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, 1998, or
--------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number 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)
25861 Industrial Blvd., 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, $.01 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 of the Registrant outstanding as of
March 1, 1999, was 11,132,815. The aggregate market value of the common
stock of the Registrant held by non-affiliates as of March 1, 1999, was
$89,291,631.
<PAGE>
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 "Business Risks" and the section entitled
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Overview
Lynx Therapeutics, Inc. ("Lynx" or the "Company") has developed,
and continues to develop, unique, proprietary technologies aimed at
handling and/or analyzing, simultaneously, the DNA molecules or fragments
in complex biological samples. Applications include the identification of
genes differentially expressed between samples, the characterization of
gene expression within a sample, and a novel, highly efficient means for
scoring ("genotyping") large numbers of genetic markers or single
nucleotide polymorphisms ("SNPs"), simultaneously, against very large
numbers of genomes.
The Company's business strategy currently combines two approaches
for the exploitation of its technologies. The first, which sells to
others access to the Company's technologies, generates immediate revenue,
and serves to finance growth and additional technological developments.
The second, which seeks to leverage the Company's technologies with the
financial and research and development resources of others, seeks a larger
share of the value enabled by the Company's technologies and longer term
income. The strategy will be modified accordingly as increased Company
resources begin to match the demands of new applications and opportunities
for the Company's technologies.
Lynx's technologies have already started to generate revenue for the
Company through high margin service agreements with pharmaceutical and
other companies. To date, Lynx has entered into agreements with Hoechst
AG and Hoechst Marion Roussel (collectively referred to as "Hoechst"),
BASF AG ("BASF"), and E.I. DuPont de Nemours and Co. ("DuPont").
Additionally, Lynx has granted a five year license to its technologies, in
return for an initial 49% equity ownership, to BASF-LYNX Bioscience AG, a joint
venture ("JV") formed by Lynx and BASF, working on the discovery of
novel gene targets. BASF committed to provide research funding to the JV
over a five year period in exchange for its initial 51% ownership interest
in the JV.
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 do
not differ in their genomes. They differ, rather, by the genes that 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.
Many human diseases result from the inappropriate performance or
production of specific proteins. 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 that result in inappropriate proteins and that are, therefore,
responsible for disease.
DNA Composition (Sequence)
The DNA material that makes up the genome contains the coded
information for life's functions. DNA molecules (or DNA fragments) are
double stranded chains of building blocks, called nucleotides, strung
together. There are only four 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 a different copy number (abundance) depending upon
the particular cell, its function, and its environmental conditions at the
time. Thus, a cell contains, at any one time, tens of thousands of
different mRNAs, each at some small to large copy number, for a total on
the order of one million or more mRNA molecules.
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 seek to identify genes connected
to the origin of disease, or genes whose expression differentiates
diseased cells from healthy ones. In either case the searches generally
are laborious and involve a very large amount of DNA sequencing to
identify genes or gene fragments. This knowledge of genes is a first step
only. It may set the stage for understanding either the pre-dispositions
to a disease or its eventual characteristics, and thus pave the way for
the development of better diagnostics. However it may not necessarily
lead to a successful 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, it
appears that in addition to understanding the cause of disease, it is
equally important, if not more so, to understand gene function in both
health and disease in order to identify the optimal target(s) for therapy.
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. It also
requires determining which of the altered gene expressions cause disease
versus result from disease. Ideally, one would follow the full gene
expression of a cell or tissue through the evolution of a disease. Then
one could apply specific and successive biological and/or chemical
modulations of specific gene expressions in order to gain insight into
cause and effect. However this is not practical, or even possible, in
human disease. While theoretically possible in in vitro or in vivo model
systems, it may not be practical, or cost effective, because of the
limitations of current technologies. Only the most abundantly expressed
genes (the top 3% to 5% of the 10,000 to 30,000 expressed in any one
sample) are accessible using current gene identification technologies. In
addition, these current technologies are all dependent on separating and
cloning double stranded copies of each individual mRNA (cDNA) prior to
analysis, which makes the process quite arduous and expensive.
Single Nucleotide Polymorphisms ("SNPs") and the Search for Disease Genes
SNPs are single base mutations in the human genome. They are
believed to occur frequently, perhaps as often as once in every 1,000
bases. Some are relatively recent and others may have occurred a long
time ago and been passed on over many generations. Their importance lies
in that they may have been passed on together with inherited sequences
containing inappropriate genetic modifications responsible for disease,
disease pre-disposition, or even inordinate sensitivity to certain
otherwise therapeutic drugs. Many companies attempt to discover and
catalogue as many SNPs as possible, in order to test for their presence or
absence from the genomes of individuals sharing disorders or negative
reactions to drugs. SNPs that are found preferentially in such genomes
could, if their correlation to the disorder is proven ("linkage"), point
to those regions of the genomes in which the sequences responsible for the
disorder may be located. The larger the SNP set, the narrower the
potential localization of the regions of interest. It is believed 50,000
SNPs, which if evenly distributed along the genome would be separated by
an average of 64,000 basepairs, are probably the smallest set likely to
provide useful correlations. However, testing one genome for the absence
or presence of one SNP (genotyping) currently costs approximately $1.00.
Thus, to genotype 50,000 SNPs against a few hundred to a few thousand
individuals as statistics dictate, would cost many millions of dollars.
While some companies have undertaken such studies, the cost and time
required to do such may prove prohibitive for many. Hence, the search for
new genotyping technologies.
LYNX'S TECHNOLOGIES
Lynx's novel, proprietary technologies are designed to manipulate
simultaneously the hundreds of thousands to a million or more DNA
molecules or fragments that typically make up a sample, with the aim of
either characterizing that sample, or comparing it to others. Lynx's
technologies are based on a process, proprietary to Lynx, called
MegacloneTM technology.
MegacloneTM Technology
MegacloneTM technology transforms a sample containing millions of
DNA molecules into one made up of millions of micro-beads, each of which
carries approximately 100,000 copies of one of the DNA molecules in the
sample. Because each such molecule is replaced by approximately 100,000
copies concentrated on a micro-bead, detection, analysis, and other
operations aimed at that molecule are much easier to conduct.
Approximately 100,000 identical copies of a molecule, concentrated on the
surface of a 5 micron bead, are much more easy to "see" or detect than a
single molecule reacting to an assay. In addition, because each DNA
molecule is anchored to a micro-bead, the millions of DNA molecules in a
given sample may be separated, manipulated, operated or reacted upon,
detected and analyzed simultaneously. This enables several powerful
sorting manipulations and/or analyses.
