
conditions and, hence, to evaluate the gene as a potential therapeutic or
diagnostic product candidate.
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THE HYBRIDIZATION AND SEQUENCE ASSEMBLY PROCESS
[GRAPHIC APPEARS HERE]
Figure 3 is a black and white schematic diagram entitled "The Hybridization and
Sequence Assembly Process". From left to right, the diagram reads across four
stations. The first station, on the leftmost side of the diagram, has three
vertical, parallel lines, two of which represent a sample of DNA as two single
strands, and a third line, which is placed between the two strands of DNA, which
represents a probe hybridized to one of the DNA strands. A sunburst figure is
placed at the base of the third line to represent a label attached to the probe.
An arrow from this station points to a second station which is a box with a list
of probe DNA sequences which hybridize to the DNA sample. An arrow from the
second station points to the next station which is a box with a list of the
probes' DNA sequences maximally overlapped. An arrow from this station points
down to the fourth station which is a box with a unique assembled DNA sequence
obtained by reading down each column in the third station.
DNA Arrays
The HyX Platform uses industrial robots to print DNA arrays onto substrates
such as glass, plastic or paper. The HyX Platform's Gene Discovery Module
presently uses two types of DNA arrays: (i) DNA sample arrays with unknown
sequences in its Gene Discovery and HyGnostics Modules; and (ii) DNA probe
arrays with known sequences in its HyChip Module, to which a sample and one or
more labeled probes are applied. Tissue samples, such as blood or biopsy
tissues, are prepared by using standard biochemical methods for use with any
of the Company's DNA arrays.
Gene Discovery Arrays. The Gene Discovery array is designed to identify, map
and sequence large numbers of DNA samples within genomes and to correlate and
compare such sequences in gene discovery. The Gene Discovery Module
robotically prints an array of 30,000 to 50,000 DNA samples and then applies a
labeled probe or a set of probes of known sequence to each array. After
washing the array to remove unbound probes and determining which known probes
have hybridized to the DNA sample, an SBH process assembles the sequence of
that sample. The Company is using this type of array in generating proprietary
product candidates that affect cell receptors or that are candidates in
disease categories including certain cancer, central nervous system,
cardiovascular and infectious diseases.
HyGnostics Arrays. The HyGnostics array is designed to perform complete
sequencing of small to medium numbers of DNA samples. The HyGnostics Module
robotically prints duplicate arrays of 10 to 1,000 DNA samples, with each
array being printed inside a square of a grid that prevents fluid leakage from
one square to another, and then applies a labeled probe or set of probes to
each array. After washing the arrays, the known sequence of any labeled probe
that binds to a sample in the array is used in an SBH process to assemble the
sequence of that sample. The Company is marketing the HyGnostics Module to
clinical reference laboratories for the testing of genetic and infectious
disease and cancer.
HyChip Arrays. The HyChip array is designed for gene discovery and
diagnostic applications that require analysis of DNA samples in a range of
lengths, from detecting single base mutation to the sequencing of entire viral
genomes. The HyChip Module robotically prints duplicate arrays of different
unlabeled DNA probes on a substrate (the "chip" component of the HyChip
Module). The sequence of each unlabeled probe is known for
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each point in the array. A DNA sample, a labeled probe or set of probes and a
chemical linking agent are applied to each array. The sample then hybridizes
to a substrate-bound unlabeled probe and a free-floating labeled probe. The
two probes hybridize to the sample end-to-end and are bound together by the
chemical agent. After washing the arrays, the combined known sequences of the
labeled probe and the unlabeled probe to which it is linked are used in an SBH
process to assemble the sequence of the sample. The HyChip Module currently is
being used internally for research applications, while being developed for
commercial applications.
Hyseq's Integrated Platform
[GRAPHIC APPEARS HERE]
Figure 4 is a black and white schematic diagram entitled "The HyX Platform". The
diagram is arranged as three boxes, two of which are juxtaposed to each other
and a third box is placed below and centered between the two upper boxes. A line
with a sunburst image placed at one end of the line is situated between the
two upper boxes and is labeled "Labeled Probe Set". Three arrows point from the
Labeled Probe Set to one of the three boxes. The upper left box is an image of
laboratory results and is labeled "Gene Discovery Module". The upper right box
is an image of laboratory results and is labeled "HyGnostics Module". The lower
center box is an image of laboratory results and is labeled "HyChip Module".
THE HYX PLATFORM--The comprehensive set of labeled probes is a common
element among the types of DNA arrays currently being used by Hyseq.
Probe Selection
Hyseq's proprietary probe selection software gives users the flexibility to
select any combination of probes tailored for a given sample or genomic
application. For example, a technician can select the Gene Discovery Module
motif-searching application or the HyGnostics Module for complete sequencing.
The technician's selection is transmitted to an industrial robot that locates
appropriate probes from Hyseq's comprehensive collection of labeled probes and
then pipettes selected probes into multi-well plastic plates. By comparison,
other biochip approaches require hardware changes, in some cases including
design and retooling to manufacture new hardware, in order to switch among
applications.
Instrumentation
The multi-well plastic plate with the selected probes and one of the
Company's sample-containing DNA arrays are introduced into a proprietary
robotic hybridization station. The hybridization station applies the labeled
probes to the DNA array, incubates them for a programmed period of time and
then washes the unbound probes away. The DNA array with bound labeled probes
is transferred to a reader that detects the labeled probes' locations in the
array and transmits the data through a local area workstation network for
sequence assembly. The Company uses robots and readers with proprietary
modifications for integration into the Company's platform.
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Bioinformatics
The HyX Platform's sophisticated proprietary image analysis software can
extract as much as 50,000 sequence information bits in less than three
minutes. Data is stored in the HyGenomics Database, which the Company believes
is one of the largest human gene databases in the world. The Company believes
that the Database's design facilitates commercial-scale genomic
experimentation by providing capabilities for rapidly processing, storing,
retrieving and analyzing biological information and for manipulating that
information. The Company's bioinformatics software allows it to analyze and
compare SBH and other data in the HyGenomics Database, both internally and
against publicly available gene sequences. The Company's software also
performs similarity analyses for identifying identical or related gene
samples, sequence motif identification, differential gene expression analysis
and sequence assembly. The Company uses the BioMerge software of Molecular
Informatics Inc. for searching complete sequence and EST data.
APPLICATIONS OF THE HYX PLATFORM
Therapeutics
Gene Discovery. To identify the best potential therapeutic and diagnostic
product candidates, the Company is analyzing selected human tissues to
discover disease-related human genes and their functions. In addition to
screening for highly expressed genes, the Company is focusing on screening for
rarely expressed genes in these tissues. By obtaining information about the
degree to which a small number of probes hybridize to a cDNA, the HyX Platform
generates a unique intermittent partial sequence called a "signature" for that
cDNA. The Company uses signatures for identifying genes and for characterizing
their functions. Because the signatures are spread throughout the cDNA, and
not just at its end as is the case with ESTs, the Company believes that the
signature process is more accurate than the EST process in determining the
identity of a cDNA and, as a result, whether it represents a known or new
gene. By comparing such signatures, the number of identical, similar and
different cDNAs can be determined and inventoried. The Company presently is
analyzing human DNA samples at a rate of approximately 400,000 partial gene
sequences per month, representing 50% of the Gene Discovery Module's present
capacity.
Expression Monitoring. The relative gene expression levels corresponding to
cDNAs can be determined by comparing the number of copies of each signature
found in collections of cDNA samples such as those obtained from diseased and
normal tissues or before and after drug administration. Hyseq's signature
analysis differs from other technologies in that it can provide both identity
and expression level information in one analysis on a single platform.
Furthermore, unlike other approaches, expression levels of all expressed genes
can be determined. The Company believes that its high-throughput screening of
large DNA sample libraries may enable it to determine a gene's function by
examining the gene's pattern of expression. For example, a gene expressed in
the human prostate during the early stages of cancer, but not expressed in
other tissues or at other times, may be a marker for the cancer and may
provide insights into the biological mechanism of the cancer. The Company
currently is analyzing hundreds of thousands of DNA samples from a number of
tissue types to determine relative gene expression levels.
HyGenomics Database. The Company compiles DNA sequence information generated
by its Modules in its HyGenomics Database where the information is compared
against other sequences in the Database and sequences of known genes and
proteins in public databases. The Company believes that information generated
by these comparative analyses may facilitate the development of potential
therapeutic products and diagnostic tests. The Company intends to collaborate
with collaboration partners to develop products based on genetic information
in its HyGenomics Database. The Company believes that its HyGenomics Database
of partial gene sequences is one of the largest proprietary human gene
databases in the world.
Polymorphism Screening. By correlating a polymorphism with a specific
condition, polymorphism screening can be used to determine the significance of
gene regions to the function of the gene as a whole. This correlation assists
in targeting pharmaceuticals to appropriate regions of gene products (e.g., to
a binding site of a receptor). In a polymorphism study, the more types of
sequences that are screened, the more information
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regarding variability is obtained. Hyseq's high-throughput Gene Discovery
Module is designed to sequence tens of thousands of samples simultaneously.
The Company believes that conducting a successful polymorphism study requires
the ability to sequence billions of bases per year, which the HyX Platform can
provide more cost-effectively than other technologies.
Genetic Mapping. Genetic mapping is a method for linking diseases to
particular genes by correlating the presence or absence on chromosomes of
predetermined DNA sequences, known as markers, with a genetic trait.
Researchers attempt to locate genes by using markers in conditions such as
diabetes, asthma and cardiovascular disease. Tissue samples and histories from
families with members who have the disease are analyzed by comparing the
patterns of markers between healthy and diseased family members. A correlation
of a marker with a disease indicates that a gene or genes involved in the
disease is located near the marker. The more markers that are available, the
more likely it will be that a disease will be correlated with at least one of
these markers. The usual marker linkage process is labor intensive and
requires significant computational capabilities. The Company believes that its
ability to sequence and analyze billions of bases per year will generate
substantial numbers of markers, including markers consisting of entire gene
sequences, thus facilitating linkage of genes with disease.
Diagnostics
The Company believes that the ability of its DNA array technology to detect
gene mutations with a high level of accuracy broadens the scope of diagnostic
applications of its HyGnostics Module and can provide diagnostic tests on a
commercial scale more quickly and at a lower cost than other technologies.
Hyseq currently is marketing its HyGnostics Module for diagnostics testing of
genetic and infectious disease and cancer primarily to clinical reference
laboratories. In October 1995, the Company's wholly owned subsidiary, Hyseq
Diagnostics, Inc., entered into an initial agreement with SmithKline Beecham,
one of the nation's leading clinical reference laboratories. The agreement,
among other things, provides for the granting of a non-exclusive license to
use the HyGnostics Module in the United States for testing human genetic
disease and cancer. In May 1997, the Company entered into an initial agreement
with Quest relating to evaluation of the HyGnostics Module for commercial-
scale diagnostic testing. See "Collaborative and Other Arrangements."
Cancer. An estimated 1.35 million new cases of cancer will be diagnosed in
1997 in the United States and approximately 530,000 people will die from
cancer in 1997. Colorectal, breast, prostate and lung cancer account for about
half of all cancer diagnoses. The normal protein product of the p53 gene
controls cell replication, but a mutation in the gene may contribute to the
aggressive growth of some cancers, including colorectal, breast and bladder
cancers. Mutations have been observed at more than 400 distinct sites in the
p53 gene. Currently available antibody-based diagnostic tests detect
accumulation of p53 gene products, but not gene mutations, and gel-sequencing
methods are impractical because mutations occur over a large area requiring
many gels to be processed. Other biochip approaches are reported to be under
development for research purposes, but these approaches reportedly are unable
to sequence certain types of mutations and therefore may be less reliable than
gel sequencing. As a result, these methods have thus far been unable to
provide a practical prediction of susceptibility to cancer or the rate of
cancer progression, which would be valuable for determining an appropriate
cancer therapy.
The Company is currently developing cancer DNA sequencing tests for future
commercialization. The HyGnostics Module can apply any combination of its DNA
sequence probes to determine the gene sequences of patient samples. In a
recent blind test administered by SmithKline Beecham and designed to sequence
p53 samples, the HyGnostics Module was 100% accurate and met or exceeded all
requirements of the test for sensitivity, cost, speed, correct heterozygote
sequencing, reproducibility and temperature range. The results were
reproducible within and between runs. All types of mutations (substitutions,
insertions and deletions) were correctly sequenced, generating no false
positives or false negatives.
Infectious Diseases. The Company believes that its proprietary DNA array
technology has the potential to significantly improve the understanding of
infectious diseases and thereby advance their diagnosis and treatment. Hyseq
currently is using a version of the HyChip Module internally for research
applications and is developing HyChip products for commercial applications
with Perkin-Elmer. The Company is currently developing an HIV
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test for commercial use. Over 3.1 million individuals worldwide were estimated
to be infected with HIV in 1996. Approximately 75,000 individuals in the
United States were diagnosed with AIDS in 1996. Mutations in the HIV genome
have been correlated with the success of various therapies, and rapid mutation
in the HIV genome is an indicator of progression of the disease. Using the
HyChip Module, the Company has conducted tests in which it has scored all one
million possible probes 10 bases in length on HIV sequence samples. The
Company believes this is the first time that a set of probes capable of
complete sequencing of all mutations has been reported to be applied to HIV
sequence samples.
COLLABORATIVE AND OTHER ARRANGEMENTS
Chiron Corporation. In May 1997, the Company entered into an exclusive
collaboration with Chiron. Pursuant to the terms of the collaboration
agreement, the Company and Chiron are collaborating to develop therapeutics,
diagnostic molecules and vaccines relating to a specified disease area (the
"Disease Area"). The collaboration has an initial term of three years and can
be extended at Chiron's option for two additional two-year periods. Chiron has
guaranteed payment of a minimum of $8.5 million in the first year and $5.5
million in each of the two years thereafter in connection with the Company's
research on Chiron tissue sample libraries. The agreement requires the Company
to generate data at a specified level per year which, if not met could result
in the Company's breach of the agreement. Chiron has the exclusive right to
commercialize any Disease Area products resulting from the collaboration. The
Company will receive royalties on any such products. Pursuant to the terms of
a stock purchase agreement, Chiron concurrently acquired 427,350 shares of
Common Stock issuable upon the conversion of shares of Series B Preferred
Stock at $11.70 per share for a total investment of $5.0 million. The Series B
Preferred Stock will convert automatically into Common Stock on a 1.27-for-1
basis immediately upon the closing of this offering, which Common Stock will
split on a 1.92-for-1 basis. Concurrent with this offering, Chiron has agreed
to purchase 199,283 shares of Common Stock (based on an assumed initial public
offering price of $13.00 per share in this offering) directly from the Company
in the Private Placement at a price per share equal to the price to public,
less one-half of the underwriting discounts and commissions applicable to the
shares of Common Stock being offered to the public hereby, for an aggregate
purchase price of $2.5 million.
The Perkin-Elmer Corporation. In May 1997, the Company entered into an
agreement with Perkin-Elmer to combine the Company's super chip technology and
Perkin-Elmer's life science system capabilities to commercialize HyChip
products (collectively, the "HyChip System"). Pursuant to the terms of the
agreement, the Company is obligated to commit $5.0 million to further
development of the Company's "chip" component of the HyChip System over the
next two years, and Perkin-Elmer must commit certain funds to develop the
overall system. The collaboration has an initial term of five years and will
be extended automatically thereafter unless the parties mutually agree to
termination. The agreement contemplates that the design, development and
manufacture of the HyChip "chip" will be under the direction of the Company,
while design, development and manufacture of the system will be under the
direction of Perkin-Elmer. HyChip products will be distributed through Perkin-
Elmer's Applied Biosystems Division. Perkin-Elmer also has agreed to acquire
427,350 shares of Common Stock issuable upon the conversion of shares of
Series B Preferred Stock at $11.70 per share for a total investment of $5.0
million. The Series B Preferred Stock will convert automatically into Common
Stock on a 1.27-for-1 basis immediately upon the closing of this offering,
which Common Stock will split on a 1.92-for-1 basis. Concurrent with this
offering, Perkin-Elmer has agreed to purchase 398,566 shares of Common Stock
(based on an assumed initial public offering price of $13.00 per share in this
offering) directly from the Company in the Private Placement at a price per
share equal to the price to public, less one-half of the underwriting
discounts and commissions applicable to the shares of Common Stock being
offered to the public hereby, for an aggregate purchase price of $5.0 million.
See "--Government Regulation."
SmithKline Beecham Clinical Laboratories, Inc. In September 1995, the
Company entered into an initial agreement with SmithKline Beecham. The
agreement, among other things, required an up-front payment to the Company and
grants SmithKline Beecham a non-exclusive license to use the HyGnostics Module
in the United States for testing human genetic disease and cancer upon
satisfaction of certain conditions by the Company and payment of a license fee
by SmithKline Beecham. Under the conditions, which were satisfied in February
1997,
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SmithKline Beecham administered a blind test designed to sequence p53 samples.
The HyGnostics Module was 100% accurate and met or exceeded all requirements
of the test for sensitivity, cost, speed, correct heterozygote sequencing,
reproducibility and temperature range. All types of mutations (substitutions,
insertions and deletions) were correctly sequenced, generating no false
positives or false negatives. The agreement expires in October 1997 unless
SmithKline Beecham pays the license fee. The Company and SmithKline Beecham
are discussing possible modifications to, and expansion of, their relationship
under the agreement. As of June 30, 1997, the Company had received a total of
$200,000 from SmithKline Beecham.
Quest Diagnostics Incorporated. In May 1997, the Company entered into an
initial agreement with Quest pursuant to which the Company is performing an
evaluation project for Quest. The Company received a total of $75,000 from
Quest under the initial agreement. Depending upon the results of the
evaluation, Quest will continue negotiation of a non-exclusive license from
the Company.
The National Institute of Standards and Technology. In November 1994, the
Company was awarded a three-year, $2.0 million grant from The National
Institute of Standards and Technology ("NIST"). Funds received from NIST are
being applied to develop the Company's super chip technology, which is being
used in the HyChip Module. As of May 31, 1997, the Company had received a
total of approximately $1.4 million from NIST. The Company expects to receive
and apply the balance of the NIST grant in 1997. See "--Licensed Technology."
Conservation International, Inc. In February 1997, the Company entered into
an agreement with Conservation International, Inc. ("CII"), an environmental
conservation organization, to search for genetic products with commercial
potential. Pursuant to the terms of the agreement, the Company will focus on
initial areas of interest for further development with potential corporate
partners, with the initial focus being on rain forest species. CII will
provide research and other assistance in identifying potential products for
consideration and has received an initial $30,000 payment from the Company for
research relating to a specified product. The Company and potential corporate
partners will be responsible for all costs of development. The Company
believes that rain forest genetic information may be an important source of
genetic variety for developing new drugs and agricultural products.
COMPETITION
The Company believes that virtually all genes in the human genome will be
identified within several years. However, the Company believes that
determination of function, rather than identification, will be the primary
driver of competition in genomics since function is a critical element in
obtaining patent protection with respect to gene discovery and
commercialization. The Company believes that its primary competitors in
genomics are Human Genome Sciences, Inc. and Incyte Pharmaceuticals, Inc.,
which are using gel sequencers as part of their gene sequencing efforts. A
number of other companies engage in, or have announced plans to engage in,
gene discovery and have acquired, or could acquire, gel sequencers or other
technologies, or may develop alternative procedures for gene sequencing. Such
competitors may include major pharmaceutical and biotechnology firms and other
companies, not-for-profit entities and United States and foreign government-
financed programs, many of which have substantially greater research and
product development capabilities and financial, scientific, marketing and
human resources than the Company. These competitors may succeed in identifying
genes and determining their functions or developing products earlier than the
Company or its current or future collaboration partners, obtaining patents and
regulatory approvals for such products more rapidly than the Company or its
current or future collaboration partners, or developing products that are more
effective than those proposed to be developed by the Company or its
collaboration partners.
The Company believes that its ability to compete in genomics is dependent,
in part, upon its ability to continue to improve the HyX Platform to permit
more rapid identification of genes while improving its bioinformatics capacity
for analyzing gene sequences and identifying the possible function of the
genes sequenced. While the Company believes that its HyX Platform provides a
significant competitive advantage, any one of the Company's competitors may
discover and establish a patent position in one or more genes which the
Company has identified and designated as a product candidate. Loss of its SBH
patent rights also could remove
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a legal obstacle to competitors in designing platforms with similar
competitive advantages. Further, any potential products based on genes
identified by the Company ultimately will face competition both from companies
developing gene-based products and from companies developing other forms of
treatment for diseases which may be caused by, or related to, genes identified
by the Company. There can be no assurance that research and development by
others will not render the products which the Company or its collaboration
partners may develop, obsolete or uneconomical or result in treatments, cures
or diagnostics superior to any therapy or diagnostic developed by the Company
or its collaboration partners, or that any therapy developed by the Company or
its collaboration partners will be preferred to any existing or newly
developed technologies. Competition in this field is expected to intensify.
In the area of diagnostics, the Company competes primarily with Affymetrix,
Inc. ("Affymetrix"). See "--Litigation," regarding the Company's litigation
against Affymetrix. Additionally, although the Company is collaborating with
Perkin-Elmer to develop HyChip products for commercial applications, the
Applied Biosystems division of Perkin-Elmer presently markets gel sequencers
that are used by third parties to compete with the Company in gene discovery
and diagnostics. The Company believes that its ability to compete in
diagnostics will depend primarily upon its continued ability to demonstrate
that the HyGnostics Module can provide higher levels of accuracy and a lower
cost per test for clinical reference laboratories than other prevailing
technologies. Additionally, although the Company believes that the ability of
the HyGnostics Module to accommodate new tests through software modifications
will be attractive to clinical reference laboratories, biochips such as those
being marketed by Affymetrix may be competitive for certain applications. In
addition, other commercial diagnostic products from competitors or other
companies could adversely impact the Company's ability to market the
HyGnostics Module or HyChip products. See "Risk Factors--Competition."
PATENTS AND PROPRIETARY TECHNOLOGY
Patents Rights Relating to Technology
Hyseq holds three United States patents with claims covering the method of
SBH. Hyseq also has pending several patent applications covering SBH
technology and its applications in diagnostics. If granted, these pending
applications would provide supplementary protection in related areas of
potential interest.
Patent Rights Relating to Genes
Hyseq intends to patent commercially relevant genes and ESTs obtained by SBH
technology and has filed for patent protection on a limited number of these
targets. The patenting of genes is a well recognized commercial practice in
the United States. For example, hundreds of gene targets (not including many
times that number of constructions containing genes) have been patented,
including valuable human genes such as those encoding EPO (patent owned by
Amgen, Inc.), granulocyte colony stimulating factor (patent owned by Amgen,
Inc.), tissue plasminogen activator (patent owned by Genentech, Inc.), immune
interferon (patent owned by Genentech, Inc.), interleukin-2 muteins (patent
owned by Chiron) and leukocyte interferon (patent owned by Biogen, Inc.). Many
more are claimed in patent applications, including patent applications filed
by competitors such as Human Genome Sciences, Inc.
There are certain court decisions indicating that disclosure of a partial
sequence may not be sufficient to support the patentability of a full-length
sequence. In view of these court decisions, as well as the position of the
United States Patent and Trademark Office (the "Patent Office") referred to
below, the Company believes that there is significant risk that patents will
not issue based on patent disclosures limited to partial gene sequences. Even
if patents issue on the basis of partial gene sequences, there is uncertainty
as to the scope of the coverage, enforceability or commercial protection
provided by any such patents. The Patent Office rejected patent claims
contained in a patent application filed by the National Institutes of Health
("NIH") relating to partial gene sequence ESTs produced by conventional gel
sequencing. The NIH elected not to appeal the decision. The application
generated substantial controversy in the scientific community regarding the
patentability of gene fragments and the full-length gene based on only partial
sequencing of genes, particularly in cases where the biological function of
the full-length gene is not identified. In practice, the way in which ESTs are
generated by
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gel sequencing does not identify complete gene sequences nor are the ESTs
readily correlated with the function of the product of the gene. The Company
believes that SBH technology enables complete sequencing of genes more rapidly
and cost effectively than other existing technologies. The Company also
believes that SBH technology will facilitate correlation between gene
sequences and gene functions. The Company therefore believes that it will take
entities using gel sequencing significantly longer to obtain information about
gene function for patenting gene sequences. Information about the function of
the gene products provides the critical information for obtaining patents that
Hyseq's competitors may lack. Hyseq believes that this information would be
useful for satisfying the current requirements for obtaining patents on genes
in the manner followed by the biotechnology companies over the past 10 years.
See "Risk Factors--Dependence upon Proprietary Rights; Risks of Infringement."
LICENSED TECHNOLOGY
In 1994, the Company acquired an exclusive license from Arch Development
Corporation, a not-for-profit corporation affiliated with the University of
Chicago that manages The Argonne National Laboratories ("Argonne"), to further
develop and use certain SBH super chip improvements developed by one of the
Company's chief scientists while he was at Argonne. The Company must commit a
total of $2.5 million, directly or indirectly, through grants and other
sources of funding, to the development of super chip improvements through June
30, 1998. In addition, the Company must pay royalties commencing in July 1997.
The Company is applying the proceeds of a three-year, $2.0 million NIST grant
to development of super chip technology. The Company's HyChip Module, which is
being developed for commercial applications with Perkin-Elmer, utilizes the
Company's super chip technology.
GOVERNMENT REGULATION
The FDA regulates drugs, biologics and medical devices under the Federal
Food, Drug and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. These laws and implementing
regulations govern, among other things, the development, testing,
manufacturing, record keeping, storage, labeling, advertising, promotion and
premarket clearance or approval of products subject to regulation. The Company
presently plans to develop drugs or biologicals only through collaborations
with third parties who would be responsible for obtaining regulatory approval
or clearance. Although the Company believes that its HyGnostics Module, as
presently marketed, is not subject to regulation as a medical device, the FDA
recently proposed regulations that may subject it to such regulation. The
Company believes that HyChip products sold as diagnostic products will be
subject to regulation as medical devices when commercial sales for clinical
use commence. The Company may ultimately determine to pursue directly the
development of therapeutic and other diagnostic products requiring regulatory
approval or clearance.
The Company believes that any pharmaceutical products that may be developed
by or with a collaboration partner will be regulated by the FDA as drugs or
biologicals. Additionally, any diagnostic products developed are likely to be
regulated as medical devices or biologicals. The following is a discussion of
the government regulation to which the Company or collaboration partners may
become subject.
FDA Regulation
Approval of Therapeutic Products. Generally, in order to gain FDA pre-market
approval, a company first must conduct pre-clinical studies in the laboratory
and in animal model systems to identify safety problems and to gain
preliminary information on an agent's efficacy. The results of these studies
are submitted as a part of an Investigational New Drug Application ("IND"),
which the FDA must review before human clinical trials of an investigational
drug can start. In order to commercialize any products, the collaboration
partner or the Company will be required to sponsor and file an IND and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety, efficacy and potency that are necessary to obtain FDA approval of
any such products. Clinical trials are normally done in three phases, which
may overlap, and generally take two to five years, but may take longer to
complete as a result of many factors, including slower than anticipated
patient enrollment, difficulty in finding a sufficient number of patients
fitting the appropriate trial profile or in the
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acquisition of sufficient supplies of clinical trial materials or adverse
events occurring during the clinical trials. After completion of clinical
trials of a new product, FDA marketing approval must be obtained. If the
product is classified as a new drug, the collaboration partner or the Company
will be required to file a New Drug Application ("NDA") and receive approval
before commercial marketing of the drug. The testing and approval processes
require substantial time and effort and there can be no assurance that any
approval will be granted on a timely basis, if at all. NDAs submitted to the
FDA take, on average, two to five years to receive approval. If questions
arise during the FDA review process, approval can take more than five years.
The Company or its collaboration partners also must demonstrate the
approvability of a Biological License Application or a Product License
Application as well as an Establishment License Application for biological
products. Even if FDA regulatory clearances are obtained, a marketed product
is subject to continual review, and later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market as well as possible civil or criminal sanctions. For
marketing outside the United States, the collaboration partner or the Company
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country and are becoming more
restrictive throughout the European Union.
Regulatory approval or clearance could include significant limitations on
the indicated uses for which a product could be marketed. The approval process
is affected by a number of factors, including the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. After
FDA approval for the initial indications, further clinical trials may be
necessary to gain approval for the use of the product for additional
indications. The FDA may also require post-marketing testing to monitor for
adverse effects, which can involve significant expense or result in
restrictions on the product, including withdrawal of the product from the
market. In addition, the policies of the FDA may change, and additional
regulations may be promulgated which could prevent or delay regulatory
approval. There can be no assurance that any approval or clearance will be
granted on a timely basis, if at all. In the event that a collaboration
partner fails to receive FDA clearance for a therapeutic product, the Company
may not receive revenues from the collaboration until some type of FDA
approval is received, if at all.
Approval of Diagnostic Products. In the United States, the FDA regulates, as
medical devices, most diagnostic tests and in vitro reagents that are marketed
as finished test kits or equipment. Some clinical laboratories, however,
purchase individual reagents intended for specific analyses, and, using those
reagents, develop and prepare their own finished diagnostic tests. Although
the FDA has not generally exercised regulatory authority over these individual
reagents or the finished tests prepared from them by the clinical
laboratories, the FDA has recently proposed a rule that, if adopted, would
regulate reagents sold to clinical laboratories as medical devices. The
proposed rule would also restrict sales of these reagents to clinical
laboratories certified under the Clinical Laboratory Improvement Amendments
("CLIA") as high-complexity laboratories. The Company intends to market its
HyGnostics Module and tests which may be run on the module as well as
diagnostic products primarily to clinical laboratories. The Company may market
some diagnostic products such as its HyChip products, as finished tests or
equipment and others as individual reagents; consequently, some or all of
these products may be regulated as medical devices.
The Food, Drug and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance (known as a "510(k)") or premarket
approval ("PMA"). Some of the Company's diagnostic products may be deemed to
be medical devices and require a PMA or a 510(k). With respect to devices
reviewed through the 510(k) process, a Company may not market a device until
an order is issued by the FDA finding the product to be substantially
equivalent to a legally marketed device known as a "predicate device." A
510(k) submission may involve the presentation of a substantial volume of
data, including clinical data, and may require a substantial review. The FDA
may agree that the product is substantially equivalent to a predicate device
and allow the product to be marketed in the United States. The FDA, however,
may (i) determine that the device is not substantially equivalent and require
a PMA; or (ii) require further information, such as additional test data,
including data from clinical studies, before
40
<PAGE>
it is able to make a determination regarding substantial equivalence. By
requesting additional information, the FDA can further delay market
introduction of a company's products. If the FDA indicates that a PMA is
required for any of the Company's diagnostic products, the application will
require extensive clinical studies, manufacturing information and likely
review by a panel of experts outside the FDA. Clinical studies to support
either a 510(k) submission or a PMA application would need to be conducted in
accordance with FDA requirements. FDA review of PMA applications routinely
takes significantly longer than that of 510(k) applications.
If the Company's diagnostics products are subject to FDA regulation, there
can be no assurance that the Company will be able to meet the FDA's
requirements or that any necessary approval will be received. Once granted, a
510(k) clearance or PMA may place substantial restrictions on how the device
is marketed or to whom it may be sold. Even where a device is exempted from
510(k) clearance or PMA, the FDA may impose restrictions on its marketing. In
addition to requiring clearance or approval for new products, the FDA may
require clearance or approval prior to marketing products that are significant
modifications of existing products. There can be no assurance that any
necessary 510(k) clearance or PMA will be granted on a timely basis or at all.
FDA imposed restrictions could limit the number of customers to whom
particular products could be marketed or what may be communicated about
particular products. Delays in receipt of or failure to receive any necessary
510(k) clearance or PMA could have a material adverse effect on the Company.
Customers using the Company's diagnostic devices for clinical use in the
United States may be regulated under the CLIA. CLIA is intended to ensure
quality and reliability of clinical laboratories in the United States by
mandating specific standards in the areas of personnel, qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations
promulgated under CLIA establish three levels of diagnostic tests ("waived,"
"moderately complex" and "highly complex"), and the standards applicable to a
clinical laboratory depend on the level of the tests it performs. CLIA
requirements may prevent some clinical laboratories from using certain of the
Company's diagnostic products. Therefore, there can be no assurances that the
CLIA regulations and future administrative interpretations of CLIA will not
have a material adverse impact on the Company by limiting the potential market
for diagnostic products.
Post-Approval Requirements. Even if regulatory approvals for the Company's
product candidates are obtained, the products and the facilities manufacturing
the products are subject to continued review and periodic inspection. Each
drug and device manufacturing establishment in the United States must be
registered with the FDA. Domestic manufacturing establishments are subject to
biannual inspections by the FDA and must comply with the FDA's current Good
Manufacturing Practice ("cGMP") regulations. The Company also may be required
to comply with standards prescribed by various other federal, state and local
regulatory agencies in the United States as well regulatory agencies in other
countries. In complying with cGMP regulations, manufacturers must expend
funds, time and effort to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. The Company and
its collaboration partners will need to comply with cGMP regulations to
manufacture HyChip diagnostic products for sale to third parties.
The FDA's cGMP regulations require that drugs and medical devices be
manufactured and records be maintained in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the Company would be
required to comply with the FDA requirements for labeling and promotion of its
medical devices. For example, the FDA prohibits cleared or approved drugs and
devices from being marketed for uncleared or unapproved uses. In addition,
drugs and medical device reporting regulations would require that the Company
provide information to the FDA whenever there is evidence to reasonably
suggest that one of its drugs or devices may have caused or contributed to a
death or serious injury, or a medical device malfunction that has occurred
would be likely to cause or contribute to a death or serious injury if the
malfunction were to recur.
Failure to comply with applicable regulatory requirements can result in,
among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant approvals, premarket clearance or premarket
approval, withdrawal of approvals and criminal prosecution of the Company and
employees.
41
<PAGE>
Environmental Regulation
The Company is subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of hazardous materials and
certain waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any liability could exceed the resources of
the Company.
FACILITIES AND EMPLOYEES
The Company leases a 12,000 square foot facility at 670 Almanor Avenue,
Sunnyvale, California, which serves as its executive offices and research and
production facility. The facility lease expires in November 1999 and requires
base payments on average of approximately $12,300 per month, subject to
standard pass-throughs and escalations. The Company expects to require
additional space by the end of 1997. As of the date of this Prospectus, the
Company had 54 full-time employees, including 35 scientists. Fourteen
employees hold Ph.D.s or are M.D.s. No employees are represented by unions.
The Company believes that relations with its employees are good.
LITIGATION
On March 3, 1997, the Company brought suit against Affymetrix in the U.S.
District Court for the Northern District of California, San Jose Division,
alleging infringement by Affymetrix of the Company's U.S. Patents Nos.
5,202,231 and 5,525,464 (Hyseq, Inc. v. Affymetrix, Inc., Case No. C 97-20188
RMW ENE, U.S. District Court). The suit alleges that Affymetrix willfully
infringed, and continues to infringe, upon these patents covering SBH
technology. Through the lawsuit, the Company seeks both to enjoin Affymetrix
from infringing upon the patents covering SBH technology and an award of
monetary damages for Affymetrix's past infringement. On April 23, 1997,
Affymetrix filed a motion to dismiss or, in the alternative, for a more
definite statement. On May 19, 1997, Affymetrix filed an Answer and
Affirmative Defenses to the First Amended Complaint and Counterclaim. The
counterclaim seeks a declaratory judgment of invalidity and non-infringement
with respect to these patents covering SBH technology. On June 9, 1997, the
Company filed a reply to the counterclaim in which it denied the allegation of
invalidity and non-infringement. By order of the court, an initial case
management conference is scheduled for August 1, 1997. While the Company
believes it has meritorious defenses to the counterclaim, this litigation is
at an early stage and there can be no assurance that the Company will prevail
in the claim. The Company may incur substantial costs and expend substantial
personnel time in asserting the Company's patent rights against Affymetrix or
others and there can be no assurance that the Company will be successful in
asserting its patent rights. Failure to successfully enforce its patent rights
or the loss of these patent rights covering SBH technology also could remove a
legal obstacle to competitors in designing platforms with similar competitive
advantages.
On May 10, 1996, Sands Brothers & Co., Ltd. ("Sands") filed a suit against
the Company in the U.S. District Court for the Southern District of New York
alleging certain claims against the Company arising out of the Company's prior
engagement of Sands to act as a placement agent in a private placement. The
complaint seeks, among other things, damages in the aggregate amount of at
least $12 million. The Company filed a motion to dismiss the complaint with
the District Court on July 25, 1996. The court has not yet ruled on the
Company's motion. The Company believes that the suit has no merit and that it
has valid defenses to the claims. There can be no assurance, however, that the
Company will prevail in its defense of the claims asserted by Sands. Any such
failure to prevail could have a material adverse effect on the Company's
business, financial condition and operating results.
The Company is not a party to any other litigation that is expected to have
a material effect on the Company or its business.
42
<PAGE>
MANAGEMENT AND SCIENTIFIC ADVISORY BOARD
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, ages and positions of the executive
officers and directors of the Company as of June 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Robert D. Weist (1)(2)........... 57 Chairman of the Board of Directors
Chief Executive Officer, President and
Lewis S. Gruber.................. 46 Director
Executive Vice President and Chief
Christopher R. Wolf.............. 43 Financial Officer
Co-Senior Vice President for Research
Radoje T. Drmanac, Ph.D.......... 39 and Director
Co-Senior Vice President for Research
Radomir B. Crkvenjakov, Ph.D..... 50 and Director
Vice President of Corporate
Douglas C. Lane.................. 47 Development
Vice President of Administration and
James N. Fletcher................ 44 Secretary
Raymond F. Baddour, Ph.D. (1)(3). 72 Director
Greta E. Marshall (2)............ 59 Director
Thomas N. McCarter III (3)....... 67 Director
Kenneth D. Noonan, Ph.D. (3)..... 49 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Nominating Committee.
(3) Member of the Audit Committee.
Robert D. Weist has served as Chairman of the Board of Directors of the
Company since March 1994, and served as the President and a director of the
Company from May 1993 until March 1994. Mr. Weist has also been President of
Weist Associates, a management consulting firm, since April 1992. Mr. Weist
was a consultant to and Senior Vice President, Administration, General Counsel
and Secretary of Amgen Inc., a biotechnology company ("Amgen"), from January
1986 through April 1992, and served as its Vice President, General Counsel and
Secretary from May 1982 to January 1986. Mr. Weist also serves as a director
of BioSource International Inc., a biological products supplier. Mr. Weist
holds a B.S. in chemical engineering from Purdue University, a J.D. from New
York University and an M.B.A. from the University of Chicago.
Lewis S. Gruber, a founder of the Company, has been the Chief Executive
Officer, President and a director since joining the Company in June 1994. From
January 1989 until June 1994, Mr. Gruber was a partner with the law firm of
Marshall, O'Toole, Gerstein, Murray & Borun, which has represented the Company
as one of its patent counsel since May 1992. Mr. Gruber holds a B.S. in
sociology and M.S. in cell biology and genetics from the University of Arizona
and a J.D. from Arizona State University.
Christopher R. Wolf joined the Company as Executive Vice President and Chief
Financial Officer in December 1996. From May 1996 to December 1996, Mr. Wolf
was Senior Vice President, Investment Banking and Group Head of Healthcare for
Fahnestock & Co. Inc., an investment banking firm, and from February 1991
until May 1996, was a partner of the Georgica Group, Inc., a financial
consulting company. From 1989 until February 1991, Mr. Wolf was a partner of
Oppenheimer & Co., Inc., an investment banking firm, and from 1983 until 1988,
was with Kidder Peabody & Co. Incorporated, an investment banking firm. Mr.
Wolf holds a B.A. in political science from Ohio Wesleyan University and an
M.P.P.M. from Yale University School of Management.
Radoje T. Drmanac, Ph.D. joined the Company in August 1994 and serves as Co-
Senior Vice President for Research and a director. Dr. Drmanac co-invented SBH
technology while at the Institute of Molecular Genetics and Genetics
Engineering in Belgrade, Yugoslavia ("IMGGE"), where he conducted research
from May 1986 until February 1991. Dr. Drmanac served as a Molecular Biologist
and Group Leader at Argonne National Laboratory ("Argonne") from February 1991
until August 1994. Dr. Drmanac was a member of the Editorial Board of the
International Journal of Genome Research from 1992 to 1994, and has been a
member of the Human Genome Organization ("HUGO") since 1992. Dr. Drmanac
received his Ph.D. from Belgrade University and conducted post-doctoral
studies at the Imperial Cancer Fund Research Laboratories in London.
43
<PAGE>
Radomir B. Crkvenjakov, Ph.D. joined the Company in August 1994 and serves
as Co-Senior Vice President for Research and a director. Dr. Crkvenjakov was
appointed to the Editorial Board of Mutation Research Genomics in January
1997. Dr. Crkvenjakov served as Senior Molecular Biologist and Group Leader at
Argonne from February 1991 until August 1994. Prior to joining Argonne, Dr.
Crkvenjakov was with IMGGE from May 1986 until February 1991, where he co-
invented SBH technology. Dr. Crkvenjakov has performed research projects for
the U.S. National Institutes of Health ("NIH") and has been a member of HUGO
since 1992. Dr. Crkvenjakov received his Ph.D. in biochemistry and molecular
biology from Harvard University and conducted post-doctoral studies at the
University of Heidelberg.
Douglas C. Lane joined the Company as Vice President of Corporate
Development in July 1996. From June 1995 until June 1996, Mr. Lane was a
principal of Interhealth Development Consulting, a technology development
consulting firm. From June 1994 to May 1995, Mr. Lane managed business
development for the Advance Technologies in Genetics Group of SmithKline
Beecham Pharmaceutical, a pharmaceutical company. From October 1988 until May
1994, Mr. Lane was the Director of Business Development of SmithKline Beecham,
a diagnostic laboratory company. Mr. Lane holds a B.A. in psychology from the
University of Southern California, a B.S. in microbiology and biochemistry
from California State University, Chico and an M.B.A. from Golden Gate
University.
James N. Fletcher has served as the Company's Vice President of
Administration since September 1994 and as its Secretary since April 1996. Mr.
Fletcher was an independent consultant to the Company from April 1994 until
September 1994. Mr. Fletcher served as general counsel and a consultant to
National Business Funding, a development-stage financial services company,
from July 1993 until May 1994 and as assistant general counsel of ComputerLand
Corporation, a computer reseller, from November 1990 until December 1992 and
served as a consultant from December 1992 until May 1993. Mr. Fletcher holds a
B.S. in political science from Arizona State University and a J.D. from the
University of Arizona.
Raymond F. Baddour, Ph.D. has served as a director of the Company since
December 1993. Since July 1989, Dr. Baddour has served as the Lammot du Pont
Professor of Chemical Engineering, Emeritus, at the Massachusetts Institute of
Technology where he formerly served as the Lammot du Pont Professor of
Chemical Engineering from 1973 to 1989. Dr. Baddour also serves as a director
of Amgen, Ascent Pediatrics, Inc., a pharmaceutical company, and MatTet
Corporation, a bio-materials company. Dr. Baddour holds a B.S. in chemical
engineering from Notre Dame University and a M.S. and Sc.D. from the
Massachusetts Institute of Technology.
Greta E. Marshall has served as a director of the Company since July 1994.
Ms. Marshall is a principal of The Marshall Plan, an investment management
company, which she founded in 1989. From 1985 until 1989, Ms. Marshall was
Investment Manager of the California Public Employee's Retirement System, a
public pension organization. Ms. Marshall is also a director of EG&G Inc., a
technology and scientific instrument company. Ms. Marshall holds a B.A. in
English and an M.B.A. from the University of Louisville.
Thomas N. McCarter III has served as a director of the Company since October
1996. Mr. McCarter currently serves as Chairman of the Ramapo Land Company, a
real estate company, and is a general partner of Miles Timber Properties, a
land company which positions he has held for more than the past five years.
Mr. McCarter is a director and was past Chairman of Stillrock Management,
Inc., an investment company, serves as Chairman of Pendragon Technologies, a
diversified technology company, and is a director of Parock Group, a
diversified investment company, and a director of other closely held
companies. Mr. McCarter attended Princeton University from 1948 to 1951 and
has been a Certified Investment Counselor since 1972.
Kenneth D. Noonan, Ph.D. has served as a director of the Company since
October 1996. Dr. Noonan has been a Vice President at Booz-Allen & Hamilton,
Inc., a management consulting firm, since March 1996. From January 1992 until
February 1996, Dr. Noonan was the Managing Director of The Wilkerson Group,
Inc., a management consulting group specializing in medical products. Dr.
Noonan has also held senior positions in the diagnostics industry. Dr. Noonan
also serves as a director of Galenica Pharma. Dr. Noonan holds a Ph.D. in
biochemistry from Princeton University.
44
<PAGE>
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. All directors hold office until the
next annual meeting of stockholders or until their successors are duly elected
and qualified. The Board of Directors is divided into three classes, each of
whose members serve for a staggered three-year term. The Board comprises two
Class I Directors (Messrs. Weist and Gruber), two Class II Directors (Dr.
Baddour and Ms. Marshall) and four Class III Directors (Drs. Drmanac,
Crkvenjakov and Noonan and Mr. McCarter). At each annual meeting of
stockholders, the appropriate number of directors will be elected for a three-
year term to succeed the directors of the same class whose terms are then
expiring. The terms of the Class I Directors, Class II Directors and Class III
Directors expire upon the due election and qualification of successor
directors at the annual meetings of stockholders held in calendar years 2000,
1998 and 1999, respectively. See "Description of Capital Stock--Anti-Takeover
Effects of Provisions of the Articles and By-Laws and Nevada Law."
There are no family relationships among the directors and executive officers
of the Company. See "Certain Transactions."
SCIENTIFIC ADVISORY BOARD
Hyseq has established a Scientific Advisory Board ("SAB") of internationally
recognized scientists and may add additional members over time, as
appropriate. In addition to Drs. Drmanac and Crkvenjakov, who serve as Co-
Chairmen of the SAB, the following individuals serve on the SAB:
Paul Doty, Ph.D. is a member of the U.S. National Academy of Sciences
("NAS") and was a technical advisor to the Strategic Arms Limitation Treaty
negotiations. His career has included participation in the Manhattan Project
and membership in the President's Science Advisors Committee under Presidents
John F. Kennedy and Lyndon B. Johnson. Nucleic acid hybridization technology
was invented in the laboratory of Dr. Doty at Harvard University. Dr. Doty
presently serves as Director Emeritus of the Center for Science and
International Affairs at Harvard University.
Vladimir Glisin, Ph.D. is a Director of the IMGGE. Dr. Glisin is a recipient
of the U.S. National Science Foundation Senior Foreign Scientist Award. Dr.
Glisin serves as a consultant and science advisor to the United Nations and
has organized a United Nations Industrial Development Organization Genome
Sequencing Conference. Dr. Glisin conducted his post-graduate research with
Dr. Doty at Harvard University and has served as a visiting professor at
Harvard University and the University of New Hampshire. Dr. Glisin has also
served as invited professor of Biochemistry and Molecular Biology at the
Kuwait Medical School and is currently on the Faculty of Sciences of the
University of Belgrade.
Anthony Carrano, Ph.D. is the Associate Director, Biology and Biotechnology
Research Program of Lawrence Livermore National Laboratory, and a Professor of
Molecular Genetics and Human Genetics at the University of California at
Davis. Dr. Carrano is a fellow of the American Association for the Advancement
of Science ("AAAS"). Dr. Carrano is a recipient of the Environmental Mutagen
Society Recognition Award. Dr. Carrano has also served as special fellow to
the U.S. Atomic Energy Commission. Dr. Carrano is a member of the editorial
boards of numerous scientific journals, has been a member of HUGO since 1989,
the NIH/Department of Energy Joint Human Genome Advisory Committee since 1989
and the U.S. Department of Energy Human Genome Project Coordinating Committee
since 1988.
Michael Waterman, Ph.D. is a Professor of Mathematics and Biological
Sciences at the University of Southern California ("USC"). Dr. Waterman is a
co-developer of the Smith-Waterman algorithm used worldwide in gene sequence
analysis. Dr. Waterman serves on the editorial boards of numerous scientific
journals. Dr. Waterman is a fellow of the Institute of Mathematical Statistics
and the AAAS and a member of HUGO and numerous other professional societies.
Dr. Waterman received the USC Associates Award for Creativity in Research and
Scholarship and holds a USC Associates Endowed Professorship in Mathematics
and Biology.
45
<PAGE>
Douglas Brutlag, Ph.D. is a Professor of Biochemistry at the Stanford
University School of Medicine. Dr. Brutlag was a co-founder of IntelliCorp,
Inc., a financial software development company, and IntelliGenetics Inc., a
biotech software supplier, and is the recipient of numerous professional
honors and memberships. Dr. Brutlag is a fellow of the AAAS and a member of
the American Association of Artificial Intelligence.
BOARD COMMITTEES
Compensation Committee; Compensation Committee Interlocks and Insider
Participation
In April 1994, the Board of Directors established a Compensation Committee.
The Compensation Committee recommends to the Board of Directors compensation
for certain of the Company's personnel and administers the Stock Option Plan.
The Compensation Committee comprises Dr. Baddour as the chairperson and Mr.
Weist. Mr. Weist served as Acting President of the Company from May 1993 until
March 1994. The Company entered into a consulting agreement with Mr. Weist in
May 1993 pursuant to which he received $125,000 in 1993 for services rendered
in connection with the original structuring of the Company and other matters.
Mr. Weist purchased 489,763 shares of Common Stock in May 1993 for $20,000 in
cash and delivery of a promissory note in the original principal amount of
$180,000. The promissory note accrued interest at 3.72% per annum and matured
in May 1994. Such promissory note had an outstanding balance of approximately
$55,000 (plus approximately $3,900 of accrued interest) at May 1, 1994 when it
was repaid in connection with the Company's exercise of an outstanding option
to repurchase 205,056 of Mr. Weist's shares at his original purchase price of
$0.41 per share.
Audit Committee
In March 1997, the Board of Directors established an Audit Committee. The
Audit Committee reviews the Company's annual audit and will meet with the
Company's independent accountants to review the Company's internal controls
and financial management practices. The Audit Committee comprises Mr. McCarter
as the chairperson, Dr. Baddour and Dr. Noonan.
Nominating Committee
In March 1997, the Board of Directors also established a Nominating
Committee. The Nominating Committee considers and recommends individuals for
Board membership and senior management positions. The Nominating Committee
comprises Ms. Marshall as the chairperson and Mr. Weist.
DIRECTOR COMPENSATION
From the Company's inception in August 1992 until October 1996, no fees were
paid to non-employee directors. Commencing in October 1996, the Company
instituted a policy to pay all non-employee directors a fee of $2,500 for each
Board meeting attended in person or by telephone, subject to an overall cap of
$10,000 per year. Each non-employee director earned $7,500 in 1996, of which
$2,500 was paid to each in 1996 and the balance was paid in the first quarter
of 1997. Employees of the Company who are also directors do not receive any
director fees. All directors are reimbursed for reasonable expenses incurred
in attending meetings. Directors do not receive fees for attendance at
Committee meetings. See "--Stock Option Plans and Agreements."
STOCK OPTION PLANS AND AGREEMENTS
Stock Option Agreements
The Company has reserved 604,992 shares of Common Stock for issuance upon
exercise of options granted in 1994, to certain executive officers, an
employee, directors and members of the Company's SAB. See "Certain
Transactions."
46
<PAGE>
1995 Stock Option Plan
At the Company's 1995 annual meeting, the stockholders approved an incentive
and non-qualified stock option plan (the "Stock Option Plan") for the purposes
of incentivizing employees and attracting and retaining executive officers and
other key employees. The Stock Option Plan permits grants of incentive and
non-qualified stock options (within the meaning of the Internal Revenue Code
of 1986, as amended) that are exercisable at a price equal to the fair market
value of the Common Stock on the date of grant as established by the Board. A
total of 576,000 shares of Common Stock initially were reserved for issuance
under the Stock Option Plan. At the Company's 1997 annual meeting,
stockholders approved an amendment to the Stock Option Plan which reserved an
additional 576,000 shares for issuance under the Stock Option Plan. At June
30, 1997, options granted under the Stock Option Plan to purchase 739,515
shares were issued and outstanding, including options to purchase 63,360
shares issued to directors and options to purchase 14,400 shares issued to SAB
members. See "Principal Stockholders."
1996 Director Stock Option Plan
At the Company's 1996 annual meeting, the stockholders approved a Non-
Employee Director Stock Option Plan (the "Directors' Plan") providing for
periodic stock option grants to Company directors who are not employees of the
Company. Management believes that the inherent value created by the granting
of options under the Directors' Plan will prove to be a successful means of
attracting, retaining and motivating highly qualified individuals for the
Company's Board. Under the Directors' Plan, each new, non-employee director
receives a one-time grant of options to purchase 23,040 shares of Common
Stock, of which options to purchase 11,520 shares vest immediately, with the
balance vesting in two equal allotments on the first and second anniversaries
of joining the Board. All non-employee directors automatically receive options
to purchase up to 5,760 shares each year (such that the amount received under
the Directors' Plan when added to all prior options granted to a director
which vest in that year total 5,760) on the date of the annual meeting of the
stockholders, commencing in 1997. Mr. Weist, Dr. Baddour and Ms. Marshall each
received options to purchase 960 shares immediately following the annual
meeting in 1997 under the Directors' Plan. A total of 138,240 shares of Common
Stock have been reserved and are available for purchase upon the exercise of
options granted under the Directors' Plan, of which options to purchase 48,960
shares were issued and outstanding at June 30, 1997.
47
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation earned for the fiscal year ended December 31, 1996 for the
Company's Chief Executive Officer and, based on actual or annualized salaries,
the four other most highly compensated executive officers (the "Named
Executive Officers"). No other executive officer's compensation exceeded
$100,000 for the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996
ANNUAL LONG-TERM
COMPENSATION COMPENSATION ON AWARD'S
---------------- ---------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL STOCK UNDERLYING ALL OTHER
POSITIONS SALARY BONUS AWARD($) OPTIONS COMPENSATION
- ------------------ -------- ------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Lewis S. Gruber......... $200,000 $ -- -- 42,240 $ --
President and Chief Ex-
ecutive Officer
Christopher R. Wolf (1). 10,416 -- 0(1) 144,000 30,000(1)
Executive Vice Presi-
dent and Chief Finan-
cial Officer
Radoje T. Drmanac (2)... 146,000 13,680 -- 35,476 46,200(2)
Co-Senior Vice Presi-
dent for Research
Radomir B. Crkvenjakov
(2).................... 146,000 13,680 -- 35,476 46,200(2)
Co-Senior Vice Presi-
dent for Research
Douglas C. Lane (3)..... 55,000 -- -- 48,000 11,824(3)
Vice President of Cor-
porate Development
</TABLE>
- --------
(1) Mr. Wolf joined the Company in December 1996 and received compensation
based on an annual salary of $125,000. In addition, Mr. Wolf received a
one-time reimbursement for relocation expenses of $30,000. In December
1996, Mr. Wolf purchased 161,280 shares of Common Stock at $4.17 per
share. The shares vest over a period of two years, in equal allotments of
6,720 shares per month for so long as Mr. Wolf is employed by the Company.
As of December 31, 1996, the value of Mr. Wolf's aggregate restricted
stock holdings was $0.
(2) Pursuant to the terms of employment agreements dated as of August 1, 1994,
each of Drs. Drmanac and Crkvenjakov are entitled to annual bonuses of
$13,680 and were entitled to a one-time special bonus of $91,200 when the
Company reached $8.5 million of funding. Although the funding level was
reached in 1995, the special bonuses were not paid until January 1996. As
a condition of payment, Drs. Drmanac and Crkvenjakov forfeited options to
purchase 57,600 shares and 48,000 shares respectively, at an exercise
price of $1.56 per share and their two-year employment agreements were
automatically extended to terms of four years. The amounts paid were
offset against loans made in August 1994 by the Company to each of
Drs. Drmanac and Crkvenjakov in the amount of $45,000, such that each of
Drs. Drmanac and Crkvenjakov received a net payment of $46,200 in January
1996.
(3) Mr. Lane joined the Company in July 1996 and received compensation based
on an annual salary of $120,000. In addition, Mr. Lane received a one-time
reimbursement for relocation expenses of $11,824.
48
<PAGE>
The following table sets forth certain information with respect to the grant
of options to purchase Common Stock by the Company during 1996 to the Named
Executive Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR (PER SHARE) DATE
---- ---------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Lewis S. Gruber............... 42,240 10.6% $4.17 5/31/06
Christopher R. Wolf........... 144,000 36.1 4.17 12/08/06
Radoje T. Drmanac............. 35,476 8.9 4.17 5/31/06
Radomir B. Crkvenjakov........ 35,476 8.9 4.17 5/31/06
Douglas C. Lane .............. 48,000 12.0 4.17 7/14/06
</TABLE>
- --------
(1) All options were granted pursuant to the Stock Option Plan and, with the
exception of options granted to Mr. Wolf, vest in four equal annual
installments commencing one year after the date of grant. Mr. Wolf's
options were granted in connection with commencement of his employment in
December 1996 and vest in four equal annual installments commencing on the
date of grant.
The following table sets forth for each of the Named Executive Officers
certain information with respect to the exercise of options to purchase Common
Stock during the year ended December 31, 1996 and the number of shares subject
to both exercisable and unexercisable stock options as of December 31, 1996.
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS OF THE MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996 (2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lewis S. Gruber......... 67,200 $175,000 195,581 139,382 $2,335,616 $1,456,247
Christopher R. Wolf..... -- -- 36,000 108,000 317,880 953,640
Radoje T. Drmanac....... -- -- 76,800 73,876 878,592 752,549
Radomir B. Crkvenjakov.. -- -- 72,000 69,076 823,680 697,992
Douglas C. Lane......... -- -- -- 48,000 -- 423,840
</TABLE>
- --------
(1) Based on the fair market value at the date of exercise, as determined by
the Board of Directors, minus the exercise price.
(2) Based on the assumed initial public offering price of $13.00 per share
minus the exercise price.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Dr. Drmanac and Dr. Crkvenjakov,
pursuant to which they became employees on August 1, 1994. These agreements
have terms of four years and expire on July 31, 1998. See "--Executive
Compensation" and "Principal Stockholders" regarding stock options granted in
connection with their employment. Pursuant to the terms of their employment
agreements, each of Drs. Drmanac and Crkvenjakov are entitled to annual
bonuses of $13,680 and were entitled to a one-time special bonus of $91,200
when the Company reached an aggregate of $8.5 million of funding. Although the
funding level was reached in 1995, the special bonuses were not paid until
January 1996. As a condition of payment, Drs. Drmanac and Crkvenjakov
surrendered options to purchase 57,600 shares and 48,000 shares respectively,
at an exercise price of $1.56 per share. The amounts paid were offset against
loans made in August 1994 by the Company to each of Drs. Drmanac and
Crkvenjakov in the amount of $45,000, such that each of Drs. Drmanac and
Crkvenjakov received a net payment in January 1996 of $46,200.
49
<PAGE>
CERTAIN TRANSACTIONS
Robert D. Weist is a director and serves as chairperson of the Compensation
Committee. For a description of certain transactions relating to Mr. Weist, see
"Management and Scientific Advisory Board--Board Committees."
In December 1993, Lewis S. Gruber, a director and executive officer of the
Company, received a warrant to purchase 144,000 shares of Common Stock at $2.90
per share in exchange for the assignment of all right, title and interest in
and to certain patent rights relating to diagnostic applications owned by him.
In connection with Mr. Gruber's employment by the Company in June 1994, Mr.
Gruber was granted a 10-year option to purchase 345,600 shares of Common Stock
at an exercise price of $1.56 per share. In September 1996, Mr. Gruber
exercised options to purchase 19,200 shares of Common Stock at an exercise
price of $1.56 per share. In December 1996, Mr. Gruber used the proceeds of a
loan from the Company to exercise the warrant to purchase 144,000 shares of
Common Stock at $2.90 per share and to exercise options to purchase 48,000
shares of Common Stock at an exercise price of $1.56 per share. The loan, in
the principal amount of $492,000, is evidenced by a promissory note dated
December 9, 1996, that bears interest at 3% per annum and is due on December 8,
2001. The loan is secured by, and with recourse only to, 118,080 shares of Mr.
Gruber's Common Stock. In March and June 1997, Mr. Gruber exercised options to
purchase an additional 7,680 and 2,880 shares, respectively, of Common Stock at
an exercise price of $1.56 per share. Also in March 1997, Mr. Gruber purchased
179,712 shares at $6.51 per share using the proceeds of an additional
$1,170,000 loan, as evidenced by a promissory note dated March 12, 1997 on the
same terms as his prior loan. As of June 30, 1997, the amounts outstanding
under such loans were $492,000 and $1,170,000, respectively. The 179,712 shares
are subject to a right of repurchase by the Company over a period of two years.
This repurchase option lapses in equal allotments of 7,488 shares per month for
so long as Mr. Gruber is employed by the Company. As a condition of the
purchase in March 1997, Mr. Gruber did not and will not receive any options
under the Stock Option Plan during 1997.
Until joining the Company, Mr. Gruber was a member of Marshall, O'Toole,
Gerstein, Murray & Borun, which firm has served as one of the Company's patent
counsel since its inception in 1992. He also is the spouse of Misty S. Gruber,
who was a director of the Company from inception to June 1994 and is a member
of Sachnoff & Weaver, Ltd., which law firm has served as general corporate
counsel to Hyseq since June 1996. Ms. Gruber formerly was a member of Shefsky
Froelich & Devine Ltd, which law firm served as general corporate counsel to
the Company from inception to June 1996. Sachnoff & Weaver, Ltd. and one member
in addition to Ms. Gruber and certain partners and related persons of Marshall,
O'Toole, Gerstein, Murray & Borun are stockholders of the Company. Mr. and Ms.
Gruber, individually and through a corporation that they control, beneficially
own a total of 559,941 shares of Common Stock, including 179,712 shares of
Common Stock purchased in March 1997 at $6.51 per share, 144,000 shares of
Common Stock issued upon the exercise of a warrant to purchase shares in
December 1996 at $2.90 per share, 158,469 shares of Common Stock purchased in
August 1992 and May 1993 at purchase prices of $0.35 and $0.41 respectively,
and 77,760 shares of Common Stock at $1.56 per share issued upon the exercise
of options in September 1996, December 1996, March 1997 and June 1997 (which
shares include the 297,792 shares pledged as security for the loans referenced
above). Mr. and Ms. Gruber also jointly purchased 6,716 shares of Series A
Preferred Stock at $2.90 per share in November 1993 and 7,317 shares of Series
A Preferred Stock at $3.46 per share in November 1994. See also "Principal
Stockholders."
In May 1996, the Company issued to Fahnestock & Co. Inc. a warrant to
purchase 206,822 shares of Common Stock at an exercise price of $4.58 per
share, a portion of which warrant was subsequently transferred to certain
principals of this firm, including a warrant to purchase 1,920 shares to
Christopher R. Wolf who was then a principal of the investment bank and is now
Executive Vice President and Chief Financial Officer of the Company. Fahnestock
& Co. Inc. is one of the Representatives. See "Underwriting." In December 1996,
Mr. Wolf borrowed $672,000 from the Company, as evidenced by a promissory note
dated December 9, 1996, which bears interest at 3% per annum and is due on
December 8, 2001. Mr. Wolf used the proceeds of the loan to purchase 161,280
shares of Common Stock at $4.17 per share in December 1996. The shares vest
over a period of two years, in equal allotments of 6,720 shares per month for
so long as Mr. Wolf is employed by the
50
<PAGE>
Company. In March 1997, Mr. Wolf purchased 179,712 shares at $6.51 per share
using the proceeds of a $1,170,000 Company loan on the same terms as the loan
to Mr. Gruber in March 1997. As of June 30, 1997, the amounts outstanding
under such loans were $672,000 and $1,170,000, respectively. As a condition of
the purchase, Mr. Wolf did not and will not receive any options under the
Stock Option Plan during 1997. The loans are secured by, and with recourse
only to, all 340,992 shares purchased by Mr. Wolf using proceeds of Company
loans. Mr. Wolf also is a partner in Blue Hill Partners, a partnership
controlled by Thomas N. McCarter III, a director of the Company. Blue Hill
Partners purchased 76,800 shares of Common Stock at $4.17 per share in
September 1996.
In order to maintain certain agreed upon ratios of ownership in the Company,
the Company issued 5,446,502 shares of Common Stock at par ($0.001 per share)
to the Hyseq One Trust, an Illinois business trust (the "Trust"). The Trust
held 42,862 shares as of June 30, 1997. The Company has the right, among other
things, to repurchase shares from the Trust for $0.0016 per share (the
"Repurchase Price") as the Company issues Common Stock or Preferred Stock. The
Trust will terminate when all Trust shares have been repurchased. The Company
cancels all shares that are repurchased from the Trust. Pending repurchase,
all shares of Common Stock held by the Trust are voted by its trustee, who is
an independent third party with no relationship to the Company, or its
stockholders other than as trustee of the Trust. Concurrently with completion
of this offering, the Company will repurchase all remaining shares held by the
Trust for nominal consideration and the Trust will terminate. See "Principal
Stockholders."
In January 1997, Sachnoff & Weaver, Ltd. purchased 76,800 shares of Common
Stock at $6.51 per share. Sachnoff & Weaver, Ltd., a member of which is the
spouse of the Company's President and Chief Executive Officer, paid $102,415
and delivered a promissory note to the Company for the balance in the amount
of $397,585 secured by 61,069 shares of Common Stock. The note bears interest
at 8.25% per annum and is due on March 18, 2001. As of May 16, 1997, the note
had an outstanding balance of $374,887.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of June 30, 1997, and as adjusted to reflect the
sale of the shares offered hereby and the Private Placement, by: (i) each
person known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock; (ii) each of the Company's
directors; (iii) each of the Named Executive Officers; and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
-----------------------------------
PERCENTAGE PERCENTAGE
NUMBER OF PRIOR TO AFTER
NAME AND ADDRESS (2) SHARES OFFERING (3) OFFERING (4)
-------------------- --------- ------------ ------------
<S> <C> <C> <C>
Robert D. Weist (5)........................ 223,075 2.5% 1.8%
Lewis S. Gruber (6)........................ 859,536 9.5 7.0
Christopher R. Wolf (7).................... 378,912 4.3 3.1
Radoje T. Drmanac (8) ..................... 866,314 9.7 7.1
Radomir B. Crkvenjakov (9)................. 806,148 9.1 6.6
Douglas C. Lane (10)....................... 12,000 * *
Raymond F. Baddour (11).................... 28,800 * *
Greta E. Marshall (12)..................... 32,640 * *
Thomas N. McCarter III (13)................ 88,320 1.0 *
Kenneth D. Noonan (14)..................... 11,520 * *
Institute of Molecular Genetics and Genetic
Engineering (15).......................... 708,480 8.1 5.9
Vojode Stepe 283
P.O. Box 794
11001 Belgrade Yugoslavia
Attn.: Dr. Vladimir Glisin
Lindner Dividend Fund (16)................. 600,000 6.8 5.0
7711 Carondolet Avenue
Suite 700
Clayton, MO 63105
Lindner Growth Fund (16)................... 600,000 6.8 5.0
7711 Carondolet Avenue
Suite 700
Clayton, MO 63105
Chiron Corporation (17).................... 427,350 4.9 5.2
4560 Horton St.
Emeryville, CA 94608
The Perkin-Elmer Corporation (18).......... 427,350 4.9 6.8
761 Main Ave.
Norwalk, CT 06859
All directors and executive officers of the
Company, as a group (11 persons) (19)..... 3,316,919 33.5 25.0
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission"), based on factors
including voting and investment power with respect to shares. Shares of
Common Stock issuable pursuant to stock options currently exercisable, or
exercisable within 60 days after June 30, 1997, are deemed outstanding
for purposes of computing the percentage owned by the person holding such
options, but are not deemed outstanding for computing the percentage of
any other person.
52
<PAGE>
(2) Unless otherwise indicated, the persons named in the table above have the
sole voting and investment power with respect to all shares beneficially
owned by them, subject to applicable community property laws. Unless
otherwise indicated, the address of each beneficial owner is: c/o Hyseq,
Inc., 670 Almanor Avenue, Sunnyvale, California 94086.
(3) Applicable percentage ownership is based on 8,779,569 shares of Common
Stock outstanding as of June 30, 1997, which gives effect to the
conversion of Series A Preferred Stock to Common Stock on a 1-to-1 basis
and Series B Preferred Stock to Common Stock on a 1.27-to-1 basis and a
subsequent 1.92-for-one split of the Common Stock.
(4) Applicable percentage ownership after this offering and the Private
Placement is based upon 12,127,418 shares of Common Stock outstanding,
which gives effect to the conversion of Series A Preferred Stock on a 1-
for-1 basis and Series B Preferred Stock to Common Stock on a 1.27-for-1
basis and a subsequent 1.92-for-1 split of the Common Stock.
(5) Includes 14,400 shares issuable upon exercise of options.
(6) Mr. Gruber holds shares individually, jointly with his wife and through a
corporation that they control. Includes 285,562 shares issuable upon
exercise of options.
(7) Includes 1,920 shares issuable upon exercise of a warrant and 36,000
shares issuable upon exercise of options. Does not include 76,800 shares
owned by a partnership controlled by Mr. McCarter and of which Mr. Wolf
is a partner.
(8) Includes 104,868 shares issuable upon exercise of options held
individually by Dr. Radoje Drmanac. Also includes 52,965 shares issuable
upon exercise of options held individually by Dr. Radoje Drmanac's
spouse, Dr. Snezana Drmanac. Dr. Radoje Drmanac disclaims beneficial
ownership of any shares owned by, or issuable upon the exercise of
options held by, Dr. Snezana Drmanac.
(9) Includes 97,668 shares issuable upon exercise of options.
(10) Includes 12,000 shares issuable upon exercise of options.
(11) Includes 28,800 shares issuable upon exercise of options.
(12) Includes 28,800 shares issuable upon exercise of options.
(13) Mr. McCarter owns 76,800 shares through a partnership which he controls
and of which Mr. Wolf is a partner. Includes 11,520 shares issuable upon
exercise of options.
(14) Includes 11,520 shares issuable upon exercise of options.
(15) The 708,480 shares issued to the Institute of Molecular Genetics and
Genetic Engineering are being held by the First National Bank of Chicago
and cannot be voted or disposed of while held thereby until certain
restrictions imposed by the United States Department of the Treasury are
satisfied.
(16) An additional 120,000 shares of Series A Preferred Stock are held by the
Lindner Bulwark Fund.
(17) Applicable percentage ownership prior to the offering includes 854,700
shares of Common Stock issuable upon the conversion of shares of Series B
Preferred Stock sold by the Company to Chiron in May 1997. Applicable
percentage ownership after the offering includes an additional 199,283
shares of Common Stock to be purchased by Chiron in the Private Placement
concurrent with this offering.
(18) Applicable percentage ownership prior to the offering includes 854,700
shares of Common Stock issuable upon the conversion of shares of Series B
Preferred Stock sold to Perkin-Elmer on or about June 20, 1997.
Applicable percentage ownership after the offering includes an additional
398,566 shares of Common Stock to be purchased by Perkin-Elmer in the
Private Placement concurrent with this offering.
(19) Includes 1,135,233 shares issuable upon exercise of options.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this offering and the Private Placement, the authorized
capital stock of the Company will consist of 50,000,000 shares of Common
Stock, par value $.001 per share, 12,127,418 shares of which will be
outstanding and 8,000,000 shares of Preferred Stock, par value $.001 per
share, none of which will be issued or outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for the election
of directors and all other matters submitted for stockholder vote, except
matters submitted to the vote of another class or series of shares. Holders of
Common Stock are not entitled to cumulative voting rights. The holders of
Common Stock are entitled to dividends in such amounts and at such times, if
any, as may be declared by the Board of Directors out of funds legally
available therefor. The Company has not paid any dividends on its Common Stock
and does not anticipate paying any cash dividends on such stock in the
foreseeable future. See "Dividend Policy." Upon liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all net assets available for distribution to stockholders after
payments to creditors and holders of senior securities. The Common Stock is
not redeemable and has no preemptive or conversion rights. The rights of the
holders of Common Stock are subject to the rights of the holders of any
Preferred Stock which may, in the future, be issued. All outstanding shares of
Common Stock are, and the shares of Common Stock to be sold by the Company in
this offering when issued will be, duly authorized, validly issued, fully paid
and non-assessable.
PREFERRED STOCK
The Board of Directors will have the authority to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect
the voting and other rights of the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no present plans to issue any series of
Preferred Stock.
WARRANTS
The warrants referenced in this paragraph were outstanding as of June 30,
1997. In connection with private placements of the Company's Series A
Preferred Stock, the Company issued a warrant to purchase 172,664 shares of
Common Stock issued in December 1993 at an exercise price of $2.90 per share,
which warrant is exercisable until December 1, 2000; a warrant to purchase
166,241 shares of Common Stock issued in November 1994 at an exercise price of
$3.42 per share, which warrant is exercisable until November 7, 2001; and a
warrant to purchase 137,520 shares of Common Stock issued in July 1995 at an
exercise price of $4.17 per share, which warrant is exercisable until July 15,
2002. The Company also issued a warrant to purchase 206,822 shares of Common
Stock at an exercise price of $4.58 per share to Fahnestock & Co. Inc., which
warrant is exercisable until May 16, 2001. A portion of the warrant was
subsequently transferred to certain principals of this firm, including a
warrant to purchase 1,920 shares to Christopher R. Wolf who was then a
principal of Fahnestock & Co. Inc. and is now Executive Vice President and
Chief Financial Officer of the Company. See "Certain Transactions." In
December 1996, the Company granted to a secured lender a warrant to purchase a
total of 9,600 shares of Common Stock at an exercise price of $5.21 per share,
which warrant is exercisable until December 23, 2001. The average exercise
price of all warrants outstanding as of the date of this Prospectus was $3.81.
54
<PAGE>
REGISTRATION RIGHTS
Pursuant to certain registration rights agreements ("Rights Agreements")
among the Company and certain of its securities holders, 3,892,140 shares of
Common Stock (including 281,760 shares held by affiliates of Fahnestock & Co.
Inc.) and 216,422 shares issuable upon the exercise of warrants (including
178,022 shares issuable to Fahnestock & Co. Inc. and certain affiliates) (the
"Registrable Securities") will be entitled to certain rights with respect to
the registration of the Registrable Securities under the Securities Act.
Registration rights covering 227,760 shares will expire prior to the end of
the Lock-Up Period; registration rights covering an additional 2,652,240
shares will expire between the end of the Lock-Up Period and May 1998; and
registration rights covering 76,800 shares will expire in January 1999. Under
all of the Rights Agreements, if after completion of this offering the Company
proposes to register any of its securities under the Securities Act, either
for its own account or the account of other stockholders, the holders of
Registrable Securities are entitled to notice of such registration and are
entitled to include their Registrable Securities therein. In addition, if at
any time beginning six months following the date of this Prospectus, the
Company receives a request from certain initiating holders of Registrable
Securities, the Company is obligated to cause such shares to be registered
under the Securities Act. Holders of Registrable Securities have the right to
cause two such demand registrations. In addition to these two demand
registrations, holders of Registrable Securities may also require the Company
to register all or a portion of their Registrable Securities on Form S-2 or
Form S-3 under the Securities Act, when such forms become available for use by
the Company, and subject to certain other conditions and limitations. The
holders' rights with respect to all such registrations are subject to certain
conditions, including the right of the underwriters to limit the number of
shares included in any such registration. The Company has agreed to pay all
expenses related thereto, except for underwriting discounts and commissions,
to effect the sale of the Registrable Securities.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES AND BY-LAWS AND NEVADA LAW
Articles of Incorporation and By-Laws
The Company's By-Laws provide that members of the Board of Directors serve
staggered three-year terms. The Articles provide that all stockholder action
must be effected at a duly called meeting and not by a consent in writing. The
By-Laws provide that the Company's stockholders may call a special meeting of
stockholders only upon a request of stockholders owning at least 50% of the
Company's capital stock. These provisions of the Articles and By-Laws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition
proposal. The provisions also are intended to discourage certain tactics that
may be used in proxy fights. However, such provisions could have the effect of
discouraging others from making tender offers for the Company's shares. As a
consequence, they also may inhibit fluctuations in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management of the Company. See "Risk Factors--Anti-Takeover Provisions."
Nevada Statutory Provisions
Nevada "Combination with Interested Stockholders Statute." Nevada Revised
Statutes Sections 78.411 through 78.444 (the "Combination with Interested
Stockholders Statute") prohibit an "interested stockholder," under certain
circumstances, from entering into a "combination" with a Nevada corporation,
unless certain conditions are met. A "combination" includes (a) any merger
with an "interested stockholder," or any other corporation which is or after
the merger would be, an affiliate or associate of the interested stockholder,
(b) certain sales, leases, exchanges, mortgages, pledges, transfers or other
dispositions of assets, in one transaction or a series of transactions, to or
with an "interested stockholder," (c) any issuance or transfer of shares of
the corporation or its subsidiaries, to the "interested stockholder," having
an aggregate market value equal to 5% or
55
<PAGE>
more of the aggregate market value of all the outstanding shares of the
corporation, (d) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would result in increasing the proportionate share
of shares of the corporation owned by the "interested stockholder," or (f) the
receipt of benefits by an interested stockholder, except proportionately as a
stockholder, of any loans, advances or other financial benefits provided by
the corporation. An "interested stockholder" is a person who, together with
affiliates and associates, beneficially owns (or within the prior three years,
did beneficially own) 10% or more of the corporation's voting stock. A
corporation to which the statute applies may not engage in a "combination"
within three years after the interested stockholder acquired its shares,
unless the combination or the interested stockholder's acquisition of shares
was approved by the board of directors before the interested stockholder
acquired the shares. Generally, the combination may be consummated after the
three-year period expires if either (i) the board of directors of the
corporation approved, prior to such person becoming an interested stockholder,
the combination or the purchase of shares by the interested stockholder or
(ii) the combination is approved by the affirmative vote of holders of a
majority of voting power not beneficially owned by the interested stockholder
at a meeting called no earlier than three years after the date the interested
stockholder became an interested director.
Nevada "Control Share Acquisition Statute." Nevada Revised Statutes Sections
78.378 through 78.3793 (the "Control Share Acquisition Statute") prohibit an
acquirer, under certain circumstances, from voting shares of a target
corporation's stock after crossing certain threshold ownership percentages,
unless the acquirer obtains the approval of the target corporation's
stockholders. The Control Share Acquisition Statute only applies to Nevada
corporations that do business directly or indirectly in Nevada. The Company
does not intend to "do business" in Nevada within the meaning of the Control
Share Acquisition Statute. Therefore, it is unlikely that the Control Share
Acquisition Statute will apply to the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability
As permitted by the Nevada General Corporation Law, the Company's Articles
and By-Laws provide that officers and directors of the Company shall not be
personally liable for monetary damages to the Company for certain breaches of
their fiduciary duty as directors, unless they violated their duty of loyalty
to the Company or its stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions,
or derived an improper personal benefit from their action as directors. This
provision would have no effect on the availability of equitable remedies or
nonmonetary relief, such as an injunction or rescission for breach of the duty
of care. Directors will, however, no longer be liable for monetary damages
arising from decisions involving violations of the duty of care which could be
deemed grossly negligent.
