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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-22570
LYNX THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3161073
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3832 Bay Center Place, Hayward, CA 94545
(Address of principal executive offices, including zip code)
(510) 670-9300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The number of shares of common stock, Series B preferred stock, Series
C preferred stock and Series D preferred stock of the Registrant outstanding as
of February 28, 1998, was 5,940,269, 332,288, 123,299 and 40,000, respectively.
The Series B, Series C and Series D preferred stock are convertible into common
stock on a ten-for-one basis. The aggregate market value of the common stock of
the Registrant held by non-affiliates as of February 28, 1998 was $49,777,060.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Lynx has spent the last several years developing unique, proprietary
massively parallel cloning, arraying, and sequencing technologies designed to
enable the simultaneous identification and analysis of all (or nearly all) the
DNA molecules or fragments in a single biological sample. Lynx has recently
demonstrated that these technologies can be reduced to practice, which should
enable the Company to derive revenue from their uses. At the same time, the
Company's business model continues to evolve as Lynx identifies new applications
for its technologies and evaluates alternative approaches to their potential
commercialization.
Lynx initially proposed to exploit its technologies in two ways. First,
in the short term, by selling access to its technologies, i.e., by analyzing
biological samples, and then, later, by selling access to databases to
pharmaceutical and biotechnology companies. The Company now believes that the
range of genetic and genomic information its technologies can access may be too
broad to be addressed simultaneously by the Company alone, even if it is
successful in funding these efforts with the expected revenue from contract
analyses. Consequently, the Company is currently evaluating whether it should
seek alliances with other genomic, pharmaceutical, and biotechnology companies
whose complementary expertises may enable earlier and more efficient
exploitation of Lynx's technologies.
Pharmaceutical companies recognized early the potential of Lynx's
technologies. As a result, the Company was able to enter into agreements
involving access to its technologies with Hoechst AG and Hoechst Marion Roussel
(collectively referred to as "Hoechst") and BASF AG ("BASF").
INDUSTRY BACKGROUND
Genomics
A human consists of many trillions of cells. The nucleus of each cell
contains the same DNA material comprising the same set of genes. This full
complement of genes that is present in each cell is referred to as the "genome."
The many different types of cells in a single human differ not in their genomes
but in which genes of the genome are active or expressed (i.e., transcribed into
messenger RNA molecules which are in turn translated into specific protein
molecules) in order to meet the requirements of that particular cell and its
function. Proteins play a central role in nearly every aspect of human
metabolism and physiology. Most human diseases result from the inappropriate
performance of specific protein molecules or their production. Most drugs today
are either compounds designed to interact with proteins, or are proteins
themselves (such as insulin). Proteins are difficult to purify and analyze, but
it is possible to access their composition (amino acid sequences) by analyzing
the genetic code (base sequence) of the genes that specify them. Advances in
techniques for analyzing gene sequences to discover new gene products and
understand gene function, have generated expectations that more effective
therapies could result from finding the genes or the messenger RNAs responsible
for disease.
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DNA Composition (Sequence)
The DNA material that makes up the genome contains within its
composition the coded information for life's functions. DNA molecules (or DNA
fragments) are double stranded long chains made up of very large numbers of
building blocks, called nucleotides, strung together. There are only four such
nucleotides commonly referred to as the four bases, adenine ("A"), guanine
("G"), cytosine ("C"), or thymine ("T"). The single most important determinant
of a particular DNA molecule or fragment is the sequence of bases that make up
the chains. Analyzing such a molecule or fragment for the specific sequence of
As, Gs, Cs and Ts that make it up, is called sequencing.
Gene Expression
The process of converting the genetic information encoded in the
double-stranded DNA of a gene into messenger or mRNA (transcription) and
subsequently into a specific protein molecule (translation) is referred to as
"gene expression." At any one time, the transcribing and translating machinery
of any particular human cell expresses some tens of thousands of genes (out of
some 100,000 total genes in the human genome). Each mRNA type will be present at
different copy numbers (abundances) depending upon the particular cell, its
function, and its environmental conditions at the time. A cell will thus
contain, at any one time, perhaps as many as one million mRNA molecules of tens
of thousands of different types.
Regulation of Gene Expression
The regulation of gene expression is highly complex, differing not only
between the various cell types within the organism, but also differing within
each cell during growth, development and aging, as well as during the organism's
response to various stimuli from the environment. Higher organisms, such as
humans, include in their makeup genetically programmed responses (to intrinsic
and extrinsic stimulations or insults) that have evolved to protect them from
injury. These protective responses require, in turn, biochemical sensors (such
as receptors) that are coupled to the cellular mechanisms controlling gene
expression through changes in the amounts of specific mRNA molecules within the
cell.
Disease
Many diseases spring from a failure of the host's genetically
programmed, protective response to an insult such as trauma, infection, stress,
or an inherited mutant gene. That failure may mean that the insult is followed
by inadequate, misguided, or exaggerated gene expression(s). These then unfold a
complex pathogenic process which may resolve itself, linger chronically, or
evolve with increasingly destructive effects in a manner quite removed from, and
even independent of, the original insult.
The Genome and the Search for Therapeutics
Genomic approaches to therapeutics begin with a search for genes
connected to the origin of disease, or for genes whose expression differentiates
diseased cells from healthy ones. In either case the searches are laborious and
involve a very large amount of DNA sequencing to identify genes or gene
fragments. Still, laborious as it is to obtain, this knowledge of genes is a
first step only. While it does set the stage for understanding either the
predispositions to a disease or its eventual characteristics, and thus paves the
way for the development of better diagnostics, it doesn't necessarily lead to a
therapy. For example, while a particular gene, or absence of a gene, may
predispose to a cancer, the full-blown tumor and its metastases are likely
governed by entirely different genes. Hence, the more recent realization is that
in addition to understanding disease causes, it is equally important, if not
more so, to understand gene function in both health and disease in order to
identify the optimal target for therapy.
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Gene Function and Gene Expression
Elucidation of gene function is not simply a matter of looking up which
genes are expressed in a healthy or diseased tissue. One needs to understand
which of the altered gene expressions are causative and which are consequences.
Ideally, one would want to follow the full gene expression of a cell or tissue
all along the evolution of a disease, from the healthy state to the point when
therapy would begin. One would then also want to apply specific and successive
biological and/or chemical modulations of specific gene expressions in order to
gain insight into cause and effect. This is obviously not practical, or even
possible, in human disease. And, while theoretically possible in in-vitro or
in-vivo model systems, it is not practical, or cost effective, because of the
limitations of current technologies. At this time, only the most abundantly
expressed genes (the top 3% to 5% amongst the 10,000 to 30,000 expressed in any
one sample) are accessible using current gene identification technologies. Also,
because the latter are all dependent on separating and cloning double stranded
copies of each individual mRNA (cDNA) prior to analysis, the process is quite
cumbersome and onerous.
LYNX'S MASSIVELY PARALLEL TECHNOLOGIES
Lynx's novel, proprietary technologies are designed to identify
hundreds of thousands, perhaps even a million or more, fragments of DNA
simultaneously from a single sample preparation. The Company is presently
testing three prototype instruments, each potentially capable of analyzing one
such sample per week. Second generation instruments, of which two have been
built and eight are under construction, are designed eventually to analyze each
up to eight samples simultaneously in less than three days. This contrasts
dramatically with instruments based on current technology that can only analyze
several dozen individually prepared fragments in an instrument run.
Massively Parallel Solid Phase Cloning. Central to Lynx's proprietary
technologies is the ability to amplify, simultaneously, a million or more DNA
molecules or fragments present in a given sample, and then to direct and bind
the amplified copies of each fragment to one of a million or more beads. These
bead libraries enable a number of previously unavailable analyses. They can be
probed to count the number of beads that carry a particular sequence, thereby
determining the number of copies of that sequence that were present in the
original sample. They can be compared to one another in competitive
hybridization experiments and then sorted to isolate those beads that carry
genes equally, or differentially, expressed in both samples. They can also be
arrayed and immobilized in a reaction cell where they are all subjected
simultaneously to biochemical processes designed to probe for various pieces of
information.
Massively Parallel Hybridization Arrays or "Chips." Unlike arrays, or
gene chips, constructed with other technologies, arrays constructed with Lynx
beads can include any gene, from any species, whether already known or not. With
Lynx technologies, it is possible to construct an array or chip that includes
any identifiable subset, or all, of the genes involved in a particular disease
or disease model. Genes arrayed in a Lynx device are identified after isolation,
cloning, and arraying, using a biochemical process proprietary to Lynx.
Massively Parallel Sequencing. In this proprietary process, the DNA
fragments bound to each bead are probed to determine the bases at the free ends
of the fragments. The process is then applied repetitively to determine the
sequence carried by each bead. Because DNA is made up of four types of bases, a
sequence of 24 is sufficiently long to uniquely identify the fragments and thus
to provide unique "signatures" for the fragments, thereby characterizing the
genes or sequences that make up the array.
Utilizing these massively parallel technologies, Lynx expects
eventually to probe for genetic and genomic information in a much more efficient
manner than allowed by current sequencing technology. Lynx eventually expects to
be able to obtain over a million signatures with only one sample preparation,
and one machine run (a few days). In contrast, one commercial DNA sequencing
instrument from the current market leader will yield at best a thousand or so
signatures from several runs in the same time interval, provided, however, that
the thousand samples are prepared individually beforehand. The savings in sample
preparation, the lower number of runs, and the savings
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in the use of reagents due to the massive parallelism should translate into
significant economic advantages. The cost of sequencing a base utilizing Lynx's
technology is expected to be significantly lower than using conventional
technology.
TECHNICAL APPLICATIONS OF LYNX'S MASSIVELY PARALLEL TECHNOLOGIES
Lynx technologies have a number of major applications and each of these
can be applied to the genomes of man, pathogenic organisms and commercially
important plants and animals.
Gene Expression Analysis. Cells in the human body contain the same set
of 100,000 or so genes. However, in any given cell, only an estimated
10,000-30,000 may be active, or expressed, at any given time. Gene expression
varies, not only as a function of different cell types, but also as a result of
disease. Thus, by examining the levels and changes of gene expression during a
disease process, or as a result of experimental treatments, pharmaceutical
companies can better identify new targets for drug screening. In addition, gene
expression analysis can be applied to pathogenic organisms to help determine the
genes that cause virulence or antibiotic resistance. Lynx's technologies are
expected to enable more rapid, and deeper, analyses of gene expression than is
currently possible, capturing in these analyses genes that are rarely expressed
and hence are missed when conventional technologies are used. This is because
with conventional technology one must, after amplifying the genetic messages in
a sample, sort them out and separate them to sequence them. Since the separation
procedures favor the most abundant messages, i.e. those present in high copy
numbers, it is very difficult to detect the less abundant messages. This means
that conventional technology will miss detecting genes expressed at lower
levels. But such genes are believed responsible for many important control
functions in a cell and, as a consequence, they may represent important drug
targets. Since Lynx's technologies associate each copy of an expressed gene to a
particular bead, only very rarely expressed genes may, on occasion, be missed.
Since each copy of a gene is associated with a bead, the levels of gene
expression are readily quantified: the more abundantly expressed genes will
occupy proportionately more beads than genes expressed at lower levels.
High Resolution Genomic Maps. Another application of Lynx's
technologies is the construction of high resolution maps of the human and other
genomes. Genomic maps are used by researchers in academic institutions and
companies undertaking positional cloning studies to find genes that cause
specific diseases. Currently available maps have resolutions on the order of
hundreds of thousands of bases (i.e., identifiable markers, spaced with 100,000
or more DNA bases between them). Newer maps are under development in industry
and academia that will have resolutions of 50,000.
Lynx's technologies can, in principle, efficiently analyze any genome
for a particular subset of signatures and also construct a physical map of these
at the same time. For example, a 1 kilobase resolution map (1 signature every
1,000 bases) of the entire human genome could be derived by determining 12
million signatures and mapping them. Lynx believes that its technologies can be
used to make maps with a resolution of about 500 to 1,000 bases with a
manageable number of runs once such runs are able to routinely process 500,000
signatures.
Such high-resolution maps should have wide utility. First, all human
DNA sequence databases could be examined for the presence of these signatures,
and any fragment containing a known signature sequence could instantly be placed
on the map. This should also apply to the gene expression signatures described
earlier, and should allow the production of expression maps for the entire human
genome well in advance of determining the entire genome sequence or, for that
matter, the sequences of all cDNAs.
The possession of such maps, together with the capacity for the
technology to handle large numbers of DNA fragments in parallel, should have
profound implications for human genetics. First, positional cloning of genes
located by genetic mapping techniques in family studies could be carried out
very easily without the need to perform large amounts of sequencing to identify
candidate genes. For example, there may already be cDNAs located by their
signatures in the region. In addition, the signatures themselves can be used as
Polymerase Chain Reaction ("PCR") primer pairs to amplify selected regions, thus
bypassing the laborious screening of libraries of cloned DNA fragments.
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Maps could be constructed for the mouse or rat in the same way, and the
signature data bases could be cross-referenced simply through the known genetic
concordance of the human with rodent genomes. The cross-referencing could be
extended to the genomes of other mammals of economic importance such as the pig
or the cow.
Maps could also be constructed for economically important crops such as
wheat, corn, and rice, thus allowing plant geneticists much more efficient
studies and manipulations of these very large genomes.
OTHER LYNX PROGRAMS
Biology-based Target Discovery Programs
In 1995, the Company launched a program to establish the concepts,
strategies and techniques necessary for the identification of drug targets based
on the analysis of differential gene expression. This program was designed to
capitalize eventually on the power of the Company's massively parallel
technologies but, in its early phase, was built on know-how and intermediate
technologies currently resident within Lynx. These include existing differential
molecular techniques, as well as hybridization-based techniques for the analysis
of specific disease paradigms. The initial projects were centered on the
medically important field of neurovascular diseases, in areas for which good in
vitro and in vivo models exist, and that are particularly well suited to
analyses with the Company's technologies.
Early results from these programs formed one of the bases for the
biotechnology joint venture company formed in partnership with BASF, and called
BASF-LYNX Bioscience AG.
Therapeutic Program
Lynx was originally formed in 1992 to target inappropriate gene
expression in disease with synthetic DNA fragments designed to bind to, and
functionally block, genes whose inappropriate expression could be correlated
with disease. Lynx's early efforts in this area formed the foundation and
understanding for the development of its massively parallel technologies. The
research efforts have resulted in a compound ("LR-3280") for the prevention of
coronary artery restenosis. The acute safety segment of its Phase II study on
LR-3280 has recently been completed. Certain follow-up measurements and analyses
from the clinical trial are expected to be completed during the next quarter.
Two pharmaceutical companies, Schwarz Pharma AG ("Schwarz") and Tanabe Seiyaku
Co., Ltd. ("Tanabe"), have purchased the rights to market the compound and have
also committed to bear the costs of its continued clinical development.
In March 1998, Lynx sold its portfolio of phosphorothioate antisense
patents and licenses (which includes LR-3280), and its therapeutic
oligonucleotide manufacturing facility, to Inex Pharmaceuticals Corporation
("Inex") of Vancouver, Canada. Lynx received $3 million in cash and will receive
1.2 million shares of Inex common stock and royalties on future sales of
phosphorothioate antisense products. In addition, Lynx has agreed to a
royalty-bearing license to Inex for its phosphoroamidate chemistry for certain
therapeutic applications in the fields of cancer and inflammation that will be
defined later.
Under the agreement, Inex will assume responsibility of manufacturing
LR-3280 for Schwarz and Tanabe. Lynx retains the right to collect, if and when
earned, the next milestone payments, totaling $7 million, under the Schwarz and
Tanabe agreements, as well as 50% of all future milestone payments and gross
profits associated with the success in the development and sale of the compound.
Corporate Collaborations
o In October 1996, Lynx entered into two agreements with BASF AG aimed at
exploiting Lynx's proprietary massively parallel technologies. The
first agreement commits the two companies to form a new biotechnology
Joint Venture ("JV") called BASF-LYNX Bioscience AG in Heidelberg,
Germany, which
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will be governed by a detailed operating agreement developed jointly
between the Company and BASF. Initial ownership of the JV will be split
51%-49% between BASF and Lynx, respectively. Under the sponsorship of
BASF and Lynx the JV will be focused primarily on the identification of
novel drug targets in certain central nervous system diseases. BASF
will provide research funding of up to 50 million DM (approximately $27
million at current exchange rates) over a five year period, as well as
access to certain of its technologies, and Lynx will provide access to
its massively parallel technologies for use in the JV's research
programs.
The second agreement is a service agreement which provides BASF access
to Lynx's massively parallel technologies for its own internal and
proprietary research, independent of the JV's objectives. For access to
this service, which commits Lynx to provide BASF with a certain number
of analyses per year, BASF paid Lynx an access fee of $5.5 million on
execution of the agreement. Also, upon the achievement of a certain
milestone, BASF agreed to pay an additional fee of $5.5 million and a
subscription fee of $4 million for each year of a two-year subscription
period for the analyses.
o In October 1995, Lynx entered into an agreement with Hoechst, which
provides Hoechst with access to Lynx's massively parallel technologies.
Under the terms of the agreement, Hoechst paid Lynx an access fee of $3
million on execution of the agreement, and upon the achievement of a
certain milestone, agreed to pay an additional fee of $8 million and a
subscription fee of $4 million for a one year subscription under the
agreement. In return, Lynx will provide Hoechst with a certain number
of analyses per year. This agreement allows for no more than two
additional companies to access this technology for a specified period.
In addition, the Company received $5 million in November 1995, relating
to the closing of a private placement offering to Hoechst of 40,000
shares of its Series D preferred stock at $125.00 per share.
In September 1997, the agreement between Hoechst and Lynx was amended.
The amendment modified the technology milestone included in the
original agreement and extended the date by which such milestone must
be achieved under the contract. If the subject milestone is not met by
such date, then Hoechst may either terminate the agreement or extend
the technology milestone date.
Research and Development Expenditures
Lynx has devoted its efforts primarily to research and development.
Research and development expenses were $14.2 million for the year ended December
31, 1997, $12.5 million for the year ended December 31, 1996 and $11.3 million
for the year ended December 31, 1995.
Scientific Advisors
The following are Lynx's principal scientific advisors:
Sydney Brenner, M.B., D. Phil. Director and President of The Molecular
Sciences Institute, a non-profit research institute in Berkeley, California.
Until his retirement in 1996, Dr. Brenner was Honorary Professor of Genetic
Medicine, University of Cambridge School of Clinical Medicine, Cambridge,
England. Dr. Brenner is known for his work on the genetic code and information
transfer from genes to proteins, and for his pioneering research on the genetics
and development of the nematode. Dr. Brenner is a Fellow of the Royal Society
(1955) and a Foreign Associate of the U.S. National Academy of Sciences (1977)
and has received numerous awards of recognition, including the Albert Lasker
Medical Research Award (1991), the Genetics Society of America Medal (1987), and
the Kyoto Prize (1990).
Dennis Choi, M.D., Ph.D. Chairman of the Department of Neurology and
Director of the Center for the Study of Nervous System Injury at Washington
University School of Medicine, St. Louis, Missouri. Dr. Choi is an
internationally recognized leader in the area of cellular and molecular
neuroscience with a specific focus on understanding the mechanisms of brain and
nervous system injury.
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Robert L. Letsinger, Ph.D. holds joint appointments in the Departments
of Chemistry and Molecular Biology and is also Professor of Chemistry at the
Northwestern University in Evanston, Illinois. Dr. Letsinger is known for his
pioneering work in solid phase synthesis of DNA and the phosphite method for
assembly of oligonucleotides. Dr. Letsinger's achievements in these areas laid
much of the conceptual groundwork for current automated technologies to produce
synthetic DNA.
Laszlo Patthy, Ph.D., D.Sc. Director of the Institute of Enzymology,
Hungarian Academy of Sciences, Budapest, Hungary. Dr. Patthy, a leading
structural and evolutionary biologist, has made seminal discoveries in the area
of modular protein evolution. Dr. Patthy has developed a sophisticated protein
sequence informatics technology that is making unique contributions to the
structural and functional aspects of proteins and their genes.