MegasortTM Technology
MegasortTM technology enables the comparison of samples, each
containing millions of DNA molecules (or genes), and the physical
extraction of those genes that are differentially expressed in the
samples. Because the comparison and sorting do not require prior
knowledge of the genes in the samples, the technique is extremely
powerful, especially when the samples involved are from organs or
organisms that are not yet well characterized.
Massively Parallel Signature Sequencing
Massively Parallel Signature Sequencing is another unique analysis
technique enabled by the MegacloneTM technology. It permits the
simultaneous identification, based on short sequences of approximately 20
bases each, of all the DNA molecules in a sample after they have been
cloned on micro-beads. Lynx is in the final testing stages of over a
dozen second generation instruments capable of reading the required
sequences from up to 1,000,000 micro-beads.
MegatypingTM Technology
MegatypingTM technology is the latest application of MegacloneTM
technology. It involves a recently validated proprietary process which
the Company expects will enable it to offer pharmaceutical companies a
powerful and competitive tool to genotype disease populations or
populations that exhibit negative reactions to otherwise promising drugs.
Lynx expects to be able to genotype very large numbers of SNPs against
large populations of genomes, simultaneously, in one experiment.
High Resolution Genomic Maps
Another potential 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 approximately
50,000 bases.
Lynx's technologies could potentially analyze any genome for a
particular subset of signatures and construct a physical map of these.
For example, a one kilobase resolution map (one 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
could potentially 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. Lynx's collaboration agreement with
DuPont includes a program to develop a mapping capability at Lynx and to
produce a high-resolution map of a certain crop genome. If and when the
technology is fully developed, Lynx believes it could potentially be used
to construct other economically useful maps.
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 then currently resident within Lynx. These
included 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 contributed to the formation of
BASF-LYNX Bioscience AG, the biotechnology joint venture company formed in
partnership with BASF. In December 1998, Lynx sold these programs to the
joint venture company in which it continues to hold a 49% interest.
Concomitantly, BASF increased its funding commitment to the joint venture
to enable active pursuit of the programs. BASF-LYNX Bioscience AG
currently has 35 employees.
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 existing
technologies. These research efforts resulted in a compound ("LR-3280")
for the prevention of coronary artery restenosis. 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 granted a
royalty-bearing license to Inex for its phosphoramidate chemistry for
certain therapeutic applications in the fields of cancer and inflammation.
CORPORATE COLLABORATIONS
o In October 1998, the Company entered into a research collaboration
with DuPont to apply Lynx's technologies to the study of certain
crop plants and their protection. Under the terms of the agreement,
Lynx could receive $60 million over a five-year period for certain
analyses, the achievement of specific technological milestones and
the delivery of the genomic map of a certain crop. An initial
payment of $10 million was received at the execution of the
agreement, with an additional minimum of $12 million to be
received by Lynx over the next three years.
o Also in the fourth quarter of 1998, Lynx reached agreement with
BASF to expand the scope of the agreements that the
companies had signed in 1996. The first of these agreements had
granted BASF non-exclusive access to certain other Lynx bead-based
technologies developed since the original agreements, and to
establish the basis upon which BASF will pay Lynx (cost plus a
specified profit margin) for any experiments performed by Lynx under
the agreement. Pursuant to this amendment, BASF paid $1 million to
Lynx in January 1999.
o The other 1996 agreements with BASF had established and defined a
JV (BASF-LYNX Bioscience AG) licensed to use Lynx's
technologies in epilepsy, toxicology and fermentation,
with financial support from BASF. These agreements were amended to
enable the JV to study certain other central nervous system
("CNS") diseases and, subject to approval by Lynx and BASF through
their representatives on the Advisory Board of the JV, other fields
of interest. The non-exclusive license granted by Lynx to the JV
was extended accordingly. Together with these amendments, BASF
agreed to commit an additional $10 million in funding to the JV, of
which $4.25 million was paid to Lynx in January 1999, for the JV's
acquisition of Lynx's technology assets for certain CNS diseases.
o In October 1995, Lynx entered into an agreement with Hoechst, which
provided Hoechst with non-exclusive access to Lynx's Massively
Parallel Signature Sequencing. 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 service fee of $4
million for the first subscription year under the agreement. In
return, Lynx will provide Hoechst with a certain number of analyses
per year. In addition, the Company received $5 million in November
1995 in a private placement to Hoechst of 40,000 shares of Lynx's
Series D preferred stock at $125.00 per share (since converted into
400,000 shares of common stock).
o The agreement between Hoechst and Lynx was amended in September 1997
and again in May 1998. The 1997 amendment modified the technology
milestone included in the original agreement and extended the date
by which such milestone must be achieved under the contract. The
1998 amendment eliminated the milestone and includes instead
Hoechst's right to access Lynx's Massively Parallel Signature
Sequencing technologies by payment of a technology access fee. Also,
the 1998 amendment allows Hoechst and Lynx to mutually agree to
include access by Hoechst to certain other of Lynx's technologies.
RESEARCH AND DEVELOPMENT EXPENDITURES
Lynx has devoted its efforts primarily to research and development.
Research and development expenses were $13.2 million for the year ended
December 31, 1998, $14.2 million for the year ended December 31, 1997 and
$12.5 million for the year ended December 31, 1996.
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 the 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).
Robert L. Letsinger, Ph.D. holds joint appointments in the
Departments of Chemistry and Molecular Biology and 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.
EMPLOYEES
As of December 31, 1998, Lynx employed 73 full-time employees, of
which 58 were engaged in research and development activities and 15 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 proprietary technologies 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 use of the Company's 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 products or services. The Company's ability to
achieve profitability depends on attracting customers for its 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, three of which 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.
Lynx's 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 believes 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 $4.3 and $10.8 million during the years ended
December 31, 1998 and 1997, respectively. The Company had an accumulated
deficit of approximately $46.7 million through December 31, 1998. The
Company may incur additional losses for at least the next several years
and 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 under corporate collaborations and agreements, and the
Company expects that substantially all of its revenues for the foreseeable
future will result from payments under corporate collaborations and
agreements and interest income. There can be no assurance that the
Company will receive additional revenues under existing corporate
collaborations and agreements or that the Company will be successful in
entering into any new corporate collaborations and agreements that result
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 corporate collaborations and agreements, and on the
ability of the Company and its corporate 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 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
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
While Lynx, at this time, is not aware of technologies equivalent or
superior to its 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.
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 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 collaborations,
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, and products. There can be no
assurance that Lynx will be able to negotiate attractive corporate
arrangements or that such collaborations will be available to Lynx on
acceptable terms or that any such relationships, once established, will be
scientifically or commercially successful. Lynx currently has three
corporate agreements for its technologies, with Hoechst, BASF and DuPont.