Indemnification
The By-Laws provide that directors of the Company shall be indemnified by
the Company to the fullest extent authorized by Nevada law, as it now exists
or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of the
Company. The By-Laws also authorizes the Company to enter into one or more
agreements with any person which provide for indemnification greater or
different from that provided in the Articles. The Company has entered into
indemnification agreements with all current officers and members of the Board
of Directors. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation, 1745 Gardena Ave., Glendale, California 91204, (818) 502-1404.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The number of shares of Common Stock available for sale in the public market
is limited by restrictions under the Securities Act and by the lock-up
agreements (the "Lock-Up Agreements"), both restrictions being described
below. Upon completion of this offering and the Private Placement, the Company
will have 12,127,418 shares of Common Stock outstanding (assuming no exercise
of outstanding warrants or options). Of these shares, the 2,750,000 shares
sold in this offering will be freely transferable without restriction or
further registration under the Securities Act, unless purchased by
"affiliates" of the Company, as that term is defined under the Securities Act
("Affiliates"). Such shares would generally only be sold in compliance with
the limitations of Rule 144 described below. The remaining 9,377,418
(including the 597,849 shares of Common Stock, based on an assumed initial
public offering price of $13.00 per share in this offering, sold in the
Private Placement) are deemed "Restricted Shares" under Rule 144. The Company
intends to register the shares sold in the Private Placement following the
expiration of the 180 day lock-up agreements covering these shares as
described below. Chiron and Perkin-Elmer have no present intentions to dispose
of any shares of Common Stock which will be owned by them at the completion of
this offering. However, there can be no assurance that such intentions will
not change in the future.
Pursuant to the terms of the Lock-Up Agreements, all officers, directors and
substantially all stockholders (including Chiron and Perkin-Elmer),
optionholders and warrantholders of the Company have agreed not to (1) offer,
pledge, sell, contract to sell, engage in any short sale, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2) enter
into any swap or similar agreement that transfers, in whole or in part, the
economic risk of ownership of the Common Stock of the Company, until 180 days
after the effective date of the registration statement filed in connection
with this offering (the "Lock-Up Period"), without the prior consent of Lehman
Brothers Inc. However, Lehman Brothers Inc. may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to Lock-Up Agreements. As a result of these contractual restrictions,
Restricted Shares that would otherwise be eligible for sale after 90 days
under Rules 144 or 701, or eligible for sale pursuant to a subsequent
registration, as described below, will not be eligible for sale without prior
written consent of Lehman Brothers Inc. until the end of the Lock-Up Period.
Of the 9,377,418 Restricted Shares, 1,612,339 shares will be freely
transferable pursuant to Rule 144 at the end of the Lock-Up Period and
2,262,778 shares will be held by affiliates and transferable pursuant to Rules
144 and 701 subject to the volume limitations of Rule 144 at the end of the
Lock-Up Period. Additional Restricted Shares, which will be transferable at
the end of the Lock-Up Period subject to volume limitations of Rule 144, will
become freely transferable pursuant to Rule 144(k) as follows: 66,980 shares
at various time during February and March 1998; 2,585,280 at various times
during April and May 1998; and 81,600 at various times during December 1998
and January 1999. An additional 1,462,132 Restricted Shares will not be
transferable pursuant to Rule 144 until the expiration of their one-year
holding periods, beginning at various times following the end of the Lock-Up
Period. An additional 708,480 shares are expected to remain in a blocked
account and will therefore not be voted or transferable pursuant to
restrictions imposed by the U.S. Department of Treasury. The 597,849 shares of
Common Stock (based on an assumed initial public offering price of $13.00 per
share in this offering) sold in the Private Placement will be freely
transferable following the effectiveness of a registration statement which the
Company intends to file at the end of the Lock-Up Period.
In addition, 1,324,307 shares will be issuable upon the exercise of options
and warrants which will have vested 180 days after the effective date of this
offering of which 1,178,319 shares will be subject to the one-year holding
period requirement of Rule 144 upon issuance and an additional 119,514 shares
will be subject to volume limitations of Rule 144 upon issuance. The Company
intends to file a registration statement on Form S-8 under the Securities Act
covering certain of these shares subject to issuance upon exercise of options,
as described below. The remaining 26,473 shares issuable upon exercise of
options and warrants which will have vested 180 days after the effective date
of the offering will be freely transferable upon exercise.
Pursuant to certain registration rights agreements among the Company and
certain of its securities holders, 3,892,140 shares of Common Stock and
216,422 shares issuable upon the exercise of warrants will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. Registration rights covering
57
<PAGE>
227,760 of such shares will expire prior to the end of the Lock-Up Period;
registration rights covering an additional 2,652,240 of such shares will
expire between the end of the Lock-Up Period and May 1998; and registration
rights covering 67,800 of such shares will expire in January 1999. See
"Description of Capital Stock--Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under Securities Act immediately upon the
effectiveness of such registration, subject to the contractual obligations
discussed above.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated), who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including persons who may be deemed Affiliates of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of the Common Stock (approximately 121,000 shares immediately after the
offering) or the average weekly trading volume of Common Stock in the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who owns shares within the definition of "restricted securities" under Rule
144 under the Securities Act that were purchased from the Company (or any
Affiliate) at least two years previously, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers up to the date the
Company becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the effective date of this offering, such securities
may be sold (i) by persons other than Affiliates, subject only to the manner
of sale provisions of Rule 144 and (ii) by Affiliates under Rule 144 without
compliance with its one-year minimum holding period requirement.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering approximately 1,895,232 shares of Common Stock issued
or reserved for issuance under stock option agreements entered into in 1994,
the Stock Option Plan and the Directors' Plan. See "Management and Scientific
Advisory Board--Stock Option Plans and Agreements." Such registration
statement will be filed within approximately 180 days following the effective
date of this offering and will automatically become effective upon filing.
Accordingly, shares acquired pursuant to the Stock Option agreements, the
Stock Option Plan and the Directors' Plan will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
At June 30, 1997, options to purchase 1,393,467 shares were issued and
outstanding under stock option agreements, the Stock Option Plan and the
Directors' Plan. See "Risk Factors--Shares Eligible for Future Sale."
58
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the underwriters named below
(the "Underwriters"), for whom Lehman Brothers Inc., Smith Barney Inc. and
Fahnestock & Co. Inc. are acting as representatives (the "Representatives"),
have severally agreed to purchase from the Company, and the Company has agreed
to sell to each Underwriter, the number of shares set forth opposite of each
such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc. ..............................................
Smith Barney Inc. .................................................
Fahnestock & Co. Inc. .............................................
---------
Total............................................................ 2,750,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public initially at the public offering
price set forth on the cover page hereof, and to certain dealers at such
public offering price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other Underwriters or to certain other
brokers or dealers. After the offering to the public, the offering price and
other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the shares offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings
for such purpose are pending or threatened by the Commission and that there
has been no material adverse change or any development involving a prospective
material adverse change in the condition of the Company from that set forth in
the Registration Statement otherwise than as set forth or contemplated in this
Prospectus, and that certain certificates, opinions and letters have been
received from the Company and its counsel and independent auditors. The
Underwriters are obligated to take and pay for all of the above shares if any
such shares are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities
under the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 412,500 shares, exercisable solely to cover over-allotments, at the
public offering price, less the underwriting discounts and commissions shown
on the cover page hereof. Such option may be exercised at any time until 30
days after the date of the Underwriting Agreement. To the extent that the
option is exercised, each Underwriter will be committed, subject to certain
conditions, to purchase a number of the additional shares that is
proportionate to such Underwriter's initial commitment as indicated on the
preceding table.
The Company, the executive officers and directors of the Company and certain
employees of the Company have each agreed, pursuant to the terms of the Lock-
Up Agreement, that during the Lock-Up Period they will not, without the prior
written consent of Lehman Brothers Inc., (1) offer, pledge, sell, contract to
sell, engage in any short sale, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (2) enter into any swap or similar agreement
that transfers, in whole or in part, the economic risk of ownership of the
Common Stock of the Company, except that the Company may issue shares upon the
exercise of stock options granted
59
<PAGE>
prior to the execution of the Underwriting Agreement, and may grant additional
options under its employee compensation plans, provided that, without the
prior written consent of the Representatives, such options shall not be
exercisable during such Lock-Up Period.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales in excess of five percent of the total number of
shares offered hereby to accounts over which they exercise discretionary
authority. Until the distribution of the shares is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to
these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock. In addition, if the Representatives
over-allot (i.e., if they sell more shares of Common Stock than are set forth
on the cover page of this Prospectus), and thereby create a short position in
the Common Stock in connection with this offering, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering. In general, purchases
of a security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
might have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in the offering. Neither the
Company 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 the
Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice. Prior to this
offering, there has been no public market for the shares of Common Stock. The
initial public offering price will be negotiated among the Company and the
Representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
Affiliates of Fahnestock & Co. Inc., one of the Representatives, are the
beneficial owner of 281,760 shares of Common Stock. Fahnestock & Co. Inc. and
certain of its affiliates are the beneficial owners of warrants to purchase
178,022 shares of Common Stock at an exercise price of $4.58 per share which
warrants expire in May 2001.
60
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sachnoff & Weaver, Ltd., Chicago, Illinois. Sachnoff &
Weaver, Ltd. and certain of its members own shares of Common Stock. A member
of Sachnoff & Weaver, Ltd. is the spouse of Lewis S. Gruber, Chief Executive
Officer of the Company. See "Certain Transactions." Certain legal matters in
connection with the offering will be passed upon for the Underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
The consolidated financial statements of Hyseq, Inc. at December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996
and for the period from August 14, 1992 (inception) to December 31, 1996,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
Certain legal matters with respect to information contained in this
Prospectus under the captions "Risk Factors--Dependence upon Proprietary
Rights; Risks of Infringement," and "Business--Patents and Proprietary
Technology" will be passed upon for the Company by McCutchen, Doyle, Brown &
Enersen LLP, Palo Alto, California, patent counsel to the Company.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement, of which this Prospectus constitutes a part, on Form S-1 under the
Securities Act (herein, together with all amendments and exhibits referred to
herein as the "Registration Statement") with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules to the
Registration Statement, as certain parts have been omitted in accordance with
rules and regulations of the Commission. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract, agreement or any other document referred to are not
necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified in all respects by such reference to such exhibit.
A copy of the Registration Statement, including exhibits and schedules
thereto, may be inspected without charge and obtained at the prescribed rates
at the Public Reference Section of the Commission at its principal offices,
located at 450 Fifth Street, N.W., Washington, D.C. 20549, and may be
inspected without charge at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Registration Statement, including the exhibits and schedules thereto, is also
available at the Commission's site on the World Wide Web at
http://www.sec.gov.
The Company intends to furnish its stockholders annual reports containing
consolidated financial statements audited by its independent auditors and
quarterly reports containing unaudited consolidated financial information.
61
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statement of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows..................................... F-8
Notes to Consolidated Financial Statements.................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Hyseq, Inc.
We have audited the accompanying consolidated balance sheets of Hyseq, Inc.
(a development-stage company) as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996 and
for the period from August 14, 1992 (inception) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hyseq, Inc.
at December 31, 1995 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, and for the period from August 14, 1992 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.
Palo Alto, California
February 20, 1997, except for
Note 10 as to which the date
is June , 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be issued upon completion of
the matters discussed in the sixth and seventh paragraphs of Note 10 of Notes
to Consolidated Financial Statements.
ERNST & YOUNG LLP
Palo Alto, California
June 12, 1997
F-2
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------------ MARCH 31, MARCH 31,
1995 1996 1997 1997
----------- ----------- ------------ -------------
(UNAUDITED) (NOTE 10)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 750,291 $ 6,707,288 $ 4,743,260
Accounts receivable.... 136,336 146,400 272,373
Notes receivable from
officers.............. 120,000 -- --
Prepaid expenses and
other current assets.. 55,386 311,855 291,153
----------- ----------- ------------
Total current assets..... 1,062,013 7,165,543 5,306,786
Equipment and leasehold
improvements, net....... 1,022,260 1,638,922 1,707,494
Patents, licenses and
other assets, net....... 655,406 561,349 534,953
----------- ----------- ------------
$ 2,739,679 $ 9,365,814 $ 7,549,233
=========== =========== ============
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable....... $ 220,279 $ 572,049 $ 272,919
Accrued professional
fees.................. 403,278 88,620 396,193
Other current
liabilities........... 75,396 284,916 311,431
Current portion of
capital lease
obligations........... 31,809 132,173 136,730
Current portion of loan
obligation............ -- 133,114 138,163
----------- ----------- ------------
Total current
liabilities............. 730,762 1,210,872 1,255,436
Noncurrent portion of
capital lease
obligations............. 32,360 174,519 138,580
Noncurrent portion of
loan obligation......... -- 616,886 580,393
Commitments and
contingencies
Stockholders' equity:
Preferred stock, $0.001
par value:
Authorized shares--
8,000,000
Series A convertible
preferred stock:
Authorized shares--
3,000,000
Issued and
outstanding shares--
789,085 in 1995 and
2,170,460 in 1996
and 1997
Aggregate liquidation
value of $21,704,600
at March 31, 1997... 4,920,496 14,780,013 14,780,013 $ --
Common stock, $0.001
par value:
Authorized shares--
20,000,000
Issued and
outstanding shares--
7,124,956 in 1995
and 4,472,716 in
1996 and 1997....... 507,422 2,032,570 5,396,571 20,176,584
Notes receivable from
stockholders.......... (78,370) (1,237,120) (3,905,705) (3,905,705)
Deferred compensation.. -- -- (568,064) (568,064)
Deficit accumulated
during the development
stage................. (3,372,991) (8,211,926) (10,127,991) (10,127,991)
----------- ----------- ------------ -----------
Total stockholders'
equity.................. 1,976,557 7,363,537 5,574,824 $ 5,574,824
----------- ----------- ------------ ===========
$ 2,739,679 $ 9,365,814 $ 7,549,233
=========== =========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
AUGUST 14, 1992 THREE MONTHS ENDED AUGUST 14, 1992
YEAR ENDED DECEMBER 31, (INCEPTION) TO MARCH 31, (INCEPTION) TO
------------------------------------ DECEMBER 31, ------------------------ MARCH 31,
1994 1995 1996 1996 1996 1997 1997
----------- ---------- ----------- --------------- ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Contract revenues....... $ 50,000 $2,127,000 $ 426,099 $ 2,603,099 $ 78,327 $ 272,373 $ 2,875,472
Operating expenses:
Research and
development............ 850,707 1,811,212 3,735,925 6,397,844 946,324 1,306,233 7,704,077
General and
administrative......... 1,477,664 937,656 1,749,086 4,676,161 400,670 931,298 5,607,459
----------- ---------- ----------- ----------- ----------- ----------- ------------
Total operating
expenses............... 2,328,371 2,748,868 5,485,011 11,074,005 1,346,994 2,237,531 13,311,536
----------- ---------- ----------- ----------- ----------- ----------- ------------
Loss from operations.... (2,278,371) (621,868) (5,058,912) (8,470,906) (1,268,667) (1,965,158) (10,436,064)
Interest expense........ (318) (2,655) (42,560) (45,533) (9,072) (42,776) (88,309)
Interest income......... 16,244 23,259 262,537 304,513 3,232 91,869 396,382
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net loss................ $(2,262,445) $ (601,264) $(4,838,935) $(8,211,926) $(1,274,507) $(1,916,065) $(10,127,991)
=========== ========== =========== =========== =========== =========== ============
Pro forma net loss per
share.................. $ (0.52) $ (0.21)
=========== ===========
Shares used in computing
pro forma net loss per
share.................. 9,403,000 9,067,000
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE TOTAL
------------------ ------------------- FROM DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION STAGE EQUITY
------- ---------- --------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders for cash at
inception in August
1992................... -- $ -- 100,435 $ 35,000 $ -- $-- $ -- $ 35,000
Issuance of common stock
for cash and
stockholders' note
receivable in May 1993. -- -- 495,329 202,750 (180,000) -- -- 22,750
Issuance of common stock
for cash in September
1993................... -- -- 93,717 38,361 -- -- -- 38,361
Issuance of common stock
to acquire patent in
November 1993.......... -- -- 2,125,440 243,540 -- -- -- 243,540
Issuance of Series A
convertible preferred
stock for cash at $5.56
per share in November
1993................... 282,399 1,458,148 -- -- -- -- -- 1,458,148
Issuance of common stock
for cash at $0.001 per
share in November 1993
to Hyseq One Trust..... -- -- 5,446,502 2,837 -- -- -- 2,837
Issuance of common stock
for cash at $0.001 per
share in December 1993
to Hyseq One Trust..... -- -- 9,033 4 -- -- -- 4
Repurchase of common
stock for cash at
$0.002 per share from
Hyseq One Trust in
December 1993.......... -- -- (172,663) (256) -- -- -- (256)
Cash payment of note
receivable from
stockholder in December
1993................... -- -- -- -- 125,000 -- -- 125,000
Net loss................ -- -- -- -- -- -- (509,282) (509,282)
------- ---------- --------- -------- --------- ---- ----------- -----------
Balances at December 31,
1993................... 282,399 1,458,148 8,097,793 522,236 (55,000) -- (509,282) 1,416,102
Issuances of Series A
preferred stock for
cash and stockholders'
note receivable at
$6.56 per share in
January through
November 1994.......... 366,545 2,372,575 -- -- (13,120) -- -- 2,359,455
Issuance of Series A
preferred stock for
property and license in
lieu of cash at $6.56
per share in June and
November 1994.......... 21,516 141,145 -- -- -- -- -- 141,145
Issuance of common stock
for stockholders' note
receivable and cash at
$0.78 per share in
March 1994............. -- -- 88,320 69,000 (67,500) -- -- 1,500
Repurchase of common
stock at $0.41 per
share and repayment of
stockholders' note
receivable in March
1994................... -- -- (205,056) (84,372) 55,000 -- -- (29,372)
Issuance of common stock
at $0.001 per share in
March 1994 to Hyseq One
Trust.................. -- -- 191,873 100 -- -- -- 100
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through November 1994.. -- -- (820,214) (1,282) -- -- -- (1,282)
Net loss................ -- -- -- -- -- -- (2,262,445) (2,262,445)
------- ---------- --------- -------- --------- ---- ----------- -----------
Balances at December 31,
1994 (carried forward). 670,460 $3,971,868 7,352,716 $505,682 $ (80,620) $-- $(2,771,727) $ 1,625,203
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE TOTAL
--------------------- ---------------------- FROM DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION STAGE EQUITY
--------- ----------- ---------- ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994 (brought
forward)............. 670,460 $ 3,971,868 7,352,716 $ 505,682 $ (80,620) $ -- $(2,771,727) $ 1,625,203
Issuance of Series A
preferred stock for
cash at $8.00 per
share in January
through December
1995, less issuance
costs of $372....... 118,625 948,628 -- -- -- -- -- 948,628
Issuance of common
stock for cash at
$0.78 per share in
December 1995....... -- -- 2,688 2,100 -- -- -- 2,100
Cash payment of note
receivable from
stockholders........ -- -- -- -- 2,250 -- -- 2,250
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through December
1995................ -- -- (230,448) (360) -- -- -- (360)
Net loss............. -- -- -- -- -- -- (601,264) (601,264)
--------- ----------- ---------- ---------- ----------- ------ ----------- -----------
Balances at December
31, 1995............. 789,085 4,920,496 7,124,956 507,422 (78,370) -- (3,372,991) 1,976,557
Issuance of Series A
preferred stock for
cash at $8.00 per
share in April and
May 1996, less
issuance costs of
$1,191,483.......... 1,381,375 9,859,517 -- -- -- -- -- 9,859,517
Issuance of common
stock for cash at
$4.17 per share in
September 1996...... -- -- 80,640 336,000 -- -- -- 336,000
Issuance of common
stock upon exercise
of stock option
grants for cash and
stockholders' note
receivable at $1.56
per share in
September and
December 1996....... -- -- 67,200 105,000 (75,000) -- -- 30,000
Issuance of common
stock upon exercise
of warrants for
stockholders' note
receivable at $2.90
per share in
December 1996....... -- -- 144,000 417,000 (417,000) -- -- --
Issuance of common
stock for
stockholders' note
receivable at $4.17
per share in
December 1996....... -- -- 161,280 672,000 (672,000) -- -- --
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through December
1996................ -- -- (3,105,360) (4,852) -- -- -- (4,852)
Cash payment of note
receivable from
stockholders........ -- -- -- -- 5,250 -- -- 5,250
Net loss............. -- -- -- -- -- -- (4,838,935) (4,838,935)
--------- ----------- ---------- ---------- ----------- ------ ----------- -----------
Balances at December
31, 1996 (carried
forward)............. 2,170,460 $14,780,013 4,472,716 $2,032,570 $(1,237,120) $ -- $(8,211,926) $ 7,363,537
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE TOTAL
--------------------- --------------------- FROM DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION STAGE EQUITY
--------- ----------- --------- ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1996 (brought
forward).............. 2,170,460 $14,780,013 4,472,716 $2,032,570 $(1,237,120) $ -- $ (8,211,926) $ 7,363,537
Issuance of common
stock for services and
stockholders' note
receivable at $6.51
per share in January
1997 (unaudited)...... -- -- 76,800 500,000 (397,585) -- -- 102,415
Forfeiture of note
receivable from
stockholders at $0.78
per share in February
1997 (unaudited)...... -- -- (86,400) (67,500) 67,500 -- -- --
Purchase of common
stock at $0.001 per
share by Hyseq One
Trust in February 1997
(unaudited)........... -- -- 86,400 45 -- -- -- 45
Issuance of common
stock for
stockholders' note
receivable at $6.51
per share in March
1997 (unaudited)...... -- -- 359,424 2,340,000 (2,340,000) -- -- --
Issuance of common
stock upon exercise of
stock option grants
for cash at $1.56 per
share in March 1997
(unaudited)........... -- -- 7,680 12,000 -- -- -- 12,000
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through March 1997
(unaudited)........... -- -- (443,904) (694) -- -- -- (694)
Deferred compensation
(unaudited)........... -- -- -- 580,150 -- (580,150) -- --
Amortization of
deferred compensation
(unaudited)........... -- -- -- -- -- 12,086 -- 12,086
Cash payment of note
receivable from
stockholders
(unaudited)........... -- -- -- -- 1,500 -- -- 1,500
Net loss (unaudited)... -- -- -- -- -- -- (1,916,065) (1,916,065)
--------- ----------- --------- ---------- ----------- --------- ------------ -----------
Balances at March 31,
1997 (unaudited)...... 2,170,460 $14,780,013 4,472,716 $5,396,571 $(3,905,705) $(568,064) $(10,127,991) $ 5,574,824
========= =========== ========= ========== =========== ========= ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14,
1992 PERIOD FROM
(INCEPTION) THREE MONTHS ENDED AUGUST 14,
YEAR ENDED DECEMBER 31, TO MARCH 31, 1992
------------------------------------ DECEMBER 31, ------------------------ (INCEPTION) TO
1994 1995 1996 1996 1996 1997 MARCH 31, 1997
----------- ---------- ----------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(2,262,445) $ (601,264) $(4,838,935) $(8,211,926) $(1,274,508) $(1,916,065) $(10,127,991)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 91,164 286,844 444,036 822,044 93,660 165,542 987,586
Amortization of
deferred
compensation.......... -- -- -- -- -- 12,086 12,086
Shares of common stock
issued for services... -- -- -- -- -- 102,415 102,415
License fees acquired
through issuance of
preferred stock....... 100,000 -- -- 100,000 -- -- 100,000
Changes in assets and
liabilities:
Accounts receivable.. -- (136,336) (10,064) (146,400) 136,336 (125,973) (272,373)
Notes receivable from
officers............ -- (120,000) 120,000 -- 120,000 -- --
Prepaid expenses and
other current
assets.............. (64,256) 8,870 (256,469) (311,855) 16,812 20,702 (291,153)
Other assets......... -- (26,498) (23,678) (50,176) (91,598) 738 (49,438)
Accounts payable and
other current
liabilities......... 105,694 (8,706) 351,770 572,049 90,584 (299,130) 272,919
Accrued professional
fees................ 391,320 11,958 (314,658) 88,620 15,834 307,573 396,193
Other current
liabilities......... -- 75,396 209,520 284,916 67,143 26,515 311,431
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net cash used in
operating activities... (1,638,523) (509,736) (4,318,478) (6,852,728) (825,737) (1,705,597) (8,558,325)
----------- ---------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Expenditures for
property and equipment. (415,397) (678,635) (943,319) (2,037,351) (111,560) (208,456) (2,245,807)
Organization costs...... -- -- -- (14,763) -- -- (14,763)
Patents and other
intangibles............ (90,000) (210,000) -- (571,527) -- -- (571,527)
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities... (505,397) (888,635) (943,319) (2,623,641) (111,560) (208,456) (2,832,097)
----------- ---------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments of
stockholders' notes
receivable............. 55,000 2,250 -- 57,250 -- 1,500 58,750
Cash proceeds from
issuance of:
Series A preferred
stock................. 2,359,455 948,628 9,859,517 14,625,748 279,000 -- 14,625,748
Common stock........... 1,600 2,100 371,250 598,646 1,000 12,000 610,646
Cash used to repurchase
common stock........... (85,654) (360) (4,852) (90,866) (105) (649) (91,515)
Cash proceeds from sale
leaseback.............. -- -- 369,350 369,350 369,350 -- 369,350
Principal payments on
capital lease.......... -- -- (126,471) (126,471) (29,331) (31,382) (157,853)
Financing loan.......... -- -- 750,000 750,000 -- -- 750,000
Principal payments on
financing loan......... -- -- -- -- -- (31,444) (31,444)
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............. 2,330,401 952,618 11,218,794 16,183,657 619,914 (49,975) 16,133,682
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net (decrease) increase
in cash and cash
equivalents............ 186,481 (445,753) 5,956,997 6,707,288 (317,383) (1,964,028) 4,743,260
Cash and cash
equivalents at
beginning of period.... 1,009,563 1,196,044 750,291 -- 750,291 6,707,288 --
----------- ---------- ----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents at end of
period................. $ 1,196,044 $ 750,291 $ 6,707,288 $ 6,707,288 $ 432,908 $ 4,743,260 $ 4,743,260
=========== ========== =========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
INFORMATION
Cash paid for interest.. $ 318 $ 2,655 $ 42,560 $ 45,533 $ 9,072 $ 42,776 $ 88,309
=========== ========== =========== =========== =========== =========== ============
SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING
ACTIVITIES
Equipment acquired under
capital leases......... $ -- $ 64,169 $ -- $ 64,169 $ -- $ -- $ 64,169
=========== ========== =========== =========== =========== =========== ============
Issuance of 708,480
shares of common stock
for patent............. $ -- $ -- $ -- $ 243,540 $ -- $ -- $ 243,540
=========== ========== =========== =========== =========== =========== ============
Issuance of 21,516
shares of Series A
preferred stock in
exchange for equipment
and license............ $ 141,145 $ -- $ -- $ 141,145 $ -- $ -- $ 141,145
=========== ========== =========== =========== =========== =========== ============
Issuance of 15,728
shares of common stock
in exchange for legal
services............... $ -- $ -- $ -- $ -- $ -- $ 102,415 $ 102,415
=========== ========== =========== =========== =========== =========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-8
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997 AND WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Hyseq, Inc. (the "Company") was established in August 1992 as an Illinois
corporation and subsequently reincorporated as a Nevada corporation on
November 12, 1993. The Company's wholly owned subsidiary, Hyseq Diagnostics,
Inc. ("HDI"), was formed as a Nevada corporation on July 18, 1995. The Company
applies the proprietary DNA array technology of its integrated HyX genomics
platform (the "HyX Platform") to develop gene-based therapeutic product
candidates and diagnostic products and tests. The Company believes that its
HyX Platform, which utilizes the Company's proprietary sequencing by
hybridization ("SBH") technology as its foundation, generates higher gene
sequence throughput with greater analytical flexibility and accuracy and lower
cost than prevailing technologies. To date, the Company's primary activities
have involved establishment of operations, recruiting of personnel and pursuit
of its research and development programs. Accordingly, it is classified as a
development-stage company.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiary. All significant intercompany transactions and
accounts have been eliminated.
All common stock and common per share amounts have been retroactively
restated to reflect a 1.92-for-1 stock split of the Company's outstanding
common stock to be effected before the completion of the Company's initial
public offering -- See Note 10. All preferred share and preferred share
amounts are presented on a historical basis.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements at March 31, 1997 and for the three-
month periods ended March 31, 1996 and 1997 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that management
of the Company believes are necessary for presentation of its financial
position and results of operations in accordance with generally accepted
accounting principles. The results of operations and cash flows for the three
months ended March 31, 1997 are not necessarily indicative of the results to
be expected for the full year 1997.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid interest-bearing deposits with
original maturities of less than 90 days and insignificant interest rate risk
to be cash equivalents. The Company invests its excess cash in money market
accounts, certificates of deposit and other bank instruments.
F-9
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives ranging from three to five years, except that leasehold
improvements are amortized over the remaining life of the lease or the life of
the improvement, whichever is less.
REVENUE RECOGNITION
Revenues from research, technology and license agreements are recognized
when the Company has satisfied milestones and payments received or to be
received are nonrefundable. Nonrefundable up-front payments are recognized
upon execution of the agreements and government grant revenue is recognized as
the reimbursable services are performed. See Notes 6 and 10.
Revenues from collaborative agreements representing 10% or more of total
revenue are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- ------------
1994 1995 1996 1996 1997
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Source:
NIST Grant........................... -- 33% 100% 100% 100%
Collaboration Partner A.............. -- 57% -- -- --
Collaboration Partner B.............. 100% -- -- -- --
</TABLE>
ACCOUNTING FOR STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee and director stock options
rather than the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as
this alternative requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted-average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options and
warrants) issued during the 12-month period prior to the initial filing of the
proposed offering at prices below the assumed public offering price have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss per share...... $ (0.26) $ (0.07) $ (0.61) $ (0.16) $ (0.25)
Shares used in computing
net loss per share..... 8,820,000 8,140,000 7,888,000 7,910,000 7,552,000
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of the Company's initial
public offering (using the if-converted method) from the original date of
issuance.
F-10
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is not expected to result in a
change in primary earnings per share for the quarters ended March 31, 1996 and
1997 as the Company incurred net losses in those periods and, accordingly, the
calculation of earnings per share for those periods excluded stock options as
their effect was antidilutive.
2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery, equipment, and furniture....... $1,121,477 $2,016,656 $2,211,879
Leasehold improvements.................... 77,868 125,652 138,885
---------- ---------- ----------
1,199,345 2,142,308 2,350,764
Less accumulated depreciation and
amortization............................. 177,085 503,386 643,270
---------- ---------- ----------
$1,022,260 $1,638,922 $1,707,494
========== ========== ==========
</TABLE>
Equipment and leasehold improvements at December 31, 1996 include items
under capitalized leases. Accumulated amortization related to leased assets is
included in depreciation expense.
3. PATENTS, LICENSES AND OTHER ASSETS
PATENTS
Patents consist primarily of costs and expenses incurred in connection with
obtaining patents and patent applications in the United States. Included in
patent costs is $243,540 related to the issuance of 708,480 shares of common
stock in November 1993 at an estimated fair value of $0.34 per share, as
determined by the management of the Company. The Company also issued 1,416,960
shares of common stock for technology related to the same patent to the
Company's two Co-Senior Vice Presidents for Research. Amortization, which
amounted to $42,735 in each of the three years ended December 31, 1996, is
being recorded over the patents' estimated useful lives, which approximate 17
years. For the three months ended March 31, 1996 and 1997, amortization
expense was $10,684 and $6,908, respectively.
LICENSE AND FRANCHISE AGREEMENT
In 1994, the Company entered into a license and franchise agreement for the
exclusive right to use and resell robotic equipment in the field of
manipulating, sorting, identifying or sequencing nucleic acids in
hybridization reactions of DNA or RNA. The agreement required the Company to
pay total license fees of $300,000. Amortization, which amounted to $75,000
for each of the years ended December 31, 1995 and 1996 and $37,500 for the
year ended December 31, 1994, is being recorded over the four-year term of the
agreement. For each of the three months ended March 31, 1996 and 1997,
amortization expense was $18,750. As of December 31, 1996, the Company had a
purchase commitment for 10 remaining additional robotic units for a total
remaining commitment of approximately $700,000 through 1998. These purchase
commitments may be met by reselling such units to third parties.
F-11
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PATENTS, LICENSES AND OTHER ASSETS--(CONTINUED)
PATENT AGREEMENT
In 1994, the Company entered into a patent agreement for the exclusive
license to use certain SBH proprietary technology (developed by one of the
Company's two Co-Senior Vice Presidents for Research) and to develop, use, and
sell licensed products or processes under the license patent rights. The
Company issued 15,244 shares of Series A Preferred Stock and must pay minimum
royalties ranging from $25,000 to $100,000 per annum beginning in 1997 and
expiring at expiration of the related patents. The agreement requires that the
Company incur research and development costs relating to the patent technology
in the amount of $2,500,000 through June 1998. At March 31, 1997, the Company
estimates that its remaining obligation is less than $640,000.
4. LOAN OBLIGATION
In December 1996, the Company entered into a $1,000,000 loan agreement with
a capital management partnership and issued a warrant to purchase 9,600 shares
of common stock at $5.21 per share in connection with such loan. The loan has
an imputed interest rate of 14.9% per annum. As of December 31, 1996, the
Company had borrowed $750,000 under the loan agreement which amount is secured
by certain equipment owned by the Company.
Future minimum loan payments under the loan agreement are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1997........................................................ $ 236,610
1998........................................................ 236,610
1999........................................................ 236,610
2000........................................................ 311,610
----------
Total loan payments........................................... 1,021,440
Loan amount representing interest............................. 271,440
----------
Present value of future loan payments......................... 750,000
Less current portion.......................................... 133,114
----------
Noncurrent portion............................................ $ 616,886
==========
</TABLE>
F-12
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LEASE COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE OBLIGATIONS
During December 1995, the Company entered into capital lease agreements to
finance certain equipment purchases. In February and July 1996, the Company
entered into sale and leaseback transactions for certain equipment.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
---------
<S> <C>
Years ending December 31:
1997......................................................... $ 162,194
1998......................................................... 159,068
1999......................................................... 26,758
---------
Total minimum lease payments................................... 348,020
Less amount representing interest.............................. (41,328)
---------
Present value of future lease payments......................... 306,692
Less current portion........................................... (132,173)
---------
Noncurrent portion............................................. $ 174,519
=========
</TABLE>
OPERATING LEASE COMMITMENTS
The Company leases its facilities under an operating lease agreement that
expires in 1999. The Company also leases certain equipment under operating
leases. Rental expense was approximately $86,000 in 1994, $182,000 in 1995,
$183,000 in 1996 and $453,000 for the period from August 14, 1992 (inception)
to December 31, 1996. Minimum future rental commitments under operating leases
at December 31, 1996 are approximately $181,000, $169,000 and $159,000 in
1997, 1998 and 1999, respectively. Rental expense was approximately $46,000
for each of the three months ended March 31, 1996 and 1997.
CONTINGENCIES
On May 10, 1996, Sands Brothers & Co., Ltd. ("Sands") filed a suit against
the Company arising out of the Company's prior engagement of Sands to act as a
placement agent in a private placement. The complaint seeks, among other
things, damages in the aggregate amount of at least $12 million. The Company
filed a motion to dismiss the complaint on July 25, 1996. The court has not
yet ruled on the Company's motion. The Company believes that the suit has no
merit and that it has valid defenses to the claims. There can be no assurance,
however, that the Company will prevail in its defense of the claims asserted
by Sands. Any such failure to prevail could have a material adverse effect on
the Company's business, financial condition and operating results.
On March 3, 1997, the Company brought suit against Affymetrix, Inc.
("Affymetrix"), alleging infringement by Affymetrix of two of the Company's
patents covering SBH technology. The Company may incur substantial costs and
expend substantial personnel time in asserting the Company's patent rights
against Affymetrix or others and there can be no assurance that the Company
will be successful in asserting its patent rights. See Note 10.
6. COLLABORATIVE AGREEMENTS
In January 1995, the Company received a grant award from the National
Institute of Standards and Technology ("NIST") to further the development of
the Company's SBH technology. Under this award, the Company is entitled to
receive approximately 80% of actual direct costs of this program up to
$2,000,000 over a three-year period. Total revenue recognized under the NIST
agreement for the years ended December 31, 1995 and 1996 and for the three
months ended March 31, 1996 and 1997 was $700,000, $426,098, $78,327 and
$272,373, respectively.
F-13
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COLLABORATIVE AGREEMENTS--(CONTINUED)
The Company entered into collaborative agreements with two pharmaceutical
companies, which provided for total contract fees of $1,250,000 and royalty
payments for any future sales of products generated from the agreements.
Contract fees are payable upon achievement of milestones and are
nonrefundable. During 1994, 1995 and 1996, the Company recorded revenues of
$50,000, $1,200,000 and zero, respectively, under these agreements. No
revenues were recorded under these agreements during each of the three months
ended March 31, 1996 and 1997.
Under the terms of another agreement with a clinical reference laboratory,
the Company has received an initial payment of $200,000 and will grant its
corporate partner a non-exclusive license to use, promote, commercialize,
market and sell certain technology for clinical diagnostic purposes upon
payment of the license fee. The corporate partner and the Company are in the
process of evaluating whether to enter into a broader license agreement. See
Note 10.
7. STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
Each share of Series A Preferred Stock is convertible at any time into one
share of common stock, subject to adjustment for antidilution. Conversion is
automatic upon the closing of an underwritten public offering with aggregate
offering proceeds exceeding $15,000,000 and a preoffering valuation of the
Company exceeding $42,000,000.
The Series A preferred stockholders have one vote per share and are entitled
to receive, ratably with common stockholders, dividends when and if declared
by the board of directors. Through December 31, 1996, no such dividends have
been declared. The Series A preferred stockholders have liquidation
preferences equal to $10.00 per share, plus all dividends declared and unpaid.
COMMON STOCK
At December 31, 1996, an aggregate of 8,099,792 shares of common stock were
reserved for issuance upon the exercise of warrants (see "Warrants" below),
conversion of Series A Preferred Stock (5,760,000 shares) outstanding stock
options granted and stock options reserved for issuance.
In December 1996, an officer of the Company purchased 161,280 shares of
common stock at $4.17 per share for a total purchase price of $672,000.
Simultaneously with the purchase of such stock, the officer borrowed from the
Company $672,000 as evidenced by a promissory note that bears interest at 3%
per annum, matures in December 2001, and is secured by and with recourse only
to the 161,280 shares. The Company has the right, but not the obligation to
repurchase certain of the shares if the officer's employment with the Company
terminates before December 1997. Also in December 1996, another officer
exercised options to purchase 48,000 shares of common stock at an exercise
price of $1.56 per share and exercised warrants to purchase 144,000 shares of
common stock at $2.90 per share. Simultaneously with exercise, the officer
borrowed from the Company $492,000, as evidenced by a promissory note that
bears interest at 3% per annum, matures in December 2001, and is secured by
and with recourse only to 118,080 shares.
In March 1997, the Company sold a total of 359,424 shares of common stock
for $6.51 per share to two officers of the Company in exchange for promissory
notes with terms similar to those described above. Such shares are subject to
repurchase by the Company if the officers do not remain employed by the
Company through March 1999; such repurchase rights of the Company expire
ratably over this two-year period. Additionally, the Company granted options
to purchase a total of 86,131 shares of common stock at an exercise price of
$6.51 per share to officers and employees.
F-14
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY--(CONTINUED)
DEFERRED COMPENSATION
The Company has recorded deferred compensation of $580,150 representing the
difference between the issuance and exercise prices related to stock awards
and options and the deemed fair value for financial reporting purposes of the
Company's common stock for 359,424 shares subject to stock awards and 86,131
shares subject to stock options granted during the three-months ended March
31, 1997. The deferred stock compensation will be amortized to expense over
the vesting period of the options and over the two year repurchase period for
the stock awards.
SHARES HELD IN TRUST
In November 1993, the Company sold 5,446,502 shares of common stock to the
Hyseq One Trust (the "Trust") for $2,837 or $0.001 per share. The Trust was
formed to maintain certain agreed upon ownership ratios and avoid dilution to
existing stockholders. A trustee holds the shares in accordance with terms of
the trust agreement. The trustee retained all voting rights attributable to
those shares held in the Trust.
The Company has the right to purchase from the Trust (i) the equal number of
shares of its preferred or common stock that it issues in the same period
(excluding shares issued as a result of a stock split or stock dividend) to
any person other than the Trust and (ii) the number of shares calculated as
the Company's revenues prior to May 1, 1994 divided by $2.90 or the Company's
revenues subsequent to May 1, 1994 divided by $5.21. The price that the
Company pays to purchase shares from the Trust is $0.002 per share. At such
time as the Company reacquires shares of common or preferred stock from anyone
other than the Trust, an equivalent number of common shares are to be issued
to the Trust at $0.001 per share.
As of March 31, 1997, the Trust owned 961,219 shares of the Company's common
stock; 4,686,190 shares of common stock had been purchased from the Trust and
retired by the Company. The Trust shall terminate at such time as there are no
shares held thereunder, at which time any remaining trust property shall be
distributed to the Company. The Trust will terminate upon completion of the
Company's proposed initial public offering. See Note 10.
WARRANTS
As of December 31, 1996, the Company has issued warrants to purchase up to
1,010,000 shares of common stock at exercise prices ranging from $2.90 to
$5.21 ($3.73 average exercise price) per share to certain investors, an
executive officer and the private placement agent for the 1996 Series A
Preferred Stock financing. The value of these warrants is not material. In
1996, an executive officer of the Company exercised a warrant to purchase
144,000 shares of common stock at $2.90 per share.
In January 1997, the Company obtained a commitment for an additional
$500,000 under its loan agreement with a capital management partnership
entered into in December 1996. The Company is committed to issuing an
additional warrant to purchase 4,800 shares of common stock at $5.21 per share
related to this loan commitment. This loan will be secured by certain
equipment owned by the Company to the extent it is used.
F-15
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY--(CONTINUED)
STOCK OPTION PLANS
During 1995, the Company adopted the 1995 Stock Option Plan (the "Stock
Option Plan"). The Company reserved a total of 576,000 common shares for
issuance under the Plan. Under the Plan, stock options may be granted by the
board of directors to employees and consultants. Options granted may be either
incentive stock options or nonstatutory stock options. Incentive stock options
may be granted to employees or consultants with exercise prices of no less
than fair value and nonstatutory options may be granted to employees or
consultants at exercise prices of no less than par value of the common stock
on the date of grant as determined by the board of directors. Options vest as
determined by the board of directors and expire 10 years from the date of
grant.
The Company had granted options to purchase common stock to several key
employees, directors, and scientists prior to adoption of the Plan. Each
option gives the holder the right to purchase common stock at prices between
$0.78 and $4.17 per share. The options vest over periods up to four years. As
of December 31, 1996, 615,552 options were outstanding which were issued
outside of the Stock Option Plan.
During 1996, the Company adopted the Non-Employee Directors Stock Option
Plan (the "Directors' Plan"), which provides for the issuance of nonqualified
stock options to nonemployee members of the board of directors. An aggregate
of 138,240 shares of the Company's authorized but unissued common stock has
been reserved for issuance upon the exercise of options granted under the
Directors' Plan.
As adjusted information regarding net loss and net loss per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method. The fair value for these
options was estimated at the date of grant using the minimum value method with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Risk-free interest rates........................ 6.1% 6.2%
Dividend yield.................................. -- --
Expected life of option......................... 3.5 years 3.0 years
</TABLE>
The minimum value method estimates the fair value of options by calculating
the current price of the stock at the date of grant reduced by the present
value of the exercise price. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of as adjusted disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's as adjusted information follows (in thousands, except for per share
information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- ------------
<S> <C> <C>
As adjusted net loss........................... $ (604,084) $ (4,891,322)
As adjusted net loss per share................. $ (0.07) $ (0.62)
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its as adjusted effect will not be fully reflected until
fiscal 1999.
F-16
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY--(CONTINUED)
A summary of the Company's stock options activity, and related information
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------- MARCH 31,
1995 1996 1997
------------------ -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 829,440 $1.55 860,131 $1.66 1,153,553 $2.77
Options granted......... 33,379 $4.17 569,397 $4.17 86,131 $6.51
Options exercised....... (2,688) $0.78 (67,200) $1.56 (7,680) $1.56
Options canceled........ -- -- (208,775) $2.37 (2,052) $4.17
------- --------- ---------
Options outstanding at
end of the period...... 860,131 $1.66 1,153,553 $2.77 1,229,952 $3.04
======= ========= =========
</TABLE>
The following table summarized information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF OF CONTRACTUAL AVERAGE OF AVERAGE
EXERCISE PRICE SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
-------------- --------- ----------- -------------- ------- --------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.78 - $0.78........... 24,192 7.20 $0.78 12,672 $0.78
$1.56 - $1.56........... 556,800 7.50 $1.56 379,200 $1.56
$1.82 - $1.82........... 34,560 7.86 $1.82 34,560 $1.82
$4.17 - $4.17........... 538,001 9.56 $4.17 87,114 $4.17
--------- -------
Total................. 1,153,553 8.46 $2.77 513,546 $2.00
========= =======
</TABLE>
The weighted-average grant-date fair value of options granted during the
years ended December 31, 1995 and 1996 was $0.74 and $0.69, respectively.
8. INCOME TAXES
As of December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $7,400,000. The net operating
loss carryforwards will expire at various dates beginning in 2008 through
2011, if not utilized.
Utilization of the net operating losses is expected to be subject to a
substantial annual limitation because of the "change in ownership" provisions
of the Internal Revenue Code of 1986, as amended. The annual limitation may
result in the expiration of net operating losses before utilization.
F-17
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES--(CONTINUED)
Significant components of the Company's deferred tax assets for federal and
state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................. $ 1,000,000 $ 2,500,000
Capitalized research and development.............. -- 200,000
Other--net........................................ 200,000 200,000
----------- -----------
Net deferred tax assets........................... 1,200,000 2,900,000
Valuation allowance............................... (1,200,000) (2,900,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The net valuation allowance increased by $200,000 during 1995.
9. TRANSACTIONS WITH RELATED PARTIES
As of December 31, 1995 and 1996, the Company owed $238,602 and $44,026,
respectively, for professional services rendered by separate law firms of
which the spouse of the Company's President and Chief Executive Officer was a
member during each of the periods. The Company incurred legal fees and costs
to one of these law firms of $83,112 for the year ended December 31, 1996 and
$233,212 for the three months ended March 31, 1997. The Company incurred
legal fees and costs of $229,764, $34,834 and $68,775 for the years ended
December 31, 1994, 1995 and 1996, respectively, to one of these law firms.
In January 1997, the Sachnoff & Weaver, Ltd. purchased 76,800 shares of the
Company's common stock at $6.51 per share. Sachnoff & Weaver, Ltd., a member
of which is the spouse of the Company's President and Chief Executive Officer,
paid $102,415 and delivered a promissory note to the Company for the balance
in the amount of $397,585 secured by 61,069 shares of common stock. The note
bears interest at 8.25% per annum and is due on March 18, 2001.
10. SUBSEQUENT EVENTS
In April 1997, the Company's board of directors approved an increase of
576,000 in the number of shares authorized for issuance under the Stock Option
Plan.
On April 23, 1997, Affymetrix filed a motion to dismiss or, in the
alternative, for a more definitive statement. On May 19, 1997, Affymetrix
filed an Answer and Affirmative Defenses to the First Amended Complaint and
Counterclaim. The counterclaim seeks a declaratory judgment of invalidity and
non-infringement with respect to these SBH patents that are the basis for the
infringement allegation. On June 9, 1997, the Company filed a reply to the
counterclaim in which it denied the allegation of invalidity and non-
infringement. By order of the court, an initial case management conference is
scheduled for August 1, 1997.
In May 1997, the Company entered into an exclusive collaboration with Chiron
Corporation ("Chiron"). Pursuant to the terms of the collaboration agreement,
the Company and Chiron are collaborating to develop therapeutics, diagnostic
molecules and vaccines relating to a specified disease area (the "Disease
Area"). The collaboration has an initial term of three years and can be
extended at Chiron's option for two additional two-year periods. Chiron has
guaranteed payment of a minimum of $8.5 million in the first year and $5.5
million in each
F-18
<PAGE>
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SUBSEQUENT EVENTS--(CONTINUED)
of the two years thereafter in connection with the Company's research on
Chiron tissue sample libraries. The agreement requires the Company to generate
data at a specified level per year, which if not met could result in the
Company's breach of the agreement. Chiron has the exclusive right to
commercialize any Disease Area products resulting from the collaboration. The
Company will receive royalties on any such products. Pursuant to the terms of
a stock purchase agreement, Chiron concurrently acquired 175,070 shares of the
Series B Preferred Stock in a private placement at $28.56 per share for a
total investment of $5.0 million and has committed to purchase an additional
$2.5 million under certain conditions.
In May 1997, the Company entered into an agreement with The Perkin-Elmer
Corporation ("Perkin-Elmer") to combine the Company's super chip technology
and Perkin-Elmer's life science system capabilities to commercialize HyChip
products (collectively, the "HyChip System"). Pursuant to the terms of the
agreement, the Company is obligated to commit $5.0 million to further
development of the Company's "chip" component of the HyChip System over the
next two years, and Perkin-Elmer must commit certain funds to develop the
overall system. The collaboration has an initial term of five years and will
be extended automatically thereafter unless the parties mutually agree to
termination. The agreement contemplates that the design, development and
manufacture of the HyChip "chip" will be under the direction of the Company,
while design, development and manufacture of the overall system will be under
the direction of Perkin-Elmer. HyChip products will be distributed through
Perkin-Elmer's Applied Biosystem Division. Perkin-Elmer also has agree to
acquire, subject to the approval of its board of directors, 175,070 shares of
the Company's Series B Preferred Stock in a private placement at $28.56 per
share for a total investment of $5.0 million and to make an additional
investment of $5.0 million upon the earlier of the closing of this offering or
December 2, 1997.
In May 1997, the Company executed a Certificate of Designations, Preferences
and Rights of Series B Preferred Stock providing for the issuance of up to
525,210 shares of Series B Preferred Stock. The Series B Preferred Stock has
certain anti-dilution rights in connection with automatic conversions
triggered by an initial public offering. If this offering is completed by
November 25, 1997 at a price to the public that is less than 1.1111 times the
conversion price of the Series B Preferred Stock then in effect (currently,
$28.56 per share), the conversion price will decrease to an amount equal to
ninety percent of the price to the public.
Also in May 1997, the Company's board of directors authorized the filing of
a registration statement with the Securities and Exchange Commission for the
Company's initial public offering of its common stock. Under the terms
currently contemplated, all outstanding shares of Series A Convertible
Preferred Stock outstanding will automatically convert on a 1-for-1 basis into
2,170,460 shares of common stock upon completion of the offering. In addition,
all outstanding shares of Series B Preferred Stock outstanding will
automatically convert on a 1.27-for-one basis (assuming an initial public
offering price of $13.00 per share) into 445,156 shares of common stock upon
completion of the offering. Such conversion is reflected in the unaudited pro
forma stockholders equity at March 31, 1997 in the accompanying consolidated
balance sheet.
In June 1997, the Company's board of directors approved a 1.92-for-1 stock
split of the Company's outstanding common stock to be effected before the
completion of the Company's initial public offering. In connection with this
split, the Company's board of directors approved an increase in the number of
authorized common shares to 50,000,000. All common share and common per share
amounts have been retroactively restated to reflect the stock split in the
accompanying consolidated financial statements.
F-19
<PAGE>
[GRAPHICS APPEAR HERE]
A computer image in false colors of a Hyseq 55,000 DNA samples array entitled
"Hyseq Gene Discovery DNA Array". The computer image takes up most of the page.
The caption below the computer image reads "Image of 55,000 DNA Samples in a
Hyseq Gene Discovery Array. The entire human genome can fit into 60 of these
arrays."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANYTIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 15
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 23
Management and Scientific Advisory Board.................................. 43
Certain Transactions...................................................... 50
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 57
Underwriting.............................................................. 59
Legal Matters............................................................. 61
Experts................................................................... 61
Additional Information.................................................... 61
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,750,000 SHARES
[LOGO OF HYSEQ INC. APPEARS HERE]
COMMON STOCK
------------------
PROSPECTUS , 1997
------------------
LEHMAN BROTHERS
SMITH BARNEY INC.
FAHNESTOCK & CO. INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All the amounts
shown are estimated, except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 13,417
NASD filing fee................................................. 4,928
Nasdaq National Market listing fee.............................. 47,819
Blue Sky filing fees and expenses............................... 3,000
Printing expenses............................................... 110,000
Legal fees and expenses......................................... 200,000
Accounting fees and expenses.................................... 150,000
Transfer Agent and Registrar fees and expenses.................. 2,500
Miscellaneous expenses.......................................... 218,336
--------
Total......................................................... $750,000
========
</TABLE>
- --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Nevada corporation, subject to the applicable
indemnification provisions of the Nevada General Corporation Law (the "NGCL").
The NGCL requires the Company to indemnify officers and directors for any
expenses incurred by any officer or director in connection with any actions or
proceedings, whether civil, criminal, administrative, or investigative,
brought against such officer or director because of his or her status as an
officer or director, to the extent that the director or officer has been
successful on the merits or otherwise in defense of the action or proceeding.
The NGCL permits a corporation to indemnify an officer or director, even in
the absence of an agreement to do so, for expenses incurred in connection with
any action or proceeding if such officer of director acted in good faith and
in a manner in which he or she reasonably believed to be in or not opposed to
the best interests of the corporation and such indemnification is authorized
by the stockholders, by a quorum of disinterested directors, by independent
legal counsel in a written opinion authorized by a majority vote of a quorum
of directors consisting of disinterested directors or by independent legal
counsel in a written opinion if a quorum of disinterested directors cannot be
obtained. The NGCL prohibits indemnification of a director or officer if a
final adjudication establishes that the officer's or director's acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and were material to the cause of action. Despite the foregoing
limitations on indemnification, the NGCL may permit an officer or director to
apply to the court for approval of indemnification even if the officer or
director is adjudged to have committed intentional misconduct, fraud or a
knowing violation of the law. The NGCL also provides that indemnification of
directors is not permitted for the unlawful payment of distributions, except
for those directors registering their dissent to the payment of the
distribution.
The Company's Amended and Restated Articles of Incorporation, as amended,
and By-Laws eliminate personal liability of directors or officers for any
expenses, claims, damages or liability incurred by reason of their position in
the Company to the fullest extent allowed under the NGCL.
The Company's By-Laws provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding because he or
II-1
<PAGE>
she was or is a director, officer, employee or agent of the Company. In
addition, the Company's By-Laws provide that the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company because he or she was or is a director, officer, employee or agent of
the Company against expenses, actually and reasonably incurred if he or she
acted in good faith, unless adjudged liable to the Company. Further, the
Company's By-Laws provide that to the extent that a director, officer,
employee or agent of the Company has been successful on the merits or
otherwise, in defense of any action, suit or proceeding referred to above or
in defense of any claim, matter or issue therein, he or she shall be
indemnified against expenses actually and reasonably incurred by him or her in
connection therewith.
The Company has entered into indemnification agreements with each of its
officers and directors in which the Company agrees to indemnify and hold
harmless the officer or director to the fullest extent permitted by applicable
law against any and all reasonable attorneys' fees and all other reasonable
expense, cost, liability and loss (including a mandatory obligation by the
Company to advance reimbursement of legal fees and expenses) paid or
reasonably incurred by such officer or director or on his or her behalf in
connection with any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation not initiated by the officer or
director that he or she believes in good faith might lead to a proceeding,
inquiry or investigation (a "Proceeding"), because the officer or director is
or was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee,
trustee, agent or fiduciary of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise, or by reason of any
action or inaction by the officer or director in such capacity. However, the
Company's obligation to indemnify the officer or director is subject to a
determination by: (i) the Company's Board of Directors, by vote of the
majority of disinterested directors; (ii) under certain circumstances,
independent legal counsel appointed by the Board of Directors in a written
opinion; (iii) stockholders of the Company; or (iv) a court of competent
jurisdiction in a final, non-appealable adjudication, that the officer or
director acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any criminal Proceeding, the officer or director acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal Proceeding, the
officer or director had no reasonable cause to believe that his or her conduct
was unlawful.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the Company and its directors and executive officers in
the offering of the Common Stock registered hereby, and each person, if any,
who controls the Company, for certain liabilities, including liabilities
arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1994, the Company has issued the following securities that were
not registered under the Securities Act:
In an offering that commenced in April 1994, the Company sold 740,962 shares
of Series A Preferred Stock for total consideration of $2,545,681 and issued
warrants to purchase 418,114 shares of Common Stock at an exercise price of
$3.42 per share. In June 1997, the Company issued 194,020 shares of Common
Stock to the holder of a warrant representing 251,873 of the shares underlying
the warrants in satisfaction of the exercise of such warrant.
In June 1994, an officer of the Company was granted an option to purchase
345,600 shares of Common Stock at $1.56 per share in connection with his
employment. In September 1996, the Company issued 19,200 shares of Common
Stock to this officer upon the exercise of a portion of the option at $1.56
per share for total consideration of $30,000. In December 1996, the Company
issued 48,000 shares of Common Stock to this officer upon the exercise of a
portion of this option at $1.56 per share for total consideration of $75,000,
which the officer borrowed from the Company. In March 1997, the Company issued
7,680 shares of Common Stock to this officer upon the exercise of a portion of
the option at $1.56 per share for total consideration of $12,000. In June
1997, the Company issued 2,880 shares of Common Stock to this officer upon
exercise of a portion of the optional $1.56 share for total consideration of
$4,500.
II-2
<PAGE>
In August 1994, the Company granted options to two officers and one employee
to purchase a total of 278,400 shares of Common Stock at $1.56 in connection
with their employment.
In September 1994, the Company issued 1,920 shares of Common Stock to a
member of the Scientific Advisory Board ("SAB") upon the exercise of a portion
of options granted in March 1994 at the exercise price of $0.78 per share for
total consideration of $1,500.
In November 1994, the Company granted options to purchase a total of 34,560
shares of Common Stock at an exercise price of $1.82 per share to two
directors in consideration of their services.
In an offering that commenced in May 1995, the Company sold 2,880,000 shares
of Series A Preferred Stock for total consideration of $12,000,000 and issued
warrants to purchase 202,800 shares at an exercise price of $4.17 per share
and warrants to purchase 206,822 shares of Common Stock at an exercise price
of $4.58 per share. Fahnestock & Co. Inc. acted as placement agent in
connection with this offering. In consideration for placing 2,585,280 shares
of Series A Preferred Stock, it received the aforementioned warrants to
purchase 206,822 shares of Common Stock and a private placement fee equal to
7.0% of the gross proceeds from the sale of such shares. In June 1997, the
Company issued 46,994 shares of Common Stock to the holder of a warrant
representing 65,280 of the shares underlying the warrants in satisfaction of
the exercise of such warrant.
In December 1995, the Company issued 2,688 shares of Common Stock to an SAB
member upon the exercise of a portion of options granted in March 1994 at the
exercise price of $0.78 per share for total consideration of $2,100.
In September and December 1996, the Company sold a total of 241,920 shares
of Common Stock at $4.17 per share for total consideration of $1,008,000. An
officer of the Company purchased 161,280 of these shares and two directors
purchased a total of 80,640 these shares. The officer borrowed $672,000 from
the Company to pay for his shares.
In October 1996, the Company issued options to purchase 46,080 shares of
Common Stock at an exercise price of $4.17 per share to each of its two new
independent directors under the Directors' Plan.
In December 1996, the Company issued 144,000 shares of Common Stock to an
officer the exercise of a warrant granted in 1993 at $2.90 per share for total
consideration of $417,000, which the officer borrowed from the Company to pay
for his shares.
In December 1996, the Company issued a warrant to purchase 9,600 shares of
Common Stock at $5.21 per share to Aberlyn Capital in connection with the
funding of a $750,000 loan to the Company.
In January 1997, the Company issued 76,800 shares of Common Stock at $6.51
per share to Sachnoff & Weaver, Ltd. Sachnoff & Weaver, Ltd. paid $102,415 and
delivered a promissory note to the Company for the balance in the amount of
$397,585 secured by 61,069 shares of Common Stock. The note bears interest at
8.25% per annum and is due on March 18, 2001. As of May 16, 1997, the note had
an outstanding balance of $374,887.
In March 1997, two officers each purchased 179,712 shares of Common Stock at
$6.51 per share for total consideration of $2,340,000. The officers each
borrowed $1,170,000 from the Company to pay for these shares.
In April 1997, the Company granted three directors options to purchase a
total of 2,880 shares of Common Stock at $8.33 per share pursuant to the terms
of the Directors' Plan.
In May 1997, the Company issued shares of Series B Preferred Stock which are
convertible into 427,350 shares of Common Stock at a post-conversion price of
$11.70 per share to a collaboration partner for total consideration of
$5,000,000.
Between April 1995 and June 30, 1997, the Company granted options to
purchase an aggregate of 739,515 shares of Common Stock, net of cancelled
options, at exercise prices ranging from $4.17 to $8.33, pursuant to the Stock
Option Plan for the purpose of incentivizing employees and attracting and
retaining executive officers and other key employees, directors and members of
its SAB.
II-3
<PAGE>
Immediately prior to the closing of this offering, the Company will issue
shares of Common Stock in connection with a 1.92-for-1 stock split.
Except as described above, no underwriters were engaged in connection with
the foregoing sales of securities. Such sales of shares of Common Stock and
Series A Preferred Stock were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder for transactions not involving a public
offering and, with the exception of certain persons who purchased shares in
the April 1994 offering, all purchasers were accredited investors as such term
is defined in Rule 501(a) of Regulation D. Issuances of options to the
Company's employees, directors and members of its SAB were made pursuant to
Rule 701 promulgated under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1(a) Amended and Restated Articles of Incorporation of the Company, as
amended
3.1(b) Certificate of Designations, Preferences and Rights of Series B
Preferred Stock
3.2 By-Laws of the Company
4.1 Specimen Common Stock certificate*
4.2 Form of Registration Rights Agreement
4.3 Form of Warrant Agreement
5.1 Opinion of Sachnoff & Weaver, Ltd.*
10.1 Form of Indemnification Agreement between the Company and each of
its directors and officers
10.2 Stock Option Plan, as amended+
10.3(a) Employment Agreement between the Company and Dr. Radoje T.
Drmanac+
10.3(b) Employment Agreement between the Company and Dr. Radomir B.
Crkvenjakov+
10.4 Non-Employee Director Stock Option Plan+
10.5 Patent License Agreement between Arch Development Corporation and
Hyseq, Inc. dated June 7, 1994+
10.6 License Agreement between Hyseq Diagnostics, Inc. and SmithKline
Beecham Clinical Laboratories, Inc. dated September 25, 1995, as
amended+
10.7 Stock Purchase Agreement for Series B Convertible Preferred Stock
dated as of May 28, 1997
10.8 Collaboration Agreement between Hyseq Inc. and Chiron Corporation
dated as of May 30, 1997+
10.9 Collaboration Agreement between Hyseq Inc. and The Perkin-Elmer
Corporation dated as of May 30, 1997+
11.1 Statement of Computation of Net Loss Per Share
21.1 Subsidiaries of Hyseq, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Sachnoff & Weaver, Ltd. (to be included in Exhibit 5.1)*
23.3 Consent of McCutchen, Doyle, Brown & Enersen, LLP
24.1 Power of Attorney (included herein on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
+ Denotes compensation plan in which an executive officer or director
participates.
+ Portions have been omitted pursuant to a request for confidential treatment.
(b) Financial Statement Schedule(s).
None
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
To provide to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described Item 14 above 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 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 and will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it is declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on the 12th day of June, 1997.
HYSEQ, INC.
By: /s/ Lewis S. Gruber
-----------------------------------
LEWIS S. GRUBER
President and Chief Executive
Officer
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES AND APPOINTS
LEWIS S. GRUBER AND CHRISTOPHER R. WOLF, AND EACH OF THEM, WITH FULL POWER OF
SUBSTITUTION AND FULL POWER TO ACT WITHOUT THE OTHER, AS HIS TRUE AND LAWFUL
ATTORNEY-IN-FACT AND AGENT WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION,
FOR SUCH PERSON AND IN SUCH PERSON'S NAME, PLACE AND STEAD, TO SIGN THE
REGISTRATION STATEMENT FILED HEREWITH AND ANY OR ALL AMENDMENTS TO SAID
REGISTRATION STATEMENT (INCLUDING POST-EFFECTIVE AMENDMENTS AND REGISTRATION
STATEMENTS FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AND
ANY OR ALL AMENDMENTS THERETO, AS AMENDED AND OTHERWISE) AND TO FILE THE SAME,
WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH
THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS THE FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT
AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE FOREGOING, AS
FULL TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF
THEM, OR HIS OR HER SUBSTITUTE, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 12th day of June, 1997.
SIGNATURE TITLE
--------- -----
/s/ Robert D. Weist Chairman of the Board
---------------------------
ROBERT D. WEIST
/s/ Lewis S. Gruber President and Chief Executive
--------------------------- Officer, Director (Principal
LEWIS S. GRUBER Executive Officer)
/s/ Christopher R. Wolf Executive Vice President and
--------------------------- Chief Financial Officer
CHRISTOPHER R. WOLF (Principal Financial and
Accounting Officer)
/s/ Radoje T. Drmanac Director
---------------------------
RADOJE T. DRMANAC
/s/ Radomir B. Crkvenjakov Director
---------------------------
RADOMIR B. CRKVENJAKOV
/s/ Raymond F. Baddour Director
---------------------------
RAYMOND F. BADDOUR
/s/ Greta E. Marshall Director
---------------------------
GRETA E. MARSHALL
Director
---------------------------
THOMAS N. MCCARTER III
Director
---------------------------
KENNETH D. NOONAN
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1(a) Amended and Restated Articles of Incorporation of the Company, as
amended
3.1(b) Certificate of Designations, Preferences and Rights of Series B
Preferred Stock
3.2 By-Laws of the Company
4.1 Specimen Common Stock certificate*
4.2 Form of Registration Rights Agreement
4.3 Form of Warrant Agreement
5.1 Opinion of Sachnoff & Weaver, Ltd.*
10.1 Form of Indemnification Agreement between the Company and each of
its directors and officers
10.2 Stock Option Plan, as amended+
10.3(a) Employment Agreement between the Company and Dr. Radoje T.
Drmanac+
10.3(b) Employment Agreement between the Company and Dr. Radomir B.
Crkvenjakov+
10.4 Non-Employee Director Stock Option Plan+
10.5 Patent License Agreement between Arch Development Corporation and
Hyseq, Inc. dated June 7, 1994+
10.6 License Agreement between Hyseq Diagnostics, Inc. and SmithKline
Beecham Clinical Laboratories, Inc. dated September 25, 1995, as
amended+
10.7 Stock Purchase Agreement for Series B Convertible Preferred Stock
dated as of May 28, 1997
10.8 Collaboration Agreement between Hyseq Inc. and Chiron Corporation
dated as of May 30, 1997+
10.9 Collaboration Agreement between Hyseq Inc. and The Perkin-Elmer
Corporation dated as of May 30, 1997+
11.1 Statement of Computation of Net Loss Per Share
21.1 Subsidiaries of Hyseq, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Sachnoff & Weaver, Ltd. (to be included in Exhibit 5.1)*
23.3 Consent of McCutchen, Doyle, Brown & Enersen, LLP
24.1 Power of Attorney (included herein on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
+ Denotes compensation plan in which an executive officer or director
participates.
+ Portions have been omitted pursuant to a request for confidential treatment.
<PAGE>
EXHIBIT 3.1(a)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
HYSEQ, INC.
HYSEQ, INC., a corporation organized and existing under the laws of the
State of Nevada (the "Corporation"), pursuant to the provisions of Section
78.390 of the Nevada Revised Statutes DOES HEREBY CERTIFY:
(1) that the Corporation was originally incorporated under the name Hyseq,
Inc. and the original Articles of Incorporation of the Corporation were filed
with the Secretary of State of Nevada on the 8th day of November, 1993.
(2) that the Amended and Restated Articles of Incorporation of the
Corporation were duly approved and adopted by the Directors and the Shareholders
of the Corporation at a meeting duly convened and held on the 3rd day of June,
1994.
(3) that the Articles of Incorporation of the Corporation are hereby
amended and restated to read in its entirety as follows:
FIRST: The name of the corporation is HYSEQ, INC.
SECOND: Its registered office in the State of Nevada is located at 2533
North Carson Street, Carson City, Nevada 89706. The name of its resident agent
at that address is Laughlin Associates, Inc.
THIRD: The objects for which the Corporation is formed are: To engage in
any lawful activity, including, but not limited to the following:
(A) Shall have such rights, privileges and powers as may be conferred
upon corporations by any existing law.
(B) May at any time exercise such rights, privileges and powers, when
not inconsistent with the purposes and objects for which the Corporation is
organized.
(C) Shall have power to have succession by its corporate name for the
period limited in its certificate or articles of incorporation, and when no
period is limited, perpetually, or until dissolved and its affairs would
wind up accordingly to law.
(D) Shall have power to sue and be sued in any court of law or equity.
(E) Shall have power to make contracts.
(F) Shall have power to hold, purchase and convey real and personal
estate and to mortgage or lease any such real and personal estate with its
franchises. The power to hold real
1
<PAGE>
and personal estate shall include the power to take the same by devise or
bequest in the State of Nevada or in any other state, territory or country.
(G) Shall have power to appoint such officers and agents as the
affairs of the Corporation shall require, and to allow them suitable
compensation.
(H) Shall have power to make By-Laws not inconsistent with the
constitution or laws of the United States, or of the State of Nevada, for
the management, regulation and government of its affairs and property, the
issuance and transfer of its capital stock, the transaction of its
business, and the calling and holding of meetings of its stockholders.
(I) Shall have power to wind up and dissolve itself, or be wound up or
dissolved.
(J) Shall have power to adopt and use a common seal or stamp, and
alter the same at pleasure. The use of a seal or stamp by the Corporation
on any corporate documents is not necessary. The Corporation may use a seal
or stamp, if it desires, but such use or nonuse shall not in any way affect
the legality of the document.
(K) Shall have power to borrow money and contract debts when necessary
for the transaction of its business, or for the exercise of its corporate
rights, privileges or franchises, or for any other lawful purpose of its
incorporation; to issue bonds, promissory notes, bills of exchange,
debentures, and other obligations and evidences of indebtedness, payable at
a specified time or times, or payable upon the happening of a specified
event or events, whether secured by mortgage, pledge or otherwise, or
unsecured, for money borrowed, or in payment for property purchased, or
acquired, or for any other lawful object.
(L) Shall have power to guarantee, purchase, hold, sell, assign,
transfer, mortgage, pledge or otherwise dispose of the shares of the
capital stock of, or any bonds, securities or evidences of the indebtedness
created by, any other corporation or corporations of the State of Nevada,
or any other state or government, and, while owners of such stock, bonds,
securities or evidences of indebtedness, to exercise all the rights, powers
and privileges of ownership, including the right to vote, if any.
(M) Shall have power to purchase, hold, sell and transfer shares of
its own capital stock, and use therefor its capital, capital surplus,
surplus, or other property or fund.
(N) Shall have power to conduct business, have one or more offices,
and hold, purchase, mortgage and convey real and personal property in the
State of Nevada, and in any of the states, territories, possessions and
dependencies of the United States, the District of Columbia, and any
foreign countries.
(O) Shall have power to do all and everything necessary and proper for
the accomplishment of the objects enumerated in its certificate or articles
of incorporation, or any amendment thereof, or necessary or incidental to
the protection and benefit of the Corporation and, in general, to carry on
any lawful business necessary or incidental to the attainment of the
objects of the Corporation, whether or not such business is similar in
nature to the objects set forth in the certificate or articles of
incorporation of the Corporation, or any amendment thereof.
2
<PAGE>
(P) Shall have power to make donations for the public welfare or for
charitable, scientific or educational purposes.
(Q) Shall have power to enter into partnerships, general or limited or
joint ventures, in connection with any lawful activities.
(R) Shall have power to issue shares of any of its classes of stock in
public or private offerings.
FOURTH: The number and classes and/or series of shares the Corporation is
authorized to issue is as follows:
Number of
Authorized
Shares Class or Series Par Value
---------- --------------- ---------
3,000,000 Preferred Stock Series A $.001
5,000,000 All Other Series Preferred Stock .001
20,000,000 Common Stock .001
The voting powers, designation, preferences, limitations, restrictions, relative
rights and distinguishing designation of each class and/or series is as follows:
Preferred Stock
---------------
Series A
- --------
1. Preference. The preferences of each share of Series A Preferred Stock
----------
with respect to dividend payment and distributions of the Corporation's assets
upon redemption and upon the voluntary liquidation, dissolution or winding up of
the Corporation shall be equal to the preferences of every other share of Series
A Preferred Stock from time to time outstanding in every respect.
2. Voting Rights. Each holder of Series A Preferred Stock by virtue of
-------------
his ownership thereof is entitled to vote on all matters and is entitled to one
vote per share. An affirmative vote of the holders of shares representing a
majority of the outstanding Series A Preferred Stock shall be required to (i)
alter or change any preference or any relative or other right given to the
Series A Preferred Stock; (ii) create any new series of stock having dividend
rights or a liquidation preference pari passu with or senior to those possessed
by the Series A Preferred Stock, (iii) increase the number of shares of Series A
Preferred Stock, (iv) approve (a) the sale of U.S. Patent 5,202,231, or (b)
exclusive license or assignment to a single person or entity, other than a
wholly owned subsidiary, which license or assignment has the same effect as a
sale of all rights, title and interest in U.S. Patent 5,202,231, (v) liquidation
of the Corporation, (vi) merge or consolidate the Corporation other than with a
wholly owned subsidiary of the Corporation, or (vii) increase the size of the
Board of Directors to more than nine (9) Directors. In addition, the Board of
Directors is authorized to determine whether the Series A Preferred Stock is
entitled to vote separately as a class with respect to approval of certain other
extraordinary corporate transactions as determined in the Board's sole
discretion.
3
<PAGE>
3. Liquidation Rights. Upon any liquidation, dissolution or winding up
------------------
of the Corporation, whether voluntary or involuntary, the holders of the Series
A Preferred Stock shall be paid an amount equal to Ten Dollars and no/100
($10.00) per share, plus accrued and unpaid dividends as and only if such
dividends were declared by the Board of Directors, before any payment shall be
made to the holders of any stock ranking on liquidation junior to the Series A
Preferred Stock, such amount payable with respect to one (1) share of Series A
Preferred Stock (being sometimes referred to as the "Series A Liquidation
Preference Amount") (and with respect to all shares, being sometimes referred to
as the "Series A Liquidation Preference Amounts"). If upon any liquidation,
dissolution or winding up of the Corporation, the assets to be distributed to
the holders of the Series A Preferred Stock shall be insufficient to permit
payment of the Series A Liquidation Preference Amounts, then all of the assets
of the Corporation shall be distributed to such holders of the Series A
Preferred Stock pro rata, so that each holder receives that portion of the
assets available for distribution as the number of shares of Series A Preferred
Stock held by such shareholder bears to the total number of shares of Series A
Preferred Stock then outstanding. Upon any such liquidation, dissolution or
winding up of the Corporation, immediately after the holders of the Series A
Preferred Stock shall have been paid in full, the Series A Liquidation
Preference Amounts, the remaining net assets of the Corporation available for
distribution shall be paid to the holders of the shares of Common Stock and any
other series of preferred stock. Written notice of such liquidation, dissolution
or winding up, stating a payment date and the place where such payments shall be
made, shall be given by delivery of such notice, by registered mail, to the
holders of record of Series A Preferred Stock, at the address of each such
holder as shown on the records of the Corporation. The consolidation or merger
of the Corporation not being the surviving corporation (except where the
shareholders of the Corporation immediately prior to such merger or
consolidation hold a majority of the voting power of the surviving corporation
immediately after such merger or consolidation) and the sale or transfer by the
Corporation of all or substantially all of its assets, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
the provisions of this Section 3. The Series A Liquidation Preference Amount is
---------
subject to adjustment for stock splits, combination reclassifications and other
similar events affecting it.
4. Dividends. Each share of Series A Preferred Stock is entitled to
---------
dividend payments when and if declared by the Board of Directors in the same
amount per share as would be payable on Common Stock, on a pari passu basis.
5. Conversion.
----------
(a) At the option of the holder, at any time after the earlier to
occur of (i) three (3) years after the date of issue or (ii) subject to the
consent of the underwriters, immediately prior to the filing of a registration
statement, each share of the Series A Preferred Stock shall be convertible into
one (1) (the "Conversion Ratio") share of Common Stock. The Conversion Ratio
shall be appropriately adjusted for stock splits, stock dividends, stock
combinations and their recapitalizations affecting such shares.
(b) Each share of Series A Preferred Stock shall be automatically
converted at the Conversion Ratio at such time as shall be determined by a
resolution of the Board of Directors. The Conversion Ratio shall be
appropriately adjusted for stock splits, stock dividends, stock combinations and
other recapitalizations affecting such shares.
(c) The Method of Exercise; Payment; Issuance of New Series A
---------------------------------------------------------
Preferred Stock; Transfer and Exchange. The conversion right granted in 5(a)
- --------------------------------------
above may be exercised by a holder of Series A Preferred Stock, in whole or in
part, by the surrender of the stock certificate or certificates
4
<PAGE>
representing the Series A Preferred Stock to be converted at the principal
office of the Corporation (or at such other place as the Corporation may
designate in a written notice sent to the holder of the Series A Preferred Stock
by first class mail, postage prepaid, at the address shown on the books of the
Corporation) against delivery of that number of whole shares of Common Stock as
shall be computed by multiplying the number of shares of Series A Preferred
Stock surrendered by the Conversion Ratio. Each Series A Preferred Stock
certificate surrendered for conversion shall be endorsed by its holder. In the
event of any exercise of the conversion right of the Series A Preferred Stock
granted herein, (i) stock certificates for the shares of Common Stock purchased
by virtue of such exercise shall be delivered to such holder forthwith, and
unless the Series A Preferred Stock has been fully converted, a new Series A
Preferred Stock certificate representing the Series A Preferred Stock not so
converted, if any, shall also be delivered to such holder forthwith, and (ii)
stock certificates for the shares of Common Stock so purchased shall be dated
the date of such surrender and the holder making such surrender shall be deemed
for all purposes to be holder of the shares of Common Stock so purchased as of
the date of such surrender.
(d) Automatic Conversion; Issuance of New Series A Preferred Stock;
---------------------------------------------------------------
Transfer and Exchange. If the Series A Preferred Stock is automatically
- ---------------------
converted into one (1) share of Common Stock pursuant to 5(b), each holder of
Series A Preferred Stock shall within fifteen (15) days following written notice
sent to the holder of the Series A Preferred Stock, surrender the stock
certificate or certificates representing the Series A Preferred Stock to the
Corporation at the principal office of the Corporation (or at such other place
as the Corporation designates in the notice) against delivery of that number of
whole shares of Common Stock as shall be computed by multiplying the number of
shares of Series A Preferred Stock surrendered by the Conversion Ratio. Stock
certificates for the shares of Common Stock shall be delivered to each holder
forthwith and the holder making such surrender shall be deemed for all purposes
to be holder of the shares of Common Stock so purchased as of the date of the
automatic conversion.