Peter H. Seeburg, Ph.D., D.Sc. Professor, University of Heidelberg,
Germany. Dr. Seeburg is an internationally recognized pioneer in molecular
biology who developed several essential molecular biological techniques and was
the sixth most cited scientific author of the 1980's. He was also a principal
scientist in the early phase of Genentech, Inc. In recent years, Dr. Seeburg has
made seminal discoveries in molecular neuroscience. In 1996, he assumed the
directorship of the department of Molecular Neurobiology at Max Planck Institute
of Heidelberg.
Paul F. Worley, M.D. Associate Professor, Department of Neuroscience
and Neurology at Johns Hopkins University Medical School. Dr. Worley, a
neurologist and molecular biologist, is a pioneer in applying differential
cloning techniques to understand the molecular basis of neuronal plasticity.
Employees
As of December 31, 1997, Lynx employed 73 full-time employees, of which
59 were engaged in research and development activities and 14 in finance and
administrative activities. Lynx believes that it has been successful in
attracting skilled and experienced scientific personnel; however, competition
for such personnel is intense. None of Lynx's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
Business Risks
Technology Uncertainty and Product Development Risk. The Company's
strategy of using its massively parallel technologies for gene sequencing for
the purpose of rapidly identifying genes, defining and characterizing gene
function, and enabling high-resolution genomic mapping is unproven. While
certain other companies have similar technology or have adopted a similar
strategy, the application of these technologies and strategies is in too early a
stage to determine whether it can be successfully implemented. These
technologies are new and unproven approaches and are based on the assumption
that information about gene expression and gene sequences may enable scientists
to understand better complex disease processes. Generally, there is limited
understanding of the roles of genes in these diseases, and relatively few
therapeutic products based on gene discoveries have been developed and
commercialized. There can be no assurance that the Company's technologies will
enable it or its strategic partners to identify genes, drug targets and drug
leads useful for the discovery and development of therapeutic and diagnostic
products. To date, no drug targets or drug leads have been identified based on
the Company's technologies, and the Company has not commercialized any
therapeutic or diagnostic products either alone or in conjunction with its
strategic partners.
The Company's genomic database subscription business and the use of its
products to assist in and improve the efficiency of the traditional drug
discovery process is in too early a stage to determine whether it can be
successful. There can be no assurance that companies will accept the usefulness
of the Company's products and related services. In addition, the Company has
limited experience in providing software-based database products or services.
The Company's ability to achieve profitability depends on attracting customers
for its database and sequencing products and services. The nature of the
Company's products and services are such that there is a limited number of large
pharmaceutical companies that are potential customers for such products and
services, two of which
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have signed agreements with the Company to date. There can be no assurance that
any of the Company's product development efforts will be successfully completed
or that the Company's products will gain market acceptance.
Early Stage of Development; Limited Operating History; Profitability
Uncertainty. Lynx is at an early stage of development and must be evaluated in
light of the uncertainties and complications present in an early stage genomics
company. All of Lynx's products and services are in research or development, and
have not generated significant revenues. The massively parallel technologies are
in the development stage and are dependent upon the successful integration of
independent technologies, each of which has its own development risks. The
development of the Company's technologies and their application to the discovery
of genes, genomic mapping, drug targets and drug leads will require significant
additional research and development and investment, including testing to further
validate performance and demonstrate cost effectiveness. There can be no
assurance that the Company's technologies will continue to be successfully
developed, or that any therapeutic or diagnostic products discovered or
developed through their utilization will prove to be commercially useful, meet
applicable regulatory standards in a timely manner or at all, compete with other
technologies and products, avoid infringing the proprietary rights of others, be
manufactured in sufficient quantities or at reasonable costs or be marketed
successfully. The Company may that it will be a number of years, if ever, before
the Company will recognize revenue from therapeutic or diagnostic product sales
or royalties. There can be no assurance that these technologies will be
successfully developed or, if they are, that they can be integrated
successfully.
The Company has a limited history of operations and has experienced
significant operating losses since its inception in 1992, including net losses
of approximately $10.8 million during the year ended December 31, 1997. The
Company had an accumulated deficit of approximately $42.3 million through
December 31, 1997. The Company expects to incur additional losses for at least
the next several years and that such losses may increase as the Company expands
its research and development activities. The Company's losses to date have
resulted principally from costs incurred in research and development and from
general and administrative costs associated with the Company's operations. To
date, substantially all of the Company's revenues have been derived from
payments from strategic alliances and licensing arrangements, and the Company
expects that substantially all of its revenues for the foreseeable future will
result from payments from strategic alliances and licensing arrangements and
interest income. There can be no assurance that the Company will receive
additional revenues under existing strategic alliances or that the Company will
be successful in entering into any new strategic alliance that results in
revenues. The Company's ability to generate revenues and achieve profitability
is dependent in large part on the Company's ability to enter into additional
strategic alliances, and on the ability of the Company and its strategic
partners to discover genes and drug targets associated with particular diseases
and, thereafter, utilize such discoveries to identify drug leads, develop
therapeutic and diagnostic products, conduct preclinical studies and clinical
trials, obtain required regulatory approvals and successfully manufacture,
introduce and market such products. In addition, to the extent that the Company
relies upon others for these research, development and commercialization
activities, the Company's ability to achieve profitability will be dependent in
part upon the success of such outside parties. The time required to reach
profitability is highly uncertain and there can be no assurance that the Company
will be able to achieve profitability on a sustained basis, if at all. Failure
to achieve significant revenue or profitability would have a material adverse
effect on the Company's business, financial condition and results of operations.
Intense Competition; Rapid Technological Change. There are a finite
number of genes in the human genome. The race amongst competitors in the
genomics field is not just to identify these genes by their sequences, but also
to determine gene function, particularly gene function in disease. Competition
among entities attempting to identify genes associated with specific diseases
and to develop products based on such discoveries is intense. Even when all
genes are known, and their sequences determined, the hunt for functional
information in the wide variety of diseases and disease conditions will
continue, and characterization of genes (by their sequences) in various samples
will still be needed. While Lynx believes that it contributes a uniquely
efficient gene analysis technique to that hunt, other companies have
substantially greater research and product development capabilities and
financial, scientific, and marketing resources than the Company.
The Company faces, and will continue to face, competition from
pharmaceutical, biotechnology and diagnostic companies, academic and research
institutions and government agencies, both in the United States and
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abroad. Several entities are attempting to identify and patent randomly
sequenced genes and gene fragments, while others are pursuing a gene
identification, characterization and product development strategy based on
positional cloning. The Company is aware that certain entities are utilizing a
variety of different gene expression analysis methodologies, including the use
of chip-based systems, to attempt to identify disease-related genes. In
addition, numerous pharmaceutical companies are developing genomic research
programs, either alone or in partnership with the Company's competitors.
Competition among such entities is intense and is expected to increase. In order
to compete against existing and future technologies, the Company will need to
demonstrate to potential customers that its technologies and capabilities are
superior to competing technologies.
Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads in advance of Lynx which could have a material
adverse effect on any similar Lynx program. Moreover, there can be no assurance
that the Company's competitors will not obtain patent protection or other
intellectual property rights that would limit the Company's or its strategic
partners' ability to use the Company's high resolution genomic mapping
technologies or drug discovery technologies or commercialize therapeutic or
diagnostic products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also faces
competition from these and other entities in gaining access to relevant samples
used in its discovery programs.
While Lynx, at this time, is not aware of technologies equivalent or
superior to its massively parallel technologies, there are other companies that
provide data or access to data similar to that which Lynx intends to offer.
There can be no assurance that research and development efforts by others will
not render any of the Company's potential products and services noncompetitive.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, gene expression analysis, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Genomic technologies have undergone and are
expected to continue to undergo rapid and significant change. The Company's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by the Company
or others may result in products or technologies becoming obsolete before the
Company recovers the expenses it incurs in connection with their development.
Products offered by the Company could be made obsolete by less expensive or more
effective drug target and drug lead technologies, including technologies which
may be unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technologies necessary to compete
successfully with newly emerging technologies.
Patents and Proprietary Rights; Third Party Rights. Lynx's success will
depend on its ability to obtain patents for its technologies and products,
maintain trade secrets and operate without infringing on the proprietary rights
of others, both in the United States and in other countries. Patent matters in
biotechnology are highly uncertain and involve complex legal and factual
questions. Accordingly, the availability of and breadth of claims allowed in
biotechnology and pharmaceutical patents cannot be predicted. Lynx has filed and
will continue to file applications, as appropriate, for patents covering both
its products and processes and has licensed a number of patents and patent
applications covering certain of its technologies, processes and compounds. No
assurance can be given that patents will issue from any of the pending
applications or that, if patents do issue, the claims allowed will be
sufficiently broad to protect Lynx's technologies. In addition, patent law
relating to the scope of claims in the technology field in which the Company
operates is still evolving. The degree of future protection for the Company's
proprietary rights, therefore, is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
licensed or issued to the Company, design around the patented technologies
licensed to or developed by the Company. In addition, the Company could incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates such suits.
10.
<PAGE>
The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned by
third parties relating to the analysis of gene expression or the manufacture and
use of DNA chips. There can be no assurance that these or other technologies
will not provide third parties with competitive advantages over the Company and
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, certain third party patent
applications contain broad claims, and it is not possible to determine whether
or not such claims will be narrowed during prosecution and/or will be allowed
and issued as patents, even if such claims appear to cover the prior art or have
other defects. There can be no assurance that an owner or licensee of a patent
in the field will not threaten or file an infringement action or that the
Company would prevail in any such action. There can be no assurance that the
cost of defending an infringement action would not be substantial and would not
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that any
required licenses would be made available on commercially viable terms, if at
all. Failure to obtain any required license could prevent the Company from
utilizing or commercializing one or more of its technologies and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In general, the Company intends to continue to apply for patent
protection for methods relating to gene expression and to apply for patent
protection for the individual disease genes and drug targets it discovers. Such
patents may include claims relating to novel genes and gene fragments and to
novel uses for known genes or gene fragments identified through its discovery
programs. There can be no assurance that the Company will be able to obtain
meaningful patent protection for its discoveries; even if patents are issued,
the scope of the coverage or protection afforded thereby is uncertain. Failure
to secure such meaningful patent protection could have a material adverse effect
on the Company's business, financial condition and results of operations.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that the
potential products and processes of the Company or its strategic partners may
give rise to claims of patent infringement. The public availability of partial
or full sequence information or the existence of patent applications related
thereto, even if not accompanied by relevant function or disease association,
prior to the time the Company applies for patent protection on a corresponding
gene could adversely affect the Company's ability to obtain patent protection
with respect to such gene or related expression patterns. Furthermore, others
may have filed, and in the future are likely to file, patent applications
covering genes or gene products that are similar or identical to any for which
the Company may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to potential
liability for damages, require the Company or its strategic partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its strategic partners
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all. The
Company believes that there is likely to be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources and have a material adverse
effect on the Company's business, financial condition and results of operations.
Enactment of legislation implementing the General Agreement on Tariffs
and Trade has resulted in certain changes to United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period of
17 years from the date of grant. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may adversely affect the Company's
patent position. If this change results in a shorter period of patent coverage,
the Company's business could be adversely affected to the
11.
<PAGE>
extent that the duration and level of the royalties it is entitled to receive
from its strategic partners are based on the existence of a valid patent
covering the product subject to the royalty obligation.
Lynx also relies on trade secrets and proprietary know-how, which it
seeks to protect in part by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that Lynx would have adequate remedies for any breach or that
its trade secrets will not otherwise become known or be independently developed
by competitors. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes may also arise as to the rights in related or resulting
know-how and inventions.
Need to Establish Collaborative Relationships; Dependence on Partners.
Lynx's business strategy includes entering into subscription arrangements,
strategic alliances or licensing arrangements with corporate partners, primarily
pharmaceutical, biotechnology and genomic companies, relating to the development
and commercialization of certain of its potential technologies, databases and
products. There can be no assurance that Lynx will be able to negotiate
attractive collaborative arrangements or that such collaborations will be
available to Lynx on acceptable terms so that any such relationships, once
established, will be scientifically or commercially successful. Lynx currently
has two corporate agreements for its massively parallel DNA cloning and
sequencing technologies, with Hoechst and BASF.
There can be no assurance that Hoechst or BASF or any other future
collaborator will not pursue their existing or alternative technologies in
preference to those being developed in collaboration with the Company.
Furthermore, there can be no assurance that the Company will be able to
negotiate additional collaborative arrangements on acceptable terms, if at all,
or that such collaborations will be successful. To the extent that the Company
chooses not to or is unable to establish such arrangements, it would require
substantially greater capital to undertake research and development of certain
of its potential technologies, data bases and products at its own expense.
Absence of Sales and Marketing Experience. Lynx has no experience in
the sales, marketing or distribution of pharmaceutical products or services. To
market the products or services of its massively parallel technologies, Lynx
must define the particular products and services that it will offer and develop
a sales and marketing group with the appropriate technical expertise. Lynx does
not plan to market any future pharmaceutical products directly. There can be no
assurance that Lynx will be able to build such a sales force or that its direct
sales and marketing efforts will be successful.
Use of Hazardous Materials. Lynx's research and development may involve
the controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although Lynx believes that its safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by state, federal and local regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, Lynx could be held liable for any damages that
result, and any such liability could exceed the resources of Lynx.
Dependence Upon Key Personnel. Lynx is highly dependent on the
principal members of its management and scientific staff, the loss of whose
services could significantly delay or prevent the achievement of research,
development and business objectives, thus having a material adverse effect on
Lynx. Furthermore, recruiting and retaining qualified scientific personnel to
perform research and development work in the future will be critical to Lynx's
success. Although Lynx believes it will be successful in attracting and
retaining skilled and experienced scientific personnel, there can be no
assurance that Lynx will be able to attract and retain such personnel on
acceptable terms, given the competition among numerous pharmaceutical and health
care companies, universities and non-profit research institutions for
experienced scientists. The Company is dependent on its Chairman and Chief
Executive Officer, Sam Eletr, Ph.D., the loss of whose services would have a
material adverse effect on the Company. The Company has recently applied for
key-man life insurance on Dr. Eletr. The Company has not entered into an
employment agreement with him.
12.
<PAGE>
Potential Volatility of Stock Price; Limited Market for Stock. The
Company qualified its common stock to trade on The Nasdaq Stock Market
("Nasdaq") on December 30, 1997. There can be no assurance that a sufficient
trading market will develop. In addition, the securities markets have from time
to time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. The market
prices of the common stock of many publicly held, early stage biotechnology
companies have in the past been, and can in the future be expected to be,
especially volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new commercial products
by the Company or its competitors, release of reports by securities analysts,
developments or disputes concerning patent or proprietary rights, developments
in the Company's relationships with current or future collaborative partners, if
any, and general market conditions may have a significant and adverse impact on
the market price of the common stock.
Future Capital Requirements; Uncertainty Of Access To Additional
Funding. The Company has invested significant capital in its infrastructure and
in its scientific and business development activities and expects capital and
operating expenditures to increase over the next several years as it expands its
operations. The Company's actual future capital requirements and the adequacy of
its available funds will depend on many factors, including the number, breadth
and progress of its programs, the ability of the Company to establish and
maintain strategic alliance and licensing arrangements and the progress of the
development and commercialization efforts of the Company's strategic partners.
These factors also include the level of the Company's activities relating to
competing technological and market developments, the costs associated with
obtaining access to tissue samples and related information and the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights.
The Company expects that it will require significant additional funding
in the future, which it may seek through public or private equity offerings,
debt financings or additional strategic alliance and licensing arrangements. No
assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed, or that, if available,
such financing will be obtained on terms favorable to the Company or its
stockholders. To the extent the Company raises additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result. If adequate funds are not available when needed, the Company may be
required to curtail operations significantly or to obtain funds by entering into
strategic alliances and licensing arrangements, in which case the Company may be
required to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to the
Company, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that
adequate funds are not available, the Company's business would be adversely
affected.
Ethical, Legal And Social Implications Of Gene-Based Diagnostics. The
Company and its partners may seek to develop diagnostic products based on genes
it discovers. The prospect of broadly available gene-based diagnostic tests
raises issues regarding their appropriate utilization and the confidentiality of
the information provided by such testing. It is possible that discrimination by
third party payors, based on the results of such testing, could lead to the
increase of premiums by such payors to prohibitive levels, outright cancellation
of insurance or unwillingness to provide coverage to individuals showing
unfavorable gene expression profiles. Similarly, employers could discriminate
against employees with gene expression profiles indicative of the potential for
high disease-related costs and lost employment time. Finally, government
authorities could, for social or other purposes, limit or prohibit the use of
such tests under certain circumstances. There can be no assurance that such
ethical and social factors or concerns about genetic testing and target
identification will not have a material adverse effect on market acceptance of
the Company's technologies and products.
13.
<PAGE>
ITEM 2. PROPERTIES
Lynx's corporate headquarters and principal research and development
facilities are located in Hayward, California, in a building totaling
approximately 44,000 square feet. The building is leased through July 2003, and
the Company has options to renew the lease for two additional periods of five
years each.
In February 1998, the Company entered into a lease for additional
facilities space of approximately 111,000 square feet in two buildings in
Hayward, California. The term of the lease is ten years and commences on
December 15, 1998. Lynx intends to relocate its corporate headquarters and
research and development facilities to, and to construct its production
facilities in, this space. The space will be developed and occupied in phases,
depending on the growth of the Company. Lynx has the option to extend the lease
for an additional five year period, subject to certain conditions. The Company
has an option to lease additional space, as needed, for expansion purposes. Lynx
believes it is positioned to obtain the space needed to accommodate its
anticipated growth on commercially reasonable terms.
In connection with the aforementioned transaction with Inex, the
Company has entered into an agreement to sublease to Inex approximately 6,300
square feet of its existing facilities under lease. The term of the sublease to
Inex is twenty-four months, commencing on March 10, 1998. Inex has the option to
extend the term of sublease through July 2003, subject to certain conditions.
The Company intends to seek additional sublessees for the remaining portion of
its existing facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1997.
14.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 30, 1997, the Company listed its common stock on The Nasdaq
Stock Market. Prior to December 30, 1997, there was no established public
trading market for the Company's voting stock.
The Company also has outstanding Series B, Series C and Series D
preferred stock, the shares of which will convert into common stock on a
ten-for-one basis (i.e., ten shares of common stock for each share of preferred
stock) on March 31, 1998. The Company's Series B, Series C and Series D
preferred stock has not been registered pursuant to the Securities and Exchange
Act of 1934, as amended, and has not been listed on any exchange or on The
Nasdaq Stock Market. There is currently no established trading market for the
Company's preferred stock.
As of February 28, 1998, there were approximately 2,900 stockholders of
record of the Company's common stock, 26 stockholders of record of the Company's
Series B preferred stock, 28 stockholders of record of the Company's Series C
preferred stock and 1 stockholder of record of the Company's Series D preferred
stock. On March 23, 1998, the last sale price reported on The Nasdaq Stock
Market for the Company's common stock was $12.50.
The Company has not paid any dividends on its common stock or preferred
stock and does not anticipate the payment of dividends in the foreseeable
future. The Company expects that any future earnings will be retained and
applied toward the development of the Company's business.