There can be no assurance that Hoechst, BASF or DuPont or any other
future collaborator or contract partner will not pursue their existing or
alternative technologies in preference to those being developed in
collaboration with or by the Company. Furthermore, there can be no
assurance that the Company will be able to negotiate additional
collaborative arrangements or contracts on acceptable terms, if at all, or
that such collaborations or relationships 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 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 could have a
material adverse effect on the Company. The Company has not entered into
an employment agreement with him.
Potential Volatility of Stock Price; Limited Market for Stock. The
trading price of Lynx's common stock is subject to significant
fluctuations. 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. 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. 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 or contract 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 corporate
collaborations, corporate agreements, and licensing arrangements, and the
progress of the development and commercialization efforts under the Company's
corporate collaborations and corporate agreements. 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 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 corporate collaborations and
corporate agreements. No assurance can be given that additional financing
or corporate collaborations and corporate agreements will be available
when needed, or that, if available, such financing and other arrangements
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 corporate collaborations and corporate agreements, 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.
ITEM 2. PROPERTIES
In February 1998, the Company entered into a noncancelable operating
lease for facilities space of approximately 111,000 square feet in two
buildings in Hayward, California. Currently, Lynx's corporate headquarters,
principal research and development facilities and production facilities are
located in one of the two buildings. The remaining space will be developed
and occupied in phases, depending on the growth of the Company. The lease
runs through December 2008. The Company has the option to extend the lease
for an additional five year period, subject to certain conditions. The Company
has an option to lease approximately 37,000 square feet of additional
building space for expansion purposes.
In August 1993, the Company entered into a noncancelable operating
lease for facilities which expires on July 31, 2003. In 1998, the Company
entered into an agreement to sublease a portion of this space. The term of the
sublease is twenty-four months, commencing in March 1998. The sublessee
has the option to extend the term of the sublease through July 2003,
subject to certain conditions. In January 1999, the Company entered into
a second agreement to sublease the remaining portion of its facilities
under the 1993 lease. The term of this second sublease is fifty-four
months, commencing in February 1999, and runs through July 2003.
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, 1998.
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. On March 31, 1998,
pursuant to the Amended and Restated Certificate of Designation dated
September 30, 1997, all shares of Series B, Series C, and Series D
preferred stock were converted into common stock on a ten-for-one basis.
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "LYNX." The following table sets forth, for the periods
indicated, the high and low close sales prices for the common stock as
reported by The Nasdaq Stock Market:
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1998
First Quarter.............. $19.25 $10.00
Second Quarter............. 11.13 7.75
Third Quarter.............. 13.25 7.75
Fourth Quarter............. 13.00 7.13
As of March 1, 1999, there were approximately 2,800 stockholders of
record of the Company's common stock. On March 22, 1999, the last
reported sale price of the Company's common stock was $9.13.
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.
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
(in thousands, except per share data)
Revenues.............................. $7,005 $4,582 $9,749 $680 $4,699
Operating costs and expenses:
Research and development............ 13,166 14,226 12,545 11,301 8,457
Selling, general and administrative. 2,141 1,930 3,170 1,591 1,768
-------- --------- -------- --------- --------
Total operating costs and expenses.... 15,307 16,156 15,715 12,892 10,225
-------- --------- -------- --------- --------
Other income, net..................... 4,106 753 585 744 506
Provision for income taxes............ 151 -- 10 -- --
-------- --------- -------- --------- --------
Net loss.............................. ($4,347) ($10,821) ($5,391) ($11,468) ($5,020)
======== ========= ======== ========= ========
Basic and diluted net loss
per share .......................... ($0.45) ($3.09) ($2.45) ($5.66) ($4.87)
======== ========= ======== ========= ========
Shares used in per share
computation ........................ 9,642 3,501 2,197 2,026 1,031
<CAPTION>
December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
(in thousands)
Cash, cash equivalents and
short-term investments.............. $23,862 $24,930 $14,082 $13,779 $12,246
Working capital....................... 20,834 21,875 9,118 12,730 11,702
Total assets.......................... 40,334 29,267 18,412 17,685 15,142
Stockholders' equity.................. 23,457 25,590 10,732 13,742 14,044
</TABLE>
<PAGE>
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 Therapeutics, Inc. ("Lynx" or the "Company") has developed,
and continues to develop, unique, proprietary technologies aimed at
handling and/or analyzing, simultaneously, the DNA molecules or fragments
in complex biological samples. At the core of these technologies is
Lynx's MegacloneTM technology which allows both the
simultaneous cloning of millions of DNA molecules or fragments in a
sample, and the parallel probing or assaying of the millions
of resulting clones, all without requiring prior separation, purification,
individual amplification, or identification of any of the templates.
Applications include the identification of genes differentially expressed
between samples, the characterization of gene expression within a sample,
and a novel, highly efficient means for scoring ("genotyping") large
numbers of genetic markers or single nucleotide polymorphisms ("SNPs"),
simultaneously, against very large numbers of genomes.
During the fourth quarter of 1998, Lynx entered into a research
collaboration with E.I. DuPont De Nemours and Company ("DuPont") to
apply the above technologies to the study of certain crop plants and their
protection. In addition to an initial payment of $10 million received by
Lynx from DuPont at the execution of the agreement, Lynx will receive
payments from DuPont over the five-year term of the agreement for certain
analyses, the achievement by Lynx of specific technological milestones,
and Lynx's delivery to DuPont of the genomic map of a certain crop.
Also during the fourth quarter of 1998, Lynx and BASF AG ("BASF")
amended several agreements originally signed by the two parties in 1996.
One of the amendments provides for non-exclusive access by BASF to certain
other Lynx bead-based technologies, in addition to the originally
contemplated access to Lynx's Massively Parallel Signature Sequencing
technology. The amended agreement also establishes the basis upon which
BASF will pay Lynx (cost plus a specified profit margin) for any
experiments performed by Lynx under the agreement.
The other 1996 agreements with BASF had set up and defined a joint
venture ("JV") company (BASF-LYNX Bioscience AG) licensed to use Lynx's
technologies in epilepsy, toxicology and fermentation, with financial
support from BASF. These agreements were amended in 1998 to enable the JV
to study certain other central nervous system ("CNS") diseases and,
subject to approval by Lynx and BASF through their representatives on the
Advisory Board of the JV, other fields of interest. The non-exclusive
license granted by Lynx to the JV was extended accordingly. Together with
these amendments, BASF agreed to commit an additional $10 million in
funding to the JV.