(e) Stock Fully Paid; Reservation of Shares. All shares of Common
---------------------------------------
Stock which may be issued upon conversion of Series A Preferred Stock will, upon
issuance, be duly issued, fully paid and non-assessable, and free from all
taxes, liens and charges with respect to the issue thereof. At all times that
any shares of Series A Preferred Stock are outstanding, the Corporation shall
have authorized and shall have reserved for the purpose of issuance upon such
conversion, a sufficient number of shares of Common Stock to provide for the
conversion into Common Stock of all Series A Preferred Stock then outstanding.
All Other Series of Preferred Stock
- -----------------------------------
Authority to prescribe the class or series of all other shares of Preferred
Stock, the voting power, designation, preferences, limitations, restrictions and
relative rights of each such class or series of Preferred Stock shall be in the
Board of Directors without shareholder approval (except as specifically provided
in Article Fourth, paragraph 2).
Common Stock
------------
1. Preference. The preferences of each share of Common Stock with
----------
respect to dividend payment and distributions of the Corporation's assets upon
redemption and upon the voluntary liquidation, dissolution or winding up of the
Corporation shall be equal to the preferences of every other share of Common
Stock from time to time outstanding in every respect.
5
<PAGE>
2. Voting Rights. Each holder of Common Stock is entitled to one (1)
-------------
vote for each share held of record on all matters submitted to a vote of
Shareholders. An affirmative vote of the holders of shares representing a
majority of the outstanding Common Stock shall be required to approve (a) the
sale of U.S. Patent 5,202,231, or (b) exclusive license or assignment to a
single person or entity, other than a wholly owned subsidiary, which license or
assignment has the same effect as a sale of all rights, title and interest in
U.S. Patent 5,202,231.
3. Liquidation Rights. After payment of the Series A Liquidation
------------------
Preference Amounts and any preference of any other Series of Preferred Stock in
full, the remaining assets of the Corporation available for distribution shall
be paid to the holders of Common Stock.
4. Dividends. Each share of Common Stock is entitled to dividend
---------
payments, when and if declared by the Board of Directors, in the same amount per
share as are payable on all other shares of Common Stock and Series A Preferred
Stock, on a pari passu basis.
FIFTH: The governing board of this Corporation shall be known as the Board
of Directors, and the number of Directors serving on the Board of Directors may,
subject to the By-Laws, from time to time be increased or decreased exclusively
by the Directors without shareholder approval, provided (i) that there is a
minimum of two (2) Directors, and (ii) each Director will continue to serve the
remainder of his term, notwithstanding any reduction in the number of Directors.
Vacancies occurring on the Board of Directors other than by expiration of the
Director's term may be filled only by the Board of Directors and not by the
shareholders.
The names and addresses of the Directors serving on the Board of Directors,
as of the date hereof, are as follows:
NAME ADDRESS
---- -------
Robert D. Weist 670 Almanor Avenue, Sunnyvale, California 94068
Raymond F. Baddour 670 Almanor Avenue, Sunnyvale, California 94086
Lewis S. Gruber 670 Almanor Avenue, Sunnyvale, California 94086
James L. Rathman 670 Almanor Avenue, Sunnyvale, California 94086
Greta M. Marshall P.O. Box 4169, Incline Village, Nevada 29450
Radoje T. Drmanac 670 Almanor Avenue, Sunnyvale, California 94086
Radomir B. Crkvenjakov 670 Almanor Avenue, Sunnyvale, California 94086
SIXTH: The name and address of the original incorporator signing the
articles of incorporation is as follows :
NAME ADDRESS
- ---- -------
Misty S. Gruber 444 North Michigan Avenue
Suite 2500
Chicago, Illinois 606011
6
<PAGE>
SEVENTH: The Corporation is to have perpetual existence.
EIGHTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
Subject to the By-Laws, if any, adopted by the Stockholders, to make, alter
and amend the By-Laws of the Corporation.
To fix the amount to be reserved as working capital over and above its
capital stock paid in, to authorize and cause to be executed, mortgages and
liens upon the real and personal property of the Corporation.
By resolution passed by a majority of the whole Board, to designate one (1)
or more committees, each committee to consist of one or more of the Directors of
the Corporation, which, to the extent provided in the resolution, or in the By-
Laws of the Corporation, shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation. Such
committee, or committees, shall have such name, or names, as may be stated in
the By-Laws of the Corporation, or as may be determined from time to time by
resolution adopted by the Board of Directors.
When as authorized by the affirmative vote of the Stockholders holding
stock entitling them to exercise at least a majority of the voting power given
at a Stockholders meeting called for that purpose, the Board of Directors shall
have power and authority at any meeting to sell, lease or exchange all of the
property and assets of the Corporation, including its goodwill and its corporate
franchises, upon such terms and conditions as its Board of Directors deems
expedient and for the best interests of the Corporation.
NINTH: No action of the shareholders may be taken by a written consent.
TENTH: No shareholder shall be entitled as a matter of right to subscribe
for or receive additional shares of any class of stock of the Corporation,
whether now or hereafter authorized, or any bonds, debentures of securities
convertibles into stock, but such additional shares of stock or other securities
convertible into stock may be issued or disposed of by the Board of Directors to
such persons and on such terms as in its discretion it shall deem advisable.
ELEVENTH: No Director of officer of the Corporation shall be personally
liable to the Corporation or any of its stockholders for damages for breach of
fiduciary duty as a Director or officer involving any act or omission of any
such Director or officer; provided, however, that the foregoing provision shall
not eliminate or limit the liability of a Director or officer (i) for acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law, or (ii) the payment of dividends in violation of Section 78.300 of the
Nevada Revised Statutes. Any repeal or modification of this Article by the
stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a Director or
officer of the Corporation for acts or omissions prior to such repeal or
modification.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in the Articles of Incorporation, by an
affirmative vote of the holders of a majority of the voting rights of all
classes of stock entitled to vote. The affirmative vote of the holders of 66-
2/3% of the voting rights is required to amend, repeal or adopt any provision
inconsistent with the provisions of the
7
<PAGE>
Articles of Incorporation relating to: (i) the requirement that all stockholder
action be taken only at a duly called annual meeting or special meeting called
by the President or a majority of the Directors; (ii) the authority and power of
the Board of Directors and the procedure required to amend the Corporation's By-
Laws; (iii) the authority of the Directors to consider factors other than price
when evaluating whether to accept an offer to acquire the Corporation or its
assets; (iv) the percentage of the shares necessary to amend the Articles of
Incorporation; (v) the elimination of Directors' personal liability for monetary
damages arising from their negligence and gross negligence; and (vi)
indemnification of Directors, officers and other persons. The By-Laws may be
amended by the Board of Directors or by an affirmative vote of the holders of
66-2/3% of the voting rights of all classes of stock entitled to vote.
(4) that the number of shares of the Corporation outstanding and entitled
to vote on the Amended and Restated Articles of Incorporation are 4,500,000
(4,171,815 common shares and 328,185 Preferred shares); and that the above
Amended and Restated Articles of Incorporation have been consented to and
approved by a majority vote of the shareholders holding at least a majority of
each class of stock outstanding and entitled to vote thereon.
Lewis S. Gruber, as President, and Misty S. Gruber, as Secretary of Hyseq,
Inc. have been authorized to execute the foregoing certificate by resolution of
the Directors duly called and that such meeting was held on the 19th day of
May, 1994, and that the foregoing certificate sets forth the text of
the Articles of Incorporation as amended and restated to the date of the
certificate.
/s/ LEWIS S. GRUBER
-----------------------------------
Lewis S. Gruber
/s/ MISTY S. GRUBER
-----------------------------------
Misty S. Gruber
8
<PAGE>
AMENDMENT TO AMENDED AND
RESTATED ARTICLES OF INCORPORATION OF HYSEQ, INC.
FOURTH: The number and classes and/or series of shares the Corporation is
authorized to issue is as follows:
Number of
Authorized
Shares Class or Series Par Value
---------- --------------- ---------
3,000,000 Preferred Stock Series A $.001
5,000,000 All Other Series Preferred Stock .001
20,000,000 Common Stock .001
The voting powers, designation, preferences, limitations, restrictions, relative
rights and distinguishing designation of each class and/or series is as follows:
Preferred Stock
---------------
Series A
- --------
1. Preference. The preferences of each share of Series A Preferred Stock
----------
with respect to dividend payment and distributions of the Corporation's assets
upon redemption and upon the voluntary liquidation, dissolution or winding up of
the Corporation shall be equal to the preferences of every other share of Series
A Preferred Stock from time to time outstanding in every respect.
2. Voting Rights. Each holder of Series A Preferred Stock by virtue of
-------------
his ownership thereof is entitled to vote on all matters and is entitled to one
vote per share. An affirmative vote of the holders of shares representing not
less than eighty percent (80%) of the outstanding Series A Preferred Stock shall
be required to (i) alter or change any preference or any relative or other right
given to the Series A Preferred Stock; (ii) create any new series of stock
having dividend rights or a liquidation preference pari passu with or senior to
those possessed by the Series A Preferred Stock; (iii) increase the number of
shares of Series A Preferred Stock; (iv) approve (a) the sale of U.S. Patent
5,202,231, or (b) an exclusive license or assignment to a single person or
entity, other than a wholly-owned subsidiary, which license or assignment has
the same effect as a sale of all rights, title and interest in U.S. Patent
5,202,231; (v) liquidate the Corporation; (vi) merge or consolidate the
Corporation other than with a wholly-owned subsidiary of the Corporation; or
(vii) increase the size of the Board of Directors to more than nine (9)
Directors. The holders of Series A Preferred Stock shall be entitled to elect
two (2) Directors to the Corporation's Board of Directors, consistent with the
By-Laws of the Corporation, for so long as the Series A Preferred Stock remains
outstanding. In addition, the independent directors of the Board of Directors
are authorized to determine whether the Series A Preferred Stock is entitled to
vote separately as a class with respect to approval of certain other
extraordinary corporate transactions as determined in the Board's sole
discretion. For purposes hereof, a director who is not an employee of the
Corporation shall be deemed an independent director.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up of
------------------
the Corporation, whether voluntary or involuntary, the holders of the Series A
Preferred Stock shall be paid an amount
<PAGE>
equal to Ten Dollars and no/100 ($10.00) per share, plus accrued and unpaid
dividends as and only if such dividends were declared by the Board of Directors,
before any payment shall be made to the holders of any stock ranking on
liquidation junior to the Series A Preferred Stock, such amount payable with
respect to one (1) share of Series A Preferred Stock (being sometimes referred
to as the "Series A Liquidation Preference Amount") (and with respect to all
shares, being sometimes referred to as the "Series A Liquidation Preference
Amounts"). If upon any liquidation, dissolution or winding up of the
Corporation, the assets to be distributed to the holders of the Series A
Preferred Stock shall be insufficient to permit payment of the Series A
Liquidation Preference Amounts, then all of the assets of the Corporation shall
be distributed to such holders of the Series A Preferred Stock pro rata, so that
each holder receives that portion of the assets available for distribution as
the number of shares of Series A Preferred Stock then held by such shareholder
bears to the total number of shares of Series A Preferred Stock then
outstanding. Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of the Series A Preferred Stock shall
have been paid in full, the Series A Liquidation Preference Amounts, the
remaining net assets of the Corporation available for distribution shall be paid
to the holders of the shares of Common Stock and any other series of preferred
stock. Written notice of such liquidation, dissolution or winding up, stating a
payment date and the place where such payments shall be made, shall be given by
delivery of such notice, by registered mail, to the holders of record of Series
A Preferred Stock, at the address of each such holder as shown on the records of
the Corporation. The consolidation or merger of the Corporation into or with any
other entity or entities which results in the Corporation not being the
surviving corporation (except where the shareholders of the Corporation
immediately prior to such merger or consolidation hold a majority of the voting
power of the surviving corporation immediately after such merger or
consolidation) and the sale or transfer by the Corporation of all or
substantially all of its assets, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of the
provisions of this Section 3. The Series A Liquidation Preference Amount
---------
is subject to adjustment for stock splits, combination reclassifications and
other similar events affecting it.
4. Dividends. Each share of Series A Preferred Stock is entitled to
---------
dividend payments when and if declared by the Board of Directors in the same
amount per share as would be payable on Common Stock, on a pari passu basis.
5. Conversion.
----------
(a) At any time, at the option of the holder, each share of the Series
A Preferred Stock shall be convertible into one (1) (the "Conversion Ratio")
share of Common Stock. The Conversion Ratio shall be appropriately adjusted for
stock splits, stock dividends, stock combinations and other recapitalizations
affecting such shares.
(b) Each share of Series A Preferred Stock shall be automatically
converted at the Conversion Ratio immediately upon the closing of an initial
public offering of the Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
in which the aggregate gross proceeds received by the Company equal or exceed
$15.0 million and the pre-offering valuation of the Company equals or exceeds
$42 million.
(c) The Method of Exercise; Payment; Issuance of New Series A
---------------------------------------------------------
Preferred Stock; Transfer and Exchange. The conversion right granted in 5(a)
- --------------------------------------
above may be exercised by a holder of Series A Preferred Stock, in whole or in
part, by the surrender of the stock certificate or certificates representing the
Series A Preferred Stock to be converted at the principal office of the
Corporation (or at such other place as the Corporation may designate in a
written notice sent to the holder of the Series A
2
<PAGE>
Preferred Stock by first class mail, postage prepaid, at the address shown on
the books of the Corporation) against delivery of that number of whole shares of
Common Stock as shall be computed by multiplying the number of shares of Series
A Preferred Stock surrendered by the Conversion Ratio. Each Series A Preferred
Stock certificate surrendered for conversion shall be endorsed by its holder. In
the event of any exercise of the conversion right of the Series A Preferred
Stock granted herein (i) stock certificates for the shares of Common Stock
purchased by virtue of such exercise shall be delivered to such holder
forthwith, and unless the Series A Preferred Stock has been fully converted, a
new Series A Preferred Stock certificate representing the Series A Preferred
Stock not so converted, if any, shall also be delivered to such holder
forthwith, and (ii) stock certificates for the shares of Common Stock so
purchased shall be dated the date of such surrender and the holder making such
surrender shall be deemed for all purposes to be holder of the shares of Common
Stock so purchased as of the date of such surrender.
(d) Automatic Conversion; Issuance of New Series A Preferred Stock;
---------------------------------------------------------------
Transfer and Exchange. If the Series A Preferred Stock is automatically
- ---------------------
converted into one (1) share of Common Stock pursuant to 5(b), each holder of
Series A Preferred Stock shall within fifteen (15) days following written notice
sent to the holder of the Series A Preferred Stock, surrender the stock
certificate or certificates representing the Series A Preferred Stock to the
Corporation at the principal office of the Corporation (or at such other place
as the Corporation designates in the notice) against delivery of that number of
whole shares of Common Stock as shall be computed by multiplying the number of
shares of Series A Preferred Stock surrendered by the Conversion Ratio. Stock
certificates for the shares of Common Stock shall be delivered to each holder
forthwith and the holder making such surrender shall be deemed for all purposes
to be holder of the shares of Common Stock so purchased as of the date of the
automatic conversion.
(e) Stock Fully Paid; Reservation of Shares. All shares of Common
---------------------------------------
Stock which may be issued upon conversion of Series A Preferred Stock will, upon
issuance, be duly issued, fully paid and non-assessable, and free from all
taxes, liens and charges with respect to the issue thereof. At all times that
any shares of Series A Preferred Stock are outstanding, the Corporation shall
have authorized and shall have reserved for the purpose of issuance upon such
conversion, a sufficient number of shares of Common Stock to provide for the
conversion into Common Stock of all Series A Preferred Stock then outstanding.
All Other Series of Preferred Stock
- -----------------------------------
Authority to prescribe the class or series of all other shares of Preferred
Stock, the voting power, designation, preferences, limitations, restrictions and
relative rights of each such class or series of Preferred Stock shall be in the
Board of Directors without shareholder approval (except as specifically provided
in Article Fourth, paragraph 2).
Common Stock
------------
1. Preference. The preferences of each share of Common Stock with
----------
respect to dividend payment and distributions of the Corporation's assets upon
redemption and upon the voluntary liquidation, dissolution or winding up of the
Corporation shall be equal to the preferences of every other share of Common
Stock from time to time outstanding in every respect.
2. Voting Rights. Each holder of Common Stock is entitled to one (1)
-------------
vote for each share held of record on all matters submitted to a vote of
Shareholders. An affirmative vote of the holders of
3
<PAGE>
shares representing a majority of the outstanding Common Stock shall be required
to approve (a) the sale of U.S. Patent 5,202,231, or (b) exclusive license or
assignment to a single person or entity, other than a wholly-owned subsidiary,
which license or assignment has the same effect as a sale of all rights, title
and interest in U.S. Patent 5,202,231.
3. Liquidation Rights. After payment of the Series A Liquidation
------------------
Preference Amounts and any preference of any other Series of Preferred Stock in
full, the remaining assets of the Corporation available for distribution shall
be paid to the holders of Common Stock.
4. Dividends. Each share of Common Stock is entitled to dividend
---------
payments, when and if declared by the Board of Directors, in the same amount per
share as are payable on all other shares of Common Stock and Series A Preferred
Stock, on a pari passu basis.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in the Articles of Incorporation, by an
affirmative vote of the holders of a majority of the voting rights of all
classes of stock entitled to vote, provided, however, that no amendment,
alteration, change or repeal of any provision requiring the affirmative vote of
the holders of more than a majority of the voting rights may be made unless
approved by the affirmative vote of such greater number of holders. The
affirmative vote of the holders of 66 2/3% of the voting rights is required to
amend, repeal or adopt any provision inconsistent with the provisions of the
Articles of Incorporation relating to: (i) the requirement that all stockholder
action be taken only at a duly called annual meeting or special meeting called
by the President or a majority of the Directors; (ii) the authority and power of
the Board of Directors and the procedure required to amend the Corporation's By-
Laws; (iii) the authority of the Directors to consider factors other than price
when evaluating whether to accept an offer to acquire the Corporation or its
assets; (iv) the percentage of the shares necessary to amend the Articles of
Incorporation; (v) the elimination of Directors' personal liability for monetary
damages arising from their negligence and gross negligence; and (vi)
indemnification of Directors, officers and other persons. The By-Laws may be
amended by the Board of Directors by an affirmative vote of the holders of 66
2/3% of the voting rights of all classes of stock entitled to vote.
No other provisions of the Articles are to be amended.
4
<PAGE>
AMENDMENT NO. 2 TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HYSEQ, INC.
Filed Pursuant To
Section 78.390, General Corporation Law of Nevada
FOURTH: The number and classes and/or series of shares the Corporation is
authorized to issue is as follows:
Number of
Authorized
Shares Class or Series Par Value
- ------------ -------------------------------- ---------
3,000,000 Preferred Stock Series A $.001
5,000,000 All Other Series Preferred Stock .001
50,000,000 Common Stock .001
The voting powers, designation, preferences, limitations, restrictions, relative
rights and distinguishing designation of each class and/or series is as follows:
Preferred Stock
---------------
Series A
- --------
1. Preference. The preferences of each share of Series A Preferred Stock
----------
with respect to dividend payment and distributions of the Corporation's assets
upon redemption and upon the voluntary liquidation, dissolution or winding up of
the Corporation shall be equal to the preferences of every other share of Series
A Preferred Stock from time to time outstanding in every respect.
2. Voting Rights. Each holder of Series A Preferred Stock by virtue of
-------------
his ownership thereof is entitled to vote on all matters and is entitled to one
vote per share. An affirmative vote of the holders of shares representing not
less than eighty percent (80%) of the outstanding Series A Preferred Stock shall
be required to (i) alter or change any preference or any relative or other right
given to the Series A Preferred Stock; (ii) create any new series of stock
having dividend rights or a liquidation preference pari passu with or senior to
those possessed by the Series A Preferred Stock; (iii) increase the number of
shares of Series A Preferred Stock; (iv) approve (a) the sale of U.S. Patent
5,202,231, or (b) an exclusive license or assignment to a single person or
entity, other than a wholly-owned subsidiary, which license or assignment has
the same effect as a sale of all rights, title and interest in U.S. Patent
5,202,231; (v) liquidate the Corporation; (vi) merge or consolidate the
Corporation other than with a wholly-owned subsidiary of the Corporation; or
(vii) increase the size of the Board of Directors to more than nine (9)
Directors. The holders of Series A Preferred Stock shall be entitled to elect
two (2) Directors to the Corporation's Board of Directors, consistent with the
By-Laws of the Corporation, for so long as the Series A Preferred Stock remains
outstanding. In addition, the independent directors of the Board of Directors
are authorized to determine whether the Series A Preferred Stock is entitled to
vote separately as a class with respect to approval of certain other
extraordinary corporate transactions as determined in the Board's sole
discretion. For purposes hereof, a director who is not an employee of the
Corporation shall be deemed an independent director.
<PAGE>
3. Liquidation Rights. Upon any liquidation, dissolution or winding up of
------------------
the Corporation, whether voluntary or involuntary, the holders of the Series A
Preferred Stock shall be paid an amount equal to Ten Dollars and no/100 ($10.00)
per share, plus accrued and unpaid dividends as and only if such dividends were
declared by the Board of Directors, before any payment shall be made to the
holders of any stock ranking on liquidation junior to the Series A Preferred
Stock, such amount payable with respect to one (1) share of Series A Preferred
Stock (being sometimes referred to as the "Series A Liquidation Preference
Amount") (and with respect to all shares, being sometimes referred to as the
"Series A Liquidation Preference Amounts"). If upon any liquidation,
dissolution or winding up of the Corporation, the assets to be distributed to
the holders of the Series A Preferred Stock shall be insufficient to permit
payment of the Series A Liquidation Preference Amounts, then all of the assets
of the Corporation shall be distributed to such holders of the Series A
Preferred Stock pro rata, so that each holder receives that portion of the
assets available for distribution as the number of shares of Series A Preferred
Stock then held by such stockholder bears to the total number of shares of
Series A Preferred Stock then outstanding. Upon any such liquidation,
dissolution or winding up of the Corporation, immediately after the holders of
the Series A Preferred Stock shall have been paid in full, the Series A
Liquidation Preference Amounts, the remaining net assets of the Corporation
available for distribution shall be paid to the holders of the shares of Common
Stock and any other series of preferred stock. Written notice of such
liquidation, dissolution or winding up, stating a payment date and the place
where such payments shall be made, shall be given by delivery of such notice, by
registered mail, to the holders of record of Series A Preferred Stock, at the
address of each such holder as shown on the records of the Corporation. The
consolidation or merger of the Corporation into or with any other entity or
entities which results in the Corporation not being the surviving corporation
(except where the stockholders of the Corporation immediately prior to such
merger or consolidation hold a majority of the voting power of the surviving
corporation immediately after such merger or consolidation) and the sale or
transfer by the Corporation of all or substantially all of its assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of the provisions of this Section 3. The Series A Liquidation
---------
Preference Amount is subject to adjustment for stock splits, combination
reclassifications and other similar events affecting it.
4. Dividends. Each share of Series A Preferred Stock is entitled to
---------
dividend payments when and if declared by the Board of Directors in the same
amount per share as would be payable on Common Stock, on a pari passu basis.
5. Conversion.
----------
(a) At any time, at the option of the holder, each share of the Series
A Preferred Stock shall be convertible into one (1) (the "Conversion Ratio")
share of Common Stock. The Conversion Ratio shall be appropriately adjusted for
stock splits, stock dividends, stock combinations and other recapitalizations
affecting such shares.
(b) Each share of Series A Preferred Stock shall be automatically
converted at the Conversion Ratio immediately upon the closing of an initial
public offering of the Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
in which the aggregate gross proceeds received by the Corporation equals or
exceeds $15.0 million and the pre-offering valuation of the Corporation equals
or exceeds $42 million.
(c) The Method of Exercise; Payment; Issuance of New Series A
---------------------------------------------------------
Preferred Stock; Transfer and Exchange. The conversion right granted in 5(a)
- --------------------------------------
above may be exercised by a holder of Series A Preferred Stock, in whole or in
part, by the surrender of the stock certificate or certificates
2
<PAGE>
representing the Series A Preferred Stock to be converted at the principal
office of the Corporation (or at such other place as the Corporation may
designate in a written notice sent to the holder of the Series A Preferred
Stock by first class mail, postage prepaid, at the address shown on the books
of the Corporation) against delivery of that number of whole shares of Common
Stock as shall be computed by multiplying the number of shares of Series A
Preferred Stock surrendered by the Conversion Ratio. Each Series A Preferred
Stock certificate surrendered for conversion shall be endorsed by its holder.
In the event of any exercise of the conversion right of the Series A Preferred
Stock granted herein (i) stock certificates for the shares of Common Stock
purchased by virtue of such exercise shall be delivered to such holder
forthwith, and unless the Series A Preferred Stock has been fully converted, a
new Series A Preferred Stock certificate representing the Series A Preferred
Stock not so converted, if any, shall also be delivered to such holder
forthwith, and (ii) stock certificates for the shares of Common Stock so
purchased shall be dated the date of such surrender and the holder making such
surrender shall be deemed for all purposes to be holder of the shares of
Common Stock so purchased as of the date of such surrender.
(d) Automatic Conversion; Issuance of New Series A Preferred Stock;
---------------------------------------------------------------
Transfer and Exchange. If the Series A Preferred Stock is automatically
- ---------------------
converted into one (1) share of Common Stock pursuant to 5(b), each holder of
Series A Preferred Stock shall within fifteen (15) days following written notice
sent to the holder of the Series A Preferred Stock, surrender the stock
certificate or certificates representing the Series A Preferred Stock to the
Corporation at the principal office of the Corporation (or at such other place
as the Corporation designates in the notice) against delivery of that number of
whole shares of Common Stock as shall be computed by multiplying the number of
shares of Series A Preferred Stock surrendered by the Conversion Ratio. Stock
certificates for the shares of Common Stock shall be delivered to each holder
forthwith and the holder making such surrender shall be deemed for all purposes
to be holder of the shares of Common Stock so purchased as of the date of the
automatic conversion.
(e) Stock Fully Paid; Reservation of Shares. All shares of Common
---------------------------------------
Stock which may be issued upon conversion of Series A Preferred Stock will, upon
issuance, be duly issued, fully paid and non-assessable, and free from all
taxes, liens and charges with respect to the issue thereof. At all times that
any shares of Series A Preferred Stock are outstanding, the Corporation shall
have authorized and shall have reserved for the purpose of issuance upon such
conversion, a sufficient number of shares of Common Stock to provide for the
conversion into Common Stock of all Series A Preferred Stock then outstanding.
All Other Series of Preferred Stock
- -----------------------------------
Authority to prescribe the class or series of all other shares of Preferred
Stock, the voting power, designation, preferences, limitations, restrictions and
relative rights of each such class or series of Preferred Stock shall be in the
Board of Directors without stockholder approval (except as specifically provided
in this Article Fourth, paragraph 2).
Common Stock
------------
1. Preference. The preferences of each share of Common Stock with
----------
respect to dividend payment and distributions of the Corporation's assets upon
redemption and upon the voluntary liquidation, dissolution or winding up of the
Corporation shall be equal to the preferences of every other share of Common
Stock from time to time outstanding in every respect.
3
<PAGE>
2. Voting Rights. Each holder of Common Stock is entitled to one (1)
-------------
vote for each share held of record on all matters submitted to a vote of
stockholders. An affirmative vote of the holders of shares representing a
majority of the outstanding Common Stock shall be required to approve (a) the
sale of U.S. Patent 5,202,231, or (b) exclusive license or assignment to a
single person or entity, other than a wholly-owned subsidiary, which license or
assignment has the same effect as a sale of all rights, title and interest in
U.S. Patent 5,202,231.
3. Liquidation Rights. After payment of the Series A Liquidation
------------------
Preference Amounts and any preference of any other Series of Preferred Stock in
full, the remaining assets of the Corporation available for distribution shall
be paid to the holders of Common Stock.
4. Dividends. Each share of Common Stock is entitled to dividend
---------
payments, when and if declared by the Board of Directors, in the same amount per
share as are payable on all other shares of Common Stock and Series A Preferred
Stock, on a pari passu basis.
No other provisions of the Amended and Restated Articles of Incorporated, as
amended are to be amended.
4
<PAGE>
EXHIBIT 3.1(b)
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS OF SERIES B PREFERRED STOCK
OF
HYSEQ, INC.
Hyseq, Inc. (the "Corporation"), a corporation organized and existing under
the General Corporation Law of the State of Nevada, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors by the
Corporation's Amended and Restated Articles of Incorporation, as amended (the
"Articles"), and pursuant to the provisions of Section 78.195 of Title 8 of the
Nevada Statutes, said Board of Directors at a meeting held on May 27, 1997
adopted a resolution providing for the issuance of up to 525,210 shares of
Series B Preferred Stock (the "Series B Preferred Stock"), with the following
designations, preferences and relative, participating, optional or other rights,
and qualifications, limitations or restrictions:
Series B
--------
1. Ranking. Subject to and in accordance with the provisions of
-------
Article Fourth of the Articles, with respect to preference upon the
liquidation of the Corporation, the Series B Preferred Stock shall rank
senior to all other securities of the Corporation with the exception of the
Corporation's Series A Preferred Stock, with respect to which the Series B
Preferred Stock shall rank junior.
2. Dividends. Each share of Series B Preferred Stock is entitled to
---------
dividend payments when, if and as declared by the Board of Directors in the
same amount per share as would be payable on Common Stock, on an as-
converted basis.
3. Liquidation Rights. Upon any liquidation, dissolution or winding
------------------
up of the Corporation, whether voluntary or involuntary, the holders of the
Series B Preferred Stock shall be entitled to receive or to have set apart
for them, before any payment or distribution of the assets of the
Corporation shall be made or set apart for any Class or Series of stock of
the Corporation ranking junior to the Series B Preferred Stock with respect
to liquidation preference, an amount equal to $28.56 per share, plus an
amount equal to all dividends accrued, accumulated, and unpaid thereon to
the date of final distribution to such holders. If the assets of the
Corporation distributable to shares of the Series B Preferred Stock and to
the shares of any class or series of stock of the Corporation ranking on a
parity with the Series B Preferred Stock with respect to liquidation
preference shall be insufficient to provide for full payment of the
preferential amounts to which holders thereof are respectively entitled,
the Corporation shall make payments on shares of the Series B Preferred
Stock and on shares of any such class or series ratably in accordance with
the preferential amounts to which such shares are respectively entitled.
The consolidation or merger of the Corporation into or with any other
entity or entities which results in the Corporation not being the surviving
<PAGE>
corporation (except where the shareholders of the Corporation immediately
prior to such merger or consolidation hold a majority of the voting power
of the surviving corporation immediately after such merger or
consolidation) and the sale or transfer by the Corporation of all or
substantially all of its assets, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this
Section 3. The foregoing liquidation preference amount is subject to
adjustment for stock dividends, stock splits, combination,
reclassifications and other similar events affecting it.
4. Voting. The holders of the Series B Preferred Stock shall be
------
entitled to one (1) vote for each share of Common Stock into which their
respective shares of Series B Preferred Stock are convertible at any
election of directors or on any other matter submitted to stockholders of
the Corporation. So long as any shares of Series B Preferred Stock shall
be outstanding, the Corporation shall not, without the affirmative votes or
written consent of the holders of more than 80% of the aggregate number of
outstanding shares of Series B Preferred Stock, amend, alter, or repeal any
of the provisions of the Articles of the Corporation so as to affect the
holders of the Series B Preferred Stock materially and adversely.
5. Conversion.
----------
(a) The Series B Preferred Stock will be convertible into the
number of shares of Common Stock determined pursuant to Section 6(l)
as follows: (i) at any time, at the option of the holder and (ii)
automatically and immediately upon the closing of an initial public
offering of the Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the
"Securities Act"); provided that (A) if such offering occurs prior to
May 31, 1998, the shares of Series B Preferred Stock shall not
automatically convert unless all of the shares of Series A Preferred
Stock are automatically or voluntarily converted into Common Stock
prior to or in connection with such offering or (B) if such offering
does not occur prior to May 31, 1998, the shares of Series B Preferred
Stock shall not automatically convert unless (x) the offering is made
at a price to public of at least 130% of the Conversion Price then in
effect and results in aggregate gross proceeds to the Corporation of
at least $20 million or (y) the holders of more than 80% of the
outstanding Series B Preferred Stock consent to such transaction.
(b) The conversion right granted in Section 5(a)(i) above may be
exercised by a holder of Series B Preferred Stock, in whole or in
part, by the surrender of the stock certificate or certificates
representing the Series B Preferred Stock to be converted at the
principal office of the Corporation (or at such other place as the
Corporation may designate in a written notice sent to the holder of
the Series B Preferred Stock by first class mail, postage prepaid, at
the address shown on the books of the Corporation) against delivery of
that number of whole shares of Common Stock into which such Series B
Preferred Stock surrendered for conversion is convertible. Each
Series B Preferred Stock certificate surrendered
2
<PAGE>
for conversion shall be endorsed by its holder. In the event of any
exercise of the conversion right of the Series B Preferred Stock
granted herein, (i) stock certificates for the shares of Common Stock
purchased by virtue of such exercise shall be delivered to such holder
forthwith, and unless the Series B Preferred Stock has been fully
converted, a new Series B Preferred Stock certificate representing the
Series B Preferred Stock not so converted, if any, shall also be
delivered to such holder forthwith, and (ii) stock certificates for
the shares of Common Stock so purchased shall be dated the date of
such surrender and the holder making such surrender shall be deemed
for all purposes to be the holder of the shares of Common Stock so
purchased as of the date of such surrender.
(c) If the Series B Preferred Stock is automatically converted
into Common Stock pursuant to Section 5(a)(ii), each holder of Series
B Preferred Stock shall, as soon as practicable following written
notice sent to the holder of the Series B Preferred Stock, surrender
the stock certificate or certificates representing the Series B
Preferred Stock of the Corporation at the principal office of the
Corporation (or at such other place as the Corporation designates in
the notice) against delivery of that number of whole shares of Common
Stock deliverable in connection with such conversion. Stock
certificates for the shares of Common Stock shall be delivered to each
holder forthwith and the holder making such surrender shall be deemed
for all purposes to be the holder of the shares of Common Stock so
purchased as of the date of the automatic conversion.
(d) All shares of Common Stock which may be issued upon
conversion of Series B Preferred Stock will, upon issuance, be duly
issued, fully paid and non-assessable, and free from all taxes, liens
and charges with respect to the issue thereof. At all times that any
shares of Series B Preferred Stock are outstanding, the Corporation
shall have authorized and shall have reserved for the purpose of
issuance upon such conversion, a sufficient number of shares of Common
Stock to provide for the conversion into Common Stock of all Series B
Preferred Stock then outstanding.
6. Adjustments and Termination of Conversion Rights. The Conversion
------------------------------------------------
Price (as initially defined in subsection 6(l) below) and the number of
shares of Common Stock receivable upon conversion of the Series B Preferred
Stock are subject to adjustment from time to time as follows:
(a) Merger. If at any time while the Series B Preferred Stock is
------
outstanding there shall be a merger or consolidation of the
Corporation with or into another corporation, then, as a part of such
merger or consolidation, appropriate provisions shall be made so that
the holder of the Series B Preferred Stock shall, in lieu of the
securities otherwise receivable upon conversion of the Series B
Preferred Stock, thereafter be entitled to receive upon conversion of
the Series B Preferred Stock, the number of shares of stock or other
securities or property (including cash) payable or issuable pursuant
to such merger or
3
<PAGE>
consolidation, to which a holder of the securities receivable upon
conversion of the Series B Preferred Stock would have been entitled in
such merger or consolidation if the Series B Preferred Stock had been
converted immediately before such merger or consolidation. In any such
case appropriate adjustment (as determined by the Board of Directors
in good faith) shall be made in the application of the conversion
provisions of the Series B Preferred Stock with respect to the rights
and interests of the Holder after such merger or consolidation.
(b) Reclassification, etc. Except in situations where
----------------------
adjustments are effected pursuant to Section 6(a) above, if the
Corporation at any time while the Series B Preferred Stock is
outstanding shall, by subdivision, combination, reclassification,
conversion of securities or otherwise, change any of the securities
receivable upon the conversion of the Series B Preferred Stock into
the same or a different number of securities of any other class or
classes, the Series B Preferred Stock shall, in lieu of the securities
otherwise receivable upon the conversion of the Series B Preferred
Stock, thereafter represent the right to acquire such number and kind
of securities as would have been issuable as the result of such change
with respect to the securities receivable upon the conversion of the
Series B Preferred Stock immediately prior to such subdivision,
combination, reclassification, conversion or other change.
(c) Split, Subdivision or Combination of Shares. If the
-------------------------------------------
Corporation at any time while the Series B Preferred Stock is
outstanding shall split or subdivide its issued and outstanding shares
of securities receivable upon the conversion of the Series B Preferred
Stock into a larger number of shares of such securities or combine its
issued and outstanding shares of securities receivable upon the
conversion of the Series B Preferred Stock into a smaller number of
shares of such securities, the Conversion Price shall be adjusted to
equal the product of (i) the existing Conversion Price immediately
prior to any such split, subdivision or combination, multiplied by
(ii) a fraction, the numerator of which is the number of outstanding
shares of securities receivable upon the conversion of the Series B
Preferred Stock immediately prior to any such split, subdivision or
combination and the denominator of which is the number of outstanding
shares of securities receivable upon the conversion of the Series B
Preferred Stock immediately after any such split, subdivision or
combination. Upon each adjustment in the Conversion Price pursuant to
this Section 6(c), the number of shares of securities receivable upon
the conversion of the Series B Preferred Stock shall be adjusted, to
the nearest whole share, to the product obtained by multiplying the
number of shares of securities receivable upon the conversion of the
Series B Preferred Stock immediately prior to such adjustment in the
Conversion Price by a fraction (i) the numerator of which shall be
the Conversion Price immediately prior to such adjustment, and (ii)
the denominator of which shall be the Conversion Price immediately
after such adjustment.
4
<PAGE>
(d) Issuance of Additional Shares of Common Stock. If the
---------------------------------------------
Corporation at any time while the Series B Preferred Stock remains
outstanding shall issue any Additional Shares of Common Stock
(otherwise than as provided in the foregoing Sections 6(a) through (c)
above) at a price per share less, or for other consideration lower,
than the Conversion Price per share in effect immediately prior to
such issuance, or without consideration, then upon such issuance the
Conversion Price shall be adjusted to the price equal to (i) if such
issuance occurs on or before June 1, 1998, the amount of consideration
per share at which the Additional Shares are issued or (ii) if such
issuance occurs after June 1, 1998, that price determined by
multiplying such Conversion Price by a fraction (A) the numerator of
which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such Additional Shares of Common
Stock plus the number of shares of Common Stock which the aggregate
consideration for the total number of such Additional Shares of Common
Stock so issued would purchase at such Conversion Price and (B) the
denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such Additional
Shares of Common Stock plus the number of such Additional Shares of
Common Stock so issued. The provisions of this subsection shall not
apply under any of the circumstances for which an adjustment is
provided in subsections 6(a), 6(b), or 6(c) but shall apply to any
public offering of the Corporation's capital stock.
As used herein, the term "Additional Shares of Common Stock"
shall mean all shares of common stock issued by the Corporation (or
deemed to have been issued pursuant to Section 6(e) by the
Corporation), excluding (i) shares of Common Stock issued and
outstanding as of May 28, 1997, (ii) shares of Common Stock issued in
transactions described in Section 6(a) through 6(c), (iii) shares of
Common Stock issuable upon exercise of the warrants issued and
outstanding as of May 28, 1997(as adjusted for stock dividends, stock
splits, combinations, reorganizations, reclassifications and other
similar events), (iv) shares of Common Stock issuable upon the
conversion of the Series A Preferred Stock issued and outstanding as
of May 28, 1997 (as adjusted for stock dividends, stock splits,
combinations, reorganizations, reclassifications and other similar
events) and (v) shares of Common Stock issuable upon exercise of the
stock options issued or issuable under the Corporation's existing or
future stock option plans in an amount not to exceed 150,000 per
calendar year or part thereof from and after May 28, 1997 (as adjusted
for stock dividends, stock splits, combinations, reorganizations,
reclassifications and other similar events).
(e) Computation of Consideration. The following provisions
-----------------------------
will be applicable to the making of adjustments in the Conversion
Price pursuant to Section 6(d) above and Section 6(m) below:
(i) In the case of an issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid
therefor
5
<PAGE>
before deducting any discounts, commissions or other expenses
allowed, paid or incurred by the Corporation.
(ii) In the case of an issuance of Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
market value thereof as reasonably determined by the Board of
Directors.
(iii) In the case of an issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or
exchangeable securities, either:
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase
or rights to subscribe for Common Stock shall be deemed for
purposes of Section 6(d) to have been issued at the time
such options or rights were issued and for a consideration
equal to the consideration (determined in the manner
provided in Sections 6(e)(i) and 6(e)(ii)), if any, received
by the Corporation upon the issuance of such options or
rights plus the purchase price provided in such options or
rights for the Common Stock covered thereby; or
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any
such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for
such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed for purposes
of Section 6(d) to have been issued at the time securities
were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received
by the Corporation for any such securities or such options
or rights, plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange
of such securities or the exercise of such options or rights
(the consideration in each case to be determined in the
manner provided in Sections 6(e)(i) and 6(e)(ii)).
(f) Readjustment. Upon the termination or expiration of any such
------------
options or rights, or any rights to convert or exchange any such
convertible or exchangeable securities, the Conversion Price shall
forthwith be readjusted to such Conversion Price as would have been
obtained had the adjustment (which was made upon the issuance of such
options, rights or securities), been made upon the basis of the
issuance of only the number of shares of Common Stock actually
6
<PAGE>
issued upon the exercise of such options or rights or upon the
conversion or exchange of such securities. No adjustment to either the
Conversion Price or the number of shares to be received upon
conversion of the Series B Preferred Stock shall be made for the
actual issuance of Common Stock or convertible or exchangeable
securities upon the exercise of any such options or rights or the
conversion or exchange of such securities.
(g) Determination of Fair Market Value of Stock. For the purpose
-------------------------------------------
of any computation under this Agreement, the current fair market value
per share of stock shall be the average of the current market value of
stock, determined for the twenty (20) consecutive trading day period
prior to the date in question which market value shall be determined
as follows: (i) if the stock in question is listed on a national
securities exchange or admitted to unlisted trading privileges on such
an exchange or, if not so listed or admitted to unlisted trading
privileges, quoted on the National Association of Securities Dealers
Automated Quotations System ("NASDAQ"), the current market value of
each share shall be the last reported sale price per share of stock on
such exchange or reported by NASDAQ or if no such sale is made or
reported on such day, the mean of the closing bid and asked prices for
such day on such exchange or reported by NASDAQ; (ii) if the stock is
not listed on a national securities exchange or quoted on NASDAQ or
admitted to unlisted trading privileges on a national securities
exchange, the current market value of each share shall be the amount
as reasonably determined by the Board of Directors.
(h) Successive Adjustments. The provisions of this Section 6
----------------------
shall apply to each successive event that would give rise to any
adjustment under any such provision.
(i) Adjustments. No adjustment in the number of shares of
-----------
securities receivable upon the conversion of the Series B Preferred
Stock or in the Conversion Price shall be required unless such
adjustment will require an increase or decrease of at least one
percent (1%) in the number of shares of securities receivable upon the
conversion of the Series B Preferred Stock or in the Conversion Price,
respectively; provided, however, that any adjustments which by reason
of this Section 6(i) are not required to be made shall be carried
forward and taken into account in any subsequent share or price
adjustment.
(j) Revoked Actions. In the event that any occurrence that has
---------------
resulted in an adjustment pursuant to this Section 6 ceases to exist,
is revoked or is determined to the satisfaction of the holder to have
no dilutive effect, then thereafter no adjustment shall be required
under this Section 6 and any adjustment in respect thereof shall be
rescinded and annulled.
(k) Adjustment of Conversion Price for Initial Public Offering.
-----------------------------------------------------------
The following provisions will be applicable to the making of
adjustments in the
7
<PAGE>
Conversion Price upon consummation of an initial public offering by
the Corporation: (i) if the Corporation consummates an initial public
offering of its Common Stock within 180 days following the date hereof
at a price less than 1.1111 times the Conversion Price then in effect,
the Conversion Price shall be decreased to an amount equal to ninety
(90%) of such initial offering price to the public; and (ii) if the
Corporation consummates an initial public offering of its Common Stock
after 180 days through 365 days following the date hereof at a price
less than 1.25 times the Conversion Price then in effect, the
Conversion Price shall be decreased to an amount equal to eighty (80%)
of such initial offering price to the public.
(l) Conversion Price; Notice of Adjustments. The initial
---------------------------------------
Conversion Price under this Agreement shall be equal to $28.56 per
share of Common Stock. The number of shares of Common Stock into which
each share of Series B Preferred Stock shall convert at any time shall
equal $28.56 divided by the Conversion Price in effect at such time.
Each subsequent Conversion Price required to be computed pursuant to
this Section 6 shall be computed in the manner provided in subsections
6(c) through (k), inclusive, as appropriate. Whenever the Conversion
Price or the number of shares receivable upon the conversion of the
Series B Preferred Stock shall be adjusted pursuant to this Section 6,
the Corporation shall issue a certificate signed by its Chief
Financial Officer or such other officer as shall be designated by the
Board of Directors setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated and the Conversion Price and
number of shares receivable upon the conversion of shares of Series B
Preferred Stock after giving effect to such adjustment, and shall
cause a copy of such certificate to be mailed (by first class mail,
postage prepaid) to the holder.
(m) No Valuation Transaction. If there is no Valuation
------------------------
Transaction (as defined below) prior to June 1, 1998, the Conversion
Price shall be adjusted to the price equal to the Appraised Value (as
defined below). The Appraised Value shall be the per share fair market
value of the Common Stock as of June 1, 1997, determined by an
independent nationally recognized valuation consultant or investment
banker selected by the Corporation and reasonably acceptable to the
holders of in excess of 80% of the Series B Preferred Stock then
outstanding. The determination of Appraised Value (i) shall be
determined on a going concern basis, (ii) shall not include a minority
discount and (iii) shall be determined giving effect to the issuance
of shares of capital stock pursuant to the exercise of outstanding
options and warrants and the receipt of consideration therefor and the
conversion of all convertible securities. No adjustment shall be made
if the Appraised Value is more than the Conversion Price then in
effect. The term "Valuation Transaction" means the sale or issuance of
the Corporation's capital stock (i) to an unaffiliated party, other
than pursuant to or contemporaneous with
8
<PAGE>
the licensing, sale or other transfer of technology from or by the
Corporation to or from such party, and (ii) for consideration
aggregating at least $3,000,000.
7. Protective Provisions. So long as any shares of Series B
---------------------
Preferred Stock are outstanding, the Corporation shall not, without first
obtaining the approval of more than 80% of the then outstanding shares of
such series, voting as a separate class, take any action that:
(a) alters the rights, preferences or privileges of such series;
(b) increases the number of authorized shares of Series B
Preferred Stock or creates any new class or series of shares that has
a preference over or is parri passu with such series with respect to
dividends or liquidation preference or has voting rights more
favorable than one vote per share on an as converted basis; provided,
however, that the Corporation may increase the number of authorized
Series B Preferred Stock and/or create any new class or series of
shares that is parri passu with the Series B Preferred Stock, so long
as the aggregate purchase price of the shares of all such series and
classes of stock so issued does not exceed $10,000,000 and the number
of authorized shares of Series B Preferred Stock does not exceed
875,000;
(c) reclassifies stock into shares having a preference over or
parri passu with such series with respect to dividends or liquidation
preference (unless such stock was senior to the Series B Preferred
Stock prior to such reclassification) or having voting rights more
favorable than one vote per share on an as converted basis; or
(d) repurchases, redeems or retires any shares of capital stock
of the Corporation other than (i) shares of Common Stock held by
employees, directors or consultants of the Corporation or its
subsidiaries upon termination of their employment or services; (ii)
pursuant to the exercise of a contractual right of first refusal held
by the Corporation; (iii) pursuant to other existing contractual
rights to repurchase shares of capital stock of the Corporation; or
(iv) in connection with cashless exercises of options and warrants.
9
<PAGE>
IN WITNESS WHEREOF, Hyseq, Inc. has caused the Certificate to be
signed by _________________________, this 29th day of May, 1997.
HYSEQ, INC.
By: /s/ LEWIS S. GRUBER
----------------------------------------------
Lewis S. Gruber, President and Chief Executive
Officer
ATTEST:
/s/ JAMES N. FLETCHER
----------------------------------------------
James N. Fletcher, Secretary
STATE OF ILLINOIS )
) SS:
COUNTY OF COOK )
On May 29, 1997, personally appeared before me, a Notary Public, Lewis S.
Gruber and James N. Fletcher who acknowledged that they executed the above
instrument.
/s/ KRISTINE A. HEMLOCK
----------------------------------------------
Signature of Notary
10
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
HYSEQ, INC.
ARTICLE I
OFFICES
-------
The corporation shall continuously maintain in the State of Nevada, a
registered office and a resident agent whose office is identical with such
registered office and may have other offices within or without the state. The
address of the corporation's registered office in the State of Nevada is
Laughlin Associates, Inc., 2533 North Carson Street, Carson City, Nevada 89706.
The name of the corporation's resident agent at such address is the Laughlin
Associates, Inc. The corporation reserves the power to change its resident agent
and registered office at any time.
ARTICLE II
STOCKHOLDERS
------------
SECTION 1. ANNUAL MEETING. An annual meeting of the stockholders
entitled, under the Articles of Incorporation, to vote on matters properly to be
considered at an annual meeting shall be held not less than thirty (30) days
after delivery of the annual report, but within six (6) months after the end of
each fiscal year, for the purpose of electing directors and for the transaction
of such other business, as may come before the meeting.
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be
called by the president, the board of directors, or by holders of Common Stock
who hold, in the aggregate, not less than fifty percent (50%) of the outstanding
shares of Common Stock for the purpose or purposes stated in the call of the
meeting.
SECTION 3. PLACE OF MEETINGS. Each meeting of the stockholders for the
election of directors shall be held at the offices of the corporation in Carson
City, Nevada, unless the board of directors shall by resolution, designate any
other place of such meeting. Meetings of stockholders for any other purpose may
be held at such place, within or without the State of Nevada, and at such time
as shall be determined pursuant to Section 2 of this Article II, and stated in
the notice of the meeting or in a duly executed waiver of notice thereof.
SECTION 4. NOTICE OF MEETINGS. A written notice of each meeting of
stockholders, stating the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given to each stockholder entitled to vote at the meeting. Unless
otherwise provided by the Laws of the State of Nevada ("Nevada Law"), the notice
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting, and, if mailed, shall be deposited in the United States
mail, postage prepaid, both directed to the stockholder at his address as it
appears on the records of the corporation. No notice need be given to any
person with whom communication is unlawful, nor shall there be any duty to apply
for any permit or license to give notice to any such person.
<PAGE>
SECTION 5. STOCKHOLDER PROPOSALS. The corporation must receive notice
from a stockholder of any matter such stockholder proposes to be voted upon at a
stockholders' meeting within ten (10) days following the date on which notice of
the meeting is given to the stockholders. Stockholders are not permitted to
nominate individuals to serve as directors, unless notice of such nomination is
given to the corporation by the date which is ten (10) days following the date
on which notice of the meeting is provided to the stockholders.
SECTION 6. WAIVER OF NOTICE. Anything herein to the contrary
notwithstanding, with respect to any stockholder meeting, any stockholder who in
person or by proxy shall have waived in writing notice of the meeting, either
before or after such meeting, or who shall attend the meeting in person or by
proxy, shall be deemed to have waived notice of such meeting unless he attends
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
SECTION 7. QUORUM; MANNER OF ACTING AND ORDER OF BUSINESS. Subject to the
provisions of these by-laws, the Articles of Incorporation and Nevada Law as to
the vote that is required for a specified action, the presence in person or by
proxy of the holders of a majority of the outstanding shares of the corporation
entitled to vote at any meeting of stockholders shall constitute a quorum for
the transaction of business. The vote of the holders of a majority of the
shares of the corporation's stock entitled to vote, present in person or
represented by proxy, shall be binding on all stockholders of the corporation,
unless the vote of a greater number or voting by classes is required by law or
the Articles of Incorporation or these by-laws. The stockholders present at a
duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
In the absence of a quorum, stockholders holding a majority of the shares
present in person or by proxy and entitled to vote, regardless of whether or not
they constitute a quorum, or if no stockholders are present, any officer
entitled to preside at or act as secretary of the meeting, may adjourn the
meeting to another time and place. Any business which might have been
transacted at the original meeting may be transacted at any adjourned meeting at
which a quorum is present. No notice of an adjourned meeting need be given if
the time and place are announced at the meeting at which the adjournment is
taken except that, if adjournment is for more than thirty (30) days or if, after
the adjournment, a new record date is fixed for the meeting, notice of the
adjourned meeting shall be given pursuant to Section 4 of this Article II.
Meetings of the stockholders shall be presided over by the chairman of the
board, or in his absence by the president, or in his absence by a vice
president, or in the absence of the foregoing persons by a chairman designated
by the board of directors, or in the absence of such designation by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The order of business at all meetings of the
stockholders shall be determined by the chairman. The order of business so
determined, however, may be changed by
2
<PAGE>
vote of the holders of a majority of the shares present at the meeting in person
or represented by proxy.
SECTION 8. VOTING; PROXIES. Each stockholder of record on the record
date, as determined pursuant to Section 6 of Article VI, shall be entitled to
one vote for every share registered in his name. However, all elections of
directors shall be by written ballot. Each stockholder entitled to vote at any
meeting of stockholders or to express consent to or dissent from corporate
action in writing without a meeting may authorize another person to act for him
by proxy. No proxy shall be valid after three years from its date of execution,
unless the proxy provides for a longer period.
SECTION 9. INSPECTORS OF ELECTION. (a) In advance of any meeting of
stockholders, the board of directors may appoint inspectors of election to act
at each meeting of stockholders and any adjournment thereof. If inspectors of
election are not so appointed, the chairman of the meeting may, and upon the
request of any stockholder or his proxy shall, appoint inspectors of election at
the meeting. The number of inspectors shall be either one or three. If
appointed at the meeting upon the request of one or more stockholders or
proxies, the vote of the holders of a majority of shares present shall determine
whether one or three inspectors are appointed. In any case any person appointed
as an inspector fails to appear or fails or refuses to act, the vacancy may be
filled by appointment made by the directors in advance of the convening of the
meeting or at the meeting by the person acting as chairman.
(b) The inspectors of election shall determine the outstanding stock of the
corporation, the stock represented at the meeting and the existence of a quorum,
shall receive votes, ballots, or consents, shall count and tabulate all votes
and shall determine the result; and in connection therewith, the inspector shall
determine the authority, validity and effect of proxies, hear and determine all
challenges and questions, and do such other ministerial acts as may be proper to
conduct the election or vote with fairness to all stockholders. If there are
three inspectors of election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all. If no
inspectors of election are appointed, the secretary shall pass upon all
questions and shall have all other duties specified in this Section.
(c) Upon request of the chairman of the meeting or any stockholder or his
proxy, the inspector(s) of election shall make a report in writing of any
challenge or question or other matter determined by him and shall execute a
certificate of any fact found in connection therewith. Any such report or
certificate shall be filed with the record of the meeting.
SECTION 10. NO ACTION WITHOUT A MEETING. No action of the stockholders
may be taken by written consent.
SECTION 11. REVOCATION OF CONSENT. Any stockholder giving a written
consent, or the stockholder's proxyholders, or a transferee of the shares or a
personal representative of the stockholder or its respective proxyholder, may
revoke the consent by a writing received by the corporation prior to the time
that written consents of the number of shares required to authorize the proposed
action have been filed with the secretary of the corporation,
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but may not do so thereafter. Such revocation is effective upon its receipt by
the secretary of the corporation.
ARTICLE III
DIRECTORS
---------
SECTION 1. NUMBER, TENURE AND QUALIFICATIONS.
(a) The number of directors of the corporation shall consist of not less
than two (2) nor more than nine (9) directors, the exact number of directors to
be determined from time to time by resolution adopted by the affirmative vote of
a majority of the directors. A director shall hold office until the later of
(i) the next annual meeting of the stockholders of the corporation immediately
following, or (ii) coinciding with the expiration of his term or until his
successor shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. Directors
need not be residents of the State of Nevada or stockholders of the corporation.
(b) Each director shall serve a term of one, two or three years as is
designated at the time of his election provided that no less than one-fourth
(1/4) of the directors serving in any year shall be subject to annual
reelection.
(c) Any director or the entire board of directors may be removed, with
cause, by the holders of 66-2/3% of the voting rights of the shares then
entitled to vote at an election of directors, unless otherwise provided under
Nevada Law or the Articles of Incorporation.
SECTION 2. RESIGNATIONS. Any director may resign at any time by giving
written notice to the chairman of the board or to the president.
SECTION 3. MEETINGS. Meetings of the board of directors may be called by
or at the request of the chairman of the board, the president or a majority of
the directors. The person or persons authorized to call meetings of the board
of directors may fix any place as the place for holding any meeting of the board
of directors called by them. Meetings of the board of directors may be held
within or outside the State of Nevada.
SECTION 4. BUSINESS OF MEETINGS. Except as otherwise expressly provided
in these by-laws, any and all business may be transacted at any meeting of the
board of directors.
SECTION 5. NOTICE OF MEETINGS. Notice of any meeting shall be given at
least one (1) day previous thereto by prior written notice to each director at
his principal place of business.
SECTION 6. ATTENDANCE BY TELEPHONE. Directors may participate in meetings
of the board of directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear one another, and such participation shall constitute presence
in person at the meeting.
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SECTION 7. QUORUM AND MANNER OF ACTING; ADJOURNMENT. A majority of the
directors shall constitute a quorum for the transaction of business at any
meeting of the board of directors and the act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
board.
SECTION 8. ACTION WITHOUT A MEETING. Any action which could be taken at a
meeting of the board of directors may be taken without a meeting if all of the
directors consent to the action in writing and the writing or writings are filed
with the minutes of proceedings of the board.
SECTION 9. FILLING OF VACANCIES. A vacancy or vacancies in the board of
directors shall exist when any previously authorized position of director is not
then filled by a duly elected director, whether caused by death, resignation or
removal. Vacancies caused by reason of death, resignation or removal shall be
filled by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director.
Vacancies and newly created directorships resulting from an increase in the
authorized number of directors elected by all the stockholders having the right
to vote as a single class may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the Articles of Incorporation or the by-laws, or may apply to a court of
appropriate jurisdiction for a decree summarily ordering an election.
SECTION 10. COMPENSATION OF DIRECTORS. The board of directors shall have
the authority to fix the compensation of directors, unless otherwise provided in
the Articles of Incorporation.
SECTION 11. PRESIDING OFFICER. The presiding officer at any meeting of
the board of directors shall be the chairman of the board, or in his absence,
any other director elected chairman by vote of a majority of the directors
present at the meeting.
SECTION 12. COMMITTEE. The board of directors, by resolution adopted by a
majority of the number of directors fixed by the by-laws or otherwise, may
designate one (1) or more committees, each committee to consist of one (1) or
more directors of the corporation, which committees, to the extent provided in
such resolution, shall have and exercise all of the authority of the board of
directors in the management of the corporation, except as otherwise required by
law. The board of directors may designate one (1) or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee.
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ARTICLE IV
OFFICERS
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SECTION 1. NUMBER. The officers of the corporation may consist of the
chairman of the board, the president, one or more vice presidents (the number
thereof to be determined by the board of directors), the secretary, the
treasurer, the registered agent, and such assistant secretaries and assistant
treasurers or any other officers thereunto authorized or elected by the board of
directors. Any two or more offices may be held by the same person.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the corporation
shall be elected by the board of directors at their first meeting and thereafter
at any subsequent meeting and shall hold their offices for such term as
determined by the board of directors. Each officer shall hold office until his
successor is duly elected and qualified, or until his death or disability, or
until he resigns or is removed from his duties in the manner hereinafter
provided.
SECTION 3. REMOVAL AND RESIGNATION. Any officer may be removed, either
with or without cause, by a majority of the directors, then in office, at any
meeting of the board of directors. Any officer may resign at any time by giving
written notice to the corporation. Any such resignation shall take effect at
the date of the receipt of such notice or at any later time specified therein.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation or removal or any other cause may be filled for the unexpired
portion of the term by the board of directors.
SECTION 5. CHAIRMAN OF THE BOARD. The chairman of the board of the
corporation shall preside at all meetings of the board of directors, and at all
stockholders' meetings, whether annual or special, at which he is present and
shall exercise such other powers and perform such other duties as the board of
directors may from time to time assign to him or as may be prescribed by these
by-laws. In the event that the chairman of the board is not present at a
directors' meeting or stockholders' meeting, the president of the corporation
shall serve in his place and stead. Except in those instances in which the
authority to execute is expressly delegated to another officer or agent of the
corporation, or a different mode of execution is expressly prescribed by the
board of directors or these by-laws, he may execute for the corporation,
certificates for its shares, and any contracts, deeds, mortgages, bonds or other
instruments which the board of directors have authorized to be executed, and he
may accomplish such execution either under or without the seal of the
corporation, or either individually with the secretary, any assistant secretary
or any other officer thereunto authorized by the board of directors, according
to the requirements of the form of the instrument.
SECTION 6. PRESIDENT. The president shall be the chief executive officer
of the corporation. Subject to the direction and control of the board of
directors, the president shall be in charge of the business of the corporation;
he shall see that the resolutions and directions of the board of directors are
carried into effect, except in those instances in which that responsibility is
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specifically assigned to some other person by the board of directors; and in
general, he shall discharge all duties incident to the office of president and
such other duties as may be prescribed by the board of directors from time to
time. He shall preside at all annual meetings of the stockholders. Except in
those instances in which the authority to execute is expressly delegated to
another officer or agent of the corporation, or a different mode of execution is
expressly prescribed by the board of directors or these by-laws, he may execute
for the corporation, certificates for its shares, and any contracts, deeds,
mortgages, bonds or other instruments which the board of directors have
authorized to be executed, and he may accomplish such execution either under or
without the seal of the corporation, or either individually or with the
secretary, any assistant secretary or any other officer thereunto authorized by
the board of directors, according to the requirements of the form of the
instrument. He may vote all securities which the corporation is entitled to
vote, except as and to the extent such authority shall be vested in a different
officer or agent of the corporation by the board of directors.
SECTION 7. VICE PRESIDENT. The vice president (or in the event there be
more than one vice president, each of the vice presidents), if one shall he
elected, shall assist the president in the discharge of his duties, as the
president may direct and shall perform such other duties as from time to time
may be assigned to him by the president or by the board of directors. In the
absence of the president or in the event of his inability or refusal to act, the
vice president (or in the event there be more than one vice president, the vice
presidents in the order designated by the board of directors, or by the
president if the board of directors have not made such a designation, or in the
absence of any designation, then in the order of seniority of tenure as vice
president) shall perform the duties of the president, and when so acting, shall
have the powers of and be subject to all the restrictions upon the president.
Except in those instances in which the authority to execute is expressly
delegated to another officer or agent of the corporation, or a different mode of
execution is expressly prescribed by the board of directors or these by-laws,
the vice president (or each of them if there are more than one) may execute for
the corporation, certificates for its shares and any contracts, deeds,
mortgages, bonds or other instruments which the board of directors have
authorized to be executed, and he may accomplish such execution either under or
without the seal of the corporation, and either individually or with the
secretary, any assistant secretary or any other officer thereunto authorized by
the board of directors, according to the requirements of the form of the
instrument.
SECTION 8. TREASURER. The treasurer, if any, shall be the principal
accounting and financial officer of the corporation. The treasurer shall: (i)
have charge of and be responsible for the maintenance of the adequate books and
records for the corporation; (ii) have charge and custody of all funds and
securities of the corporation, and be responsible therefor and for the receipt
and disbursement thereof; and (iii) perform all the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him by the president or by the board of directors. If required by the board
of directors, the treasurer shall give a bond for the faithful discharge of his
duties in such sum and with such surety or sureties as the board of directors
may determine.
SECTION 9. SECRETARY. The secretary shall: (i) record the minutes of the
stockholders and of the board of directors' meetings in one or more books
provided for that
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purpose; (ii) see that all notices are duly given in accordance with the
provisions of these by-laws or as required by law; (iii) be custodian of the
corporate books and records and of the seal of the corporation; (iv) keep a
register of the post-office address of each stockholder which shall be furnished
to the secretary by such stockholder; (v) sign with the chairman of the board or
the president or a vice president or any other officer thereunto authorized by
the board of directors, certificates for the shares of the corporation, the
issue of which shall have been authorized by the board of directors, and any
contracts, deeds, mortgages, bonds or other instruments which the board of
directors have authorized to be executed, according to the requirements of the
form of the instrument, except when a different mode of execution is expressly
prescribed by the board of directors or these by-laws; (vi) have general charge
of the stock transfer books of the corporation; (vii) perform all duties
incident to the office of secretary and such other duties as from time to time
may be assigned to him by the president or by the board of directors.
Consistently with the foregoing, the secretary shall be responsible for the
corporation's compliance with Section 78.105 of the Nevada Laws and shall supply
to the registered agent, any and all amendments to the corporation's Articles of
Incorporation and any and all amendments or changes to its By-Laws. In
compliance with said Section 78.105, the secretary will also supply to the
registered agent, and maintain, a current statement setting out the name of the
custodian of the Stock ledger or duplicate stock ledger, and the present and
complete Post Office address, including street and number, if any, where such
stock ledger or duplicate stock ledger specified in the section is kept.
SECTION 10. REGISTERED AGENT. The registered agent shall be in charge of
the corporation's registered office in the State of Nevada, upon whom process
against the corporation may be served and shall perform all duties required by
statute.
SECTION 11. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The assistant
treasurers and assistant secretaries shall perform such duties as shall be
assigned to them by the board of directors. When the secretary is unavailable,
any assistant secretary may sign with the president, or a vice president, or any
other officer thereunto authorized by the board of directors, any contracts,
deeds, mortgages, bonds or other instruments according to the requirements of
the form of the instrument, except when a different mode of execution is
expressly prescribed by the board of directors or these by-laws. The assistant
treasurers shall, respectively, if required by the board of directors, give
bonds for the faithful discharge of their duties in such sums and with such
sureties as the board of directors shall determine.
SECTION 12. SALARIES. The salaries of the officers shall be fixed from
time to time by the board of directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
corporation.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
-------------------------------------
SECTION l. CONTRACTS. The board of directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation and such authority
may be general or confined to specific instances.
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SECTION 2. LOANS. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name, unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued by the
name of the corporation, shall be signed by such officer or officers, agent or
agents of the corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositaries as the board of directors may
select.
ARTICLE VI
CERTIFICATES OF STOCK AND THEIR TRANSFER
----------------------------------------
SECTION 1. STOCK RECORD AND CERTIFICATES. Records shall be kept by or on
behalf of the corporation, which shall contain the names and addresses of
stockholders, the number of shares held by them respectively, and the number of
certificates, if any, representing the shares, and in which there shall be
recorded all transfers of shares. Every stockholder shall be entitled to a
certificate signed by the chairman of the board of directors, or the president
or a vice president, and by the treasurer or an assistant treasurer, or the
secretary or an assistant secretary of the corporation, certifying the class and
number of shares owned by him in the corporation, provided that any and all
signatures on a certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he or it were such officer, transfer agent or
registrar at the date of issue.
SECTION 2. TRANSFER AGENTS AND REGISTRARS. The board of directors may, in
its discretion, appoint one or more responsible banks or trust companies as the
board may deem advisable, from time to time, to act as transfer agents and
registrars of shares of the corporation; and, when such appointments shall have
been made, no certificate for shares of the corporation shall be valid until
countersigned by one of such transfer agents and registered by one of such
registrars.
SECTION 3. STOCKHOLDERS' ADDRESSES. Every stockholder or transferee shall
furnish the secretary or a transfer agent with the address to which notice of
meetings and all other notices may be served upon or mailed to such stockholder
or transferee, and in default thereof, such stockholder or transferee shall not
be entitled to service or mailing of any such notice.
SECTION 4. LOST CERTIFICATES. In case any certificate for shares of the
corporation is lost, stolen or destroyed, the board of directors, in its
discretion, or any transfer agent duly authorized by the board, may authorize
the issue of a substitute certificate in place of
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the certificate so lost, stolen or destroyed. The corporation may require the
owner of the lost, stolen or destroyed certificate or his legal representative
to give the corporation a bond sufficient to indemnify the corporation against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate or
uncertified shares.
SECTION 5. DISTRIBUTIONS TO STOCKHOLDERS. To the extent permitted by
Nevada Law and subject to any restrictions contained in the Articles of
Incorporation, the directors may declare and pay dividends upon the shares of
its capital stock in the manner and upon the terms and conditions provided by
Nevada Law and the Articles of Incorporation.
SECTION 6. RECORD DATES. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of shares or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date which shall be not more than sixty (60) nor less than ten (10) days before
the date of any meeting of stockholders, and not more than sixty (60) days prior
to any other action.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the board of directors. In such
case, those stockholders, and only those stockholders, who are stockholders of
record on the date fixed by the board of directors shall, notwithstanding any
subsequent transfer of shares on the books of the corporation, be entitled to
notice of and to vote at such meeting of stockholders, or any adjournment
thereof, or to express consent to such corporate action in writing without a
meeting, or entitled to receive payment of such dividend or other distribution
or allotment of rights, or entitled to exercise rights in respect of any such
change, conversion or exchange of shares or to participate in any such other
lawful action.
SECTION 7. TRANSFERS OF SHARES. Shares of the corporation may be
transferred by delivery of the certificates therefor, accompanied either by an
assignment in writing on the back of the certificates, or by written power of
attorney to sell, assign and transfer the same, signed by the record holder
thereof; but no transfer shall affect the right of the corporation to pay any
distribution upon the shares to the holder of record thereof, or to treat the
holder of record as the holder in fact thereof for all purposes, and no transfer
shall be valid, except between the parties thereto, until such transfer shall
have been made upon the books of the corporation.
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SECTION 8. REPURCHASE OF SHARES ON OPEN MARKET. The corporation may
purchase its shares on the open market and invest its assets in its own shares,
provided that in each case the consent of the board of directors shall have been
obtained.
ARTICLE VII
INDEMNIFICATION AND INSURANCE
-----------------------------
SECTION 1. DEFINITIONS. For the purposes of this Article VII the
following definitions shall apply:
"Agent" means any person who: (i) is or was a director, officer, employee,
or other agent of this corporation; or (ii) is or was serving at the request of
this corporation as a director, officer, employee, or agent of another foreign
or domestic corporation, partnership, joint venture, trust or other enterprise
("enterprise").
"Proceeding" means any threatened, pending or completed action suit or
proceeding, whether civil, criminal, administrative, or investigative and
whether internal or external to the corporation.
"Expenses" includes, without limitation, attorneys' fees and any expenses
of establishing a right to indemnification under this Article VII.
"Losses" mean the total amount which the agent becomes legally obligated to
pay in connection with any proceeding, including judgments, fines, amounts paid
in settlement and Expenses.
SECTION 2. THIRD PARTY ACTIONS. The corporation shall indemnify any
person who was or is a party or is threatened to be made a party to, or
otherwise becomes involved in, any Proceeding (other than an action by or in the
right of the corporation) by reason of the fact that he is or was an Agent of
the corporation against Losses actually and reasonably incurred by him in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal Proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any Proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
---- ----------
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in such a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal Proceeding, had reasonable cause to believe that his conduct was
unlawful.
SECTION 3. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to, or otherwise becomes involved in, any Proceeding by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that he
is or was an Agent of the corporation against Expenses, including amounts paid
in settlement, actually and reasonably incurred by him in connection with the
defense or settlement of such Proceeding if he acted in good faith and in a
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manner he reasonably believed to be in or not opposed to the best interests of
the corporation and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged by a
court of competent jurisdiction after exhaustion of all appeals to be liable to
the corporation or for amounts paid in settlement to the corporation unless and
only to the extent that the court in which such Proceeding was brought shall
determine upon application that, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such Expenses as
the court shall deem proper.
SECTION 4. SUCCESSFUL DEFENSE. To the extent that an Agent of the
corporation has been successful on the merits or otherwise in defense of any
Proceeding referred to in Sections 2 and 3 of this Article VII, or in defense of
any claim, issue or matter therein, he must be indemnified against Expenses
actually and reasonably incurred by him in connection therewith.
SECTION 5. DETERMINATION OF CONDUCT. Any indemnification under Sections 2
and 3 of this Article VII, (unless ordered by a court or advanced pursuant to
Section 6 of this Article VII) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
Agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in Sections 2 and 3 of this Article VII. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such Proceeding, or (b)
if such a quorum is not obtainable or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) if a majority vote of a quorum consisting of directors who were
not parties to the Proceeding so orders, by independent legal counsel in a
written opinion, or (d) by the stockholders.
SECTION 6. PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred by an Agent
in connection with a Proceeding shall be paid by the corporation as they are
incurred and in advance of the final disposition of such Proceeding upon receipt
of an undertaking by or on behalf of such Agent to repay such amount if it shall
ultimately be determined by a court of competent jurisdiction that he is not
entitled to be indemnified by the corporation as authorized in this Article VII.
SECTION 7. INDEMNITY NOT EXCLUSIVE. The indemnification and advancement
of Expenses provided by, or granted pursuant to, the other provisions of this
Article VII shall not be deemed exclusive of any other rights to which a person
seeking indemnification or advancement of Expenses may be entitled under any by-
law, agreement, vote of stockholders or disinterested directors, or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
SECTION 8. INSURANCE INDEMNIFICATION. The corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or was
an Agent of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article VII.
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SECTION 9. HEIRS, EXECUTORS AND ADMINISTRATORS. The indemnification and
advancement of Expenses provided by, or granted pursuant to, this Article VII
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be an Agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SECTION 10. FURTHER AMENDMENT. Notwithstanding any provision in this
Article VII to the contrary, in the event the Nevada Law is either amended to
provide, or interpreted by judicial or other binding legal decision to provide,
broader indemnification rights than those contained herein, such broader
indemnification rights shall be provided to any and all persons entitled to be
indemnified pursuant to the Nevada Law the intent of this provision being to
permit the corporation to indemnify, to the full extent permitted by Nevada Law,
persons whom it may indemnify thereunder.
ARTICLE VIII
AMENDMENTS
----------
The by-laws may be amended by a majority vote of the directors or by an
affirmative vote by the holders of 66-2/3% of the voting rights of all classes
of stock entitled to vote. The by-laws may contain any provisions for the
regulation and management of the affairs of the corporation not inconsistent
with Nevada Law or the Articles of Incorporation.
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Exhibit: 4.2
REGISTRATION RIGHTS AGREEMENT
HYSEQ, INC.
This Registration Rights Agreement (the "Agreement") is made and entered
into as of the __th day of ______, 199_, by and between Hyseq, Inc., a Nevada
corporation (the "Company"), and _______________ or its designee (the "Holder")
executing a Stock Purchase Agreement concurrently herewith in connection with
each such Holder's purchase of shares of the Company's Common Stock, par value
$.001 per share (the "Common Stock" or "Shares").
W I T N E S S E T H:
WHEREAS, the Holder has agreed to acquire shares of Common Stock of the
Company; and
WHEREAS, as additional consideration for the purchase of the Shares by the
Holder, the Company desires to grant to each such Holder registration rights
with respect to the Shares;
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement:
-----------
(a) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"1933 Act") and the declaration or ordering of effectiveness of such
registration statement or document;
(b) The term "Registrable Securities" means (i) the Common Stock acquired
by the Holder (the "Common Stock") which is not subject to reconveyance; and
(ii) any Common Stock of the Company issued as (or issuable upon the conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the Common Stock, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which such person's
registration rights are not assigned; provided, however, that as to any
particular securities that are included in Registrable Securities, such
securities shall cease to be Registrable Securities when (i) such shares shall
have been sold to the public pursuant to a registered public offering or (ii)
such securities shall have been sold pursuant to Rule 144 (or any successor
provision) under the 1933 Act.
(c) The number of shares of "Registrable Securities then outstanding" shall
be determined by the number of shares of Common Stock outstanding which are, and
the number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities which are exercisable or convertible into, Registrable
Securities; and
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Paragraph 10 hereof.
2. Incidental Registration. If (but without any obligation to do so) the
-----------------------
Company, at any time, proposes to register (including for this purpose a
registration effected by the Company for stockholders other than the Holder) any
of its stock or other securities under the 1933 Act (other than on Form S-4,
Form S-8 or any successor form), the Company shall, each such time, give the
Holder at least 45 days' prior written notice of such registration in accordance
with subparagraph 14(b) hereof. Upon the written request of the Holder given
within
1
<PAGE>
twenty (20) business days after mailing of such notice by the Company, the
Company shall use its best efforts, subject to the provisions of Paragraph 6, to
cause to be registered under the Securities Act all of the Registrable
Securities that the Holder has requested to be registered; provided that the
Company shall have the right to postpone or withdraw any registration effected
pursuant to this Paragraph 2 without obligation to the Holder.
3. Obligations of the Company. Whenever required under this Agreement to
--------------------------
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible (unless otherwise specified in this
Agreement):
(a) Prepare and file with the SEC a registration statement with respect to
such Registrable Securities and use its best efforts to cause such registration
statement to become effective, and, upon the request of the Holder, keep such
registration statement effective until this Agreement is terminated pursuant to
Paragraph 13 hereof.
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holder, such numbers of copies of the registration
statement (including each preliminary prospectus) and the prospectus contained
therein in conformity with the requirements of the 1933 Act, and such other
documents all as they may reasonably request in order to facilitate the
disposition of such Registrable Securities.
(d) Use its best efforts to register and qualify the securities covered by
such registration statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify the Holder at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing. Upon
such notification, such Holders shall immediately cease making offers of
Registered Securities. The Company shall promptly provide such Holders with
revised prospectuses and, following receipt of the revised prospectuses, such
Holder shall be free to resume making offers of the Registered Securities.
(g) If the offering is underwritten, at the request of the Holder, use its
best efforts to furnish on the date that Registrable Securities are delivered to
the underwriters for sale pursuant to such registration: (i) an opinion, dated
such date, of counsel representing the Company for the purposes of such
registration, addressed to the underwriters and to such Holder, stating that
such registration statement has become effective under the 1933 Act and that (A)
to the best knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the 1933 Act, (B) the
registration statement, the related prospectus and each amendment or supplement
thereof comply as to form in all material respects with the requirements of the
1933 Act (except that such counsel need not express any opinion as to financial
statements contained therein) and (C) to such other effects as reasonably may be
requested by counsel for the underwriters or by such Holder or its counsel and
(ii) a letter dated such date from the independent public accountants retained
by the Company, addressed to the underwriters and to such Holder, stating that
they are independent public accountants within the meaning of the 1933 Act and
that, in the opinion of such accountants, the financial statements of the
Company included in the registration statement or the prospectus, or any
amendment or
2
<PAGE>
supplement thereof, comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request.
(h) Use its best efforts to list the Registrable Securities covered by such
registration statement with any securities exchange or interdealer quotation
system on which the Common Stock is then listed or included for quotation.