15.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Six-Month Fiscal Year
Period Ended Ended
Year Ended December 31, December 31, June 30,
----------------------------------------------- -------- --------
1997 1996 1995 1994 1993(1) 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
(in thousands, except per share data)
Revenues $ 4,582 $ 9,749 $ 680 $ 4,699 $ 183 $ 1,238
Operating costs and expenses:
Research and development 14,226 12,545 11,301 8,457 3,431 6,196
Selling, general and administrative 1,930 3,170 1,591 1,768 650 1,102
-------- -------- -------- -------- -------- --------
Total operating costs and expenses 16,156 15,715 12,892 10,225 4,081 7,298
-------- -------- -------- -------- -------- --------
Interest income 753 585 744 506 75 243
Provision for income taxes -- 10 -- -- -- --
-------- -------- -------- -------- -------- --------
Net loss $(10,821) $ (5,391) $(11,468) $ (5,020) $ (3,823) $ (5,817)
======== ======== ======== ======== ======== ========
Basic and diluted net loss per share (2) $ (3.09) $ (2.45) $ (5.66) $ (4.87) $ (5.69) $ (8.40)
======== ======== ======== ======== ======== ========
Shares used in per share computation 3,501 2,197 2,026 1,031 672 692
</TABLE>
<TABLE>
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993(1)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
(in thousands)
Cash, cash equivalents and short-term investments $24,930 $14,082 $13,779 $12,246 $2,383
Working capital 21,875 9,118 12,730 11,702 891
Total assets 29,267 18,412 17,685 15,142 4,857
Stockholders' equity 25,590 10,732 13,742 14,044 2,930
<FN>
(1) In July 1993, the Company changed its fiscal year end from a year ending
June 30 to a calendar year.
(2) The net loss per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, Earnings Per Share. For further discussion of net loss per share and
the impact of Statement No. 128, see the Notes to Financial Statements.
</FN>
</TABLE>
16.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled "Item 1. Business--Business Risks."
Overview
Lynx has spent the last several years developing unique, proprietary
technologies designed to enable the simultaneous identification and analysis of
all (or nearly all) the DNA molecules or fragments in a single biological
sample. Utilizing its massively parallel solid phase cloning, massively parallel
hybridization arrays, and massively parallel sequencing technologies, Lynx
expects eventually to probe for genetic and genomic information in a much more
efficient manner than current technologies. The proposed applications of Lynx's
massively parallel technologies include gene discovery, gene expression, high
resolution genome mapping and the identification of genetic variations. Lynx
expects its technologies will be applicable to the genomes of man, pathogenic
organisms, and commercially important plants and animals. Lynx believes that its
technologies will open new avenues to understanding genetics and the
relationships between gene function and the various states from health to
disease.
In 1995, Lynx launched an internal biology-based drug discovery program
to establish the concepts, strategies and techniques necessary for the
identification of drug targets based on the analysis of differential gene
expression. This program is ultimately designed to capitalize on the power of
Lynx's massively parallel technologies, but in its early phase is utilizing
know-how and intermediate technologies currently resident within Lynx. The
projects are centered on the medically important field of neurovascular diseases
that are particularly well suited to analyses with the Company's technologies.
Lynx was originally formed in 1992 to target inappropriate gene
expression in disease with synthetic DNA fragments designed to bind to, and
functionally block, genes whose inappropriate expression could be correlated
with disease. Lynx's early efforts in this area formed the foundation and
understanding for the development of its massively parallel technologies. The
research efforts have resulted in a compound ("LR-3280") for the prevention of
coronary artery restenosis. The acute safety segment of its Phase II study on
LR-3280 has recently been completed. Certain follow-up measurements and analyses
from the clinical trial are expected to be completed during the next quarter.
Two pharmaceutical companies, Schwarz Pharma AG ("Schwarz") and Tanabe Seiyaku
Co., Ltd. ("Tanabe"), have purchased the rights to market the compound and have
also committed to bear the costs of its continued clinical development.
In March 1998, Lynx sold its portfolio of phosphorothioate antisense
patents and licenses (which includes LR-3280), and its therapeutic
oligonucleotide manufacturing facility, to Inex Pharmaceuticals Corporation
("Inex") of Vancouver, Canada. Lynx received $3 million in cash and will receive
1.2 million shares of Inex common stock and royalties on future sales of
phosphorothioate antisense products. In addition, Lynx has agreed to a
royalty-bearing license to Inex for its phosphoroamidate chemistry for certain
therapeutic applications in the fields of cancer and inflammation that will be
defined later.
Under the agreement, Inex will assume responsibility of manufacturing
LR-3280 for Schwarz and Tanabe. Lynx retains the right to collect, if and when
earned, the next milestone payments, totaling $7 million, under the Schwarz and
Tanabe agreements, as well as 50% of all future milestone payments and gross
profits associated with the continued success in the development and sale of the
compound.
Lynx has been unprofitable since its inception and may incur
substantial losses for the next several years, due primarily to the expansion of
its research and development programs, including additional development of its
massively parallel technologies. Lynx may generate revenues based on its
agreements with collaborative partners as
17.
<PAGE>
a result of achievement of the milestones defined in the agreements. However,
there is no guarantee that the milestones will be achieved or that the
technologies will be proven commercially successful. Lynx does not anticipate
that it will generate significant revenues and profits, if any, from the
commercial sale of its products and services for several years, if not longer.
There can be no assurance that Lynx will ever successfully develop and market
any of its proposed products or that it will ever be able to achieve or sustain
profitability.
Lynx's business is subject to significant risks, including the risks
inherent in its research and development efforts, uncertainties associated with
obtaining and enforcing patents, and possible competition from other products.
Lynx's massively parallel technologies could face competition from the
development of similarly efficient, or better, combinations of cloning and
sequencing techniques.
On March 31, 1998, the Series B, Series C and Series D preferred stock
will convert to common stock on a ten-for-one basis. The inclusion of these
shares in both the basic and diluted earnings per share, will have a significant
impact on the earnings per share amounts in 1998 and subsequent years.
Results of Operations
Years Ended December 31, 1997 and 1996
Revenue
Lynx had total revenues of $4.6 million and $9.7 million for the years
ended December 31, 1997 and 1996, respectively. Revenues for 1997 included $3.9
million earned under agreements with Hoechst and BASF for access to gene
expression analysis services to be performed by Lynx. The 1997 revenue also
included approximately $400,000 in sales of LR-3280 for use in clinical trials,
and approximately $162,000 in grant revenue and other product sales. The 1996
revenue included $7.5 million in up-front fees under the agreements related to
LR-3280 with Schwarz and Tanabe, approximately $1.9 million earned under the
agreements with Hoechst and BASF, and approximately $291,000 earned from a
government grant.
Operating Expenses
Research and development expenses were $14.2 million and $12.5 million
in the years ended December 31, 1997 and 1996, respectively. The increase was
primarily due to costs associated with increased levels of research and
development personnel, and increased patent and licensing activity. Lynx expects
to continue to incur substantial research and development expenses due to
planned spending for ongoing technology development and implementation, and new
research applications.
General and administrative expenses were $1.9 million for the year
ended December 31, 1997 compared to $3.2 million for the year ended December 31,
1996. The decrease is primarily attributable to lower corporate development and
legal expenses in 1997 than in 1996, which reflected the costs associated with
the signing of several corporate collaborative agreements. Headcount related
expenses were also slightly lower in 1997 than in 1996 due to the expiration of
the settlement agreement associated with the termination of a corporate officer
in 1996. Lynx expects to continue to incur substantial general and
administrative expenses in support of its research and development and corporate
development efforts.
Other
Interest income was $753,000 and $585,000 in the years ended December
31, 1997 and 1996, respectively. The increase was due to higher average cash
balances in 1997 than in 1996, particularly in the fourth quarter.
Income Taxes
Due to operating losses and the inability to recognize an income tax
benefit therefrom, there is no provision for income taxes for 1997. The
provision for income taxes of approximately $10,000 for 1996 consists entirely
of alternative minimum tax.
18.
<PAGE>
Years Ended December 31, 1996 and 1995
Revenue
Lynx had total revenues of $9.7 million and $680,000 for the years
ended December 31, 1996 and 1995, respectively. The 1996 revenue included $7.5
million in sign-up fees under the Tanabe and Schwarz Pharma agreements,
approximately $1.9 million earned under the agreements with Hoechst and BASF,
and approximately $291,000 from a government grant. The 1995 revenue included
$375,000 of revenue earned under the agreement with Hoechst and approximately
$305,000 generated from product sales and grant revenue.
Operating Expenses
Research and development expenses were $12.5 million for the year ended
December 31, 1996 compared to $11.3 million for the year ended December 31,
1995. The increase was due to expenses associated with the issuance of Lynx
common stock and stock options to certain employees and one consultant pursuant
to the Agreement of Merger between Lynx and its majority-owned subsidiary,
Spectragen Inc., increased spending in support of clinical trials for LR-3280,
and higher depreciation on lab equipment. A portion of this increase was offset
by reduced funding to various laboratories under collaborative research
agreements and lower patent and related legal expense.
General and administrative expenses were $3.2 million for the year
ended December 31, 1996, compared to $1.6 million for the year ended December
31, 1995. The increase is primarily attributable to higher corporate development
and legal expenses in 1996, which reflected the costs associated with the
signing of several corporate collaborative agreements, higher salary expense
related to increased headcount and the settlement agreement associated with the
termination of a corporate officer.
Other
Interest income was $585,000 for the year ended December 31, 1996
compared to $744,000 for the year ended December 31, 1995. The decrease was due
primarily to slightly lower interest rates despite modestly higher average cash
balances during the year ended December 31, 1996 as compared to the prior fiscal
year.
Income Taxes
The provision for income taxes of approximately $10,000 for 1996
consists entirely of alternative minimum tax. Due to operating losses and the
inability to recognize an income tax benefit therefrom, there is no provision
for income taxes for 1995.
Liquidity and Capital Resources
Net cash used in operating activities of $13.1 million for the year
ended December 31, 1997 differs from the net loss for the same period due to the
current year recognition of a portion of previously deferred revenue,
depreciation and amortization of fixed assets and leasehold improvements,
amortization of deferred compensation, and changes in working capital. Net cash
used in investing activities of $15.3 million for the year ended December 31,
1997, was primarily due to the purchase of short-term investments and capital
equipment purchases. Net cash provided by financing activities in 1997 consisted
primarily of $25.1 million raised in the private placement of common stock at
$10 per share, net of financing costs of $1.7 million. Cash and cash equivalents
were $8.8 million at December 31, 1997.
Lynx plans to use available funds for the development and
implementation of its massively parallel technologies and to build capacity for
their early commercial uses. Pending such uses as described above, Lynx intends
to invest its excess cash in short-term, investment grade, interest-bearing
securities or certificates of deposit.
19.
<PAGE>
Since commencing operations as an independent company, Lynx has
obtained funding for its operations through sales of preferred and common stock
to venture capital investors, institutional investors, and collaborative
partners; revenue from collaborative research and development arrangements;
interest income; product sales; and government grants. The cost, timing, and
amount of funds required for specific uses by Lynx cannot be precisely
determined at this time and will be based upon Lynx's progress in its research
and development, administrative and legal costs, the establishment of corporate
collaborations and other arrangements, and the availability of alternate methods
of financing.
Lynx expects to incur substantial and increasing research and
development expenses and intends to seek additional financing, as needed,
through contractual arrangements with corporate partners and equity or debt
offerings. There can be no assurance that any additional financing required by
Lynx will be available or, if available, will be on terms favorable to Lynx. The
Company believes that, at current spending levels, its existing capital
resources and interest income thereon will enable it to maintain its current and
planned operations at least through 1998.
Impact of Year 2000
The Company has completed an assessment of its computer operating
systems and related software and, with only a few minor exceptions, has found
them to be Year 2000 compliant. The Company's exposure is limited due to the
fact that most of its computers and software were acquired within the past five
years and were Year 2000 compliant at purchase. The Company plans to replace the
operating systems on the few non-compliant computers before 2000 and expects
that the cost will be immaterial. The Company believes that even if such
modifications are not made, there will be no adverse impact on operations.
However, Year 2000 problems may affect the computer systems of the Company's
business partners, vendors, customers, and financial service organizations with
which the Company interacts. The Compnay is in the process of developing a plan
to determine the impact that third parties which are not Year 2000 compliant may
have on the operations of the Company. There can be no assurance that such plan
will be able to address fully, or at all, the "Year 2000 issue" which could have
a material adverse effect upon the Company's business financial condition and
results of operations.
20.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Lynx Therapeutics, Inc.
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors.......................... 22
Audited Consolidated Financial Statements:
Consolidated Balance Sheets................................................ 23
Consolidated Statements of Operations...................................... 24
Consolidated Statements of Stockholders' Equity............................ 25
Consolidated Statements of Cash Flows...................................... 26
Notes to Consolidated Financial Statements................................. 27
21
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Lynx Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Lynx
Therapeutics, Inc. as of December 31, 1997 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, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lynx Therapeutics,
Inc. at December 31, 1997 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, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 30, 1998
22.
<PAGE>
<TABLE>
Lynx Therapeutics, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,798 $ 12,109
Short-term investments 16,132 1,973
Accounts receivable 244 118
Other current assets 199 158
----------- -----------
Total current assets 25,373 14,358
Property and equipment:
Leasehold improvements 3,795 3,193
Laboratory and other equipment 3,562 2,976
----------- -----------
7,357 6,169
Less accumulated depreciation (3,588) (2,290)
----------- -----------
Net property and equipment 3,769 3,879
Notes receivable from officers and employees 125 175
----------- -----------
$ 29,267 $ 18,412
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 210 $ 429
Accrued compensation 289 394
Accrued professional fees 179 169
Deferred revenue from related parties 2,292 3,875
Other accrued liabilities 528 373
----------- -----------
Total current liabilities 3,498 5,240
Deferred revenue from related parties -- 2,292
Other noncurrent liabilities 179 148
Stockholders' equity:
Preferred stock, issuable in series, $.001 par value; 2,000,000 shares
authorized, all shares designated represent convertible preferred stock:
Series B, 332,288 shares designated, issued, and outstanding at December 31, 1997
and 1996; aggregate liquidation value of $16,614 at December 31, 1997 16,091 16,091
Series C, 123,299 shares designated, issued, and outstanding at December 31, 1997
and 1996; aggregate liquidation value of $6,165 at December 31, 1997 6,109 6,109
Series D, 40,000 shares designated, issued, and outstanding at December 31, 1997
and 1996; aggregate liquidation value of $5,000 at December 31, 1997 4,989 4,989
Common stock, $.001 par value; 20,000,000 shares authorized, 5,892,353 and
3,152,148 shares issued and outstanding at December 31, 1997 and 1996, respectively 46,640 17,361
Notes receivable from stockholders (460) (210)
Deferred compensation (5,394) (2,092)
Unrealized gain/(loss) on marketable securities (45) 3
Accumulated deficit (42,340) (31,519)
----------- -----------
Total stockholders' equity 25,590 10,732
----------- -----------
$ 29,267 $ 18,412
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
23.
<PAGE>
<TABLE>
Lynx Therapeutics, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
License fees $ -- $ 7,500 $ --
Revenues from collaborative arrangements
with related parties 4,420 1,958 375
Product sales and other revenues 162 291 305
-------- -------- --------
Total revenues 4,582 9,749 680
Operating costs and expenses:
Research and development 14,226 12,545 11,301
Selling, general and administrative 1,930 3,170 1,591
-------- -------- --------
Total operating costs and expenses 16,156 15,715 12,892
-------- -------- --------
Loss from operations (11,574) (5,966) (12,212)
Interest income 753 585 744
Provision for income taxes -- 10 --
-------- -------- --------
Net loss $(10,821) $ (5,391) $(11,468)
======== ======== ========
Basic and diluted net loss per share (Note 1) $ (3.09) $ (2.45) $ (5.66)
======== ======== ========
Shares used in basic and diluted per share computation 3,501 2,197 2,026
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
24.
<PAGE>
<TABLE>
Lynx Therapeutics, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1995, 1996 and 1997
(In thousands, except share numbers)
<CAPTION>
Preferred Stock Common Stock Notes
--------------- ------------ Receivable Deferred
Shares Amount Shares Amount From Officers Compensation
-------------------- ------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 332,288 $ 16,091 2,010,329 $ 12,723 $ 0 $ (86)
Issuance of Series C preferred stock for
cash, net of issuance costs of $56 123,299 6,109 -- -- -- --
Issuance of Series D preferred stock for
cash, net of issuance costs of $11 40,000 4,989 -- -- -- --
Exercise of employee stock options for cash
and note receivable -- -- 324,410 675 (660) --
Issuance of common stock for services -- -- 812 1 -- --
Cash paid in lieu of fractional shares
for reverse stock split -- -- (1,027) (5) -- --
Amortization of deferred compensation -- -- -- -- -- 35
Net unrealized gain on securities available
for sale -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance at December 31, 1995 495,587 27,189 2,334,524 13,394 (660) (51)
Exercise of employee stock options for cash -- -- 9,663 12 -- --
Repurchase of common stock -- -- (157,500) (297) 450 --
Issuance of common stock in connection
with Lynx/Spectragen merger -- -- 959,182 4,221 -- (2,076)
Issuance of common stock for services -- -- 6,279 31 -- --
Amortization of deferred compensation -- -- -- -- -- 35
Net unrealized gain on securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance at December 31, 1996 495,587 27,189 3,152,148 17,361 (210) (2,092)
Exercise of employee stock options for cash
and note receivable -- -- 76,181 287 (250) --
Repurchase of common stock -- -- (11,476) (198) -- 197
Issuance of common stock for cash, net of
issuance costs of $1,685 -- -- 2,675,500 25,070 -- --
Amortization of deferred compensation -- -- -- -- -- 621
Recognition of deferred compensation on
employee stock options -- -- -- 4,120 -- (4,120)
Net unrealized loss on securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance at December 31, 1997 495,587 $ 27,189 5,892,353 $ 46,640 $ (460) $ (5,394)
----------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss) on Total
Marketable Accumulated Stockholders'
Securities Deficit Equity
------------ ---------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994 $ (24) $(14,660) $ 14,044
Issuance of Series C preferred stock for
cash, net of issuance costs of $56 -- -- 6,109
Issuance of Series D preferred stock for
cash, net of issuance costs of $11 -- -- 4,989
Exercise of employee stock options for cash
and note receivable -- -- 15
Issuance of common stock for services -- -- 1
Cash paid in lieu of fractional shares
for reverse stock split -- -- (5)
Amortization of deferred compensation -- -- 35
Net unrealized gain on securities available
for sale 22 22
Net loss -- (11,468) (11,468)
------------ ---------- ---------
Balance at December 31, 1995 (2) (26,128) 13,742
Exercise of employee stock options for cash -- -- 12
Repurchase of common stock -- -- 153
Issuance of common stock in connection
with Lynx/Spectragen merger -- -- 2,145
Issuance of common stock for services -- -- 31
Amortization of deferred compensation -- -- 35
Net unrealized gain on securities 5 -- 5
Net loss -- (5,391) (5,391)
------------ ---------- ---------
Balance at December 31, 1996 3 (31,519) 10,732
Exercise of employee stock options for cash
and note receivable -- -- 37
Repurchase of common stock -- -- (1)
Issuance of common stock for cash, net of
issuance costs of $1,685 -- -- 25,070
Amortization of deferred compensation -- -- 621
Recognition of deferred compensation on
employee stock options -- -- --
Net unrealized loss on securities (48) -- (48)
Net loss -- (10,821) (10,821)
------------ ---------- ---------
Balance at December 31, 1997 $ (45) $(42,340) $ 25,590
------------ ---------- ---------
</TABLE>
25.
<PAGE>
<TABLE>
Lynx Therapeutics, Inc.