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 existing
technologies. The research efforts resulted in a compound ("LR-3280")
for the prevention of coronary artery restenosis. 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 phosphoramidate chemistry for
certain therapeutic applications in the fields of cancer and inflammation.
Lynx has been unprofitable since its inception and may incur
substantial losses for the next several years, due primarily to its
research and development programs, including the continuing development of
applications for its technologies and costs associated with establishing
commercial capacity. Lynx may generate revenues based on its agreements
with partners for certain analyses, the achievement of certain milestones,
and the delivery of products or services, as defined in the agreements.
However, there is no guarantee that the underlying technologies will ever
be proven commercially successful.
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 technologies could face competition from the development
of similarly efficient, or better, combinations of techniques for the
handling of DNA molecules and fragments.
On March 31, 1998, the Series B, Series C and Series D preferred
stock converted to common stock on ten-for-one basis. The inclusion of
these shares in both the basic and diluted earnings per share had, and
will have, a significant impact on loss per share amounts in 1998 and
subsequent years, respectively.
Results of Operations
Years Ended December 31, 1998 and 1997
Revenues
Lynx had total revenues of $7.0 million and $4.6 million for the
years ended December 31, 1998 and 1997, respectively. Revenues for 1998
included $2.3 million earned under an agreement with BASF for access to
Lynx's gene expression analysis services; $4.3 million for the fourth
quarter acquisition by BASF-LYNX Bioscience AG of Lynx's technology assets
for certain central nervous system ("CNS") diseases; $0.3 million earned
under a research collaboration signed in late 1998 with DuPont to apply
Lynx's technologies to the study of certain crop plants and their
protection; and approximately $0.1 million in product and other revenue.
Revenues for 1997 included $3.9 million earned under agreements with BASF
and Hoechst AG and Hoechst Marion Roussel (collectively referred to as
"Hoechst"), for access to gene expression analysis services to be
performed by Lynx. The 1997 revenue also included approximately $0.5
million in sales of LR-3280 for use in clinical trials, and approximately
$0.2 million in grant revenue and other product sales.
Operating Expenses
Research and development expenses were $13.2 million and $14.2
million in the years ended December 31, 1998 and 1997, respectively. The
decrease in expenses was due primarily to lower spending subsequent to the
sale of Lynx's antisense program in March 1998 and the phaseout of the CNS
scientific efforts at Lynx. The Company's efforts in 1998 focused on
continuing the development of applications of its technologies and
establishing initial commercial capacity. 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 $2.1 million for the year
ended December 31, 1998 compared to $1.9 million for the year ended
December 31, 1997. The increase was partially due to outside legal and
administrative costs associated with the Company's business development
efforts and facilities expansion. Lynx expects to continue to incur
substantial general and administrative expenses in support of its research
and development and business development efforts.
Other
Other income was $4.1 million and $0.8 million in the years ended
December 31, 1998 and 1997, respectively. The increase was due primarily
to the $2.9 million gain from the March 1998 sale of Lynx's antisense
program to Inex. As partial consideration in this transaction, Lynx
received $3 million in cash and will receive 1.2 million shares of Inex
common stock, in three equal installments, with the first 400,000 shares
received on March 10, 1998, and the second and third installments of stock
to be received no later than 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. Interest income increased between years due to
higher average cash, cash equivalents and investment balances during 1998
as compared to 1997.
Income Taxes
The provision for income taxes of approximately $151,000 for 1998
consists entirely of alternative minimum tax. Due to operating losses and
the inability to recognize an income tax benefit therefrom there was no
provision for income taxes for 1997.
Years Ended December 31, 1997 and 1996
Revenues
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 $0.5 million in sales of LR-3280
for use in clinical trials, and approximately $0.2 million 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
Pharma AG and Tanabe Seiyaku Co., Ltd., approximately $1.9 million earned
under the agreements with Hoechst and BASF, and approximately $0.3 million
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 higher levels of
research and development personnel, and increased patent and licensing
activity.
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
business development and legal expenses in 1997 than in 1996 which
reflected the costs associated with the signing of several corporate
agreements. Headcount related expenses were also slightly lower in 1997
than in 1996 due to the severance agreement associated with the
termination of a corporate officer in 1996.
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, cash equivalents and investment 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 was no provision for income taxes for 1997. The
provision for income taxes of approximately $10,000 for 1996 consisted
entirely of alternative minimum tax.
Liquidity and Capital Resources
Net cash provided by operating activities of $5.7 million for the
year ended December 31, 1998 differs from the net loss for the same period
due to: the increase in deferred revenue from a contract payment received
in 1998, partially offset by the current year recognition of a portion of
previously deferred revenue; changes in working capital; amortization of
deferred compensation; and depreciation and amortization of fixed assets
and leasehold improvements. Net cash provided by investing activities of
$1.0 million for the year ended December 31, 1998, was primarily due to
maturities of short-term investments, partially offset by the cost of
leasehold improvements to the Company's new facility and purchases of
equipment. Net cash provided by financing activities in 1998 of $0.6
million resulted primarily from the issuance of common stock through the
exercise of stock options. Cash and cash equivalents and short term
investments were $23.9 million at December 31, 1998.
Lynx plans to use available funds to further the development of, and
applications for, its technologies. During the year ended December 31,
1998, Lynx invested approximately $5.7 million to develop and improve a
new facility to meet anticipated expansion needs for Lynx's operations.
Most of the facilities development work has been completed, although there
will be a relatively low level of additional expenditures in early 1999.
Lynx expects that capital investments during 1999 will be comprised
primarily of purchases of equipment required in the normal course of
business. Lynx intends to invest its excess cash in short-term investment
grade, interest-bearing securities or certificates of deposit.
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 contract
partners; revenue from contractual 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, legal and administrative costs, the establishment of
corporate collaborations and other arrangements, additional facilities
capacity needs, 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 the middle
of the year 2000.
In late 1998, the Company entered into an agreement with a financial
institution ("Lender") whereby the Company may borrow from the Lender up
to $5.0 million for the purchase of equipment and certain other capital
expenditures. The Lender will obtain a security interest in all items
financed by it under this agreement. The Company paid to the Lender a fee
that will be applied to loan transaction costs and expenses and to
payments due by the Company under its borrowings. As of December 31, 1998
the Company had not financed any equipment under this arrangement.
Impact of Year 2000
The Year 2000 ("Y2K") issue is the result of computer programs
being written using two rather than four digits to define the year. A
company's hardware or computer programs that have date-sensitive software
or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
Lynx has established a team comprised of financial, information
technology ("IT") and scientific personnel to address the potential
exposure related to the impact of Y2K issues on its IT and non-IT systems.