4. Provision of Information. It shall be a condition precedent to the
------------------------
obligations of the Company to take any action pursuant to this Agreement that
the Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by them, and the intended method of disposition of
such securities as shall be required to effect the registration of the
Registrable Securities.
5. Expenses of Incidental Registration. The Company shall bear and pay
-----------------------------------
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Paragraph 2 for the Holder, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees
relating or apportionable thereto and the reasonable fees and disbursements of
one counsel for the Holder selected by it, but excluding underwriting discounts
and commissions of underwriters relating to Registrable Securities.
6. Underwriting Requirements. In connection with any offering involving
-------------------------
an underwriting of shares being issued by the Company, the Company shall not be
required under Paragraph 2 to include any of the Holder's securities in such
underwriting unless it accepts the terms of the underwriting as agreed upon
between the Company and the underwriters and then only in such quantity as will
not, in the opinion of the underwriters, jeopardize the success of the offering
by the Company. If the total amount of securities, including Registrable
Securities, requested by stockholders to be included in such offering exceeds
the amount of securities sold other than by the Company that the underwriters
reasonably believe compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters believe
will not jeopardize the success of the offering (the securities so included to
be apportioned such that all Registrable Securities held by the Holder shall be
included in such registration, and if this is not possible, then, prior to
including securities owned by any other selling stockholders. For purposes of
the preceding parenthetical concerning apportionment, for any selling
stockholder, including the Holder, that is a partnership or corporation, the
partners, retired partners and stockholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
stockholder," and any pro rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
7. Delay of Registration. The Holder shall not have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
8. Indemnification. In the event any Registrable Securities are included
---------------
in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless the Holder of such Registrable Securities, the officers and directors
of such Holder, any underwriter (as defined in the 1933 Act) for such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the 1933 Act or the Securities and Exchange Act of 1934, as amended ("the
1934 Act"), against any losses, claims, damages or liabilities joint or several)
to which they may become subject under the 1933 Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based
3
<PAGE>
upon any of the following statements, omissions or violations (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the 1933 Act, the 1934 Act or any state securities
law; and the Company will reimburse the Holder, officer or director, underwriter
or controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subparagraph 8(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder.
(b) To the extent permitted by law, the Holder will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the registration statement, each person, if any, who controls the Company
within the meaning of the 1933 Act, any underwriter and any other stockholder
selling securities in such registration statement or any of its directors or
officers or any person who controls such selling stockholder, against any
losses, claims, damages or liabilities joint or several) to which the Company or
any such director, officer or controlling person may become subject, under the
1933 Act, the 1934 Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and such Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or controlling person, other selling
stockholder, officer, director, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subparagraph
8(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided, that,
in no event shall any indemnity under this subparagraph 8(b) exceed the gross
proceeds from the offering received by the Holder.
(c) Promptly after receipt by an indemnified party under this Paragraph 8
of notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Paragraph 8, deliver to the indemnifying party
a written notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that any indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
actions, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Paragraph 10, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Paragraph 8.
(d) To provide for just and equitable contribution, if (i) an indemnified
party makes a claim for indemnification pursuant to subparagraph 8(a) or 8(b)
but it is found in a final judicial determination, not subject to further
appeal, that such indemnification may not be enforced in such case, even though
this Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the 1933 Act, the
1934 Act, or otherwise, then the Company (including for this purpose any
contribution made by or
4
<PAGE>
on behalf of any officer, director, employee, agent or counsel of the Company,
or any controlling person of the Company), on the one hand, and the Holder
(including for this purpose any contribution by or on behalf of an indemnified
party), on the other hand, shall contribute to the losses, liabilities, claims,
damages, and expenses to which any of them may be subject, in such proportions
as are appropriate to reflect the relative benefits received by the Company, on
the one hand, and the Holder, on the other hand; provided, however, that if
applicable law does not permit such allocation, then other relevant equitable
considerations such as the relative fault of the Company and the Holder in
connection with the facts which resulted in such losses, liabilities, claims,
damages and expenses shall also be considered. The relative benefits received by
the Company, on the one hand, and the Holder, on the other hand, shall be deemed
to be in the same proportion as the total proceeds from the offering received by
each of the Company on the one hand and the Holder, on the other hand.
The relative fault, in the case of an untrue statement, alleged untrue
statement, omission, or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission, or alleged omission
relates to information supplied by the Company or by the Holder, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement, alleged statement, omission, or alleged
omission. The Company and Holder agree that it would be unjust and inequitable
if the respective obligations of the Company and the Holder for contribution
were determined by pro rata or per capital allocation of the aggregate losses,
liabilities, claims, damages and expenses or by any other method of allocation
that does not reflect the equitable considerations referred to in this
subparagraph 8(d). No person guilty of a fraudulent misrepresentation (within
the meaning of subparagraph 11(f) of the 1933 Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this subparagraph 8(d), each person, if any,
who controls the Holder within the meaning of Section 15 of the 1933 Act or
Section 20(a) of the 1934 Act and each officer, director, stockholder, employee,
agent and counsel of the Holder shall have the same rights of contribution as
the Holder, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act and each officer,
director, employee, agent and counsel of the Company, shall have the same rights
to contribution as the Company, subject in each case to the provisions of this
subparagraph 8(d). Anything in this subparagraph 8(d) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
subparagraph 8(d) is intended to supersede any right to contribution under the
1933 Act, the 1934 Act, or otherwise.
(e) The obligations of the Company and Holder under this Paragraph 8 shall
survive the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
9. Efforts Under the 1934 Act. With a view to making available to the
--------------------------
Holder the benefits of Rule 144 under the 1933 Act and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times after 90 days after the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act; and
(c) furnish to the Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 (at any time after
90 days after the effective date of the first registration statement filed by
the Company), the 1933 Act and the 1934 Act (at any time after it has become
subject to such reporting requirements), (ii) a copy of the most recent annual
or quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably requested
in availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration.
5
<PAGE>
10. Assignment of Registration Rights. The rights to cause the Company to
---------------------------------
register Registrable Securities pursuant to this Agreement may be assigned by
the Holder to a transferee or assignee of such securities; provided, in each
case, the Company is, within a reasonable time after such transfer, furnished
with written notice of the name and address of such transferee or assignee and
the securities with respect to which such registration rights are being
assigned; and, such transferee or assignee shall, as a condition to such
transfer, deliver to the Company a written instrument by which such transferee
or assignee agrees to be bound by the obligations imposed on Holders of
Registrable Securities pursuant to this Agreement and provided, further, that
such assignment shall be effective only if immediately following such transfer,
the disposition of such securities by the transferee or assignee: (i) is
restricted under the 1933 Act; or (ii) is exempt from registration under the
1933 Act.
11. Market Stand-Off Agreement. The Holder hereby agrees that it shall
--------------------------
not, to the extent requested by the Company and an underwriter of Common Stock
(or other securities) of the Company, sell or otherwise transfer or dispose
(other than to donees who agree to be similarly bound) of any Registrable
Securities during a reasonable and customary period of time, as agreed to by the
Company and the underwriters, not to exceed 90 days, following the effective
date of a registration statement of the Company filed under the 1933 Act;
provided, however, that:
(a) such agreement shall be applicable only to a registration statement of
the Company which covers shares (or securities) to be sold to the public by an
underwriter on its behalf in an initial public offering; and
(b) such agreement shall only be applicable in the event shares held by the
Holder exceed one percent (1%) of the then outstanding common shares or common
share equivalents of the Company.
(c) all officers and directors of the Company and all other persons with
registration rights (whether or not pursuant to this Agreement) enter into
similar agreements.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of the Holder
thereof until the end of such reasonable and customary period.
12. Amendment of Registration Rights. Any provision of this Agreement may
--------------------------------
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holder; provided, however, that any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding, each future holder of all such securities, and the Company.
13. Termination of Registration Rights. The Company's obligations
----------------------------------
pursuant to this Agreement (other than pursuant to Paragraphs 8) shall
terminate as to the Holder on the earlier of (i) when the Holder can remove the
restrictive legend on all such Holder's shares pursuant to Rule 144(k) under the
1933 Act (or any such successor rule) or (ii) on the second anniversary of the
closing of the initial registered public offering of Common Stock of the
Company.
14. Miscellaneous.
-------------
(a) Remedies. In the event of a breach by the Company of its obligations
--------
under this Agreement, the Holder, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement.
(b) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, registered first-
class mail, telex, or telecopies, initially to the address set forth below, and
thereafter at such other address, notice of which is given in accordance with
the provisions of this subparagraph 14(b):
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(i) if to the Company:
Lewis S. Gruber, President and CEO
Hyseq, Inc.
Almanor Avenue
Sunnyvale, California 94086
(ii) if to the Holder:
At the address set forth in the Company's Stock Register.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; two business days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; and when receipt is acknowledged, if telecopied.
(c) Successors and Assigns. Subject to Paragraph 10, this Agreement shall
----------------------
inure to the benefit of and be binding upon the successors and assigns of each
of the parties, including without limitation and without the need for an express
assignment, subsequent holders of the Registrable Shares subject to the terms
hereof.
(d) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
--------
references only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Illinois without reference to its
conflicts of law provisions.
(g) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application hereof in any circumstance is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provisions contained herein shall not be affected or impaired thereby.
(h) Entire Agreement. This Agreement is intended by the parties as a final
----------------
expression of their agreement and intended to be a complete and exclusive
statement of this agreement and understanding of the parties hereto in respect
of the subject matter contained herein. There are not restrictions, promises
warranties or undertakings, other than those set forth or referred to herein,
concerning the registration rights granted by the Company pursuant to this
Agreement.
(i) Future Grants. The Company shall not grant to any third party any
-------------
registration rights more favorable than, or inconsistent with, any of those
contained herein so long as any of the registration rights under this Agreement
remains in effect.
7
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
HYSEQ, INC.
By: _________________________________________
Name: Lewis S. Gruber
Title: President and CEO
HOLDER:
________________________
By: _______________________________
Its: _____________________________
8
<PAGE>
EXHIBIT 4.3
Form of
WARRANT AGREEMENT
HYSEQ, INC.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE SOLD,
OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS SECURITY UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO HYSEQ, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase __________
Shares of Common Stock
of Hyseq, Inc.
No. __-___
HYSEQ, INC.
Common Stock Purchase Warrant
HYSEQ, INC., a Nevada corporation (the "Company"), hereby certifies that,
for value received, ________________________ (the "Holder"), or its successors
or registered assigns, is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time before 5:00 p.m., New
York time, on the Expiration Date (as hereinafter defined), that number of fully
paid and non-assessable shares of Common Stock of the Company as shall be equal
to the Warrant Number (as hereinafter defined), at an initial purchase price per
share of $____ (the "Purchase Price"). The Warrant Number and the Purchase
Price are subject to adjustment as provided in this Warrant.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" shall include Hyseq, Inc., and any
corporation that shall succeed to or assume the obligations of Hyseq,
Inc. hereunder.
(b) The term "Common Stock" includes (i) the Company's common
stock, $.001 par value, as authorized on the date hereof, (ii) any
other capital stock of any class or classes (however designated) of
the Company, authorized on or after such date, the holders of which
shall have the right, without limitation as to amount, either to all
or to a share of the balance of current dividends and liquidating
dividends after the payment of dividends and distributions on any
shares entitled to preference and (iii) any other securities into
which or for which any of the securities described in (i) or (ii) may
be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than
Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holder of the Warrant at any time
shall be entitled to receive, or shall have received, on the exercise
of the Warrant, in lieu of or in addition to Common Stock, or which at
any time shall be issuable or shall have been issued in exchange for
or in replacement of Common Stock or Other Securities pursuant to
Section 4 or otherwise.
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(d) The term "Expiration Date" means ____________.
(e) The term "Warrant Number" shall mean, subject to adjustment
pursuant to Sections 3, 4 or 5 hereof, ______________________ (_____)
shares of Common Stock.
1. Exercise of Warrant.
-------------------
1.1 Exercise. This Warrant may be exercised in full or in part at
--------
any time or from time to time until the Expiration Date by the holder hereof by
surrender of this Warrant and the subscription form annexed hereto (duly
executed) by such holder, to the Company at its principal office, accompanied by
payment, in cash or by certified or official bank check payable to the order of
the Company in the amount obtained by multiplying (a) the number of shares of
Common Stock designated by the Holder in the subscription form by (b) the
Purchase Price then in effect. On any partial exercise, the Company at its
expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, providing in the aggregate on the face or faces thereof for the
number of shares of Common Stock for which such Warrant or Warrants may still be
exercised.
1.2 Right to Convert Warrant. Notwithstanding the payment provision
------------------------
of subsection 1.1 hereof:
(a) the Holder shall have the right (the "Conversion Right") to
require the Company to convert this Warrant, in whole or in part, at any
time prior to the Expiration Date into shares of Common Stock as provided
for in this subsection 1.2. At the sole option of the Holder, upon
exercise of the Conversion Right, the Company shall deliver to the Holder
(without payment by the Holder of any Purchase Price) that number of shares
of Common Stock equal to the quotient obtained by dividing (x) the value of
the Warrant at the time the Conversion Right is exercised (determined by
subtracting the aggregate Purchase Price for the shares of Common Stock
then issuable upon exercise of this Warrant (the "Warrant Shares") in
effect immediately prior to the exercise of the Conversion Right from the
aggregate Fair Market Value (as defined below) for the Warrant Shares
immediately prior to the exercise of the Conversion Right) by (y) the Fair
Market Value of one share of Common Stock immediately prior to the exercise
of the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at any time,
or from time to time, prior to the Expiration Date, on any business day by
delivering a written notice (the "Conversion Notice") to the Company
exercising the Conversion Right and specifying (i) the total number of
shares of Common Stock the Holder will purchase pursuant to such conversion
and (ii) a place and date not less than one nor more than 20 business days
from the date of the Conversion Notice for the closing of such purchase.
(c) At any closing under this subsection 1.2, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Common Stock
issuable upon such conversion, together with cash, in lieu of any fraction
of a share, as provided in Section 2 below.
(d) Fair Market Value of a share of Common Stock as of a particular
date (the "Determination Date") shall mean the Fair Market Value of a share
of the Company's Common Stock. Fair Market Value of a share of Common
Stock as of a Determination Date shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the Nasdaq National Market ("Nasdaq"), then the closing or
last sale price, respectively, reported for the last business day (on
which a sale in the Common Stock was made) immediately preceding the
Determination Date.
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(ii) If the Company's Common Stock is not traded on an exchange
or on Nasdaq but is traded in the over-the-counter market, then the
mean of the closing bid and asked prices reported for the last
business day (on which a sale in the Common Stock was made)
immediately preceding the Determination Date.
(iii) If the Determination Date is the date on which the
Company's Common Stock is first sold to the public by the Company in a
firm commitment public offering under the Securities Act of 1933, as
amended (the 1933 Act"), then the initial public offering price
(before deducting commissions, discounts or expenses) at which the
Common Stock is sold in such offering.
(iv) If the Company's stock is not publicly traded, then as
determined in good faith by the Company's Board of Directors upon
review of relevant factors.
1.3 Trustee for Warrant Holders. In the event that a bank or trust
---------------------------
company shall have been appointed as trustee for the holder of the Warrant
pursuant to subsection 4.2, such bank or trust company shall have all the powers
and duties of a warrant agent appointed pursuant to Section 14 and shall accept,
in its own name for the account of the Company or such successor person as may
be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1. The Company shall give the holder of the Warrant notice of the
appointment of any trustee and any change thereof.
2. Delivery of Stock Certificates, etc., on Exercise. As soon as
-------------------------------------------------
practicable after the exercise of this Warrant, and in any event within 3
(three) days thereafter, the Company at its expense (including the payment by it
of any applicable issue or stamp taxes) will cause to be continued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and nonassessable shares of Common
Stock (or Other Securities) to which such holder shall be entitled on such
exercise, in such denominations as may be requested by such holder, plus, in
lieu of any fractional share to which such holder would otherwise be entitled,
cash equal to such fraction multiplied by the then Fair Market Value of the full
share, together with any other stock or other securities and property (including
cash, where applicable) to which such holder is entitled upon such exercise
pursuant to Section 1 or otherwise. The Company agrees that the shares so
purchased shall be deemed to be issued to the holder hereof as the record owner
of the shares as of the close of business on the date on which this Warrant
shall have been delivered to the Company and payment made for such shares as
aforesaid.
3. Adjustment for Dividends in Other Stock, Property, etc.;
--------------------------------------------------------
Reclassification, etc. In case at any time or from time to time, the holders of
- ----------------------
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of shareholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of earnings
or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement
other than additional shares of Common Stock (or Other Securities) issued
as a stock dividend or in a stock-split (adjustments in respect of which
are provided for in Section 5), then and in each such case the holder of
this Warrant, on the exercise hereof as provided in Section 1, shall be
entitled to receive the amount of stock and other securities and property
(including cash in the cases referred to in subdivisions (b) and (c) of
this Section 3) which such holder would hold on the date of such exercise
if on the date hereof he had been the holder of record of the number of
shares of Common Stock called for on the face of this Warrant and had
thereafter, during the period from the date hereof to and including the
date of such exercise, retained such shares and all such other or
additional stock and other securities and properly
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<PAGE>
(including cash in the cases referred to in subdivisions (b) and (c) of
this Section 3) receivable by him as aforesaid during such period, giving
effect to all adjustments called for during such period by Sections 4 and
5.
4. Adjustment for Reorganization, Consolidation, Merger, etc.
----------------------------------------------------------
4.1 Reorganization. In case at any time or from time to time, the
--------------
Company shall (a) effect a reorganization, (b) consolidate with or merge into
any other person, or (c) transfer all or substantially all of its properties or
assets to any other person under any plan or arrangement contemplating the
dissolution of the Company, then, in each such case, the holder of this Warrant,
on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Sections 3 and 5.
4.2 Dissolution. In the event of any dissolution of the Company
-----------
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause to
be delivered the stock and other securities and property (including cash, where
applicable) receivable by the holder of this Warrant after the effective date of
such dissolution pursuant to this Section 4 to the holder of a bank or trust
company having its principal office in New York, New York as trustee for the
holder or holders of the Warrants.
4.3 Continuation of Terms. Upon any reorganization, consolidation,
---------------------
merger or transfer (and any dissolution following any transfer referred to in
this Section 4) this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially, all of the
properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant.
5. Other Adjustments.
-----------------
5.1 Adjustment for Extraordinary Events. In the event that the
-----------------------------------
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this subsection
5.1. The Holder of this Warrant shall thereafter, on the exercise hereof as
provided in Section 1, be entitled to receive that number of shares of Common
Stock determined by multiplying the number of shares of Common Stock which would
be issuable on such exercise as of immediately prior to such issuance by a
fraction of which (i) the numerator is the Purchase Price in effect immediately
prior to such issuance and (ii) the denominator is the Purchase Price in effect
on the date of such exercise.
[5.2 Adjustment for Anti-dilution Provisions Contained in the Company's
------------------------------------------------------------------
Charter. The Company and the holder hereof agree that the Purchase Price
- -------
(defined above) is the amount which is 110% of the initial Conversion Price of
the Series A Convertible Preferred Stock, $.001 par value ("Series A Preferred
Stock"), as set forth in Section 7(y) of the subscription agreement (the
"Subscription Agreement") to subscribe for shares of
4
<PAGE>
the Series A Preferred Stock pursuant to the Company's Confidential Private
Placement Memorandum dated April 16, 1996, as the same may be amended or
supplemented. The Company and the holder hereof further agree that if any
adjustment in the Conversion Price or the number of shares of Common Stock
issuable upon conversion of the Series A Preferred Stock should occur by
operation of Section 7(y) of the Subscription Agreement, appropriate adjustments
shall be made to the Purchase Price and the Warrant Number in accordance with
the terms of Section 7(y) of the Subscription Agreement.]
6. No Impairment. The Company will not, by amendment of its Articles of
-------------
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, or any other similar voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the holder of the Warrant against impairment due to such
event. Without limiting the generality of the foregoing, the Company (a) will
not increase the par value of any shares of stock receivable on the exercise of
the Warrants above the amount payable therefor on such exercise and (b) will
take all action that may be necessary or appropriate in order that the Company
may validly and legally issue fully paid and nonassessable shares of stock, free
from all taxes, liens and charges with respect to the issue thereof, on the
exercise of all of the Warrants from time to time outstanding.
7. Certificate as to Adjustments. In each case of any adjustment or
-----------------------------
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrants, the Company at its expense will promptly cause its
principal financial or accounting officer to compute such adjustment or
readjustment in accordance with the terms of this Warrant and prepare a
certificate setting forth such adjustment or readjustment, the Purchase Price
resulting therefrom and the increase or decrease, if any, in the number of
shares purchasable at such price upon exercise of the Warrant, and showing in
detail the facts and computation upon which such adjustment or readjustment is
based. The Company will forthwith mail a copy of each such certificate to each
registered holder of this Warrant, and will, on the written request at any time
of the holder of this Warrant, furnish to such holder a like certificate setting
forth the Purchase Price at the time in effect and showing how it was
calculated.
8. Notices of Record Date, etc. In the event of
----------------------------
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend on, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any transfer, of all or substantially all the assets of the
Company to or consolidation or merger of the Company with or into any
other person, or
(c) any voluntary or involuntary dissolution, liquidation, or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
registered holder of this Warrant a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or Other Securities) shall be entitled to
exchange their shares of Common Stock (or Other Securities) for securities or
other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up, and (iii) the amount and character of any stock or other securities,
or rights or options with respect thereto, proposed to be issued or granted, the
date of such proposed issue or grant and the persons or class of persons to whom
such proposed issue or grant is to be offered or made. Such notice shall also
state that the action in question or the record date is subject
5
<PAGE>
to the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), or a favorable vote of stockholders if
either is required. Such notice shall be mailed at least 20 days prior to the
date specified in such notice on which any such action is to be taken or the
record date, whichever is earlier.
9. Reservation of Stock, etc., Issuable on Exercise of Warrants. The
------------------------------------------------------------
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of the Warrant, all shares of Common Stock (or Other
Securities) from time to time issuable on the exercise of the Warrant.
10. Transfer of Warrant; Restrictions on Transfer. The holder hereof
---------------------------------------------
shall not transfer this Warrant, in whole or in part, without the prior written
consent of the Company, which consent shall not be unreasonably withheld;
provided, however, that the transfer of this Warrant, in whole or in part, to
- -------- -------
any officer, director, shareholder or affiliate of the original Holder shall not
require the Company's consent. The foregoing to the contrary notwithstanding,
this Warrant and all shares of Common Stock (or Other Securities) from time to
time issuable on the exercise of the Warrant (a) shall be subject to any
applicable terms and restrictions of other agreements between the Company and
the holder and (b) may not be sold, offered for sale, transferred, pledged or
hypothecated in the absence of an effective registration statement under the
Securities Act and applicable state securities laws or an opinion of counsel
reasonably satisfactory to the Company that such registration is not required.
11. Register of Warrants; Registration Rights. The Company shall
-----------------------------------------
maintain, at the principal office of the Company (or such other office as it may
designate by notice to the holder hereof), a register for Warrants, in which the
Company records the name and address of the person in whose name a Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of such Warrant. The shares of Common Stock issuable upon exercise of
this Warrant shall, upon issuance, be entitled to the same rights and privileges
set forth in that certain Registration Rights Agreement dated as of even date
herewith between the Company and the Holder.
12. Exchange of Warrants. This Warrant is exchangeable, upon the
--------------------
surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 11, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares as shall be designated by said Holder hereof at the time
of such surrender.
13. Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
14. Warrant Agent. The Company by written notice to the registered holder
-------------
of this Warrant may appoint an agent having an office in New York, New York, for
the purpose of issuing Common Stock (or Other Securities) on the exercise of the
Warrant pursuant to Section 1, exchanging this Warrant to Section 12, and
replacing this Warrant pursuant to Section 13, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
15. Remedies. The Company stipulates that the remedies at law of the
--------
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
16. Closing of Books. The Company will at no time close its transfer
----------------
books against the transfer of any Warrant or of any shares of Common Stock
issued or issuable upon the exercise of any Warrant in any manner which
interferes with the timely exercise of this Warrant.
6
<PAGE>
17. No Rights or Liabilities as a Stockholder. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Common Stock, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Purchase Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
18. Notices, etc. All notices and other communications from the Company
-------------
to the registered holder of this Warrant shall be mailed in writing by hand-
delivery, first class registered or certified mail, postage prepaid, telex or
telecopies, at such address as may have been furnished to the Company in writing
by such holder or at the address shown on such holder's Warrant.
[REMAINDER OF THIS PAGE INTENTIONALLY BLANK]
7
<PAGE>
19. Miscellaneous. This Warrant and any terms hereof may be changed,
-------------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the laws of the State of New York, without
reference to its conflicts of law provisions. The headings in this Warrant are
for purpose of reference only, and shall not limit or otherwise affect any of
the terms hereof. This Warrant is being executed as an instrument under seal.
The invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provision.
Dated: __________, 199_ HYSEQ, INC.
By:____________________________
Title:_________________________
Attest:
By:_________________________
Title:______________________
8
<PAGE>
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
HYSEQ, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, __________
shares of Common Stock for HYSEQ, INC. and hereby makes payment of
$_____________ therefor in cash and requests that the certificates for such
shares be issued in the name of, and delivered to _______________________ whose
address is _______________________.
Dated:___________________
-------------------------------
(Signature must conform to name
of holder as specified on the
fact of the Warrant)
-------------------------------
-------------------------------
(Address)
9
<PAGE>
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For values received, the undersigned hereby sells, assigns and transfers
unto ____________________ the right represented by the within Warrant to
purchase __________ shares of Common Stock of HYSEQ, INC. to which the within
Warrant relates, and appoints ___________________________ Attorney to transfer
such right on the books of HYSEQ, INC. with full power of substitution in the
premises.
Dated:______________________
-------------------------------
(Signature must conform
to name of holder as specified
on the face of the Warrant)
------------------------------
------------------------------
(Address)
Signed in the presence of:
___________________________
10
<PAGE>
EXHIBIT 10.1
FORM OF
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement"), entered into as of the
______ day of ___________, 199_, between Hyseq, Inc., a Nevada corporation
("Hyseq" or the "Company") and _______________ (the "Indemnitee").
WHEREAS, the Indemnitee is an officer or a member of the Board of Directors
of Hyseq and in such capacity is performing a valuable service for Hyseq;
WHEREAS, the law of Hyseq's state of incorporation permits Hyseq to enter
into contracts with its officers or members of its Board of Directors with
respect to indemnification of such persons; and
WHEREAS, to induce the Indemnitee to continue to provide services to Hyseq
as an officer or a member of the Board of Directors, and to provide the
Indemnitee with specific contractual assurance that indemnification will be
available to the Indemnitee regardless of, among other things, any amendment to
or revocation of Hyseq's Articles of Incorporation, or any acquisition
transaction relating to Hyseq, Hyseq desires to provide the Indemnitee with
protection against personal liability;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, Hyseq and the Indemnitee hereby agree as follows:
1. DEFINITIONS
For purposes of this Agreement:
(a) "Change in Control" shall mean a change in the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of Hyseq, or any successor in interest thereto, whether through the
ownership of voting securities, by contract or otherwise, including but not
limited to a change which would be required to be reported under Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 as in effect on the date hereof (the "Exchange Act") or as may otherwise be
determined pursuant to a resolution of the Hyseq Board of the Directors. A
rebuttable presumption of a Change in Control shall be created by any of the
following which first occur after the date hereof and Hyseq shall have the
burden of proof to overcome such presumption:
(i) the ability of any "Person" (as such term is defined in Sections
13(d) and 14(d) of the Exchange Act) together with an "Affiliate" or
"Associate" (as defined in Rule 12b-2 of the Exchange Act) or "Group"
(within the meaning of Section 13(d)(3) of the Exchange Act) to exercise or
direct the exercise of 20% or more of the combined voting power of all
outstanding shares of voting stock of Hyseq in the election of its
directors
-1-
<PAGE>
("Interested Party") (provided, however, "Interested Party" shall not
include an agent, broker, nominee, custodian or trustee, solely in their
capacity as such, for one or more persons who do not individually or as a
group possess such power);
(i) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of Hyseq
cease for any reason to constitute at least a majority thereof, unless the
election of each director who was not a director at the beginning of such
period has been approved in advance by the directors representing two-
thirds of the directors then in office who were the directors at the
beginning of the period;
(ii) the approval of the shareholders of Hyseq of:
(A) a merger or consolidation of Hyseq with any Interested
Party;
(B) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition, to or with any Interested Party in any transaction
or series of transactions, of Hyseq's assets or the assets of any
subsidiary of Hyseq having a market value equal to 10% or more of the
aggregate market value of all assets of Hyseq determined on a
consolidated basis, all outstanding stock of Hyseq, or the earning
power or net income of Hyseq, determined on a consolidated basis;
(C) the issuance or transfer by Hyseq, or any subsidiary
thereof, to any Interested Party in any transaction or a series of
transactions, of capital securities with a value equal to 5% or more
of the aggregate market value of the then outstanding shares of voting
stock of Hyseq other than the issuance or transfer of such shares of
stock to all Hyseq shareholders on a pro rata basis;
(D) the adoption of any plan or proposal for the partial or
complete liquidation or dissolution of Hyseq proposed by an Interested
Party or pursuant to any agreement, arrangement or understanding,
whether or not in writing, with any Interested Party; or
(E) any reclassification of securities, including without
limitation, any stock split, stock dividend, or other distributions of
stock, or any reverse stock split, recapitalization of Hyseq, or any
merger or consolidation of Hyseq with any subsidiary thereof, or any
other transaction proposed by, or pursuant to, any agreement,
arrangement, or understanding, whether or not in writing, with any
Interested Party which has the effect, directly or indirectly, of
increasing the proportionate shares of the voting stock of Hyseq
directly or indirectly owned by any such Interested Party; or
(iv) any receipt by any Interested Party, directly or indirectly, of
any loans, advances, guarantees, pledges or other financial assistance, or
any tax credits or other tax
-2-
<PAGE>
advantages provided by or through Hyseq other than the receipt of such
advantages which are provided to all Hyseq shareholders on a pro rata
basis.
(b) "Corporate Status" describes the status of a person who is or was a
director, officer, employee, agent or fiduciary of Hyseq or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise (whether conducted for profit or not for profit) if such person is or
was so serving at the request of Hyseq.
(c) "Disinterested Director" means a director of Hyseq who is not and was
not a party to the Proceeding (as hereinafter defined) in respect of which
indemnification is sought by the Indemnitee.
(d) "Effective Date" means the date of this Agreement.
(e) "Expenses" shall include all reasonable attorneys' and paralegals'
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, or being or preparing to be a
witness in a Proceeding.
(f) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, or
in the past five (5) years has been, retained to represent (i) Hyseq or the
Indemnitee in any matter material to either such party, or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
(g) "Proceeding" includes any action, suit, arbitration, alternate dispute
resolution mechanism, investigation, administrative hearing, or any other
proceeding, including appeals therefrom, whether civil, criminal,
administrative, or investigative, except one initiated by the Indemnitee
pursuant to paragraph 8 of this Agreement to enforce his rights under this
Agreement.
2. INDEMNIFICATION - GENERAL
The Indemnitee shall be entitled to the rights of indemnification provided
in this paragraph 2 if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to any threatened, pending, or completed
Proceeding, including a Proceeding by or in the right of Hyseq. Unless
prohibited by paragraph 13 hereof, the Indemnitee shall be indemnified against
Expenses, judgments, penalties, fines, and settlement amounts actually and
reasonably incurred by him or on his behalf in connection with such Proceeding
or any claim, issue or matter therein.
-3-
<PAGE>
3. EXPENSES OF A SUCCESSFUL PARTY
Without limiting the effect of any other provision of this Agreement, to
the extent that the Indemnitee is, by reason of his Corporate Status, a party to
and is successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually and reasonably incurred by him or on
his behalf in connection therewith. If the Indemnitee is not wholly successful
in such Proceeding but is successful, on the merits or otherwise, as to one or
more but less than all claims, issues, or matters in such Proceeding, Hyseq
shall indemnify the Indemnitee against all Expenses actually and reasonably
incurred by him or on his behalf in connection with each successfully resolved
claim, issue or matter. For purposes of this paragraph and without limitation,
the termination of any claim, issue or matter in such a Proceeding by dismissal,
with or without prejudice, shall be deemed to be a successful result as to such
claim, issue or matter.
4. WITNESS EXPENSES
Notwithstanding any other provision of this Agreement, to the extent that
the Indemnitee is, by reason of his Corporate Status, a witness in any
Proceeding to which he is not a party, he shall be indemnified against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith.
5. ADVANCES
Hyseq shall advance all reasonable Expenses incurred by or on behalf of the
Indemnitee in connection with any Proceeding within twenty (20) days after the
receipt by Hyseq of a statement from the Indemnitee requesting such advance from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement shall reasonably evidence the Expenses incurred by the Indemnitee
and shall include or be preceded or accompanied by an undertaking by or on
behalf of the Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that the Indemnitee is not entitled to be indemnified against such
Expenses.
6. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION
(a) To obtain indemnification under this Agreement, the Indemnitee shall
submit to Hyseq a written request, including therewith such documentation and
information reasonably necessary to determine whether and to what extent the
Indemnitee is entitled to indemnification.
(b) Upon such written request pursuant to subparagraph 6(a), a
determination with respect to the Indemnitee's entitlement thereto shall be made
in the specific case (i) if a Change in Control shall have occurred, by
Independent Counsel in a written opinion to the Board of the Directors, a copy
of which shall be delivered to the Indemnitee (unless the Indemnitee shall
request that such determination be made by the Board of Directors or the
Shareholders, in which case by the person or persons or in the manner provided
in clauses (ii) or (iii) of this paragraph
-4-
<PAGE>
6(b)); (ii) if a Change in Control shall not have occurred, (A) by the Board of
Directors by a majority vote of a quorum consisting of Disinterested Directors,
or (B) if a quorum of the Board of Directors consisting of Disinterested
Directors is not obtainable or, even if obtainable, if such quorum of
Disinterested Directors so directs, by Independent Counsel in a written opinion
to the Board of Directors, a copy of which shall be delivered to the Director,
or (C) by the shareholders of Hyseq; or (iii) as provided in paragraph 7(b) of
this Agreement. If it is so determined that the Indemnitee is entitled to
indemnification, payment to the Indemnitee shall be made within ten (10) days
after such determination.
(c) The Indemnitee shall cooperate with the person or entity making such
determination with respect to the Indemnitee's entitlement to indemnification,
including providing upon reasonable advance request any documentation or
information which is not privileged or otherwise protected from disclosure and
which is reasonably available to the Indemnitee and reasonably necessary to such
determination. Any costs or expenses (including attorneys' fees and
disbursements) incurred by the Indemnitee in so cooperating shall be borne by
Hyseq (irrespective of the determination as to the Indemnitee's entitlement to
indemnification) and Hyseq hereby indemnifies and agree to hold the Indemnitee's
harmless therefrom.
(d) In the event the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to paragraph 6(b) hereof, the
Independent Counsel shall be selected as provided in this paragraph 6(d). If a
Change in Control shall not have occurred, the Independent Counsel shall be
selected by the Board of Directors, and Hyseq shall give written notice to the
Indemnitee advising him of the identity of the Independent Counsel so selected.
If a Change in Control shall have occurred, the Independent Counsel shall be
selected by the Director (unless the Indemnitee shall request that such
selection be made by the Board of Directors, in which event the preceding
sentence shall apply), and the Indemnitee shall give written notice to Hyseq
advising it of the identity of the Independent Counsel so selected. In either
event, the Indemnitee, or Hyseq, as the case may be, may, within seven (7) days
after such written notice of selection shall have been given, deliver to Hyseq
or to the Indemnitee, as the case may be, a written objection to such selection.
Such objection may be asserted only on the grounds that the Independent Counsel
so selected does not meet the requirements of "Independent Counsel" as defined
in paragraph 1 of this Agreement. If such written objection is made, the
Independent Counsel so selected may not serve as Independent Counsel until a
court has determined that such objection is without merit. If, within twenty
(20) days after submission by the Indemnitee of a written request for
indemnification pursuant to paragraph 6(a) hereof, no Independent Counsel shall
have been selected or, if selected, shall have been objected to, either Hyseq or
the Indemnitee may petition a court for resolution of any objection which shall
have been made by Hyseq or the Indemnitee to the other's selection of
Independent Counsel and/or for the appointment as Independent Counsel of a
person selected by the court or by such other person as the court shall
designate, and the person with respect to whom an objection is so resolved or
the person so appointed shall act as Independent Counsel under paragraph 6(b)
hereof. Hyseq shall pay all reasonable fees and expenses of Independent Counsel
incurred in connection with acting pursuant to paragraph 6(b) hereof, and all
reasonable fees and expenses incident to the selection of such Independent
Counsel pursuant to this paragraph 6(d). In the event that a determination of
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entitlement to indemnification is to be made by Independent Counsel and such
determination shall not have been made and delivered in a written opinion within
ninety (90) days after the receipt by Hyseq of the Indemnitee's request in
accordance with paragraph 6(a), upon the due commencement of any judicial
proceeding in accordance with paragraph 8(a) of this Agreement, Independent
Counsel shall be discharged and relieved of any further responsibility in such
capacity.
7. PRESUMPTIONS
(a) In making a determination with respect to entitlement or
indemnification hereunder, the person or entity making such determination shall
presume that the Indemnitee is entitled to indemnification under this Agreement
and Hyseq shall have the burden of proof to overcome such presumption.
(b) If the person or entity making the determination whether the
Indemnitee is entitled to indemnification shall not have made a determination
within sixty (60) days after receipt by Hyseq of the request therefor, the
requisite determination of entitlement to indemnification shall be deemed to
have been made and the Indemnitee shall be entitled to such indemnification,
absent (i) a misstatement by the Indemnitee of a material fact, or an omission
of a material fact necessary to make the Indemnitee's statement not materially
misleading, in connection with the request for indemnification, or (ii) a
prohibition of such indemnification under applicable law. Such sixty (60)-day
period may be extended for a reasonable time, not to exceed an additional thirty
(30) days, if the person or entity making said determination in good faith
requires additional time for the obtaining or evaluating of documentation and/or
information relating thereto. The foregoing provisions of this paragraph 7(b)
shall not apply (i) if the determination of entitlement to indemnification is to
be made by the shareholders and if within fifteen (15) days after receipt by
Hyseq of the request for such determination the Board of Directors resolves to
submit such determination to the shareholders for consideration at an annual or
special meeting thereof to be held within seventy-five (75) days after such
receipt and such determination is made at such meeting, or (ii) if the
determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to paragraph 6(b) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement, or conviction, or upon a plea of nolo
contendere or its equivalent, shall not (except as otherwise expressly provided
in this Agreement) of itself adversely affect the right of the Indemnitee to
indemnification.
8. REMEDIES
(a) In the event that (i) a determination is made that the Indemnitee is
not entitled to indemnification under this Agreement, or (ii) advancement of
Expenses is not timely made pursuant to this Agreement, or (iii) payment of
indemnification due the Indemnitee under this Agreement is not timely made, the
Indemnitee shall be entitled to an adjudication in an
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appropriate court of competent jurisdiction of his entitlement to such
indemnification or advancement of Expenses.
(b) In the event that a determination shall have been made pursuant to
this Agreement that the Indemnitee is not entitled to indemnification, any
judicial proceeding commenced pursuant to this paragraph 8 shall be conducted in
all respects as a de novo trial, on the merits and the Indemnitee shall not be
prejudiced by reason of that adverse determination. In any judicial proceeding
or arbitration commenced pursuant to this paragraph 8, Hyseq shall have the
burden of proving that the Indemnitee is not entitled to indemnification or
advancement of Expenses, as the case may be.
(c) If a determination shall have been made or deemed to have been made
pursuant to this Agreement that the Indemnitee is entitled to indemnification,
Hyseq shall be bound by such determination in any judicial proceeding commenced
pursuant to this paragraph 8, absent (i) a misstatement by the Indemnitee of a
material fact, or an omission of a material fact necessary to make the
Indemnitee's statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(i) Hyseq shall be precluded from asserting in any judicial
proceeding commenced pursuant to this paragraph 8 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and
shall stipulate in any such court that Hyseq is bound by all the provisions
of this Agreement.
(ii) In the event that the Indemnitee, pursuant to this paragraph 8,
seeks a judicial adjudication of his rights under, or to recover damages
for breach of, this Agreement, if successful in whole or in part, the
Indemnitee shall be entitled to recover from Hyseq, and shall be
indemnified by Hyseq against, any and all Expenses actually and reasonably
incurred by him in such judicial adjudication.
9. ESTABLISHMENT OF TRUST
In the event of a Change in Control, Hyseq shall, upon written request by
the Indemnitee, create a trust for the benefit of the Indemnitee ("Trust") and
from time-to-time upon written request by the Indemnitee, shall fund such Trust
in an amount sufficient to satisfy any and all Expenses, judgments, penalties,
fines and settlement amounts actually and reasonably incurred by him or on his
behalf or claimed, reasonably anticipated or proposed to be paid in accordance
with the terms of this Agreement. The amount to be deposited in the Trust
pursuant to the foregoing funding obligation shall be determined by Independent
Counsel. The terms of the Trust shall provide that upon a Change in Control (i)
the Trust shall not be revoked or the principal thereof invaded, without the
prior written consent of the Indemnitee, (ii) the Trustee shall advance, within
two business days of a request by the Indemnitee and in accordance with
paragraph 5 of this Agreement, any and all Expenses to the Indemnitee, (iii) the
Trust shall continue to be funded by Hyseq in accordance with the funding
obligation set forth above, (iv) the Trustee shall promptly pay to the
Indemnitee all amounts for which the Indemnitee shall be
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entitled to indemnification pursuant to this Agreement or otherwise, and (v) all
unexpended funds in such Trust shall revert to Hyseq upon a final determination
by Independent Counsel that the Indemnitee has been fully indemnified under the
terms of this Agreement. The Trustee shall be chosen by the Indemnitee and
agreed to by Hyseq. Nothing in this Section 9 shall relieve Hyseq of any of its
obligations under this Agreement.
10. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE SUBROGATION
(a) The rights of indemnification and to receive advancement of Expenses
as provided by this Agreement shall not be deemed exclusive of any other rights
to which the Indemnitee may at any time be entitled under applicable law,
Hyseq's Charter, the Bylaws, any agreement, a vote of shareholders or a
resolution of directors, or otherwise. No amendment, alteration or repeal of
this Agreement or any provision hereof shall be effective as to the Indemnitee
with respect to any action taken or omitted by the Indemnitee as a member of the
Board of Directors prior to such amendment, alteration or repeal.
(b) To the extent that Hyseq maintains an insurance policy or policies
providing liability insurance for directors of Hyseq, the Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available.
(c) In the event of any payment under this Agreement, Hyseq shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee, who shall execute all papers required and take all actions necessary
to secure such rights, including execution of such documents as are necessary to
enable Hyseq to bring suit to enforce such rights.
(d) Hyseq shall not be liable under this Agreement to make any payment of
amounts otherwise indemnifiable hereunder if and to the extent that the
Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement, or otherwise.
11. CONTINUATION OF INDEMNITY
All agreements and obligations of Hyseq contained herein shall continue
during the period the Indemnitee is an officer or a member of the Board of
Directors of Hyseq and shall continue thereafter so long as the Indemnitee shall
be subject to any threatened, pending or completed Proceeding by reason of his
Corporate Status. No legal action shall be brought and no cause of action shall
be asserted by or on behalf of Hyseq against the Indemnitee, the Indemnitee's
spouse, heirs, executors or personal or legal representatives after the
expiration of two (2) years from the date of accrual of such cause of action,
and any claim or cause of action of Hyseq shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such two
(2)-year period; provided, however, that if any shorter prior of limitations is
otherwise applicable to any such cause of action such shorter period shall
govern. This Agreement shall be binding upon Hyseq and its successors and
assigns and shall inure to the benefit of the Indemnitee and his heirs,
executors and administrators.
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12. SEVERABILITY
If any provision or provisions of this Agreement shall be held to be
invalid, illegal, or unenforceable for any reason whatsoever (i) the validity,
legality, and enforceability of the remaining provisions of this Agreement
(including, without limitation, each portion of any paragraph of this Agreement
containing any such provision held to be invalid, illegal, or unenforceable,
that is not itself invalid, illegal, or unenforceable) shall not in any way be
affected or impaired thereby, and (ii) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of any
paragraph of this Agreement containing any such provision held to be invalid,
illegal, or unenforceable, that is not itself invalid, illegal, or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provisions held invalid, illegal, or unenforceable.
13. EXCEPTIONS TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES
Notwithstanding any other provisions of this Agreement, the Indemnitee
shall not be entitled to indemnification or advancement of Expenses under this
Agreement unless the Indemnitee acted in good faith and in a manner which the
Indemnitee believed to be or not opposed to the best interests of Hyseq.
Indemnification may not be made for any claim, issue or matter as to which the
Indemnitee has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to Hyseq or for amounts paid
in settlement to Hyseq, unless and only to the extent that the court in which
the action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the case,
the Indemnitee is fairly and reasonably entitled to indemnification for such
expenses as the court deems proper.
14. HEADINGS
The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect the construction thereof.
15. MODIFICATION AND WAIVER
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this Agreement shall be deemed to, nor shall constitute
a waiver of any other provisions hereof (whether or not similar) nor shall such
waiver constitute a continuing waiver.
16. NOTICE BY THE INDEMNITEE
The Indemnitee agrees promptly to notify Hyseq in writing upon being served
with any summons, citation, subpoena, complaint, indictment, information, or
other document relating to
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any Proceeding or matter which may be subject to indemnification or advancement
of Expenses covered hereunder.
17. NOTICES
All notices, requests, demands, and other communications hereunder shall be
in writing and shall be deemed to have been duly given if (i) delivered by hand
and receipted for by the party to whom said notice or other communication shall
have been directed, or (ii) mailed by certified or registered mail with postage
prepaid, on the third business day after the date on which it is so mailed:
If to the Indemnitee, to:
If to Hyseq, to:
Hyseq, Inc.
670 Almanor Avenue
Sunnyvale, CA 94086
or to such other address as may have been furnished to the Director by Hyseq or
to Hyseq by the Indemnitee, as the case may be.
18. GOVERNING LAW
The parties agree that this Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of Nevada.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
HYSEQ, INC.
By:
----------------------------------
Lewis S. Gruber, President
INDEMNITEE
By:
----------------------------------
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EXHIBIT 10.2
HYSEQ, INC.
STOCK OPTION PLAN
ARTICLE I
GENERAL
1.1. STOCK OPTION PLAN; PURPOSE:
Hyseq, Inc., a Nevada corporation (the "Company"), hereby adopts this Stock
Option Plan, subject to stockholder approval. This plan shall be known as the
HYSEQ, INC. STOCK OPTION PLAN (the "Plan"). The purpose of the Plan is to
foster and promote the long-term financial success of the Company and materially
increase stockholder value by: (a) strengthening the Company's capability to
develop, maintain and direct outstanding employees, (b) motivating superior
performance by means of long-term performance related incentives, (c)
encouraging and providing for obtaining an ownership interest in the Company,
(d) attracting and retaining outstanding talent by providing incentive
compensation opportunities competitive with other major companies, and (e)
enabling employees to participate in the long-term growth and financial success
of the Company.
1.2. ADMINISTRATION:
(a) The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company or such other committee of directors as is
designated by the Board of Directors of the Company (the "Committee"), which
shall consist of two or more members. Each member shall be a "disinterested
person," as that term is defined by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act") or any similar rule which may
subsequently be in effect ("Rule 16b-3"). The members shall be appointed by the
Board of Directors, and any vacancy on the Committee shall be filled by the
Board of Directors
(b) Subject to the limitations of the Plan, the Committee shall have the
sole and complete authority: (i) to select from the regular, full-time
employees of the Company, those who shall participate in the Plan (a
"Participant" or "Participants"), (ii) to make awards in such forms and amounts
as it shall determine, (iii) to impose such limitations, restrictions and
conditions upon such awards as it shall deem appropriate, (iv) to interpret the
Plan and to adopt, amend and rescind administrative guidelines and other rules
and regulations relating to the Plan, (v) to correct any defect or omission or
to reconcile any inconsistency in this Plan or in any award granted hereunder
and (vi) to make all other determinations and to take all other actions
necessary or advisable for the implementation and administration of the Plan.
The Committee's determinations on matters within its authority shall be
conclusive and binding upon the Company and all other persons.
(c) All expenses associated with the Plan shall be borne by the Company.
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(d) The Committee may, to the extent that any such action will not prevent
the Plan from complying with Rule 16b-3, delegate any of its authority hereunder
to such persons as it deems appropriate.
1.3. SELECTION FOR PARTICIPATION:
Participants shall be selected by the Committee from the employees who have
the capacity to contribute to the success of the Company. In making this
selection and in determining the form and amount of awards, the Committee may
give consideration to the functions and responsibilities of the employee, his
past, present and potential contributions to the Company's profitability and
sound growth, the value of his services to the Company and other factors deemed
relevant by the Committee. Grants may be made to the same individual on more
than one occasion.
1.4. TYPES OF AWARDS UNDER PLAN:
Awards under the Plan may be in the form of statutory stock options
("ISOs," which term shall be deemed to include Incentive Stock Options as
defined in Section 2.5 and any future type of tax qualified option which may
subsequently be authorized) and/or nonstatutory Stock Options ("NSOs" and,
collectively with ISOs, "Options"), as described in Article II.
1.5. SHARES SUBJECT TO THE PLAN:
Shares of stock covered by Options under the Plan may be in whole or in
part authorized and unissued or treasury shares of the Company's common stock,
$.01 par value per share, or such other shares as may be substituted pursuant to
Section 3.2 ("Common Stock"). The maximum number of shares of Common Stock
which may be issued for all purposes under the Plan shall be 300,000 (subject to
adjustment pursuant to Section 3.2). Any shares of Common Stock subject to an
Option which for any reason is cancelled or terminated without having been
exercised, shall again be available for Options under the Plan. No fractional
shares shall be issued, and the Committee shall determine the manner in which
fractional share value shall be treated.
1.6. GENDER AND NUMBER:
Except when otherwise indicated by the context, words in the masculine
gender when used in the Plan shall include the feminine gender, the singular
shall include the plural, and the plural shall include the singular.
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ARTICLE II
STOCK OPTIONS
2.1. AWARD OF STOCK OPTIONS:
The Committee may, from time to time, subject to the provisions of the Plan
and such other terms and conditions as the Committee may prescribe, award to any
Participant ISOs and NSOs to purchase Common Stock.
2.2. STOCK OPTION AGREEMENTS:
The award of an Option shall be evidenced by a signed written agreement (a
"Stock Option Agreement") containing such terms and conditions as the Committee
may from time to time determine.
2.3. OPTION PRICE:
The purchase price of Common Stock under each Option (the "Option Price")
shall be: (a) for ISOs, not less than the Fair Market Value of the Common Stock
(110% of the Fair Market Value in the case of an ISO granted to a person owning,
within the meaning of Section 424(d) of the Code, more than 10% of the total
combined voting power of all classes of stock of the Company or its
subsidiaries), on the date the Option is awarded, and (b) for all other Options,
not less than the par value of the Common Stock on the date the Option is
awarded or may be exercised.
2.4. EXERCISE AND TERM OF OPTIONS:
Options awarded under the Plan shall be exercisable at such times and be
subject to such restrictions and conditions as the Committee shall approve,
either at the time of grant of such Options or pursuant to a general
determination, and which need not be the same for all Participants, provided
that, in the case of a grant of an Option to an officer, as that term is used in
Rule 16a-l promulgated under the Exchange Act or any similar rule which may
subsequently be in effect (an "Officer"), the Committee may determine either (i)
no such Option shall be exercisable within the first six months of its term or
(ii) if such Option is exercisable in the first six months of its term, no
Common Stock acquired under such exercise shall be transferable until the six
month anniversary of the date of the grant of the Option. Each Option which is
intended to qualify as an ISO pursuant to Section 422 of the Internal Revenue
Code of 1986, as it may be amended from time to time (the "Code), and each
Option which is intended to qualify as another type of ISO which may
subsequently be authorized by law, shall comply with the applicable provisions
of the Code pertaining to such Options.
The Committee shall establish procedures governing the exercise of Options
and shall require that written notice of exercise be given and that the Option
Price be paid in full in cash (including check, bank draft or money order) at
the time of exercise. As soon as practicable after
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receipt of each notice and full payment, the Company shall deliver to the
Participant a certificate or certificates representing the acquired shares of
Common Stock.
2.5. LIMITATIONS OF ISOs:
Notwithstanding anything in the Plan to the contrary, to the extent
required from time to time by the Code, the following additional provisions
shall apply to the grant of Options which are intended to qualify as ISOs (as
such term is defined in Section 422 of the Code:)
(a) The aggregate Fair Market Value (determined as of the date the Option
is granted) of the shares of Common Stock with respect to which ISOs are
exercisable for the first time by any Participant during any calendar year
(under all plans of the Company) shall not exceed $100,000 or such other amount
as may subsequently be specified by the Code; provided that, to the extent that
such limitation is exceeded, any excess Options (as determined under the Code)
shall be deemed to be NSOs.
(b) Any ISO authorized under the Plan shall contain such other provisions
as the Committee shall deem advisable, but shall in all events be consistent
with and contain or be deemed to contain all provisions required in order to
qualify the Options as ISOs.
(c) All ISOs must be granted within ten years from the earlier of the date
on which this Plan was adopted by the Board of Directors or the date this Plan
was approved by the stockholders.
(d) Unless sooner exercised, terminated or cancelled, all ISOs shall expire
no later than ten years after the date of grant.
2.6. TERMINATION OF EMPLOYMENT:
In the event of a Participant's death or disability, each of his
outstanding Options shall be exercisable by the Participant (or his legal
representative or designated beneficiary), to the extent that such Option was
then exercisable, for one year after the Participant's death or disability, but
in no event after its respective expiration date. If the Participant ceases to
be an employee for any other reason, all of the Participant's then outstanding
Options shall terminate immediately.
ARTICLE III
MISCELLANEOUS PROVISIONS
3.1. NON-TRANSFERABILITY:
No Option under the Plan, and no interest therein, shall be transferable by
the Participant otherwise than by will or, if the Participant dies intestate, by
the laws of descent and distribution. All Options shall be exercisable or
received during the Participant's lifetime only by the
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Participant or his legal representative. Any transfer contrary to this Section
3.1 will nullify the Option.
3.2. ADJUSTMENT UPON CERTAIN CHANGES:
(a) If the outstanding shares of Common Stock are increased, decreased or
changed into, or exchanged for, a different number or kind of shares or
securities of the Company through a reorganization or merger in which the
Company is the surviving entity, or through a combination, recapitalization,
reclassification, stock split, stock dividend, stock consolidation or otherwise,
an appropriate adjustment shall be made in the number and kind of shares that
may be issued pursuant to Options. A corresponding adjustment to the
consideration payable with respect to Options granted prior to any such change
shall also be made. Any such adjustment, however, shall be made without change
in the total payment, if any, applicable to the portion of the Option not
exercised but with a corresponding adjustment in the price for each share.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation
or upon sale of all or substantially all of the Company's property, the Plan
shall terminate, and any outstanding Options shall terminate and be forfeited.
Notwithstanding the foregoing, the Committee may provide in writing in
connection with, or in contemplation of, any such transaction for any or all of
the following alternatives (separately or in combinations): (i) for the
assumption by the successor corporation of the Options theretofore granted or
the substitution by such corporation for such Options of options covering the
stock of the successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices; (ii) for
the continuance of the Plan by such successor corporation in which event the
Plan and the Options shall continue in the manner and under the terms so
provided; or (iii) for the payment in cash or shares of Common Stock in lieu of
and in complete satisfaction of such Options.
3.3. TAX WITHHOLDING:
(a) The Company shall have the power to withhold, or require a Participant
to remit to the Company, an amount sufficient to satisfy any withholding or
other tax due from the Company with respect to any amount payable and/or shares
issuable under the Plan, and the Company may defer such payment or issuance
unless indemnified to its satisfaction.
(b) Subject to the consent of the Committee, due to (i) the exercise of a
NSO, or (ii) the issuance of any other stock award under the Plan, a Participant
may make an irrevocable election (an "Election") to (A) have shares of Common
Stock otherwise issuable under (i) withheld, or (B) tender back to the Company
shares of Common Stock received pursuant to (i) or (ii) or (C) deliver back to
the Company pursuant to (i) or (ii) previously acquired shares of Common Stock
of the Company having a Fair Market Value sufficient to satisfy all or part of
the Participant's estimated tax obligations associated with the transaction.
Such Election must be made by a Participant prior to the date on which the
relevant tax obligation arises (the "Tax Date"). The Committee may disapprove of
any Election, may suspend or terminate the right to
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make Elections, or may provide with respect to any Option under this Plan that
the right to make Elections shall not apply to such Options.
(c) If a Participant is an Officer, then an Election is subject to the
following additional restrictions:
(i) No Election shall be effective for a Tax Date which occurs within
six months of the grant of the award.
(ii) The Election must be made and must be effective during a period
beginning on the third business day following the date of release for
publication of the Company's quarterly or annual summary statements of
sales and earnings and ending on the twelfth business day following such
date.
3.4. CONDITIONS ON OPTIONS:
In addition to the other terms hereof, in the event of the termination of
the employment of a Participant, by reason of disability while holding any
Option, the rights of such Participant to any such Option shall be subject to
the conditions that until any such Option is exercised, he shall (a) not engage,
either directly or indirectly, in any manner or capacity as advisor, principal,
agent, partner, officer, director, employee, member of any association or
otherwise, in any business or activity which is at the time competitive with any
business or activity conducted by the Company and (b) be available, unless he
shall have died, at reasonable times for consultations (which shall not require
substantial time or effort) at the request of the Company's management with
respect to phases of the business with which he was actively connected, but such
consultations shall not be required to be performed at any place or places
outside of the United States of America or during usual vacation periods or
periods of illness or other incapacity. In the event that either of the above
conditions is not fulfilled, the Participant shall forfeit all rights to any
unexercised Option held on the date of the breach of condition. Any
determination by the Board of Directors of the Company, which shall act upon the
recommendation of the Chairman, that the Participant is, or has, engaged in a
competitive business or activity as aforesaid or has not been available for
consultations as aforesaid shall be conclusive.
3.5. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN:
(a) The Board of Directors may suspend or terminate the Plan or any portion
thereof at any time and may amend it from time to time in such respects as the
Board of Directors may deem advisable in order that any Options thereunder shall
conform to or otherwise reflect any change in applicable laws or regulations, or
to permit the Company or its employees to enjoy the benefits of any change in
applicable law or regulations, or in any other respect the Board of Directors
may deem to be in the best interests of the Company; provided, however, that no
such amendment shall, without stockholder approval to the extent required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, (i) except as provided in Section 3.2, materially increase the number of
shares of Common Stock which may be issued under the
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Plan, (ii) materially modify the requirements as to eligibility for
participation in the Plan, (iii) materially increase the benefits accruing to
Participants under the Plan, or (iv) extend the termination date of the Plan. No
such amendment, suspension or termination shall (A) impair the rights of
Participants under outstanding Options without the consent of the Participants
affected thereby or (B) make any change that would disqualify the Plan, or any
other plan of the Company intended to be so qualified, from the exemption period
provided by Rule 16b-3.
(b) The Committee may amend or modify any outstanding Options, in any
manner to the extent that the Committee would have had the authority under the
Plan to initially award such Options, as so modified or amended, including
without limitation, to change the date or dates as of which such Options may be
exercised. No such amendment or modification shall impair the rights of any
Participant under any such Option without the consent of such Participant.
3.6. DEFINITIONS AND OTHER GENERAL PROVISIONS:
(a) The term "disability" as used under the Plan shall mean a finding by
the Committee that a Participant is fully and permanently unable to be gainfully
employed because of a physical or mental disability.
(b) The term "Fair Market Value" as it relates to Common Stock on any given
date means (i) the mean of the high and low sales prices of the Company's Common
Stock as reported by the Composite Tape of the New York Stock Exchange (or, if
not so reported, on any domestic stock exchanges on which the Common Stock is
then listed); or (ii) if the Common Stock is not listed on any domestic stock
exchange, the mean of the high and low sales prices of the Company's Common
Stock as reported by the National Association of Securities Dealers Automated
Quotation System (or, if not so reported, by the system then regarded as the
most reliable source of such quotations) or, if there are no reported sales on
such date, the mean of the closing bid and asked prices as so reported; or,
(iii) if the Common Stock is listed on a domestic exchange or quoted in the
domestic over-the-counter market, but there are not reported sales or
quotations, as the case may be, on the given date, the value determined pursuant
to (i) or (ii) above using the reported sale prices or quotations on the last
previous date on which so report; or (iv) if none of the foregoing clauses
apply, the fair value as determined in good faith by the Company's Board of
Directors or the Committee.
(c) The adoption of the Plan shall not preclude the adoption by appropriate
means of any other stock option or other incentive plan for employees.
3.7. NON-UNIFORM DETERMINATIONS:
The Committee's determinations under the Plan, including without
limitation, (a) the determination of the Participants to receive options, (b)
the form, amount and timing of such Options, (c) the terms and provisions of
such Options and (d) the agreements evidencing the same, need not be uniform and
may be made by it selectively among Participants who receive, or who are
eligible to receive, Options under the Plan, whether or not such Participants
are similarly situated.
7
<PAGE>
3.8. LEAVES OF ABSENCE; TRANSFERS:
The Committee shall be entitled to make such rules, regulations and
determinations as it deems appropriate under the Plan in respect of any leave of
absence from the Company granted to a Participant. Without limiting the
generality of the foregoing, the Committee shall be entitled to determine (a)
whether or not any such leave of absence shall be treated as if the Participant
ceased to be an employee and (b) the impact, if any, of any such leave of
absence on Options under the Plan. In the event a Participant transfers within
the Company, such Participant shall not be deemed to have ceased to be an
employee for purposes of the Plan.
3.9. LISTING, REGISTRATION AND LEGAL COMPLIANCE:
Each Option shall be subject to the requirement that if at any time the
Committee shall determine, in its discretion, that the listing, registration or
qualification of such Option, or any shares of Common Stock or other property
subject thereto, upon any securities exchange or under any foreign, federal or
state securities or other law or regulation, or the consent or approval of any
governmental body or the taking of any other action to comply with or otherwise
with respect to any such law or regulation, is necessary or desirable as a
condition to or in connection with the granting of such Option or the issue,
delivery or purchase of shares of Common Stock or other property thereunder, no
such Option may be exercised or paid in Common Stock or other property unless
such listing, registration, qualification, consent, approval or other action
shall have been effected or obtained free of any conditions not acceptable to
the Committee and the holder of the Option will supply the Company with such
certificates, representations and information as the Company shall request and
shall otherwise cooperate with the Company in effecting or obtaining such
listing, registration, qualification, consent, approval or other action. In the
case of officers and other persons subject to Section 16(b) of the Exchange Act,
the Committee may at any time impose any limitations upon the exercise, delivery
or payment of any Option which, in the discretion of the Committee, are
necessary or desirable in order to comply with Section 16(b) and the rules and
regulations thereunder. If the Company, as part of an offering of securities or
otherwise, finds it desirable because of foreign, federal or state legal or
regulatory requirements to reduce the period during which Options may be
exercised, the Committee may, in its discretion and without the holders'
consent, so reduce such period on not less than 15 days written notice to the
holders thereof.
3.10. LOANS:
The Committee may provide for the Company to make loans to finance the
exercise of any Option as well as the estimated or actual amount of any taxes
payable by the holder as a result of the exercise or payment of any Option and
may prescribe, or may empower the Company to prescribe, the other terms and
conditions (including but not limited to the interest rate, maturity date and
whether the loan will be secured or unsecured) of any such loan.
8
<PAGE>
3.11. INDEMNIFICATION:
Each person who is or shall have been a member of the Committee shall be
indemnified and held harmless by the Company against and from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by him in
connection with or resulting from any claim, action, suit, or proceeding to
which he may be a party or in which he may be involved by reason of any action
taken or failure to act under the Plan and against and from any and all amounts
paid by him in settlement thereof, with the Company's approval, or paid by him
in satisfaction of any judgment in any such action, suit, or proceeding against
him, provided he shall give the Company an opportunity, at its own expense, to
handle and defend the same before he undertakes to handle and defend it on his
own behalf. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
3.12. BENEFICIARY DESIGNATION:
Each Participant under the Plan may name, from time to time, any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his death before he
receives any or all of such benefit. Each designation will revoke all prior
designations by the same Participant, shall be in a form prescribed by the
Committee, and will be effective only when filed by the Participant in writing
with the Committee during his lifetime. In the absence of any such designation,
benefits remaining unpaid at the Participant's death shall be paid to his
estate.
3.13. RIGHTS OF PARTICIPANTS:
Nothing in the Plan shall interfere with or limit in any way the right of
the Company to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company for any
period of time or to continue his present or any other rate of compensation. No
employee shall have a right to be selected as a Participant, or, having been so
selected, to be selected again as a Participant.
3.14. REQUIREMENTS OF LAW, GOVERNING LAW:
The granting of Options and the issuance of shares of Common Stock shall be
subject to all applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be required.
The Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the State of Delaware. The provisions of the Plan
shall be interpreted so as to comply with the conditions or requirements of Rule
16b-3 under the Exchange Act, unless a contrary interpretation of any such
provisions is otherwise required by applicable law.
9
<PAGE>
3.15. EFFECTIVE DATE:
This Stock Option Plan, having been approved by the holders of a majority
of the shares of Common Stock and Series A Preferred Stock at the Annual Meeting
of the Stockholders held on May 25, 1995, shall be deemed effective as of May
25, 1995. No awards of Options shall be made hereunder after May 24, 2005.
10
<PAGE>
Amendment No. 1
to
Hyseq, Inc. Stock Option Plan
WHEREAS, the Board of Directors and the Stockholders of Hyseq, Inc. have
approved that certain amendment to Section 1.5 of the Hyseq, Inc. Stock Option
Plan effective as of April 16, 1997 (the "Stock Option Plan").
NOW, THEREFORE, Section 1.5 of the Stock Option Plan is hereby amended to
increase the maximum number of shares of Common Stock which may be issued for
all purposes under the Stock Option Plan from 300,000 to 600,000.
All other provisions of the Stock Option Plan remain in full force and
effect.
<PAGE>
EXHIBIT 10.3(a)
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), made and entered into as of the
1st day of August, 1994, by and between HYSEQ, INC., a Nevada corporation (the
"Corporation"), and DR. RADOJE T. DRMANAC ("Scientist").
In consideration of the mutual promises and agreements herein contained,
the Corporation hereby employs Scientist, and Scientist hereby agrees to work
for the Corporation, upon following terms and conditions:
1. Employment.
----------
(a) Positions. Scientist shall become employed by the Corporation on
---------
August 1, 1994, or such earlier time as the parties shall mutually agree (the
"Commencement Date"). The Scientist shall serve as a Co-Senior Vice President of
Research of the Corporation and Co-Chairman of its Scientific Advisory Board and
shall perform such duties as may be assigned by the Corporation to Scientist
consistent with this position.
(b) Service as a Director. Unless Scientist is requested to resign as
---------------------
herein provided, Scientist shall serve as a director of the Corporation for a
one (1) year term, beginning on the Commencement Date. After Funding,
Corporation may request that Scientist resign as a director, provided that (i)
Radomir B. Crkvenjakov is serving on the Corporation's Board of Directors at
that time; and (ii) a majority of the other directors of the Board believe that
is in the best interest of the Corporation that a new director replace
Scientist.
2. Term. The term of this Agreement shall continue until July 31, 1998,
----
unless the Corporation fails to obtain aggregate funds, including funds already
obtained, from any source or sources of not less than $8.5 million on or prior
to August 1, 1995 (the "Funding"), in which case, the term of this Agreement
shall terminate on July 31, 1996. Notwithstanding the above,
(a) the Agreement shall terminate immediately upon the first to occur
of the following:
(i) the death of Scientist; or
(ii) the disability of Scientist extending for a continuous
period of twelve (12) months; however, any periods of disability separated
by thirty (30) days or less shall be considered continuous;
(b) the Scientist may terminate this Agreement upon a Change in
Control (as hereinafter defined) by giving written notice to Corporation of such
termination whereupon such termination shall be effective ten (10) days after
the giving of such notice; and
<PAGE>
(c) the Corporation may terminate this Agreement upon an Act of
Misconduct (as hereinafter defined) by giving written notice to Scientist of
such termination, whereupon such termination shall be effective ten (10) days
after the giving of such notice.
In the event this Agreement terminates for any reason other than an Act of
Misconduct, the Scientist shall be entitled to the full cash compensation as set
forth in Paragraph 4(a) he would have received under the full term of the
Agreement.
For the purposes of this Agreement, "Change in Control" shall mean that (i)
the members of the Board of Directors of the Corporation, as of the date the
Scientist begins employment, each as set forth on Exhibit A, fail to constitute
---------
a majority of the Board of Directors of the Corporation; provided, however, that
if the Scientist has consented to the appointment or election of an individual
who becomes a new member of the Board of Directors, for the purposes of this
paragraph, that new member shall be treated as if he were a member of the Board
of Directors as of the date this Agreement is executed; and (ii) a sale of the
Corporation (whether such sale is a stock or asset purchase or merger or share
exchange in which the Company is not the survivor), but shall not include
additional offerings of Corporation stock.
For the purposes of this Agreement, an "Act of Misconduct" shall be deemed
to exist if Scientist (i) is grossly negligent or engages in willful misconduct
in the performance of his obligations under this Agreement; (ii) engages in
fraudulent activity detrimental to the Corporation; or (iii) engages in
competition with the Corporation without the consent of the Board of Directors
of the Corporation.
3. Scientist Obligations. Scientist agrees:
---------------------
(a) To diligently and faithfully serve the Corporation and to devote
his best efforts, talents, skills, and his full-time attention to the affairs
and activities of the Corporation as may be required to best serve the interests
of the Corporation and to handle such administrative and supervisory
responsibilities as may be assigned to him from time to time by the Corporation.
(b) Without limiting the generality of the foregoing, to not, directly
or indirectly, alone or as a member of a partnership or as an officer, director
or shareholder of any other corporation, be engaged in or concerned with any
other commercial or professional duties or pursuits whatsoever, without the
consent of the Board of Directors of the Corporation.
(c) To comply with the Corporation's policies, rules and regulations
as reasonably determined by the Board of Directors of the Corporation.
4. Compensation.
------------
(a) Cash Compensation. Subject to the provisions of Section 6 hereof
----------------- ---------
and subject to Corporation's right to pay a portion of such bonus in stock
options, as described in
2
<PAGE>
Section 4(c) below, the Corporation agrees to pay to Scientist as cash
- ------------
compensation for his services hereunder as follows:
(i) A one time funding bonus of Ninety-One Thousand Two Hundred
Dollars ($91,200.00), payable on Funding.
(ii) A cash salary of One Hundred Forty-Six Thousand Dollars
($146,00.00), payable in monthly installments of Twelve Thousand One
Hundred Sixty-Six and 67/100 Dollars ($12,166.67) for each year of
employment hereunder.
(iii) A guaranteed annual bonus of Thirteen Thousand Six Hundred
Eighty Dollars ($13,680.00) paid at the same time as other senior
executives.
(b) Stock Compensation. The Corporation agrees to grant stock options
------------------
as additional compensation for Scientist's services hereunder as follows:
(i) A stock and signing bonus consisting of an option to
purchase twenty thousand (20,000) shares of the common stock of the
Corporation at a purchase price of Three Dollars ($3.00) per share. This
option will be fully vested on the Commencement Date.
(ii) A stock option to purchase seventy thousand (70,000) shares
of common stock, which option shall vest in four (4) equal annual
installments, with the first such installment vesting on the one (1) year
anniversary of the Commencement, and each subsequent installment in each of
the next three (3) years thereafter; provided the Scientist is employed at
such time. Notwithstanding the above, in the event that the Funding occurs
within twelve (12) months after the date hereof, thirty thousand (30,000)
shares of such option shall be surrendered to Corporation for cancellation.
(iii) If the Funding does not occur within twelve (12) months
after the Commencement Date, an additional stock option to acquire ten
thousand (10,000) shares of the Corporation's common stock at Three Dollars
($3.00) per share, which option shall be fully vested on the date of grant.
(c) Election to Pay in Stock Options. Corporation may, in its
--------------------------------
discretion, elect to pay up to Six Thousand Dollars ($6,000.00) of the salary,
up to Two Thousand Four Hundred Thirty Dollars ($2,430.00) of the guaranteed
bonus, and up to Sixteen Thousand Dollars ($16,000.00) of the funding bonus in
stock options to purchase common shares at a purchase price of Three Dollars
($3.00) per share, which options will be fully vested on the date of grant. If
the Corporation elects to pay a portion of such compensation in stock options,
the number of shares of common stock to be acquired upon exercise of the option
will be equal to that number of shares which is obtained by dividing that
portion of cash compensation to be paid in stock options by the difference
between the Three Dollar ($3.00) purchase price and the offering price
3
<PAGE>
for the Corporation's next offering of securities, or if there is no offering
within twelve (12) months following the date hereof, the offering price of the
most recent offering prior to the date hereof ($6.56), less that number of
shares attributable to the funding bonus if the Funding occurs by August 1,
1995.
(d) Loan. The Corporation will loan Scientist Forty-Five Thousand
----
Dollars ($45,000.00) on a date no later than the Commencement Date. This loan
shall be evidenced by a nonrecourse promissory note due and payable on the date
the cash portion of the bonus described in Section 4(a)(i) above is paid by the
---------------
Corporation.
(e) Benefits. As an employee, Scientist shall, upon meeting the
--------
respective eligibility requirements, be entitled to participate in any pension,
profit-sharing, bonus or other employee benefit plan as may be in effect from
time to time.
(f) Health Coverage. During Scientist's employment, he shall be
---------------
entitled to such health and other insurance coverage in amounts equivalent to
the coverage provided by the Corporation for its other professional employees.
(g) Vacation. Scientist shall also be entitled to two (2) weeks' paid
--------
vacation during the first full year of his employment, to be taken at such time
or times, as shall be acceptable to the Corporation, and three (3) weeks' paid
vacation for each subsequent full year of employment under this Agreement.
Attendance at professional meetings shall not be treated as vacation time.
Scientist shall not be entitled to any payment for any unused vacation time and
no vacation time may be carried over to a subsequent year.
(h) Best Efforts. The Corporation shall use its best efforts to offer
------------
to Scientist, and Scientist shall have the right to purchase from the
Corporation, any and all securities of the Corporation made available through
future offerings of the Corporation's securities, on the same terms and
conditions that the securities are made available to other offerees. The
Corporation shall have no obligation to assist Scientist in either financing or
obtaining financing for the purchase of such securities.
5. Reimbursement of Expenses.
-------------------------
(a) Subject to the prior approval of the President of the Corporation,
Scientist shall be entitled to reimbursement for reasonable out-of-pocket
expenses (including professional license fees, dues and subscriptions, fees for
professional seminars and postgraduate courses, expenses incurred in the
attendance at professional meetings and conventions as are necessary in order to
be fully and currently informed as to new developments in the fields of bio-
technology, health care, and other similar topics) actually incurred by him on
behalf of the Corporation upon supplying to the Corporation the necessary proof
of expenses; provided, however, that reimbursement of expenses incurred as a
result of attendance at professional meetings and conventions shall not exceed
Fifty Thousand Dollars ($50,000) in any year. Such reimbursement
4
<PAGE>
shall not be deemed compensation to him for purposes of paragraph 4 above, but
ordinary and necessary business expenses. It is therefore agreed that if any
expense paid for or reimbursed to Scientist is disallowed by the Internal
Revenue Service as a federal income tax deduction of the Corporation, that
Scientist will reimburse the Corporation for such disallowed expense within
sixty (60) days after the final determination of such disallowance by the
Internal Revenue Service.
(b) Corporation shall pay, or reimburse Scientist, for expenses of
moving Scientist's personalty and family plus the cost of the family's travel to
the new location (subject to a maximum of Twenty Thousand Dollars ($20,000.00))
and temporary living facilities at the new location for not less than 14 days,
subject to an overall limit of Five Thousand Dollars ($5,000.00). To the extent
such amounts exceed the amount that is currently deductible under the Internal
Revenue Code ("Code"), the excess over the currently deductible portion shall be
adjusted for the related tax liability.
6. Disability. In the event Scientist is unable by reason of illness or
----------
injury to perform his duties hereunder (whether temporarily or permanently), he
shall be considered disabled and he shall be entitled to receive full
compensation and benefits during his period of disability subject to the
termination of this Agreement pursuant to Section 2(a)(ii).
----------------
7. Confidential Information.
------------------------
(a) Scientist shall use his best efforts and exercise utmost diligence
to protect and guard Confidential Information (as hereinafter defined). Except
as specifically required in the performance of Scientist's services for the
Corporation, Scientist will not directly or indirectly use, permit others to
use, disseminate, or disclose any Confidential Information. If Scientist
prepares a grant, research, or similar proposal for dissemination to a third
party, Scientist agrees not to include any Confidential Information therein and
shall first furnish to the Corporation those portions of the proposal that refer
to the Corporation, its subsidiaries, or affiliates, or any of their
consultants, employees, or agents, or any work done by such persons for them.
(b) Scientist may lecture upon, disseminate, and publish under
Scientist's own name scientific papers arising from the work done in the course
of performance of services for the Corporation hereunder, but only upon the
prior written approval of the Corporation. The Corporation will not unreasonably
withhold its approval provided Confidential Information will not be disclosed by
such dissemination or publication. Appropriate credit will be given to the
Corporation in any publication.
(c) All rights, title and interest in all documents, records,
notebooks, correspondence, deposits of microorganisms, cells or parts thereof,
cell lines, parts and progeny thereof, and all products made thereby that
directly or indirectly relate to and arise out of his work under this Agreement
shall belong to the Corporation, and upon expiration or termination
5
<PAGE>
of this Agreement, all such documents and material, including copies thereof,
then in Scientist's possession or subject to his control, whether prepared by
him or others, will be turned over to the Corporation.
(d) For the purposes of this Agreement, "Confidential Information"
shall mean information disclosed to Scientist or known to Scientist as a
consequence of or through performance of services for the Corporation, whether
or not related to his duties at the Corporation, and includes trade secrets or
any other like information of value relating to the business and/or field of
interest of the Corporation or of any corporation, firm, or partnership directly
or indirectly controlled by or controlling the Corporation or in which any of
the aforesaid have more than 20% ownership interest, including, but not limited
to, information relating to inventions, disclosures, processes, systems,
methods, formulas, patents, patent applications, machinery, materials, research
activities and plans, cost of production, contract forms, prices, volume of
sales, promotional methods, and lists of names or classes of customers.
Information shall be considered, for purposes of this Agreement, to be
confidential if not known by the trade generally, even though such information
has been disclosed to one or more third parties pursuant to distribution
agreements, joint research agreements, or other agreements entered into by the
Corporation or any of its affiliates. For purposes of this Agreement,
information shall not be considered confidential to the extent that such
information is or becomes, through no fault of Scientist, part of the public
domain, such information is independently known to Scientist, or such
information is lawfully furnished to Scientist by a third party without
restriction on disclosure.