Consolidated Statements of Cash Flows
Net increase (decrease) in cash and cash equivalents
(In thousands)
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(10,821) $ (5,391) $(11,468)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of fixed assets and
leasehold improvements 1,298 829 608
Issuance of common stock expensed in connection
with the Lynx/Spectragen merger -- 2,145 --
Amortization of deferred compensation 621 35 35
Other -- 31 7
Changes in operating assets and liabilities:
Accounts receivable (126) (30) 174
Other current assets (41) (79) 157
Accounts payable (219) (264) 334
Accrued liabilities 60 413 (160)
Deferred revenue from related parties (3,875) 3,542 2,625
Other noncurrent liabilities 31 46 45
-----------------------------------------
Net cash provided by (used in) in operating activities (13,072) 1,277 (7,643)
Cash flows from investing activities
Purchases of short-term investments (16,180) (6,903) --
Maturities of short-term investments 1,973 4,935 8,022
Purchases of property and equipment, net of retirements (1,188) (1,511) (1,430)
Notes receivable from officers and employees 50 367 (524)
------------------------------------------
Net cash provided by (used in) investing activities (15,345) (3,112) 6,068
Cash flows from financing activities
Issuance of preferred stock, net of repurchases -- -- 11,098
Issuance of common stock, net of repurchases 25,106 165 10
-----------------------------------------
Net cash provided by financing activities 25,106 165 11,108
-----------------------------------------
Net increase (decrease) in cash and cash equivalents (3,311) (1,670) 9,533
Cash and cash equivalents at beginning of year 12,109 13,779 4,246
-----------------------------------------
Cash and cash equivalents at end of year $ 8,798 $12,109 $13,779
=========================================
Supplemental disclosures of cash flow information:
Income tax paid $ -- $ 10 $ --
=========================================
<FN>
See accompanying notes.
</FN>
</TABLE>
26.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies and Basis of Presentation
Ownership and Basis of Presentation
Lynx Therapeutics, Inc. ("Lynx" or the "Company"), was incorporated in
February 1992 under the laws of the State of Delaware. Lynx has spent the last
several years developing unique, proprietary technologies designed to enable the
simultaneous identification and analysis of all (or nearly all) the DNA
molecules or fragments in a single biological sample. Utilizing its massively
parallel solid phase cloning, massively parallel hybridization arrays, and
massively parallel sequencing technologies, Lynx expects eventually to probe for
genetic and genomic information in a much more efficient manner than current
technologies. The proposed applications of Lynx's massively parallel
technologies include gene discovery, gene expression, high resolution genome
mapping and the identification of genetic variations. Lynx expects its
technologies will be applicable to the genomes of man, pathogenic organisms, and
commercially important plants and animals. Lynx believes that its technologies
will open new avenues to understanding genetics and the relationships between
gene function and the various states from health to disease.
In October 1997, Lynx completed a $26.8 million private placement of
common stock. The net proceeds of the financing are being used for the
development and implementation of the Company's novel technologies, and to build
production capacity for early commercial uses. Lynx common stock began trading
on The Nasdaq Stock Market on December 30, 1997.
The consolidated financial statements of the Company include the
accounts of the Company and its wholly owned subsidiary, Lynx GmbH, formed under
the laws of the Federal Republic of Germany. In November 1996, Lynx and its
majority owned subsidiary, Spectragen, Inc. ("Spectragen"), a Delaware
corporation, entered into an Agreement of Merger, whereby Lynx acquired the
outstanding minority interest in Spectragen, and Spectragen was merged with and
into Lynx and the separate corporate existence of Spectragen ceased.
Additionally, the Company has dissolved its wholly owned subsidiary,
LYNXNebraska, Inc., with no consequent impact on the consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated.
The Company has sustained continuing operating losses and expects such
losses to continue for at least the next several years. The Company plans to
finance operations through contractual arrangements with corporate partners and
through equity or debt offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all investments with an original maturity at the
date of purchase of 90 days or less as cash equivalents. Investments with
original maturities beyond 90 days but less than one year are considered to be
short-term investments. The Company's investment policy stipulates that the
investment portfolio be maintained with the objectives of preserving principal,
maintaining liquidity and maximizing return.
27.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies and Basis of Presentation
(continued)
Cash, Cash Equivalents and Short-Term Investments (continued)
The Company determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. As of December 31, 1997 and 1996, the Company has classified
its entire investment portfolio as available-for-sale. Available-for-sale
securities are carried at fair value based on quoted market prices, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. The cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity, which are
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary, if any, on available-for-sale securities, if
any, are included in interest income or expense. The cost of securities sold is
based on the specific identification method.
Property and Equipment
Property and equipment are stated at original cost and are depreciated
using the straight-line method over the estimated useful lives of the assets,
which is generally three years. Leasehold improvements are amortized over the
lesser of the useful life of the asset or the remaining term of the facility
lease.
Revenue Recognition
Payments under collaborative arrangements are recognized as revenue as
research services are performed pursuant to the terms of the respective
agreements. Payments received which are related to future performance are
deferred until earned. Non-refundable license fees are generally recorded as
revenue upon execution of the agreement. Milestone payments are recognized as
revenue upon the achievement of the related milestone. Revenues from the sales
of products are recognized upon shipment.
During 1997 and 1996, revenue from three collaborative partners
represented 60%, 25% and 11%, and 15%, 36% and 30% of total revenue,
respectively. During 1995, revenue from one collaborative partner represented
55% of total revenue.
Net Loss per Share
In 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share" ("EPS"), effective for periods ending after December 15, 1997. SFAS 128
requires that companies present two measures of earnings per share, basic and
diluted. Basic earnings per share is computed by dividing income or loss
applicable to common shareholders by the weighted-average number of common
shares outstanding for the period, while diluted EPS reflects the potential
dilution of securities that could share in the earnings of the company, to the
extent such securities are dilutive.
The Company has adopted SFAS 128 for annual and interim financial
statements issued after December 15, 1997, and has calculated and restated EPS
in accordance with SFAS 128 for each prior period in which an income statement
is reported. Basic loss per share is calculated based on the weighted average
number of common shares outstanding, net of certain common shares outstanding
which are subject to continued vesting and the Company's right of repurchase.
Basic and diluted loss per share are equivalent for all periods presented herein
due to the Company's net loss. The following have been excluded from the
calculation of loss per share because the effect of inclusion would be
antidilutive: approximately 300,000 common shares which are outstanding but are
subject to the Company's right of repurchase which expires ratably over five
years; approximately 500,000 shares of Series B, C, and D preferred stock which
will be converted on March 31, 1998, into common stock on a ten-for-one basis;
and options to purchase approximately 1,600,000 shares of common stock at a
weighted average price of $3.22 per
28.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies and Basis of Presentation
(continued)
Net Loss per Share (continued)
share. The preferred stock will be included in the loss per share calculations
for all periods subsequent to conversion. The repurchasable shares and options
will be included in the calculation at such time as the effect is no longer
antidilutive, as calculated using the treasury stock method.
For additional disclosure regarding the preferred stock, common stock
and stock option plan, refer to Note 6.
Stock-Based Compensation
As permitted by Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to account for stock options granted to employees using the intrinsic value
method and, accordingly, does not recognize compensation expense for options
granted to employees with exercise prices equal to the fair market value of the
Company's common stock on the grant date.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130 (SFAS 130), "Reporting Comprehensive Income," and No. 131 (SFAS
131), "Disclosures About Segments of an Enterprise and Related Information." The
Company will be required to comply with the provisions of these statements in
fiscal 1998. The Company believes that the adoption of these statements will not
have a material effect on its results of operations or financial position, but
may require additional disclosure.
<TABLE>
2. Investments
The following is a summary of available-for-sale securities:
<CAPTION>
Available-for-Sale Securities
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1997
Money market mutual funds $ 3,280 $ -- $ -- $ 3,280
Commercial paper 7,904 -- (6) 7,898
Government notes 6,902 -- (35) 6,867
Mutual funds 1,000 -- -- 1,000
Corporate bonds and notes 5,809 -- (4) 5,805
-------------------------------------------------------------------
$ 24,895 $ -- $ (45) $ 24,850
===================================================================
December 31, 1996
Money market mutual funds $ 979 $ -- $ -- $ 979
Commercial paper 12,964 3 -- 12,967
-------------------------------------------------------------------
$ 13,943 $ 3 $ -- $ 13,946
===================================================================
</TABLE>
29.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
During the years ended December 31, 1997, 1996 and 1995, the Company
did not sell any securities. As of December 31, 1997, $8.8 million of the
marketable securities were classified as cash equivalents, and the balance of
$16.1 million was classified as short-term investments. As of December 31, 1996,
$11.9 million of the marketable securities were classified as cash equivalents,
with the remaining $2.0 million classified as short-term investments. All
short-term investments have maturities of less than one year. Expected
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.
3. Collaborative Arrangements
In October 1996, Lynx entered into two agreements with BASF AG aimed at
exploiting Lynx's proprietary massively parallel technologies. The first
agreement commits the two companies to form a new biotechnology Joint Venture
("JV") called BASF-LYNX Bioscience AG in Heidelberg, Germany, which will be
governed by a detailed operating agreement to be developed jointly between the
Company and BASF. Initial ownership of the JV will be split 51%-49% between BASF
and Lynx, respectively. Under the sponsorship of BASF and Lynx the JV will be
focused primarily on the identification of novel drug targets in certain central
nervous system diseases. BASF will provide research funding of up to 50 million
DM (approximately $27 million at current exchange rates) over a five year
period, as well as access to certain of its technologies, and Lynx will provide
access to its massively parallel technologies for use in the JV's research
programs. The Company is accounting for its interest in the JV under the equity
method.
The second agreement is a service agreement which provides BASF access
to Lynx's massively parallel technologies for its own internal and proprietary
research, independent of the JV's objectives. For access to this service, which
commits Lynx to provide BASF with a certain number of analyses per year, BASF
paid Lynx an access fee of $5.5 million on execution of the agreement. Also,
upon the achievement of a certain milestone, BASF agreed to make a milestone
payment of $5.5 million and to pay a subscription fee of $4 million for each
year of a two year subscription period for the analyses. The access fee of $5.5
million paid by BASF to Lynx is being recognized ratably over a two year period
from the commencement of the agreement. Approximately $2.8 million and $0.5
million was recognized as revenue in the years ended December 31, 1997 and 1996,
respectively.
In October 1995, Lynx entered into an agreement with Hoechst AG and
Hoechst Marion Roussel (collectively referred to as "Hoechst"), which provides
Hoechst with access to Lynx's massively parallel technologies. Under the terms
of the agreement, Hoechst paid Lynx an access fee of $3 million on execution of
the agreement. Also, upon the achievement of a certain milestone, Hoechst agreed
to make a milestone payment of $8 million and to pay a subscription fee of $4
million for a one year subscription under the agreement. In return, Lynx will
provide Hoechst with a certain number of analyses per year. The $3 million
access fee Lynx received from Hoechst was recognized ratably over a two year
period from the commencement of the agreement, in amounts of $1.125 million,
$1.5 million and $375,000 in the years ended December 31, 1997, 1996 and 1995,
respectively. This agreement allows for no more than two additional companies to
access this technology for a specified period. In addition, the Company received
$5 million in November 1995, relating to the closing of a private placement
offering to Hoechst of 40,000 shares of its Series D preferred stock at $125.00
per share.
In September 1997, the agreement between Hoechst and Lynx was amended.
The amendment modified the technology milestone included in the original
agreement and extended the date by which such milestone must be achieved under
the contract. If the subject milestone is not met by such date, then Hoechst may
either terminate the agreement or extend the technology milestone date.
30.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
4. License Agreements
Lynx has entered into various license agreements with companies and
academic institutions. Such agreements generally require Lynx to pay annual or
semiannual license fees and are generally cancelable upon 60 to 120 days'
notice. The expenses associated with such licenses were approximately $314,000,
$242,000, and $138,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
5. Notes Receivable from Officers
In October 1995, the Company entered into a full-recourse loan
agreement with Karoly Nikolich, an officer of the Company. A note receivable of
$210,000 was issued under a stock purchase agreement for the purchase of 60,000
shares of common stock whereby all the shares issued under the agreement are
pledged as collateral. The outstanding principal amount is due and payable in
full in October 2000, subject to an obligation to prepay under specified
circumstances. Interest is payable upon the expiration or termination of the
note and accrues at the rate of 6.38% per annum.
In April 1997, the Company entered into a full-recourse loan agreement
with Edward C. Albini, an officer of the Company. A note receivable of $250,000
was issued under a stock purchase agreement for the purchase of 50,000 shares of
common stock whereby all the shares issued under the agreement are pledged as
collateral. The outstanding principal amount is due and payable in full in April
2002, subject to an obligation to prepay under specified circumstances. Interest
is payable upon the expiration or termination of the note and accrues at the
rate of 6.49% per annum.
6. Stockholders' Equity
Preferred Stock
Each share of Series B, Series C and Series D preferred stock is
convertible into ten shares of common stock and has voting rights equal to the
voting rights of the common shares issuable upon conversion. In the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, the holders of each share of Series B, Series C and Series D
preferred stock then outstanding shall be entitled to be paid out of the assets
of the Company legally available for distribution to its stockholders, before
any payment to be made in respect of the common stock, until such time as the
holders of Series B and Series C preferred stock shall have received an
aggregate of $50.00 per share and the holders of Series D preferred stock shall
have received an aggregate of $125.00 per share, adjusted for any combinations,
consolidations, or stock distributions or stock dividends with respect to such
shares (a "Recapitalization Event"), plus all declared but unpaid dividends
thereon, if any, to the date fixed for distribution. If upon any liquidation,
dissolution or winding up of the Company, the assets of the Company available
for distribution to its stockholders shall be insufficient to pay the holders of
shares of Series B, Series C, and Series D preferred stockholders in full, then
such holders shall share ratably in any distribution of assets in proportion to
the full amount to which they would otherwise be respectively entitled.
Pursuant to the Amended and Restated Certificate of Designation, dated
September 30, 1997, the Series B, Series C and Series D preferred stock will
convert to common stock on a ten-for-one basis on March 31, 1998.
31.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stockholders' Equity (continued)
Common Stock
In November 1996, Lynx issued 959,182 shares of Lynx common stock in
exchange for 737,832 shares of Spectragen, Inc. common stock held by certain
officers, employees and one consultant of Spectragen, pursuant to an Agreement
of Merger between Lynx and Spectragen. A portion of the shares are subject to
repurchase rights which expire ratably over a five year period. Pursuant to the
merger, and in accordance with APB 25, Accounting for Stock Issued to Employees,
Lynx recorded compensation and consultant expense of $2.1 million and recognized
approximately $1.4 million in deferred compensation for the difference between
the fair market value of the Lynx stock and the deemed fair market value of the
Spectragen stock on the day of acquisition. The deferred compensation will be
charged ratably to expense as the repurchase rights expire.
In October 1997, Lynx issued 2,675,500 shares of common stock,
resulting in net proceeds of $25.1 million, pursuant to a common stock purchase
agreement between the Company and certain investors. The shares were registered
for resale on Form S-3 Registration Statement that became effective on December
31, 1997. In connection with this transaction, warrants to purchase 50,000
shares of common stock at an exercise price of $14.00 per share were issued to
the underwriters of the transaction, pursuant to the Common Stock Purchase
Agreement dated September 28, 1997 between the Company and certain investors,
and will expire on October 1, 2000.
At December 31, 1997, Lynx has reserved 7,392,932 shares of common
stock for issuance upon conversion of the Series B, Series C and Series D
preferred stock, upon the exercise of outstanding employee and nonemployee stock
options, and upon the exercise of certain warrants, as noted below:
Conversion of Series B preferred stock 3,322,880
Conversion of Series C preferred stock 1,232,990
Conversion of Series D preferred stock 400,000
Stock option grants outstanding 1,626,254
Shares available for grant 360,808
Warrants outstanding 50,000
Other 400,000
----------
7,392,932
==========
1992 Stock Option Plan
In July 1992, Lynx adopted the 1992 Stock Option Plan ("the Plan")
under which incentive or nonqualified stock options to purchase shares of common
stock may be granted to employees and officers of, and consultants to, the
Company. As a result of a series of amendments, an aggregate of 3,400,000 shares
of the Company's common stock have been authorized for issuance under the 1992
Plan. In February 1998, the Board of Directors approved an amendment to the 1992
Plan, subject to stockholder approval, to enhance the flexibility of the Board
and the Compensation Committee in granting stock options. The amendment
increases the number of shares authorized for issuance under the 1992 Plan from
a total of 3,400,000 to 4,000,000 shares.
Under the Plan, the exercise price of incentive options granted may not
be less than 100% (110% in the case of options granted to a person who owns more
than 10% of the total combined voting power of all classes of stock of the
Company) of the fair market value of common stock at the date of grant.
Nonqualified options may be granted at not less than 85% of fair market value at
the date of grant. Options generally vest over a five-year period from the date
of grant and have a term of ten years (five years in the case of options granted
to a person who owns more than 10% of the total combined voting power of all
classes of stock of the Company).
32.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stockholders' Equity (continued)
In November 1996, Lynx issued 524,355 options to purchase Lynx common
stock in exchange for 403,350 options to purchase Spectragen common stock
pursuant to the Agreement of Merger between the Company and Spectragen. In
accordance with APB 25, Accounting for Stock Issued to Employees, Lynx
recognized deferred compensation of $712,000 representing the difference between
the exercise price of the options and the fair market value of the Company's
common stock on the day of the grants. The deferred compensation will be charged
to expense over the five year vesting period of the grants.
In December 1997, the Board of Directors approved the commencement of
vesting of certain performance-based stock options that had been granted to
certain employees prior to the merger between Spectragen and Lynx. In connection
with this action, Lynx recognized deferred compensation of $4.1 million
representing the difference between the exercise price of the options and the
fair market value of the Company's common stock at the time of the December 1997
approval. The deferred compensation will be charged to expense over the period
beginning December 1997, through the end of the five year vesting period.
<TABLE>
The stock option activity under the Plan was as follows:
<CAPTION>
Options Outstanding
---------------------------------------------------------------
Weighted
Number of Exercise Average
Available Shares Subject Price Exercise
for Grant to Options per Share Price
--------- ---------- --------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1994 781,155 444,701 $0.10 - 2.00 $1.03
Options granted (678,436) 678,436 1.00 - 5.00 2.55
Options exercised -- (324,410) 1.00 - 5.00 2.08
Options canceled 66,316 (66,316) 1.00 - 2.00 1.06
--------- ---------
Balance at December 31, 1995 169,035 732,411 0.10 - 5.00 1.97
Options authorized 1,224,355 -- -- --
Options granted (859,858) 859,858 0.15 - 6.00 2.75
Options exercised -- (9,663) 0.10 - 6.00 1.23
Options canceled 64,954 (65,004) 0.10 - 6.00 2.76
--------- ---------
Balance at December 31, 1996 598,486 1,517,602 0.10 - 6.00 2.39
Options granted (266,841) 266,841 4.00- 14.38 7.56
Options retired (52,845) -- --
Options exercised -- (76,181) 0.10 - 6.00 3.78
Options canceled 82,008 (82,008) 0.15- 14.10 1.68
--------- ---------
Balance at December 31, 1997 360,808 1,626,254 0.10- 14.38 3.22
========= =========
</TABLE>
To date, all options granted under the Plan are nonqualified options.
Options to purchase a total of 767,037 shares were exercisable under the Plan at
December 31, 1997. Certain officers and employees of the Company were granted
the right to exercise their options prior to vesting, subject to the Company's
right of repurchase at the original issue price, which lapses ratably over five
years. As of December 31, 1997, 333,066 shares outstanding were subject to
repurchase.