Lynx's approach to the Y2K issue involves the following four phases:
assessment, remediation, testing, and implementation, including
development of a contingency plan. As of March 1999, the Company had
completed assessment of almost all of its facilities, IT equipment and
systems, non-IT equipment and systems, third-party services, and vendors.
Facilities
In January 1999, the Company moved to a newly-built facility whose
building systems are Y2K compliant.
IT Equipment and Systems
Most of Lynx's computers and computer software are either compliant
or can be made compliant with patches available from the vendors at
minimal cost. The IT staff is in the process of installing and testing
the patches. During the second quarter of 1999, the Company will install
new Y2K compliant software for accounting, purchasing, and human resources
applications. The decision to implement the new administrative software
was made as a result of overall Company need, irrespective of Y2K issues.
Non-IT Equipment and Systems
Lynx's non-IT equipment consists primarily of laboratory equipment.
The majority of this equipment has no date function and will not be
affected by Y2K. Overall, the company found the level of non-compliant
equipment to be minimal, although approximately 5% of the lab equipment
have yet to be assessed. It is not expected that a significant number of
the unassessed pieces of equipment will be found to be non-compliant.
Third Party Services and Vendors
The Company is reliant upon third parties to provide Y2K compliant
systems sufficiently before December 31, 1999. Lynx has surveyed its
primary suppliers, banks, investment brokerages, and other third party
service providers to determine whether they are Y2K compliant. The
Company has determined that certain of the third parties use systems that
are not Y2K compliant, but all of the third parties surveyed have programs
in place to address these Y2K issues. The Company cannot guarantee that
all of the third parties will achieve Y2K compliance in a timely manner.
The failure of third parties to successfully address the Y2K issue could
have a material adverse effect on the Company's business, financial
condition and results of operations.
Due to the relatively low level of Y2K non-compliance of Lynx's
facilities, equipment, and systems, Lynx expects the remediation and
testing process to be limited. As such, the Company to date has spent an
insignificant amount of funds addressing the Y2K issue, and expects that
the total costs associated with addressing the Y2K issue and attaining
compliance will be immaterial. Lynx expects the remediation and testing
phase of compliance to be completed by August 1999.
The Company is in the process of developing a contingency plan for
the IT and non-IT equipment and systems and third party service providers
and vendors, if any, for which Lynx determines Y2K compliance is
substantially at risk. Lynx expects to have completed the contingency
plan by September 1999.
ITEM 7A. MARKET RISK DISCLOSURES
The primary objective of the company's investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, the Company
invests in highly liquid and high quality debt securities. The Company's
investments in debt securities are subject to interest rate risk. To
minimize the exposure due to adverse shifts in interest rates, the Company
invests in short term securities and maintains an average maturity of less
than one year.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Lynx Therapeutics, Inc.
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Audited Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Lynx Therapeutics, Inc.
We have audited the accompanying balance sheets of Lynx
Therapeutics, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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 financial position of Lynx Therapeutics, Inc.
at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 29, 1999
<PAGE>
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. $16,170 $8,798
Short-term investments................................ 7,692 16,132
Accounts receivable................................... 5,316 244
Other current assets.................................. 678 199
---------- ----------
Total current assets..................................... 29,856 25,373
Property and equipment:
Leasehold improvements................................ 9,510 3,795
Laboratory and other equipment........................ 3,657 3,562
---------- ----------
13,167 7,357
Less accumulated depreciation......................... (3,530) (3,588)
---------- ----------
Net property and equipment............................... 9,637 3,769
Notes receivable from officers and employees............. 841 125
---------- ----------
$40,334 $29,267
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable...................................... $1,770 $191
Accrued accounts payable.............................. 3,332 19
Accrued compensation.................................. 295 289
Accrued professional fees............................. 136 179
Deferred revenue - current portion.................... 3,000 2,292
Other accrued liabilities............................. 489 528
---------- ----------
Total current liabilities................................ 9,022 3,498
Deferred revenue......................................... 7,667 --
Other noncurrent liabilities............................. 188 179
Stockholders' equity:
Preferred stock, issuable in series, $.001
par value; 2,000,000 shares authorized, all
shares designated represent convertible
preferred stock:
Series B, no shares outstanding at December 31,
1998; 332,288 shares designated, issued, and
outstanding at December 31, 1997.................... -- 16,091
Series C, no shares outstanding at December 31,
1998; 123,299 shares designated, issued, and
outstanding at December 31, 1997.................... -- 6,109
Series D, no shares outstanding at December 31,
1998; 40,000 shares designated, issued, and
outstanding at December 31, 1997.................... -- 4,989
Common stock, $.01 par value; 20,000,000 shares
authorized, 11,132,815 and 5,892,353 shares
issued and outstanding at December 31, 1998 and
1997, respectively.................................. 74,329 46,640
Notes receivable from stockholders.................... (436) (460)
Deferred compensation................................. (3,742) (5,394)
Accumulated other comprehensive income (loss)......... (7) (45)
Accumulated deficit................................... (46,687) (42,340)
---------- ----------
Total stockholders' equity............................... 23,457 25,590
---------- ----------
$40,334 $29,267
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C>
Net revenues:
License fees........................ $ -- $ -- $7,500
Revenues from collaborative
arrangements...................... 6,875 4,420 1,958
Product sales and other revenues.... 130 162 291
---------- ---------- ----------
Total revenues 7,005 4,582 9,749
Operating costs and expenses:
Research and development............ 13,166 14,226 12,545
Selling, general and administrative. 2,141 1,930 3,170
---------- ---------- ----------
Total operating costs and expenses.... 15,307 16,156 15,715
---------- ---------- ----------
Loss from operations.................. (8,302) (11,574) (5,966)
Interest income....................... 1,241 753 585
Other income.......................... 2,865 -- --
Provision for income taxes............ 151 -- 10
---------- ---------- ----------
Net loss.............................. ($4,347) ($10,821) ($5,391)
========== ========== ==========
Basic and diluted net loss per
share .............................. ($0.45) ($3.09) ($2.45)
========== ========== ==========
Shares used in basic and diluted per
share computation................... 9,642 3,501 2,197
========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1997 and 1998
(In thousands, except share numbers)
<TABLE>
<CAPTION>
Accumulated
Other Total
Preferred Stock Common Stock Notes Deferred Comprehen- Stock-
------------------ --------------------- Receiv- Compen- sive Accumulated holders'