8. Inventions. All Inventions (as hereinafter defined) made, conceived,
----------
or completed by Scientist, individually or in conjunction with others during the
term of this Agreement or within one year after termination (or, which having
possibly been conceived prior hereto, may be completed during the term of this
Agreement or within one year after termination) shall be the sole and exclusive
property of the Corporation provided such Inventions (i) are made, conceived, or
completed with the equipment, supplies, facilities, or Confidential Information
of the Corporation, its subsidiaries, or affiliates; or (ii) are made,
conceived, or completed by Scientist during the term of his employment with the
Corporation; or (iii) result from any work performed by Scientist for the
Corporation; provided, however, that this Agreement does not apply to any
Inventions that are protected by Section 2870 of the California Labor Code.
For the purposes of this Agreement, "Inventions" shall mean any and all
discoveries, concepts, and ideas, whether patentable or not, including, but not
limited to, processes, methods, formulas, compositions, techniques, articles,
and machines, as well as improvements thereof or know-how related thereto,
relating to the business and/or field of interest, including, actual or
anticipated research and development, of the Corporation or of any corporation,
firm, or partnership directly or indirectly controlled by or controlling the
Corporation or in which any of the aforesaid have more than a 20% ownership
interest.
6
<PAGE>
Scientist shall, without royalty or any further consideration to Scientist
therefor, but at the expense of the Corporation:
(a) As promptly as known or possessed by Scientist, disclose to the
Corporation all information with respect to any Inventions.
(b) Whenever requested so to do by the Corporation, promptly execute
and assign any and all applications, assignments, and other instruments that the
Corporation shall deem necessary to apply for and obtain letters patent of the
United States and of foreign countries for said Inventions, and to assign and
convey to the Corporation or to the Corporation's nominee the sole and exclusive
right, title, and interest in and to the Inventions or any applications or
patents thereon.
(c) Whenever requested so to do by the Corporation, deliver to the
Corporation evidence for interference purposes or other legal proceedings and
testify in any interference or other legal proceedings.
(d) Do such other acts as may be necessary in the opinion of the
Corporation to obtain and maintain United States and foreign letters patent for
the Inventions.
9. Non-Competition.
---------------
(a) During the term of his employment with the Corporation, and for a
period of two (2) years (one (1) year if the Funding does not occur) following
the termination, for any reason whatsoever, of his employment therewith,
Scientist will not (i) own or have any interest, directly or indirectly, in, or
act as an officer, director, agent, employee, or consultant of, or assist in any
way or in any capacity, any person, firm, association, partnership, corporation,
or other entity which is in competition with the Corporation; (ii) divert or
attempt to divert any business from the Corporation; or (iii) directly or
indirectly entice, induce or in any manner influence any person who is, or shall
be, in the service of the Corporation to leave such services for the purpose of
engaging in a business, or being employed by or associated with any person,
firm, association, partnership, corporation or other entity, which is in
competition with the Corporation. The Scientist's obligations under this
Subsection (a) shall terminate in the event the Corporation terminates this
Agreement prior to its expiration for any reason other than an Act of
Misconduct.
(b) Scientist agrees that upon termination of his employment with the
Corporation he will deliver to the Corporation all books, records, lists or
suppliers and customers, samples, price lists, brochures and other property
belonging to the Corporation or relating to the business of the Corporation.
(c) Scientist agrees that he will not at any time during or after his
employment with the Corporation reveal, divulge or make known to any person,
firm or corporation any knowledge or information or any facts concerning any
suppliers, customers, methods, processes,
7
<PAGE>
developments, schedules, lists or plans of or relating to the business of the
Corporation and will retain all knowledge and information which he has acquired
or which he will acquire during his employment therewith relating to such
supplier, customers, methods, processes, developments, schedules, lists and
plans and the business of the Corporation in trust in a fiduciary capacity for
the sole benefit of the Corporation, its successors or assigns.
(d) In the event any court shall finally hold that the time or any
other provision of this Section 9 constitutes an unreasonable restriction
---------
against the Scientist, Scientist agrees that the provision hereof shall not be
rendered void but shall apply as to such time, territory, and other extent as
such court may judicially determinate or indicate constitutes a reasonable
restriction under the circumstances involved.
(e) The provisions for this Section 9 shall survive the termination of
---------
the terms of this Agreement and shall run to and inure to the benefit of the
Corporation, its successors and assigns.
10. Acknowledgment.
--------------
(a) Scientist hereby waives any rights, now existing or in the future,
to assert a claim for damages, liability, loss or expense in connection with any
alleged breach or cause of action against the Corporation regarding any conflict
Scientist may have with Arch or Argonne. Scientist further covenants and agrees
that, subject to Section 11 hereof, Scientist will not bring a lawsuit against
----------
the Corporation or join the Corporation in any suit to which Scientist is a
party in connection with any claim, alleged wrong doing, act, cause of action or
damage regarding any conflict Scientist may have with Arch or Argonne.
Scientist acknowledges that he was paid the amount of Sixty-Five Thousand
Dollars ($65,000.00) to enter the Employment Option Agreement dated November 12,
1993 between Company and Scientist.
(b) Scientist waives any rights to claim a breach of confidentiality
against the Corporation with respect to or arising from any information supplied
by the Corporation to Arch or Argonne. Scientist further agrees that he
consented in the Employment Option Agreement to supply certain information to
Arch and Argonne and that with respect to providing such information, he waived
any rights to claim confidentiality. Scientist further acknowledges that he hand
delivered the Employment Option Agreement to Argonne.
(c) Scientist further acknowledges that Scientist has been advised
that the resignation of the Chief Executive Officer of the Corporation may
result in a delay or termination of the funding of the private placement
offering for which Oppenheimer & Company is the placement agent and that in such
case, Scientist understands that other funding sources will need to be pursued.
Although the Corporation believes that it has alternatives, the Corporation
provides no guarantee that any such funding will be available.
8
<PAGE>
11. Indemnification. The Corporation hereby indemnifies Scientist with
---------------
respect to all expenses and liabilities which Scientist may incur arising from
actions performed on behalf of Corporation and requested by or known to the
Corporation which result in an alleged conflict of interest in the event
Scientist is sued by Argonne or any of its affiliates, Arch or the Department of
Energy or any other person or entity.
12. Restrictions. Scientist agrees that he will not, unless authorized
------------
by the Board of Directors of the Corporation, make, draw, accept or endorse any
contract, lease, promissory note or other instrument requiring the payment of
money by the Corporation nor pledge the credit of the Corporation.
13. Arbitration and Extension of Time. Any dispute or controversy
---------------------------------
arising out of or relating to this Agreement, but not relating to any other
agreement or contract made or entered into by, or made on behalf of, the
Corporation shall be determined and settled by arbitration in Chicago, Illinois,
in accordance with the Commercial Rules of the American Arbitration Association
then in effect, and judgment rendered upon the award rendered by the Arbitrator
may be entered in any court of a competent jurisdiction. Expenses incurred in
connection with any such arbitration shall be borne equally by the parties
thereto, provided, however, that each party shall bear the cost of its own
expert evidence and legal counsel. Whenever any action is required to be taken
by the terms of this Agreement within a specified period of time and the taking
of such action is materially affected by a matter subjected to arbitration under
this provision, such period shall be extended automatically by the number of
days plus ten (10) business days that are taken for the determination of the
matter by the arbitrator(s).
14. Governing Law. This Agreement shall be subject to and governed by
-------------
the law of the State of Illinois, irrespective of the fact that one or more of
the parties now is or may become a resident of a different state.
15. Assignment. This Agreement and all rights and benefits hereunder
----------
are personal to Scientist, and neither this Agreement nor any right or interest
of Scientist herein or arising hereunder shall be voluntarily or involuntarily
sold, transferred or assigned.
16. Equity. The relationship of Scientist and the Corporation being of
------
a special and unique nature, it is expressly agreed that this Agreement shall be
enforceable in equity by specific performance.
17. Beneficiaries. This Agreement shall be binding upon and inure to
-------------
the benefit of the parties and their respective heirs, representatives and
successors.
18. Written Consent. No termination or amendment of this Agreement or
---------------
any provision hereof, or waiver of any right or remedy herein provided, shall be
effective for any purpose unless specifically set forth in writing, and signed
by the party or parties to be bound thereby. The waiver of any right or remedy
in respect of any occurrence or event on one
9
<PAGE>
occasion shall not be deemed a waiver of such right or remedy in respect of the
same of any similar occurrence or event on any other occasion.
19. Severability. If any term or provision of this Agreement shall be
------------
found by any court of competent jurisdiction to be unenforceable, the remaining
terms and provisions hereof shall remain in full force and effect, as if such
unenforceable provisions or term had never been a part hereof. If any provision
hereof is determined to be unenforceable, the parties shall promptly meet to
negotiate a substitute for such provisions in order to preserve to the extent
legally possible the original intent of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HYSEQ, INC.
By: /s/ Lewis S. Gruber
----------------------------
Lewis S. Gruber
Its: President
/s/ Radoje T. Drmanac
---------------------------------
DR. RADOJE T. DRMANAC
10
<PAGE>
EXHIBIT 10.3(b)
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), made and entered into as of the
1st day of August, 1994, by and between HYSEQ, INC., a Nevada corporation (the
"Corporation"), and DR. RADOMIR B. CRKVENJAKOV ("Scientist").
In consideration of the mutual promises and agreements herein contained,
the Corporation hereby employs Scientist, and Scientist hereby agrees to work
for the Corporation, upon following terms and conditions:
1. Employment.
----------
(a) Positions. Scientist shall become employed by the Corporation on
---------
August 1, 1994, or such earlier time as the parties shall mutually agree (the
"Commencement Date"). The Scientist shall serve as a Co-Senior Vice President
of Research of the Corporation and Co-Chairman of its Scientific Advisory Board
and shall perform such duties as may be assigned by the Corporation to Scientist
consistent with this position.
(b) Service as a Director. Unless Scientist is requested to resign as
---------------------
herein provided, Scientist shall serve as a director of the Corporation for a
one (1) year term, beginning on the Commencement Date. After Funding,
Corporation may request that Scientist resign as a director, provided that (i)
Radoje T. Drmanac is serving on the Corporation's Board of Directors at that
time; and (ii) a majority of the other directors of the Board believe that is in
the best interest of the Corporation that a new director replace Scientist.
2. Term. The term of this Agreement shall continue until July 31, 1998,
----
unless the Corporation fails to obtain aggregate funds, including funds already
obtained, from any source or sources of not less than $8.5 million on or prior
to August 1, 1995 (the "Funding"), in which case, the term of this Agreement
shall terminate on July 31, 1996. Notwithstanding the above,
(a) the Agreement shall terminate immediately upon the first to occur
of the following:
(i) the death of Scientist; or
(ii) the disability of Scientist extending for a continuous
period of twelve (12) months; however, any periods of disability separated
by thirty (30) days or less shall be considered continuous;
(b) the Scientist may terminate this Agreement upon a Change in
Control (as hereinafter defined) by giving written notice to Corporation of such
termination whereupon such termination shall be effective ten (10) days after
the giving of such notice; and
<PAGE>
(c) the Corporation may terminate this Agreement upon an Act of
Misconduct (as hereinafter defined) by giving written notice to Scientist of
such termination, whereupon such termination shall be effective ten (10) days
after the giving of such notice.
In the event this Agreement terminates for any reason other than an Act of
Misconduct, the Scientist shall be entitled to the full cash compensation as set
forth in Paragraph 4(a) he would have received under the full term of the
Agreement.
For the purposes of this Agreement, "Change in Control" shall mean that (i)
the members of the Board of Directors of the Corporation, as of the date the
Scientist begins employment, each as set forth on Exhibit A, fail to constitute
---------
a majority of the Board of Directors of the Corporation; provided, however, that
if the Scientist has consented to the appointment or election of an individual
who becomes a new member of the Board of Directors, for the purposes of this
paragraph, that new member shall be treated as if he were a member of the Board
of Directors as of the date this Agreement is executed; and (ii) a sale of the
Corporation (whether such sale is a stock or asset purchase or merger or share
exchange in which the Company is not the survivor), but shall not include
additional offerings of Corporation stock.
For the purposes of this Agreement, an "Act of Misconduct" shall be deemed
to exist if Scientist (i) is grossly negligent or engages in willful misconduct
in the performance of his obligations under this Agreement; (ii) engages in
fraudulent activity detrimental to the Corporation; or (iii) engages in
competition with the Corporation without the consent of the Board of Directors
of the Corporation.
3. Scientist Obligations. Scientist agrees:
---------------------
(a) To diligently and faithfully serve the Corporation and to devote
his best efforts, talents, skills, and his full-time attention to the affairs
and activities of the Corporation as may be required to best serve the interests
of the Corporation and to handle such administrative and supervisory
responsibilities as may be assigned to him from time to time by the Corporation.
(b) Without limiting the generality of the foregoing, to not, directly
or indirectly, alone or as a member of a partnership or as an officer, director
or shareholder of any other corporation, be engaged in or concerned with any
other commercial or professional duties or pursuits whatsoever, without the
consent of the Board of Directors of the Corporation.
(c) To comply with the Corporation's policies, rules and regulations
as reasonably determined by the Board of Directors of the Corporation.
4. Compensation.
------------
(a) Cash Compensation. Subject to the provisions of Section 6 hereof
----------------- ---------
and subject to Corporation's right to pay a portion of such bonus in stock
options, as described in
2
<PAGE>
Section 4(c) below, the Corporation agrees to pay to Scientist as cash
- ------------
compensation for his services hereunder as follows:
(i) A one time funding bonus of Ninety-One Thousand Two Hundred
Dollars ($91,200.00), payable on Funding.
(ii) A cash salary of One Hundred Forty-Six Thousand Dollars
($146,000.00), payable in monthly installments of Twelve Thousand One
Hundred Sixty-Six and 67/100 Dollars ($12,166.67) for each year of
employment hereunder.
(iii) A guaranteed annual bonus of Thirteen Thousand Six Hundred
Eighty Dollars ($13,680.00) paid at the same time as other senior
executives.
(b) Stock Compensation. The Corporation agrees to grant stock options
------------------
as additional compensation for Scientist's services hereunder as follows:
(i) A stock and signing bonus consisting of an option to purchase
twenty thousand (20,000) shares of the common stock of the Corporation at a
purchase price of Three Dollars ($3.00) per share. This option will be
fully vested on the Commencement Date.
(ii) A stock option to purchase sixty thousand (60,000) shares of
common stock, which option shall vest in four (4) equal annual
installments, with the first such installment vesting on the one (1) year
anniversary of the Commencement, and each subsequent installment in each of
the next three (3) years thereafter, provided the Scientist is employed at
such time. Notwithstanding the above, in the event that the Funding occurs
within twelve (12) months after the date hereof, twenty-five thousand
(25,000) shares of such option shall be surrendered to Corporation for
cancellation.
(iii) If the Funding does not occur within twelve (12) months
after the Commencement Date, an additional stock option to acquire ten
thousand (10,000) shares of the Corporation's common stock at Three Dollars
($3.00) per share, which option shall be fully vested on the date of grant.
(c) Election to Pay in Stock Options. Corporation may, in its
--------------------------------
discretion, elect to pay up to Six Thousand Dollars ($6,000.00) of the salary,
up to Two Thousand Four Hundred Thirty Dollars ($2,430.00) of the guaranteed
bonus, and up to Sixteen Thousand Dollars ($16,000.00) of the funding bonus in
stock options to purchase common shares at a purchase price of Three Dollars
($3.00) per share, which options will be fully vested on the date of grant. If
the Corporation elects to pay a portion of such compensation in stock options,
the number of shares of common stock to be acquired upon exercise of the option
will be equal to that number of shares which is obtained by dividing that
portion of cash compensation to be paid in stock options by the difference
between the Three Dollar ($3.00) purchase price and the offering price
3
<PAGE>
for the Corporation's next offering of securities, or if there is no offering
within twelve (12) months following the date hereof, the offering price of the
most recent offering prior to the date hereof ($6.56), less that number of
shares attributable to the funding bonus if the Funding occurs by August 1,
1995.
(d) Loan. The Corporation will loan Scientist Forty-Five Thousand
----
Dollars ($45,000.00) on a date no later than the Commencement Date. This loan
shall be evidenced by a nonrecourse promissory note due and payable on the date
the cash portion of the bonus described in Section 4(a)(i) above is paid by the
---------------
Corporation.
(e) Benefits. As an employee, Scientist shall, upon meeting the
--------
respective eligibility requirements, be entitled to participate in any pension,
profit-sharing, bonus or other employee benefit plan, including, without
limitation, any management incentive plans and bonus plans, as may be in effect
from time to time.
(f) Health Coverage. During Scientist's employment, he shall be
---------------
entitled to such health and other insurance coverage in amounts equivalent to
the coverage provided by the Corporation for its other professional employees.
(g) Vacation. Scientist shall also be entitled to two (2) weeks' paid
--------
vacation during the first full year of his employment, to be taken at such time
or times, as shall be acceptable to the Corporation, and three (3) weeks' paid
vacation for each subsequent full year of employment under this Agreement.
Attendance at professional meetings shall not be treated as vacation time.
Scientist shall not be entitled to any payment for any unused vacation time and
no vacation time may be carried over to a subsequent year.
(h) Best Efforts. The Corporation shall use its best efforts to offer
------------
to Scientist, and Scientist shall have the right to purchase from the
Corporation, any and all securities of the Corporation made available through
future offerings of the Corporation's securities, on the same terms and
conditions that the securities are made available to other offerees. The
Corporation shall have no obligation to assist Scientist in either financing or
obtaining financing for the purchase of such securities.
5. Reimbursement of Expenses.
-------------------------
(a) Subject to the prior approval of the President of the Corporation,
Scientist shall be entitled to reimbursement for reasonable out-of-pocket
expenses (including professional license fees, dues and subscriptions, fees for
professional seminars and postgraduate courses, expenses incurred in the
attendance at professional meetings and conventions as are necessary in order to
be fully and currently informed as to new developments in the fields of bio-
technology, health care, and other similar topics) actually incurred by him on
behalf of the Corporation upon supplying to the Corporation the necessary proof
of expenses; provided, however, that reimbursement of expenses incurred as a
result of attendance at professional meetings and
4
<PAGE>
conventions shall not exceed Fifty Thousand Dollars ($50,000) in any year. Such
reimbursement shall not be deemed compensation to him for purposes of paragraph
4 above, but ordinary and necessary business expenses. It is therefore agreed
that if any expense paid for or reimbursed to Scientist is disallowed by the
Internal Revenue Service as a federal income tax deduction of the Corporation,
that Scientist will reimburse the Corporation for such disallowed expense within
sixty (60) days after the final determination of such disallowance by the
Internal Revenue Service.
(b) Corporation shall pay, or reimburse Scientist, for expenses of
moving Scientist's personalty and family plus the cost of the family's travel to
the new location (subject to a maximum of Twenty Thousand Dollars ($20,000.00))
and temporary living facilities at the new location for not less than 14 days,
subject to an overall limit of Five Thousand Dollars ($5,000.00). To the extent
such amounts exceed the amount that is currently deductible under the Internal
Revenue Code ("Code"), the excess over the currently deductible portion shall be
adjusted for the related tax liability.
6. Disability. In the event Scientist is unable by reason of illness or
----------
injury to perform his duties hereunder (whether temporarily or permanently), he
shall be considered disabled and he shall be entitled to receive full
compensation and benefits during his period of disability subject to the
termination of this Agreement pursuant to Section 2(a)(ii).
----------------
7. Confidential Information.
------------------------
(a) Scientist shall use his best efforts and exercise utmost diligence
to protect and guard Confidential Information (as hereinafter defined). Except
as specifically required in the performance of Scientist's services for the
Corporation, Scientist will not directly or indirectly use, permit others to
use, disseminate, or disclose any Confidential Information. If Scientist
prepares a grant, research, or similar proposal for dissemination to a third
party, Scientist agrees not to include any Confidential Information therein and
shall first furnish to the Corporation those portions of the proposal that refer
to the Corporation, its subsidiaries, or affiliates, or any of their
consultants, employees, or agents, or any work done by such persons for them.
(b) Scientist may lecture upon, disseminate, and publish under
Scientist's own name scientific papers arising from the work done in the course
of performance of services for the Corporation hereunder, but only upon the
prior written approval of the Corporation. The Corporation will not
unreasonably withhold its approval provided Confidential Information will not be
disclosed by such dissemination or publication. Appropriate credit will be
given to the Corporation in any publication.
(c) All rights, title and interest in all documents, records,
notebooks, correspondence, deposits of microorganisms, cells or parts thereof,
cell lines, parts and progeny thereof, and all products made thereby that
directly or indirectly relate to and arise out of his
5
<PAGE>
work under this Agreement shall belong to the Corporation, and upon expiration
or termination of this Agreement, all such documents and material, including
copies thereof, then in Scientist's possession or subject to his control,
whether prepared by him or others, will be turned over to the Corporation.
(d) For the purposes of this Agreement, "Confidential Information"
shall mean information disclosed to Scientist or known to Scientist as a
consequence of or through performance of services for the Corporation, whether
or not related to his duties at the Corporation, and includes trade secrets or
any other like information of value relating to the business and/or field of
interest of the Corporation or of any corporation, firm, or partnership directly
or indirectly controlled by or controlling the Corporation or in which any of
the aforesaid have more than 20% ownership interest, including, but not limited
to, information relating to inventions, disclosures, processes, systems,
methods, formulas, patents, patent applications, machinery, materials, research
activities and plans, cost of production, contract forms, prices, volume of
sales, promotional methods, and lists of names or classes of customers.
Information shall be considered, for purposes of this Agreement, to be
confidential if not known by the trade generally, even though such information
has been disclosed to one or more third parties pursuant to distribution
agreements, joint research agreements, or other agreements entered into by the
Corporation or any of its affiliates. For purposes of this Agreement,
information shall not be considered confidential to the extent that such
information is or becomes, through no fault of Scientist, part of the public
domain, such information is independently known to Scientist, or such
information is lawfully furnished to Scientist by a third party without
restriction on disclosure.
8. Inventions. All Inventions (as hereinafter defined) made, conceived,
----------
or completed by Scientist, individually or in conjunction with others during the
term of this Agreement or within one year after termination (or, which having
possibly been conceived prior hereto, may be completed during the term of this
Agreement or within one year after termination) shall be the sole and exclusive
property of the Corporation provided such Inventions (i) are made, conceived, or
completed with the equipment, supplies, facilities, or Confidential Information
of the Corporation, its subsidiaries, or affiliates, or (ii) are made,
conceived, or completed by Scientist during the term of his employment with the
Corporation, or (iii) result from any work performed by Scientist for the
Corporation; provided, however, that this Agreement does not apply to any
Inventions that are protected by Section 2870 of the California Labor Code.
For the purposes of this Agreement, "Inventions" shall mean any and all
discoveries, concepts, and ideas, whether patentable or not, including, but not
limited to, processes, methods, formulas, compositions, techniques, articles,
and machines, as well as improvements thereof or know-how related thereto,
relating to the business and/or field of interest, including, actual or
anticipated research and development, of the Corporation or of any corporation,
firm, or partnership directly or indirectly controlled by or controlling the
Corporation or in which any of the aforesaid have more than a 20% ownership
interest.
6
<PAGE>
Scientist shall, without royalty or any further consideration to Scientist
therefor, but at the expense of the Corporation:
(a) As promptly as known or possessed by Scientist, disclose to the
Corporation all information with respect to any Inventions.
(b) Whenever requested so to do by the Corporation, promptly execute
and assign any and all applications, assignments, and other instruments that the
Corporation shall deem necessary to apply for and obtain letters patent of the
United States and of foreign countries for said Inventions, and to assign and
convey to the Corporation or to the Corporation's nominee the sole and exclusive
right, title, and interest in and to the Inventions or any applications or
patents thereon.
(c) Whenever requested so to do by the Corporation, deliver to the
Corporation evidence for interference purposes or other legal proceedings and
testify in any interference or other legal proceedings.
(d) Do such other acts as may be necessary in the opinion of the
Corporation to obtain and maintain United States and foreign letters patent for
the Inventions.
9. Non-Competition.
---------------
(a) During the term of his employment with the Corporation, and for a
period of two (2) years (one (1) year if the Funding does not occur) following
the termination, for any reason whatsoever, of his employment therewith,
Scientist will not (i) own or have any interest, directly or indirectly, in, or
act as an officer, director, agent, employee, or consultant of, or assist in any
way or in any capacity, any person, firm, association, partnership, corporation,
or other entity which is in competition with the Corporation; (ii) divert or
attempt to divert any business from the Corporation; or (iii) directly or
indirectly entice, induce or in any manner influence any person who is, or shall
be, in the service of the Corporation to leave such services for the purpose of
engaging in a business, or being employed by or associated with any person,
firm, association, partnership, corporation or other entity, which is in
competition with the Corporation. The Scientist's obligations under this
Subsection (a) shall terminate in the event the Corporation terminates this
- --------------
Agreement prior to its expiration for any reason other than an Act of
Misconduct.
(b) Scientist agrees that upon termination of his employment with the
Corporation he will deliver to the Corporation all books, records, lists or
suppliers and customers, samples, price lists, brochures and other property
belonging to the Corporation or relating to the business of the Corporation.
(c) Scientist agrees that he will not at any time during or after his
employment with the Corporation reveal, divulge or make known to any person,
firm or corporation any knowledge or information or any facts concerning any
suppliers, customers, methods, processes,
7
<PAGE>
developments, schedules, lists or plans of or relating to the business of the
Corporation and will retain all knowledge and information which he has acquired
or which he will acquire during his employment therewith relating to such
supplier, customers, methods, processes, developments, schedules, lists and
plans and the business of the Corporation in trust in a fiduciary capacity for
the sole benefit of the Corporation, its successors or assigns.
(d) In the event any court shall finally hold that the time or any
other provision of this Section 9 constitutes an unreasonable restriction
---------
against the Scientist, Scientist agrees that the provision hereof shall not be
rendered void but shall apply as to such time, territory, and other extent as
such court may judicially determinate or indicate constitutes a reasonable
restriction under the circumstances involved.
(e) The provisions for this Section 9 shall survive the termination of
---------
the terms of this Agreement and shall run to and inure to the benefit of the
Corporation, its successors and assigns.
10. Acknowledgment.
--------------
(a) Scientist hereby waives any rights, now existing or in the future,
to assert a claim for damages, liability, loss or expense in connection with any
alleged breach or cause of action against the Corporation regarding any conflict
Scientist may have with Arch or Argonne. Scientist further covenants and agrees
that, subject to Section 11 hereof, Scientist will not bring a lawsuit against
----------
the Corporation or join the Corporation in any suit to which Scientist is a
party in connection with any claim, alleged wrong doing, act, cause of action or
damage regarding any conflict Scientist may have with Arch or Argonne.
Scientist acknowledges that he was paid the amount of Sixty-Five Thousand
Dollars ($65,000.00) to enter the Employment Option Agreement dated November 12,
1993 between Company and Scientist.
(b) Scientist waives any rights to claim a breach of confidentiality
against the Corporation with respect to or arising from any information supplied
by the Corporation to Arch or Argonne. Scientist further agrees that he
consented in the Employment Option Agreement to supply certain information to
Arch and Argonne and that with respect to providing such information, he waived
any rights to claim confidentiality. Scientist further acknowledges that he
hand delivered the Employment Option Agreement to Argonne.
(c) Scientist further acknowledges that Scientist has been advised
that the resignation of the Chief Executive Officer of the Corporation may
result in a delay or termination of the funding of the private placement
offering for which Oppenheimer & Company is the placement agent and that in such
case, Scientist understands that other funding sources will need to be pursued.
Although the Corporation believes that it has alternatives, the Corporation
provides no guarantee that any such funding will be available.
8
<PAGE>
11. Indemnification. The Corporation hereby indemnifies Scientist with
---------------
respect to all expenses and liabilities which Scientist may incur arising from
actions performed on behalf of Corporation and requested by or known to the
Corporation which result in an alleged conflict of interest in the event
Scientist is sued by Argonne or any of its affiliates, Arch or the Department of
Energy or any other person or entity.
12. Restrictions. Scientist agrees that he will not, unless authorized
------------
by the Board of Directors of the Corporation, make, draw, accept or endorse any
contract, lease, promissory note or other instrument requiring the payment of
money by the Corporation nor pledge the credit of the Corporation.
13. Arbitration and Extension of Time. Any dispute or controversy
---------------------------------
arising out of or relating to this Agreement, but not relating to any other
agreement or contract made or entered into by, or made on behalf of, the
Corporation shall be determined and settled by arbitration in Chicago, Illinois,
in accordance with the Commercial Rules of the American Arbitration Association
then in effect, and judgment rendered upon the award rendered by the Arbitrator
may be entered in any court of a competent jurisdiction. Expenses incurred in
connection with any such arbitration shall be borne equally by the parties
thereto, provided, however, that each party shall bear the cost of its own
expert evidence and legal counsel. Whenever any action is required to be taken
by the terms of this Agreement within a specified period of time and the taking
of such action is materially affected by a matter subjected to arbitration under
this provision, such period shall be extended automatically by the number of
days plus ten (10) business days that are taken for the determination of the
matter by the arbitrator(s).
14. Governing Law. This Agreement shall be subject to and governed by
-------------
the law of the State of Illinois, irrespective of the fact that one or more of
the parties now is or may become a resident of a different state.
15. Assignment. This Agreement and all rights and benefits hereunder
----------
are personal to Scientist, and neither this Agreement nor any right or interest
of Scientist herein or arising hereunder shall be voluntarily or involuntarily
sold, transferred or assigned.
16. Equity. The relationship of Scientist and the Corporation being of
------
a special and unique nature, it is expressly agreed that this Agreement shall be
enforceable in equity by specific performance.
17. Beneficiaries. This Agreement shall be binding upon and inure to
-------------
the benefit of the parties and their respective heirs, representatives and
successors.
18. Written Consent. No termination or amendment of this Agreement or
---------------
any provision hereof, or waiver of any right or remedy herein provided, shall be
effective for any purpose unless specifically set forth in writing, and signed
by the party or parties to be bound thereby. The waiver of any right or remedy
in respect of any occurrence or event on one
9
<PAGE>
occasion shall not be deemed a waiver of such right or remedy in respect of the
same of any similar occurrence or event on any other occasion.
19. Severability. If any term or provision of this Agreement shall be
------------
found by any court of competent jurisdiction to be unenforceable, the remaining
terms and provisions hereof shall remain in full force and effect, as if such
unenforceable provisions or term had never been a part hereof. If any provision
hereof is determined to be unenforceable, the parties shall promptly meet to
negotiate a substitute for such provisions in order to preserve to the extent
legally possible the original intent of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HYSEQ, INC.
By: /s/ Lewis S. Gruber
-------------------
Lewis S. Gruber
Its: President
/s/ Radomir B. Crkvenjakov
--------------------------
DR. RADOMIR B. CRKVENJAKOV
10
<PAGE>
EXHIBIT 10.4
HYSEQ, INC.
NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
I. GENERAL
A. PURPOSE:
Hyseq Inc., a Nevada corporation (the "Company"), hereby adopts this Non-
Employee Director Stock Option Plan, subject to stockholder approval. This plan
shall be known as the HYSEQ, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (the
"Plan"). The purpose of the Plan is to foster and promote the long-term
financial success of the Company and materially increase stockholder value by:
(a) motivating superior performance by means of long-term performance related
incentives, (b) encouraging, and providing a means to obtain, an ownership
interest in the Company, (c) attracting and retaining outstanding talent by
providing incentive compensation opportunities competitive with other companies
and (d) enabling non-employee directors to participate in the long-term growth
and financial success of the Company.
B. ADMINISTRATION:
1. The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company (the "Board") or such other committee of
directors as is designated by the Board (the "Committee"), which shall consist
of two or more members. The members shall be appointed by the Board, and any
vacancy on the Committee shall be filled by the Board.
2. Subject to the limitations of the Plan, the Committee shall have the
sole and complete authority: (i) to interpret the Plan and to adopt, amend and
rescind administrative guidelines and other rules and regulations relating to
the Plan, (ii) to correct any defect or omission or to reconcile any
inconsistency in the Plan or in any award granted hereunder and (iii) to make
all other determinations and to take all other actions necessary or advisable
for the implementation and administration of the Plan. The Committee's
determinations on matters within its authority shall be conclusive and binding
upon the Company and all other persons.
3. All expenses associated with the Plan shall be borne by the Company.
4. The Committee may, to the extent that any such action will not prevent
the Plan from complying with Rule 16b-3, delegate any of its authority hereunder
to such persons as it deems appropriate.
C. PARTICIPATION:
Only directors of the Corporation who, at the time an Option is granted,
meet the following criteria (a "Participant") shall be entitled to participate
in the Plan: (a) the director is
-1-
<PAGE>
not, and has not been for at least two years, an employee or officer of the
Corporation or any subsidiary of the Corporation; and (b) the director does not
receive compensation directly or indirectly as a consultant, or in any capacity
other than as a director, in excess of $60,000 in any year.
D. TYPES OF AWARDS UNDER PLAN:
Awards under the Plan will be in the form of non-statutory Stock Options
("Options"), as described in Article II.
E. SHARES SUBJECT TO THE PLAN:
Shares of stock covered by Options granted under the Plan may be, in whole
or in part, authorized and unissued or treasury shares of the Company's common
stock, $.001 par value per share, or such other shares as may be substituted
pursuant to Section 3.2 ("Common Stock"). The maximum number of shares of Common
Stock which may be issued for all purposes under the Plan shall be 72,000
(subject to adjustment pursuant to Section 3.2). Any shares of Common Stock
subject to an Option which, for any reason, is canceled or terminated without
having been exercised, shall again be available for Options under the Plan. No
fractional shares shall be issued, and the Committee shall determine the manner
in which fractional share value shall be treated.
F. GENDER AND NUMBER:
Except when otherwise indicated by the context, words in the masculine
gender when used in the Plan shall include the feminine gender, the singular
shall include the plural, and the plural shall include the singular.
II. STOCK OPTIONS
A. AWARD OF STOCK OPTIONS:
Effective on the date on which a Director first becomes a member of the
Board of Directors of the Company, commencing with Directors who first become
members on or after September 5, 1996 ( "New Directors"), each New Director who
satisfies the conditions set forth in Section 1.3 will automatically be awarded
a stock option (an "Initial Option" or the "Initial Options") under the Plan to
purchase 12,000 shares of Common Stock (subject to adjustment pursuant to
Section 3.2). Effective on the date of each Annual Meeting of the Stockholders,
commencing with the Annual Meeting of the Stockholders held in 1997, each
Director then in office who satisfies the conditions set forth in Section 1.3,
will automatically be awarded a stock option (a "Subsequent Option" or the
"Subsequent Options," collectively with the "Initial Options" referred to herein
as an "Option" or "Options") to purchase that number of shares which, when added
to shares underlying other options held by the Director which vest in that
-2-
<PAGE>
year (including any portion of an Initial Option so vesting), equal 3,000
(subject to adjustment pursuant to Section 3.2) shares of Common Stock.
B. STOCK OPTION AGREEMENTS:
The award of an Option shall be evidenced by a signed written agreement (a
"Stock Option Agreement") containing such terms and conditions as the Committee
may from time to time determine.
C. OPTION PRICE:
The purchase price of Common Stock under each Option (the "Option Price")
shall be not less than the Fair Market Value of the Common Stock on the date the
Option is awarded.
D. EXERCISE AND TERM OF OPTIONS:
1. Options may be exercised by the delivery of written notice of exercise
and payment of the aggregate Option Price for the shares to be purchased to the
Corporate Secretary of the Corporation. The Option Price may be paid in cash
(including check, bank draft or money order) or, unless in the opinion of
counsel to the Corporation to do so may result in a possible violation of law,
by delivery of Common Stock already owned by the Participant, valued at Fair
Market Value on the date of the exercise. As soon as practicable after receipt
of each notice and full payment, the Corporation shall deliver to the
Participant a certificate or certificates representing the acquired shares of
Common Stock.
2. Each certificate for shares issued upon exercise of an Option, unless
at the time of exercise such shares are registered with the Securities and
Exchange Commission (the "Commission"), under the Securities Act of 1933, as
amended (the "Act"), shall bear the following legend:
NO SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THESE SHARES SHALL BE
MADE EXCEPT PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of such counsel as shall be reasonably approved by the Company, the
securities represented thereby need no longer be subject to such restrictions.
3. One half of the Participant's Initial Option (6,000 shares) shall
become exercisable on the date of grant and one fourth of the Initial Option
(3,000 shares) shall become exercisable on the date of the Annual Meeting of the
Stockholders held in each of the two years
-3-
<PAGE>
following the year in which the Participant receives the Initial Option. The
Initial Option shall continue to be exercisable until the first to occur of the
tenth anniversary of the date of grant or one month following the date the
Director ceases to be a Participant. Each of a Director's Subsequent Options
shall become exercisable on the date of grant (the date of each Annual Meeting)
and shall continue to be exercisable until the first to occur of the tenth
anniversary of the date on which the Subsequent Option(s) was granted or one
month following the date the Director ceases to be a Participant.
Notwithstanding the foregoing, in the event that the death or disability of the
Director occurs, all outstanding Options will be exercisable by the Director (or
his legal representative or designated beneficiary) for one year following the
Director's death or disability, provided, however, if the Option is exercised
within the first six months after it becomes exercisable, any shares of Common
Stock issued on such exercise may not be sold until the six month anniversary of
the date of the grant of the Option.
III. MISCELLANEOUS PROVISIONS
A. NON-TRANSFERABILITY:
No Option under the Plan, and no interest therein, shall be transferable by
the Participant otherwise than by will or, if the Participant dies intestate, by
the laws of descent and distribution. All Options shall be exercisable or
received during the Participant's lifetime only by the Participant or his legal
representative. Any transfer contrary to this Section 3.1 will nullify the
Option.
B. ADJUSTMENTS UPON CERTAIN CHANGES:
1. If the outstanding shares of Common Stock are increased, decreased or
changed into, or exchanged for, a different number or kind of shares or
securities of the Company through a reorganization or merger in which the
Company is the surviving entity, or through a combination, recapitalization,
reclassification, stock split, stock dividend, stock consolidation or otherwise,
an appropriate adjustment shall be made in the number and kind of shares that
may be issued pursuant to Options. A corresponding adjustment to the
consideration payable with respect to Options granted prior to any such change
shall also be made. Any such adjustment, however, shall be made without change
in the total payment, if any, applicable to the portion of the Option not
exercised but with a corresponding adjustment in the price for each share.
2. Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation
or upon sale of all or substantially all of the Company's property, the Plan
shall terminate, and any outstanding Options shall terminate and be forfeited.
Notwithstanding the foregoing, the Committee may provide in writing in
connection with, or in contemplation of, any such transaction for any or all of
the following alternatives (separately or in combinations): (i) for the
assumption by the successor corporation of the Options theretofore granted or
the substitution by such corporation for such
-4-
<PAGE>
Options of options covering the stock of the successor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices; (ii) for the continuance of the Plan by such successor
corporation in which event the Plan and the Options shall continue in the manner
and under the terms so provided; or (iii) for the payment in cash or shares of
Common Stock in lieu of and in complete satisfaction of such Options.
C. TAX WITHHOLDING:
1. The Company shall have the power to withhold, or require a Participant
to remit to the Company, an amount sufficient to satisfy any withholding or
other tax due from the Company with respect to any amount payable and/or shares
issuable under the Plan, and the Company may defer such payment or issuance
unless indemnified to its satisfaction.
2. Subject to the consent of the Committee, due to the exercise of an
option, a Director may make an irrevocable election (an "Election") to (A) have
shares of Common Stock otherwise issuable upon such exercise withheld, or (B)
tender back to the Company shares of Common Stock received pursuant to such
exercise or (C) deliver back to the Company pursuant to such exercise previously
acquired shares of Common Stock of the Company having a Fair Market Value
sufficient to satisfy all or part of the Director's estimated tax obligations
associated with the transaction. Such Election must be made by a Director prior
to the date on which the relevant tax obligation arises (the "Tax Date"). The
Committee may disapprove of any Election, may suspend or terminate the right to
make Elections, or may provide with respect to any Option under this Plan that
the right to make Elections shall not apply to such Options.
D. CONDITIONS ON OPTIONS:
In addition to the other terms hereof, in the event a Participant's status
as a non-employee director ceases by reason of disability while holding any
Option, the rights of such Participant to any such Option shall be subject to
the conditions that until any such Option is exercised, he shall (a) not engage,
either directly or indirectly, in any manner or capacity as advisor, principal,
agent, partner, officer, director, employee, member of any association or
otherwise, in any business or activity which is at the time competitive with any
business or activity conducted by the Company and (b) be available at reasonable
times for consultations (which shall not require substantial time or effort) at
the request of the Company's management with respect to phases of the business
with which he was actively connected, but such consultations shall not be
required to be performed at any place or places outside of the United States of
America or during usual vacation periods or periods of illness or other
incapacity. In the event that either of the above conditions is not fulfilled,
the Participant shall forfeit all rights to any unexercised Option held on the
date of the breach of condition. Any determination by the Board of the Company,
which shall act upon the recommendation of the Chairman, that the Participant
is, or has, engaged in a competitive business or activity as aforesaid or has
not been available for consultations as aforesaid shall be conclusive.
-5-
<PAGE>
E. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN:
1. The Board may suspend or terminate the Plan or any portion thereof at
any time and may amend it from time to time in such respects as the Board may
deem advisable in order that any Options thereunder shall conform to or
otherwise reflect any change in applicable laws or regulations, or to permit the
Company or the Participants to enjoy the benefits of any change in applicable
law or regulations, or in any other respect the Board may deem to be in the best
interests of the Company; provided, however, that no such amendment shall,
without stockholder approval to the extent required by law, agreement or the
rules of any exchange upon which the Common Stock is listed, (i) except as
provided in Section 3.2, materially increase the number of shares of Common
Stock which may be issued under the Plan, (ii) materially modify the
requirements as to eligibility for participation in the Plan, (iii) materially
increase the benefits accruing to Participants under the Plan, or (iv) extend
the termination date of the Plan. No such amendment, suspension or termination
shall (A) impair the rights of Participants under outstanding Options without
the consent of the Participants affected thereby or (B) make any change that
would disqualify the Plan, or any other plan of the Company intended to be so
qualified, from the exemption period provided by Rule 16b-3 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act").
2. The Committee may amend or modify any outstanding Options, in any
manner to the extent that the Committee would have had the authority under the
Plan to initially award such Options, as so modified or amended, including,
without limitation, to change the date or dates as of which such Options may be
exercised. No such amendment or modification shall impair the rights of any
Participant under any such Option without the consent of such Participant.
F. DEFINITIONS AND OTHER GENERAL PROVISIONS:
1. The term "disability" as used under the Plan shall mean a finding by
the Committee that a Participant is fully and permanently unable to serve as a
director of the Company because of a physical or mental disability.
2. The term "Fair Market Value" as it relates to Common Stock on any
given date means (i) the mean of the high and low sales prices of the Company's
Common Stock as reported by the Composite Tape of the New York Stock Exchange
(or, if not so reported, on any domestic stock exchanges on which the Common
Stock is then listed); or (ii) if the Common Stock is not listed on any domestic
stock exchange, the mean of the high and low sales prices of the Company's
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System (or, if not so reported, by the system then regarded
as the most reliable source of such quotations) or, if there are no reported
sales on such date, the mean of the closing bid and asked prices as so reported;
or, (iii) if the Common Stock is listed on a domestic exchange or quoted in the
domestic over-the-counter market, but there are not reported sales or
quotations, as the case may be, on the given date, the value determined pursuant
to (i) or (ii) above using the reported sale prices or quotations on the last
previous date on which so report; or
-6-
<PAGE>
(iv) if none of the foregoing clauses apply, the fair value as determined in
good faith by the Board or the Committee.
G. LISTING, REGISTRATION AND LEGAL COMPLIANCE:
Each Option shall be subject to the requirement that if at any time the
Committee shall determine, in its discretion, that the listing, registration or
qualification of such Option, or any shares of Common Stock or other property
subject thereto, upon any securities exchange or under any foreign, federal or
state securities or other law or regulation, or the consent or approval of any
governmental body or the taking of any other action to comply with or otherwise
with respect to any such law or regulation, is necessary or desirable as a
condition to or in connection with the granting of such Option or the issue,
delivery or purchase of shares of Common Stock or other property thereunder, no
such Option may be exercised or paid in Common Stock or other property unless
such listing, registration, qualification, consent, approval or other action
shall have been effected or obtained free of any conditions not acceptable to
the Committee and the holder of the Option will supply the Company with such
certificates, representations and information as the Company shall request and
shall otherwise cooperate with the Company in effecting or obtaining such
listing, registration, qualification, consent, approval or other action. In the
case of persons subject to Section 16(b) of the Exchange Act, the Committee may
at any time impose any limitations upon the exercise, delivery or payment of any
Option which, in the discretion of the Committee, are necessary or desirable in
order to comply with said Section 16(b) and the rules and regulations
thereunder. If the Company, as part of an offering of securities or otherwise,
finds it desirable because of foreign, federal or state legal or regulatory
requirements to reduce the period during which Options may be exercised, the
Committee may, in its discretion and without the holders' consent, so reduce
such period on not less than 15 days written notice to the holders thereof.
H. LOANS:
The Committee may provide for the Company to make loans to finance the
exercise of any Option as well as the estimated or actual amount of any taxes
payable by the holder as a result of the exercise or payment of any Option and
may prescribe, or may empower the Company to prescribe, the other terms and
conditions (including but not limited to the interest rate, maturity date and
whether the loan will be secured or unsecured) of any such loan.
I. INDEMNIFICATION:
Each person who is or shall have been a member of the Committee shall be
indemnified and held harmless by the Company against and from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by him in
connection with or resulting from any claim, action, suit, or proceeding to
which he may be a party or in which he may be involved by reason of any action
taken or failure to act under the Plan and against and from any and all amounts
paid by him in settlement thereof, with the Company's approval, or paid by him
in satisfaction of any judgment in any such action, suit, or proceeding against
him, provided he shall give the Company an opportunity, at its own expense, to
handle and defend the same before he
-7-
<PAGE>
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the
Company may have to indemnify them or hold them harmless.
J. BENEFICIARY DESIGNATION:
Each Participant under the Plan may name, from time to time, any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his death before he
receives any or all of such benefit. Each designation will revoke all prior
designations by the same Participant, shall be in a form prescribed by the
Committee, and will be effective only when filed by the Participant in writing
with the Committee during his lifetime. In the absence of any such designation,
benefits remaining unpaid at the Participant's death shall be paid to his
estate.
K. RIGHTS OF PARTICIPANTS:
Nothing in the Plan shall interfere with or limit in any way the right of
the Stockholders to terminate any Participant as a director, nor confer upon any
Participant any right to continue as a Director of the Company for any period of
time.
L. REQUIREMENTS OF LAW, GOVERNING LAW:
The granting of Options and the issuance of shares of Common Stock shall be
subject to all applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be required.
The Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the State of California. The provisions of the Plan
shall be interpreted so as to comply with the conditions or requirements of Rule
16b-3 under the Exchange Act, unless a contrary interpretation of any such
provisions is otherwise required by applicable law.
M. EFFECTIVE DATE:
This Stock Option Plan, having been approved by the holders of a majority
of the shares of Common Stock and Series A Preferred Stock at the Annual Meeting
of the Stockholders held on October 24, 1996, shall be deemed effective as of
October 24, 1996. No awards of Options shall be made hereunder after October 23,
2005.
-8-
<PAGE>
EXHIBIT 10.5
PATENT LICENSE AGREEMENT
(Sequencing by Hybridization)
---------------------------
Patent License Agreement (this "Agreement"), dated June 7, 1994, between
ARCH DEVELOPMENT CORPORATION, an Illinois not-for-profit corporation ("ARCH"),
and HYSEQ, INC., a Nevada corporation ("Licensee").
PRELIMINARY STATEMENT
---------------------
ARCH holds rights to the Licensed Patent Rights described below.
Licensee wishes to obtain the right to exploit the Licensed Patent Rights
in commercial settings.
Therefore, in consideration of the mutual obligations set forth herein and
other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, ARCH and Licensee agree as follows.
ARTICLE
1.
DEFINITIONS
-----------
The following capitalized terms are used in this Agreement with the following
meanings:
"Affiliate" means, as to any person or entity, any other person or entity
---------
which directly or indirectly controls, is controlled by, or is under common
control with such person or entity. For purposes of the preceding definition,
"control" means the right to control, or actual control of, the management of
such other entity, whether by ownership of voting securities, by agreement, or
otherwise.
"Combination Product" means any product sold as a single unit but which
-------------------
incorporates both (a) one or more Licensed Products and (b) one or more
products, not themselves Licensed Products, for which a separate market exists
and which are capable of being sold separately from the Combination Product.
"Equity Securities" means those securities of Licensee first issued and
-----------------
sold by Licensee after the date of this Agreement in a single transaction or
series of transactions (excluding the exercise of warrants or options) for an
aggregate price paid by the purchasers in cash of * or more, or if no such
issuance and sale occurs within the first year after execution of this
Agreement, then those securities of Licensee most recently issued and sold by
Licensee prior to the date of this Agreement.
* CERTAIN INFORMATION IN THIS AGREEMENT AND ON THIS PAGE HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED
PORTIONS.
<PAGE>
"Inventions" means the devices, machines, methods, processes, manufactures,
----------
compositions of matter and uses described in U.S. Patent Application Serial No.
*, a copy of a portion of which Licensee has previously received from ARCH, or
described in any of the patents and patent applications that are divisions,
continuations, continuations-in-part, reissues, renewals, reexaminations,
foreign counterparts, substitutions or extensions of or to U.S. Patent
Application Serial No. *.
"Licensed Patent Rights" means (a) the patents and patent applications
----------------------
that may issue on the Inventions, and (b) all patents and patent applications
which are divisions, continuations, continuations-in-part, reissues, renewals,
reexaminations, foreign counterparts, substitutions, or extensions of or to any
patent applications or patents described in clause (a) of this sentence.
"Licensed Products or Processes" means any product or process within the
------------------------------
scope of any Valid Claim within the Licensed Patent Rights, and any product made
by any art, method or process within the scope of any Valid Claim within the
Licensed Patent Rights.
"Net Sales" means
---------
(a) with respect to Licensed Products or Processes, Combination Products
and Resulting Products, the gross sales price actually charged in the sale
of such Licensed Product or Process, Combination Product or Resulting
Product, less:
(i) customary trade, quantity or cash discounts, rebates,
nonaffiliated brokers' or agents' commissions actually allowed and
taken;
(ii) amounts repaid or credited to customers on account of
rejections or returns of specified products subject to royalty
hereunder or on account of retroactive price reductions affecting such
products; and
(iii) freight and other transportation costs, including insurance
charges, and duties, tariffs, sales and excise taxes and other
governmental charges based directly on sales, turnover or delivery of
the specified products and actually paid or allowed by Licensee, an
Affiliate of Licensee or a sublicensee; and
(b) with respect to Resulting Sequences, the gross sales price actually
charged in the sale of such Resulting Sequences.
"Patent Costs" means a person's out-of-pocket expenses incurred in
------------
connection with the preparation, filing, prosecution and maintenance of the
patents under the Licensed Patent Rights, including, among other items, the fees
and expenses of attorneys and patent agents, filing fees and maintenance fees,
but excluding costs involved in any patent infringement claims.
"Resulting Products" means products incorporating, or resulting from the
------------------
application of, Resulting Sequences.
2
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
"Resulting Sequences" means nucleotide sequences of genetic material
-------------------
determined by or for the benefit of Licensee or any Affiliate of Licensee with
the use of Licensed Products or Processes; provided that after the date (the
"Cumulative Sales Date") that cumulative Net Sales (plus the fair market value
of other consideration described in Section 3.1(b)(iii), determined by mutual
agreement between the parties or by a mutually acceptable independent appraiser)
equals *, Resulting Sequences shall include only nucleotide sequences of genetic
material determined prior to the date (the "Commercial Availability Date") that
Licensed Products or Processes (other than Resulting Sequences and Resulting
Products) are available to non-Affiliates of Licensee on commercial terms and
Licensee is using its best efforts to meet demand, and provided further that
cumulative Royalties otherwise accruing under Sections 3.1(b) and 3.1(c) after
the Cumulative Sales Date shall be reduced (or an equivalent adjustment shall be
made with respect to non-cash Royalties previously transferred to ARCH) by a
cumulative amount equal to the amount of such Royalties previously paid to ARCH
with respect to Resulting Sequences determined after the Commercial Availability
Date.
"Royalties" means all amounts payable under Sections 3.1(b) and 3.1(c)
----------
of this Agreement.
"Sublicense" means any grant by Licensee of any rights to a sublicensee
----------
under the terms of Section 2.1 of this Agreement.
"Technical Information" means ARCH's rights in any technical information
---------------------
and know-how, if any, in ARCH's possession relating to the Inventions.
"Territory" means all countries of the world.
---------
"Valid Claim" means an issued claim of any unexpired patent, or a claim
-----------
of any pending patent application, which has not been held unenforceable,
unpatentable or invalid by a decision of a court or governmental body of
competent jurisdiction, unappealable or unappealed within the tune allowed for
appeal, which has not been rendered unenforceable through disclaimer or
otherwise, and which has not been lost through an interference proceeding.
Notwithstanding the foregoing to the contrary, a claim of a pending patent
application shall cease to be a Valid Claim if no patent has issued on such
claim on or prior to the fifth (5th) anniversary of the date of filing such
patent application (or in the case of a divisional or continuation application,
the date of the filing of the earliest parent application); provided that such
claim shall once again become a Valid Claim on the issue date of a patent that
subsequently issues and covers such claim.
3
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
ARTICLE
2.
GRANT OF LICENSE
----------------
2.1. Grant. ARCH hereby grants and agrees to grant to Licensee:
-----
(a) an exclusive (except as otherwise specified in Sections 2.2 and 2.3)
license to use the Technical Information, and to make, have made, use and sell
Licensed Products or Processes under the Licensed Patent Rights, within the
Territory; and
(b) the exclusive right and authority to grant Sublicenses of the
licenses granted in clause (a) above, subject to the provisions of this
Agreement.
2.2. Reservations.
------------
(a) The Inventions were developed at Argonne National Laboratory ("ANL"),
which is operated by The University of Chicago (the "University") pursuant to a
contract between the University and the United States Department of Energy
("DOE") (such contract, as it may be amended from time to time, is referred to
as the "Prime Contract"). Pursuant to the Prime Contract, DOE has certain rights
with respect to the Inventions and the Licensed Patent Rights, to all of which
rights the rights granted in Section 2.1 of this Agreement are subject. DOE's
rights include, but are not limited to, (i) a nonexclusive, nontransferable,
irrevocable paid-up license to practice, or have practiced, those Inventions in
which the United States Government has or had rights for or on behalf of the
United States Government throughout the world, and (ii) march-in rights.
(b) ARCH reserves for itself and the University the irrevocable but
nontransferable worldwide right to make and use (but not sell commercially)
Licensed Products or Processes and to use the Licensed Patent Rights and the
Licensed Products or Processes for educational and research purposes only
(excluding improvements invented by or assigned to Licensee). Neither ARCH nor
the University shall have any obligation to pay Licensee a royalty or any other
fee for the rights reserved and granted in this Section.
(c) All rights to any Inventions, Technical Information, Licensed Patent
Rights and Licensed Products or Processes which are not expressly granted to
Licensee hereunder or reserved to third parties are hereby expressly reserved to
ARCH.
(d) Except as otherwise expressly set forth in Section 2.2(b) of this
Agreement, nothing in this Agreement shall be interpreted to grant any express
or implied license in any patent rights of Licensee.
2.3. Other Rights. ARCH has not previously granted licenses or other rights
------------
with respect to the Technical Information, the Inventions or the Licensed Patent
Rights in the Territory.
4
<PAGE>
2.4. Sublicenses. Prior to entering into any Sublicense, Licensee shall
-----------
obtain the approval of ARCH to the terms of the Sublicense, which approval shall
not be unreasonably withheld, provided the terms of any such Sublicense are
consistent with the terms of this Agreement. Upon the termination of this
Agreement for any reason, each Sublicense shall terminate without the necessity
of any notice or other communication from ARCH to the sublicensee. ARCH agrees
to negotiate in good faith for a period of ninety (90) days following the
termination of this Agreement with each sublicensee under any Sublicense which
is by its own terms in force and good standing upon the termination of this
Agreement, for a license from ARCH of those rights subject to the Sublicense, on
terms substantially comparable to those set forth in the Sublicense and this
Agreement, provided that nothing herein shall be deemed to extend any sublicense
beyond its original term unless specifically agreed to by ARCH.
2.5. Technical Information. ARCH agrees to use its good faith efforts to
---------------------
obtain access for Licensee to laboratory notebooks and other technical
information in the possession of ANL related to the Licensed Patent Rights in
connection with Licensee's use of the Licensed Patent Rights.
ARTICLE
3.
PAYMENTS
--------
3.1. Cash Royalties. For the licenses granted in Section 2.1 of this
--------------
Agreement, Licensee shall pay ARCH:
(a) promptly upon execution of this Agreement, a Licensing Fee in the
amount of *, which shall be non-refundable under any and all circumstances; and
(b) (i) a royalty equal to * of Net Sales of Licensed Products or
Processes, other than Licensed Products or Processes sold as an element of a
Combination Product, sold by Licensee or any of its Affiliates in each
jurisdiction in which a patent under the Licensed Patent Rights exists or in
which a patent application under the Licensed Patent Rights is pending; and
(ii) a royalty equal to * of Net Sales of Licensed Products or
Processes sold as an element of a Combination Product sold by Licensee or any of
its Affiliates in each jurisdiction in which a patent under the Licensed Patent
Rights exists or in which a patent application under the Licensed Patent Rights
is pending; and
(iii) a royalty equal to * of Net Sales received by Licensee or any
of its Affiliates with respect to Resulting Sequences and Resulting Products in
each jurisdiction in which a patent under the Licensed Patent Rights exists or
in which a patent application under the Licensed Paten Rights is pending,
provided, however, that if Licensee receives consideration (whether such
consideration is cash, securities, or otherwise) in addition to or in lieu of
Net Sales revenue on Resulting Sequences or Resulting Products, a royalty equal
to * of the aggregate of such consideration, in form and substance the same as
such consideration (e.g., if Licensee
5
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
receives securities as consideration for Resulting Sequences or Resulting
Products, Licensee shall make ARCH the beneficial owner of * of such
securities); and
(c) a royalty equal to the greater of: (i) * of all payments received by
Licensee or any of its Affiliates with respect to any Sublicenses from any
sublicensee other than an Affiliate, regardless of whether such payments-are
denominated as fees, royalties or otherwise; or (ii) * of Net Sales of Licensed
Products or Processes sold by any sublicensee in each jurisdiction in which a
patent under the Licensed Patent Rights exists or in which a patent application
under-the Licensed Patent Rights is pending.
All Royalties paid to ARCH pursuant to this Section 3.1 shall be non-refundable
under any and all circumstances.
3.2. Stock Payment. For the licenses granted in Section 2.1 of this
-------------
Agreement, Licensee shall also pay ARCH the sum of * by issuing to ARCH, without
separate consideration and free and clear of all claims, liens and other
encumbrances, (a) simultaneously with and as a part of the consummation of the
sale by Licensee of Equity Securities, or (b) if Equity Securities are not sold
within one year after execution of this Agreement, on the anniversary of the
execution of this Agreement, * in aggregate purchase price of Equity Securities,
at the same price and otherwise on the same terms as the Equity Securities are
issued and sold, or were last issued and sold, to the other purchasers of such
Equity Securities. ARCH shall have all the same rights and privileges, and shall
be subject to the same obligations and limitations, as a purchaser of Equity
Securities as all other purchasers of Equity Securities. Licensee's obligation
to issue Equity Securities to ARCH under this Section shall be contingent only
on the execution and delivery by ARCH of the same agreements and other documents
required to be executed by all other purchasers of Equity Securities.
3.3. Minimum Royalties. If (i) the total Royalties paid to ARCH pursuant to
-----------------
Sections 3.1(b) and 3.1(c) for the calendar quarters set forth below are less
than the amounts ("Quarterly Targets") set forth next to such periods below and
(ii) Licensee fails to pay to ARCH, in addition to the Royalties paid to ARCH
pursuant to Section 3.1 for that quarter, an amount (the "Minimum Royalty") with
respect to that quarter equal to the difference between the corresponding
Quarterly Target and the Royalty paid to ARCH pursuant to Section 3.1 with
respect to that quarter, then ARCH may terminate this Agreement at any time
after the date that the Royalties and any Minimum Royalty are payable with
respect to that quarter, on thirty (30) days written notice to Licensee.
The Quarterly Targets to which Minimum Royalties apply as set forth in this
Section 3.3 are as follows:
Quarters Beginning Quarterly Target
July 1, 1997 through April 1, 1998 *
July 1, 1998 through April 1, 1999 *
July 1, 1999 and thereafter *
6
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
3.4. Research and Development Expenditure. Licensee agrees to fund, directly
------------------------------------
or indirectly with or through strategic alliances, joint ventures and other
entities, including without limitation application of matching funds or grants
provided by governmental or quasi-governmental agencies or entities, research
and development work; directed to the demonstration and further development of
the Inventions in the following amounts in the following periods:
(a) not less than * not later than June 30, 1995; and
(b) not less than * (including the amounts referred to in Section 3.4(a))
not later than June 30, 1996; and
(c) not less than * (including the amounts referred to in Sections 3.4(a)
and 3.4(b)) not later than June 30, 1997; and
(d) not less than * (including the amounts referred to in Sections
3.4(a), 3.4(b) and 3.4(c)) not later than June 30, 1998.
Licensee agrees to give consideration to the performance of each aspect of the
work described above at ANL, taking into account the resources and capacities of
ANL relevant to the work. Any such work will be performed by ANL pursuant to
agreements to be negotiated in good faith between ANL and Licensee.
3.5. *
3.6. Reduction in Royalties. Licensee shall have the right to reduce
----------------------
Royalties and Minimum Royalties due under this Agreement by one of two
alternatives: (a) by royalties paid by Licensee to third parties which are not
Affiliates of Licensee for licensing patent claims which may be infringed by a
Licensed Product, up to a maximum reduction of *; or (b) by * Reducing Royalties
and Minimum Royalties due by one of the aforementioned alternatives excludes
reduction of Royalties and Minimum Royalties by the other alternative.
3.7. Calculation of Royalties.
------------------------
(a) Royalties shall be calculated on a calendar quarter basis. Payment of
Royalties (and, if applicable, Minimum Royalties) with respect to each calendar
quarter shall be due within forty-five (45) days after the end of each quarter,
beginning with the earlier of (i) the calendar quarter in which the first
commercial sale of Licensed Products or Processes occurs, and (ii) the quarter
for which Minimum Royalties would be due pursuant to Section 3.3 above.
(b) At the same time that it makes payment of Royalties (and, if
applicable, Minimum Royalties) due with respect to a calendar quarter, Licensee
shall deliver to ARCH a true and complete accounting of sales and other
dispositions of Licensed Products or Processes,
7
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
Resulting Sequences and Resulting Products and receipts from those sales and
other dispositions by Licensee, its Affiliates and its sublicensees during the
quarter, with a separate accounting of sales and receipts by country and a
calculation of the Royalty Payment due ARCH for such calendar quarter. If no
sales of Licensed Products or Processes, or Sublicense payments were made in
such quarter then Licensee's statement shall be a statement to such effect.
3.8. Records. Licensee shall keep, and shall cause its Affiliates and
-------
sublicensees to keep, accurate records in sufficient detail to permit the
Royalties payable under this Agreement to be determined. During the term of this
Agreement and for a period of three years following termination of this
Agreement, Licensee shall permit (and shall cause each of its Affiliates and
sublicensees to permit), its books and records regarding its Patent Costs and
the sale and other dispositions of Licensed Products or Processes, Resulting
Sequences and Resulting Products to be examined and copied from time to time, at
the request of ARCH, during normal business hours by ARCH or any representative
of ARCH, and shall require each of its Affiliates and sublicensees to do the
same. Such examination shall be made at ARCH's expense, except that if such
examination discloses a discrepancy of 5% or more in the amount of Royalties due
ARCH, then Licensee shall reimburse ARCH for the cost of such examination,
including any professional fees incurred by ARCH. In connection with any
examination or copying of books or records in accordance with the preceding
sentence, ARCH or such representative of ARCH shall examine only such
information as is required to verify the Licensee's compliance under this
Agreement.
3.9. Foreign Payments. In the event of transactions giving rise to an
----------------
obligation to make a payment hereunder with respect to which Licensee, any of
its Affiliates or any sublicensee receives payment in a currency other than
currency which is legal tender in the United States of America, all payments
required to be made by Licensee under Section 3.1 hereof shall be converted,
prior to payment, into United States dollars at the applicable rate of exchange
of Citibank, N.A., in New York, New York, on the last day of the quarter in
which such transaction occurred.
3.10. Overdue Payments. Payments due to ARCH under this Agreement shall, if
----------------
not paid when due under the terms of this Agreement, bear simple interest at the
lower of 15 % or the highest rate permitted by law, calculated on the basis of a
360 day year for the number of days actually elapsed, beginning on the due date
and ending on the day prior to the day on which payment is made in full.
Interest accruing under this Section shall be due to ARCH on demand. The accrual
or receipt by ARCH of interest under this Section shall not constitute a waiver
by ARCH of any right it may otherwise have to declare a default under this
Agreement or to terminate this Agreement.
3.11. Termination Report and Payment. Within sixty (60) days after the date
------------------------------
of termination of this Agreement, Licensee shall make a written report to ARCH
which report shall state the number, description, and amount of Licensed
Products or Processes, Resulting Sequences and Resulting Products sold or
otherwise disposed of by Licensee, its Affiliates or any sublicensee upon which
Royalties are payable hereunder but which were not previously reported to ARCH,
a calculation of the Net Sales of such Licensed Products or Processes, Resulting
Sequences and Resulting Products, and a calculation of this Royalty payment due
ARCH for such Licensed Products or Processes, Resulting Sequences and
8
<PAGE>
Resulting Products. Concurrent with the making of such report, Licensee shall
make the Royalty payment due ARCH for such period.
3.12. Progress Report. On or before January 30 of each year during the term
---------------
of this Agreement, Licensee shall make a written annual report to ARCH, in such
detail as ARCH may reasonably request, covering the preceding year and
describing newly developed Resulting Sequences and Resulting Products, and the
progress of Licensee toward commercialization of Licensed Products or Processes,
Resulting Sequences and Resulting Products.
ARTICLE
4.
NO WARRANTIES: INDEMNIFICATION
------------------------------
4.1. Disclaimer of Warranties. EXCEPT WITH RESPECT TO A MATERIAL
------------------------
MISREPRESENTATION OR FRAUD BY ARCH IN THIS AGREEMENT, ARCH HEREBY EXPRESSLY
DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND OR NATURE, WHETHER EXPRESS OR
IMPLIED, RELATING TO THE INVENTIONS, THE TECHNICAL INFORMATION, THE LICENSED
PRODUCTS OR PROCESSES, OR LICENSED PATENT RIGHTS. ARCH FURTHER HEREBY EXPRESSLY
DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, OR THAT THE PRACTICE OF THE LICENSED PATENT RIGHTS OR THE
NAMING, USING OR SELLING OF LICENSED PRODUCTS OR PROCESSES WILL NOT INFRINGE ANY
PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OF THIRD PARTIES. Without limiting
the generality of the foregoing, and except with respect to a material
misrepresentation or fraud by ARCH in this Agreement, ARCH expressly does not
warrant (i) the patentability of any of the Inventions, (ii) the accuracy of any
Technical Information or other information contained in the documents attached
hereto as, or (iii) the accuracy, safety, or usefulness for any purpose, of the
Technical Information, Licensed Patent Rights, Inventions, or Licensed Products
or Processes. Nothing contained in this Agreement shall be construed as either a
warranty or representation by ARCH as to the validity or scope of any Licensed
Patent Rights. ARCH assumes no liability in respect of any infringement of any
patent or other right of third parties due to the activities of Licensee, any of
its Affiliates or any sublicensee under this Agreement. Notwithstanding the
foregoing, ARCH hereby expressly represents and warrants to Licensee that ARCH
has full corporate power and authority to enter into this Agreement and to
perform its obligations in accordance with the terms hereof.
4.2. Indemnification.
---------------
(a) None of the University, DOE, any Affiliate other than ARCH of any of
the foregoing or of ARCH, or any trustee, director, officer, employee, agent or
representative of any of the foregoing or of ARCH, or (except with respect to
claims, demands, losses, damages or penalties arising from a material
misrepresentation or fraud by ARCH in this Agreement) ARCH itself (each an
"Indemnified Person") shall have any liability whatsoever to Licensee, any of
its Affiliates, any sublicensee or any other person for or on account of (and
Licensee agrees and
9
<PAGE>
covenants, and agrees to cause each of its Affiliates and sublicensee to agree
and covenant, not to sue any Indemnified Person in connection with) any injury,
loss, or damage, of any kind or nature, sustained by, or any damage assessed or
asserted against, or any other liability incurred by or imposed upon, Licensee,
any of its Affiliates, any sublicensee or any other person, arising out of or in
connection with or resulting from (i) the production, use or sale of the
Licensed Products or Processes by Licensee, any of its Affiliates or its
sublicensees, (ii) the use of any Technical Information or Invention by
Licensee, any of its Affiliates or its sublicensee, or (iii) any advertising or
other promotional activities with respect to either of the foregoing. Licensee
shall indemnify and hold ARCH harmless against all claims, demands, losses,
damages or penalties (including but not limited to attorney's fees at the
pretrial, trial or appellate level) made against any Indemnified Person with
respect to items (i), (ii) and (iii) above (excluding claims made by any third
party alleging the invalidity or challenging the scope of any patent included in
the Licensed Patent Rights), whether or not such claims are groundless or
without merit or basis.
(b) This Agreement is entered into by ARCH independently from the Prime
Contract between the University and DOE. ARCH is acting independently from DOE
and the Government of the United States of America and its own private capacity
and is not acting on behalf of the U.S. Government, nor as its contractor nor
its agent. Correspondingly, it is understood and agreed that the U.S. Government
is not a party to this Agreement and in no manner shall be liable for nor assume
any responsibility or obligation for any claim, cost or damages arising out of
or resulting from this Agreement, the subject matter licensed, or any action or
lack thereof by ARCH, the University, Licensee or any of Licensee's Affiliates
or with respect thereto.
(c) Licensee agrees to list ARCH, at Licensee's expense, as an additional
insured under each liability insurance policy that Licensee, and each of its
Affiliates and sublicensees obtains that includes any coverage of claims
relating to any of the Inventions, Licensed Patent Rights or Licensed Products
or Processes. At ARCH's request, Licensee will supply ARCH from time to time
with copies of each such policy, and will notify ARCH in writing of any
termination of or change in coverage under any such policies.
(d) Licensee's obligations under this Section 4.2 shall survive the
expiration or earlier termination of all or any part of this Agreement.
ARTICLE
5.
PROSECUTION AND MAINTENANCE OF LICENSED PATENT RIGHTS
-----------------------------------------------------
5.1. Prosecution and Maintenance. During the term of this Agreement, and
---------------------------
subject to the provisions of Section 5.3 below, ARCH shall be responsible for
prosecuting and maintaining patents under the Licensed Patent Rights. Except as
otherwise specified in this Agreement, Licensee shall pay when due, or at ARCH's
option reimburse ARCH for, all Patent Costs previously or hereafter incurred by
ARCH with respect to the Licensed Patent Rights, and any Patent Costs for which
ARCH is obligated to reimburse DOE. At Licensee's request, ARCH will provide
Licensee with copies of all official actions and other communications from the
United
10
<PAGE>
States Patent and Trademark Office or any foreign equivalent, received by ARCH
or its patent counsel with respect to patents under the Licensed Patent Rights
and, copies of all filings and draft filings with governmental agencies from
ARCH or its patent counsel with respect to the Licensed Patent Rights.
5.2. Cooperation. Licensee agrees to cooperate with ARCH in the preparation,
-----------
filing, prosecution and maintenance of patents under the Licensed Patent Rights,
by disclosing such information as may be necessary and by promptly executing
such documents as ARCH may reasonably request to effect such efforts. ARCH will
reimburse Licensee for its reasonable out-of-pocket expenses actually incurred
at ARCH's request connection with its cooperation with ARCH under this Section
5.2, excluding time of Inventors. All patents under the Licensed Patent Rights
shall be filed, prosecuted and maintained in ARCH's name or as ARCH shall
designate.
5.3. Licensee Applications.
---------------------
(a) In the event that Licensee wishes to file a patent application with
respect to any of the Inventions in any jurisdiction in which an application has
not already been filed, Licensee shall identify the jurisdiction in writing to
ARCH, and ARCH shall have ninety (90) days after it receives such written notice
in which to file such a patent application. If ARCH declines or fails to file
such a patent application within ninety (90) days after receiving the written
notice, Licensee may, in Licensee's discretion and at Licensee's sole expense
but in ARCH's name, file and prosecute such patent application.
(b) In the event that ARCH determines to abandon a patent application
previously filed with respect to any of the Inventions, it will give Licensee at
least ninety (90) day's prior written notice of its intention to abandon such
application. Licensee may, by written notice to ARCH, elect to continue the
prosecution of the application at Licensee's sole expense but in ARCH's name.
5.4. Confidentiality.
---------------
(a) Both Licensee and ARCH agree to treat (and, in the case of Licensee,
to cause its Affiliates and sublicensees to treat) as confidential all
proprietary information with respect to the Inventions, the Technical
Information or the Licensed Patent Rights made available by ARCH to Licensee or
by Licensee to ARCH, whether such information is in tangible or intangible form;
provided that all information that is in written form or other tangible medium
shall prior to delivery be marked as "Confidential" or "Proprietary," and all
information disclosed orally or otherwise shall be identified as being
"Confidential" or "Proprietary" by a memorandum delivered to the recipient
within sixty (60) days after the date of disclosure. ARCH acknowledges that
Licensee may find it beneficial to disclose such information provided by ARCH
during the conduct of Licensee's business. Under such circumstances, Licensee
may make such information available to third parties, provided that Licensee
shall first obtain from the recipients a fully-executed confidentiality
agreement which is at least as restrictive as the confidentiality agreement
Licensee employs to protect its own most valuable trade secrets.
11
<PAGE>
(b) Neither Licensee nor ARCH shall be bound by the provisions of Section
5.4 with respect to information which (i) was previously known to the recipient
at the time of disclosure; (ii) is in the public domain at the time of
disclosure; (iii) becomes a part of the public domain after the time of
disclosure, other than through disclosure by the recipient or some other third
party who is under an agreement of confidentiality with respect to the subject
information; or (iv) is required to be disclosed by law.
(c) Notwithstanding the provisions of Section 5.4(a), each of ARCH and
the University shall be entitled to make disclosures of information included in
the Technical Information and the Inventions in scholarly journals and
publications where in its reasonable judgment such disclosure will not
materially compromise any proprietary rights to the Inventions otherwise
licensed under this Agreement.
(d) Licensee and ARCH shall each take such actions as the other party may
reasonably request from time to time to safeguard the confidentiality of any
information subject to the terms of this Section 5.4.
(e) To the extent that United State Export Control Regulations are
applicable, neither Licensee nor ARCH shall, without having first fully complied
with such regulations, (i) knowingly transfer, directly or indirectly, any
unpublished technical data obtained or to be obtained from the other party
hereto to a destination outside the United States, or (ii) knowingly ship,
directly or indirectly, any product produced using such unpublished technical
data to any destination outside the United States.
(f) The obligations of Licensee and ARCH under this Section 5.4 shall
survive the expiration or earlier termination of all or any other part of this
Agreement, but all obligations of ARCH and Licensee under this Section 5.4 shall
terminate five (5) years from the last disclosure of confidential information
under this Agreement.
(g) Licensee and ARCH acknowledge that they have entered into that
certain Confidentiality and Non-Use Agreement ("Confidentiality Agreement") a
copy of which is attached hereto as Addendum A. The parties agree that, to the
extent this Agreement conflicts with the terms of the Confidentiality Agreement,
this Agreement shall be binding with respect to the information covered under
the terms of this Article 5.
ARTICLE
6.
INFRINGEMENT
------------
6.1. Notification. In the event that either ARCH or Licensee becomes aware of
------------
the infringement of any patent under the Licensed Patent Rights, each shall
inform the other in writing of all details available.
12
<PAGE>
6.2. Licensee Right to Prosecute.
---------------------------
(a) In the event of infringement by a third party of any patent under the
Licensed Patent Rights, Licensee may enforce the Licensed Patent Rights against
the infringers by appropriate legal proceedings or otherwise, provided that
Licensee shall employ counsel reasonably satisfactory to ARCH and shall inform
ARCH of all material developments in such proceedings. Licensee shall be
responsible for all costs and expenses of any enforcement activities, including
legal proceedings, against infringers. which Licensee initiates. ARCH agrees to
cooperate with and join in any enforcement proceedings at the request of
Licensee, and at Licensee's expense. ARCH may be represented by ARCH's counsel
in any such legal proceedings, at ARCH's own expense (subject to reimbursement
under Section 6.2(c)), acting in an advisory but nor controlling capacity.
(b) The prosecution, settlement, or abandonment of any proceeding under
Section 6.2(a) shall be at Licensee's reasonable discretion, provided that
Licensee shall not have any right to surrender any of ARCH's rights to the
Licensed Patent Rights without agreement by ARCH or to grant any infringer any
rights to the Licensed Patent Rights other than a sublicense subject to the
conditions which would apply to the grant of any other sublicense.
(c) All recoveries by way of royalties, damages and claims with respect
to infringement actions instituted, and claims made (including penalties and
interest), during the term of this Agreement, excluding any prosecuted by ARCH
under Section 6.3, shall belong to Licensee. To the extent that Licensee's
recoveries with respect to an infringement action or claim exceed Licensee's
reasonable expenses with respect to such action or claim, Licensee shall
reimburse ARCH for ARCH's reasonable expenses for separate representation as
provided in Section 6.2(a) with respect to such action or claim. After deduction
of Licensee's costs and expenses, including reasonable attorneys fees incurred
with respect to such action or claim, any such recoveries shall be considered
Net Sales under this Agreement, giving rise to Royalty obligations under Section
3.1(c).
6.3. ARCH Right to Prosecute. In the event of infringement by a third party
-----------------------
of any Licensed Patent Rights which ARCH wishes to prosecute, ARCH shall first
make a written request that Licensee proceed. In the event that Licensee fails
or declines to proceed within thirty (30) days after receipt of a written
request by ARCH to do so, then, in ARCH's sole discretion, (i) ARCH may
prosecute the infringer in the name of ARCH or Licensee, and (ii) (subject to
Licensee's right to reimburse ARCH for all costs and expenses of the prosecution
then incurred and thereupon to assume such prosecution) the grant of license to
Licensee may become non-exclusive to allow ARCH the right to grant to the
infringer a non-transferable license without right to sublicense. Any actions by
ARCH pursuant to this clause shall be ARCH's own expense, and ARCH may collect
and retain for ARCH's own use any and all recoveries in any proceeding by ARCH
under this Section 6.3. Recoveries collected and retained by ARCH under this
Section 6.3 shall not be considered Net Sales or give rise to royalty
obligations under Article 3. Licensee will cooperate with ARCH and execute any
documents necessary for ARCH to exercise ARCH's rights under this clause. To the
extent that ARCH's recoveries with respect to an infringement action or claim
exceed ARCH's reasonable expenses with respect to such action
13
<PAGE>
or claim, ARCH shall reimburse Licensee for Licensee's reasonable costs in
connection with cooperating with ARCH in the prosecution of such action or
claim.