33.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stockholders' Equity (continued)
<TABLE>
The options outstanding at December 31, 1997 have been segregated into
ranges for additional disclosure as follows:
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------------
Weighted-
average Options
Options remaining currently
outstanding at contractual Weighted- exercisable at Weighted-
Range of December 31, life average December 31, average
exercises prices 1997 (in years) exercise price 1997 exercise price
- ---------------- ------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$0.10 - 0.15 65,080 6.4 $0.13 65,080 $0.13
$0.38 - 0.39 78,820 8.0 0.38 25,887 0.38
$0.77 - 1.00 409,674 6.6 1.00 383,704 1.00
$1.54 - 2.00 386,595 8.2 1.58 34,279 2.00
$3.50 - 5.00 405,744 8.3 4.56 197,775 4.66
$6.00 - 6.00 185,500 8.4 6.00 60,312 6.00
$6.95 - 14.38 94,841 9.8 12.82 -- --
---------- -------
1,626,254 7.8 $ 3.22 767,037 $2.29
========== =======
</TABLE>
Pro Forma Information
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS 123 requires use of option
valuation models that were not developed for use in valuing stock options. Under
APB 25, when the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options granted subsequent to December 31, 1994 under the fair
value method of SFAS 123. The weighted average fair value of options granted in
1995, 1996 and 1997 was $0.91, $2.61 and $4.11 per share, respectively. The
weighted average fair value of options granted in 1996 at a weighted average
exercise price of $1.40 per share, which was less than the market price on grant
date, was $6.79. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model for the multiple option
approach with the following weighted-average assumptions: a risk-free interest
rate of 6.33%, 6.34% and 6.26% for 1997, 1996, and 1995, respectively, a
weighted-average expected life of 4.2 years for 1997 grants, 4.3 years for 1996
grants, and 4.4 years for 1995 grants, and an expected dividend yield of zero
for all three years. The Company believes that due to the low trading volume of
Lynx stock in 1995 and 1996, the calculated volatility of the Company's common
stock does not provide a representative picture of future volatility.
Consequently, an industry-based proxy volatility of 73% was used in the
calculations for 1995 and 1996. In 1997, trading increased to a volume that was
sufficient to generate an average volatility of 56%, which the Company believes
is representative of future volatility.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective
34.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stockholders' Equity (continued)
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 the Company's stock options.
Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value at the grant date for awards under the
plan consistent with the method of SFAS 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below:
Year Ended December 31,
1997 1996 1995
---------------------------------------
(in thousands)
Net loss
Historical $10,821 $5,391 $11,468
Pro forma $11,498 $5,853 $11,661
Net loss per share
Historical $3.09 $2.45 $5.66
Pro Forma $3.28 $2.66 $5.76
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, future pro forma net income/loss and income/loss per share
results, may be materially different from actual amounts presented.
7. Income Taxes
The provision for income taxes is based on pre-tax financial accounting
income. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax and book basis of assets
and liabilities.
The reconciliation of income tax expense (benefit) attributable to
continuing operations computed at the U.S. federal statutory rates to income tax
expense (benefit) for the fiscal years ended December 31, 1997, 1996 and 1995 is
as follows (in thousands):
Fiscal Year Ended
----------------------------------
1997 1996 1995
------- ------- -------
Tax provision (benefit) at U.S. $(3,679) $(1,830) $(3,899)
statutory rate
Alternative minimum tax -- 10 --
Loss for which no tax benefit is
currently recognizable 3,679 1,830 3,899
------- ------- -------
$ -- $ 10 $ --
======= ======= =======
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
<TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows (in thousands):
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,800 $ 6,980
Research & development tax credit carryforwards 1,172 830
Capitalized research and development expenditures 616 1,031
Deferred revenue 912 2,475
Other, net 718 241
Valuation allowance (14,218) (11,557)
---------------- --------------
Net deferred tax assets $ -- $ --
================ ==============
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if
any, the timing and the amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of December 31,
1997 and 1996 has been established to reflect these uncertainties. The change in
the valuation allowance was a net increase of approximately $2,661,000,
$2,773,000 and 3,234,000 for the fiscal years ended December 31, 1997, 1996 and
1995, respectively.
As of December 31, 1997, the Company had federal and California net
operating loss carryforwards of approximately $30,400,000 and $9,300,000,
respectively, which will expire from 2000 through 2012, if not utilized. As of
December 31, 1997, the Company also had federal and California research and
development tax credit carryforwards of approximately $867,000 and $305,000,
respectively, which will expire at various dates from 2007 through 2012, if not
utilized.
The Company's losses through November 20, 1992, were included in the
consolidated income tax returns of Applied Biosystems, a division of Perkin
Elmer Corporation. As a result, the Company's net operating loss carryforwards
available to offset future taxable income consist only of losses incurred after
November 20, 1992, and, therefore, differ from the book accumulated deficit.
Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in expiration of net
operating loss and tax credit carryforwards before full utilization.
36.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
8. Obligations under Operating Leases
The Company entered into a noncancelable operating lease for facilities
which commenced on August 1, 1993 and expires on July 31, 2003. Under the terms
of the lease, rental payments commenced in the third month of the lease and
increase on a graduated scale beginning with the second year of the lease as the
Company occupies additional space. The Company is recognizing rent expense on a
straight-line method over the lease period. The Company has the option to extend
the lease for two additional periods of five years each, with payments to be
determined when the option is exercised. The Company also leases equipment under
various operating lease agreements subject to minimum annual lease payments.
Minimum annual rental commitments under operating leases are as
follows:
Years ending December 31: (in thousands)
1998 $ 606
1999 564
2000 546
2001 528
2002 553
Thereafter 322
------
$3,119
======
Rent expense for facilities and equipment under operating leases was
$649,000, $722,000 and $684,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
9. 401(k) Plan
In October 1992, Lynx adopted a 401(k) Plan covering all of its
employees. The 401(k) Plan is intended to qualify under Section 401 of the Code
so that contributions by employees or by Lynx to the 401(k) Plan are not taxable
to employees until withdrawn from the 401(k) Plan, and so that contributions by
Lynx, if any, will be deductible by Lynx when made. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to 15% (subject
to an annual limit prescribed by the Code as described below) and have the
amount of such reduction contributed to the 401(k) Plan. Under limitations
imposed by the Code, the maximum amount of compensation reduction a participant
could elect to have contributed to the 401(k) Plan for the 1997 calendar year
was $9,500. This amount is subject to annual adjustments for increases in the
cost of living, as determined under Internal Revenue Service regulations. The
401(k) Plan permits, but does not require, additional contributions to the
401(k) Plan by Lynx on behalf of all participants in the 401(k) Plan. In the
years ended 1997, 1996 and 1995, the Company contributed $42,088, $37,073 and
$22,825, respectively.
10. Subsequent Events (unaudited)
In March 1998, Lynx sold its portfolio of phosphorothioate antisense
patents and licenses, and its therapeutic oligonucleotide manufacturing
facility, to Inex Pharmaceuticals Corporation ("Inex") a Canadian company. As
partial consideration in this transaction, Lynx received $3 million in cash and
1.2 million shares of Inex common stock, in three equal installments, with the
first 400,000 shares received on the above date, and the second and third
installments of stock to be received no later then two and three years,
respectively, from the closing date of the transaction. The Inex common stock
received by Lynx is subject to certain restrictions on trading for specific
periods of time following receipt by Lynx. Lynx is also entitled to receive
royalties on future sales of phosphorothioate antisense products. In addition,
Lynx has agreed to a royalty-bearing license to Inex for its phosphoroamidate
chemistry for certain therapeutic applications in the fields of cancer and
inflammation that will be defined later.
37.
<PAGE>
Lynx Therapeutics, Inc.
Notes to Consolidated Financial Statements (continued)
10. Subsequent Events (unaudited) (continued)
The agreement requires that Inex will assume the responsibility, going
forward, of manufacturing LR-3280, a compound for the prevention of
cardiovascular restenosis, for Schwarz Pharma AG ("Schwarz") and Tanabe Seiyaku
Co., Ltd. ("Tanabe"). Under agreements signed with Lynx in 1986, Schwarz and
Tanabe purchased the rights to market LR-3280 and committed to bear the costs of
its continued clinical development. Lynx retains the right to collect, if and
when earned, the next milestone payments, totaling $7 million, under the Schwarz
and Tanabe agreements, as well as 50% of all future milestone payments and gross
profits associated with the continued success in the development and sales of
the compound.
In connection with the aforementioned transaction with Inex, the
Company has entered into an agreement to sublease to Inex a portion of its
existing facilities under lease. The term of the sublease to Inex is twenty-four
months, commencing March 10, 1998. Inex has the option to extend the term of
sublease through July 31, 2003, subject to certain conditions. The Company
expects to receive aggregate rental payments from Inex of approximately $462,000
over the term of the lease. The Company intends to seek additional sublessees
for the remaining portion of its existing facilities not under sublease to Inex.
On February 27, 1998, the Company entered into a noncancelable lease
for additional facilities space. The term of the lease commences on December 15,
1998 and expires on December 14, 2008. Under the terms of the lease, the monthly
rental payments are fixed for the first twenty-four months. Thereafter, the
monthly rental payments increase, and are subject to annual Consumer Price
Index-based adjustments, with minimum and maximum limits. The Company will
record rent expense on a straight-line method over the initial lease period. The
Company has the option to extend the lease for an additional five year period,
subject to certain conditions, with payments to be determined at the time of the
exercise of such option. Additionally, the Company has an option (the "Expansion
Option"), exercisable on or prior to January 1, 2000, to lease additional
building space for expansion purposes. In return for the Expansion Option, the
Company may be subject to a nominal carrying cost on the additional space,
depending on the timing of the exercise of such option, if ever.
Minimum annual rental commitments under the above operating lease are
as follow:
Years ending December 31: (in thousands)
1998 $ 31
1999 848
2000 1,145
2001 1,465
2002 1,509
Thereafter 9,980
---------
$ 14,978
=========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
The Company's executive officers, directors and certain employees, and
their ages as of December 31, 1997 are as follows:
<CAPTION>
Name Age Company Positions
---- --- -----------------
<S> <C> <C>
Sam Eletr, Ph.D. 58 Chief Executive Officer and
Chairman of the Board
Edward C. Albini 40 Chief Financial Officer and Secretary
Timothy G. Geiser, Ph.D. 55 Vice President, Manufacturing
Stephen C. Macevicz, Ph.D. 48 Vice President, Intellectual Property
Karoly Nikolich, Ph.D. 49 Vice President, Research
Gerald Zon, Ph.D. 52 Vice President, Medicinal Chemistry
William K. Bowes, Jr.(1) 71 Director
Sydney Brenner, M.B., D. Phil. 70 Director
James C. Kitch(1) 50 Director
Kathleen D. La Porte(2) 36 Director
Craig C. Taylor(2) 47 Director
-----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
</TABLE>
Sam Eletr, Ph.D., has served as Chairman of the Board of the Company
since February 1992 and resumed the position of Chief Executive Officer of the
Company in November 1996, a position he held from February 1992 through January
1996. In 1981, Dr. Eletr founded Applied Biosystems, Inc., ("ABI"), a
manufacturer of instruments and consumables for life science research and
related applications, now a wholly-owned subsidiary of Perkin Elmer Corporation,
and served as Chairman of the Board of Directors and in various executive
positions at ABI from its inception until March 1987. Dr. Eletr acted as a
consultant to ABI from September 1990 until July 1992, during which time he
undertook to assume the leadership of the Company.
Edward C. Albini, has served as Chief Financial Officer of the Company
since April 1997. He was elected Secretary of the Company in February 1998. From
January 1983 to April 1997, Mr. Albini served in various financial management
positions with Genentech, Inc., a biotechnology company ("Genentech"). His most
recent role at Genentech was as the director of Financial Planning and Analysis.
Mr. Albini holds a BS degree in Accounting from Santa Clara University and an
MBA degree from Walter A. Haas School of Business at the University of
California at Berkeley. Mr. Albini is also a certified public accountant.
Timothy G. Geiser, Ph.D., has served as Vice President, Manufacturing
of Lynx since July 1992. Prior to that time, he was a Senior Scientist at ABI
from May 1981 to July 1992 where he had earlier directed DNA chemistry and
peptide chemistry research and development activities and later joined with Dr.
Zon in 1987 to co-direct the establishment of the DNA Therapeutics Group which
led to the formation of Lynx Therapeutics, Inc. He received his Ph.D. in Organic
Chemistry from Cornell University.
Stephen C. Macevicz, Ph.D., joined the Company in September 1995, as
Vice President, Intellectual Property. He was Senior Patent Attorney and chief
patent counsel at ABI from 1992 to August 1995 and, prior to that, from 1986 to
1992, Patent Counsel at DNAX Research Institute of Molecular and Cellular
Biology, a research subsidiary of Schering-Plough Corporation. He received his
law degree from University of California, Berkeley (Boalt Hall) in 1984 and his
Ph.D. in Biophysics from the University of California, Berkeley in 1979.
39.
<PAGE>
Karoly Nikolich, Ph.D., has served as Vice President, Research of the
Company since November 1996 and was Vice President, Biological Research from
October 1995 to November 1996. Prior to that time he was a Senior Scientist and
Head of the Neuroscience Research Program at Genentech from 1989 to 1995, and a
scientist from 1985 to 1989. Dr. Nikolich established the neuroscience program
at Genentech and is a widely published and recognized expert in neurotropic
factor research. After receiving his doctorate from Eotvos University of
Budapest, he was a postdoctoral fellow at Tulane University and prior to joining
Genentech, a visiting scientist at the Hormone Research Laboratory, University
of California, San Francisco.
Gerald Zon, Ph.D., has served as Vice President, Medicinal Chemistry
and Head of Quality Control and Regulatory Affairs of Lynx since January 1993.
Dr. Zon joined Lynx in July 1992. Prior to that time, he served as Senior
Scientist at ABI from November 1986 to July 1992, and directed the Food and Drug
Administration's Pharmacology Laboratory from 1981 to 1986. Dr. Zon received his
Ph.D. in Organic Chemistry from Princeton University, and has over 200
publications in the areas of organic, medicinal and oligonucleotide chemistry.
Mr. Bowes has served as a director of the Company since March 1994. He
has been a general partner of U.S. Venture Partners, a venture capital
partnership, since 1981. He currently serves as a director of Amgen, Inc., a
biotechnology company, AMCC, an integrated circuit company, XOMA Corporation, a
biotechnology company, and one U.S. Venture Partners' privately owned portfolio
company.
Dr. Brenner has served as a director of the Company since October 1993.
In July 1996, he was appointed the Director and President of The Molecular
Sciences Institute, a non-profit research institute in Berkeley, California. In
September 1996 he retired from his position of Honorary Professor of Genetic
Medicine, University of Cambridge Clinical School. From 1986 to his retirement
in 1991, Dr. Brenner directed the Medical Research Council Unit of Molecular
Genetics. He was a member of the Scripps Research Institute in La Jolla,
California until December 1994.
Mr. Kitch has served as a director of the Company since February 1993
and Secretary of Lynx from February 1992 to December 1997. He was a director of
ABI, Lynx's predecessor, from August 1986 to February 1993. He is a partner at
Cooley Godward LLP, a law firm which has provided legal services to the Company.
Ms. La Porte has served as a director of the Company since March 1994.
She is a general partner of the Sprout Group, the venture capital affiliate of
Donaldson, Lufkin and Jenrette. From 1987 to 1993, Ms. La Porte was a principal
at Asset Management Company. She currently serves as a director of Onyx
Pharmaceuticals, Inc., a biotechnology company, Fem Rx, Inc., a medical device
company, and several private companies.
Mr. Taylor has served as a director of the Company since March 1994 and
as Acting Chief Financial Officer from July 1994 to April 1997. He has been
active in venture capital since 1977 when he joined Asset Management Company. He
is a general partner of AMC Partners 89 L.P., which serves as the general
partner of Asset Management Associates 1989 L.P., a private venture capital
partnership. He currently serves as a director of Metra BioSystems, Inc., a
biotechnology company, Pharmacyclics, Inc., a biotechnology company, and several
private companies.
Compliance with the Reporting Requirements of Section 16(a)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Security
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the Company.
Officers, directors and greater than ten percent (10%) stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company, during the calendar year ended December
31, 1997, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent (10%) beneficial owners were complied
with.
40.
<PAGE>
<TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the Company
during the calendar years ended December 31, 1997, 1996 and 1995, to its Chief
Executive Officer and each of the four other most highly compensated executive
officers whose compensation exceeded $100,000 (the "Named Executive Officers"):
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation All Other
Name and Principal Position Year Salary(1) Options(#) Compensation(2)
- --------------------------- ---- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Sam Eletr, Ph.D. 1997 $196,131 -- $--
Chief Executive Officer and 1996 176,121 32,500 --
Chairman of the Board 1995 170,484 105,000 --
Timothy G. Geiser, Ph.D. 1997 156,634(3) -- 750
Vice President, Manufacturing 1996 153,818 -- 750
1995 142,674 60,000 750
Stephen C. Macevicz, Ph.D. 1997 155,886 -- 750
Vice President, Intellectual Property 1996 144,505 -- 750
1995 53,632(4) 106,000 --
Karoly Nikolich, Ph.D. 1997 155,889 -- 750
Vice President, Research 1996 150,210 30,000 750
1995 37,085(5) 70,000 --
Gerald Zon, Ph.D. 1997 156,610(6) -- 750
Vice President, Medicinal Chemistry 1996 154,168 -- 750
1995 143,130 60,000 750
<FN>
(1) Includes amounts earned but deferred at the election of the Named Executive
Officer pursuant to the Company's 401(k) Plan.
(2) Contributions made by the Company to the Company's 401(k) Plan on behalf of
such employee.
(3) Dr. Geiser resigned from the Company in January 1998, in connection with
the sale of the phosphorothioate antisense assets to Inex Pharmaceuticals
Corporation.
(4) Dr. Macevicz joined the Company in September 1995. The 1995 annual salary
represents a partial year.
(5) Dr. Nikolich joined the Company in October 1995. The 1995 annual salary
represents a partial year.
(6) Dr. Zon resigned from the Company in January 1998, in connection with the
sale of the phosphorothioate antisense assets to Inex Pharmaceuticals
Corporation.
</FN>
</TABLE>
Except as disclosed above, no compensation characterized as long-term
compensation, including restricted stock awards issued at a price below fair
market value or long-term incentive plan payouts, were paid by the Company
during the year ended December 31, 1997, to any of the Named Executive Officers.
Stock Option Grants and Exercises
There were no grants of stock options to any of the Named Executive
Officers in the Summary Compensation Table during the year ended December 31,
1997.
41.
<PAGE>
<TABLE>
The following table sets forth certain information concerning the
number of options exercised by the Named Officers during the year ended December
31, 1997, and the number of shares covered by both exercisable and unexercisable
stock options held by the Named Officers. Also reported are values for
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding options and the fair market value of the
Company's common stock as of December 31, 1997 ($16.25 per share).
Aggregated Option Exercises in the Year Ended December 31, 1997 and Option Values
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options at
Shares at Year-End Year-End (1)
Acquired on Value --------------------------- ----------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Sam Eletr -- $ -- 185,000 32,500 $2,621,250 $478,075
Timothy G. Geiser -- -- 123,500 -- 1,771,025 --
Stephen C. Macevicz -- -- 54,000 -- 856,650 --
Karoly Nikolich -- -- 40,000 -- 495,000 --
Gerald Zon -- -- 130,750 -- 1,883,613 --
<FN>
(1) Based on the fair market value of the Company's common stock at December 31, 1997 ($16.25), minus the
exercise price of the option, multiplied by the number of shares underlying the options.
</FN>
</TABLE>
Compensation of Directors
Directors are not compensated by the Company for service as directors.
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee was established in March 1994.
There were no officers or employees of the Company who participated in
deliberations of the Company's Compensation Committee concerning executive
officer compensation during the year ended December 31, 1997.
Limitations of Liability and Indemnification
The Company's Bylaws provide that the Company will indemnify its
directors and executive officers and may indemnify its other officers, employees
and other agents to the fullest extent permitted by Delaware law. The Company is
also empowered under its Bylaws to enter into indemnification agreements with
its directors and officers and to purchase insurance on behalf of any person
whom it is required or permitted to indemnify. Pursuant to this provision, the
Company has entered into indemnity agreements with each of its directors and
executive officers.
In addition, the Company's Certificate of Incorporation provides that,
to the fullest extent permitted by Delaware law, the Company's directors will
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to the Company and its stockholders. This provision in the Certificate
of Incorporation does not eliminate the duty of care, and in appropriate
circumstances, equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Delaware law. Each director will
continue to be subject to liability for breach of the director's duty of loyalty
to the Company, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for acts or omissions that the director
believes to be contrary to the best interests of the Company or its
stockholders, for any transaction from which the director derived an improper
personal benefit, for acts or omissions involving a reckless disregard for the
director's duty to the Company or its stockholders when the director was aware
or should have been aware of a risk of serious injury to the Company or its
stockholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the Company
or its stockholders, for improper transactions between the director and the
Company and for improper distributions to stockholders and loans to directors
and officers. This
42.