Shares Amount Shares Amount able sation Income (loss Deficit Equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.. 495,587 $27,189 2,334,524 $13,394 ($660) ($51) ($2) ($26,128) $13,742
----------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss................... -- -- -- -- -- -- -- (5,391) (5,391)
Other comprehensive
income (loss)
Net unrealized
gain/(loss) on
securities -- -- -- -- -- -- 5 -- 5
---------------------------------
Comprehensive loss 5 (5,391) (5,386)
Exercise of employee stock
options for cash............ -- -- 9,663 12 -- -- -- -- 12
Repurchase of common stock -- -- (157,500) (297) 450 -- -- -- 153
Issuance of common stock
in connection with
Lynx/Spectragen merger...... -- -- 959,182 4,221 -- (2,076) -- -- 2,145
Issuance of common stock
for services................ -- -- 6,279 31 -- -- -- -- 31
Amortization of deferred
compensation................ -- -- -- -- -- 35 -- -- 35
----------------------------------------------------------------------------------------------
Balance at December 31, 1996.. 495,587 27,189 3,152,148 17,361 (210) (2,092) 3 (31,519) 10,732
----------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss................... -- -- -- -- -- -- -- (10,821) (10,821)
Other comprehensive
income (loss)
Net unrealized
gain/(loss) on
securities -- -- -- -- -- -- (48) -- (48)
---------------------------------
Comprehensive loss (48) (10,821) (10,869)
Exercise of employee stock
options for cash and note
receivable.................. -- -- 76,181 287 (250) -- -- -- 37
Repurchase of common stock.... -- -- (11,476) (198) -- 197 -- -- (1)
Issuance of common stock for
cash, net of issuance
costs of $1,685............. -- -- 2,675,500 25,070 -- -- -- -- 25,070
Amortization of deferred
compensation................ -- -- -- -- -- 621 -- -- 621
Recognition of deferred
compensation on employee
stock options............... -- -- -- 4,120 -- (4,120) -- -- --
----------------------------------------------------------------------------------------------
Balance at December 31, 1997.. 495,587 27,189 5,892,353 46,640 (460) (5,394) (45) (42,340) 25,590
----------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss................... -- -- -- -- -- -- -- (4,347) (4,347)
Other comprehensive
income (loss)
Net unrealized
gain/(loss) on
securities -- -- -- -- -- -- 38 -- 38
---------------------------------
Comprehensive loss 38 (4,347) (4,309)
Exercise of employee stock
options for cash and note
receivable.................. -- -- 334,309 744 (81) -- -- -- 663
Repurchase of common stock.... -- -- (49,717) (108) 105 -- -- -- (3)
Conversion of series B, C
and D preferred stock to
common stock................ (495,587) (27,189) 4,955,870 27,189 -- -- -- -- --
Amortization of deferred
compensation, including
forfeitures................ -- -- -- (416) -- 1,652 -- -- 1,236
Compensation and service
expense related to stock
option grants.............. -- -- -- 280 -- -- -- -- 280
----------------------------------------------------------------------------------------------
Balance at December 31, 1998.. -- $ -- 11,132,815 $74,329 ($436) ($3,742) ($7) ($46,687) $23,457
==============================================================================================
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Cash Flows
Net increase (decrease) in cash and cash equivalents
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ ($4,347) ($10,821) ($5,391)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of fixed
assets and leasehold improvements.......... 1,176 1,298 829
Issuance of common stock expensed in
connection with the Lynx/Spectragen merger. -- -- 2,145
Issuance of stock options to
non-employees in exchange for services..... 111 -- --
Amortization of deferred compensation........ 1,236 621 35
Other........................................ (138) -- 31
Changes in operating assets and liabilities:
Accounts receivable.......................... (5,072) (126) (30)
Other current assets......................... (479) (41) (79)
Accounts payable............................. 4,892 (219) (264)
Accrued liabilities.......................... (76) 60 413
Deferred revenue............................. 8,375 (3,875) 3,542
Other noncurrent liabilities................. 9 31 46
---------- ---------- ----------
Net cash provided by (used in) operating
activities.................................... 5,687 (13,072) 1,277
---------- ---------- ----------
Cash flows from investing activities:
Purchases of short-term investments............. (21,767) (16,180) (6,903)
Maturities of short-term investments............ 30,245 1,973 4,935
Leasehold improvements and equipment
purchases, net of retirements................. (7,254) (1,188) (1,511)
Notes receivable from officers and employees.... (175) 50 367
---------- ---------- ----------
Net cash provided by (used in) investing
activities.................................... 1,049 (15,345) (3,112)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of common stock, net of repurchases.... 636 25,106 165
---------- ---------- ----------
Net cash provided by financing activities....... 636 25,106 165
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................... 7,372 (3,311) (1,670)
Cash and cash equivalents at beginning of year.. 8,798 12,109 13,779
---------- ---------- ----------
Cash and cash equivalents at end of year........ $16,170 $8,798 $12,109
========== ========== ==========
Supplemental disclosures of cash flow
information:
Income tax paid.............................. $ -- $ -- $10
========== ========== ==========
Following are the effects of the non-cash
transactions relating to the sale of the
antisense business:
Assets sold, net of depreciation............. $210 $ -- $ --
========== ========== ==========
Inex stock received.......................... $603 $ -- $ --
</TABLE> ========== ========== ==========
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of Significant Accounting Policies and Basis of Presentation
Ownership and Basis of Presentation
Lynx Therapeutics, Inc. ("Lynx" or the "Company") has developed,
and continues to develop, unique, proprietary technologies aimed at
handling and/or analyzing, simultaneously, the DNA molecules or fragments
in complex biological samples. At the core of these technologies is
Lynx's MegacloneTM technology which allows both the
simultaneous cloning of millions of DNA molecules or fragments in a
sample, and the parallel probing or assaying of the millions
of resulting clones, all without requiring prior separation, purification,
individual amplification, or identification of any of the templates.
Applications include the identification of genes differentially expressed
between samples, the characterization of gene expression within a sample,
and a novel, highly efficient means for scoring ("genotyping") large
numbers of genetic markers or single nucleotide polymorphisms ("SNPs"),
simultaneously, against very large numbers of genomes.
The consolidated financial statements of the Company include the
accounts of the Company and its wholly owned subsidiary, Lynx Therapeutics
GmbH, formed under the laws of the Federal Republic of Germany. All
significant intercompany balances and transactions have been eliminated.
Certain amounts in prior periods have been reclassified to conform to
current presentation.
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 maturities 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.
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, 1998 and 1997, 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,
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.
The Company invests its excess cash in deposits with major banks and
in money market and short-term debt securities of companies with strong
credit ratings from a variety of industries. These securities generally
mature within 365 days and, therefore, bear minimal risk. The Company has
not experienced any losses on it's investments. The Company, by Corporate
policy, limits the amount of credit exposure to any one issuer and to any
one type of investment.