ARTICLE
7.
TERMINATION
-----------
7.1. ARCH Right to Terminate. ARCH shall have the right (without prejudice
-----------------------
to any of its other fights conferred on it by this Agreement) to terminate this
Agreement if Licensee (or, with respect to Section 7.1(d) below, any of its
Affiliates):
(a) is in default in payment of Royalties or making of reports, and
Licensee fails to remedy any such default within ten (10) days after written
notice thereof by ARCH;
(b) is in breach of any other provision of this Agreement, and Licensee
fails to remedy any such default within thirty (30) days after written notice
thereof by ARCH;
(c) makes any materially false report; or
(d) shall commence a voluntary case as a debtor under the Bankruptcy Code
of the United States or any successor statute (the "Bankruptcy Code"), or if an
involuntary case shall be commenced against Licensee under the Bankruptcy Code
and the petition in such case is not dismissed within 45 days of the
commencement of the case, or if an order for relief shall be entered in such
case, or if the same or any similar circumstance shall occur under the laws of
any foreign jurisdiction.
7.2. Licensee Right to Terminate. Licensee shall have the right (without
---------------------------
prejudice to any of its other rights conferred on it by this Agreement) to
terminate this Agreement at any time by written notice to ARCH, given at least
ninety (90) days prior to the termination date specified in the notice.
7.3. Effect of Termination.
---------------------
(a) In the event of the termination of this Agreement for any reason,
whether by Licensee or ARCH, Licensee shall immediately cease and shall cause
each of its Affiliates to immediately cease using, making, having made and
selling the Inventions, the Technical Information, and any Licensed Products or
Processes derived therefrom, and shall return to ARCH, or deliver as ARCH
directs, the Inventions, the Technical Information. and all such Licensed
Products or Processes then in its possession.
(b) Notwithstanding the termination of this Agreement, the following
provisions of this Agreement shall survive:
(i) Licensee's obligation to pay Royalties accrued or accruable;
14
<PAGE>
(ii) Licensee's obligations under Sections 3.8 through and
including 3.12, Article 4, Sections 5.1, 5.2, 5.4 and, to the extent
proceedings have been initiated, Section 6.2, and this Section 7.3(b),
and the rights granted to ARCH and the University pursuant to Section
2.2(b); and
(iii) any cause of action or claim of Licensee or ARCH, accrued or
to accrue. because of any breach or default by the other party.
7.4. Expiration of Patent Rights. This Agreement shall terminate as to each
---------------------------
jurisdiction, and except as otherwise provided in Section 7.3(b), upon the later
to occur of (a) fifteen years after the date of this Agreement or (b) the
expiration of the last-to-expire patents of the Licensed Patent Rights in that
jurisdiction, provided in either case that ARCH's and Licensee's obligations
under Sections 4.2 and 5.4 shall survive and continue in effect as provided in
such Sections.
ARTICLE
8.
ADVERTISING
-----------
Each party agrees not to use the name of the other party in any product or
service, marketing, advertising or sales brochures except with the prior written
consent of the other party, which such consent may be granted or withheld in
such party's sole and complete discretion. Licensee agrees not to use, and shall
prohibit its Affiliates and sublicensees from using, the name of DOE, the
University, ANL or any of the inventors of the Inventions (unless such inventors
are employees of Licensee at the time of such use or Licensee otherwise has the
consent of such inventor) with regard to the Licensed Patent Rights and
Inventions in any commercial activity, product or service, marketing,
advertising or sales brochures, in each case except as such entity shall
otherwise agree in writing.
ARTICLE
9.
MISCELLANEOUS
-------------
9.1. Assignment.
----------
(a) This Agreement may, at any time and upon sixty (60) days prior notice
to Licensee, be assigned by ARCH without such assignment operating to terminate,
impair or in any way change the obligations or rights which ARCH would have had,
or any of the obligations or rights which Licensee would have had, if such
assignment had not occurred. From and after the making of such assignment, the
assignee shall be substituted for ARCH as a party hereto, and ARCH shall no
longer be bound hereby.
(b) This Agreement shall not be assigned by Licensee without the prior
written consent of ARCH except to a wholly-owned subsidiary of Licensee or to
the successor or assignee of substantially all of its business related to
Licensed Products or Processes.
15
<PAGE>
9.2. Entire Agreement. Amendment and Waiver. This Agreement (including any
--------------------------------------
schedules and exhibits attached) contains the entire understanding of the
parties with respect to the subject matter hereof. This Agreement may be
amended, modified or altered only by an instrument in writing duly executed by
the parties hereto. The waiver of a breach hereunder may be effected only by a
writing signed by the waiving party and shall not constitute a waiver of any
other breach.
9.3. Notices. Any notice or report required or permitted to be given or made
-------
under this Agreement by one of the parties hereto to the other shall be in
writing and shall be given by personal delivery or by United States registered
or certified mail, return receipt requested, addressed as follows:
If to ARCH: ARCH Development Corporation
1101 East 58th Street, Suite 213
Chicago, Illinois 60637
Attention: President
with a copy to:
Thomas M. Fitzpatrick, Esq.
Fitzpatrick Eilenberg & Zivian
20 North Wacker Drive, Suite 2200
Chicago, Illinois 60606
If to Licensee: Hyseq, Inc.
670 Almanor Avenue
Sunnyvale, California 94086
Attention: Lewis S. Gruber, Chief Executive Officer
with a copy to:
Misty S. Gruber, Esq.
Shefsky & Froelich Ltd.
444 North Michigan Avenue, Suite 2500
Chicago, Illinois 60611
or to such other address of which the intended recipient shall have notified the
sender by a written notice given in accordance with the terms of this Section
9.3. Any notice under this Agreement shall be effective when received.
9.4. Severability. In the event that any one or more of the provisions of
------------
this agreement should for any reason be held by any court or authority having
jurisdiction over this Agreement, or either of the parties hereto, to be
invalid, illegal or unenforceable, such provision or provisions shall be
reformed to approximate as nearly as possible the intent of the parties, and the
validity of the remaining provisions shall not be affected.
16
<PAGE>
9.5. Governing Law. The interpretation and performance of this Agreement
-------------
shall be governed by the laws of the State of Illinois in the United States of
America applicable to contracts made and to be performed in that state.
9.6. Marking. Licensee shall place in a conspicuous location on any Licensed
-------
Product (or its packaging where appropriate) made or sold under this Agreement,
a patent entire in accordance with the laws concerning the marking of patented
articles.
9.7. United States Manufacture. Unless DOE shall agree otherwise, Licensee
-------------------------
agrees that Licensed Products or Processes for sale in the United States of
America will be manufactured substantially in the United States of America, and
further agrees that it will not grant any exclusive sublicenses under this
Agreement unless the sublicensee agrees that any Licensed Products or Processes
for sale in the United States of America will be manufactured substantially in
the United States of America.
9.8. Implementation. Each party shall, at the request of the other party,
--------------
execute any document reasonably necessary to supplement the provision of this
Agreement.
9.9. Counterparts. This Agreement may be executed in multiple counterparts,
------------
each of which when taken together shall constitute one and the same instrument.
9.10. Signatures. Facsimile signatures shall be sufficient for purposes of
----------
executing and finalizing this Agreement.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers or representatives on the
date first above written.
ARCH: ARCH DEVELOPMENT CORPORATION,
an Illinois not-for-profit corporation
By: /s/ Thomas M. Fitzpatrick
----------------------------------------
Thomas M. Fitzpatrick, Secretary and
General Counsel
Licensee: HYSEQ, INC., a Nevada corporation
By: /s/ Lewis S. Gruber
----------------------------------------
Lewis S. Gruber, Chief Executive
Officer and President
18
<PAGE>
[LETTERHEAD OF SMITHKLINE BEECHAM APPEARS HERE]
June 6, 1997
VIA FACSIMILE - 408/524-8141
- -------------
VIA CERTIFIED MAIL
- ------------------
Dr. Louis Gruber
President and Chief Executive Officer
Hyseq Diagnostics, Inc.
670 Almanor Avenue
Sunnyvale, CA 94086
RE: LICENSE AGREEMENT BY AND BETWEEN HYSEQ DIAGNOSTICS, INC. AND
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. DATED SEPTEMBER
25, 1995 (THE "AGREEMENT")
Dear Louis:
This letter confirms the discussions we had with your staff earlier
this week in which you advised, on behalf of Hyseq Diagnostics, Inc. ("HDI"),
that HDI has agreed to extend through and including October 7, 1997, the date
by which SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") must notify
HDI whether it has elected to accept the Proof of Concept, as defined in the
Agreement, or terminate the License Agreement in accordance with Section
9.6(a) thereof.
I look forward to continuing our work together.
Very truly yours,
/s/ Michael B. McNulty
--------------------------------
Michael B. McNulty
VP Business Development
cc: Misty Gruber, Esquire (via facsimile - 312/527-3194)
Wayne Wecksler, Ph.D.
Mr. Patrick McKay
John Okkerse Ph.D.
<PAGE>
EXHIBIT 10.6
LICENSE AGREEMENT
-----------------
THIS LICENSE AGREEMENT (the "Agreement") dated September 25, 1995, between
Hyseq Diagnostics Inc., a Nevada corporation with a principal place of business
at 670 Almanor, Sunnyvale, California 94086 ("HDI") and SmithKline Beecham
Clinical Laboratories, Inc., a Delaware corporation with a principal place of
business at 1201 S. Collegeville Road, Collegeville, PA 19426 ("SBCL").
BACKGROUND
----------
1. HDI is a diagnostic company involved in the research and development
of new technologies that has developed certain Technology, as more particularly
described in Appendix A attached hereto and incorporated herein by reference,
and Know-how relating to the Technology.
2. HDI has the right to grant licenses as described herein to use the
Technology.
3. SBCL is a clinical laboratory that performs various laboratory tests
for the purpose of providing information for the diagnosis, prevention and
treatment of disease and the assessment of medical conditions, including testing
samples of human specimens to identify genetic diseases.
4. SBCL desires to obtain a non-exclusive license from HDI in the Field
in the Territory, as defined herein, to use, promote, commercialize, market and
sell the services of performing clinical laboratory tests, using the Technology
and Know-how, to assay patient samples for clinical diagnostic purposes.
5. SBCL also desires that HDI make certain Developments and develop
certain technologies as described herein.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
contained herein and intending to be legally bound, HDI and SBCL agree as
follows:
1.0 DEFINITIONS
-----------
1.1. Wherever the following terms are used in this Agreement, they shall
have the meaning specified below:
a. "Affiliates" shall mean any corporation, firm, partnership or
other entity or person, whether de jure or de facto, which directly or
indirectly owns, is owned by or is under common ownership with a party to this
Agreement to the extent of at least fifty percent (50%) of the equity (or such
lesser percentage which is the maximum allowed to be owned by a foreign
* CERTAIN INFORMATION IN THIS AGREEMENT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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corporation in a particular jurisdiction) having the power to vote on or direct
the affairs of the entity.
b. "Patents" shall mean any and all patents issued or granted
throughout the Territory which are or become owned by HDI or pursuant to which
HDI otherwise has, now or in the future, the right to grant licenses, which
generically or specifically include within the scope of a claim the Technology
in the Field including components or processes for manufacturing a component
required for carrying out the Technology in the Field. Included within the
definition of Patents are all continuations, continuations-in-part, divisions,
patents of addition, reissues, renewals or extensions thereof and all
Supplementary Protection Certificates where applicable. Also included within the
definition of Patents are any patents which generically or specifically claim
any reagents, processes, improvements or manufacturing processes required for
carrying out the Technology in the Field licensed to SBCL under this Agreement
which are developed by HDI, or which HDI otherwise has the right to grant
licenses, now or in the future, during the term of this Agreement. The current,
attached list of Patents is set forth in Appendix B attached hereto and
incorporated herein by reference which will be updated by HDI as necessary from
time to time.
c. "Know-how" shall mean all present and future proprietary
technical information and know-how owned or controlled by HDI which is required
for the practice of the Technology in the Field in the Territory including,
without limitation, biological, chemical, pharmacological, toxicological,
clinical, assay, control and manufacturing data and any other information
relating to such physical components of the Technology and useful for the
development and commercialization of the Technology.
d. "Technology" shall mean the Format 1 Sequencing by Hybridization
technology described in Appendix A.
e. "Territory" *.
f. "Field" shall mean the service of performing any diagnostic test
by means of Sequencing by Hybridization for use on patient samples in diagnosing
actual human genetic diseases and human predisposition to genetic diseases,
including cancer, wherein labeled nucleic acid probes are applied in solution to
unlabeled patient nucleic acid samples directly bound to a substrate *.
g. "Net Sales" shall mean gross billings from the sale to third
parties of the Services using Technology licensed pursuant to this Agreement (or
the fair market value of any non-monetary consideration which SBCL agrees to
receive in exchange for the Services) by SBCL, or its respective Sublicensees or
Affiliates (provided that, if sales by Sublicensees or Affiliates are included
in gross billings, sales between or among SBCL and its respective Sublicensees
or Affiliates, as applicable, shall be excluded from gross billings), less the
following deductions to the extent such amounts offset amounts included in gross
billings, it being understood that bad debt expense shall be based on an
estimated provision for bad debts determined in accordance with methods
generally used by SBCL to calculate bad debts, and it
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being further understood that if and to the extent recoveries of bad debt are
made, that the amount of such recoveries will be included in gross billings or
otherwise credited to Net Sales:
(i) all discounts or rebates which are not used to offset other
product or service revenues received by or to promote other products or services
offered by SBCL, its Sublicensees or its Affiliates;
(ii) disallowances by any third party payor which are not part of a
general disallowance or payment for the test or tests of its type;
(iii) all sales adjustments, credits or refunds;
(iv) bad debt expense; and
(v) any sales and/or use taxes and/or duties imposed upon such
sales or billings.
h. "Proof of Concept" shall mean the demonstration of the efficacy
of the Technology, in accordance with the procedures set forth in Appendix C
attached hereto and incorporated herein by reference.
i. "License Fee" shall mean the fee paid by SBCL to HDI for the
license of the Technology, pursuant to Section 3.1.
j. "Proof of Concept Fee" shall mean the non-refundable fee paid by
SBCL to HDI pursuant to Section 3.2, *.
k. "Royalty" shall mean the additional payments set forth in Section
3.3 that SBCL shall pay to HDI for the license and use of the Technology in
accordance with this Agreement.
l. "Developments" shall mean, without limitation, *.
m. "Developments Fee" shall mean *.
n. "Target Date" shall mean *.
o. "Service" shall mean the performance of a particular test or
assay using Technology in the Field in the Territory licensed pursuant to this
Agreement developed by or for SBCL which is used or offered for sale by SBCL or
its respective Sublicensees or Affiliates.
p. "Sublicensees" shall mean those sublicensees of SBCL as permitted
by Section 2.1.
q. *
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r. *
2.0 LICENSE AND APPOINTMENT
-----------------------
2.1 Subject to the provisions of this Agreement, HDI hereby grants to SBCL
a nonexclusive license in the Field in the Territory under Patents and Know-how,
with the right to grant sublicenses as provided below, to use, promote,
commercialize, market and sell Services using the Technology in the Field in the
Territory. SBCL may sublicense its rights under this Agreement only with the
consent of HDI, which consent shall be in the sole discretion of HDI, to
Sublicensees that agree to be bound by the terms of this Agreement by signing a
counterpart agreement with HDI and agreeing to use the Technology and Know-how
for purposes permitted by this Agreement. This license also shall include the
right to make any reagents or use any processes required for carrying out the
Technology in the Field which, but for this license, would infringe an
enforceable claim of the Patents in the Territory.
2.2 The license granted to SBCL by HDI pursuant to this Section 2 permits
SBCL to use, promote and commercialize the Technology in the Field, and to
market and sell Services in the Territory in the Field for use, without
limitation, in clinical laboratories *.
2.3 Subject to the provisions of this Agreement, SBCL and HDI each grants
to the other a royalty-free, non-exclusive license under any patent issuing on
an invention under Section 7.1. and the right to grant sublicenses under such
license. This license shall include the right to make any reagents or use any
processes in carrying out the Technology which, but for this license, would
infringe an enforceable claim of the patent. This license shall remain in effect
until termination of this Agreement. Any benefit, including monetary payments
received by SBCL or HDI from sublicensing any patent owned solely by the other
or equally by SBCL and HDI shall be shared equally between SBCL and HDI;
provided, however, that SBCL shall not be obligated to share any monetary
payments received from sublicensees if SBCL is paying a License Fee or Royalties
to HDI under this Agreement for SBCL's own use of the Technology in the Field in
the Territory.
3.0 LICENSE FEE AND ROYALTY
-----------------------
3.1 In consideration for the license for the rights and privileges under
Section 2 of this Agreement, SBCL shall pay HDI a License Fee in the total
amount of *
a. *
b. *
3.2 *
4
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3.3 In addition to the License Fee and Proof of Concept Fee, SBCL also
shall pay HDI a Royalty on Net Sales of all Services sold by SBCL, as follows:
a. *
b. *
c. *
*
3.4 a. SBCL, in its discretion, may request that HDI perform the
Developments and, if SBCL does so request and HDI, in its sole discretion
accepts, shall pay to HDI a Developments Fee equal to HDI's cost of
consultation, test construction and development of non-isotopic detection with
supporting informatics for sequence determination, storage and retrieval of
results and comparison of results to a library of known mutations and any other
Developments in the Field as requested by SBCL to tailor the Technology to the
requirements of SBCL. Such Developments shall be based upon a plan and budget
agreed to by the parties. SBCL shall pay HDI *.
b. Notwithstanding the foregoing, nothing herein shall obligate SBCL
to request that HDI perform the Developments or pay HDI any amount of the
Developments Fee if Developments work is not requested. Further, nothing herein
shall obligate HDI to perform Developments work for SBCL beyond the amount of
the Developments Fee.
c. SBCL shall have the right to periodic review of the Developments
work by HDI to ensure progress by HDI on the Developments and confidentiality of
the Developments.
d. SBCL acknowledges that all Developments requested *.
e. *
f. Information and materials concerning the Developments requested
by SBCL and all Developments performed by HDI for SBCL shall be kept
confidential by HDI in accordance with Section 6 of this Agreement.
3.5 HDI shall credit the amount of the paid License Fee and the
Developments Fee against the Royalty.
4.0 COMPULSORY LICENSE; RIGHT OF FIRST REFUSAL
------------------------------------------
4.1 In the event that a governmental agency in any country or territory
grants or compels HDI to grant a license to any third party for the Technology,
SBCL shall have the
5
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<PAGE>
benefit in such country or territory of the terms granted to such third party to
the extent that such terms are more favorable to the third party than those of
this Agreement.
4.2 HDI agrees that SBCL shall have a right of first refusal with respect
to an exclusive license for all rights to the Technology in the Field in the
Territory. SBCL shall have sixty (60) days after completion of the Proof of
Concept to determine whether it wishes to exercise its right of first refusal.
If SBCL decides to exercise its right, it shall so notify HDI. Unless otherwise
agreed by SBCL and HDI, the right of first refusal shall expire if the principal
terms of the exclusive license are not agreed to in principle within ninety (90)
days after completion of the Proof of Concept.
5.0 STATEMENTS AND REMITTANCES
--------------------------
5.1 Royalties shall be calculated on a quarterly basis. Payment of
Royalties with respect to each calendar quarter shall be due within forty-five
(45) days after the end of each quarter, beginning with the calendar quarter in
which the first sale of a Service occurs. SBCL shall notify HDI promptly, in
writing, of the identity of the Services when they become commercially available
and the date of the first sale of a Service.
5.2 *
5.3 At the same time that it makes payment of Royalties due with respect
to a calendar quarter, SBCL shall deliver to HDI a true and complete accounting
of Net Sales and other dispositions of Services sold by SBCL and receipts from
those Net Sales and other dispositions by SBCL, and its Sublicensees and
Affiliates during the quarter, with a separate accounting of Net Sales and
receipts by country and a calculation of the Royalty due HDI for such calendar
quarter (less the credits allowed by Section 3.5). If no sales of Services were
made in any such quarter then SBCL's statement shall be a statement to such
effect.
5.4 SBCL shall keep, and shall cause its Sublicensees and Affiliates to
keep, accurate books and records in sufficient detail to permit the Royalties
payable under this Agreement to be determined and audited. During the term of
this Agreement and for a period of one year following termination of this
Agreement, SBCL shall permit (and shall cause each of its Sublicensees or
Affiliates to permit), its books and records regarding its sales and other
dispositions of to be examined and copied from time to time, at the request of
HDI, during normal business hours by HDI or any representative of HDI, and shall
require each of its Sublicensees and Affiliates to do the same; provided,
however, that such examination shall not take place more often than once a year
and shall not cover such records for more than the preceding two (2) years. Such
examination shall be made at HDI's expense, except that if such examination
discloses a discrepancy *. In connection with any examination or copying of
books or records in accordance with the preceding sentence, HDI or such
representative of HDI shall examine only such information as is required to
verify compliance by SBCL, its Sublicensees and Affiliates under this Agreement.
This representative shall treat all relevant matters as confidential pursuant to
Section 6 of this Agreement and should be acceptable SBCL. SBCL may require
that this representative be an independent Certified Public Accountant.
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THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
5.5 In the event of transactions giving rise to an obligation to make a
payment hereunder with respect to which SBCL, or any of its Sublicensees or
Affiliates receives payment in a currency other than currency which is legal
tender in the United States of America, all payments required to be made by SBCL
to HDI shall be converted, prior to payment, into United States dollars at the
applicable rate of exchange of Citibank, N.A., in New York, New York, on the
last day of the quarter in which such transaction occurred.
5.6 Payments due to HDI under this Agreement, if not paid when due under
the terms of this Agreement, shall bear simple interest at the rate of 10% per
annum, calculated on the basis of a 360 day year for the number of days actually
elapsed, beginning on the due date and ending on the day prior to the day on
which payment is made in full. Interest accruing under this section shall be due
to HDI on demand. The accrual or receipt by HDI of interest under this Section
shall not constitute a waiver by HDI of any right it may otherwise have to
declare a default under this Agreement or to terminate this Agreement.
6.0 EXCHANGE OF INFORMATION AND CONFIDENTIALITY
-------------------------------------------
6.1 Promptly after payment of both installments of the License Fee by SBCL
to HDI, HDI shall disclose and supply to SBCL all Know-how required for
performing the Services not already disclosed to SBCL during the negotiations of
this Agreement. Thereafter, HDI shall promptly disclose and supply to SBCL any
further Know-how required for performing the Services developed for SBCL by HDI
which is or may become known to HDI.
6.2 During the term of this Agreement, each party shall promptly inform
the other party of any information that it obtains or develops regarding the
utility and safety of the Technology in the Field. Each party promptly shall
report to the other any information on all serious or unexpected reactions or
side effects related to the utilization of the Technology in the Field.
6.3 Except for documents labeled "Technology Secret" and their content
which SBCL may not disclose to third parties except upon order of a judicial or
administrative body during the term of this Agreement and for five (5) years
thereafter, irrespective of any termination earlier than the expiration of the
term of this Agreement, HDI, Hyseq Inc. ("HI") and SBCL shall not use or reveal
or disclose to third parties any confidential information received from the
other party or otherwise developed by either party in the performance of
activities in furtherance of this Agreement, which information is identified by
either party as confidential, without first obtaining the written consent of the
other party; provided, however, that such confidential information may be
disclosed for securing essential or desirable authorizations, privileges or
rights from governmental agencies, or as required to be disclosed to a
governmental agency or as necessary to file or prosecute Patent applications
concerning the Technology or to carry out any litigation concerning the
Technology; provided, however, that SBCL will consult with HDI prior to such
disclosure. HDI, HI and SBCL shall take reasonable measures to assure that no
unauthorized use or disclosure is made by others to whom access to such
information is granted. This
7
<PAGE>
confidentiality obligation shall not apply to such information which is or
becomes a matter of public knowledge, other than through the action or inaction
of the party to be bound, or is already in the possession of the receiving
party, or is disclosed to the receiving party by a third party having the right
to do so, or is subsequently and independently developed by employees of the
receiving party or Affiliates thereof who had no knowledge of the confidential
information disclosed.
6.4 Subject to Section 6.3, nothing herein shall be construed as
preventing either party from disclosing any confidential information received
from the other to an Affiliate or Sublicensee of such party, provided that
disclosure is required for use of the Technology in the Field and such Affiliate
or Sublicensee has undertaken a similar obligation of confidentiality under this
Agreement with respect to the confidential information.
6.5 All confidential information disclosed by one party to the other shall
remain the intellectual property of the disclosing party. In the event that a
court or other legal or administrative tribunal, directly or through an
appointed master, trustee or receiver, assumes partial or complete control over
the assets of a party to this Agreement based on the insolvency or bankruptcy of
such party, the bankrupt or insolvent party shall promptly notify the court or
other tribunal (i) that confidential information received from the other party
under this Agreement remains the property of the other party and (ii) of the
confidentiality obligations under this Agreement. In addition, the bankrupt or
insolvent party shall, to the extent permitted by law, take all steps necessary
or desirable to maintain the confidentiality of the other party's confidential
information and to insure that the court, other tribunal or appointee maintains
such information in confidence in accordance with the terms of this Agreement.
6.6 No public announcement or other disclosure to third parties concerning
the existence of or terms of this Agreement shall be made, either directly or
indirectly, by any party to this Agreement, except as may be legally required or
as may be required for recording purposes, without first obtaining the approval
of the other party and agreement upon the nature and text of such announcement
or disclosure, unless the disclosure does not identify the other party. The
party desiring to make any such public announcement or other disclosure shall
inform the other party of the proposed announcement or disclosure in reasonably
sufficient time prior to public release, and shall provide the other party with
a written copy thereof, in order to allow such other party to comment upon such
announcement or disclosure. If either party believes it needs to disclose any
information to a third party for the purpose of public offering, merger or
acquisition, it shall submit a request for approval from the other party along
with the information it desires to disclose which approval will not unreasonably
be withheld.
6.7 Neither SBCL nor HDI shall submit for written or oral publication any
manuscript, abstract or the like which includes proprietary and confidential
data or information generated and provided by the other party without first
obtaining the prior written consent of the other party, which consent shall not
be unreasonably withheld. The contribution of each party shall be noted in all
publications or presentations by acknowledgment or co-authorship, whichever is
appropriate.
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<PAGE>
7.0 INVENTIONS, PATENT PROSECUTION AND LITIGATION
---------------------------------------------
7.1 Each party shall have and retain sole and exclusive title to all
inventions, discoveries and know-how relating to the Technology which are made,
conceived, reduced to practice or generated solely by its employees, agents, or
other persons acting under its authority in the course of or as a result of the
performance of its obligations under the Agreement. Each party shall own a *.
Except as otherwise provided in the Agreement, each joint owner may make, use,
license and sell such jointly owned inventions, discoveries and know-how without
the consent of and without accounting to the other joint owner.
7.2 Each party shall promptly notify the other upon the making, conceiving
or reducing to practice of any invention or discovery referred to in Section
7.1. With respect to any such invention,
(i) SBCL shall have the sole right to prepare, file, prosecute,
maintain and extend patent applications, except as provided for below,
concerning all inventions and discoveries made under this Section and owned
wholly by SBCL. SBCL shall have the first right, using in-house or outside
legal counsel selected at SBCL's sole discretion, to prepare, file, prosecute,
maintain and extend patent applications and patents concerning all such
inventions and discoveries made under this Section and owned jointly by SBCL and
HDI in countries of SBCL's choice throughout the world with appropriate credit
to HDI representatives, including the naming of such parties as inventors where
appropriate and in accordance with the relevant legal requirements, for which
SBCL shall bear the costs relating to such activities which occur at SBCL's
request or direction.
(ii) HDI shall have the sole right to prepare, file, prosecute,
maintain and extend patent applications, except as provided for below,
concerning all inventions and discoveries made under this Section and owned
wholly by HDI. HDI shall have the first right, using in-house or outside legal
counsel selected at HDI's sole discretion, to prepare, file, prosecute, maintain
and extend patent applications and patents concerning all such inventions and
discoveries made under this Section and owned in whole by HDI in countries of
HDI's choice throughout the world, for which HDI shall bear the costs.
(iii) If SBCL, prior or subsequent to filing certain patent
applications on any inventions or discoveries which are owned in part by HDI and
in part by SBCL, elects not to file, prosecute or maintain such patent
applications or ensuing patents or certain claims encompassed by such patent
applications or ensuing patents in any country of the Territory, SBCL shall give
HDI notice thereof within a reasonable period prior to allowing such patent
applications or patents or such certain claims encompassed by such patent
applications or patents to lapse or become abandoned or otherwise unpatentable
or unenforceable, and HDI shall thereafter have the right, at its sole expense,
to prepare, file, prosecute and maintain patent applications and patents or
divisional applications related to such certain claims encompassed by such
patent applications or patents concerning all such inventions and discoveries in
countries of its choice throughout the world.
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(iv) If HDI, prior or subsequent to filing certain patent
applications on any inventions or discoveries which are owned in part by HDI and
in part by SBCL, elects not to file, prosecute or maintain such patent
applications or ensuing patents or certain claims encompassed by such patent
applications or ensuing patents that relate to the Technology in the Field in
any country of the Territory, HDI shall give SBCL notice thereof within a
reasonable period prior to allowing such patent applications or patents or such
certain claims encompassed by such patent applications or patents to lapse or
become abandoned or unenforceable, and SBCL shall thereafter have the right, at
its sole expense, to prepare, file, prosecute and maintain patent applications
and patents or divisional applications related to such certain claims
encompassed by such patent applications or patents concerning all such
inventions and discoveries in countries of its choice throughout the world.
(v) The party filing patent applications for jointly owned
inventions and discoveries shall do so in the name of and on behalf of both SBCL
and HDI. Each of HDI and SBCL shall hold all information it presently knows or
acquires under this Section 7.2 which is related to all such patents and patent
applications as confidential subject to the provisions of Section 6.
(vi) The party filing a patent application under the provisions
of this Section 7.2 shall promptly notify the other party of such filing.
7.3 HDI shall have the first right, using in-house or outside legal
counsel selected at HDI's sole discretion, to prosecute, maintain and extend
Patents in existence as of the date of mutual execution of the Agreement or
which claim inventions or discoveries in the Field in the Territory which are
not outlined in Section 7.1, for which HDI shall bear all costs. If HDI elects
not to prosecute or maintain such Patents or certain claims encompassed by such
Patents in countries of its choice throughout the world in HDI's name, HDI shall
give SBCL notice thereof within a reasonable period prior to allowing such
patent applications or patents or such certain claims encompassed by such patent
applications or patents to lapse or become abandoned or unenforceable, and SBCL
shall thereafter have the right, at its sole expense, to prosecute and maintain
patent applications and patents or divisional applications related to such
certain claims encompassed by such patent applications or patents concerning all
such inventions and discoveries in countries of its choice throughout the world.
7.4 HDI and HI warrant that they have disclosed to SBCL the complete texts
of all issued patents and published patent applications filed by HDI or HI which
generically or specifically include within the scope of a claim the Technology
in the Field in the Territory as of the date of this Agreement as well as the
accurate and up-to-date schedule set forth in Appendix B which shows the status
of all active patents throughout the Territory which relate to the Technology,
and further that all information known to them or their patent attorneys
concerning the existence of any interference, opposition, reexamination,
reissue, revocation, nullification or any official proceeding involving an
active patent anywhere in the Territory has been disclosed to SBCL on Appendix B
hereto. HDI will disclose to SBCL's patent attorneys unpublished patent
applications of HDI which generically or specifically include within the scope
of a claim the Technology in the Field in the Territory and related information
so that SBCL's attorneys can
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<PAGE>
advise SBCL management of SBCL's rights. Only SBCL's patent attorneys will see
the HDI patent applications until they are published.
7.5 In the event of the institution of any suit by a third party against
HDI, HI, SBCL or their respective Affiliates or Sublicensees for patent
infringement involving the manufacture, use, sale, distribution or marketing of
the Technology in the Field anywhere in the Territory, the party sued shall
promptly notify the other party, including with such notification reasonable
written detail regarding such claim. SBCL and HDI agree to cooperate with each
other in any proceeding under this Section 7.5, and each agree to participate as
a party to any proceeding initiated under this Section 7.5 in order to settle or
defend the claim as each party shall decide. The settlement or satisfaction of
any claim of patent infringement shall be resolved in a manner consistent with
Section 7.6 hereof. Each party shall bear its own expenses.
7.6 In the event that HDI or SBCL becomes aware of actual or threatened
unlicensed infringement of a claim in the Field under a Patent anywhere in the
Territory which potentially affects the rights relating to Technology licensed
to SBCL under this Agreement, that party shall promptly notify the other party
in writing. HDI shall have the first right but not the obligation to bring, at
its own expense, an infringement action against any third party. If HDI does
not commence a particular infringement action within ninety (90) days of notice
of such infringement, SBCL, after notifying HDI in writing, shall be entitled to
bring such infringement action at its own expense. The party commencing such
action shall have full control over its conduct, including settlement thereof,
subject to Sections 7.7 and 7.8. In any event, HDI and SBCL shall assist one
another and cooperate in any such litigation initiated at the other's request,
at the expense of the requesting party.
7.7 HDI and SBCL shall recover their respective actual out-of-pocket
expenses, or equitable proportions thereof, associated with any litigation or
settlement thereof from any recovery made by any party to the litigation. Any
excess amount shall be shared among SBCL and HDI and any other prevailing
parties to the litigation, with SBCL and HDI each receiving its pro rata share
of any excess damages received.
7.8 The parties shall keep one another informed of the status of and of
their respective activities regarding any litigation or settlement thereof
concerning Technology in the Field, provided that no settlement or consent
judgment or other voluntary final disposition of any suit defended or action
brought by one party pursuant to this Section 7 may be entered into without the
consent of the other party if such settlement would require the non-settling
party to be subject to an injunction or to make a monetary payment or would
adversely affect the non-settling party's patent rights or the non-settling
party's other rights under this Agreement.
7.9 SBCL shall have the right but not the obligation to seek extensions of
the terms of Patents. HDI hereby authorizes SBCL to act as HDI's agent for the
purpose of making any application for any extensions of the term of Patents and,
at SBCL's request, HDI shall provide reasonable assistance therefor to SBCL, at
SBCL's expense.
11
<PAGE>
8.0 TRADEMARKS AND NON-PROPRIETARY NAMES
------------------------------------
8.1 SBCL, at its expense, shall be responsible for the selection,
registration and maintenance of all trademarks and service marks which it
employs in connection with the Services developed with the Technology in the
Territory and shall own and control such trademarks and service marks. Nothing
in this Agreement shall be construed as a grant of rights, by license or
otherwise, to HDI to use such trademarks or service marks for any purpose.
8.2 SBCL, at its expense, shall be responsible for the selection and
registration of non-proprietary names for Technology in the Territory.
9.0 TERM AND TERMINATION
--------------------
9.1 This Agreement shall commence on the date set forth above and shall
continue until royalty obligations shall expire under Section 9.2, unless sooner
terminated as provided in this Agreement.
9.2 SBCL's royalty obligations under Section 3.3 shall expire (i) in each
country of the Territory in which a Patent is in force during the Term of this
Agreement upon the expiration, lapse or invalidation of the last remaining
Patent in such country which claims the Technology in the Field or the Services
sold or (ii) in each country in which a Patent was not granted, upon the date
that Know-how becomes part of the public domain in such country through action
or disclosure by HDI or its licensees other than SBCL or through independent
development by a third party. SBCL's royalty obligations under Section 3.3 also
shall expire in countries of the Territory on the date such royalty payment is
prohibited by applicable law, rule or regulation.
9.3 Notwithstanding any other provision of this Agreement, the termination
of the Agreement under Section 9.1 shall not preclude SBCL or its Sublicensees
or Affiliates from continuing to market Services and to use Know-how throughout
the Territory in the Field without further royalty payments to HDI under this
Agreement. Upon termination of the Agreement under any provision other than
Section 9.1, all use by SBCL of the Technology shall immediately cease, and all
accrued but unpaid amounts under 3.1 to 3.4, if any, shall be paid within thirty
(30) days of such termination.
9.4 If either party fails or neglects to perform covenants or provisions
of this Agreement and if such default is not corrected within thirty (30) days
after receiving written notice from the other party with respect to such
default, such other party shall have the right to terminate this Agreement by
giving written notice to the party in default, provided the notice of
termination is given within six (6) months of the non-defaulting party's actual
knowledge of the default and prior to correction of the default. With regard to
any non-monetary defaults, a reasonable extension of time may be provided if the
defaulting party is making diligent efforts to cure.
12
<PAGE>
9.5 Either party may terminate this Agreement in its entirety if at any
time the other party shall file in any court or agency pursuant to any statute
or regulation of any state or country, a petition in bankruptcy or insolvency or
for reorganization or for an arrangement or for the appointment of a receiver or
trustee of the party or of its assets, or if the other party proposes a written
agreement of composition or extension of its debts, or if the other party shall
be served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall not be dismissed with sixty (60) days after
the filing thereof, or if the other party shall propose or be a party to any
dissolution or liquidation, or if the other party shall make an assignment for
the benefit of creditors.
9.6 a. *
b. *
c. *
d. *
9.7 SBCL may immediately terminate this Agreement in its entirety upon
written notice to HDI at any time should the manufacture, use, sale,
distribution or marketing of the Services using the Technology in the Field
anywhere within the Territory infringe any claim of an enforceable patent owned
by a third party, other than patents relating to PCR technology, or be
prohibited by applicable Federal or state laws, rules, or regulations.
9.8 Notwithstanding the bankruptcy of HDI, or the impairment of
performance by HDI of its obligations under this Agreement as a result of
bankruptcy or insolvency of HDI, SBCL shall be entitled to retain the licenses
granted herein, subject to HDI's rights to terminate this Agreement for reasons
other than bankruptcy or insolvency as expressly provided in this Agreement.
9.9 The failure of either party to terminate this Agreement by reason of
the breach of any of its provisions by the other party shall not be construed as
a waiver of the rights or remedies available for such breach or any subsequent
breach of the terms of provisions of this Agreement.
9.10 Any rights or obligations set forth herein, assessed or accrued prior
to the termination of this Agreement, or which by their intent are meant to
survive termination of this Agreement shall survive any termination of this
Agreement, including, without limitation, Sections 3.1 to 3.5 and Sections 6, 7
and 9.3.
10.0 WARRANTIES
----------
10.1 HDI, HI and SBCL each warrants that it has the right to enter into
this Agreement, and that the execution of this Agreement and the performance by
it of its obligations hereunder will not result in any breach or violation or
default under any indenture, lease, license, or other
13
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
agreement, order or regulation to which it is a party or to which the Technology
might be subject. HI warrants that it will license HDI, with the right to grant
a sublicense to SBCL under this Agreement, any patent in the Territory owned or
controlled by HI which generically or specifically includes within the scope of
a claim the Technology in the Field.
10.2 HDI and HI, including their respective fellows, officers, employees
and agents, makes no representations or warranties that any Patent(s) is or will
be held valid, or that the manufacture, use, sale, or other distribution of any
Service will not infringe upon any patent or other rights not vested in HDI or
HI. HDI and HI do warrant, as of the date of this Agreement, that neither is
aware of any information or knowledge that any Patent is or has been alleged to
be invalid by a third party or that, except for patents covering PCR technology,
third party patents exist or may exist which would be infringed by use of the
Technology in the Field by SBCL. A holding of invalidity or unenforceability of
any Patent, from which no further appeal is or can be taken, shall not affect
any obligation already accrued hereunder, but shall only eliminate Royalties
otherwise due under such Patent from the date such holding becomes final.
10.3 HDI and HI, including their respective fellows, officers, employees
and agents, makes no representations, extends no warranties of any kind, either
express or implied, including but not limited to the implied warranties of
merchantability or fitness for a particular purpose, and assumes no
responsibilities whatever with respect to the use, sale or other disposition by
SBCL or its Affiliates of the Technology.
10.4 The entire risk as to use, offering for sale, sale or other
disposition and performance of the Technology is assumed by SBCL and its
Affiliates. In no event shall HDI, including its fellows, officers, employees
and agents, be responsible or liable for any direct, indirect, special,
incidental, or consequential damages or lost profits to SBCL, its Affiliates or
any other individual or entity regardless of legal theory. The above
limitations on liability apply even though HDI or HI, including their respective
fellows, officers, employees or agents, may have been advised of the possibility
of such damage.
10.5 SBCL shall not, and shall require that its Affiliates do not, make any
statements, representations or warranties or accept any liabilities or
responsibilities whatsoever to or with regard to any person or entity which are
inconsistent with any disclaimer or limitation included in this Section 10.
11.0 LITIGATION
----------
11.1 HDI shall protect the Technology and the Patents in the Field in the
Territory and SBCL's rights under this Agreement from infringement and shall
prosecute infringers when in HDI's judgment such action shall be reasonable,
proper and justified. In the event of infringement during the period of SBCL's
license, if HDI does not undertake all reasonable steps necessary in the
Territory to protect the Technology in the Field or the Patents or SBCL's use
under this Agreement within sixty (60) days after its receipt of written notice
from SBCL of an alleged infringement, SBCL may, at its option:
14
<PAGE>
a. Terminate this Agreement in its entirety by giving thirty (30)
days written notice to HDI; or
b. At its discretion and expense, prosecute or defend any litigation
with respect to the use of the Technology by giving thirty (30) days written
notice to HDI; or
c. Continue to provide Services and to use the Technology in the
Field; provided, however, that until such date as (i) alleged infringement by
the third party ceases; or (ii) a final determination by the Court of Appeals
for the Federal Circuit is rendered regarding infringement, whichever is
earlier, HDI shall use fifty percent (50%) of SBCL's Royalty under Section 3.3
solely to undertake all reasonable steps necessary in the Territory to protect
the Technology in the Field or the Patents or SBCL's use under this Agreement;
provided further, however, that before HDI is restricted from use of fifty
percent (50%) of the Royalty in accordance with this Section, SBCL shall first
obtain an opinion of infringement by the third party from an independent patent
attorney agreed to by SBCL and HDI, which opinion shall be made available to
HDI.
HDI hereby authorizes SBCL to use its name in connection with any
litigation commenced pursuant to Section ll.l(b), without expense to HDI. Any
monetary recovery from such litigation shall be used first to compensate the
party assuming the principal burden of the litigation for its damages and the
costs and expenses of the litigation. Any excess amount received shall be
shared between SBCL and HDI on a 50-50 basis.
12.0 MISCELLANEOUS
-------------
12.1 Notice hereunder shall be deemed sufficient if given by registered
mail, postage prepaid, and addressed to the party to receive such notice at the
address given herein, or such other address as may hereinafter be designated by
notice in writing. All such notices shall be considered as given when mailed
aforesaid:
To SBCL: SmithKline Beecham Clinical Laboratories, Inc.
1201 S. Collegeville Road
Collegeville, PA 19426
Attn.: *
With a copy to: SmithKline Beecham Corporation
Corporate Law Department - FP2230
One Franklin Plaza
200 North 16th Street
Philadelphia, PA 19102
Attn.: *
To HDI or HI: Hyseq Diagnostics, Inc.
670 Almanor
Sunnyvale, CA 94086
15
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
Attn.: Lewis S. Gruber
Chief Executive Officer and President
Facsimile: 408-524-8141
With a copy to: Shefsky & Froelich, Ltd.
444 North Michigan Avenue
Suite 2500
Chicago, IL 60611
Attn: Misty Gruber, Esq.
Facsimile: 312-527-3194
12.2 None of the terms of this Agreement may be waived or modified except
by an express agreement in writing signed by the party against whom enforcement
of such waiver or modification is sought. The failure or delay of either party
in enforcing any of its rights under this Agreement shall not be deemed a
continuing waiver or a modification by such party of such right. The exercises
of one remedy by a party shall not preclude such party from exercising
additional remedies. If one or more of the provisions of this Agreement shall
be found to be illegal or invalid by a court of competent jurisdiction, the
parties shall, if possible, agree on a legal, valid and enforceable substitute
provision which is as similar in effect to the deleted provision as possible.
The remaining portion of the Agreement not declared illegal, invalid or
unenforceable shall, in any event, remain valid and effective for the term
remaining; provided, however, that if a party's rights are materially affected
thereby, such party may terminate this Agreement.
12.3 The relationship created by this Agreement shall be that of
independent contractors and neither party shall have the authority to bind or
act as agent for the other party or its employees or agents, for any purpose.
12.4 Except as provided in this paragraph, neither party may assign any
right or obligation hereunder, except to an Affiliate, without the written
consent of the other, which consent shall not be unreasonably withheld. Any
attempted assignment in violation of this paragraph shall be void.
12.5 This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter herein contained and supersedes any previous
agreements on this subject matter executed by these parties. The parties hereto
may, from time to time during the continuance of this Agreement, modify any of
the provisions of this Agreement only by an instrument duly executed in writing
by all parties herein.
12.6 This Agreement shall be construed and enforced in accordance with the
laws of the Commonwealth of Pennsylvania without reference to its choice of law
principles.
16
<PAGE>
12.7 This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
[ Intentionally left blank ]
17
<PAGE>
13. RECORDING
---------
13.1 SBCL shall have the right, at any time, to record, register, or
otherwise notify this Agreement in appropriate governmental or regulatory
offices anywhere in the Territory, and HDI shall provide reasonable assistance
to SBCL in effecting such recording, registering or notifying.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be
executed by their respective duly authorized representatives on the respective
dates indicated below.
HYSEQ DIAGNOSTICS INC. SMITHKLINE BEECHAM
CLINICAL LABORATORIES, INC.
By: /s/ Lewis S. Gruber By: *
--------------------------------- ---------------------------------
Name: Lewis S. Gruber Name:
-------------------------------- --------------------------------
Title: Chief Executive Officer Title:
--------------------------------- -------------------------------
Date: Date:
-------------------------------- --------------------------------
18
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
[LETTERHEAD OF HYSEQ INC.]
June 3, 1997
Dr. John B. Okkerse, Ph.D.
President
SmithKline Beecham Clinical Laboratories
1201 South Collegeville Road
Collegeville, PA 19426
Dear John;
As you know, Hyseq made biotechnology history by signing three agreements on
Friday. We wanted, and expected, SBCI, would have been the first agreement to
be signed and implemented. Recognizing the value of Hyseq, our three new
partners moved very quickly to assure their access to our technology.
We remain committed to developing a genetic testing platform for SBCI, using
our proprietary SBH technology. However, we need your assistance to complete
the following open items. This summary of our past few conversations and of
our proposed resolutions should ensure understanding of our mutual desire to
develop a genetic testing platform for SBCI, and of what is needed from both
of us to proceed.
. With reference to our prior mutual agreement to extend to June 6, 1997 the
ability of SmithKline Beecham Clinical Laboratories ("SBCL") in its sole
discretion to terminate, after receipt of our proof of concept, the license
agreement between Hyseq and SBCL, dated September 25, 1995 (the "License
Agreement") without cause, we propose the following: EITHER PARTY SHALL
HAVE THE ABILITY TO TERMINATE THE LICENSE AGREEMENT WITHOUT CAUSE AND
WITHOUT ANY OBLIGATION TO THE OTHER PARTY ON THE EARLIER TO OCCUR OF 90
DAYS AFTER A DRAFT OF A PROPOSED NEW LICENSE AGREEMENT SHALL HAVE BEEN
DELIVERED BY SBCL TO HYSEQ OR OCTOBER 6, 1997. IN THE EVENT OF SUCH
TERMINATION, SBCL SHALL IMMEDIATELY INSTRUCT THE ESCROW AGENT TO RETURN TO
SBCL THE ESCROW FUND IN ACCORDANCE WITH SECTION 3.1 OF THE LICENSE
AGREEMENT. THE PARTIES INTEND THIS LETTER TO SUPERSEDE ANY PROVISION OF THE
LICENSE AGREEMENT TO THE CONTRARY.
. Hyseq has requested a document from SBCL (agreement, term sheet, or letter
of understand) stating what SBCL wants Hyseq to perform with regards to the
test observation requested by Dr. Wecksler. We have had conversations
regarding this additional requirement but we do not have an agreement in
place describing the expected outcome, payment understanding, and
expectations following completion of the new requirements. We have
performed work on the assumed requirements but we need an agreement in
place to complete the requirements for Dr. Wecksler's approval.
. We need to agree on terms and conditions of a new collaborations as
discussed earlier. We would like your comments on our April 30 proposal, or
your term sheet for our comments, so we can reach agreement within the
above extension period.
We are available to conference with you and your colleagues on these issues to
expedite our agreements and to sign the proposed extension. We look forward to
completing these open items with you.
Sincerely,
/s/ Lewis S. Gruber
Lewis S. Gruber
President and CEO
cc: Dr. Wayne Wecksler
Mr. Michael McNulty
Mr. Patrick McKay
<PAGE>
EXHIBIT 10.7
HYSEQ, INC.
STOCK PURCHASE AGREEMENT
FOR
SERIES B CONVERTIBLE PREFERRED STOCK
MAY 28, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. SALE AND PURCHASE OF STOCK........................................................................... 1
--------------------------
1.1.Sale and Purchase of Series B Convertible Preferred Stock........................................... 1
1.2.Closings............................................................................................ 1
2. THE COMPANY'S REPRESENTATIONS AND WARRANTIES......................................................... 2
2.1.Organization, Good Standing and Qualification of the Company........................................ 2
2.2.Authorization....................................................................................... 2
2.3.No Conflict with Law or Documents................................................................... 3
2.4.Capital Stock....................................................................................... 3
2.5.Shares and Conversion Shares........................................................................ 4
2.6.Consents and Approvals.............................................................................. 4
2.7.Articles of Incorporation, Certificate of Designation and By-Laws................................... 4
2.8.Subsidiaries........................................................................................ 4
2.9.Compliance with Laws................................................................................ 4
2.10.Financial Statements............................................................................... 5
2.11.Tax Matters........................................................................................ 5
2.12.Agreements Affecting the Company's Capital Stock................................................... 5
2.13.Patents, Trademarks, Proprietary Rights............................................................ 5
2.14.Contracts and Agreements........................................................................... 6
2.15.Litigation, etc.................................................................................... 6
2.16.Title to Properties and Assets; Liens, etc......................................................... 6
2.17.Permits............................................................................................ 6
2.18.Disclosure......................................................................................... 7
2.19.Changes............................................................................................ 7
2.20.Insurance.......................................................................................... 7
2.21.Labor Agreements and Actions....................................................................... 8
2.22.Loans and Advances................................................................................. 8
2.23.Employees.......................................................................................... 8
2.24.Environmental Protection........................................................................... 8
3. PURCHASERS' REPRESENTATIONS AND WARRANTIES........................................................... 9
3.1.Authority........................................................................................... 9
3.2.Place of Business................................................................................... 9
3.3.Purchase Without a View to Distribution............................................................. 9
3.4.Restrictions on Transfer............................................................................ 9
3.5.Additional Representations of the Purchaser......................................................... 10
4. CONDITIONS PRECEDENT TO PURCHASERS' OBLIGATIONS...................................................... 10
4.1.Proceedings and Certain Documents................................................................... 10
4.2.Representations and Warranties...................................................................... 11
4.3.Performance......................................................................................... 11
4.4.Opinion of Counsel to the Company................................................................... 11
4.5.No Proceeding or Litigation......................................................................... 11
4.6.Board Approval...................................................................................... 11
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
4.7.Additional Agreements............................................................................... 11
5. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS.................................................... 12
5.1.Representations and Warranties...................................................................... 12
5.2.Performance......................................................................................... 12
5.3.No Proceeding or Litigation......................................................................... 12
6. COVENANTS OF THE COMPANY............................................................................. 12
6.1.Use of Proceeds..................................................................................... 12
6.2.Properties, Business, Insurance..................................................................... 12
6.3.Financial Statements................................................................................ 13
6.4.Restrictive Agreements Prohibited................................................................... 13
6.5.Compliance with Laws................................................................................ 13
6.6.Keeping of Records and Books of Account............................................................. 13
6.7.Reserve for Conversion Shares....................................................................... 14
6.8.Trust Shares........................................................................................ 14
7. COVENANTS OF THE PURCHASER........................................................................... 14
7.1.Limitations on Purchase of Additional Securities.................................................... 14
8. COMPLIANCE WITH 1933 ACT; RESTRICTIONS ON TRANSFERABILITY OF PREFERRED
STOCK AND CONVERSION SHARES............................................................................. 17
8.1.Compliance with 1933 Act............................................................................ 17
8.2.Restrictive Legend.................................................................................. 17
8.3.Restrictions on Transferability..................................................................... 17
8.4.Procedures on Sale of Stock to Third Parties by the Purchaser....................................... 18
8.5.Termination of Restrictions on Transferability...................................................... 19
8.6.Required Registration............................................................................... 20
9. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS............................................... 20
9.1.Survival............................................................................................ 20
10. MISCELLANEOUS....................................................................................... 20
10.1.Owner of Shares.................................................................................... 20
10.2.Successors......................................................................................... 20
10.3.Finder's Fees...................................................................................... 20
10.4.Governing Law...................................................................................... 20
10.5.Notice............................................................................................. 21
10.6.Entire Agreement................................................................................... 21
10.7.Headings........................................................................................... 21
10.8.Amendment.......................................................................................... 21
10.9.Payment of Expenses................................................................................ 21
10.10.Waiver of Covenants and Agreements................................................................ 21
10.11.Counterparts...................................................................................... 21
10.12.Severability...................................................................................... 21
</TABLE>
-ii-
<PAGE>
EXHIBITS
"A" - Articles of Incorporation
"B" - Certificate of Designation
"C" - By-Laws
"D-1" - Audited Financial Statements - December 31, 1994, 1995 and 1996
"D-2" - Unaudited Financial Statements - March 31, 1997
"E" - Opinion of Counsel to the Company
"G" - Registration Rights Agreement
SCHEDULES
1.1(b) - Shares to be Purchased
1.2 - Closings
2.4 - Certain Options, Warrants and Other Rights
2.12 - Agreements Affecting Company's Capital Stock
2.13 - Patents
2.15 - Litigation
2.18 - Information Statement
2.22 - Loans and Advances
8.4 - List of Prohibited Transferees
-iii-
<PAGE>
STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
this 28th day of May, 1997, by and between HYSEQ, INC. (the "Company"), and The
Perkin-Elmer Corporation (the "East Coast Purchaser") and Chiron Corporation
(the "West Coast Purchaser"). The East Coast Purchaser and the West Coast
Purchaser are sometimes severally referred to herein as the "Purchaser" and
collectively as the "Purchasers."
SECTION 1. SALE AND PURCHASE OF STOCK.
SECTION 1.1. Sale and Purchase of Series B Convertible Preferred Stock
---------------------------------------------------------
(a) By the First Closing Date (as defined in Section 1.2), the
Company, by all requisite corporate action, shall have authorized the issuance
and sale of the maximum number shares of its Series B Convertible Preferred
Stock, par value $.001 per share (the "Preferred Stock"), and Common Stock,
$.001 par value ("Common Stock"), contemplated to be sold pursuant to Section
1.2 hereof. The Preferred Stock shall have the rights, preferences and
privileges set forth in the Amended and Restated Articles of Incorporation as
amended (the "Articles"), and that certain Certificate of Designations,
Preferences and Rights of Series B Preferred Stock (the "Certificate of
Designation" and together with the Articles, the "Authorizing Documents")
authorized by the Company's Board of Directors in accordance with the Articles
and as set forth elsewhere herewith. The Preferred Stock is convertible into
Common Stock on the terms set forth in the Certificate of Designation and the
terms of this Agreement. The shares of Common Stock issuable and issued upon
conversion of the Preferred Stock sold hereunder are referred to herein as
"Conversion Shares."
(b) Subject to the terms and conditions herein set forth, the Company
agrees to sell, issue and deliver to each Purchaser and each Purchaser agrees to
buy from the Company the number of shares set forth under such Purchaser's name
on Schedule 1.1(b) hereto.
SECTION 1.2. Closings.
--------
(a) The purchase and sale of the First Closing Shares with respect to
each Purchaser shall be at a closing (respectively, the "First Closing") set
forth below such Purchaser's name on Schedule 1.2 attached hereto. As used
herein, the term "First Closing Date" shall mean, with respect to each
Purchaser, the date on which the First Closing for such Purchaser takes place.
(b) The purchase and sale of the Second Closing Shares with respect to
each Purchaser shall be at a closing (respectively, the "Second Closing" and,
collectively with the First Closing, the "Closings") set forth below such
Purchaser's name on Schedule 1.2 attached hereto. As used herein, the term
"Second Closing Date" shall mean, with respect to each Purchaser, the date on
which the Second Closing for such Purchaser takes place.
<PAGE>
(c) Each Closing shall take place at the offices of Sachnoff & Weaver,
Ltd., 30 South Wacker Drive, Suite 2900, Chicago, Illinois 60606. At each
Closing, the Company shall deliver to the Purchaser a certificate representing
the number of Shares such Purchaser is purchasing, and the parties will promptly
exchange such other originally executed documents contemplated by this
Agreement. The consideration payable for the foregoing shares shall be paid by
certified or bank cashier's check or wire transfer in New York Clearing House
(next day) funds to the order of the Company's account at the Union Bank in San
Francisco, California. With respect to each Purchaser, the shares of Preferred
Stock to be sold at the First Closing are referred to herein as the "First
Closing Shares" and the shares of Preferred Stock or Common Stock to be sold at
the Second Closing are referred to herein as the "Second Closing Shares" and,
together with the First Closing Shares, as the "Shares."
SECTION 2. THE COMPANY'S REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Purchasers as follows:
SECTION 2.1. Organization, Good Standing and Qualification of the
----------------------------------------------------
Company. The Company is a corporation duly organized, validly existing and in
- -------
good standing under the laws of the State of Nevada and has all requisite
corporate power and authority to own and lease its properties and assets and to
conduct its business as now conducted. The Company is qualified to do business
as a foreign corporation and is in good standing in such states where the
conduct of its business or its ownership or leasing of property requires such
qualification and where the failure to so qualify would have a material adverse
effect on the Company's financial condition.
SECTION 2.2. Authorization. The Company has all requisite corporate
-------------
power and authority to execute and deliver this Agreement, the Registration
Rights Agreement between the Company and each Purchaser (respectively for each
Purchaser, the "Registration Rights Agreement") and to carry out the
transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the Registration Rights Agreements by the
Company have been duly authorized by all requisite corporate action, and this
Agreement and the Registration Rights Agreements have been duly executed and
delivered by the Company and constitute its valid and binding obligations,
enforceable against the Company in accordance with their terms, except as such
enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization
and other similar laws relating to or affecting the enforcement of debtors'
obligations or creditors' rights generally, and except that the availability of
specific performance, injunctive relief or other equitable remedies is subject
to the discretion of the court before which any such proceeding may be brought.
The Company shall obtain any authorization, consent or approval or other action
by, or make any filing with any court or administrative body that may be
required under the applicable federal or state securities laws in connection
with the offer, issuance, sale or delivery of the Shares or Conversion Shares.
2
<PAGE>
SECTION 2.3. No Conflict with Law or Documents. The execution,
---------------------------------
delivery and performance of this Agreement by the Company will not violate any
provision of law, any rule or regulation of any governmental authority, or any
judgment, decree or order of any court binding on the Company, and will not
conflict with or result in any breach of any of the terms, conditions or
provisions of, or constitute a default under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties,
assets or outstanding capital stock of the Company under its Articles, the
Certificate of Designation or By-Laws, or any indenture, mortgage, lease,
agreement or other instrument to which the Company is a party or by which it or
any of its properties is bound.
SECTION 2.4. Capital Stock. The authorized capital stock of the
-------------
Company consists of (i) 3,000,000 shares of Series A Preferred Stock, par value
$.001 per share, of which 2,170,460 shares have been duly and validly issued and
are currently outstanding, fully paid and nonassessable; (ii) 5,000,000
additional shares of preferred stock, par value $.001 per share, including, upon
filing of the Certificate of Designation, 525,210 shares of Series B Preferred
Stock, none of which are currently outstanding; and (iii) 20,000,000 shares of
Common Stock, par value $.001 per share, of which 2,329,540 shares have been
duly and validly issued and are currently outstanding, fully paid and
nonassessable. At the First Closing, the Company shall have reserved 4,514,642
shares of its Common Stock, including 988,600 shares of its Common Stock which
have been reserved for issuance under existing stock option plans and agreements
("Options") of which Options to purchase 727,264 shares are issued and
outstanding; 526,042 shares of its Common Stock which have been reserved upon
exercise of certain outstanding warrants ("Warrants"); and 3,000,000 shares
reserved for issuance upon conversion of the authorized shares of Series A
Preferred Stock, including 2,170,460 shares which have been reserved for
issuance upon conversion of the outstanding Series A Preferred Stock (but
excluding shares which shall have been reserved for issuance upon conversion of
the outstanding Series B Preferred Stock). At each Closing, the Company shall
have reserved for issuance such shares of Common Stock as is then necessary for
issuance upon conversion of all outstanding Series B Preferred Stock. Except as
set forth on Schedule 2.4, there are (i) no preemptive or similar rights to
purchase or otherwise acquire from the Company shares of capital stock of the
Company pursuant to any provision of law, the Articles or By-Laws of the
Company, by agreement or otherwise and (ii) except for the 2,170,460 shares of
Series A Preferred Stock outstanding, no outstanding subscriptions, warrants,
options or other rights or commitments of any character to subscribe for or
purchase from the Company, or obligating the Company to issue, any shares of
capital stock of the Company or any securities convertible into or exchangeable
for such shares. The Company intends to amend its Articles to increase the
number of its authorized shares of Common stock to 50,000,000.
SECTION 2.5. Shares and Conversion Shares. The Shares, when issued
----------------------------
and delivered against payment therefor in accordance with this Agreement, will
be duly and validly issued, fully paid and nonassessable and will have the
rights, preferences and privileges specified in the Articles. The requisite
number of shares of duly authorized and unissued Conversion Shares will have
been duly authorized and reserved for issuance upon the conversion or exercise
of the Preferred Stock, and no further corporate action will be required for the
valid issuance of
3
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shares of Common Stock constituting the Conversion Shares. The Conversion Shares
will, at the time of Closing and thereafter, not be subject to preemptive or
similar rights of any person, and when issued upon conversion of the Preferred
Stock in accordance with this Agreement and the Articles will be duly and
validly issued, fully paid and nonassessable.
SECTION 2.6. Consents and Approvals. Except for filings under Federal
----------------------
and applicable state securities laws, if any, no permit, consent, approval or
authorization of, or declaration to or filing with, any governmental or
regulatory authority or other person, not made or obtained, is required in
connection with the execution or delivery of this Agreement by the Company, the
offer, issuance, sale or delivery of the Shares or Conversion Shares, or the
carrying out by the Company of the other transactions contemplated hereby.
SECTION 2.7. Articles of Incorporation, Certificate of Designation
-----------------------------------------------------
and By-Laws. The copy of the Company's Articles, attached hereto as Exhibit A,
- -----------
is a complete, true and correct copy of such document and is in full force and
effect. The copy of the Certificate of Designation attached hereto as Exhibit B,
is a complete, true and correct copy of such document as it will be in full
force and effect at Closing. The copy of the Company's By-Laws, as amended to
date, attached hereto as Exhibit C, is a complete, true and correct copy of such
document and is in full force and effect.
SECTION 2.8. Subsidiaries. Except for Hyseq Diagnostics, Inc. (the
------------
"Subsidiary"), the Company has no subsidiaries and does not own any equity
interest, directly or indirectly, in any other corporation, partnership, joint
venture or other enterprise or entity. The Company owns all of the outstanding
capital stock of the Subsidiary.
SECTION 2.9. Compliance with Laws. The Company is in compliance with
--------------------
all laws, ordinances, rules and regulations of governmental authorities
applicable to or affecting it, its properties or its business except where
noncompliance would not have a material adverse effect on the Company, and the
Company has not received notice of any claimed default with respect to such
laws, ordinances, rules and regulations.
SECTION 2.10. Financial Statements.
--------------------
(a) The audited financial statements of the Company as of and for the
year ending December 31, 1994, 1995 and 1996 and the unaudited financial
statements of the Company as of and for the three months ending March 31, 1997
are set forth in Exhibits D-1 and D-2 (the "Financial Statements"). Each of
such Financial Statements is accurate and complete in all material respects, is
consistent with the books and records of the Company and has been prepared in
accordance with generally accepted accounting principles, consistently applied,
provided that the unaudited quarterly Financial Statements do not contain
footnote disclosure and are subject to the normal year end adjustments.
4
<PAGE>
(b) The balance sheets included in the Financial Statements reflect
all liabilities and obligations of the Company, whether absolute, accrued,
contingent or otherwise as of the dates thereof, that are of a nature required
to be set forth as a liability on a balance sheet.
SECTION 2.11. Tax Matters. The Company and the Subsidiary have filed
-----------
all Federal, state and other tax returns which are required to be filed (other
than those whose failure to be filed would not have a material adverse effect on
the Company) and have paid all taxes reflected thereon which have become due and
payable and which are not being contested in good faith by appropriate
proceedings. None of such returns nor the Subsidiary has audited for any period,
and neither the Company nor the Subsidiary has received notice that any such
returns will be audited for any period. No deficiency assessment with respect to
or proposed adjustment of the Company's or the Subsidiary's Federal, state,
county or local taxes is pending or, to the best of the Company's knowledge,
threatened. There is no tax lien, whether imposed by any federal, state, county
or local taxing authority, outstanding against the assets, properties or
business of the Company or the Subsidiary.
SECTION 2.12. Agreements Affecting the Company's Capital Stock.
------------------------------------------------
Except for this Agreement and as set forth on Schedule 2.12, there are no
agreements, written or oral, between the Company and any record owner of its
capital stock, or, to the knowledge of the Company among any record owners of
its capital stock, relating to the acquisition, disposition, repurchase,
registration under the federal securities laws, or voting of the capital stock
of the Company.
SECTION 2.13. Patents, Trademarks, Proprietary Rights. Set forth on
---------------------------------------
Schedule 2.13 is a list of patents issued or assigned to the Company. The
Company owns, or has the right to use, and has the right to bring actions for
the infringement of, all patents, trademarks, service marks, trade names,
inventions, technology, know-how, formulae, trade secrets, confidential and
proprietary information, computer software programs, and other intellectual
property necessary for the operation of the Company's business as it is
currently conducted, and no such intellectual property is used pursuant to a
license from a third party or licensed to a third party. Except as permitted by
license, the Company's operation of its business does not, to its knowledge,
infringe on the patents, trademarks, service marks, trade names, copyrights,
trade secrets or other intellectual property of any other person, and no claim
has been made, notice given or dispute arisen concerning such infringement. U.S.
Patent No. 5,202,231 is in full force, has been assigned to the Company free and
clear of all liens, encumbrances and other claims, and is not subject to any
cancellation or reexamination proceeding or any other proceeding challenging its
extent or validity. No order, holding, decision or judgment has been rendered by
any governmental authority, and no agreement, consent or stipulation exists,
which would limit the Company's use of any intellectual property.
SECTION 2.14. Contracts and Agreements. The Company is not (x) to its
------------------------
knowledge in default under any lease, employment contract, loan agreement, or
other instrument, agreement, or contract to which it is a party or by which it
is bound, (y) in violation of its Articles or By-Laws, each as amended to the
date hereof, or (z) to its knowledge in default with
5
<PAGE>
respect to any order, writ, injunction or decree of any court or governmental
agency binding on the Company, and no event has occurred which with notice or
lapse of time, or both, would create any default or violation described in
clauses (x) through (z). The Company has no knowledge of any material breach or
anticipated material breach by any other party to any agreements, instruments,
commitments, plans or arrangements to which it is a party or by which it is
bound.
SECTION 2.15. Litigation, etc. There are no actions, suits,
---------------
proceedings or investigations pending against the Company before any court or
governmental agency (nor, to the best of the Company's knowledge, is there any
overt threat thereof) that is or would be expected to have a material adverse
effect on the Company or its business or that question the validity of this
Agreement or the transactions contemplated hereby. Except as set forth on
Schedule 2.15 or described in the Information Statement, there are no actions,
suits, proceedings or investigations by the Company currently pending or which
the Company presently intends to initiate.
SECTION 2.17. Title to Properties and Assets; Liens, etc. The Company
------------------------------------------
has an assignment of U.S. Patent No. 5,202,231 and has good and marketable title
to its properties and assets described in the Financial Statements and all
properties thereafter acquired. The Company holds such property (other than
intellectual property described in Section 2.13, which is held as described in
that section) free and clear of all mortgages, pledges, liens, leases,
encumbrances or charges, other than (i) the lien of current taxes not yet due
and payable, and (ii) possible minor liens and encumbrances that do not in any
case materially detract from the value of the property subject thereto or
materially impair the operations of the Company and which have not arisen
otherwise than in the ordinary course of business.
SECTION 2.17. Permits. The Company has all franchises, permits,
-------
licenses and any similar authority necessary for the conduct of its business as
now being conducted by it, the lack of which would materially and adversely
affect the business, properties, prospects or financial condition of the Company
and believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
SECTION 2.18. Disclosure. The Company has fully provided Purchaser
----------
with all the information which Purchaser has requested for deciding whether to
purchase the Shares. Neither this Agreement, the Information Statement attached
as Schedule 2.18 nor any other statements or certificates made or delivered in
connection herewith or therewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading, except that the Information Statement (i) does not
contemplate this sale or any other sale of capital stock of the Company and (ii)
reflects the conversion of all of the Company's preferred stock and certain
other prospective transactions or events that may not have happened yet but
which are contemplated to happen in connection with an initial public offering.
6
<PAGE>
SECTION 2.19. Changes. From March 31, 1997, until the date hereof,
-------
there has not been, and from the date hereof until the First Closing, and except
as set forth herein, there will not be:
(a) any adverse change in the assets, liabilities, financial condition
or operating results of the Company, except for changes in the ordinary course
of business, including the expenditure of funds in connection with the Company's
operations, which have not been, individually or in the aggregate, materially
adverse;
(b) to the Company's knowledge, any other event or condition of any
character which can reasonably be expected to materially and adversely affect
the assets, properties, financial condition, operating results or business of
the Company (as such business is presently conducted);
(c) any change in the authorized capital of the Company;
(d) any material change in the manner of business or operations of
the Company; or
(e) any commitment (contingent or otherwise) to do any of the
foregoing.
SECTION 2.20. Insurance. The Company has insured, by reputable
---------
insurers, its assets that are of an insurable character against risks of
liability, casualty and fire in adequate amounts and consistent with prudent
industry practice. The Company has made, and will make, available to any
Purchaser, upon its request, a list of all insurance coverage carried by the
Company, the name of the carrier, the terms and amount of coverage.
SECTION 2.21. Labor Agreements and Actions. The Company is not bound
----------------------------
by or subject to (and none of its assets or properties is bound by or subject
to) any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the knowledge of
the Company, has sought to represent any of the employees, representatives or
agents of the Company.
SECTION 2.22. Loans and Advances. Except as set forth in Schedule
------------------
2.22, the Company does not have any outstanding loans or advances to any person
and is not obligated to make any such loans or advances, except, in each case,
for advances to employees of the Company in respect of reimbursable business
expenses anticipated to be incurred by them in connection with their performance
of services for the Company.
SECTION 2.23. Employees. No officer or key employee of the Company
---------
has advised the Company (orally or in writing) that he or she intends to
terminate employment with the Company. The Company, to the best of its
knowledge, has complied in all material respects
7
<PAGE>
with all applicable laws relating to wages, hours, equal opportunity, collective
bargaining and the payment of Social Security and other taxes. The Company has
complied in all material respects with the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
SECTION 2.24. Environmental Protection. The Company, the operation of
------------------------
its business, and, to the knowledge of the Company, the real property that the
Company leases at 670 Almanor Avenue, Sunnyvale, California 94086 (the
"Premises") are in compliance with all applicable Environmental Laws (as defined
below) and orders or directives of any governmental authorities having
jurisdiction under such Environmental Laws (as defined below), including,
without limitation, any Environmental Laws or orders or directives with respect
to any cleanup or remediation of any release or threat of release of Hazardous
Substances. The Company has not received any citation, directive, letter or
other communication, written or oral, or any notice of any proceeding, claim or
lawsuit, from any person arising out of the ownership or occupation of the
Premises, or the conduct of its operations, and the Company is not aware of any
basis therefor. The Company has obtained and maintains in full force and effect
all necessary permits, licenses and approvals required by all Environmental Laws
known by the Company to be applicable to the Premises and the business
operations of the Company conducted thereon. For the purposes of this Agreement,
the term "Environmental Laws" shall mean any Federal, state or local law or
ordinance or regulation pertaining to the protection of human health or the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Sections 9601, et seq., the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001, et
seq. and the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901, et
seq. For purposes of this Agreement, the term "Hazardous Substances" shall
include oil and petroleum products, asbestos, polycholorinated biphenyls, urea
formaldehyde and any other materials classified as hazardous or toxic under any
Environmental Laws in such amounts as would constitute a violation of the
Environmental Laws.
SECTION 3. PURCHASERS' REPRESENTATIONS AND WARRANTIES
Each Purchaser understands that, except as otherwise provided in
Schedule 1.1(b), neither the Shares nor the Conversion Shares will be registered
under the Securities Act of 1933, as amended (the "1933 Act"), on the grounds
that the sales provided for in this Agreement are exempt pursuant to Section
4(2) of the 1933 Act and/or Regulation D promulgated under the 1933 Act, and
that the reliance of the Company on such exemptions is predicated in part on the
Purchaser's representations, warranties, covenants and acknowledgments set forth
in this Section 3. Each purchaser, solely with respect to itself, makes the
following representations, warranties, covenants and acknowledgments to the
Company:
SECTION 3.1. Authority. The Purchaser has all requisite corporate
---------
power and authority to execute and deliver this Agreement and to carry out the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Purchaser has been duly authorized by all requisite
corporate action, and this Agreement has been duly executed and delivered by the
Purchaser and constitutes its valid and binding obligations, enforceable against
8
<PAGE>
the Purchaser in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency, moratorium, reorganization and other similar
laws relating to or affecting the enforcement of debtors' obligations or
creditors' rights generally, and except that the availability of specific
performance, injunctive relief or other equitable remedies is subject to the
discretion of the court before which any such proceeding may be brought.
SECTION 3.2. Place of Business. The Purchaser represents and warrants
-----------------
to the Company that its principal business address is as set forth elsewhere
herein.
SECTION 3.3. Purchase Without a View to Distribution. The Purchaser
---------------------------------------
represents and warrants to the Company that the Shares to be purchased by such
Purchaser (and any Conversion Shares) are being acquired by the Purchaser for
its own account, not as a nominee or agent, and not with a view to resale or
distribution within the meaning of the 1933 Act, and the rules and regulations
thereunder, and the Purchaser will not distribute the Shares or Conversion
Shares, if any, in violation of the 1933 Act.
SECTION 3.4 Restrictions on Transfer. The Purchaser (i) acknowledges
------------------------
that the Shares and Conversion Shares, if any, are not registered under the 1933
Act and that the Shares and Conversion Shares, if any, to be acquired by it must
be held indefinitely by the Purchaser unless they are subsequently registered
under the 1933 Act or an exemption from registration is available, (ii) is aware
that any routine sales, under Rule 144 of the SEC promulgated under the 1933
Act, of the Shares and/or Conversion Shares, if any, may be made only in limited
amounts and in accordance with the terms and conditions of that Rule and that in
such cases where the Rule is not applicable, compliance with some other
registration exemption will be required, (iii) is aware that Rule 144 is not
presently available for use by the Purchaser for resale of any such Shares and
Conversion Shares, and (iv) acknowledges that the Shares and Conversion Shares,
if any, are subject to the restrictions on transfer set forth in Section 8 of
this Agreement and that neither the Shares nor the Conversion Shares, if any,
may be transferred or disposed of by the Purchaser or other holder thereof
except in accordance with Section 8 hereof.
SECTION 3.5. Additional Representations of the Purchaser. The
-------------------------------------------
Purchaser represents that: (i) it is an "accredited investor" as such term is
defined in Rule 501 promulgated under the 1933 Act; (ii) its financial situation
is such that it can afford to bear the economic risk of holding the Shares and
Conversion Shares, if any, for an indefinite period of time and suffer complete
loss of its investment in the Shares and Conversion Shares; (iii) its knowledge
and experience in financial and business matters are such that it is capable of
evaluating the merits and risks of its purchase of the Shares and Conversion
Shares as contemplated by this Agreement; (iv) it understands that the Shares
and Conversion Shares are a speculative investment; (v) it understands and has
taken cognizance of all the risk factors related to the purchase of the Shares
and Conversion Shares, if any; (vi) it has obtained all documents and materials
and all other information it deems necessary or desirable to evaluate an
investment in the Shares; and (vii) it has had an opportunity to ask questions
and receive answers from the Company regarding the terms and conditions of the
sale of the Shares.
9
<PAGE>
SECTION 4. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
Each Purchaser's obligation to purchase and make payment for the
Shares to be purchased at the First Closing is subject, at its option, to the
satisfaction of each of the following conditions as of the First Closing Date,
and each Purchaser's obligation to purchase and make payment for the Shares to
be purchased at the Second Closing is subject, at its option, to the
satisfaction of each of the conditions set forth in Section 4.3, 4.4 and 4.5 as
of the Second Closing Date, it being understood that the conditions below are
several with respect to each Purchaser and that the failure or refusal of one
Purchaser to consummate a Closing or perform any other obligations hereunder
shall not affect the obligations of the other Purchaser hereunder:
SECTION 4.1. Proceedings and Certain Documents. All proceedings to be
---------------------------------
taken in connection with the transactions contemplated by this Agreement to be
consummated on or prior to the Closing Date, and all documents incident thereto,
shall be reasonably satisfactory in form and substance to the Purchaser.
SECTION 4.2. Representations and Warranties. On the First Closing
------------------------------
Date, the representations and warranties contained in Section 2 hereof shall be
true and correct in all material respects with the same effect as though made on
and as of the First Closing Date except (i) as to such representations and
warranties made as of an earlier, specific date then as of such date, and the
Company shall have so certified to the Purchaser in writing; (ii) as disclosed
in writing (the "Disclosure Notice") to the Purchaser at the First Closing with
specific reference to this Section 4.2, or (iii) that the number of issued and
outstanding shares of the Company's capital stock may be affected pursuant to
(A) issuance of Shares as contemplated herein or as described in any schedule
hereto, (B) shares of Common Stock issued upon the exercise of any or all
Options or Warrants, or (C) any conversions of issued and outstanding shares of
Series A Preferred Stock. If the Company delivers a Disclosure Notice to
Purchaser, Purchaser may elect either (i) to terminate this Agreement by written
notice delivered to the Company within 10 days of the Disclosure Notice and
neither party shall have any liability to the other or (ii) proceed with the
Closings and the Company shall have no liability to Purchaser with respect to
the items specified in the Disclosure Notice.
SECTION 4.3. Performance. All the covenants, agreements and
-----------
conditions contained in this Agreement to be performed or complied with by the
Company on or prior to the Closing Date with respect to the Purchaser purchasing
Shares on such Closing Date shall have been performed or complied with in all
material respects, and the Company shall have so certified to the Purchaser in
writing.