<PAGE>
provision also does not affect a director's responsibilities under any other
laws such as the federal securities laws or state or federal environmental laws.
No pending material litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being sought exists, and the Company is not aware of any pending or threatened
material litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
<TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock (on an as-if converted basis) as of February 28,
1998, by (i) each stockholder who is known by the Company to own beneficially
more than 5% of the Common Stock (on an as-if converted basis); (ii) each Named
Executive Officer of the Company listed on the Summary Compensation Table below;
(iii) each director of the Company; and (iv) all directors and executive
officers of the Company as a group. All Series D preferred stock is held by
Hoechst Marion Roussel as reflected in the Common Stock table and as noted in
footnote (9).
<CAPTION>
Series B Series C
Common Stock(1) Preferred Stock(1) Preferred Stock(1)
Name and Address --------------------- ------------------ ---------------------
of Beneficial Owners Number Percent(2) Number Percent(2) Number Percent(2)
- -------------------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Entities affiliated with
U.S. Venture Partners IV, L.P.(3) 730,000 10.9% 50,000 15.0% 23,000 18.7%
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Entities affiliated with the
Sprout Group(4) 729,980 10.9% 49,999 15.0% 22,999 18.7%
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025
Cannon Street Fund Ltd. 565,000 8.7% 40,000 12.0% 16,500 13.4%
c/o Meridian Venture Group
R.R. Box 272
Charlottesville, VA 22314
Biotechnology Investments Limited 545,000 8.4% 40,000 12.0% 14,500 11.8%
c/o Old Court Limited
P.O. Box 58
St. Julian's Court
St. Peter Port
Guernsey, Channel Islands
Entities affiliated with
WPG-Farber-Weber Fund(5) 500,000 8.4% -- N/A -- N/A
590 Madison Avenue
New York, NY 10022
43.
<PAGE>
Series B Series C
Common Stock(1) Preferred Stock(1) Preferred Stock(1)
Name and Address --------------------- ------------------ ---------------------
of Beneficial Owners Number Percent(2) Number Percent(2) Number Percent(2)
- -------------------- ------ ---------- ------ ---------- ------ ----------
Lombard Odier & Cie(6) 490,000 8.2% -- N/A -- N/A
11 Rue de la Corraterie
1204 Geneva, Switzerland
Entities affiliated with
Mehta and Isaly(7) 450,000 7.6% -- N/A -- N/A
41 Madison Avenue
New York, NY 10010
Singapore Bio-Innovations Pte, Ltd. 420,000 6.6% 42,000 12.6% -- N/A
250 North Bridge Road
24-00 Raffles City Tower
Singapore 0617
Entities affiliated with
Partech International(8) 415,000 6.7% 15,000 4.5% 15,000 12.2%
101 California Ave., Suite 3150
San Francisco, CA 94111
Hoechst Marion Roussel(9) 400,000 6.3% -- N/A -- N/A
10236 Marion Park Drive
Kansas City, MO 64137-1405
Entities affiliated with
The Tisch Family(10) 400,000 6.7% -- N/A -- N/A
667 Madison Avenue
New York, NY 10021
Asset Management Associates 360,000 5.7% 36,000 10.8% -- N/A
1989 L.P.(11)
2275 East Bayshore Rd., #150
Palo Alto, CA 94303
Chiron Corporation 300,000 5.1% -- N/A -- N/A
4360 Horton Street
Emeryville, CA 94608
Sam Eletr, Ph.D.(12) 463,759 7.5% -- N/A -- N/A
Lynx Therapeutics, Inc.
3832 Bay Center Place
Hayward, CA 94545
William K. Bowes, Jr.(13) 747,721 11.2% 50,000 15.0% 23,000 18.7%
U.S. Venture Partners IV, L.P.
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
44.
<PAGE>
Series B Series C
Common Stock(1) Preferred Stock(1) Preferred Stock(1)
Name and Address --------------------- ------------------ ---------------------
of Beneficial Owners Number Percent(2) Number Percent(2) Number Percent(2)
- -------------------- ------ ---------- ------ ---------- ------ ----------
Sydney Brenner, M.D., D. Phil.(14) 287,375 4.3% -- N/A -- N/A
Timothy G. Geiser(15) 160,327 2.6% -- N/A -- N/A
James C. Kitch(16) 17,818 ** 700 ** 300 **
Kathleen D. La Porte(4) 729,980 10.9% 49,999 15.0% 22,999 18.7%
Sprout Group
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025
Stephen C. Macevicz, Ph.D.(17) 106,151 1.8% -- N/A -- N/A
Karoly Nikolich, Ph.D.(18) 100,000 1.7% -- N/A -- N/A
Craig C. Taylor(19) 371,497 5.9% 36,000 10.8% 1,000 **
Asset Management Associates
1989 L.P.
2275 East Bayshore Rd., #150
Palo Alto, CA 94303
Gerald Zon, Ph.D.(20) 160,806 2.6% -- N/A -- N/A
All directors and officers 3,195,434 38.1% 136,699 41.1% 47,299 38.4%
as a group (11 persons)(21)
<FN>
**Less than one percent.
(1) Except as otherwise noted, and subject to community property laws where
applicable, each person or entity named in the table has sole voting
and investment power with respect to all shares shown as beneficially
owned by him, her or it. Beneficial ownership of common stock reflects
beneficial ownership of Series B preferred stock and Series C preferred
stock as set forth in the table, and Series D preferred stock with
respect to Hoechst Marion Roussel, as set forth in footnote (9).
(2) Percentage of beneficial ownership is based on 5,940,269 shares of
common stock, 332,288 shares of the Company's Series B preferred stock,
123,299 shares of the Company's Series C preferred stock and 40,000
shares of the Company's Series D preferred stock outstanding as of
February 28, 1998, except as otherwise noted in the footnotes. The
Series B, Series C and Series D preferred stock will convert into
common stock on a ten-for-one basis on March 31, 1998. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to
options currently exercisable or exercisable within 60 days of February
28, 1998, are deemed outstanding for computing the percentage of the
person holding such option but are not deemed outstanding for computing
the percentage of any other person.
(3) Includes 50,000 shares of Series B preferred stock and 23,000 shares of
Series C preferred stock held by entities affiliated with U.S. Venture
Partners IV, L.P. ("U.S.V.P. IV") Mr. Bowes, a director of the Company,
is a general partner of Presidio Management Group IV, the general
partner of U.S.V.P. IV. Mr. Bowes shares the power to vote and control
the disposition of shares held by U.S.V.P. IV and therefore may be
deemed to be the beneficial owner of such shares. Mr. Bowes disclaims
beneficial ownership of such
45.
<PAGE>
shares, except to the extent of his pro-rata interest therein.
(4) Includes 49,999 shares of Series B preferred stock and 22,999 shares of
Series C preferred stock held by entities affiliated with Sprout Group.
Ms. La Porte, a director of the Company, is a general partner of the
Sprout Group, an entity affiliated with Sprout Capital VI, Sprout
Capital VII and DLJ Capital. Ms. La Porte shares the power to vote and
control the disposition of shares held by Sprout Capital VI, Sprout
Capital VII and DLJ Capital and therefore may be deemed to be the
beneficial owner of such shares. Ms. La Porte disclaims beneficial
ownership of such shares, except to the extent of her pro-rata interest
therein.
(5) Includes 500,000 shares of common stock held by entities affiliated
with WPG-Farber-Weber Fund.
(6) Includes 490,000 shares of common stock held by Lombard Odier & Cie as
custodian. Lombard Odier & Cie disclaim beneficial ownership of such
shares.
(7) Includes 450,000 shares of common stock held by entities affiliated
with the Mehta and Isaly.
(8) Includes 115,000 shares of common stock, 150,000 shares of Series B
preferred stock and 150,000 shares of Series C preferred stock held by
entities affiliated with Partech International.
(9) Consists solely of 40,000 shares of Series D preferred stock, which
constitutes 100% of the shares of Series D preferred stock outstanding.
(10) Includes 400,000 shares of common stock held by entities affiliated
with the Tisch Family Interests.
(11) Includes 36,000 shares of Series B preferred stock held by Asset
Management Associates 1989 L.P. ("Asset 1989 L.P."). Mr. Taylor, a
director of the Company, is a general partner of AMC Partners 89, which
is the general partner of Asset 1989 L.P. Mr. Taylor shares the power
to vote and control the disposition of shares held by Asset 1989 L.P.
and therefore may be deemed to be the beneficial owner of such shares.
Mr. Taylor disclaims beneficial ownership of such shares, except to the
extent of his pro-rata interest therein.
(12) Includes 217,500 shares of common stock issuable upon exercise of Lynx
stock options held by Dr. Eletr that are exercisable within 60 days.
(13) See Note 3 above. Common stock amount also includes 17,721 shares held
by Mr. Bowes.
(14) Includes 27,375 shares of common stock issuable upon exercise of Lynx
stock options held by Sydney Brenner that are exercisable within 60
days.
(15) Includes 123,500 shares of common stock issuable upon exercise of Lynx
stock options held by Dr. Geiser that are exercisable within 60 days.
Also includes 4 shares of common stock held of record by Dr. Geiser's
wife, to which shares Dr. Geiser disclaims beneficial ownership.
(16) Includes 700 shares of Series B preferred stock and 300 shares of
Series C preferred stock held by GC&H Investments, an investment
partnership of which Mr. Kitch is a general partner. Also includes
1,985 shares of common stock and 5,833 shares of common stock issuable
upon the exercise of Lynx stock option held by Mr. Kitch on behalf of
GC&H Investments. Mr. Kitch shares the power to vote and control the
disposition of such shares and therefore may be deemed to be the
beneficial owner of such shares. Mr. Kitch disclaims beneficial
ownership of such shares, except to the extent of his pro-rata interest
therein.
(17) Includes 54,000 shares of common stock issuable upon exercise of Lynx
stock options held by Dr. Macevicz that are exercisable within 60 days.
(18) Includes 40,000 shares of common stock issuable upon exercise of Lynx
stock options held by Dr. Nikolich that are exercisable within 60 days.
46.
<PAGE>
(19) See Note 11 above. Includes 1,497 shares of common stock and 1,000
shares of Series C preferred stock held by Mr. Taylor.
(20) Includes 130,750 shares of common stock issuable upon exercise of Lynx
stock options held by Dr. Zon that are exercisable within 60 days. Also
includes 105 shares of common stock held of record by Dr. Zon's wife
and 64 shares of common stock issuable upon exercise of Perkin Elmer
Options held by Dr. Zon's wife that are fully vested and exercisable,
as to which shares Dr. Zon disclaims beneficial ownership.
(21) Common stock amount includes 1,839,980 shares of Series B and Series C
preferred stock (common equivalent) held by entities affiliated with
certain directors and 599,022 shares of common stock issuable upon
exercise of the Company's stock options and Perkin Elmer stock options
held by directors and officers that are exercisable within 60 days. See
Notes 12 through 20 above.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Corporate Collaborations
See "ITEM 1. BUSINESS" and "Note 3. of the Notes to Consolidated Financial
Statements"
In 1992, ABI distributed all but an aggregate of 299,800 shares of the
Lynx common stock it held to its shareholders (the "Distribution"). In
connection with this transaction, Lynx granted ABI an option to purchase up to
215,900 shares of Lynx common stock at $0.10 per share which, prior to October
1996, could only be exercised by ABI in connection with the distribution by ABI
of Lynx stock to its option holders upon the exercise of ABI stock options
outstanding as of the date of the Distribution. In September 1997, the option
expired and the remaining shares were canceled.
Transactions with Directors and Executive Officers
In October 1995, the Company entered into a full-recourse loan
agreement with Karoly Nikolich, an officer of the Company. A note receivable of
$210,000 was issued under a stock purchase agreement for the purchase of 60,000
shares of common stock whereby all the shares issued under the agreement are
pledged as collateral. The outstanding principal amount is due and payable in
full in October 2000, subject to an obligation to prepay under specified
circumstances. Interest is payable upon the expiration or termination of the
note and accrues at the rate of 6.38% per annum.
In April 1997, the Company entered into a full-recourse loan agreement
with Edward C. Albini, an officer of the Company. A note receivable of $250,000
was issued under a stock purchase agreement for the purchase of 50,000 shares of
common stock whereby all the shares issued under the agreement are pledged as
collateral. The outstanding principal amount is due and payable in full in April
2002, subject to an obligation to prepay under specified circumstances. Interest
is payable upon the expiration or termination of the note and accrues at the
rate of 6.49% per annum.
The Company currently has no employment contracts with any Named
Executive Officers, and the Company has no compensatory plan or arrangement with
Named Executive Officers where the amounts to be paid exceed $100,000 and which
are activated upon resignation, termination or retirement of any such executive
officer or upon a change in control of the Company.
For legal services rendered during the calendar year ended December 31,
1997, the Company paid approximately $228,449 to Cooley Godward LLP, the
Company's counsel, of which Mr. Kitch, a director of the Company, is a partner.
47.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) The following index, Report of Ernst & Young LLP, Independent Auditors
and financial statements are set forth on pages 22 through 27 of this report:
(i) Report of Ernst & Young LLP, Independent Auditors.
(ii) Consolidated Balance Sheets as of December 31, 1997 and 1996.
(iii) Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.
(iv) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
(v) Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 .
(vi) Notes to Consolidated Financial Statements.
(2) All schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statement or notes thereto.
(3) The following documents are filed as Exhibits to this report:
48.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
2.1** Acquisition Agreement, dated as of February 4, 1998, by and between
the Company and Inex Pharmaceuticals Corporation, incorporated by
reference to the indicated exhibit of the Registrant's current report
on Form 8-K filed on March 24, 1998.
3.1.1 Certificate of Amendment of Certificate of the Amended and Restated
Certificate of Incorporation of the Company.
3.2 Bylaws of the Company, as amended, incorporated by reference to the
indicated exhibit of the Registrant's Statement Form 10 (File No.
0-22570), as amended.
3.3 Certificate of Designation of Preferences of Series B Convertible
Preferred Stock of the Company, incorporated by reference to the
indicated exhibit of the Registrant's Form 10-K for the transition
period ended December 31, 1993.
3.4 Certificate of Amendment of Certificate of Designation of Preferences
of Series B Convertible Preferred Stock of the Company, incorporated
by reference to the indicated exhibit of the Registrant's Form 10-Q
for the period ended March 31, 1995.
3.4.1 Certificate of Amendment to Certificate of Designation of Preferences
of Series B Convertible Preferred Stock of the Company.
3.4.2 Certificate of Amendment to Certificate of Designation of Preferences
of Series B Convertible Preferred Stock of the Company dated
September 30, 1997.
3.5 Certificate of Designation of Preferences of Series C Convertible
Preferred Stock, incorporated by reference to the indicated exhibit
of the Registrant's Form 10-Q for the period ended March 31, 1995.
3.5.1 Certificate of Amendment to Certificate of Designation of Preferences
of Series C Convertible Preferred Stock of the Company dated
September 30, 1997.
3.5.2 Certificate of Amendment to Certificate of Designation of Preferences
of Series C Convertible Preferred Stock of the Company.
3.6 Certificate of Amendment to Certificate of Designation of Preferences
of Series D Convertible Preferred Stock of the Company.
4.1 Shareholders Agreement, dated as of October 1, 1992, by and among the
Company, Applied Biosystems, Inc. ("ABI") and Chiron Corporation
("Chiron"), incorporated by reference to the indicated exhibit of the
Registrant's Statement Form 10 (File No. 0-22570), as amended.
4.2 Form of Common Stock Certificate, incorporated by reference to the
indicated exhibit of the Registrant's Statement Form 10 (File No.
0-22570), as amended.
4.3 Form of Series B Preferred Stock Certificate, incorporated by
reference to Exhibit 4.4 of the Registrant's Form 10-K for the
transition period ended December 31, 1993.
4.4 Form of Series C Preferred Stock Certificate, incorporated by
reference to Exhibit 4.5 of the Registrant's Form 10-K for the period
ended December 31, 1995.
4.5 Form of Series D Preferred Stock Certificate, incorporated by
reference to Exhibit 4.6 of the Registrant's Form 10-K for the period
ended December 31, 1995.
10.1 Preferred Stock Purchase Agreement, dated as of October 1, 1992,
between the Company and ABI, incorporated by reference to the
indicated exhibit of the Registrant's Statement Form 10 (File No.
0-22570), as amended.
10.2 Stock Purchase Agreement, dated as of June 30, 1992, between the
Company and Timothy Geiser, incorporated by reference to the
indicated exhibit of the Registrant's Statement Form 10 (File No.
0-22570), as amended.
10.3 Stock Purchase Agreement, dated as of June 30, 1992, between the
Company and Gerald Zon, incorporated by reference to the indicated
exhibit of the Registrant's Statement Form 10 (File No. 0-22570), as
amended.
10.4 Stock Purchase Agreement, dated as of August 25, 1992, between the
Company and Sam Eletr, incorporated by reference to Exhibit 10.6 of
the Registrant's Statement Form 10 (File No. 0-22570), as amended.
49.
<PAGE>
10.5 Form of Indemnity Agreement entered into between the Company and its
directors and officers, incorporated by reference to Exhibit 10.7 of
the Registrant's Statement Form 10 (File No. 0-22570), as amended.
10.6+ The Company's 1992 Stock Option Plan (the "Stock Option Plan"),
incorporated by reference to Exhibit 10.8 of the Registrant's
Statement Form 10 (File No. 0-22570), as amended.
10.7+ Form of Incentive Stock Option Grant under the Stock Option Plan,
incorporated by reference to Exhibit 10.9 of the Registrant's
Statement Form 10 (File No. 0-22570), as amended.
10.8+ Form of Nonstatutory Stock Option Grant under the Stock Option Plan,
incorporated by reference to Exhibit 10.10 of the Registrant's
Statement Form 10 (File No. 0-22570), as amended.
10.9 Agreement of Assignment and License of Intellectual Property Rights,
dated June 30, 1992, between the Company and ABI, incorporated by
reference to Exhibit 10.11 of the Registrant's Statement Form 10
(File No. 0-22570), as amended.
10.10 Lease, dated as of June 28, 1993, by and between the Company and
Spieker-Singleton #87, Limited Partnership, incorporated by reference
to Exhibit 10.14 of the Registrant's Statement Form 10 (File No.
0-22570), as amended.
10.11 Series B Convertible Preferred Stock Purchase Agreement, dated as of
February 15, 1994, between the Company and the Purchasers,
incorporated by reference to the Exhibit 10.16 of the Registrant's
Form 10-K for the transition period ended December 31, 1993.
10.12 Investor Rights Agreement, dated as of February 15, 1994, between the
Company and the Purchasers, incorporated by reference to the Exhibit
10.17 of the Registrant's Form 10-K for the transition period ended
December 31, 1993.
10.13 Series C Convertible Preferred Stock Purchase Agreement, dated as of
March 24, 1995, incorporated by reference to Exhibit 10.19 of the
Registrant's Form 10-K for the period ended December 31, 1995.
10.14 Investors Rights Agreement, dated as of March 24, 1995, incorporated
by reference to Exhibit 10.20 of the Registrant's Form 10-K for the
period ended December 31, 1995.
10.15 Spectragen Formation Agreement, dated as of March 24, 1995,
incorporated by reference to Exhibit 10.21 of the Registrant's Form
10-Q for the period ended March 31, 1996.
10.16+ Spectragen Stockholder's Agreement, dated as of August 21, 1995,
incorporated by reference to Exhibit 10.22 of the Registrant's Form
10-Q for the period ended March 31, 1996.
10.17+ Employment Agreement, dated as of May 1, 1995 between the Company and
David W. Martin, Jr., M.D., incorporated by reference to Exhibit
10.23 of the Registrant's Form 10-K for the period ended December 31,
1995.