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
Technology access fees or contract initiation fees are deferred and
recognized as revenue on a straight-line basis over the noncancelable
term of the agreement, exclusive of any possible future extensions to, or
renewals of, the contract term by the other party. Payments for services
and/or materials to be provided by Lynx will be recognized as revenue when
earned over the contract period in which the services are performed and/or
materials are delivered by Lynx, provided no other obligations, refunds,
or credits to be applied to future work exist. Milestone payments are
recognized as revenue upon the achievement of the related milestone and
the satisfaction of any related obligations. Revenues from the sales of
products are recognized upon shipment.
During 1998, revenue from three collaborative partners represented
61%, 33% and 5% of total revenue. During 1997, revenue from three
collaborative partners represented 60%, 25% and 11%. During 1996, revenue
from three collaborative partners represented 36%, 30%, and 15% of total
revenue.
Net Loss per Share
The Company complies with Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings Per Share" ("EPS"). 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, net of certain common shares outstanding
which are subject to continued vesting and the Company's
right of repurchase. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of the Company,
to the extent such securities are dilutive. Basic and diluted net
loss per share are equivalent for all periods presented herein due to
the Company's net loss in all periods. The following have been excluded
from the calculation of loss per share for 1998 because the effect of
inclusion would be antidilutive: approximately 152,000 common shares which
are outstanding but are subject to the Company's right of repurchase which
expires ratably over five years; and options to purchase approximately
1,400,000 shares of common stock at a weighted average price of $5.35 per
share. 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.
Refer to Note 7 for additional disclosure regarding the common stock
and stock option plan.
Stock-Based Compensation
As permitted by Statement 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 1998, Lynx adopted the provisions of Statute of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income,"
("SFAS 130"). SFAS 130 establishes new rules for the reporting
and presentation of comprehensive income and its components;
however, the adoption of SFAS 130 had an immaterial impact on the
company's net loss and shareholders' equity. SFAS requires unrealized
gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income (loss).
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
information" ("SFAS 131"). SFAS 131 supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise". SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
SFAS 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company's business
activities include the development of technologies aimed at handling and/or
analyzing the DNA molecules or fragments in complex biological samples.
Accordingly, the Company operates in only one business segment. All of the
Company's assets and revenues are derived from this activity.
Substantially all of the Company's assets are located in the United States.
To date, revenues have been derived primarily from contracts with companies
located in the North America, Europe and Japan, as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C>
North America............ $401 $176 $291
Europe................... 6,542 4,401 5,958
Japan.................... 62 5 3,500
---------- ---------- ----------
$7,005 $4,582 $9,749
========== ========== ==========
</TABLE>
2. Investments
The following is a summary of available-for-sale securities:
<TABLE>
<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, 1998:
Money market mutual funds.. $775 $ -- $ -- $775
Commercial paper........... 8,177 -- (2) 8,175
Government notes........... 5,919 -- -- 5,919
Mutual funds............... 800 -- -- 800
Corporate bonds and notes.. 7,799 -- (5) 7,794
---------- ---------- ---------- ----------
$23,470 $ -- ($7) $23,463
========== ========== ========== ==========
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
========== ========== ========== ==========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, the Company
did not sell any securities. As of December 31, 1998, $15.8 million of
the marketable securities were classified as cash equivalents, and the
balance of $7.7 million was classified as short-term investments. 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. 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 1998, the Company entered into a research collaboration
with DuPont to apply Lynx's technologies to the study of certain crop
plants and their protection. Under the terms of the agreement, Lynx will
receive payments over a five-year period for certain analyses, the
achievement of specific technological milestones and the delivery of the
genomic map of a certain crop. An initial payment of $10.0 million was
received at the execution of the agreement, with an additional minimum of
$12.0 million to be received by Lynx over the next three years.
Also in the fourth quarter of 1998, Lynx reached agreement with BASF
AG ("BASF") to expand the scope of the agreements that the companies had
signed in 1996. The first of these agreements had granted BASF non-
exclusive access to certain other Lynx bead-based technologies developed
since the original agreements, and to establish the basis upon which BASF
will pay Lynx (cost plus a specified profit margin) for any experiments
performed by Lynx under the agreement. Pursuant to this amendment, BASF
paid $1 million to Lynx in January 1999.
The other 1996 agreements with BASF had established and defined a
joint venture ("JV") company (BASF-LYNX Bioscience AG) licensed to use
Lynx's technologies in epilepsy, toxicology and fermentation, with
financial support from BASF. These agreements were amended to enable the
JV to study certain other central nervous system ("CNS") diseases and,
subject to approval by Lynx and BASF through their representatives on the
Advisory Board of the JV, other fields of interest. The non-exclusive
license granted by Lynx to the JV was extended accordingly. Together with
these amendments, BASF agreed to commit an additional $10 million in funding
to the JV, of which $4.25 million was paid to Lynx in January 1999, for
the JV's acquisition of Lynx's technology assets for certain CNS diseases.
In October 1995, Lynx entered into an agreement with Hoechst, which
provided Hoechst with non-exclusive access to Lynx's Massively Parallel
Signature Sequencing. 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 to initiate its subscription and a minimum access fee of $4
million for the first subscription year under the agreement. In return,
Lynx will provide Hoechst with a certain number of analyses per year. In
addition, the Company received $5 million in November 1995 in a private
placement to Hoechst of 40,000 shares of Lynx's Series D preferred stock
at $125.00 per share (since converted into 400,000 shares of common
stock).
The agreement between Hoechst and Lynx was amended in September 1997
and again in May 1998. The 1997 amendment modified the technology milestone
included in the original agreement and extended the date by which such
milestone must be achieved under the contract. The amendment eliminated
the milestone and includes instead Hoechst's right to access Lynx's Massively
Parallel Signature Sequencing technologies by payment 'of a technology access
fee. Also, the 1998 amendment allows Hoechst 'and Lynx to mutually agree
to include access by Hoechst to certain other of Lynx's technologies.
4. Sale of the Antisense Business
On March 10, 1998, Lynx sold its portfolio of phosphorothioate antisense
patents and licenses, and its therapeutic oligonucleotide manufacturing facility
(collectively, the "Antisense Business"), to Inex Pharmaceuticals Corporation
("Inex"), a Canadian company. As partial consideration in this transaction,
Lynx received $3 million in cash and will receive 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 than two and three years, respectively, from the closing
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
phosphoroamidate chemistry for certain therapeutic applications in the fields
of cancer and inflammation.