SECTION 4.4. Opinion of Counsel to the Company. On the Closing Date,
---------------------------------
the Purchaser shall have received an opinion from Sachnoff & Weaver, Ltd.,
counsel for the Company, dated the Closing Date, addressed to the Purchaser, in
form attached hereto as Exhibit E (except that on the Second Closing Dates, as
to matters set forth in numbered
10
<PAGE>
paragraphs 5 and 6 of Exhibit E, counsel need only opine as to the status of
such matters as of the date of the Second Closing Date).
SECTION 4.5. No Proceeding or Litigation. No suit, action, or other
---------------------------
proceeding seeking to restrain, prevent or change the transactions contemplated
hereby or otherwise questioning the validity or legality of the transactions
contemplated in this Agreement shall have been instituted and be pending.
SECTION 4.6. Board Approval. Solely with respect to the obligations
--------------
of the East Coast Purchaser, the Board of Directors of the East Coast Purchaser
shall have approved the execution and delivery of this Agreement and the
Registration Rights Agreement.
SECTION 4.7. Additional Agreements. The Registration Rights Agreement
---------------------
and the Collaboration Agreement between the Company and the Purchaser
(respectively for each Purchaser, the "Collaboration Agreement") shall have been
executed and delivered by the Company to the applicable Purchaser.
SECTION 5. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The Company's obligation to sell the Shares to be purchased by the
Purchaser at the First Closing is subject, at the Company's option, to the
satisfaction of each of the following conditions as of the First Closing Date,
and the Company's obligation to sell the Shares to be purchased by the Purchaser
at the Second Closing is subject, at the Company's option, to the satisfaction
of conditions set forth in Sections 5.2 and 5.3 (and Section 5.1 if the Second
Closing is for Preferred Stock) as of the Second Closing Date, it being
understood that the conditions below are several with respect to each Purchaser
and that the failure or refusal of the Company to consummate a Closing for one
Purchaser hereunder shall not be a condition to the obligations of the Company
with respect to the other Purchaser:
SECTION 5.1 Representations and Warranties. On the Closing Date, the
------------------------------
representations and warranties contained in Section 3 hereof shall be true and
correct in all material respects with the same effect as though made on and as
of the Closing Date except as such representations and warranties relate to an
earlier, specific date then as of such date, and the Purchaser shall have so
certified to the Company in writing.
SECTION 5.2. Performance. All the covenants, agreements and
-----------
conditions contained in this Agreement to be performed or complied with by the
Purchaser on or prior to the Closing Date shall have been performed or complied
with in all material respects, and the Purchaser shall have so certified to the
Company in writing.
SECTION 5.3. No Proceeding or Litigation. No suit, action, or other
---------------------------
proceeding seeking to restrain, prevent or change the transactions contemplated
hereby or otherwise questioning the validity or legality of the transactions
contemplated in this Agreement shall have been instituted and be pending.
11
<PAGE>
SECTION 6. COVENANTS OF THE COMPANY
SECTION 6.1. Use of Proceeds. The proceeds of the sale of the
---------------
Offering shall be used for general corporate purposes.
SECTION 6.2. Properties, Business, Insurance. The Company shall
-------------------------------
maintain and cause each of its subsidiaries, if any, to maintain as to their
respective properties and businesses, with financially sound and reputable
insurers, insurance against such casualties and contingencies and of such types
and in such amounts as is customary for companies similarly situated, which
insurance shall be deemed by the Company to be sufficient.
SECTION 6.3. Financial Statements.
--------------------
The Company shall furnish to the holders of the Preferred Stock, and
the Conversion Shares, if any, then outstanding (i) as soon as available but no
later than 120 days of the end of each fiscal year an audited consolidated
balance sheet, and related, audited consolidated statements of income and cash
flows and stockholders' equity of the Company and its subsidiaries, if any, and
as at the end of and for such fiscal year prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by the
opinion of an independent public accountant of recognized national standing
selected by the Board; and (ii) as soon as available but no later than 90 days
of the end of each fiscal quarter an unaudited consolidated balance sheet, and
related, unaudited consolidated statements of income and cash flows and
stockholders' equity of the Company and its subsidiaries, if any, and as at the
end of and for such fiscal quarter prepared in accordance with generally
accepted accounting principles, consistently applied, provided that such
quarterly financial statements need not contain footnotes and are subject to
normal year end adjustments.
All such financial statements, reports or other information (other
than publicly available information) provided to any Purchaser pursuant to this
Section 6.3 shall be deemed to be confidential information of the Company. The
Purchaser agrees to use reasonable efforts to prevent the disclosure of such
confidential information to any other person (excluding its officers, employees,
agents and counsel who have agreed to prevent such disclosure) except (i) as may
be necessary or desirable in connection with a request by a governmental agency,
regulatory or supervisory authority or court having or claiming jurisdiction
over such Purchaser, (ii) information obtained from a third party which is not
subject to the provisions of any confidentiality agreement in favor of the
Company, and (iii) in connection with the enforcement of such Purchaser's
rights hereunder or under the Articles and/or the Certificate of Designation.
Without limiting the generality of the foregoing, the Company may require any
person receiving any confidential information of the Company to enter into a
separate confidentiality and non-disclosure agreement, in form and substance
reasonably satisfactory to the Company and such person.
12
<PAGE>
SECTION 6.4. Restrictive Agreements Prohibited. Neither the Company
---------------------------------
nor its subsidiaries, if any, shall become a party to any agreement which by its
terms restricts the Company's performance of this Agreement, the Articles, the
Certificate, the Registration Rights Agreement or the Collaboration Agreement.
SECTION 6.5. Compliance with Laws. The Company shall comply with all
--------------------
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
SECTION 6.6. Keeping of Records and Books of Account. The Company
---------------------------------------
shall keep, accurate records and books of account, in which entries will be made
in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company and such
subsidiaries, if any, and in which, for each fiscal year, all proper reserves
for depreciation, depletion, obsolescence, amortization, taxes, bad debts and
other purposes in connection with its business shall be made.
SECTION 6.7. Reserve for Conversion Shares. The Company shall at all
-----------------------------
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Preferred Stock
and otherwise complying with the terms of this Agreement, such number of its
duly authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Stock from time to time outstanding or otherwise to
comply with the terms of this Agreement. If at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Preferred Stock or otherwise to comply with the terms of this
Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable federal or state securities laws in connection with the issuance or
delivery of shares of Common Stock upon conversion of the Preferred Stock;
provided, however, that except as set forth in Section 8.6 nothing herein shall
be deemed to require the Company to register the Common Stock in any
jurisdiction. The Company will not, by amendment to its Articles or through any
reorganization, reclassification, consolidation, merger, sale of assets,
dissolution, issue or sale of securities or other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of the Preferred
Stock or the Conversion Shares, if any, and will at all times carry out all such
terms and take all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Preferred Stock.
SECTION 6.8. Trust Shares. The Company agrees to repurchase and
------------
cancel all shares of the Company's capital stock held in the Hyseq One Trust
prior to or concurrently with the Second Closing Date for the East Coast
Purchaser.
13
<PAGE>
SECTION 7. COVENANTS OF THE PURCHASER.
SECTION 7.1. Limitations on Purchase of Additional Securities. Each
------------------------------------------------
Purchaser covenants and agrees with the Company as follows:
(a) Without the prior written consent of the Company, neither the
Purchaser nor any of its Affiliates will:
(i) acquire or offer, propose, or agree to acquire, directly
or indirectly, by purchase, tender or exchange offer or otherwise, beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of shares of Common
Stock or other securities of the Company entitled to vote generally in the
election of directors or securities convertible into or exercisable for shares
of Common Stock or such other securities (collectively, "Voting Securities"), or
rights or options to acquire such ownership, if such Voting Securities, together
with all other Voting Securities beneficially owned by the Purchaser and its
Affiliates would exceed 9.9% of the outstanding Voting Securities; provided,
however, that, the foregoing restriction shall not be deemed to be violated if
the percentage of outstanding Voting Securities beneficially owned by the
Purchaser and its Affiliates is increased as a result of a recapitalization of
the Company, a repurchase of securities by the Company or any other action taken
by the Company; or
(ii) make, or in any other way promote or participate in,
directly or indirectly, any "solicitation" of "proxies" from stockholders to
vote (as used in the proxy rules of the Securities and Exchange Commission) (i)
in a contest regarding the election of directors of the Company; or (ii) in a
contest or on a proposition regarding any business combination, restructuring,
liquidation, sale of assets, extraordinary dividend or other extraordinary
transaction involving the Company, provided that nothing herein shall limit the
Purchaser's right to vote its Voting Securities in accordance with what it deems
to be its best interests.
(b) If the percentage of the outstanding Voting Securities
beneficially owned by the Purchaser and its Affiliates exceeds 9.9% of the
outstanding Voting Securities (except as a result of a recapitalization of the
Company, a repurchase of Voting Securities by the Company, or any other action
taken by the Company or except with the prior written consent of the Company),
the Purchaser and its Affiliates shall take such action as may be required to
cause that number of such shares of Voting Securities in excess of 9.9% to be
counted for purposes of determining a quorum but to abstain on all matters
presented for vote.
(c) The covenants set forth in Sections 7.1(a) and 7.1(b) shall
terminate upon the first to occur of any of the following:
(i) it is publicly disclosed or the Purchaser otherwise
learns that another person or group has acquired or offered, proposed or agreed
to acquire, directly or indirectly, by purchase, tender or exchange offer or
otherwise, beneficial ownership of Voting Securities, or rights or options to
acquire such ownership, which Voting Securities, together with
14
<PAGE>
all other Voting Securities beneficially owned by such person or group would
constitute a majority of the outstanding Voting Securities; or
(ii) subsequent to the second anniversary of the Company's
initial public offering, another person or group (other than management or the
Board of Directors of the Company) solicits proxies with the intention of
replacing a majority of the members of the Board of Directors of the Company; or
(iii) any amendment of the Articles or Bylaws of the Company
is effected without the consent of the Purchaser and such amendment adversely
affects the Purchaser in a manner different from the manner in which such
amendment affects holders of other shares of capital stock of the Company other
than those held by the Purchaser; or
(iv) the Company publicly discloses, or there is submitted to
the shareholders of the Company a proposal for, the merger, consolidation,
combination or other reorganization of the Company whereby holders of at least
80% of the outstanding Voting Securities immediately prior to such merger,
consolidation, combination or other reorganization will not hold at least 60% of
the outstanding Voting Securities of the surviving entity immediately after such
merger, consolidation, combination or other reorganization; or
(v) the Company publicly discloses, or there is submitted to
the shareholders of the Company a proposal for, the sale of all or substantially
all of the assets of the Company or any other similar transactions; or
(vi) a petition of bankruptcy or any petition for relief
under the provisions of the federal bankruptcy act or any other state or federal
law for the relief of debtors is filed by the Company or is filed by creditors
of the Company and remains undismissed for a period of 90 days after the filing
thereof or a receiver or trustee is appointed to take possession of the property
or assets of the Company or the Company executes an assignment of all or
substantially all of its assets, not in the ordinary course, for the benefit of
creditors; or
(vii) as to each Purchaser, there shall exist a material
breach of the Company of such Purchaser's Collaboration Agreement, which breach
shall remain unremedied beyond the applicable cure period set forth therein, or
the Company shall have terminated such Collaboration Agreement prior to the
expiration of its term or absent a breach by Purchaser; or
(viii) five years following the date of this Agreement; or
(ix) the Company sells capital stock to another person or
entity that is a party to a business collaboration or other similar agreement
with the Company (which expressly shall not include any agreement relating
solely to the raising of capital), which organization is not subject to a
restriction at least as restrictive as that set forth in this Section 7.1, in
which case Purchasers shall be bound by such less restrictive provisions.
15
<PAGE>
SECTION 8. COMPLIANCE WITH 1933 ACT; RESTRICTIONS ON TRANSFERABILITY OF
PREFERRED STOCK AND CONVERSION SHARES;
SECTION 8.1. Compliance with 1933 Act. The Preferred Stock, and the
------------------------
Conversion Shares, if any, shall not be transferable, except upon the conditions
specified in this Section 8, which conditions are intended to insure compliance
with the provisions of the 1933 Act, applicable state securities laws and
Section 1361(a) of the Internal Revenue Code of 1986 or any successor code or
law in respect of any such transfer.
SECTION 8.2. Restrictive Legend. Each certificate representing the
------------------
Preferred Stock and the Conversion Shares and any shares of Common Stock or
other securities issued in respect of such Preferred Stock or the Conversion
Shares upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 8.4 below) be stamped or otherwise imprinted with the
following legend:
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE FEDERAL OR
APPLICABLE STATE SECURITIES LAWS AND INSTEAD ARE BEING ISSUED PURSUANT
TO EXEMPTIONS CONTAINED IN SAID LAWS. THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT
WITH RESPECT TO SUCH SHARES SHALL BE EFFECTIVE UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR (2) THE COMPANY SHALL HAVE RECEIVED AN OPINION
OF COUNSEL SATISFACTORY TO IT THAT NO VIOLATION OF SUCH ACT OR SIMILAR
STATE ACTS WILL BE INVOLVED IN SUCH TRANSFER, OR (3) THE COMPANY SHALL
HAVE RECEIVED A "NO ACTION" LETTER FROM THE SECURITIES EXCHANGE
COMMISSION COVERING SUCH TRANSFER AND AN OPINION AS REFERRED TO ABOVE
RELATING TO STATE LAW; TRANSFERABILITY IS FURTHER SUBJECT TO THE
PROVISIONS OF A PREFERRED STOCK PURCHASE AGREEMENT, A COPY OF WHICH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
SECTION 8.3. Restrictions on Transferability. The Company shall not
-------------------------------
be required to register the transfer of the Preferred Stock or any Conversion
Shares on the books of the Company unless: (i) such securities have been
registered under applicable federal and state securities laws or (ii) the
Company shall have been provided with an opinion of counsel (from counsel
reasonably acceptable to the Company) reasonably satisfactory to it prior to
such transfer to the effect that registration under the 1933 Act or any
applicable state securities law is not required in connection with the
transaction resulting in such transfer. Each certificate representing the
Preferred Stock and the Conversion Shares, if any, issued upon any transfer as
above provided shall bear the restrictive legend set forth in Section 8.2 above,
except that such restrictive legend shall not be required if the opinion of
counsel satisfactory to the Company
16
<PAGE>
referred to above is to the further effect that such legend is not required in
order to establish compliance with the provisions of the 1933 Act and any
applicable state securities law. The cost of any opinion delivered under this
Section 8.3 shall be borne by the party requesting the transfer in question.
SECTION 8.4. Procedures on Sale of Stock to Third Parties by the
---------------------------------------------------
Purchaser. Except as otherwise expressly provided herein, the Purchaser hereby
- ---------
agrees that it shall not sell any Restricted Securities as defined under the
1933 Act or the rules and regulations promulgated thereunder, except in
accordance with the following procedures:
(a) The Purchaser shall first deliver to the Company a written notice
(the "Section 8.4 Offer Notice"), which Section 8.4 Offer Notice shall (i)
specifically identify the party or parties to whom or which the Purchaser
proposes to sell Restricted Securities (such party or parties hereinafter
referred to as the "Identified Parties"), pursuant to a bona fide written offer
from such Identified Parties ("Third Party Offer"), (ii) include a copy of the
Third Party Offer, and (iii) be irrevocable for the Offer Period, offering (the
"Section 8.4 Offer") to the Company all of the Company's securities proposed to
be sold by the Purchaser to such Identified Parties at the purchase price and on
the terms specified therein. The Company shall have the right and option, at
its sole discretion, for a period of 30 days after its receipt of the Section
8.4 Offer Notice (the "Offer Period"), to accept all, but not less than all, of
the Restricted Securities offered at the purchase price and upon the terms
stated in the Section 8.4 Offer Notice. Such acceptance will be made by
delivery of a written notice to the Purchaser within the Offer Period.
(b) Sales of Restricted Securities under the terms of Section 8.4(a)
above shall be made at the offices of the Company on a mutually satisfactory
business day within 30 days after the election by the Company to purchase such
Restricted Securities. Delivery of certificates or other instruments evidencing
such Restricted Securities duly endorsed for transfer, accompanied by investment
representations and other documents customary in transactions of this type,
shall be made on such date against payment of the purchase price therefor.
(c) If effective acceptance shall not be received pursuant to Section
8.4(a) above with respect to all Restricted Securities offered for sale pursuant
to the Section 8.4 Offer Notice or if the Company fails to complete the purchase
of the Restricted Securities within the thirty day period specified in Section
8.4(b), then, subject to subparagraph (d) below, the Purchaser may sell the
Identified Parties all or any part of the Restricted Securities so offered for
sale and not so accepted by the Company at a price not less than the price, and
on terms not more favorable to the purchaser thereof than the terms, stated in
the Section 8.4 Offer Notice at any time within 90 days after the expiration of
the Offer Period required by Section 8.4(a) above. In the event that the
Restricted Securities are not sold by the Purchaser during such 90-day period,
the right of the Purchaser to sell such stock shall expire and the obligations
of this Section 8.4 shall be reinstated; provided, however, that in the event
that the Purchaser determines, at any time during such 90-day period, that the
sale of all or any part of the remaining Restricted Securities on the terms set
forth in the Section 8.4 Offer Notice is impractical, the Purchaser can
17
<PAGE>
terminate the offer and reinstate the procedure provided in this Section 8.4
without waiting for the expiration of such 90-day period.
(d) Before consummating a sale of Restricted Securities to the
Identified Parties, the Purchaser shall submit to the Company the written
opinion, addressed to the Company, of Purchaser's counsel as to whether, in the
opinion of such counsel, such proposed transfer involves a transaction requiring
registration of such Restricted Securities under the 1933 Act and applicable
state securities laws or an exemption thereunder is available. If in such
opinion of counsel (which opinion and counsel shall be reasonably acceptable to
the Company), the proposed transfer may be effected without registration under
the 1933 Act and any applicable state securities laws or "blue sky" laws, then
the Purchaser shall thereupon be entitled to effect such transfer in accordance
with the terms of subparagraph (c) above. Each certificate or other instrument
evidencing the securities issued upon such transfer (and each certificate or
other instrument evidencing any such securities not transferred) shall bear the
legend set forth in Section 8.2 hereof unless: (a) in such opinion of such
counsel (which opinion and counsel shall be reasonably acceptable to the
Company) the registration of future transfers is not required by the applicable
provisions of the 1933 Act and state securities laws, or (b) the Company shall
have waived the requirement of such legend; provided, however, that such legend
shall not be required on any certificate or other instrument evidencing the
securities issued upon such transfer in the event such transfer shall be made in
compliance with the requirements of Rule 144 (as amended from time to time or
any similar or successor rule) promulgated under the 1933 Act. The Purchaser
shall not effect any transfer until such opinion of counsel has been given to
and accepted (which acceptance shall not be unreasonably delayed) by the Company
(unless waived by the Company) or until registration of the Restricted Shares
involved in the above-mentioned request has become effective under the 1933 Act.
(e) Anything contained herein to the contrary notwithstanding, the
provisions of this Section 8.4 shall not be applicable to a transfer pursuant to
Section 8.5 or 8.6 hereof, or a transfer to an Affiliate (as defined in the 1933
Act) of the Purchaser or to a person who is not a Competitor (as defined below)
if such Affiliate or person executes all documents necessary or desirable in the
reasonable judgment of the Company to become a party to, and be bound by, the
terms of this Agreement. As used herein, the term "Competitor" means any entity
listed on Schedule 8.4.
SECTION 8.5. Termination of Restrictions on Transferability. The
----------------------------------------------
conditions precedent imposed by this Section 8 upon the transferability of the
Preferred Stock and the Conversion Shares, if any, shall cease and terminate as
to any of the Preferred Stock or the Conversion Shares, when such securities
shall have been registered under the Securities Exchange Act of 1934.
SECTION 8.6. Required Registration. The Purchaser shall be entitled
---------------------
to request that the Company effect the registration under the 1933 Act of
Restricted Shares under the terms and conditions of that certain registration
rights agreement attached hereto as Exhibit G.
18
<PAGE>
SECTION 9. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
SECTION 9.1. Survival. All covenants, agreements, representations and
--------
warranties made herein and in the certificates delivered pursuant hereto shall
survive the execution and delivery of this Agreement and the issuance and sale
of the Shares hereunder; provided, however, representations and warranties made
herein or therein shall only be deemed to have been made as of the date hereof
and as of the Closing Date (except as specifically provided in Sections 4.2 and
5).
SECTION 10. MISCELLANEOUS
SECTION 10.1. Owner of Shares. The Company may deem and treat the
---------------
person in whose name the Shares or the Conversion Shares, if any, are registered
as the absolute owner thereof for all purposes whatsoever, and the Company shall
not be affected by any notice to the contrary.
SECTION 10.2. Successors. This Agreement shall be binding upon and
----------
except as provided herein, shall inure to the benefit of the respective
successors, executors, personal representatives, heirs and assigns of each of
the parties hereto.
SECTION 10.3. Finder's Fees. Each party to this Agreement represents
-------------
and warrants that, to the best of its knowledge, no broker or finder has acted
for such party in connection with this Agreement or the transactions
contemplated by this Agreement and that no broker or finder is entitled to any
broker's or finder's fee or other commission in respect thereof based in any way
on agreements, arrangements or understandings made by such party. The Company
shall indemnify the Purchaser against, and hold it harmless from, any liability,
cost, or expense (including reasonable attorneys' fees and expenses) resulting
from any such agreement, arrangement, or understanding made by the Company, and
the Purchaser shall indemnify the Company against, and hold the Company harmless
from, any liability, cost, or expense (including reasonable attorneys fees and
expenses) resulting from any such agreement, arrangement, or understanding made
by the Purchaser, with any third party, for brokerage or finders fees or other
commissions in connection with this Agreement.
SECTION 10.4. Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of California applicable to contracts made
and to be performed in such jurisdiction, without regard to choice of law
principles.
SECTION 10.5. Notice. Unless otherwise provided, any notice or other
------
communications required or permitted hereunder shall be given in writing and
shall be deemed effectively given when delivered personally, or upon receipt by
the party entitled to receive the
19
<PAGE>
notice when sent by registered or certified mail, postage prepaid, addressed to
the party to be notified at the address indicated for such party on the
signature page hereof or at such other address as such party may designate by
ten (10) days advance written notice to the other parties. All notices shall be
given to the Company at 670 Almanor Avenue, Sunnyvale, California 94086 to the
attention of Lewis S. Gruber, President and Chief Executive Officer, with a copy
to Sachnoff & Weaver, Ltd., 30 South Wacker Drive, Suite 2900, Chicago, Illinois
60606 to the attention of Misty S. Gruber.
SECTION 10.6. Entire Agreement. This Agreement together with the
----------------
Exhibits and Schedules attached hereto or delivered herewith sets forth the
entire understanding of the parties with respect to the transactions
contemplated hereby.
SECTION 10.7. Headings. The headings of the sections of this
--------
Agreement are inserted for convenience of reference only and shall not be
considered a part hereof.
SECTION 10.8. Amendment. This Agreement may not be modified, amended
---------
or changed without the written consent of each Purchaser.
SECTION 10.9. Payment of Expenses. The Company shall pay the costs
-------------------
and expenses incurred by it in connection with the issuance and sale of the
Shares, and the execution, delivery and performance of this Agreement. Each
Purchaser shall pay the costs and expenses incurred by it in connection with the
purchase of its Shares and the execution, delivery and performance of this
Agreement.
SECTION 10.10. Waiver of Covenants and Agreements. Notwithstanding
----------------------------------
any other provision contained herein, any covenant, agreement or provisions on
the part of the Company to be performed herein may be waived by written
agreement of the Purchaser waiving compliance.
SECTION 10.11. Counterparts. This Agreement may be executed and
------------
delivered in two or more counterparts, each of which shall be an original
document and all of which together shall constitute a single binding agreement.
SECTION 10.12. Severability. If one or more provisions of this
------------
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
20
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has fully executed this
Agreement as of the date first set forth above.
THE EAST COAST PURCHASER HYSEQ, INC.
- ------------------------ -----------
By /s/ PETER BARRETT By /s/ LEWIS S. GRUBER
- ------------------------------------- -------------------------------------
Name: Peter Barrett, M.D. Name: Lewis S. Gruber
Title: Title: President and Chief Executive
Address: Officer
Address: 670 Almanor Avenue
Sunnyvale, California 94086
THE WEST COAST PURCHASER ATTEST:
- ------------------------
By: /s/ LEWIS T. WILLIAMS By: /s/ JAMES N. FLETCHER
- ------------------------------------- ------------------------------------
Name: Lewis T. Williams, M.D., Ph.D. James N. Fletcher, Secretary
Title: Senior Vice President
Address: 4560 Horton Street
Emeryville, CA 94608
21
<PAGE>
Schedule 1.1(b)
---------------
Shares to Be Purchased
----------------------
The East Coast Purchaser
- ------------------------
Subject to the terms and conditions herein set forth, the Company agrees to
sell, issue and deliver to the East Coast Purchaser and the East Coast Purchaser
agrees to buy (i) at the First Closing, 175,070 shares of the Preferred Stock
for a price equal to $28.56 per share and an aggregate purchase price of
$5,000,000 and (ii) at the Second Closing, either (A) such number of shares of
Preferred Stock having an aggregate value of $5,000,000 based on the lesser of
(x) $28.56 per share and (y) the Conversion Price of the Preferred Stock then in
effect or (B) in the event the Company consummates an initial public offering of
its Common Stock on or prior to December 2, 1997, such number of shares of
Common Stock having an aggregate value of $5,000,000 (valued at a price per
share equal to the price to public in such public offering less one-half of the
underwriting discounts and commissions applicable to the shares sold to the
public which are not applicable to the shares of Common Stock sold to
Purchaser), which shares of Common Stock shall be registered pursuant to the
1933 Act.
The West Coast Purchaser
- ------------------------
Subject to the terms and conditions herein set forth, the Company agrees to
sell, issue and deliver to the West Coast Purchaser and the West Coast Purchaser
agrees to buy, (i) at the First Closing, 175,070 shares of the Preferred Stock
for a price equal to $28.56 per share and an aggregate purchase price of
$5,000,000 and (ii) at the Second Closing, in the event the Company consummates
an initial public offering of its Common Stock on or prior to December 2, 1997,
such number of shares of Common Stock having an aggregate value of $2,500,000
(valued at a price per share equal to the price to public in such public
offering less one-half of the underwriting discounts and commissions applicable
to the shares sold to the public which are not applicable to the shares of
Common Stock sold to Purchaser), which shares of Common Stock shall be
registered pursuant to the 1933 Act.
<PAGE>
Schedule 1.2
------------
Closings
--------
East Coast Purchaser
- --------------------
First Closing. The First Closing shall take place on such date as is
-------------
determined by mutual agreement of the parties; provided, however, that such date
shall be no later June 20, 1997.
Second Closing. The Second Closing shall take place on December 2, 1997 or,
--------------
if the Company sells Common Stock as set forth on Schedule 1.1(b), on the date
of the closing of the initial public offering, or at such other date as is
determined by mutual agreement of the parties.
West Coast Purchaser
- --------------------
First Closing. The First Closing shall be held on such date as is
-------------
determined by mutual agreement of the parties; provided, however, that such date
-------- -------
shall be no later June 2, 1997.
Second Closing. The Second Closing shall be held, if at all, on the date of
--------------
the closing of the Company's initial public offering occurring on or before
December 2, 1997 or such later date as is determined by mutual agreement of the
parties. If the Company does not consummate a public offering on or prior to
December 2, 1997, there will be no Second Closing.
<PAGE>
EXHIBIT 10.8
COLLABORATION AND LICENSE AGREEMENT
-----------------------------------
This Collaboration and License Agreement, dated as of May 30, 1997
(the "AGREEMENT"), is entered into by and between Chiron Corporation, a Delaware
corporation ("CHIRON"), and Hyseq, Inc., a Nevada corporation ("HYSEQ").
A. Hyseq possesses certain patent rights and associated know-how
related to methods of sequencing DNA by hybridization and other gene discovery
technologies.
B. Chiron and Hyseq mutually desire to enter into a collaboration
(the "COLLABORATION") in which Hyseq will apply its sequencing and other gene
discovery technologies to biological materials provided by Chiron.
C. Chiron will use the results of the Collaboration in the
development and commercialization of diagnostic, therapeutic and vaccine
products directed towards certain human health care indications.
D. Simultaneously with the execution of this Agreement, Chiron and
Hyseq are entering into a stock purchase agreement (the "STOCK PURCHASE
AGREEMENT"), pursuant to which Chiron has agreed to purchase certain equity
securities of Hyseq on the terms and subject to the conditions set forth
therein.
NOW, THEREFORE, in consideration of the mutual agreements provided in
this Agreement and the Stock Purchase Agreement, Hyseq and Chiron agree as
follows:
ARTICLE
1
DEFINITIONS
The following capitalized terms used herein shall have the respective
meanings set forth below.
1.1 "ADR REQUEST" shall have the meaning set forth in Section 10.3.
1.2 "AFFILIATE" means a person or entity that directly or indirectly
controls, is controlled by or is under common control with, a party to this
Agreement. "Control" (and, with correlative meanings, the terms "controlled by"
and "under common control with") means beneficial ownership of fifty percent
(50%) or more of the outstanding shares or securities or the ability otherwise
to elect a majority of the board of directors or other managing authority.
Notwithstanding the foregoing, the Affiliates of Chiron expressly exclude
Novartis AG ("Novartis"), a Swiss corporation, or any wholly owned subsidiary of
Novartis, unless and until such time as Novartis and Chiron may mutually agree
upon the terms and conditions upon which Novartis may be deemed an Affiliate of
Chiron for the purposes of this Agreement.
* CERTAIN INFORMATION IN THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
1.3 "ALLOWABLE COSTS" means the fully burdened, fairly allocated internal
costs of a party, on a consolidated basis, including reasonable and customary
allocations of indirect and overhead expense and charges in the nature of
depreciation and amortization of capitalized cost, and out-of-pocket expenses,
to the extent incurred in performing the applicable tasks under this Agreement,
in each case determined in accordance with generally accepted accounting
principles, consistently applied. "Allowable Costs" shall specifically exclude
Excluded Costs.
1.4 "APPLICABLE LAW" means, with respect to a party, any domestic or
foreign, federal, state or local statute, law, ordinance, rule, administrative
interpretation, regulation, order, writ, injunction, directive, judgment, decree
or other requirement of any Governmental Authority applicable to such party or
its properties, business or assets.
1.5 "BANKRUPTCY EVENT" means, with respect to either party, such party
makes an assignment for the benefit of its creditors, files a voluntary petition
under federal or state bankruptcy or insolvency laws, a receiver or custodian is
appointed for such person's business, proceedings are instituted against such
person under federal or state bankruptcy or insolvency laws that have not been
stayed within thirty (30) days, all or substantially all of such person's
business or assets become subject to attachment, garnishment or other process,
or a court or other governmental authority of competent jurisdiction determines
that such person is insolvent.
1.6 "CHIRON DISCOVERIES" means, collectively, all Novel Chiron Results,
all Collaboration Inventions and all Chiron Independent IP.
1.7 "CHIRON INDEPENDENT IP" means any Patent Rights or other intellectual
property that (a) is based on, or is otherwise developed through use of, any
Collaboration Invention and/or any Chiron Results, (b) arises pursuant to the
efforts of Chiron (or by any third parties who convey such rights to Chiron)
outside of the Collaboration, and (c) is not a Collaboration Sequence Patent
Right.
1.8 "CHIRON MATERIALS" means all Libraries and other materials provided by
Chiron to Hyseq pursuant to this Agreement, together with (i) any part, progeny,
mutant or hybrid thereof, (ii) any nucleic acid or other genetic material
therefrom, including any genes, gene sequences and gene sequence information,
(iii) any copy, complement or transcription or expression product thereof, (iv)
any biological or other materials identified in, or derived from, any of the
foregoing, including small molecule targets, antisense and ribozymes, and (v)
any related biological material and associated know-how and data that Chiron
provides to Hyseq.
1.9 "CHIRON PATENT RIGHTS" means all Patent Rights now or hereafter (a)
owned by Chiron, (b) controlled by Chiron or (c) licensed in by Chiron with the
right to sublicense. Chiron Patent Rights shall include, without limitation,
all Downstream Patent Rights.
1.10 "CHIRON RESULTS" means any DNA sequence or other information
generated pursuant to the Collaboration, including without limitation all
Signature Analysis Reports, all
2
<PAGE>
Sequence Reports, all unpublished patent applications arising therefrom, and all
information included within any of the foregoing.
1.11 "CLAIMS" shall have the meaning set forth in Section 8.1.
1.12 "COLLABORATION INVENTION" means any Invention that is made pursuant
to the efforts of Chiron and/or Hyseq, or any third parties obligated to assign
such Invention to Chiron and/or Hyseq, pursuant to the Collaboration.
"Collaboration Inventions" shall not include any Chiron Independent IP or any
Hyseq Independent IP.
1.13 "COLLABORATION SEQUENCE INVENTIONS" means all Inventions in partial
nucleic acid sequences and encoded polypeptides and/or full length coding
nucleic acid sequences and encoded polypeptides that are (a) made pursuant to
the Collaboration, or (b) based on, or were otherwise made through the use of, a
Collaboration Invention (whether pursuant to, or outside of, the Collaboration).
1.14 "COLLABORATION SEQUENCE PATENT RIGHTS" means all Patent Rights
arising from Collaboration Sequence Inventions. "Collaboration Sequence Patent
Rights" excludes, without limitation, any Downstream Patent Rights.
1.15 "COLLABORATION TERM" has the meaning set forth in Section 9.1.
1.16 "CONFIDENTIAL INFORMATION" has the meaning set forth in Section 7.1.
1.17 "CPR" has the meaning set forth in Section 10.4.
1.18 "DOWNSTREAM PATENT RIGHTS" means all Patent Rights included within
the Chiron Independent IP arising from Inventions further downstream of Hyseq
Sequence Inventions and/or Collaboration Sequence Inventions, including without
limitation Inventions in methods of making or using, modifications and/or
function of any nucleic acid and/or polypeptide product thereof.
1.19 "EXCLUDED COSTS" means (a) allocations of previously expensed
research and development costs and (b) any and all costs and expenses incurred
in defending, settling or otherwise discharging any liability to a third party
(including employees) based upon acts or omissions that are tortious, in breach
of contract, in violation of applicable law or in violation of obligations under
this Agreement.
1.20 "EXCLUSIVE FIELD" means * .
1.21 "FDA" means the United States Food and Drug Administration.
1.22 "FIRST COMMERCIAL SALE" means, with respect to any particular
Licensed Product, the first arms-length sale in any jurisdiction to one or more
Third Parties of such Licensed
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Product following receipt of approval from the applicable regulatory agency in
such jurisdiction to market such Licensed Product.
1.23 "GAAP" means U.S. generally accepted accounting principles,
consistently applied.
1.24 "GOVERNMENTAL AUTHORITY" means any foreign, domestic, federal,
territorial, state or local governmental authority, court, government or self-
regulatory organization, commission, tribunal, organization or any regulatory,
administrative or other agency, or any political or other subdivision,
department, instrumentality or branch of any of the foregoing.
1.25 "HYSEQ DISCOVERIES" means, collectively, all novel Hyseq Results and
all Hyseq Independent IP.
1.26 "HYSEQ INDEPENDENT IP" means any Patent Rights or other intellectual
property that (a) is based on, or is otherwise developed through use of, any
novel Hyseq Results, and/or (b) arises pursuant to the use of Hyseq Research
Technology and/or Hyseq Sequence Patent Rights by or on behalf of Hyseq and/or
any Subsequent Hyseq Partner outside of the Collaboration.
1.27 "HYSEQ PATENT RIGHTS" means all Patent Rights now or hereafter (a)
owned by Hyseq, (b) controlled by Hyseq or (c) licensed in by Hyseq with the
right to sublicense. Hyseq Patent Rights shall include, without limitation, all
Hyseq Sequence Patent Rights and all Collaboration Sequence Patent Rights.
1.28 "HYSEQ PROPRIETARY DATABASE" means Hyseq's proprietary HyGenomics
Database, as presently constituted and including any additional data
subsequently added thereto.
1.29 "HYSEQ RESEARCH TECHNOLOGY" means all Hyseq Patent Rights, together
with any know-how (whether or not patentable) related thereto, to the extent
relevant to the performance by Hyseq of the Research. "Hyseq Research
Technology" shall exclude the Hyseq Sequence Patent Rights.
1.30 "HYSEQ RESTRICTED PRODUCTS" means products based on, incorporating or
otherwise made through the use of any Hyseq Discovery and/or the subject matter
of any Hyseq Sequence Patent Rights.
1.31 "HYSEQ RESULTS" means any DNA sequence or other information generated
through the use of Hyseq Research Technology and/or Hyseq Sequence Patent Rights
by or on behalf of Hyseq and/or any Subsequent Hyseq Partner outside of the
Collaboration.
1.32 "HYSEQ SEQUENCE INVENTIONS" means all Inventions in partial nucleic
acid sequences and encoded polypeptides and/or full length coding nucleic acid
sequences and encoded polypeptides that are based on, or otherwise made through
the use of, information contained in the Hyseq Proprietary Database now or at
any time during the Collaboration Term.
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1.33 "HYSEQ SEQUENCE PATENT RIGHTS" means all Patent Rights arising from
Hyseq Sequence Inventions.
1.34 "IND" means an investigational new drug application filed with the
FDA under the regulations set forth in 21 CFR Part 312 or any successor
regulations.
1.35 "INVENTIONS" has the meaning set forth in Section 6.1(a).
1.36 "LICENSED PRODUCTS" means diagnostic, therapeutic and prophylactic
products (including without limitation recombinant proteins, antibodies,
antisense, ribozymes, small molecules and polynucleotides for gene therapy
applications) arising from Chiron Discoveries and/or the subject matter of the
Hyseq Sequence Patent Rights and/or the Collaboration Sequence Patent Rights.
1.37 "NET SALES" shall mean the amount invoiced for Sales of a Licensed
Product hereunder, less the following deductions:
(a) Discounts, returns, allowances (including reasonable bad debt
allowances), and wholesaler chargebacks allowed and taken, but in any case
only in amounts consistent with reasonable and customary pharmaceutical
industry standards;
(b) Import, export, excise, sales or use taxes, value added taxes, and
other taxes, tariffs or duties;
(c) Freight, handling, transportation and insurance prepaid or
allowed; and
(d) Amounts allowed or credited or retroactive price reductions or
rebates (including Medicaid rebates).
Any refund of any of the foregoing amounts (including any reversal of bad
debt allowances, whether arising from amounts received in settlement of bad
debts or otherwise) previously deducted from Net Sales shall be
appropriately credited upon receipt thereof.
Chiron may, at its option, allocate the above deductions from Sales of
Licensed Products based upon accruals estimated reasonably and consistent
with Chiron's standard business practices. If Chiron elects to utilize such
accruals, actual deductions will be calculated and, if applicable, a "true-
up" made, on an annual basis.
If a Sale of a Licensed Product is to an Affiliate of the seller (or to
Novartis, where Chiron is the seller) and such Affiliate (or, where
applicable, Novartis) is the end user of such Product, then the "amount
invoiced" with respect to such Sale shall, for purposes of calculating "Net
Sales," be the greater of (a) the actual amount invoiced, and (b) the
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amount which the invoiced amount would have been had such Sale of the
Licensed Product been to a person at arm's length with the seller.
If a Licensed Product is sold in combination with another product or
products, Net Sales under such circumstances shall be calculated by
multiplying Net Sales of the combination by the fraction A/(A+B), in which
A is the invoice price of the Licensed Product when sold separately, and B
is the total invoice price of any other product or products in combination
when sold separately.
1.38 "NOVEL CHIRON RESULTS" means all Chiron Results that were not
previously known to Chiron or the public prior to Chiron's receipt thereof
pursuant to the Collaboration.
1.39 "PATENT PROSECUTION COSTS" means Allowable Costs arising out of
obtaining and maintaining patent coverage on the applicable Inventions,
including but not limited to U.S. and foreign patent preparation, prosecution,
issuance, maintenance, opposition, interference and litigation costs, but shall
exclude costs and expenses incurred in enforcing any Patent Rights against
alleged infringement by third parties.
1.40 "PATENT RIGHTS" shall mean all inventors' certificates, patent
applications and provisional applications throughout the world, including any
renewal, division, continuation or continuation-in-part of any of such
certificates and applications, and any and all patents issuing thereon, and any
and all reissues, extensions, substitutions, confirmations, registrations,
revalidations, revisions, foreign counterparts and additions of or to any of
said patents.
1.41 "SALE" means the sale or other disposition, whether by Chiron or any
of its licensees, of a Licensed Product to a party that is not an Affiliate of
the seller, or to any party that is both an Affiliate of the seller and the end
user of the Licensed Product sold.
1.42 "STOCK PURCHASE AGREEMENT" has the meaning set forth in Recital D
above.
1.43 "SUBSEQUENT COLLABORATION AGREEMENT" means a bona fide collaboration
agreement (i.e., one containing provisions comparable to the provisions of this
Agreement, but not a naked license) entered into by Hyseq and a Subsequent Hyseq
Partner after the date hereof for the purpose of DNA sequencing and gene
discovery.
1.44 "SUBSEQUENT HYSEQ PARTNER" has the meaning set forth in Section 2.9.
1.45 "THIRD PARTY" means any person or entity other than Chiron, Hyseq or
any of their respective Affiliates.
ARTICLE
2
COLLABORATION
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2.1 GENE ANALYSIS. During the Collaboration Term, Hyseq will provide gene
analysis ("Gene Analysis") as requested by Chiron on the terms set forth in this
Section 2.1.
(a) SELECTION AND PROVISION OF LIBRARIES. Chiron will have the right
to provide cDNA libraries of its choosing to Hyseq (each a "LIBRARY," and
collectively the "LIBRARIES"). Each Library will comply with the Hyseq
specifications set forth on Exhibit A hereto (the "SPECIFICATIONS"), or as
otherwise mutually agreed.
(b) PRELIMINARY TESTING. Promptly following receipt of each Library,
Hyseq will perform preliminary testing on * clones within the Library to
determine whether the Library complies with the Specifications. In the
event that such testing determines that any Library does not conform with
the Specifications, Hyseq will notify Chiron in writing of such fact as
promptly as possible (a "NONCOMPLIANCE NOTICE"). Any Noncompliance Notice
shall state the particular respects in which the Library does not comply
with the Specifications. If the noncompliance can be corrected by changing
Library conditions, Hyseq will do so as promptly as possible. Whether or
not the Library complies, Hyseq will provide Chiron with the full results
of the preliminary testing (other than Signatures) within thirty (30) days
after receipt of the Library.
(c) SIGNATURE ANALYSIS OF LIBRARIES. * .
(d) SEQUENCING BY HYSEQ.* .
(e) TIMEFRAMES. Hyseq's obligations to perform Gene Analysis in
compliance with the timeframes set forth in Sections 2.1(b), (c) and (d)
above are subject to the following limitations:
(i) The timeframes will apply to Libraries provided to Hyseq on
or after June 15, 1997. For any Library provided prior to that date,
each applicable timeframe will be extended by one day for each day
prior to June 15, 1997 that such Library is provided to Hyseq.
(ii) The timeframes will apply only if the total number of
sequencing reactions requested by Chiron does not exceed (A) * through
August 31, 1997, and (B) * thereafter. Such number of reactions may
be allocated, in any proportions determined by Chiron, between
Research under Section 2.1(c) and Research under Section 2.1(d). In
the event that any such limitation is exceeded, Hyseq shall use
reasonable commercial efforts to complete the excess sequencing as
promptly as is practicable.
(f) SEQUENCING BY CHIRON. * .
(g) CAPACITY. During the Collaboration Term, Hyseq will guarantee
Chiron sufficient capacity to perform Gene Analysis on * . Hyseq will use
commercially
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reasonable efforts to make available any additional capacity that may be
requested by Chiron.
(h) LIMITATION ON NUMBER OF LIBRARIES. Unless otherwise agreed by
Hyseq, Chiron may not * .
(i) RETURN OF BIOLOGICAL MATERIALS, ETC. Following the completion of
Gene Analysis on any Library, Hyseq will, within two (2) weeks after a
request from Chiron, return to Chiron all of the Chiron Materials and
derivatives therefrom, including copies of all gel files from ABI
sequencing runs, all picked clones, the Libraries, glycerol freezes from
bacterial cultures and spotted filters used in performing the Research.
Hyseq will be allowed to retain a copy of the picked clones for
verification purposes. If Chiron does not request the return of such
materials, Hyseq will store them and maintain them as Chiron Results
pursuant to Section 2.9 for a period of at least two (2) years after
expiration of the Collaboration Term.
(j) ELECTRONIC REPORTS. The Electronic Signature Analysis Reports and
Electronic Sequence Reports delivered by Hyseq to Chiron shall contain EST
sequences, and shall enable Chiron to correlate * .
2.2 OTHER RESEARCH. If requested by Chiron, Hyseq will provide for Chiron
during the Collaboration Term research work offered by Hyseq from time to time
in the ordinary course of its business other than the Gene Analysis (the "OTHER
RESEARCH" and, collectively with the Gene Analysis, the "RESEARCH"). The Other
Research may include, without limitation, further analysis of Chiron Results.
2.3 TIME IS OF THE ESSENCE. Hyseq acknowledges that the commercial
benefits to Chiron of entering into this Agreement and participating in the
Collaboration depend in substantial part on the ability of Hyseq to perform the
Research within the applicable timeframes identified in this Agreement and that,
accordingly, time is of the essence in the performance of the Research.
2.4 RESEARCH COMMITTEE.
(a) JURISDICTION AND COMPOSITION. All decisions regarding the scope
and content of the Research to be performed by Hyseq pursuant to the
Collaboration shall be conclusively made, subject to the terms of this
Agreement, by a committee (the "RESEARCH COMMITTEE") composed of three (3)
representatives of Chiron and two (2) representatives of Hyseq. One of the
Chiron representatives shall serve as chair of the Research Committee.
Each party shall select its representatives to the Research Committee, and
shall notify the other party in writing of such selections and any
subsequent changes thereto.
(b) ACTIONS. Each representative of Chiron and Hyseq shall have one
vote on the Research Committee. Any approval, determination, decision or
other action by the
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Research Committee shall require the affirmative vote of three (3)
representatives. Representatives of the Research Committee may at any time
vote by proxy.
(c) MEETINGS. The Research Committee shall meet at least once per
calendar quarter, such meetings to alternate between Chiron's offices in
Emeryville, California and Hyseq's offices in Sunnyvale, California. If
approved by a majority of the representatives of the Research Committee,
meetings may be held telephonically.
(d) EXPENSES. Chiron and Hyseq each shall bear all travel, lodging,
meals and other costs and expenses associated with the participation of
their representatives on the Research Committee.
2.5 CHIRON MATERIALS.
(a) OWNERSHIP. Chiron shall solely own all right, title and interest
to and in all Chiron Materials.
(b) USE. Hyseq may use the Chiron Materials only for purposes of
performing the Research, and may not take, send or otherwise provide or
make available any Chiron Materials to any third party without the prior
written approval of Chiron, except to the extent required to enable Hyseq
to satisfy its obligations under Section 6.9.
2.6 HYSEQ PROPRIETARY DATABASE. In performing Research for Chiron
pursuant to this Agreement, Hyseq shall utilize, to the extent relevant, all
information contained in the Hyseq Proprietary Database now or at any time
during the Collaboration Term.
2.7 PERFORMANCE STANDARDS. Hyseq shall perform the Research requested by
Chiron pursuant to this Agreement in a timely and efficient manner, and in
accordance with reasonable and customary commercial and scientific standards.
2.8 RESEARCH FUNDING.
(a) RESEARCH FUNDING. During each year of the Collaboration Term,
Chiron will pay to Hyseq an amount (the "Research Funding") equal to (a)
the Allowable Costs reasonably incurred by Hyseq in performing Research
requested by Chiron pursuant to this Agreement during such year, plus (b) a
margin equal to the Applicable Percentage (as defined below) of such
Allowable Cost. Chiron will pay Hyseq * in Research Funding during the
first year of the Collaboration Term, and * in each of the second and third
years of the Collaboration Term, in each case subject to the performance by
Hyseq of the requisite Research in compliance with the terms of this
Agreement. In the event that, in any given year, Hyseq performs Research
with Chiron that result in Research Funding in excess of the minimum
requirement for that year, the excess (a "CARRYFORWARD AMOUNT") may be
carried forward and applied against the applicable minimums for subsequent
years. In addition, if Chiron elects to extend the Collaboration Term
pursuant to Section 9.1, Chiron shall pay Hyseq a minimum of * in Research
Funding in each year
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of the extension term, which shall be in addition to Research Funding
payable to Hyseq based on the Allowable Costs (plus margin at the
Applicable Percentage) incurred by Hyseq in performing Research during each
such year.
(b) APPLICABLE PERCENTAGE. The "Applicable Percentage" shall be: (i)
for the first year of the Collaboration Term, (A) *, and (B) *; (ii) for
the second and third years of the Collaboration Term, (A) *, and (B) *; and
(iii) if applicable, * for any subsequent years of the Collaboration Term.
2.9 SEGREGATION OF CHIRON RESULTS. It is understood and agreed that Hyseq
contemplates entering into collaborations with other partners outside of the
Exclusive Field ("SUBSEQUENT HYSEQ PARTNERS"), and that such other
collaborations will involve the performance of Gene Analysis and Other Research
for Subsequent Hyseq Partners. It is also understood and agreed that Hyseq
presently owns the Hyseq Proprietary Database and intends to expand that
database, and that Hyseq may in the future engage, whether independently or in
collaboration with third parties, in the research, development and
commercialization of products outside of the Exclusive Field based on
information contained in the Hyseq Proprietary Database. Notwithstanding the
foregoing, Hyseq acknowledges that all Chiron Results are the sole and exclusive
property of Chiron, and Hyseq agrees that it will in no event utilize for
itself, or directly or indirectly make available to any third party, all or any
portion of the Chiron Results, without the express prior written consent of
Chiron. Without limiting the generality of the foregoing, Hyseq will not
perform point mutation analysis, motif searches, further signature analysis or
any other analysis of the Chiron Results, except as requested by Chiron. The
provisions of this Section 2.9 do not apply to any Chiron patent applications
from and after the publication thereof, or to any actions taken by Hyseq to the
extent required to perform its obligations under Section 6.9.
2.10 RECORDS. Hyseq shall maintain records of the Research performed for
Chiron, and the Chiron Results, in sufficient detail and in good scientific
manner appropriate for patent and FDA purposes.
2.11 AVAILABILITY OF EMPLOYEES. Hyseq shall make its employees and
consultants engaged in activities relating to this Agreement available, upon
reasonable notice during normal business hours, to consult with, and provide
customer support to, Chiron on issues related to the Collaboration, but in any
case only to the extent reasonably necessary to enable Chiron to obtain the full
benefit to it of participating in the Collaboration.
2.12 COOPERATION. Each party shall provide any assistance reasonably
requested by the other in connection with the performance of the Research.
2.13 LIAISONS. Throughout the Collaboration Term, Chiron and Hyseq shall
each designate a person to serve as liaison between the parties through whom
communications regarding the Collaboration and the Research to be performed
hereunder shall be coordinated. Such person shall initially be Dr. Jaime
Escobedo for Chiron and Dr. Radomir Crkvenjakov for
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Hyseq. The parties may change their respective designees from time to time
hereunder by written notice to the other party.
ARTICLE
3
LICENSE GRANTS
3.1 LICENSES GRANTED TO CHIRON.
(a) HYSEQ RESEARCH TECHNOLOGY. Hyseq hereby grants to Chiron under
the Hyseq Research Technology an exclusive (as to any and all persons and
entities, including Hyseq, but subject to the reservation of rights under
Section 3.1(c)), worldwide, royalty-bearing license, with the right to
sublicense, to use any and all Chiron Discoveries to develop, make, have
made, use, sell and import Licensed Products directed towards any health
care indication within the Exclusive Field (and, to the limited extent
permitted under Section 4.4(a), outside of the Exclusive Field).
(b) SEQUENCE PATENT RIGHTS. Hyseq hereby grants to Chiron under the
Hyseq Sequence Patent Rights and the Collaboration Sequence Patent Rights
an exclusive (as to any and all persons and entities, including Hyseq, but
subject to the reservation of rights under Section 3.1(c)), worldwide,
royalty-bearing license, with the right to sublicense, to develop, make,
have made, use, sell and import Licensed Products directed towards any
health care indication within the Exclusive Field (and, to the limited
extent permitted under Section 4.4(a), outside of the Exclusive Field).
(c) RESERVATION OF RIGHTS. Hyseq reserves from the licenses granted
under Sections 3.1(a) and 3.1(b) above the right to practice itself (either
alone or in collaboration with third parties), and to enable third parties
to practice, the applicable Hyseq Research Technology, Hyseq Sequence
Patent Rights and/or Collaboration Sequence Patent Rights within the
Exclusive Field, but only to the extent necessary to enable Hyseq or such
third party to commercialize Hyseq Restricted Products within the Exclusive
Field as permitted under Section 4.4(b) below.
(d) SUBLICENSEES. All limitations on the rights of Chiron under this
Agreement shall apply equally to any Chiron sublicensee(s).
3.2 RIGHTS IN BANKRUPTCY. The rights granted to Chiron by Hyseq pursuant
to Section 3.1 constitute "INTELLECTUAL PROPERTY" within the meaning of Sections
101 and 365(n) of the United States Bankruptcy Code.
3.3 INDEPENDENT IP.
(a) CHIRON INDEPENDENT IP. Hyseq acknowledges that (a) Chiron may
develop or acquire Chiron Independent IP, (b) although Chiron has agreed,
pursuant to Section 4.2 and subject to the limited exception in Section
4.4(a), not to commercialize
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any Chiron Independent IP outside of the Exclusive Field, such Chiron
Independent IP may have utility outside of the Exclusive Field, and (c)
Hyseq has no rights through Chiron in any Chiron Independent IP.
(b) HYSEQ INDEPENDENT IP. Chiron acknowledges that (a) Hyseq,
individually or together with Subsequent Hyseq Partners, may develop or
acquire Hyseq Independent IP, (b) such Hyseq Independent IP may have
utility within the Exclusive Field, and (c) except for the Hyseq Sequence
Patent Rights, Hyseq Independent IP is not subject to the licenses granted
in Section 3.1.
3.4 EXPANSION OF EXCLUSIVE FIELD. Chiron shall have the right of first
negotiation to expand the Exclusive Field to include *. Either party shall have
the right to trigger the right of first negotiation by delivery of written
notice to the other party. For a period of ninety (90) days after receipt of
such written notice, the parties shall negotiate exclusively and in good faith
to agree on terms for such expansion of the Exclusive Field. If the parties
have not agreed on terms at the end of such ninety (90) day period, Hyseq shall
submit a final written offer to Chiron. If Chiron does not accept Hyseq's final
offer within five (5) days after receipt thereof, Hyseq may enter an agreement
with a third party regarding * outside of the Exclusive Field; provided,
however, that the terms of that agreement may be no less favorable to Hyseq than
those offered to Chiron in Hyseq's final offer, and provided further, that if
Hyseq has not entered into such an agreement within one hundred eighty (180)
days after submitting its final offer to Chiron, it may not do so without again
complying with this Section 3.4.
ARTICLE
4
EXCLUSIVE COMMERCIALIZATION
4.1 INTENT OF PARTIES. It is the intent of Chiron and Hyseq that, except
in each case as expressly permitted under this Article IV, (a) Chiron and its
licensees shall be entitled to commercialize Licensed Products on an exclusive
basis, but only within the Exclusive Field, and (b) Hyseq shall be entitled to
practice, directly or indirectly, the Collaboration Sequence Patent Rights
outside of the Exclusive Field only in certain limited circumstances specified
in Section 4.3(c). Hyseq acknowledges that the ability to obtain exclusivity
within the Exclusive Field is of critical importance to Chiron, and Chiron
acknowledges that the ability to maintain the option to offer Subsequent Hyseq
Partners exclusivity in fields outside of the Exclusive Field is of critical
importance to Hyseq. Both parties acknowledge that the restrictions contained
in this Article IV are reasonable in light of their respective business
objectives and of the respective benefits to each of them of the transactions
contemplated by this Agreement.
4.2 COVENANT OF CHIRON. In order to give effect to the intent of the
parties specified in Section 4.1, Chiron agrees that it will not commercialize,
directly or indirectly, whether alone or in collaboration with third parties
(including without limitation by licensing any third party to commercialize),
any Licensed Products outside of the Exclusive Field, except (a) to the limited
extent provided in Section 4.4(a) below, (b) for indications where Hyseq has not
previously granted exclusive rights to a Subsequent Hyseq Partner, with the
prior written consent of Hyseq,
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and (c) for indications where Hyseq has previously granted exclusive rights to a
Subsequent Hyseq Partner, with the prior written consent of such Subsequent
Hyseq Partner.
4.3 COVENANTS OF HYSEQ. In order to give effect to the intent of the
parties specified in Section 4.1, Hyseq agrees as follows:
(a) RESTRICTIONS ON CERTAIN GENE ANALYSIS. Hyseq will not directly or
indirectly engage in, whether alone or in collaboration with third parties,
and will not license any third party under any Hyseq Patent Rights to
engage in, Gene Analysis of the type referred to in Section 2.1(c) for
purposes of developing and/or commercializing any diagnostic, therapeutic
or prophylactic products within the Exclusive Field, except (i) to the
limited extent provided in Section 4.4(b) below, or (ii) with the prior
written consent of Chiron.
(b) RESTRICTIONS ON PRACTICE OF COLLABORATION SEQUENCE PATENT RIGHTS.
Hyseq will not practice, directly or indirectly, whether alone or in
collaboration with third parties (including without limitation by licensing
any third party to practice), any of the Collaboration Sequence Patent
Rights outside of the Exclusive Field, except (i) to the limited extent
provided in Section 4.3(c) below, or (ii) with the prior written consent of
Chiron.
(c) LICENSES TO CHIRON; RIGHT OF FIRST NEGOTIATION.
(i) *.
(ii) *.
4.4 IND EXCEPTIONS.
(a) EXCEPTION FOR CHIRON. *.
(b) EXCEPTION FOR HYSEQ. *.
4.5 MISCELLANEOUS PROVISIONS.
(a) ENFORCEMENT. It is the understanding of the parties that the
provisions of this Article IV are necessary to protect their respective
rights in connection with the transactions contemplated by this Agreement
and the potential subsequent agreements between Hyseq and Subsequent Hyseq
Partners. It is the intention of Chiron and Hyseq that these covenants be
enforced to the greatest extent (but to no greater extent) in time, area
and degree of participation as is permitted by the law of that jurisdiction
whose law is found to be applicable to any acts in breach of these
covenants.
(b) EQUITABLE RELIEF. Chiron and Hyseq each acknowledge that any
material violation of the provisions of this Article IV may cause
irreparable harm to the other party
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and that damages are not an adequate remedy. Chiron and Hyseq each
therefore agree that the other party shall be entitled to an injunction by
a court of competent jurisdiction, enjoining, prohibiting and restraining
the continuance of any such violation, in addition to any monetary damages
that might occur by reason of the violation of the provisions of this
Article IV. The remedies provided in this Section 4.5(b) are cumulative and
shall not exclude any other remedies to which any party to this Agreement
may be entitled under this Agreement or applicable law, and the exercise of
a remedy shall not be deemed an election excluding any other remedy (any
such claim by any other party to this Agreement being hereby waived).
(c) SEVERABILITY. The covenants and agreements set forth in this
Article IV shall be deemed and shall be construed as separate and
independent covenants and agreements, and, should any part or provision of
such covenants and agreements be held invalid, void or unenforceable by any
court of competent jurisdiction, such invalidity, voidness, or
unenforceability shall in no way render invalid, void or unenforceable any
other part or provision thereof or any separate covenant not declared
invalid, void or unenforceable; and this Article IV shall in that case be
construed as if the void, invalid or unenforceable provisions were omitted.
ARTICLE
5
PAYMENTS, REPORTING, AUDIT RIGHTS
5.1 UP FRONT LICENSE FEE. In consideration of the licenses granted in
Section 3.1 above, Chiron shall pay Hyseq an up front license fee of * upon
execution of this Agreement.
5.2 MILESTONE PAYMENTS. Chiron shall make milestone payments to Hyseq
with respect to each Licensed Product, upon the occurrence of following events
and in the following amounts:
(a) DIAGNOSTIC LICENSED PRODUCTS. The milestone payments for each
diagnostic Licensed Product shall be as follows:
(i) * upon submission of an application to the FDA or equivalent
regulatory agency in any jurisdiction, which application, if approved,
would confer authority to market the applicable diagnostic Licensed
Product in the applicable jurisdiction; and
(ii) * upon the First Commercial Sale of the applicable
diagnostic Licensed Product.
(b) OTHER LICENSED PRODUCTS. The milestone payments for each non-
diagnostic Licensed Product shall be as follows:
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(i) * upon submission of the first IND or equivalent to the FDA
or equivalent regulatory agency in any jurisdiction with respect to
the applicable non-diagnostic Licensed Product;
(ii) * upon submission of the first NDA or equivalent to the FDA
or equivalent regulatory agency in any jurisdiction with respect to
the applicable non-diagnostic Licensed Product; and
(iii) * upon the First Commercial Sale of the applicable non-
diagnostic Licensed Product.
5.3 MILESTONE PAYMENT METHODOLOGY. Each of the foregoing milestone
payments shall be payable separately with respect to each applicable Licensed
Product, but shall be payable only once per applicable Licensed Product. For
purposes of Section 5.2, any products that are based on or incorporate the same
Chiron Discovery, Hyseq Sequence Patent Rights and/or Collaboration Sequence
Patent Rights, as applicable, shall constitute the same Licensed Product (e.g.,
without regard to whether such products target different indications, have
different formulations, are delivered using different delivery technologies,
etc.).
5.4 ROYALTIES.
(a) OBLIGATION TO PAY ROYALTIES. Chiron shall pay Hyseq royalties on
Net Sales of Licensed Products made in any jurisdictions where the
manufacture, use or sale of such Licensed Product is, at the time of Sale,
covered by a valid and enforceable claim of (i) a Chiron Patent Right
directed to (A) a Collaboration Invention or (B) an Invention included
within the Chiron Independent IP, or (ii) a Hyseq Sequence Patent Right
and/or a Collaboration Sequence Patent Right. In addition to the
foregoing, with respect to diagnostic Licensed Products only, the Patent
Rights in a pending patent application shall be deemed to be valid and
enforceable, and royalties shall be payable with respect to diagnostic
Licensed Products covered thereby, for a period beginning on the filing of
any such patent application and ending on the earlier of (x) two (2) years
after such filing and (y) the occurrence of any event that makes it
apparent that claims of the type requiring the payment of royalties under
this Section 5.4(a) will not issue on any such patent applications.
(b) ROYALTY RATES. *.
5.5 *
5.6 REPORTS.
(a) NET SALES REPORTS. Within sixty (60) days after the end of each
fiscal quarter following the First Commercial Sale of any Licensed Product,
Chiron shall provide Hyseq with a written report (a "Sales Report") setting
forth (i) gross Sales of the applicable Licensed Product made during such
quarter, (ii) the deductions taken from
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gross Sales to arrive at Net Sales, and (iii) Net Sales of the applicable
Licensed Product made during such quarter. Each Sales Report shall include
reasonable supporting documentation.
(b) RESEARCH FUNDING REPORTS. Within thirty (30) days after the end
of each month during the Collaboration Term, Hyseq shall provide Chiron
with a written report (an "Research Funding Report") setting forth the
Allowable Costs accrued during such month in connection with the
performance of Research. Each Research Funding Report shall include
reasonable supporting documentation. Hyseq shall use diligent, good faith
efforts to ensure the accuracy of Research Funding Reports; provided,
however, that failure to include any Allowable Cost accrued during a
particular month in the Research Funding Report for such month shall not
prejudice Hyseq's ability to include such Allowable Cost in a subsequent
Research Funding Report given within the same Chiron fiscal year.
5.7 PAYMENT TERMS.
(a) ROYALTY PAYMENTS. Royalties payable under Section 5.4 above shall
be due and payable to Hyseq within sixty (60) days after the end of the
fiscal quarter in which Chiron invoices a customer for the Sale of the
applicable Licensed Product.
(b) RESEARCH FUNDING. Chiron will make Research Funding payments
within thirty (30) days after receipt of each applicable Research Funding
Report.
5.8 ACCOUNTING AND AUDITS.
(a) ROYALTIES. Chiron shall keep and maintain proper and complete
records and books of account documenting gross Sales of Licensed Products,
deductions taken therefrom to arrive at Net Sales of Licensed Products, and
Net Sales of Licensed Products. Chiron shall permit an independent public
accountant designated by Hyseq, except one to which Chiron shall have
reasonable objection, to have access, at Hyseq's own expense (except as to
the fees and expenses of the designated accountants, which shall be borne
as provided below) no more than once in each calendar year during the
License Term and twice during the three (3) calendar years following the
License Term, during regular business hours and upon reasonable notice, to
its records and books for the sole purpose of determining the
appropriateness of any royalty payments made by Chiron to Hyseq hereunder.
If such examination results in a final determination that royalties have
been overstated or understated, the applicable amount shall be refunded or
paid promptly. The fees and expenses of such accountant shall be paid by
Hyseq, unless the audit results in a final determination that royalty
payments have been understated by more than ten percent (10%) for the
period examined, in which case Chiron shall pay the fees and expenses of
such accountant. If Chiron disputes the findings of Hyseq's accountants,
such dispute shall be resolved pursuant to Article X hereof. All Chiron
information obtained by, or provided to, Hyseq and/or its accountants
pursuant to this Section 5.8 shall be subject to the confidentiality
provisions of Article VII hereof.
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(b) RESEARCH FUNDING. Hyseq shall keep and maintain proper and
complete records and books of account documenting Allowable Costs incurred
in performing Research for Chiron. Hyseq shall permit an independent
public accountant designated by Chiron, except one to which Hyseq shall
have reasonable objection, to have access, at Chiron's own expense (except
as to the fees and expenses of the designated accountants, which shall be
borne as provided below) no more than once in each calendar year during the
Collaboration Term and twice during the three (3) calendar years following
the Collaboration Term, during regular business hours and upon reasonable
notice, to its records and books for the sole purpose of determining the
appropriateness of Allowable Costs charged to Chiron hereunder. If such
examination results in a final determination that Allowable Costs have been
overstated or understated, the applicable amount shall be refunded or paid
promptly. The fees and expenses of such accountant shall be paid by
Chiron, unless the audit results in a final determination that Allowable
Costs have been overstated by more than ten percent (10%) for the period
examined, in which case Hyseq shall pay the fees and expenses of such
accountant. If Hyseq disputes the findings of Chiron's accountants, such
dispute shall be resolved pursuant to Article X hereof. All Hyseq
information obtained by, or provided to, Chiron and/or its accountants
pursuant to this Section 5.8 shall be subject to the confidentiality
provisions of Article VII hereof.
5.9 TAXES. Each party shall pay any and all taxes levied on account of
royalties or other payments it receives under this Agreement. If Applicable
Laws require that taxes be withheld, the paying party shall (a) deduct these
taxes from the remittable amount, (b) pay the taxes to the proper taxing
authority, and (c) send proof of payment to the receiving party within forty-
five (45) days following that payment.
5.10 CURRENCY; CONVERSION. All payments made under this Agreement shall
be in U.S. dollars. With respect to any royalty payment based on Net Sales of
Licensed Products made in a currency other than U.S. dollars, Chiron shall
convert such currency to U.S. dollars in accordance with the foreign currency
conversion procedures, as in effect from time to time, then used by it in the
ordinary course of its business.
5.11 BANK ACCOUNTS. All payments by Chiron to Hyseq hereunder shall be
made by wire transfer to such bank account as may be designated in writing from
time to time by Hyseq.
5.12 *
ARTICLE
6
INVENTIONS AND PATENT RIGHTS
6.1 DISCLOSURE AND OWNERSHIP OF INVENTIONS.
(a) INVENTION DISCLOSURES. Chiron and Hyseq acknowledge that the
conduct of the Collaboration may result in patentable inventions
("INVENTIONS"). Promptly
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following any development in the course of the Collaboration that could
reasonably be expected to give rise to an Invention, the party making such
development shall provide the other party with notice and a full written
description of such development (an "INVENTION DISCLOSURE"). The party
providing an Invention Disclosure shall also provide the other party any
additional information reasonably requested by the other party with respect
thereto.
(b) CHIRON INVENTIONS. Chiron shall solely own all right, title and
interest to and in all Inventions arising from the Collaboration that
relate primarily to any Chiron Materials and/or any Chiron Results, but
excluding Hyseq Sequence Inventions and Collaboration Sequence Inventions
("CHIRON INVENTIONS"). Chiron Inventions shall include, without
limitation, any such Inventions further downstream of Hyseq Sequence
Inventions and Collaboration Sequence Inventions, including without
limitation Inventions in methods of making or using, modifications and/or
function of any nucleic acid or polypeptide product thereof. Hyseq shall
have no right, title or interest to or in any Chiron Inventions except (A)
during the Collaboration Term for purposes of carrying out the
Collaboration, and (B) for the right to receive milestone payments and
royalties pursuant to Article V. Hyseq agrees to assign any Patent Rights
in Chiron Inventions, but excluding Patent Rights in Hyseq Sequence
Inventions and Collaboration Sequence Inventions, to Chiron.
(c) HYSEQ INVENTIONS. Hyseq shall solely own all right, title and
interest to and in all Hyseq Sequence Inventions and Collaboration Sequence
Inventions, and in all Inventions that relate primarily to Hyseq Research
Technology (collectively, "HYSEQ INVENTIONS"). Chiron shall have no right,
title or interest to or in any Hyseq Inventions except (A) during the
Collaboration Term for purposes of carrying out the Collaboration, and (B)
for the license rights pursuant to Section 3.1 and any potential future
license rights pursuant to Section 4.3. Chiron agrees to assign any Patent
Rights in Hyseq Inventions to Hyseq, subject to the terms of Section 6.8
below.
(d) ASSIGNMENT OF INVENTIONS. In the event that, despite the
provisions of Sections 6.1(b) and 6.1(c) above, Chiron obtains rights in
any Hyseq Invention or Hyseq obtains any rights in any Chiron Invention
(except for any such rights to which the parties are entitled as specified
in Sections 6.1(b) and 6.1(c)), the party obtaining such rights agrees to
assign all such rights to the other party. Each party will execute any
documents reasonably requested by the other party in order to fully
implement the provisions of this Section 6.1(d).
(e) EMPLOYEE ASSIGNMENTS. Neither Chiron nor Hyseq will permit any
employees or independent contractors to perform work pursuant to the
Collaboration unless such person is contractually obligated to assign his
or her interest in any Inventions to Chiron or Hyseq, as applicable.
6.2 PROSECUTION AND MAINTENANCE OF COLLABORATION SEQUENCE PATENT RIGHTS.
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(a) CONTROL. Chiron shall control filing, prosecution, maintenance
and defense of all Collaboration Sequence Patent Rights. Chiron shall
provide Hyseq with copies of all patent applications within thirty (30)
days after filing and shall also provide Hyseq copies of all material
documents relating to prosecution of all such patent applications in a
timely manner. Chiron shall notify Hyseq in writing thirty (30) days
before abandoning any Collaboration Sequence Patent Rights or before not
taking a required action such as foreign filing. In such event, Hyseq
shall have the right to assume control of the prosecution, maintenance and
defense of the applicable Collaboration Sequence Patent Rights, at Hyseq's
sole expense, after which time Chiron will have no license or other rights
therein. Chiron shall undertake the above actions in the name of Hyseq.
Hyseq shall execute any and all documents, and take any and all actions,
required to enable Chiron to undertake such actions.
(b) COSTS. Chiron shall bear all Patent Prosecution Costs incurred
pursuant to Section 6.2(a), except that any such costs incurred after any
assumption of prosecution by Hyseq.
6.3 PROSECUTION AND MAINTENANCE OF OTHER HYSEQ PATENT RIGHTS. All
decisions regarding filing, prosecution, maintenance and defense of Hyseq Patent
Rights other than Collaboration Sequence Patent Rights shall be made by Hyseq in
its sole discretion shall be implemented by Hyseq at its sole cost and expense.
Hyseq shall provide Chiron with copies of all patent applications included
within the Hyseq Sequence Patent Rights that are reasonably related to the
Exclusive Field within thirty (30) days after filing and shall also provide
Chiron copies of all material documents relating to prosecution of all such
patent applications in a timely manner. Hyseq shall notify Chiron in writing
thirty (30) days before abandoning any Hyseq Sequence Patent Rights that are
reasonably related to the Exclusive Field, or before not taking a required
action such as foreign filing. In such event, Chiron shall have the right to
assume control of the prosecution, maintenance and defense of the applicable
Hyseq Sequence Patent Rights, at Chiron's sole expense, after which time Hyseq
will assign such Hyseq Sequence Patent Rights to Chiron.
6.4 PROSECUTION AND MAINTENANCE OF CHIRON PATENT RIGHTS. All decisions
regarding filing, prosecution, maintenance and defense of Chiron Patent Rights
shall be made by Chiron in its sole discretion shall be implemented by Chiron at
its sole cost and expense.
6.5 ENFORCEMENT OF SEQUENCE PATENT RIGHTS.
(a) ALLEGED INFRINGEMENT AFFECTING LICENSED PRODUCTS. Chiron shall
have the sole right, at its own expense, to take whatever action it deems
appropriate in its own name or, if required by law, in the name of Hyseq,
to enforce any Hyseq Sequence Patent Rights and Collaboration Sequence
Patent Rights against any alleged infringement that affects Licensed
Products. All monies recovered upon the final judgment or settlement of
any such suit shall be retained by Chiron. Chiron shall keep Hyseq
reasonably apprised of the status of any such enforcement action.
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(b) ALLEGED INFRINGEMENT NOT AFFECTING LICENSED PRODUCTS. Hyseq shall
have the sole right, at its own expense, to take whatever action it deems
appropriate to enforce any Hyseq Sequence Patent Rights against any alleged
infringement that does not affect Licensed Products. All monies recovered
upon the final judgment or settlement of any such suit shall be retained by
Hyseq. Hyseq shall keep Chiron reasonably apprised of the status of any
such enforcement action.
(c) COOPERATION. Each party shall furnish all cooperation reasonably
requested by the other party in connection with the enforcement of Hyseq
Sequence Patent Rights and Collaboration Sequence Patent Rights.
6.6 ENFORCEMENT OF OTHER HYSEQ PATENT RIGHTS. All decisions regarding
enforcement of Hyseq Patent Rights other than Hyseq Sequence Patent Rights and
Collaboration Sequence Patent Rights shall be made by Hyseq in its sole
discretion shall be implemented by Hyseq at its sole cost and expense.
6.7 ENFORCEMENT OF CHIRON PATENT RIGHTS. All decisions regarding
enforcement of Chiron Patent Rights shall be made by Chiron in its sole
discretion shall be implemented by Chiron at its sole cost and expense.
6.8 OPTION FOR ASSIGNMENT OF CERTAIN SEQUENCE PATENT RIGHTS. From and
after the time that Chiron has filed a patent application arising from
Inventions in methods of making or using, modifications and/or function of any
nucleic acid and/or polypeptide product thereof, Chiron shall have the option,
exercisable by written notice to Hyseq, to require Hyseq to assign to Chiron all
Collaboration Sequence Patent Rights in any full length coding nucleic acid
sequences and encoded polypeptides specifically identified in such patent
application. In such event, Chiron and Hyseq will agree upon and execute a
suitable assignment document that preserves, but does not increase, the
respective rights and obligations of Hyseq, Chiron and any Subsequent Hyseq
Partners in the particular Collaboration Sequence Patent Rights being assigned
(the "ASSIGNED PATENT RIGHTS"). Such assignment document will include, without
limitation, provisions prohibiting Chiron from commercializing the Assigned
Patent Rights outside of the Exclusive Field (except as expressly permitted
under Article IV).
6.9 COOPERATION. Each party shall provide any assistance reasonably
requested by the other to determine priority of Inventions arising from the
Collaboration. In addition, at any time that Chiron files a patent application
included within the Collaboration Sequence Patent Rights, Hyseq will notify
Chiron whether any other patent application owned by Hyseq discloses one or more
sequences disclosed in said Chiron patent application. Hyseq will also notify
Chiron if any subsequent patent application owned by Hyseq discloses one or more
sequences disclosed in said Chiron patent application.
ARTICLE
7
CONFIDENTIALITY
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7.1 CONFIDENTIAL INFORMATION. Pursuant to the transactions contemplated
by this Agreement, the parties may provide to one another Invention Disclosures,
confidential information, including but not limited to each party's proprietary
materials and/or technologies, economic information, business or research
strategies, trade secrets and material embodiments thereof. As used herein,
"CONFIDENTIAL INFORMATION" of a party means any such confidential information
disclosed by such party to the other party (i) in written form marked
"confidential," (ii) in oral form if summarized in a writing marked
"confidential" delivered to the receiving party within thirty (30) days after
the oral disclosure, or (iii) if further disclosure of such information could
reasonably be expected to result in competitive harm to the providing party.
7.2 CONFIDENTIALITY AND NON-USE. The recipient shall maintain the
providing party's Confidential Information in confidence, except if and to the
extent that such disclosure is required by Applicable Law and provided that the
providing party has received written notice reasonably far in advance of the
proposed disclosure. The recipient shall use the providing party's Confidential
Information solely to exercise its rights and perform its obligations under this
Agreement, unless otherwise mutually agreed in writing. Upon request by the
providing party, the recipient shall return all tangible materials comprising
Confidential Information of the providing party and return or destroy any notes,
copies, summaries or extracts of the providing party's Confidential Information.
7.3 EXCLUSIONS. Confidential Information shall not include information:
(i) is shown by contemporaneous documentation of the recipient to have been in
its possession prior to receipt from the providing party; (ii) is or becomes,
through no fault of the recipient, publicly known; (iii) is furnished to the
recipient by a third party without breach of a duty to the disclosing party; or
(iv) is independently developed by the recipient without use of the providing
party's Confidential Information. The receiving party will have the burden of
proving the availability of any of the above exemptions.
7.4 TERMINATION. All obligations of confidentiality and non-use imposed
under this Article VII shall expire five (5) years following termination of this
Agreement.
ARTICLE
8
INDEMNIFICATION
8.1 INDEMNIFICATION BY HYSEQ. Hyseq shall indemnify and hold Chiron and
its Affiliates, and their respective directors, officers, employees and agents,
harmless against all claims, damages, liabilities, losses, costs and expenses
(collectively, "CLAIMS") if and to the extent arising from (a) the breach by
Hyseq of any of its representations, warranties and covenants hereunder; and (b)
any negligent or willful acts or omissions of Hyseq or its employees or agents
in connection with the performance of any tasks to be performed by Hyseq under
this Agreement, except in each case to the extent any such Claim is subject to
indemnification by Chiron pursuant to Section 8.2 below. Indirect or
consequential losses or damages are expressly excluded.