10.18+ Stock Purchase Agreement dated as of May 1, 1995, between the Company
and David W. Martin, Jr. M.D., incorporated by reference to Exhibit
10.24 of the Registrant's Form 10-K for the period ended December 31,
1995.
10.19+ Loan Agreement, dated as of May 1, 1995, between the Company and
David W. Martin, Jr., M.D. incorporated by reference to Exhibit 10.25
of the Registrant's Form 10-K for the period ended December 31, 1995.
10.20+ Promissory Note Secured by Mortgage, dated as of June 12, 1995, to
the Company by David W. and Kathleen M. Martin Revocable Trust,
incorporated by reference to Exhibit 10.26 of the Registrant's Form
10-K for the period ended December 31, 1995.
10.21+ Stock Purchase Agreement dated as of October 2, 1995, between the
Company and Karoly Nikolich, incorporated by reference to Exhibit
10.27 of the Registrant's Form 10-K for the period ended December 31,
1995.
10.22 Technology Development and Services Agreement, dated as of October 2,
1995, between the Company and Hoechst Aktiengesellschaft and its
subsidiary, Hoechst Marion Roussel, incorporated by reference to
Exhibit 10.28 of the Registrant's Form 10-K for the period ended
December 31, 1995.
10.23 Series D. Convertible Preferred Stock Purchase Agreement, dated as of
October 2, 1995, incorporated by reference to Exhibit 10.29 of the
Registrant's Form 10-K for the period ended December 31, 1995.
10.24 Amended and Restated Investor Rights Agreement, dated as of November
1, 1995, incorporated by reference to Exhibit 10.30 of the
Registrant's Form 10-K for the period ended December 31, 1995.
10.25+ Stock Purchase Agreement, dated as of June 13, 1996, between
Spectragen, Inc. and Sam Eletr. (The Stock Purchase Agreement was
assumed by the Company pursuant to the Agreement of Merger between
the Company and Spectragen, Inc.
50.
<PAGE>
10.26 Collaboration Agreement , dated as of July 9, 1996, between the
Company and Tanabe Seiyaku Co., Ltd., incorporated by reference to
Exhibit 10.31 of the Registrant's Form 10-Q for the period ended June
30, 1996.
10.27 Collaboration Agreement , dated as of September 30, 1996, between the
Company and Schwarz Pharma AG., incorporated by reference to Exhibit
10.32 of the Registrant's Form 10-Q for the period ended September
20, 1996.
10.28** Technology Services Agreement, dated October 23, 1996, between the
Company and BASF Aktiengesellschaft.
10.29 Joint Venture Agreement, dated as of October 23, 1996, between the
Company and BASF Aktiengesellschaft.**
10.30 Agreement of Merger, dated as of October 23, 1996, between the
Company and Spectragen, Inc.
10.31+ Separation Agreement, dated as of November 1, 1996, between the
Company and David W. Martin, Jr., M.D.
10.32+ Stock Purchase Agreement dated as of April 14, 1997, between the
Company and Edward C. Albini.
10.33 First Amemdment to Technology Development and Services Agreement,
dated September 1, 1997, between the Company and Hoechst
Aktiengesellschaft and its Subsidiary, Hoechst Marion Roussel,
incorporated by reference to Exhibit 10.32 of the Registrant's Form
10-Q for the period ended September 30, 1997.
10.34 Form of Common Stock Purchase Agreement, dated as of September 28,
1997, by and between the Company and the investors listed therein,
incorporated by reference to the Exhibit 4.1 of the Registrant's
Registration Statement on Form S-3, filed on October 31, 1997 (File
No. 333-39171).
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 52.
27.0 Financial Data Table for the period ended December 31, 1997.
27.1 Financial Data Table for the period ended December 31, 1996.
- ------------------------------
(+) Management contract or compensatory plan or arrangement.
** Portions of this agreement have been deleted pursuant to our request
for confidential treatment
(b) Reports on Form 8-K
Not applicable
51.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) Securities Act of
1934, the Registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March 1998.
LYNX THERAPEUTICS, INC.
By: /s/ Sam Eletr
-----------------------------
Sam Eletr, Ph.D.
Chairman of the Board
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Sam
Eletr and James C. Kitch his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement
on Form 10-K, and to file the same, with all exhibits thereto, and all documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully 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, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and of the
capacities and on the dates indicated.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sam Eletr Chief Executive Officer and
- -------------------------------------- Chairman of the Board
Sam Eletr (Principal Executive Officer) March 27, 1998
/s/ Edward C. Ablini Chief Financial Officer and Secretary
- -------------------------------------- (Principal Financial and Accounting Officer) March 27, 1998
Edward C. Albini
/s/ William K. Bowes, Jr. Director March 27, 1998
- --------------------------------------
William K. Bowes, Jr.
/s/ Sydney Brenner Director March 27, 1998
- --------------------------------------
Sydney Brenner
/s/ James C. Kitch Director March 27, 1998
- --------------------------------------
James C. Kitch
/s/ Kathleen D. La Porte Director March 27, 1998
- --------------------------------------
Kathleen D. La Porte
/s/ Craig C. Taylor Director March 27, 1998
- --------------------------------------
Craig C. Taylor
</TABLE>
52.
Exhibit 3.4.2
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF DESIGNATION
OF
PREFERENCES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
LYNX THERAPEUTICS, INC.
Lynx Therapeutics, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: The name of the corporation is Lynx Therapeutics, Inc. (the
"Corporation").
SECOND: The date on which the Certificate of Incorporation of the
Corporation first was filed with the Secretary of State of the State of Delaware
is February 18, 1992.
THIRD: The Board of Directors, acting in accordance with the provisions
of Sections 151 and 242 of the General Corporation Law of the State of Delaware,
adopted resolutions to amend paragraphs 4(a) and 4(b) of Section B of Article
THIRD of the "Certificate of Designation of Preferences of Series B Convertible
Preferred Stock of Lynx Therapeutics, Inc." to read in their entirety as
follows:
"4. CONVERSION.
The holders of the Series B Convertible Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
a. Mandatory Conversion. On March 31, 1998, each share of Series B
Convertible Preferred Stock shall automatically convert into the number of fully
paid and nonassessable shares of Common Stock which results from dividing $5.00
by the Series B Conversion Price (as hereinafter defined) per share in effect at
the time of conversion (the Automatic Conversion"). The initial Series B
Conversion Price shall be $.50. The Series B Convertible Preferred Stock is not
otherwise convertible. The number of shares of Common Stock into which one share
of Series B Convertible Preferred Stock may be converted hereinafter is referred
to as the "Conversion Rate."
b. Mechanics of Conversion. Upon the Automatic Conversion,
each holder of Series B Convertible Preferred Stock shall surrender the
certificate or certificates for such shares, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series B Convertible Preferred
Stock, or notify the Corporation or its transfer agent that such Series B
Convertible Preferred Stock certificates have been lost, stolen or destroyed and
execute an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall then, as soon as is practicable, issue and deliver at such
office to such holder of Series B Convertible Preferred Stock, or to such
holder's nominee or nominees, a certificate or certificates for the number of
shares of Common Stock to which such holder is entitled."
FOURTH: Thereafter, pursuant to a resolution of the Board of Directors,
this Certificate of Amendment was submitted to the holders of Series B
Convertible Preferred Stock for their approval in accordance with Sections 228
and 242 of the General Corporation Law of the State of Delaware and written
notice has been given to all such stockholders who have not consented as
provided in Section 228(d) of the General Corporation Law of the State of
Delaware.
53.
<PAGE>
IN WITNESS WHEREOF, Lynx Therapeutics, Inc. has caused this
Certificate of Amendment to be signed by its Chief Executive Officer and
attested by its Secretary this 30th day of September, 1997.
LYNX THERAPEUTICS, INC.
/s/ Sam Eletr
-------------------------------
Sam Eletr
Chief Executive Officer
ATTEST:
/s/ James C. Kitch
- ----------------------------
James C. Kitch
Secretary
54.
Exhibit 3.5.2
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF DESIGNATION
OF
PREFERENCES
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
LYNX THERAPEUTICS, INC.
Lynx Therapeutics, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: The name of the corporation is Lynx Therapeutics, Inc. (the
"Corporation").
SECOND: The date on which the Certificate of Incorporation of the
Corporation first was filed with the Secretary of State of the State of Delaware
is February 18, 1992.
THIRD: The Board of Directors, acting in accordance with the provisions
of Sections 151 and 242 of the General Corporation Law of the State of Delaware,
adopted resolutions to amend paragraphs 4(a) and 4(b) of Section B of Article
THIRD of the "Certificate of Designation of Preferences of Series C Convertible
Preferred Stock of Lynx Therapeutics, Inc." to read in their entirety as
follows:
"4. CONVERSION.
The holders of the Series C Convertible Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
a. Mandatory Conversion. On March 31, 1998, each share of
Series C Convertible Preferred Stock shall automatically convert into the number
of fully paid and nonassessable shares of Common Stock which results from
dividing $5.00 by the Series C Conversion Price (as hereinafter defined) per
share in effect at the time of conversion (the _______________________ Automatic
Conversion"). The initial Series C Conversion Price shall be $.50. The Series C
Convertible Preferred Stock is not otherwise convertible. The number of shares
of Common Stock into which one share of Series C Convertible Preferred Stock may
be converted hereinafter is referred to as the "Conversion Rate."
b. Mechanics of Conversion. Upon the Automatic Conversion,
each holder of Series C Convertible Preferred Stock shall surrender the
certificate or certificates for such shares, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series C Convertible Preferred
Stock, or notify the Corporation or its transfer agent that such Series C
Convertible Preferred Stock certificates have been lost, stolen or destroyed and
execute an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall then, as soon as is practicable, issue and deliver at such
office to such holder of Series C Convertible Preferred Stock, or to such
holder's nominee or nominees, a certificate or certificates for the number of
shares of Common Stock to which such holder is entitled."
FOURTH: Thereafter, pursuant to a resolution of the Board of Directors,
this Certificate of Amendment was submitted to the holders of Series C
Convertible Preferred Stock for their approval in accordance with Sections 228
and 242 of the General Corporation Law of the State of Delaware and written
notice has been given to all such stockholders who have not consented as
provided in Section 228(d) of the General Corporation Law of the State of
Delaware.
55.
<PAGE>
IN WITNESS WHEREOF, Lynx Therapeutics, Inc. has caused this Certificate
of Amendment to be signed by its Chief Executive Officer and attested by its
Secretary this 30th day of September, 1997.
LYNX THERAPEUTICS, INC.
/s/ Sam Eletr
----------------------------------
Sam Eletr
Chief Executive Officer
ATTEST:
/s/ James C. Kitch
- ---------------------------
James C. Kitch
Secretary
56.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made by and between LYNX THERAPEUTICS,
INC., a Delaware corporation (the "Company"), and Edward C. Albini
("Purchaser").
WITNESSETH:
WHEREAS, Purchaser holds one stock option to purchase shares of common
stock of the Company pursuant to the Company's 1992 Stock Option Plan (the
"Plan") which Purchaser desires to exercise;
WHEREAS, Purchaser wishes to take advantage of the early exercise
provision of his options; and
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Purchaser hereby agrees to purchase from the Company, and the
Company hereby agrees to sell to Purchaser, an aggregate of fifty thousand
(50,000) shares of the Company's common stock (the "Stock"), for an exercise
price of ($5.00) per share (total exercise price: two hundred fifty thousand
dollars ($250,000), payable as follows:
Cash at Closing $ -0-
Promissory Note in the form
of Exhibit E (the "Note") $250,000
Total Exercise Price $250,000
The closing hereunder shall occur at the offices of the Company on the
date of this Agreement or at such other time and place as the parties may
mutually agree upon in writing.
At the closing, Purchaser shall deliver one (1) stock assignment in the
form of Exhibit B, duly endorsed (with date and number of shares left blank),
joint escrow instructions (the "Joint Escrow Instructions") in the form of
Exhibit C, duly executed by Purchaser, and the total exercise price (including
an executed Note in the form of Exhibit E if a portion of the total exercise
price is to be paid by promissory note and an executed pledge agreement in the
form of Exhibit F (the "Pledge Agreement") under which all shares of the Stock
acquired by Note shall be pledged as collateral security for the payment of the
indebtedness represented by the Note).
At the closing or as soon thereafter as practicable, the Company shall
deliver to the Escrow Agent (as defined in paragraph 8 below) share certificates
for all of the Stock that is to be subject to the Purchase Option (as defined in
paragraph 2 below), and shall deliver share certificates to Purchaser for all of
the Stock, if any, that is not to be subject to the Purchase Option or the
Pledge Agreement. The certificates for all of the Stock that is subject to the
Pledge Agreement but not the Purchase Option shall be retained by the Company as
security pursuant to the Pledge Agreement.
2. In accordance with the provisions of Section 408(b) of the
California General Corporation Law, fifty thousand (50,000) shares of the Stock
to be purchased by Purchaser pursuant to this Agreement with an exercise price
of five dollars ($5.00) per share shall be subject to the following option
("Purchase Option"):
(a) Subject to the provisions of Exhibit A, in the event that
Purchaser shall cease to be an employee of the Company for any reason (including
his death), or no reason, with or without cause, the Purchase Option may be
exercised. The Company shall have the right at any time within the ninety (90)
day period after Purchaser's termination of service with the Company and all
related companies or such longer period as may be agreed to by the Company and
Purchaser (for example, for purposes of satisfying the requirements of Section
1202(c)(3) of the Internal Revenue Code) to purchase from Purchaser or his
personal representative, as the case may
57.
<PAGE>
be, at the price per share paid by Purchaser pursuant to this Agreement ("Option
Price"), up to but not exceeding the number of shares of the Stock set forth on
Exhibit A hereto which is incorporated herein by this reference.
(b) In addition, and without limiting the foregoing Purchase
Option, if at any time during the term of the Purchase Option, there occurs: (a)
a dissolution or liquidation of the Company; (b) a merger or consolidation
involving the Company in which the Company is not the surviving corporation; (c)
a reverse merger in which the Company is the surviving corporation but the
shares of the Company's common stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of other securities, cash or otherwise; or (d) any other capital
reorganization in which more than fifty percent (50%) of the shares of the
Company entitled to vote are exchanged, then: (i) if there is no successor to
the Company, the Company shall have the right to exercise its Purchase Option as
to all or any portion of the Stock then subject to the Purchase Option set forth
above to the same extent as if Purchaser's employment by the Company had ceased
on the date preceding the date of consummation of said event or transaction, or
(ii) the Purchase Option may be assigned to any successor of the Company, and
the Purchase Option shall apply if Purchaser shall cease for any reason to be an
employee of such successor on the same basis as set forth above. In that case,
references herein to the "Company" shall be deemed to refer to such successor.
(c) The Company shall be entitled to pay for any shares
purchased pursuant to its Purchase Option at the Company's option in cash, by
offset against any indebtedness given in payment for the Stock, or a combination
of both.
(d) As used herein, employment with the Company shall include
employment with an affiliate of the Company.
(e) This Agreement is not an employment contract and nothing
in this Agreement shall be deemed to create in any way whatsoever any obligation
on the part of Purchaser to continue in the employ of the Company, or of the
Company to continue Purchaser in the employ of the Company.
(f) In the event that the Stock's Fair Market Value (as
defined in the Plan) is equal to or exceeds the Option Price on the date that
the Purchaser ceases to be employed, the Company shall exercise its Purchase
Option to the extent permitted by law.
3. The Purchase Option may be exercised by giving written notice of
exercise delivered or mailed as provided in paragraph 14. Upon providing of such
notice and payment or tender of the purchase price, the Company shall become the
legal and beneficial owner of the Stock being purchased and all rights and
interests therein or related thereto.
4. If from time to time during the term of the Purchase Option there is
any stock dividend or liquidating dividend or distribution of cash and/or
property, stock split or other change in the character or amount of any of the
outstanding securities of the Company, then, in such event, any and all new,
substituted or additional securities or other property to which Purchaser is
entitled by reason of his ownership of Stock will be immediately subject to the
Purchase Option and be included in the word "Stock" for all purposes of the
Purchase Option with the same force and effect as the shares of Stock then
subject to the Purchase Option. While the total Option Price shall remain the
same after each such event, the Option Price per share of Stock upon exercise of
the Purchase Option shall be appropriately adjusted.
5. All certificates representing any shares of Stock of the Company
subject to the provisions of this Agreement shall have endorsed thereon legends
in substantially the following form:
(i) "The shares represented by this certificate are subject to
an option set forth in an agreement between the corporation and the registered
holder, or his predecessor in interest, a copy of which is on file at the
principal office of this corporation. Any transfer or attempted transfer of any
shares subject to such option is void without the prior express written consent
of the issuer of these shares."
58.
<PAGE>
(ii) Any legend required to be placed thereon by the
California Commissioner of Corporations.
6. As security for his faithful performance of the terms of this
Agreement and to insure the availability for delivery of Purchaser's Stock upon
exercise of the Purchase Option herein provided for, Purchaser agrees, at the
closing hereunder (or as soon thereafter as practicable), to deliver (or have
the Company deliver on the Purchaser's behalf) to and deposit with the Secretary
of the Company ("Escrow Agent"), as Escrow Agent in this transaction, three (3)
stock assignments duly endorsed (with date and number of shares left blank) in
the form attached hereto as Exhibit B, together with a certificate or
certificates evidencing all of the Stock subject to the Purchase Option; said
documents are to be held by the Escrow Agent and delivered by said Escrow Agent
pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth
in Exhibit C attached hereto and incorporated herein by this reference, which
instructions shall also be delivered to the Escrow Agent at the closing
hereunder (or as soon thereafter as practicable). If a portion of the total
purchase price is paid by a promissory note, the Stock is also subject to the
Pledge Agreement, and possession of the certificates and stock assignments by
the Escrow Agent shall also constitute possession by the Company of such
instruments pursuant to the Pledge Agreement.
7. Purchaser shall not sell or transfer any of the Stock subject to the
Purchase Option or any interest therein so long as such Stock is subject to the
Purchase Option or the Pledge Agreement.
8. The Company shall not be required (i) to transfer on its books any
shares of Stock of the Company which shall have been sold or transferred in
violation of any of the provisions set forth in this Agreement or (ii) to treat
as owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares shall have been so transferred.
9. Subject to the provisions of paragraphs 7 and 8 above, Purchaser
(but not any unapproved transferee) shall, during the term of this Agreement,
exercise all rights and privileges of a stockholder of the Company with respect
to the Stock.
10. Purchaser acknowledges receipt of a copy of Section 260.141.11 of
Title 10 of the California Administrative Code, attached hereto as Exhibit D.
11. The parties agree to execute such further instruments and to take
such further action as reasonably may be necessary to carry out the intent of
this Agreement.
12. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in any United States Post Office Box, by registered or certified mail
with postage and fees prepaid, addressed to the other part hereto at his address
hereinafter shown below his signature or at such other address as such part may
designate by ten (10) days' advance written notice to the other part hereto.
13. This Agreement shall bind and inure to the benefit of the
successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, inure to the benefit of and be binding upon
Purchaser, his heirs, executors, administrators, successors, and assigns.
Without limiting the generality of the foregoing, the Purchase Option of the
Company hereunder shall be assignable by the Company at any time or from time to
time, in whole or in part. Should the right of repurchase be assigned by the
Company, the assignee shall pay to the Company cash equal to the excess, if any,
of the Stock's Fair Market Value (as defined in the Plan) over the Option Price.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 14th day of April 1997.
LYNX THERAPEUTICS INC.
By Sam Eletr
-----------------------------
Sam Eletr
59.
<PAGE>
Chief Executive Officer
Address: 3832 Bay Center Place
Hayward, CA 94545
PURCHASER
/s/ Edward C. Albini
--------------------------
Edward C. Albini
Address:
---------------------------
---------------------------
ATTACHMENTS:
Exhibit A Vesting Schedule
Exhibit B Assignment Separate from Certificate
Exhibit C Joint Escrow Instructions
Exhibit D Cal. Admin. Code, Title 10, Section 260.141.11
Exhibit E Promissory Note
Exhibit F Pledge Agreement
60.