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8.2 INDEMNIFICATION BY CHIRON. Chiron shall indemnify and hold Hyseq and
its Affiliates, and their respective directors, officers, employees and agents,
harmless against all Claims if and to the extent arising from (a) the breach by
Chiron of any of its representations, warranties and covenants hereunder; and
(b) any negligent or willful acts or omissions of Chiron or its employees or
agents in connection with the performance of any tasks to be performed by Chiron
under this Agreement, except in each case to the extent any such Claim is
subject to indemnification by Hyseq pursuant to Section 8.1 above. Indirect or
consequential losses or damages are expressly excluded.
8.3 PROCEDURE. The indemnified party shall give prompt written notice to
the indemnifying party of any suits, claims or demands which may give rise to
any loss for which indemnification may be required under this Article VIII;
provided, however, that failure to give such notice shall not impair the
obligation of the indemnifying party to provide indemnification hereunder except
if and to the extent that such failure materially impairs the ability of the
indemnifying party to defend the applicable suit, claim or demand. The
indemnifying party shall be entitled to assume the defense and control of any
suit, claim or demand of any third party at its own cost and expense; provided,
however, that the other party shall have the right to be represented by its own
counsel at its own cost in such matters. In the event that the indemnifying
party shall decline to assume control of any such suit, claim or demand, the
party entitled to indemnification shall be entitled to assume such control,
conduct the defense of, and settle such suit, claim or action, all at the sole
cost and expense of the indemnifying party. The indemnifying party shall not
settle or dispose of any such matter in any manner which would adversely impact
the rights or interests of the indemnified party without the prior written
consent of the indemnified party, which shall not be unreasonably delayed or
withheld.
ARTICLE
9
TERM AND TERMINATION
9.1 COLLABORATION TERM. The term of Collaboration (the "COLLABORATION
TERM") shall begin on the date hereof and terminate three (3) years hereafter,
unless sooner terminated pursuant to Section 9.4 or Section 9.5 below. In
addition, Chiron shall have the option, exercisable by written notice to Hyseq,
to extend the Collaboration Term for up to two (2) additional periods of two (2)
years each.
9.2 LICENSE TERM. The term of the licenses granted in Article III hereof
(the "LICENSE TERM") shall begin on the date hereof and shall expire on the
later of (a) the expiration of the last Patent Right covered by any such
license, or (b) fifteen (15) years after the First Commercial Sale of a Licensed
Product hereunder, unless sooner terminated pursuant to Section 9.4 below.
9.3 EARLY TERMINATION OF AGREEMENT. This Agreement may be terminated as
follows:
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(a) by mutual written agreement of Chiron and Hyseq, effective as of
the time specified in such written agreement; or
(b) by either party,
(i) in the event of a Bankruptcy Event of the other party,
effective immediately upon the occurrence of such Bankruptcy Event; or
(ii) upon any material breach of this Agreement by the other
party; provided, however, that the party alleging such breach must
first give the other party written notice thereof, which notice must
state that nature of the breach in reasonable detail and that the
party giving such notice views such alleged breach as a basis for
terminating this Agreement under this Section 9.3(b)(ii) and the party
receiving such notice must have failed to cure such alleged breach
within sixty (60) days after receipt of such notice; or
9.4 EARLY TERMINATION OF COLLABORATION.
(a) RIGHT TO TERMINATE. * .
(b) TERMINATION FEE. * .
9.5 SURVIVAL OF OBLIGATIONS. The provisions of Sections 2.5, 2.9, 4.3(b),
5.8, 5.9, 5.10, 5.11, 9.5, 9.6 and 9.7 and Articles VI, VII, VIII, X, XI and XX
shall survive any termination of this Agreement. Chiron's obligations to make
payments under Article V for amounts accrued as of the effective date of
termination and with the statements specified in Section 5.6(a) shall also
survive any such termination. In addition, all provisions of this Agreement,
insofar as they relate to Licensed Products that are being sold commercially
upon termination of this Agreement, shall survive for as long as Licensed
Products continue to be sold commercially in any jurisdiction.
9.6 CONTINUING LIABILITY. Termination of this Agreement for any reason
shall not release any party from any liability, obligation or agreement which
has already accrued nor affect the survival of any provision hereof which is
expressly stated to survive such termination. Termination of this Agreement for
any reason shall not constitute a waiver or release of, or otherwise be deemed
to prejudice or adversely affect, any rights, remedies or claims, whether for
damages or otherwise, which a party may have hereunder or which may arise out of
or in connection with such termination.
9.7 RETURN OF CONFIDENTIAL INFORMATION. Upon termination of this
Agreement, each party shall return to the other all Confidential Information of
such other party that remains in its possession, except that each party shall be
entitled to retain one (1) copy of any such information for archival purposes.
ARTICLE
23
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THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
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10
ALTERNATIVE DISPUTE RESOLUTION ("ADR")
10.1 EXCLUSIVE DISPUTE RESOLUTION MECHANISM. The parties agree the
procedures set forth in this Article X shall be the exclusive mechanism for
resolving any bona fide disputes that arise from time to time pursuant to this
Agreement relating to any party's rights and/or obligations hereunder that
cannot be resolved through good faith negotiation between the parties.
10.2 EXECUTIVE MEDIATION. Any such dispute must first be submitted to the
officers designated below or their successors, for attempted resolution by good
faith negotiations for a period of at least thirty (30) days. Said designated
officers are as follows:
For Hyseq - Chief Executive Officer
For Chiron - President, Chiron Technologies
In the event the designated officers are not able to resolve such dispute within
such thirty (30) day period, any party may invoke the provisions below.
10.3 INITIATION OF ADR. If a party intends to begin an ADR to resolve a
dispute, such party shall provide written notice (the "ADR REQUEST") to counsel
for the other party informing such other party of such intention and the issues
to be resolved. From the date of the ADR Request and until such time as any
matter has been finally settled by ADR, the running of the time periods
contained in this Agreement within which party must cure a breach of this
Agreement shall be suspended as to the subject matter of the dispute.
10.4 SELECTION OF NEUTRAL. Within ten (10) business days after the
receipt of the ADR Request, the other party may, by written notice to the
counsel for the party initiating ADR, add additional issues to be resolved.
Within twenty (20) business days following the receipt of the ADR Request a
neutral shall be selected by the then-President of the Center for Public
Resources ("CPR"), 680 Fifth Ave., New York, New York 10019. The neutral shall
be an individual who shall preside in resolution of any disputes between the
parties. The neutral selected shall be a member of the Judicial Panel of the
CPR and shall not be an employee, director or shareholder of any party or of an
Affiliate of either party. Either party shall have ten (10) business days from
the date the neutral is selected to object in good faith to the selection of
that person. If any party makes such an objection, the then-President of the
CPR shall, as soon as possible thereafter, elect another neutral under the same
conditions set forth above. This second selection shall be final.
10.5 HEARING. No later than ninety (90) days after selection, the neutral
shall hold a hearing to resolve each of the issues identified by the parties and
shall render the award as expeditiously thereafter as possible but in no event
more than thirty (30) days after the close of hearings. In making the award the
neutral shall rule on each disputed issue and shall adopt in whole the proposed
ruling of one of the parties on each disputed issue.
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10.6 PROCEDURES. It is the intention of the parties that discovery,
although permitted as described herein, will be extremely limited except in
exceptional circumstances. The neutral shall permit such limited discovery
necessary for an understanding of any legitimate issue raised in the ADR,
including the production of documents. Each party shall be permitted but not
required to take the deposition of not more than five (5) persons, each such
deposition not to exceed six (6) hours in length. If the neutral believes that
exceptional circumstances exist, and additional discovery is necessary for a
full and fair resolution of the issues, he or she may order such additional
discovery as he or she deems necessary. At the hearing the parties may present
testimony (either by live witness or deposition) and documentary evidence. The
hearing shall be held at a location in San Francisco, California selected by the
neutral. The neutral shall have sole discretion with regard to the
admissibility of any evidence and all other matters relating to the conduct of
the hearing. The neutral shall, in rendering his or her decision, apply the
substantive law of California without giving effect to its principles of
conflicts of law, and without giving effect to any rules or laws relating to
arbitration. The decision of the neutral shall be final and not appealable,
except in cases of fraud or bad faith on the part of the neutral or any party to
the ADR proceeding in connection with the conduct of such proceedings.
10.7 PRESENTATIONS. At least thirty (30) days prior to the date set for
the hearing, each party shall submit to the other party and the neutral a list
of all documents on which such party intends to rely in any oral or written
presentation to the neutral and a list of all witnesses, if any, such party
intends to call at such hearing and a brief summary of each witness's testimony.
At least seven (7) days prior to the hearing, each party must submit to the
neutral and serve on the other party a proposed ruling on each issue to be
resolved and pre-hearing briefs. Such pre-hearing briefs shall not be more than
twenty five (25) pages. Not more than seven (7) days following the close of
hearings, the parties may each submit post hearing briefs to the neutral
addressing the evidence and issues to be resolved. Such post hearing briefs
shall not be more than ten (10) pages.
10.8 COSTS AND FEES. The neutral shall determine the proportion in which
the parties shall pay the costs and fees of the ADR. Each party shall pay its
own costs (including, without limitation, attorneys' fees) and expenses in
connection with such ADR.
10.9 CONFIDENTIALITY. The ADR proceeding shall be confidential and the
neutral shall issue appropriate protective orders to safeguard each party's
Confidential Information. Except as required by law, no party shall make (or
instruct the neutral to make) any public announcement with respect to the
proceedings or decision of the neutral without the prior written consent of the
other party. The existence of any dispute submitted to ADR, and the award of
the neutral, shall be kept in confidence by the parties and the neutral, except
as required in connection with the enforcement of such award or as otherwise
required by Applicable Law.
10.10 AWARD. Any judgment upon the award rendered by the neutral may be
entered in any court having jurisdiction thereof.
ARTICLE
11
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REPRESENTATIONS AND WARRANTIES
11.1 MUTUAL REPRESENTATIONS. Each party hereby represents and warrants to
the other as follows:
(a) DUE ORGANIZATION. It is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation.
(b) DUE AUTHORITY. It has power and authority to execute and deliver
this Agreement, and to perform its obligations hereunder.
(c) NO CONFLICT. The execution, delivery and performance by it of
this Agreement and its compliance with the terms and provisions hereof does
not and will not conflict with or result in a breach of any of the terms
and provisions of, or constitute a default under or a violation of (i) any
agreement where such conflict, breach or default would impair in any
material respect the ability of such party to perform its obligations
hereunder; (ii) the provisions of its charter document or bylaws; or (iii)
any Applicable Law, but, with respect to this clause (iii), only where such
violation could reasonably be expected to have a material adverse effect on
the ability of such party to perform its obligations hereunder.
(d) BINDING OBLIGATION. This Agreement has been duly authorized,
executed and delivered by it and constitutes its legal, valid and binding
obligation enforceable against it in accordance with its terms subject, as
to enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to the
availability of particular remedies under general equitable principles.
(e) COMPLIANCE WITH LAWS. It shall perform all of its obligations
hereunder in compliance with all Applicable Laws the violation of which
could reasonably be expected to have a material adverse effect on such
party's ability to perform its obligations hereunder.
(f) NO ACTIONS. There are no actions, suits or proceedings pending
or, to its knowledge, threatened against it or its Affiliates which affect
its ability to carry out its obligations under this Agreement.
11.2 ADDITIONAL HYSEQ REPRESENTATION. In addition to the foregoing, Hyseq
represents and warrants to Chiron that, to Hyseq's knowledge, the practice of
the Hyseq Research Technology as contemplated by this Agreement will not involve
any infringement or constitute an unauthorized use of any patent, copyright,
trade secret, proprietary information, license or right therein belonging to any
Third Party.
11.3 ADDITIONAL CHIRON REPRESENTATION. In addition to the foregoing,
Chiron represents and warrants to Hyseq that, to Chiron's knowledge, the use by
Hyseq of the Libraries
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in performing the Research as contemplated by this Agreement will not involve
any infringement or constitute an unauthorized use of any patent, copyright,
trade secret, proprietary information, license or right therein belonging to any
Third Party.
11.4 NO FURTHER REPRESENTATIONS OR WARRANTIES. Except as otherwise
expressly provided in this Article XI, neither party makes any representation or
warranty of any kind to the other party, either express or implied.
ARTICLE
12
MISCELLANEOUS
12.1 COMPLIANCE WITH APPLICABLE LAW. Each party shall exercise its
respective rights and perform its respective obligations hereunder in compliance
with Applicable Law.
12.2 RELATIONSHIP OF THE PARTIES. The parties agree that each is acting
as an independent contractor with respect to the other and nothing contained in
this Agreement is intended, or is to be construed, to constitute Chiron and
Hyseq as partners or joint venturers or Chiron or Hyseq as an agent of the
other. Neither party hereto shall have any express or implied right or
authority to assume or create any obligations on behalf of or in the name of the
other party or to bind the other party to any contract, agreement or
undertaking.
12.3 LIMITATION OF LIABILITY. Neither party shall have any liability to
the other party pursuant to this Agreement for any special, indirect or
consequential damages, including but not limited to loss of profits, loss of
business opportunities or loss of business investment.
12.4 NOTICES. Any notice or other communication hereunder shall be in
writing and shall be deemed given when so delivered in person, by overnight
courier (with receipt confirmed) or by facsimile transmission (with receipt
confirmed by telephone or by automatic transmission report) or, if given by
mail, upon receipt, as follows (or to such other persons and/or addresses as may
be specified in writing to the other party hereto):
If to Hyseq, to: Hyseq, Inc.
Almanor Avenue
Sunnyvale, CA 94086
Attention: Chief Executive Officer
Facsimile: (408) 524-8141
With a copy to: Sachnoff & Weaver, Ltd.
South Wacker Drive, 29th Floor
Chicago, IL 60606-7484
Attention: Misty S. Gruber, Esq.
Facsimile: (312) 207-6400
If to Chiron, to: Chiron Corporation
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Horton Street
Emeryville, CA 94608
Attention: President, Chiron Technologies
Facsimile: (510) 923-7460
With a copy to: Chiron Corporation
Horton Street
Emeryville, CA 94608
Attention: General Counsel
Facsimile: (510) 654-5360
12.5 SUCCESSORS AND ASSIGNS. The terms and provisions of this Agreement
shall inure to the benefit of, and be binding upon, Chiron, Hyseq, and their
respective successors and assigns; provided, however, that neither Chiron nor
Hyseq may transfer or assign any of its rights and obligations hereunder without
the prior written consent of the other, except that either party may transfer or
assign any of its rights and obligations hereunder to an Affiliate or a person
that acquires all or substantially all of the business or assets of such party
to which this Agreement relates or pursuant to a merger or consolidation. Each
party shall notify the other promptly following any such transfer, assignment,
merger or consolidation. Any purported assignment in contravention of this
Section 12.5 shall, at the option of the nonassigning party, be null and void
and of no effect.
12.6 AMENDMENTS AND WAIVERS. No amendment, modification, waiver,
termination or discharge of any provision of this Agreement, nor consent to any
departure by Chiron or Hyseq therefrom, shall in any event be effective unless
the same shall be in writing specifically identifying this Agreement and the
provision intended to be amended, modified, waived, terminated or discharged and
signed by the party against whom enforcement of such amendment is sought, and
each amendment, modification, waiver, termination or discharge shall be
effective only in the specific instance and for the specific purpose for which
given. No provision of this Agreement shall be varied, contradicted or
explained by any oral agreement, course of dealing or performance or any other
matter not set forth in an agreement in writing and signed by the party against
whom enforcement of such variance, contradiction or explanation is sought.
12.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to its
choice of law principles.
12.8 ATTORNEYS' FEES. Each party shall bear its own legal fees incurred
in connection with the transactions contemplated hereby.
12.9 SEVERABILITY. If any provision hereof should be held invalid,
illegal or unenforceable in any respect in any jurisdiction, then, to the
fullest extent permitted by law, all other provisions hereof shall remain in
full force and effect in such jurisdiction and shall be liberally construed in
order to carry out the intentions of the parties hereto as nearly as may be
possible; provided, however, that nothing herein shall be construed so as to
defeat the overall intention of the parties.
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12.10 USE OF NAMES. Neither party shall use the name, trade name or
trademark of the other party in connection with this Agreement without the
express prior written consent of the other party.
12.11 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original, and all of which counterparts,
taken together, shall constitute one and the same instrument.
12.12 ENTIRE AGREEMENT. This Agreement, together with the Stock Purchase
Agreement and all exhibits and schedules attached hereto or thereto, contains
the entire agreement and understanding of the parties hereto, and supersedes any
prior agreements or understandings between the parties with respect to the
subject matter hereof.
12.13 PUBLICITY.
(a) TERMS OF AGREEMENT. Neither party shall disclose this Agreement
or any of the terms thereof to any Third Party, whether in writing or
orally, without the prior written consent of the other party.
Notwithstanding the foregoing, either party may make any such disclosure if
but only to the extent such disclosure is, on advice of counsel, required
by Applicable Law. The disclosing party shall use all commercially
reasonable efforts to preserve the confidentiality of this Agreement and
the terms thereof notwithstanding any such required disclosure, and will
give the other party written notice of such required disclosure, which
notice shall, to the extent reasonably practicable, be given a reasonable
period of time in advance of such required disclosure. In the event either
party is required to file this Agreement with the Securities and Exchange
Commission, such party shall apply for confidential treatment of this
Agreement to the fullest extent permitted by Applicable Law, shall provide
the other party a copy of the confidential treatment request far enough in
advance of its filing to give the other party a meaningful opportunity to
comment thereon, and shall incorporate in such confidential treatment
request any reasonable comments of the other party.
(b) PRESS RELEASES. The parties will issue a joint press release
following the execution of this Agreement, the form and substance of which
shall be approved by both parties. Any subsequent press releases regarding
the transactions contemplated hereby shall be approved in advance by both
parties, such approval not to be unreasonably withheld or delayed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CHIRON CORPORATION., a Delaware corporation
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By: *
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Name: *
---------------
Title: *
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HYSEQ, INC., a Nevada corporation
By: /s/ Lewis S. Gruber
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Name: Lewis S. Gruber
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Title: Chief Executive Officer and President
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* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 10.9
COLLABORATION AGREEMENT
This Collaboration Agreement ("Agreement") dated as of the 30th day of
May, 1997 between HYSEQ, INC., 670 Almanor Avenue, Sunnyvale, California, 94086
U.S.A. (hereinafter "HYSEQ") and THE PERKIN-ELMER CORPORATION, having its PE
Applied Biosystems Division at 850 Lincoln Centre Drive, Foster City, CA 94404
(hereinafter "PERKIN-ELMER").
WHEREAS, HYSEQ and PERKIN-ELMER are interested in collaborating in the
further development and commercialization of a chip-based genetic analysis
system using HYSEQ's proprietary sequencing by hybridization technology ("SBH")
as its foundation; and
WHEREAS, HYSEQ has proprietary technology and know-how with respect to SBH
design development and manufacturing of chips and, is currently using the HyChip
Module, which utilizes superchip technology for research purposes; and
WHEREAS, PERKIN-ELMER has proprietary technology and know-how with respect
to the design, development, and manufacture of the system; and
WHEREAS, the PARTIES wish to enter into that certain stock purchase
agreement of even date with this Agreement whereby PERKIN-ELMER shall invest in
HYSEQ.
NOW THEREFORE, in consideration of the covenants and obligations expressed
herein, the PARTIES agree as follows:
1. BASIC PRINCIPLES OF THE COLLABORATION
1.1. Intent. HYSEQ and PERKIN-ELMER (collectively, the "PARTIES") intend
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that the result of this collaboration (the "Collaboration") will be a chip-based
genetic analysis system, including chips, instrumentation and application
software (the "SYSTEM") using SBH (sequencing by hybridization) as its
foundation, which is brought to market more quickly than either acting alone
could accomplish, with more effective technology than either alone could produce
in the shortened time frame and priced competitively for all markets on a
worldwide basis.
1.2. Mutually Profitable. Both PARTIES intend the Collaboration to be
-------------------
mutually profitable, and that both PARTIES share equally in the profits of the
sale of PRODUCTS on such terms as are hereinafter agreed to, or through one or
more amendments to this Agreement.
* CERTAIN INFORMATION IN THIS AGREEMENT AND ON THIS PAGE HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED
PORTIONS.
<PAGE>
1.3. Adjustment. Both PARTIES recognize that to the extent the actual
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market conditions materialize differently than anticipated, adjustments may be
needed from time to time in order that the intent of the Collaboration may be
fulfilled. Such adjustments shall be made not more often than every six months
in accordance with Article 8.1.
1.4 Pre-Existing Intellectual Properties. Both PARTIES recognize that each
------------------------------------
has rights to pre-existing intellectual properties which may directly or
indirectly contribute to the commercialization of the PRODUCTS. It is
understood that in the process of developing the RESEARCH PROGRAM contemplated
by Article 3 hereof, both PARTIES will reveal to each other relevant
intellectual property that existed prior to the EFFECTIVE DATE of the
Collaboration ("PRIOR IP") under appropriate confidentiality and nondisclosure
provisions, irrespective of whether the PRIOR IP is an issued patent, a pending
PATENT APPLICATION, a trade secret, know-how or otherwise.
1.5 Marketing, Sales, Service, and Support. The PRODUCTS of the
--------------------------------------
collaboration will be supported and distributed solely through the PERKIN-ELMER
distribution organization. The PRODUCTS will be labeled and marketed under
names of both PERKIN-ELMER and HYSEQ. PERKIN-ELMER will be responsible for all
expenses associated with sales, support and marketing. PERKIN-ELMER will
evaluate and sell, directly and through its AFFILIATES and distributors,
PRODUCTS worldwide and will use commercially reasonable efforts to sell the
PRODUCTS in their respective markets.
1.6 Funding. Within the scope of the Collaboration Agreement, HYSEQ will
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fully fund, or arrange to fund, development of CHIPS; and PERKIN-ELMER, within
the scope of the Collaboration Agreement, will fully fund development of the
SYSTEM as described in the Research Plan (except for CHIPS).
1.7 Scope. The collaboration will be an exclusive arrangement to
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commercialize, on a worldwide basis, HYSEQ's proprietary * DNA array chip
technology in a product for all markets within the application focus (Article
1.8). During the CONTRACT PERIOD, neither party will pursue commercialization
of other chip-based genetic analysis systems with a third-party using *.
1 Application Focus. To the extent practicable, the Parties will make the
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CHIPS and SYSTEMS special purpose, i.e., *. Where the Parties mutually agree
that such limitations are not appropriate, the Parties will cooperate to meet
the customer's needs in light of all the facts and circumstances, e.g. through a
field licensing program in conjunction with the sales of CHIPS and SYSTEMS, or
other arrangements that recognize the relative value to each of the PARTIES.
2. DEFINITIONS
2
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
2.1 "AFFILIATES" shall mean (i) any corporation, firm, partnership or
other entity, whether de jure or de facto, which directly or indirectly owns,
is owned by or is under common ownership with a party to this Agreement to the
extent of at least fifty percent (50%) of the equity (or such lesser percentage
which is the maximum allowed to be owned by a foreign corporation in a
particular jurisdiction) having the power to vote on or direct the affairs of
the entity; and (ii) any person, firm, partnership, corporation or other entity
actually controlled by, controlling or under common control with a party to this
Agreement.
2.2. "EFFECTIVE DATE" shall mean the date of this Agreement first written
above or such later date as the PARTIES shall determine by mutual agreement.
2.3 "EQUITY INVESTMENT AGREEMENT" shall mean the Series B Convertible
Preferred Stock Purchase Agreement entered into between HYSEQ and PERKIN-ELMER
contemporaneously herewith relating to the investment by PERKIN-ELMER of no less
than $5,000,000 and no more than $10,000,000 in HYSEQ.
2.4 "HYSEQ" shall mean HYSEQ, Inc.
2.5 "HYSEQ PATENT(S)" shall mean all patents and PATENT APPLICATIONS which
claim HYSEQ TECHNOLOGY, which are or become owned by HYSEQ during the CONTRACT
PERIOD or to which HYSEQ otherwise has, now or during the CONTRACT PERIOD, the
right to grant licenses. Included within the definition of HYSEQ PATENTS are
all continuations, continuations-in-part, divisions, patents of addition,
reissues, renewals or extensions thereof, all SPCs and PRIOR IP.
2.6 "HYSEQ TECHNOLOGY" shall mean any and all data, substances, processes,
materials, formulae, know-how and inventions, which are developed by or on
behalf of HYSEQ during or prior to the CONTRACT PERIOD and which are owned by
HYSEQ or with respect to which HYSEQ has a right to grant a license, and which
are related to the development, manufacturing, use, or sale of PRODUCTS.
2.7 "CONTRACT PERIOD" or "CONTRACT TERM" shall mean the term beginning on
the EFFECTIVE DATE and ending on the date of termination. The date of
termination shall be a minimum of five years and shall be extended year by year
automatically, unless the parties mutually agree to terminate the agreement.
2.8 "RC" or "RESEARCH COMMITTEE" shall mean the RESEARCH COMMITTEE which
shall consist of three (3) persons appointed by HYSEQ and three (3) persons
appointed by PERKIN-ELMER.
2.9 "RESEARCH PROGRAM" shall mean the research program, approved by the RC
during the CONTRACT PERIOD, to commercialize the PRODUCTS using SBH pursuant to
the Annual Research Plan adopted pursuant to Article 3 hereof and made a
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part of this Agreement in accordance therewith as in effect from time to time
during the term of this Agreement.
2.10 "CHIP" shall mean a * which is made by HYSEQ or using HYSEQ
INTELLECTUAL PROPERTY RIGHTS.
2.11 "P-E SOFTWARE" shall mean software PERKIN-ELMER generates, as
described in the Research Plan.
2.12 "INTELLECTUAL PROPERTY RIGHTS" ("IPR") shall mean rights to protected
Intellectual Properties ("IP"), which shall mean patents, copyrights,
trademarks, trade secrets and maskworks. (IPR may be subject to limitations
and/or obligations in any license from a THIRD PARTY.)
2.13 "INVENTION" shall mean intellectual property amenable to patent
protection.
2.14 "MATERIAL BREACH" shall mean: failure to pay monies, whether payment
for goods, license or royalties, due within forty-five (45) days of their due
date and absent a reasonable dispute about the amount therefor for which the
dispute resolution mechanism has been initiated as provided for herein; failure
of either Party to exercise reasonable diligence in the development of their
respective areas of responsibility; and, material failure of a Party to meet the
production or delivery schedules of its development and supply agreement.
2.15 "PERKIN-ELMER" means The Perkin-Elmer Corporation and its AFFILIATES.
2.16 "PERKIN-ELMER PATENT(S)" shall mean all patents and PATENT
APPLICATIONS which claim PERKIN-ELMER TECHNOLOGY, which are or become owned by
PERKIN-ELMER during the CONTRACT PERIOD or to which PERKIN-ELMER otherwise has,
now or during the term of the CONTRACT PERIOD, the right to grant licenses.
Included within the definition of PERKIN-ELMER PATENTS are all continuations,
continuations-in-part, divisions, patents of addition, reissues, renewals or
extensions thereof, all SPCs and PRIOR IP.
2.17 "SPC" shall mean a right based upon a patent to exclude others from
making, using or selling a PERKIN-ELMER PRODUCT or a HYSEQ PRODUCT, such as a
Supplementary Protection Certificate from the European Patent Office.
2.18 "THIRD PARTY(IES)" shall mean any party other than a Party to this
Agreement or other than an AFFILIATE of HYSEQ or of PERKIN-ELMER.
2.19 "HYSEQ SOFTWARE" shall mean HYSEQ-generated software.
4
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
2.20 "NECESSARY REAGENTS" shall mean reagents, including probes,
proprietary to HYSEQ, required for the use of CHIPS for the use, or uses, for
which any given CHIP is intended and designed.
2.21 "PATENT APPLICATION" shall mean any U.S. application, continuation,
continuation-in-part, reissue, reexamination, division or patent term extension
application or any foreign equivalent of the foregoing.
2.22 "PROSECUTE" shall mean, in the context of prosecuting pending PATENT
APPLICATIONS, taking necessary actions, including conducting oppositions and
interferences, to perfect the patent rights to an INVENTION.
2.23 "PRODUCTS" shall mean the SYSTEM, P-E SOFTWARE, CHIPS, HYSEQ SOFTWARE
and NECESSARY REAGENTS.
2.24 "RESIDUAL KNOWLEDGE" shall mean all Collaboration information in non-
tangible form which is gained and retained in the mind in the normal course of
work by those employees (i) performing under this Agreement and (ii) having
access to Collaboration information, whether confidential or not, that is in
tangible or intangible form and that is not a protected IP.
2.25 "COLLABORATION HYSEQ INTELLECTUAL PROPERTY" shall mean individually
and collectively all inventions, improvements and/or discoveries, maskworks,
computer programs, and other copyrightable material arising out of work
performed pursuant to the obligations of this Agreement, conceived and/or
reduced to practice during the CONTRACT PERIOD solely by one or more employees
or agents of HYSEQ, in furtherance of the RESEARCH PROGRAM. Such Intellectual
Property shall include any patent application and patent throughout the world on
such inventions, improvements and/or discoveries, maskworks, computer programs,
or any copyrightable material produced in connection with this Agreement,
including all copyrights and any extensions and renewals thereof on any and all
such material including translations thereof in any and all countries, filed
pursuant to this Agreement by or on behalf of HYSEQ, its employees or agents.
2.26 "COLLABORATION JOINT INTELLECTUAL PROPERTY" shall mean individually
and collectively all inventions, improvements and/or discoveries, maskworks,
computer programs, and other copyrightable material, arising out of work
performed pursuant to the obligations of this Agreement, which is jointly
conceived and/or reduced to practice during the CONTRACT PERIOD by one or more
employees or agents of HYSEQ, and by one or more employees or agents of PERKIN-
ELMER, and related to the RESEARCH PROGRAM. Such Intellectual Property shall
include any patent application and patent throughout the world on such
inventions, improvements and/or discoveries, maskworks, or computer programs or
other copyrightable material produced in connection with this Agreement,
including all copyrights and any extensions and renewals thereof on any and all
such material including translations thereof in any
5
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and all countries, filed pursuant to this Agreement by or on behalf of a party,
its employees, or agents.
2.27 "COLLABORATION PERKIN-ELMER INTELLECTUAL PROPERTY" shall mean
individually and collectively all inventions, improvements and/or discoveries,
maskworks, computer programs, and other copyrightable material, arising out of
work performed pursuant to the obligations of this Agreement, conceived and/or
reduced to practice during the CONTRACT PERIOD solely by one or more employees
or agents of PERKIN-ELMER, and related to the RESEARCH PROGRAM. Such
Intellectual Property shall include any patent application and patent throughout
the world on such inventions, improvements and/or discoveries, maskworks, or
computer programs or other copyrightable material produced in connection with
this Agreement, including all copyrights and any extensions and renewals thereof
on any and all such material including translations thereof in any and all
countries, filed pursuant to this Agreement by or on behalf of PERKIN-ELMER, its
employees or agents.
3. RESEARCH PROGRAM
3.1. Purpose. HYSEQ and PERKIN-ELMER shall conduct the RESEARCH PROGRAM
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throughout the CONTRACT PERIOD as specified in said RESEARCH PROGRAM. The
objective of the RESEARCH PROGRAM is to commercialize HYSEQ's proprietary chip
technology into a product platform for markets on a worldwide basis, it being
understood that the design and development of the CHIPS will be under the
direction and control of HYSEQ and that the design, development and manufacture
of the SYSTEM (except CHIPS), including the instrument platform, will be under
the direction and control of PERKIN-ELMER, and the design, development, and the
manufacture of the reagents and associated analysis software will be under the
joint control of PERKIN-ELMER and HYSEQ. The RESEARCH COMMITTEE will, in the
context of preparation of its Annual Research Plan, determine the most cost-
effective mechanism for production of the CHIPS and the SYSTEM considering the
expertise of each of the companies in connection therewith.
3.2 RESEARCH COMMITTEE
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3.2.1 Purpose. HYSEQ and PERKIN-ELMER shall establish the RESEARCH
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COMMITTEE within thirty (30) days after the EFFECTIVE DATE:
(a) to prepare the initial Research Plan and to revise such
Research Plan over time as approved.
(b) to review and evaluate progress under the Research Plan;
(c) to prepare the Research Plan budget for each year;
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(d) to oversee the activities associated with the Research Plan;
and
(e) to coordinate and monitor publication of research results
obtained from and the exchange of information and materials
that relate to the RESEARCH PROGRAM.
(f) to prepare specifications for CHIPS and SYSTEMS;
(g) to develop specifications for product labeling.
The RESEARCH COMMITTEE shall continue to convene for the purposes set forth
in subsection (e), above, from time to time after the termination of this
Agreement.
3.2.2 Membership. HYSEQ and PERKIN-ELMER shall each appoint, in its
----------
sole discretion, three members to the RESEARCH COMMITTEE. Substitutes may
be appointed at any time.
3.2.3 Chair. The RESEARCH COMMITTEE shall initially be chaired by the
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senior HYSEQ member. Each year, the Chair shall be rotated between the
parties, i.e., the first year the Chair will be a HYSEQ member, the second
year a PERKIN-ELMER member, and so on.
3.2.4 Meetings. The RESEARCH COMMITTEE shall meet at least quarterly,
--------
at places and on dates selected by each party in turn. Representatives of
HYSEQ or PERKIN-ELMER or both, in addition to members of the RESEARCH
COMMITTEE, may attend such meetings at the invitation of either party.
3.2.5 Minutes. The RESEARCH COMMITTEE shall keep accurate minutes of
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its deliberations which record all proposed decisions and all actions
recommended or taken. Drafts of the minutes shall be delivered to all
RESEARCH COMMITTEE members within ten (10) business days after each
meeting. The party hosting the meeting shall be responsible for the
preparation and circulation of the draft minutes. Draft minutes shall be
edited by the Chair and shall be issued in final form only with the
approval and agreement of a majority of the members.
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3.2.6 Decisions. All technical decisions of the RESEARCH COMMITTEE
---------
shall be made by majority; provided, however, that the Chair, shall cast
the deciding vote if the RESEARCH COMMITTEE is deadlocked.
3.2.7 Expenses. HYSEQ and PERKIN-ELMER shall each bear all expenses of
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their respective members related to their participation on the RESEARCH
COMMITTEE.
3.3 Annual Research Plan.
--------------------
3.3.1 An initial research plan shall be prepared by the RESEARCH
COMMITTEE for submission to and approval by HYSEQ and PERKIN-ELMER no later
than one hundred and twenty (120) days after execution of this Agreement.
3.3.2 Reports. During the CONTRACT PERIOD, each party shall furnish
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to the RESEARCH COMMITTEE:
(a) summary written reports within fifteen (15) days after the
end of each calendar year quarter period commencing on the
first complete calendar year quarter following the EFFECTIVE
DATE, describing its progress under the RESEARCH PROGRAM; and
(b) comprehensive written reports within thirty (30) days after
the end of each year of the Agreement, describing in detail
the work accomplished by it under the RESEARCH PROGRAM during
the year and discussing and evaluating the results of such
work.
3.4 Laboratory Facilities and Personnel. Each party shall provide
-----------------------------------
laboratory facilities, equipment and personnel for the work to be done by the
party in carrying out the RESEARCH PROGRAM consistent with a company of the
party's size and state of development.
3.5 Diligent Efforts. The PARTIES shall use reasonably diligent efforts
----------------
to achieve the objectives of the RESEARCH PROGRAM.
4. COMMITMENTS AND COSTS AND EXPENSES OF COLLABORATION
4.1 HYSEQ will commit $5 million, including without limitation, amounts
received under that certain grant from the National Institute of Standards and
Technology on or after the EFFECTIVE DATE, toward development of the CHIP
component of the SYSTEM. HYSEQ will commit research, development and
manufacturing resources at
8
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HYSEQ necessary to achieve the program goals of manufacturing a minimum number
of specific CHIPS in quantities previously agreed to and with performance
characteristics previously agreed to, to meet market demand for such CHIPS.
4.2 PERKIN-ELMER will commit *, including without limitation, amounts
received under that certain grant from the National Institute of Standards and
Technology toward development and commercialization of the instrumentation,
reagents, and software components of the SYSTEM.
PERKIN-ELMER shall commit monies and other resources sufficient to realize
the development of the SYSTEM as delineated in the Research Plan. PERKIN-ELMER
agrees to pay reasonable "burdened cost" (fully loaded cost) for HYSEQ employees
agreed by PERKIN-ELMER to be assigned to and performing services in the
development of the SYSTEM as described in the Research Plan.
4.3 The amounts committed by each of the PARTIES will be subject to
adjustment by the Annual Budget contemplated by Article 3; provided, however,
that nothing herein shall require either party to commit in excess of the amount
set forth in Article 4.1 or 4.2 without such party's prior written consent.
5. EXCHANGE OF INFORMATION AND CONFIDENTIALITY
5.1 Duties of Confidentiality. Because HYSEQ and PERKIN-ELMER will be
-------------------------
cooperating with each other in this collaboration, each may reveal confidential
information to the other in the course of this program. "Confidential
Information" shall include confidential knowledge, know-how, practices,
processes, equipment or information which (a) is obtained or generated during
the course of this work and (b) is related thereto and, except for generated
information (c) is identified at the time of disclosure as "CONFIDENTIAL" and,
in the case of disclosures in non-written form, is identified in writing within
thirty (30) days as confidential. HYSEQ and PERKIN-ELMER agree to hold in
confidence, by using the same degree of care as each uses for information of
like importance, but not less than a reasonable degree of care, any Confidential
Information disclosed by the other party hereunder, and PERKIN-ELMER and HYSEQ
agree not to disclose same to any third party without the express written
consent of the other or the RC, or, except as may be required for purposes of
advancing the research, investigating, developing, manufacturing or marketing of
the CHIPS or the SYSTEM, or to carry out any litigation concerning the same or
the research covered under this Agreement, provided that each such third party
is informed of the confidentiality of such information and that each said third
party agrees to be bound to at least the same degree of confidentiality as the
PARTIES are bound under this Agreement. This confidentiality requirement shall
remain in force for a period of three (3) years following termination of this
Agreement. Notwithstanding the above, Confidential Information shall not
include, and nothing in this Article shall in any way restrict the
9
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
rights of either HYSEQ or PERKIN-ELMER to use, disclose or otherwise deal with,
any information which:
(a) Can be demonstrated to have been in the public domain as of the
Effective Date or comes into the public domain during the term of
this Agreement through no act of the recipient; or
(b) Can be demonstrated to have been independently known to the recipient
prior to the receipt thereof, or made available to the recipient as a
matter of lawful right by a third party; or
(c) Can be demonstrated to have been rightfully received by the recipient
from a third party who did not require the recipient to hold it in
confidence or limit its use and who did not acquire it, directly or
indirectly, from the other party to this Agreement under a continuing
obligation of confidentiality; or
(d) Shall be required for disclosure to any governmental regulatory
agencies pursuant to approval for use; or
(e) Is independently conceived, invented or acquired by researchers of
the recipient who have not been personally exposed to the information
provided to the recipient hereunder; or
(f) Is published by a governmental agency as part of the normal patent
filing and prosecution process.
5.2 Responsibility over Employees and Agents. Each of the parties agrees
----------------------------------------
to assume individual responsibility for the actions and omissions of its
respective employees, agents and assigns in conjunction with this research, and
to inform same of the responsibilities for confidentiality and disclosure under
this Agreement, and to obtain their agreement to be bound in the same manner
that the party is bound.
5.3 Nothing herein shall be construed as preventing either party from
disclosing any information to an AFFILIATE of PERKIN-ELMER or HYSEQ or to a sub-
licensee, distributor or joint venture or other associated company of either
party for the purpose of developing or commercializing the CHIPS and the SYSTEM,
provided such AFFILIATE, sub-licensee, distributor or joint venture or other
associated company has undertaken a similar obligation of confidentiality with
respect to the Confidential Information.
5.4 All Confidential Information disclosed by one party to the other
shall remain the intellectual property of the disclosing party. In the event
that a court or other legal or administrative tribunal, directly or through an
appointed master, trustee or receiver, assumes partial or complete control over
the assets of a party to this Agreement based on the insolvency or bankruptcy of
such party, the bankrupt or insolvent party shall promptly notify the court or
other tribunal (i) that Confidential Information received from the other
10
<PAGE>
party under this Agreement remains the property of the other party and (ii) of
the confidentiality obligations under this Agreement. In addition, the bankrupt
or insolvent party shall, to the extent permitted by law, take all steps
necessary or desirable to maintain the confidentiality of the other party's
Confidential Information and to insure that the court, other tribunal or
appointed maintains such information in confidence in accordance with the terms
of this Agreement.
5.5 No public announcement concerning the existence of or terms of this
Agreement shall be made, either directly or indirectly, by any party to this
Agreement without prior written notice to the other party and, except as may be
legally required, or as may be required for a public offering of securities, or
as may be required for recording purposes, without first obtaining the approval
of the other party and agreement upon the nature and text of such announcement.
The party desiring to make any such public announcement shall inform the other
party of the proposed announcement or disclosure in reasonably sufficient time
prior to public release, and shall provide the other party with a written copy
thereof, in order to allow such other party to comment upon such announcement or
disclosure.
5.6 Neither PERKIN-ELMER nor HYSEQ shall submit for written or oral
publication any manuscript, abstract or the like which includes data or other
information generated and provided by the other party or otherwise developed by
either party in the performance of activities in furtherance of this Agreement
without first obtaining the prior written consent of the RC established in
accordance with Article 3.
5.7 For the avoidance of doubt, nothing in this Agreement shall be
construed as preventing or in any way inhibiting either party from complying
with statutory and regulatory requirements governing the development,
manufacture, use and sale or other distribution of products in any manner which
it reasonably deems appropriate, including, for example, by disclosing to
regulatory authorities confidential or other information received from a party
or THIRD PARTIES. The PARTIES shall take reasonable measures to assure that no
unauthorized use or disclosure is made by others to whom access to such
information is granted.
6. PATENT PROSECUTION AND LITIGATION
6.1 Intellectual Property.
---------------------
6.1.1 Ownership of Intellectual Property
----------------------------------
6.1.1.1 COLLABORATION HYSEQ INTELLECTUAL PROPERTY
------------------------------------------
All rights and title to COLLABORATION HYSEQ INTELLECTUAL PROPERTY,
whether patentable or copyrightable or not, shall belong to
11
<PAGE>
HYSEQ and shall be subject to the terms and conditions of this
Agreement.
6.1.1.2 COLLABORATION JOINT INTELLECTUAL PROPERTY
------------------------------------------
All rights and title to COLLABORATION JOINT INTELLECTUAL PROPERTY,
whether patentable or copyrightable or not, shall belong jointly to
PERKIN-ELMER and HYSEQ and shall be subject to the terms and
conditions of this Agreement.
6.1.1.3 COLLABORATION PERKIN-ELMER INTELLECTUAL PROPERTY
-------------------------------------------------
All rights and title to COLLABORATION PERKIN-ELMER INTELLECTUAL
PROPERTY, whether patentable or copyrightable or not, shall belong to
PERKIN-ELMER. Such PERKIN-ELMER INTELLECTUAL PROPERTY shall be
subject to the terms and conditions of this Agreement.
6.1.2 Invention and Intellectual Property Disclosures.
-----------------------------------------------
HYSEQ and PERKIN-ELMER agree to report the collaboration intellectual
property described in Articles 2.25, 2.26, and 2.27 promptly to each other
and to the RC, and in any event within thirty (30) days of their
identification thereof. HYSEQ and PERKIN-ELMER will promptly prepare
invention disclosure reports on any such COLLABORATION HYSEQ INTELLECTUAL
PROPERTY, COLLABORATION PERKIN-ELMER INTELLECTUAL PROPERTY, respectively,
and promptly deliver such reports to the RC. The RC shall direct which
party is to prepare the report for COLLABORATION JOINT INTELLECTUAL
PROPERTY. HYSEQ further agrees to report promptly to PERKIN-ELMER the
HYSEQ PRIOR IP, and in any event within thirty (30) days after the
Effective Date. Similarly, PERKIN-ELMER further agrees to report promptly,
to HYSEQ the PERKIN-ELMER PRIOR IP, and in any event within thirty (30)
days after the Effective Date.
6.1.3 Any intellectual property owned by PERKIN-ELMER or HYSEQ
that can contribute to the success of the products from the collaboration
will be made available to the Parties for the development of PRODUCTS under
the terms and conditions of this Agreement. Any intellectual property that
has been licensed to either of the parties will be made available to the
Parties for the development of PRODUCTS under the terms and conditions of
this Agreement, and under terms consistent with those licensing agreements.
12
<PAGE>
6.2 HYSEQ shall have the first right, using in-house or outside legal
counsel selected by HYSEQ's sole discretion, to prepare, file, PROSECUTE,
maintain and extend HYSEQ PATENTS and other forms of intellectual property
protection for inventions, discoveries, designs, works of authorship and other
know-how generated by HYSEQ during the CONTRACT PERIOD in countries of HYSEQ's
choosing, and HYSEQ shall bear all costs relating to such activities which occur
at HYSEQ's request or direction, except that PERKIN-ELMER and HYSEQ may agree on
a sharing of patent costs associated with filings outside the U.S. HYSEQ shall
solicit the RC's advice and review of HYSEQ PATENTS, and other forms of
intellectual property, and important prosecution matters relating thereto and
take into consideration the RC's advice thereon. If HYSEQ, prior or subsequent
to filing HYSEQ PATENTS or applications for other forms of intellectual
property, elects not to prepare, file, PROSECUTE or maintain certain of such
HYSEQ PATENTS or certain claims encompassed within such HYSEQ PATENTS, or such
other forms of intellectual property, in one or more countries, HYSEQ shall give
PERKIN-ELMER notice thereof within a reasonable period prior to allowing such
patents, claims or other forms of intellectual property, to lapse or become
abandoned or unenforceable, and PERKIN-ELMER shall thereafter have the right, at
its sole expense, to prepare, file, PROSECUTE, and maintain such HYSEQ PATENTS
or divisional PATENT APPLICATIONS related to such certain claims, or such other
forms of intellectual property, in such one or more countries. PERKIN-ELMER
shall, at PERKIN-ELMER's expense, provide reasonable assistance to HYSEQ to
facilitate the filing and prosecution of all such HYSEQ PATENTS and shall
execute all documents deemed necessary or desirable therefor. PERKIN-ELMER and
HYSEQ shall each hold all information it presently knows or acquires under this
Article as Confidential Information in accordance with Article 5.
6.3 PERKIN-ELMER shall have the first right, using in-house or outside
legal counsel selected at PERKIN-ELMER's sole discretion, to prepare, file,
PROSECUTE, maintain and extend PERKIN-ELMER PATENTS and other forms of
intellectual property for inventions, discoveries, designs, works of authorship
and other know-how by PERKIN-ELMER during the CONTRACT PERIOD in countries of
PERKIN-ELMER's choosing, and PERKIN-ELMER shall bear all costs relating to such
activities which occur at PERKIN-ELMER's request or direction. PERKIN-ELMER
shall solicit the RC's advice and review of such PERKIN-ELMER PATENTS and other
forms of intellectual property and important prosecution matters relating
thereto and take into consideration RC's comments thereon. If PERKIN-ELMER,
prior or subsequent to filing PERKIN-ELMER PATENTS, or applications for other
forms of intellectual property, elects not to prepare, file, PROSECUTE or
maintain certain of such PERKIN-ELMER PATENTS or certain claims encompassed
within such PERKIN-ELMER PATENTS, or such other forms of intellectual property,
in one or more countries, PERKIN-ELMER shall give HYSEQ notice thereof within a
reasonable period prior to allowing such patents, claims or other forms of
intellectual property to lapse or become abandoned or unenforceable, and HYSEQ
shall thereafter have the right, at its sole expense, to prepare, file,
PROSECUTE, and maintain such PERKIN-ELMER PATENTS or divisional PATENT
APPLICATIONS related to such certain claims, or such other forms of intellectual
13
<PAGE>
property, in such one or more countries. HYSEQ shall, at HYSEQ's expense,
provide reasonable assistance to PERKIN-ELMER to facilitate the filing and
prosecution of all PERKIN-ELMER PATENTS and shall execute all documents deemed
necessary or desirable therefor. HYSEQ and PERKIN-ELMER shall each hold all
information it presently knows or acquires under this Article as Confidential
Information in accordance with Article 5.
6.4 COLLABORATION JOINT INTELLECTUAL PROPERTY. With respect to
-----------------------------------------
COLLABORATION JOINT INTELLECTUAL PROPERTY, PERKIN-ELMER and HYSEQ shall jointly
determine the advisability of filing a patent application or application for
other intellectual property thereon. The RC shall appoint one of the PARTIES
the responsibility to prepare, file, PROSECUTE diligently and maintain such
application(s). The PARTIES shall share equally all reasonable costs incurred in
connection with such activities (the non-prosecuting party will promptly
reimburse the prosecuting party); provided that either party may avoid its
responsibility for such costs by assigning its rights in such COLLABORATION
JOINT INTELLECTUAL PROPERTY to the other party. If either party assigns to the
other its rights in such Property as set forth above, the other party shall be
free to decide, in its sole discretion, whether or not to file or continue
prosecution or maintain any such application(s), and whether or not to maintain
any protection issuing thereon in the U.S. and in any foreign country. Any such
filing prosecution or maintenance shall then be at the assignee's sole expense.
6.5 HYSEQ's License of IP to PERKIN-ELMER. HYSEQ grants to PERKIN-ELMER,
-------------------------------------
a license under HYSEQ PRIOR IP and COLLABORATION HYSEQ IP to make, have made,
use and sell the SYSTEM, PE SOFTWARE, HYSEQ SOFTWARE, and NECESSARY REAGENTS, to
read CHIPS, and to use and sell CHIPS; and to make, or have made, CHIPS, if
HYSEQ chooses not to manufacture, or have manufactured, same; all pursuant to
the purposes of this Collaboration Agreement to make PRODUCTS available to Third
Parties; and to pass on to customers of PERKIN-ELMER the rights to use said
PRODUCTS. However, this license specifically shall not constitute a license to
PERKIN-ELMER to manufacture CHIPS, unless HYSEQ chooses not to manufacture or
have manufactured and sell CHIPS to PERKIN-ELMER. This license shall be royalty-
free in lieu of payments to be made under this Agreement by PERKIN-ELMER to
HYSEQ based on sales of PRODUCTS. No license is provided hereunder for the use
by PERKIN-ELMER of CHIPS other than for the development, manufacturing and sale
of PRODUCTS by PERKIN-ELMER.
6.6 PERKIN-ELMER License of IP to HYSEQ. PERKIN-ELMER grants to HYSEQ a
-----------------------------------
license under PERKIN-ELMER PRIOR IP and COLLABORATION PERKIN-ELMER IP to make,
have made, and use internally, CHIPS for operation with the SYSTEM, for the
purpose of developing PRODUCTS for sale to Third Parties by PERKIN-ELMER. This
license shall be royalty free for CHIPS sold to PERKIN-ELMER by HYSEQ. No
license is provided hereunder for the use by HYSEQ of CHIPS other than for the
development, manufacturing and sale of PRODUCTS by PERKIN-ELMER.
14
<PAGE>
6.7 Each party, on behalf of itself and its directors, employees,
officers, shareholders, agents, successors and assigns hereby waives any and all
actions and causes of action, claims and demands whatsoever, in law or equity of
any kind it or they may have against the other party, its officers, directors,
employees, shareholders, agents, successors and assigns, which may arise in any
way, except as a result of gross negligence, recklessness, or willful
misconduct, in performance of patent activities under this Article 6.
6.8 Each party, as the case may be, shall disclose to the other, the
complete texts of all PATENTS filed on COLLABORATION PERKIN-ELMER INTELLECTUAL
PROPERTY, COLLABORATION HYSEQ INTELLECTUAL PROPERTY, and COLLABORATION JOINT
INTELLECTUAL PROPERTY, as well as all information received concerning the
institution or possible institution of any interference, opposition, re-
examination, reissue, revocation, nullification or any official proceeding
involving such PATENTS anywhere in the world. Each party shall have the right
to review all such pending applications and other proceedings and make
recommendations concerning them and their conduct. Each party shall keep the
other promptly and fully informed of the course of patent prosecution or other
proceedings including by providing the other party with copies of important,
substantive communications, search reports and THIRD PARTY observations
submitted to or received from patent offices throughout the world. The PARTIES
shall hold all information disclosed to it under this article as confidential
subject to the provisions of Article 5. Each party shall have the right to
assume responsibility for any PATENT or any part thereof (except for PATENTS of
the other party filed on PRIOR IP), which the other party intends to abandon or
otherwise cause or allow to be forfeited.
6.9 In the event of the institution of any suit by a THIRD PARTY against
HYSEQ, PERKIN-ELMER or its sub-licensees for patent infringement involving the
manufacture, use, sale, distribution or marketing of PRODUCTS, the party sued
shall promptly notify the other party in writing. The other party shall have
the right but not the obligation to defend or participate in the defense of such
suit at its own expense. HYSEQ and PERKIN-ELMER shall assist one another and
cooperate in any such litigation at the other's request without expense to the
requesting party.
6.10 In the event that HYSEQ or PERKIN-ELMER becomes aware of actual or
threatened infringement of a PERKIN-ELMER PATENT or HYSEQ PATENT, or PATENT
resulting from COLLABORATION JOINT INTELLECTUAL PROPERTY, that party shall
promptly notify the other party in writing. The owner of the PERKIN-ELMER PATENT
or HYSEQ PATENT, and either owner of a PATENT resulting from the COLLABORATION
JOINT INTELLECTUAL PROPERTY shall have the first right but not the obligation to
bring, at its own expense, an infringement action against any THIRD PARTY and to
use the other party's name in connection therewith. If an owner of the patent
does not commence a particular infringement action within ninety (90) days, the
other party, after notifying the owner in writing, shall be entitled to bring
such infringement action at its own expense. The party conducting such action
shall have full
15
<PAGE>
control over its conduct, including settlement thereof provided such settlement
shall not be made without the prior written consent of the other party if it
would adversely affect the patent rights of the other party. In any event,
HYSEQ and PERKIN-ELMER shall assist one another and cooperate in any such
litigation at the other's request without expense to the requesting party. In
the event any PRIOR IP is the subject of litigation, the party conducting the
litigation shall consult with the other party prior to settlement of such
litigation.
6.11 HYSEQ and PERKIN-ELMER shall recover their respective actual out-of-
pocket expenses, or equitable proportions thereof, associated with any
litigation or settlement thereof from any recovery made by any party. Any
excess amount shall be shared between PERKIN-ELMER and HYSEQ in an amount
proportional to their respective losses and expenses.
6.12 The PARTIES shall keep one another informed of the status of their
respective activities regarding any such litigation or settlement thereof.
6.13 An owner of a PERKIN-ELMER PATENT or a HYSEQ PATENT or a PATENT
resulting from COLLABORATION JOINT INTELLECTUAL PROPERTY shall have the first
right to seek extensions of the terms of the patent and to seek to obtain SPCs.
A party who is developing, selling or planning to sell a product covered by a
patent shall have the second right. Each party shall assist the other in the
obtaining of such extensions or SPCs including by authorizing the other party to
act as its agent.
6.14 All rights and licensing granted under or pursuant to this
Agreement by from one PARTY to the other PARTY are, and shall irrevocably be
deemed to be, "intellectual property" as defined in Section 101(56) of the
Bankruptcy Code. In the event of the commencement of a case by or against
either party under any Chapter of the Bankruptcy Code, this Agreement shall be
deemed an executory contract and all rights and obligations hereunder shall be
determined in accordance with Section 365(n) thereof. Unless a party rejects
this Agreement and the other party decides not to retain its rights hereunder,
---
the other party shall be entitled to a complete duplicate (or complete access
to, as appropriate) all intellectual property and all embodiments of such
intellectual property held by the party and the party shall not interfere with
the rights of the other party, which are expressly granted hereunder, to such
intellectual property and all embodiments of such intellectual property from
another entity. Further, this Agreement shall be deemed, upon presentation to
another entity, to be the same as an express instruction by the party to such
other entity to provide such intellectual property and all embodiments of such
intellectual property directly to the other party. Without limiting the
foregoing provisions in this Article, the other party shall be entitled to all
post-bankruptcy-petition improvements, updates, or developments of intellectual
property created hereunder. If such intellectual property is not fully
developed as of the commencement of any bankruptcy case, the other party shall
have the right to complete development of the property.
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7. TRADEMARKS AND NON-PROPRIETARY NAMES
7.1 PERKIN-ELMER, at its expense, shall be responsible for the selection,
registration and maintenance of all trademarks which it employs in connection
with PRODUCTS (except CHIPS) and shall own and control such trademarks. Nothing
in this Agreement shall be construed as a grant of rights, by license or
otherwise, to HYSEQ to use such trademarks for any purpose other than co-
promotion as provided in this Agreement.
7.2 PERKIN-ELMER, at its expense, shall be responsible for the selection
and registration of non-proprietary names for PERKIN-ELMER PRODUCT.
7.3 HYSEQ, at its expense, shall be responsible for the selection,
registration and maintenance of all trademarks which it employs in connection
with CHIPS and shall own and control such trademarks. Nothing in this Agreement
shall be construed as a grant of rights, by license or otherwise, to PERKIN-
ELMER to use such trademarks for any purpose other than co-promotion as
provided in this Agreement.
8. FINANCIAL ASPECTS, STATEMENTS AND REMITTANCES
8.1 In accordance with the Principles of Collaboration outlined in
Article 1.2, PERKIN-ELMER will pay to HYSEQ a royalty on the NET SALES (defined
below) of PRODUCTS sold by PERKIN-ELMER. The PARTIES will agree upon a method
from which to calculate the shared profits and resulting royalty that should be
paid to HYSEQ by June 19, 1997 or such later date as shall be mutually agreed
upon. Pending resolution of the royalty rate, PERKIN-ELMER will pay to HYSEQ an
initial royalty of * on the NET SALES of PRODUCTS sold by PERKIN-ELMER pursuant
to this Agreement, said initial royalty to be adjusted retroactively once the
royalty rate is determined according to the method. After the first year
following the first commercial sale of a PRODUCT, the royalty shall be subject
to adjustment at the written request of either party in accordance with Article
1.3. Upon such request, both parties will cooperate in providing accurate
information to the other to determine the proper royalty rate in accordance with
the method to reflect the equal sharing in the pre-tax profits on the sale of
PRODUCTS, taking into account the operating costs incurred by each party.
8.1.1 "Net Sales" means the following:
(i) With respect to sales by PERKIN-ELMER, or an Affiliate of
PERKIN-ELMER, or a distributor of PERKIN-ELMER to any
THIRD PARTY, Net Sales means the actual amount of gross
sales of PRODUCTS to a THIRD PARTY, less: trade, cash and
quantity discounts, if any, actually allowed, amounts
refunded for
17
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
faulty or defective product, returns, rejections,
freight, insurance and other transportation costs (except
income taxes), tariffs, duties and similar governmental
charges paid, to the extent included in gross sales
price.
(ii) With respect to sales by PERKIN-ELMER made to any
Affiliate or to any person, firm or corporation enjoying
a special course of dealing with PERKIN-ELMER, the Net
Sales shall be determined based on the resale of the
PRODUCTS by such Affiliate, person, firm or corporation
to THIRD PARTIES.
8.2 PERKIN-ELMER shall keep, and require its AFFILIATES and distributors
to keep, complete and accurate records of all sales of PRODUCTS under the
licenses granted herein. HYSEQ shall have the right, at its expense, through a
certified public accountant or like person reasonably acceptable to PERKIN-
ELMER, to examine such records during regular business hours during the life of
this Agreement and for six (6) months after its termination; provided, however,
that such examination shall not take place more often than once a year, provided
further that such accountant shall report only as to the accuracy of the royalty
statements and payments, including the magnitude and source of any discrepancy.
The cost of such audits will be paid by HYSEQ, unless a payment discrepancy
unfavorable to HYSEQ greater than or equal to five percent (5%) of the amounts
paid in any reporting period covered by the audit is discovered, in which case
PERKIN-ELMER shall pay the cost of the audit. PERKIN-ELMER shall be required
to maintain such records for no more than three (3) years.
8.3 Within sixty (60) days after the close of each calendar quarter,
PERKIN-ELMER shall deliver to HYSEQ a true accounting of all PRODUCTS sold by it
and its AFFILIATES and distributors during such quarter and shall at the same
time pay all royalties due. Such accounting shall show sales on a territory-by-
territory and product-by-product basis.
8.4 Any tax paid or required to be withheld on account of HYSEQ based on
royalties payable under this Agreement shall be deducted from the amount of
royalties otherwise due and immediately paid to the applicable taxing
authority. Other than taxes levied against the income of HYSEQ, imposed with
respect to the payment to HYSEQ hereunder (as to which the prior sentence shall
control), PERKIN-ELMER shall be responsible for all taxes however designated.
If such taxes are initially imposed on HYSEQ or HYSEQ is later assessed by any
taxing authority for such taxes, then PERKIN-ELMER, upon demand, will promptly
reimburse HYSEQ for such taxes, plus any interest and penalties suffered by
HYSEQ. HYSEQ shall promptly, and if possible in advance, notify PERKIN-ELMER of
any liability under this section. Each party shall secure and send to the other
proof of any such taxes withheld and paid, and PERKIN-ELMER will pay all such
taxes due on sale.
18
<PAGE>
8.5 All royalties due under this Agreement shall be payable in U.S.
dollars. If governmental regulations prevent remittances from a foreign country
with respect to sales made in that country, the obligation to pay royalties on
sales in that country shall be suspended until such remittances are possible.
Each party shall have the right, upon giving written notice to the other, to
receive payment in that country in local currency.
8.6 Monetary conversions from the currency of a foreign country, in which
a product is sold, into United States currency shall be made at the official
exchange rate in force in that country for financial transactions on the last
business day of the calendar quarter for which the royalties are being paid. If
there is no such official exchange rate, the conversion shall be made at the
rate for such remittances on that date as certified by Citibank, N.A., New York,
New York, U.S.A.
9. TERM AND TERMINATION
9.1 Unless earlier terminated, this Agreement shall come into effect as
of the EFFECTIVE DATE and shall remain in full force for a minimum of five
years, and shall be renewed year-by-year automatically each year thereafter on
the same terms and conditions unless the parties mutually agree to terminate the
Agreement.
9.2 Either party may terminate this Agreement if, at any time, the other
party shall file in any court or agency pursuant to any statute or regulation of
any state or country, a petition in bankruptcy or insolvency or for
reorganization or for an arrangement or for the appointment of a receiver or
trustee of the party or of its assets, or if the other party proposes a written
agreement of composition or extension of its debts, or if the other party shall
be served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall not be dismissed within sixty (60) days
after the filing thereof, or if the other party shall propose or be a party to
any dissolution or liquidation, or if the other party shall make an assignment
for the benefit of creditors.
9.3 Notwithstanding the bankruptcy of HYSEQ or PERKIN-ELMER, or the
impairment of performance by HYSEQ or PERKIN-ELMER of its obligations under this
Agreement as a result of bankruptcy or insolvency of HYSEQ or PERKIN-ELMER, the
other party shall be entitled to retain the licenses granted herein, subject to
rights of a party to terminate this Agreement for reasons other than bankruptcy
or insolvency as expressly provided in this Agreement.
9.4 Subject to the provisions of Article 10, this Agreement may be
terminated by either PARTY upon a MATERIAL BREACH of this Agreement by the other
PARTY, subject to providing the breaching PARTY with written notice of such
breach, and an opportunity to cure after such notice that is at least sixty (60)
days prior to termination. At the end of the sixty (60) day notice period,
the other PARTY may terminate this Agreement forthwith if the breaching PARTY
has not cured its breach of the provision(s) identified in the notice. Nothing
in this Agreement shall limit any remedies for breach
19
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which may be available pursuant to a judgment of a court, in law or equity,
including termination of this Agreement or of any or all rights hereunder.
9.5 In the event the PERKIN-ELMER board of directors does not approve
the equity investment in HYSEQ on or before June 20, 1997, HYSEQ shall have the
right to terminate this Agreement.
9.6 If there is a change in the majority control of a party through the
purchase of stock or by way of a merger transaction or otherwise as well as
through the purchase of all or substantially all of the business assets of that
party, the other party shall have the right to terminate this Agreement.
10. RIGHTS AND DUTIES UPON TERMINATION
10.1 Upon termination of this Agreement, PERKIN-ELMER shall notify HYSEQ
of the amount of CHIPS that it and its AFFILIATES and distributors then have
on hand, the sale of which would, but for the termination, be subject to
royalty, and PERKIN-ELMER, its AFFILIATES and distributors shall thereupon be
permitted to sell that amount of the CHIPS provided that PERKIN-ELMER shall pay
the royalty thereon at the time herein provided for.
10.2 Termination of this Agreement shall terminate all outstanding
obligations and liabilities between the PARTIES arising from this Agreement
except those described in Articles 1.4, 1.8, 2, 3.2.1 (e), 5, 6.2, 6.3, 6.4, 6.5
and 6.6 to the extent required by Article 10; 6.7-6.13, 8.2-8.6 to the extent
required by 10.3; 9; 10; 11.1; 11.2; 11.3; 11.4; 12; as well as any provision
not specified in this paragraph which is clearly meant to survive termination.
10.3 If this Agreement is terminated under Article 9.1, all licenses
granted to HYSEQ under Article 6.6 and to PERKIN-ELMER under Article 6.5 shall
survive such termination and the parties will agree upon the terms applicable
thereto.
10.4 If this Agreement is terminated under Article 9.4, the non-breaching
party shall retain the licenses provided in Article 6 under the terms of Article
10.3
11. WARRANTIES, REPRESENTATIONS, AND PURCHASE AND SALE
11.1 Nothing in this Agreement shall be construed as a warranty that
PERKIN-ELMER PATENTS or HYSEQ PATENTS are valid or enforceable or that their
exercise does not infringe any patent rights of THIRD PARTIES. A holding of
invalidity or un-enforceability of any such patent, from which no further appeal
is or can be taken, shall
20
<PAGE>
not affect any obligation already accrued hereunder, but shall only eliminate
royalties otherwise due under such patent from the date such holding becomes
final.
11.2 Each party further warrants and represents that it has not, up
through and including the date of this Agreement, omitted to furnish the other
with any information concerning the subject matter of this Agreement which would
be material to its decision to enter into this Agreement and to undertake the
commitments and obligations set forth herein.
11.3 Each party warrants and represents that it has the right to enter
into this Agreement and to perform in accordance therewith.
11.4 HYSEQ warrants that it shall convey good and merchantable title to
all of the CHIPS delivered under this Agreement and that each such unit of CHIPS
shall conform to the specifications and shall be free from defects in materials
and workmanship.
11.5 Sales
-----
11.5.1 Sales and Purchase. Subject to the terms and conditions of
------------------
this Agreement, HYSEQ shall sell to PERKIN-ELMER and PERKIN-ELMER
shall purchase CHIPS from HYSEQ. Prior to the first commercial sale
of CHIPS, the parties will develop and enter into a purchase
agreement that will govern the purchase and sale of CHIPS by HYSEQ to
PERKIN-ELMER.
11.5.2. Price. The price of the CHIPS shall be HYSEQ's cost, as
-----
calculated in accordance with generally accepted accounting
principles, plus five (5%) percent.
12. INDEMNIFICATION
12.1 PERKIN-ELMER shall defend, indemnify and hold harmless HYSEQ,
AFFILIATES of HYSEQ, licensors of HYSEQ and their respective directors,
officers, shareholders, agents and employees, from and against any and all
liability, loss, damages and expenses (including attorneys' fees) as the result
of claims, demands, costs or judgments which may be made or instituted against
any of them arising out of the manufacture, possession, distribution, use,
testing, sale or other disposition by or through PERKIN-ELMER of any PERKIN-
ELMER PRODUCT. PERKIN-ELMER's obligation to defend, indemnify and hold harmless
shall include claims, demands, costs or judgments, whether for money damages or
equitable relief by reason of alleged personal injury (including death) to any
person or alleged property damage, provided, however, the indemnity shall not
extend to any claims against an indemnified party which result from the gross
negligence or willful misconduct of such indemnified party. PERKIN-ELMER
21
<PAGE>
shall have the exclusive right to control the defense of any action which is to
be indemnified in whole by PERKIN-ELMER hereunder, including the right to select
counsel acceptable to HYSEQ to defend HYSEQ and to settle any claim, provided
that, without the written consent of HYSEQ (which shall not be unreasonably
withheld or delayed), PERKIN-ELMER shall not agree to settle any claim against
HYSEQ to the extent such claim has a material adverse effect on HYSEQ. The
provisions of this Article shall survive and remain in full force and effect
after any termination, expiration or cancellation of this Agreement and PERKIN-
ELMER's obligations hereunder shall apply whether or not such claims are
rightfully brought.
12.2 HYSEQ shall defend, indemnify and hold harmless PERKIN-ELMER,
AFFILIATES of PERKIN-ELMER, licensors of PERKIN-ELMER and their respective
directors, officers, shareholders, agents and employees, from and against any
and all liability, loss, damages and expenses (including attorneys' fees) as the
result of claims, demands, costs or judgments which may be made or instituted
against any of them arising out of the manufacture, possession, distribution,
use, testing, sale or other disposition by or through HYSEQ or its AFFILIATES of
any HYSEQ PRODUCT. HYSEQ's obligation to defend, indemnify and hold harmless
shall include claims, demands, costs or judgments, whether for money damages or
equitable relief by reason of alleged personal injury (including death) to any
person or alleged property damage, provided, however, the indemnity shall not
extend to any claims against an indemnified party which results from the gross
negligence or willful misconduct of such indemnified party. HYSEQ shall have
the exclusive right to control the defense of any action which is to be
indemnified in whole by HYSEQ hereunder, including the right to select counsel
acceptable to PERKIN-ELMER to defend PERKIN-ELMER and to settle any claim,
provided that, with the written consent of PERKIN-ELMER (which shall not be
unreasonably withheld or delayed), HYSEQ shall not agree to settle any claim
against PERKIN-ELMER to the extent such claim has a material adverse effect on
PERKIN-ELMER. The provisions of this Article shall survive and remain in full
force and effect after any termination, expiration or cancellation of this
Agreement and HYSEQ's obligations hereunder shall apply whether or not such
claims are rightfully brought.
12.3 A person or entity that intends to claim indemnification under this
Article 12 (the "Indemnitee") shall promptly notify the other party (the
"Indemnitor") of any loss, claim, damage, liability or action in respect of
which the Indemnitee intends to claim such indemnification, and the Indemnitor,
after it determines that indemnification is required of it, shall assume the
defense thereof with counsel mutually satisfactory to the PARTIES; provided,
however, that an Indemnitee shall have the right to retain its own counsel, with
the fees and expenses to be paid by the Indemnitor if Indemnitor does not assume
the defense; or, if representation of such Indemnitee by the counsel retained by
the Indemnitor would be inappropriate due to actual or potential differing
interests between such Indemnitee and any other party represented by such
counsel in such proceedings. The indemnity agreement in this Article 12 shall
not apply to amounts paid in settlement of any loss, claim, damage, liability or
action if such settlement is effected
22
<PAGE>
without the consent of the Indemnitor, which consent shall not be withheld
unreasonably. the failure to deliver notice to the Indemnitor within a
reasonable time after the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Article 12, but the omission so to deliver notice to
the Indemnitor will not relieve it of any liability that it may have to any
Indemnitee otherwise than under this Article 12. The Indemnitee under this
Article 12, its employees and agents, shall cooperate fully with the Indemnitor
and its legal representatives in the investigations of any action, claim or
liability covered by this indemnification. In the event that each party claims
indemnity from the other and one party is finally held liable to indemnify the
other, the Indemnitor shall additionally be liable to pay the reasonable legal
costs and attorneys' fees incurred by the Indemnitee in establishing its claim
for indemnity.
13. FORCE MAJEURE
If the performance of any part of this Agreement by either party, or of
any obligation under this Agreement, is prevented, restricted, interfered with
or delayed by reason of any cause beyond the reasonable control of the party
liable to perform, unless conclusive evidence to the contrary is provided, the
party so affected shall, upon giving written notice to the other party, be
excused from such performance to the extent of such prevention, restriction,
interference or delay, provided that the affected party shall use its reasonable
best efforts to avoid or remove such causes of non-performance and shall
continue performance with the utmost dispatch whenever such causes are removed.
When such circumstances arise, the PARTIES shall discuss what, if any,
modification of the terms of this Agreement may be required in order to arrive
at an equitable solution.
14. GOVERNING LAW
This Agreement shall be deemed to have been made in the State of
California and its form, execution, validity, construction and effect shall be
determined in accordance with the laws of the State of California.
15. SEPARABILITY
15.1 In the event any portion of this Agreement shall be held illegal,
void or ineffective, the remaining portions hereof shall be interpreted to
maintain the intent of the parties.
15.2 If any of the terms or provisions of this Agreement are in
conflict with any applicable statute or rule of law, then such terms or
provisions shall be deemed inoperative to the extent that they may conflict
therewith and shall be deemed to be modified to conform with such statute or
rule of law.
23
<PAGE>
16. ENTIRE AGREEMENT
The Agreement, the Stock Purchase Agreement and the Registration Rights
Agreement constitute the sole agreements between the PARTIES relating to the
subject matter hereof and supersede all previous writings and understandings.
Confidential disclosures made pursuant to the Confidentiality Agreement of April
30, 1997 shall remain subject to the terms of that Confidentiality Agreement.
No terms or provisions of this Agreement shall be varied or modified by any
prior or subsequent statement, conduct or act of either of the PARTIES, except
that the PARTIES may amend this Agreement by written instruments specifically
referring to and executed in the same manner as this Agreement.
17. NOTICES
17.1 Any notice required or permitted under this Agreement shall be sent
by air mail, postage pre-paid, to the following addresses of the PARTIES:
TO HYSEQ:
HYSEQ, Inc.
670 Almanor Avenue
Sunnyvale, California 94086
Attention: Lewis Gruber
copy to: Sachnoff & Weaver, Ltd
30 South Wacker Drive
Suite 2900
Chicago, Illinois 60606
Attention: Jeffrey A. Schumacher
TO PERKIN-ELMER:
PERKIN-ELMER Corporation
850 Lincoln Centre Drive
Foster City, CA 94404
24
<PAGE>
Attention: *
copy to: PE Applied Biosystems
Legal Department
850 Lincoln Centre Drive
Foster City, CA 94404
Attention: *
17.2 Any notice required or permitted to be given concerning this
Agreement shall be effective upon receipt by the party to whom it is addressed.
18. ATTENDANCE AT BOARD MEETINGS.
Until the earlier of (i) two years from the date hereof or such
later date as determined by HYSEQ or (ii) the termination of the Collaboration
Agreement between the parties. PERKIN-ELMER shall have the right to designate a
representative to attend all meetings of the HYSEQ Board of Directors in a non-
voting observer capacity and to receive notice of such meetings in the same
manner as given to HYSEQ's directors; provided, however, that HYSEQ may require
each person proposing to attend any meeting of the Board of Directors to agree
to hold in confidence and trust and to act in a fiduciary manner with respect to
all information so received during such meetings or otherwise; and provided
further, that HYSEQ reserves the right to exclude an observer from any meeting
or portion thereof if delivery of information or attendance at such meeting by
such person would result in disclosure of trade secrets to such holder or its
representative or would adversely affect the attorney-client privilege between
HYSEQ and its counsel or if PERKIN-ELMER is in direct competition with HYSEQ.
19. ASSIGNMENT
This Agreement and the licenses herein granted shall be binding upon and
inure to the benefit of the successors in interest of the respective parties.
Neither this Agreement nor any interest hereunder shall be assignable by either
party without the written consent of the other provided, however, that PERKIN-
ELMER or HYSEQ may assign this Agreement or any of its rights or obligations
hereunder to any AFFILIATE or to any THIRD PARTY with which it may merge or
consolidate, or to which it may transfer all or substantially all of its assets
to which this Agreement relates, without obtaining the consent of the other
party, subject to the other party assuming all liabilities and obligations under
the Agreement.
25
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
20. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each such
counterpart shall be deemed an original instrument, but all such counterparts
together shall constitute but one agreement.
IN WITNESS WHEREOF, the PARTIES, through their authorized officers, have
executed this Agreement as of the date first written above.
HYSEQ
By: /s/Lewis S. Gruber
------------------
PERKIN-ELMER
By: *
___________________
26
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------- ------------------------------
1994 1995 1996 1996 1997
----------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net loss................ $(2,262,445) $(601,264) $(4,838,935) $(1,274,507) $(1,916,065)
=========== ========= =========== ============ ===========
Weighted average shares
of common stock
outstanding............ 8,023,000 7,343,000 5,313,000 7,113,000 4,103,00
Shares related to Staff
Accounting
Bulletin topic 4D:
Stock options and
warrants 797,000 797,000 797,000 797,000 797,000
Preferred stock....... 1,778,000 2,652,000
----------- --------- ----------- ------------ -----------
Shares used in computing
net loss per share..... 8,820,000 8,140,000 7,888,000 7,910,000 7,552,000
=========== ========= =========== ============ ===========
Net loss per share...... $ (0.26) $ (0.07) $ (0.61) $ (0.16) $ (0.25)
=========== ========= =========== ============ ===========
Pro Forma
Calculation of shares
outstanding for
computing pro forma net
loss per share:
Shares used in
computing net loss
per share............ 8,820,000 8,140,000 7,888,000 7,910,000 7,552,000
Adjusted to reflect
the effect of the
assumed conversion of
preferred stock...... 686,000 1,430,000 1,515,000 1,515,000 1,515,000
----------- --------- ----------- ------------ -----------
Shares used in computing
pro forma net loss per
share.................. 9,506,000 9,570,000 9,403,000 9,425,000 9,067,000
=========== ========= =========== ============ ===========
Pro forma loss per
share.................. $ (0.24) $ (0.06) $ (0.52) $ (0.14) $ (0.21)
=========== ========= =========== ============ ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
Hyseq Diagnostics, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated
February 20, 1997 (except for Note 10 as to which the date is June , 1997),
in the Registration Statement (Form S-1) and related Prospectus of Hyseq, Inc.
for the registration of 2,750,000 shares of its common stock.
Palo Alto, California
June , 1997
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be issued upon completion of
the matters discussed in the sixth and seventh paragraphs of Note 10 of Notes
to Consolidated Financial Statements.
ERNST & YOUNG LLP
Palo Alto, California
June 12, 1997
<PAGE>
CONSENT OF EXPERTS
We consent to the reference to our firm under the caption "Experts" with
respect to the sections entitled "Risk Factors--Dependence upon Proprietary
Rights; Risks of Infringement" and "Business--Patents and Proprietary
Technology" in the Registration Statement on Form S-1 of Hyseq, Inc. proposed
to be filed on or about June 12, 1997.
McCutchen, Doyle, Brown & Enersen,
LLP
/s/ Bartley C. Deamer
By: _________________________________
Bartley C. Deamer
San Francisco, California
June 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,743,260
<SECURITIES> 0
<RECEIVABLES> 272,373
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 291,153
<PP&E> 2,350,764
<DEPRECIATION> 643,270
<TOTAL-ASSETS> 7,549,233
<CURRENT-LIABILITIES> 1,255,436
<BONDS> 0
0
14,780,013
<COMMON> 5,396,571
<OTHER-SE> (4,473,769)
<TOTAL-LIABILITY-AND-EQUITY> 7,549,233
<SALES> 272,373
<TOTAL-REVENUES> 272,373
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,237,531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,776
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,916,065)
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0
</TABLE>