<PAGE>
Exhibit A
VESTING SCHEDULE
Number of Shares
Subject to
If Cessation of Employment Occurs: Purchase Option:
On or before April 13, 1998 50,000 shares
On or after April 14, 1998
but on or before May 13, 1998 49,167 shares
On or after the first day of The prior month's
every month but on or before the amount less
last day of such month shares 833 shares
For purposes of this Agreement, "Cause" shall mean misconduct by
Purchaser, including (i) conviction of any felony or any crime involving moral
turpitude or dishonesty; (ii) participation in a fraud or act of dishonesty
against the Company; (iii) willful breach of the Company's policies; (iv)
intentional damage to the Company's property; or (v) conduct by Purchaser which
in the good faith and reasonable determination of the Board demonstrates gross
unfitness to serve. Physical or mental disability shall not constitute "Cause. "
For purposes of this Agreement, any material diminution in responsibilities,
duties or compensation other than for Cause will be treated, upon notice by
Purchaser to the Company, as a termination without Cause.
61.
<PAGE>
Exhibit C
JOINT ESCROW INSTRUCTIONS
Secretary
Lynx Therapeutics, Inc.
3832 Bay Center Place
Hayward, CA 94545
Dear Sir:
As Escrow Agent for both Lynx Therapeutics, Inc., a Delaware
corporation ("Company"), and the undersigned purchaser of stock of the Company
("Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Stock Purchase Agreement
("Agreement"), dated, April 14, 1997, to which a copy of these Joint Escrow
Instructions is attached as Exhibit C, in accordance with the following
instructions:
1. In the event that the Company or an assignee shall elect to exercise
the Purchase Option set forth in the Agreement, the Company or its assignee will
give to Purchaser and you a written notice specifying the number of shares of
stock to be purchased, the purchase price, and the time for a closing hereunder
at the principal office of the Company. Purchaser and the Company hereby
irrevocably authorize and direct you to close the transaction contemplated by
such notice in accordance with the terms of said notice.
2. At the closing you are directed to: (a) date any stock assignments
necessary for the transfer in question, (b) fill in the number of shares being
transferred, and (c) deliver same, together with the certificate evidencing the
shares of stock to be transferred, to the Company against the simultaneous
delivery to you of the purchase price (which may include suitable acknowledgment
of cancellation of indebtedness) of the number of shares of stock being
purchased pursuant to the exercise of the Purchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as specified in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as his
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities and other property all documents of assignment and/or
transfer and all stock certificates necessary or appropriate to make all
securities negotiable and complete any transaction herein contemplated.
4. This escrow shall terminate upon expiration or exercise in full of
the Purchase Option, whichever occurs first.
5. If, at the time of termination of this escrow, you should have in
your possession any documents, securities, or other property belonging to
Purchaser, you shall deliver all of same to Purchaser and shall be discharged of
all further obligations hereunder; provided, however, that if at the time of
termination of this escrow you are advised by the Company that the property
subject to this escrow is the subject of a pledge or other security agreement,
you shall deliver all such property to the pledgeholder or other person
designated by the Company.
6. Except as otherwise provided in these Joint Escrow Instructions,
your duties hereunder may be altered, amended, modified or revoked only by a
writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties or
their assignees. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while
acting in good faith, and any act done or omitted by you pursuant to the advice
of your own attorneys shall be conclusive evidence of such good faith.
62.
<PAGE>
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and you are
hereby expressly authorized to comply with and obey orders, judgments or decrees
of any court. In case you obey or comply with any such order, judgment or decree
of any court, you shall not be liable to any of the parties hereto or to any
other person, firm or corporation by reason of such compliance, notwithstanding
any such order, judgment or decree being subsequently reversed, modified,
annulled, set aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under any
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel (including
without limitation the firm of Cooley Godward LLP) and other experts as you may
deem necessary properly to advise you in connection with your obligations
hereunder, may rely upon the advice of such counsel, and may pay such counsel
reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company may
appoint any officer or assistant officer of the Company as successor Escrow
Agent and Purchaser hereby confirms the appointment of such successor or
successors as his attorney-in-fact and agent to the full extent of your
appointment.
13. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities, you may (but are not obligated to) retain in your possession without
liability to anyone all or any part of such securities until such dispute shall
have been settled either by mutual written agreement of the parties concerned or
by a final order, decree or judgment of a court of competent jurisdiction after
the time for appeal has expired and no appeal has been perfected, but you shall
be under no duty whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in any United States Post Box, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties hereunto
entitled at the following addresses, or at such other addresses as a party may
designate by ten (l0) days' written notice to each of the other parties hereto:
COMPANY: Lynx Therapeutics, Inc.
3832 Bay Center Place
Hayward, CA 94545
Attn: Chief Executive Officer
PURCHASER: EDWARD C. ALBINI
79 QUAIL COURT
ATHERTON, CA 94027
ESCROW AGENT: Secretary
Lynx Therapeutics, Inc.
3832 Bay Center Place
Hayward, CA 94545
63.
<PAGE>
16. By signing these Joint Escrow Instructions you become a party
hereto only for the purpose of such Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns. It is
understood and agreed that references to "you" or "your" herein refer to the
original Escrow Agent and to any and all successor Escrow Agents. It is
understood and agreed that the Company and Lynx may at any time or from time to
time assign its rights under the Agreement and these Joint Escrow Instructions
in whole or in part.
Very truly yours,
LYNX THERAPEUTICS, INC.
By: /s/ Sam Eletr
-------------------------------
Title: Chief Executive Officer
-----------------------------
PURCHASER:
/s/ Edward C. Albini
-----------------------------------
Edward C. Albini
ESCROW AGENT:
/s/ James C. Kitch
- ---------------------------------
James C. Kitch, Secretary
Lynx Therapeutics, Inc.
64.
<PAGE>
EXHIBIT B
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED Edward C. Albini hereby sells, assigns and transfers unto
Lynx Therapeutics, Inc., a Delaware Corporation ("Company"), pursuant to that
certain Stock Purchase Agreement dated as of April 14, 1997 between the Company
and the undersigned (the "Agreement____________________ ) shares of the
Company's Common Stock, standing in its name on the books of said corporation
represented by Certificate ______________ herewith, and does hereby irrevocably
constitute and appoint the Company's Attorney to transfer the said stock on the
books of the said corporation with full power of substitution in the premises.
This Assignment may be used only in accordance with and subject to the terms and
conditions of the Agreement, in connection with the repurchase of shares of
Common Stock issued to the undersigned pursuant to the Agreement, and only to
the extent that such shares remain subject to the Company's Purchase Option
under the Agreement.
Dated:________________
Signature: /s/ Edward C. Albini
-----------------------------
Print Name: Edward C. Albini
----------------------------
65.
<PAGE>
Exhibit E
PROMISSORY NOTE
$250,000 Hayward, California
April 14, 1997
For Value Received, the undersigned hereby unconditionally promises to pay
to the order of Lynx Therapeutics, Inc., a Delaware corporation the (the
"Company"), at 3832 Bay Center Place, Hayward, CA 94545, or at such other place
as the holder hereof may designate in writing in lawful money of the United
States of America and immediately available funds, the principal sum of two
hundred fifty thousand ($250,000.00) together with interest accrued from the
date hereof on the unpaid principal at the rate of 6.49% per annum, or the
maximum rate permissible by law (which under the laws of the State of California
shall be deemed to be the laws relating to permissible rates of interest on
commercial loans), whichever is less, as follows:
Principal Repayment. The outstanding principal amount hereunder shall
be due and payable in full on April 13, 2002, subject to earlier repayment
as follows: If the undersigned sells shares of stock subject to the Pledge
Agreement of even date herewith between the undersigned and the Company,
then within twenty (20) days of such sale, the undersigned shall pay as
principal repayment, $5.00 per share for each share sold until the
undersigned sells fifty thousand (50,000) shares subject the Pledge
Agreement; and
Interest Payments. Interest shall be payable upon the expiration or,
termination of this Note and shall be calculated on the basis of a 360-day
year for the actual number of days elapsed;
provided, however, that in the event that the undersigned's employment by or
association with the Company is terminated for any reason prior to payment in
full of this Note, this Note shall be accelerated and all remaining unpaid
principal and interest hereunder shall become due and payable immediately after
such termination.
If the undersigned fails to pay any of the principal hereunder when due,
then the Company, at its sole option, shall have the right to accelerate this
Note, in which event the entire principal balance and all accrued interest
hereunder immediately shall become due and payable, and immediately collectible
by the Company pursuant to applicable law.
This Note may be prepaid at any time without penalty. All money paid toward
the satisfaction of this Note shall be applied first to the payment of interest
as required hereunder and then to the retirement of the principal.
The full amount of this Note is secured by a pledge of shares of Common
Stock of the Company, and is subject to all of the terms and provisions of the
Stock Purchase Agreement and the Pledge Agreement, each of even date herewith
between the undersigned and the Company.
The undersigned hereby represents and agrees that the amounts due under
this Note are not consumer debt, and are not incurred primarily for personal,
family or household purposes, but are for business and commercial purposes only.
The undersigned hereby waives presentment, protest and notice of protest,
demand for payment, notice of dishonor and all other notices or demands in
connection with the delivery, acceptance, performance, default or endorsement of
this Note.
The holder hereof shall be entitled to recover, and the undersigned agrees
to pay when incurred, all costs and expenses of collection of this Note,
including without limitation, reasonable attorney's fees.
This Note shall be governed by, and construed, enforced and interpreted in
accordance with the laws of the State of California, as applied to contracts
made and performed entirely within the State by its residents.
Signed /s/ Edward C. Albini
-----------------------------
Edward C. Albini
66.
<PAGE>
Exhibit F
PLEDGE AGREEMENT
1. As collateral security for the payment of that certain $250,000.00
promissory note issued this date to Lynx Therapeutics, Inc. ("Pledgee") by the
undersigned (hereinafter called "indebtedness"), the undersigned hereby assigns,
transfers to and pledges with the Pledgee the securities listed on Schedule 1
hereto which, on the date hereof, were delivered for deposit with Pledgee,
together with any stock rights, rights to subscribe, dividends paid in cash or
other property in connection with the complete or partial liquidation of
Pledgee, stock dividends, dividends paid in stock, new securities or other
property except cash dividends other than liquidating dividends to which the
undersigned is or may hereafter become entitled to receive on account of such
property, and in the event that the undersigned receives any such, the
undersigned immediately will deliver it to Pledgee to be held by Pledgee
hereunder in the same manner as the property originally pledged hereunder. All
property assigned, transferred to and pledged with Pledgee under this paragraph
is hereinafter called "collateral."
2. At any time, without notice, and at the expense of the undersigned,
Pledgee in its name or in the name of its nominee or of the undersigned may, but
shall not be obligated to: (a) collect by legal proceedings or otherwise all
dividends (except cash dividends other than liquidating dividends), interest,
principal payments and other sums now or hereafter payable upon or on account of
said collateral; (b) enter into any extension, reorganization, deposit, merger,
or consolidation agreement, or any agreement in any wise relating to or
affecting the collateral, and in connection therewith may deposit or surrender
control of such collateral thereunder, accept other property in exchange for
such collateral and do and perform such acts and things as it may deem proper,
and any money or property received in exchange for such collateral shall be
applied to the indebtedness or thereafter held by it pursuant to the provisions
hereof; (c) insure, process and preserve the collateral; (d) cause the
collateral to be transferred to its name or to the name of its nominee; (e)
exercise as to such collateral all the rights, powers, and remedies of an owner,
except that so long as the indebtedness is not in default the undersigned shall
retain all voting rights as to the collateral.
3. The undersigned agrees to pay prior to delinquency all taxes,
charges, liens and assessments against the collateral, and upon the failure of
the undersigned to do so, Pledgee at its option may pay any of them and shall be
the sole judge of the legality or validity thereof and the amount necessary to
discharge the same.
4. All advances, charges, costs and expenses, including reasonable
attorneys' fees, incurred or paid by Pledgee in exercising any right, power or
remedy conferred by this agreement, or in the enforcement thereof, shall become
a part of the indebtedness secured hereunder and shall be paid to Pledgee by the
undersigned immediately and without demand.
5. At the option of Pledgee and without necessity of demand or notice,
all or any part of the indebtedness of the undersigned immediately shall become
due and payable irrespective of any agreed maturity, upon the happening of any
of the following events: (a) failure to keep or perform any of the terms or
provisions of this agreement; (b) default in the payment of principal or
interest when due; (c) the levy of any attachment, execution or other process
against the collateral; or (d) the insolvency, commission of an act of
bankruptcy, general assignment for the benefit of creditors, filing of any
petition in bankruptcy or for relief under the provisions of Title 11 of the
United States Code of, by, or against the undersigned.
6. In the event of the nonpayment of any indebtedness when due, whether
by acceleration or otherwise, or upon the happening of any of the events
specified in paragraph 5, Pledgee may then, or at any time thereafter, at its
election, apply, set off, collect or sell in one or more sales, or take such
steps as may be necessary to liquidate and reduce to cash in the hands of
Pledgee in whole or in part, with or without any previous demands or demand of
performance or notice or advertisement, the whole or any part of the collateral
in such order as Pledgee may elect, and any such sale may be made either at
public or private sale at its place of business or elsewhere, or at any broker's
board or securities exchange, either for cash or upon credit or for future
delivery; provided, however, that if such disposition is at private sale, then
the purchase price of the collateral shall be equal to the public market price
67.
<PAGE>
then in effect, or, if at the time of sale no public market for the collateral
exists, then, in recognition of the fact that the sale of the collateral would
have to be registered under the Securities Act of 1933, as amended, and that the
expenses of such registration are commercially unreasonable for the type and
amount of collateral pledged hereunder, Pledgee and the undersigned hereby agree
that such private sale shall be at a purchase price mutually agreed to by
Pledgee and the undersigned or, if the parties cannot agree upon a purchase
price, then at a purchase price established by a majority of three independent
appraisers knowledgeable of the value of such collateral, one named by the
undersigned within 10 days after written request by the Pledgee to do so, one
named by Pledgee within such 10 day period, and the third named by the two
appraisers so selected, with the appraisal to be rendered by such body within 30
days of the appointment of the third appraiser. The cost of such appraisal,
including all appraiser's fees, shall be charged against the proceeds of sale as
an expense of such sale. Pledgee may be the purchaser of any or all collateral
so sold and hold the same thereafter in its own right free from any claim of the
undersigned or right of redemption. Demands of performance, notices of sale,
advertisements and presence of property at sale are hereby waived, and Pledgee
is hereby authorized to sell hereunder any evidence of debt pledged to it. Any
sale hereunder may be conducted by any officer or agent of Pledgee.
7. The proceeds of the sale of any of the collateral and all sums
received or collected by Pledgee from or on account of such collateral shall be
applied by Pledgee to the payment of expenses incurred or paid by Pledgee in
connection with any sale, transfer or delivery of the collateral, to the payment
of any other costs, charges, attorneys' fees or expenses mentioned herein, and
to the payment of the indebtedness or any part hereof, all in such order and
manner as Pledgee in its discretion may determine. Pledgee shall pay any balance
to the undersigned.
8. Pledgee shall be under no duty or obligation whatsoever to make or
give any presentments, demands for performance, notices of non-performance,
protests, notices of protest or notices of dishonor in connection with any
obligations or evidences of indebtedness held by Pledgee as collateral, or in
connection with any obligations or evidences of indebtedness which constitute in
whole or in part the indebtedness secured hereunder.
9. Pledgee at any time may deliver the collateral or any part thereof
to the undersigned and the receipt of the undersigned shall be a complete and
full acquittance for the collateral so delivered, and Pledgee shall thereafter
be discharged from any liability or responsibility therefor.
10. Upon the transfer of all or any part of the indebtedness, Pledgee
may transfer all or any part of the collateral and shall be fully discharged
thereafter from all liability and responsibility with respect to such collateral
so transferred, and the transferee shall be vested with all the rights and
powers of Pledgee hereunder with respect to such collateral so transferred; but
with respect to any collateral not so transferred Pledgee shall retain all
rights and powers hereby given.
11. Until all indebtedness shall have been paid in full, the power of
sale and all other rights, powers and remedies granted to Pledgee hereunder
shall continue to exist and may be exercised by Pledgee at any time and from
time to time irrespective of the fact that the indebtedness or any part thereof
may have become barred by any statute of limitations, or that the personal
liability of the undersigned may have ceased.
12. Pledgee agrees that so long as the indebtedness is not in default,
shares of common stock of Pledgee held hereunder as collateral for the
indebtedness shall be released from pledge as the indebtedness is paid, at the
rate of one share for Five Dollars ($5.00) of principal amount of indebtedness
paid for the first Two Hundred Fifty Thousand Dollars ($250,000) of principal
amount of indebtedness paid. Release from pledge, however, shall not result in
release from the provisions of those certain Joint Escrow Instructions of even
date herewith among the parties to this Pledge Agreement and the Escrow Agent
named therein, from the Purchase Option of Pledgee, set forth in the Stock
Purchase Agreement of even date herewith between the parties to this Pledge
Agreement.
13. The rights, powers and remedies given to Pledgee by this Agreement
shall be in addition to all rights, powers and remedies given to Pledgee by
virtue of any statute or rule of law. Pledgee may exercise its Pledgee's lien or
right of setoff with respect to the indebtedness in the same manner as if the
indebtedness were unsecured. Any forbearance or failure or delay by Pledgee in
exercising any right, power or remedy hereunder shall not be deemed to be a
waiver of such right, power or remedy, and any single or partial exercise of any
right, power or
68.
<PAGE>
remedy hereunder shall not preclude the further exercise thereof; and every
right, power and remedy of Pledgee shall continue in full force and effect until
such right, power or remedy is specifically waived by an instrument in writing
executed by Pledgee.
Dated: April 14, 1997
/s/ Edward C. Albini
-----------------------------
Edward C. Albini
ATTACHMENT:
Schedule 1
69.
Exhibit 21.1
Subsidiary of the Company
Lynx GmbH
70.
Exhibit 23.1
Consent of Ernst & Young, LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements Form
S-3 (No. 333-39171) on Form S-8 (Nos. 333-21997, 33-86634, and 33-94872)
pertaining to the 1992 Stock Option Plan of Lynx Therapeutics, Inc. of our
report dated January 30, 1998, with respect to the financial statements of Lynx
Therapeutics, Inc. included in its Annual Report (Form 10K) for the year ended
December 31, 1997.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 27, 1998
71.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FORM 10-K PERIOD ENDED DECEMBER 31, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,798
<SECURITIES> 16,132
<RECEIVABLES> 244
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,373
<PP&E> 7,357
<DEPRECIATION> 3,588
<TOTAL-ASSETS> 29,267
<CURRENT-LIABILITIES> 3,498
<BONDS> 0
0
27,189
<COMMON> 46,640
<OTHER-SE> (48,239)
<TOTAL-LIABILITY-AND-EQUITY> 29,267
<SALES> 0
<TOTAL-REVENUES> 4,582
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,821)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,821)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,821)
<EPS-PRIMARY> (3.09)
<EPS-DILUTED> (3.09)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FORM 10-K PERIOD ENDED DECEMBER 31, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,109
<SECURITIES> 1,973
<RECEIVABLES> 118
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,358
<PP&E> 6,169
<DEPRECIATION> 2,290
<TOTAL-ASSETS> 18,412
<CURRENT-LIABILITIES> 5,240
<BONDS> 0
0
27,189
<COMMON> 17,361
<OTHER-SE> (33,818)
<TOTAL-LIABILITY-AND-EQUITY> 18,412
<SALES> 0
<TOTAL-REVENUES> 9,749
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,381)
<INCOME-TAX> 10
<INCOME-CONTINUING> (5,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,391)
<EPS-PRIMARY> (2.45)
<EPS-DILUTED> (2.45)
</TABLE>