The gain on the sale of the Antisense Business is based on the cash
and the first installment of the Inex common stock received on the transaction
date, net of the book value of the assets transferred to Inex and certain other
costs associated with the transaction and incurred by Lynx. The Inex common
stock is classified in long term assets.
5. 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. Lynx recorded a credit to expense of approximately
$27,000 in the year ended December 31, 1998 for license fees which had
been paid, then subsequently included in the sale to Inex. The expenses
associated with licenses were approximately $314,000 for the year ended
December 31, 1997; and $242,000 for the year ended December 31, 1996.
6. Notes Receivable from Officers
In August 1998, the Company entered into two loan agreements with an
officer of the Company. Each loan is in the amount of $100,000, secured
by a second mortgage on real property, with interest accruable at the rate
of 5.57% per annum, and subject to early repayment under specified
circumstances. The principal and interest on one loan will be forgiven,
based on the officer's continuous employment over a four year period, in the
following amounts: 50% on the second anniversary date of employment; and
25% on each of the third and fourth anniversary dates of employment. The
second loan is to be repaid by the officer according to the following
schedule: 50% of the principal on the third anniversary date of
employment; and the remainder of the principal plus accrued interest on
the fourth anniversary date of employment.
In April 1997, the Company entered into a full-recourse loan
agreement with 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.
In October 1995, the Company entered into a full-recourse loan
agreement with 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 note and all interest receivable was paid
in full according to the terms of the agreement in April 1998.
7. Stockholders' Equity
Preferred Stock
On March 31, 1998, pursuant to the Amended and Restated Certificate
of Designation, dated September 30, 1997, the 332,288 shares of Series B
preferred stock, 123,299 shares of Series C preferred stock and 40,000
shares of Series D preferred stock converted into 4,955,870 shares of
common stock.
Common Stock
At December 31, 1998, Lynx has reserved 2,865,563 shares of common
stock for issuance upon the exercise of outstanding employee and
nonemployee stock options, upon the issuance of shares purchased pursuant
to the employee stock purchase plan, and upon the exercise of certain
warrants, as noted below:
<TABLE>
<S> <C>
Stock option grants outstanding......... 1,429,722
Shares available for grant.............. 785,841
Employee stock purchase plan shares..... 200,000
Warrants outstanding.................... 50,000
Other................................... 400,000
----------
2,865,563
==========
</TABLE>
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.
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.
1998 Employee Stock Purchase Plan
In May 1998, the stockholders approved the adoption of the Company's
1998 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase
Plan authorized the issuance of 200,000 shares of common stock pursuant to
purchase rights granted to employees of the Company and is intended to be
an "employee stock purchase plan" as defined in Section 423 of the
Internal Revenue Code.
The Purchase Plan was adopted to provide a means by which employees
of the Company and its affiliates will be given an opportunity to purchase
stock in the Company, to assist in retaining the services of its
employees, to attract and secure the services of new employees, and to
provide incentives for all employees, to exert maximum efforts for the
success of the Company. There has been no activity to date in the
Purchase Plan.
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. In February 1998, the stockholders approved an amendment
to the 1992 Plan to enhance the flexibility of the Board of Directors
("Board") and the Board's 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).
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.
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, 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.
The stock option activity under the Plan was as follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------
Number of Weighted
Shares Exercise Average
Available Subject Price Exercise
for Grant to Options per Share Price
----------- ----------- --------------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995. 169,035 732,411 $0.10 - $5.00 $1.97
Shares 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 exercised............ -- (76,181) $0.10 - $6.00 $3.78
Options canceled............. 29,163 (82,008) $0.15 -$14.10 $1.68
----------- -----------
Balance at December 31, 1997. 360,808 1,626,254 $0.10 -$14.38 $3.22
Shares authorized........... 600,000 -- -- -- --
Options granted.............. (407,500) 407,500 $7.13 -$15.00 $11.27
Options exercised............ -- (334,309) $0.10 - $6.00 $2.27
Options canceled............. 232,533 (269,723) $0.10 -$15.00 $5.30
----------- -----------
Balance at December 31, 1998. 785,841 1,429,722 $0.10 -$15.00 $5.35
=========== ===========
</TABLE>
To date, all options granted under the Plan are nonqualified
options. Options to purchase a total of 505,522 shares were exercisable
under the Plan at December 31, 1998. 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,
1998, 151,978 shares outstanding were subject to repurchase.
The options outstanding at December 31, 1998 have been segregated into
ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Options Weighted Options
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life (Years) Price 1998 Price
- --------------- ------------ ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.10 $0.77 112,773 8.81 $0.30 48,736 $0.30
$1.00 $1.00 182,625 5.79 $1.00 170,596 $1.00
$1.54 $1.54 311,610 7.60 $1.54 39,195 $1.54
$2.00 $4.00 89,580 7.54 $3.69 42,362 $3.35
$5.00 $5.00 143,806 7.22 $5.00 89,703 $5.00
$6.00 $7.13 154,576 7.59 $6.11 72,906 $6.00
$7.25 $8.75 176,000 9.47 $8.54 1,166 $8.38
$9.13 $14.25 136,986 9.96 $11.96 28,464 $11.62
$14.38 $14.38 7,500 8.46 $14.38 2,250 $14.38
15.00 $15.00 114,266 9.15 $15.00 10,144 $15.00
------------ ------------
1,429,722 8.01 $5.35 505,522 $3.56
============ ============
</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 1996, 1997 and 1998 was $2.61, $4.11 and $6.74 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 5.5%, 6.33%
and 6.34% for 1998, 1997, and 1996, respectively, a weighted-average
expected life of 5.1 years for 1998 grants, 4.2 years for 1997 grants, and
4.3 years for 1996 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 1996, the calculated volatility of the Company's common
stock did not provide a representative picture of future volatility.
Consequently, an industry-based proxy volatility of 73% was used in the
calculations for 1996. In 1997 and 1998, trading volume was sufficient to
generate an average volatility of 56% and 64% respectively, 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 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:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C>
Net loss:
Historical.................. ($4,347) ($10,821) ($5,391)
Pro forma................... ($5,610) ($11,498) ($5,853)
Net loss per share:
Historical.................. ($0.45) ($3.09) ($2.45)
Pro forma................... ($0.58) ($3.28) ($2.66)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, future pro forma net income and income/loss per share
results, may be materially different from actual amounts presented.
8. Income Taxes
The provision for income taxes of approximately $151,000 for 1998
and $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 1997.
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, 1998,
1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C>
Tax provision (benefit) at U.S.
statutory rate.................. ($1,427) ($3,679) ($1,830)
Book amortization of compensation
expense for which no tax
deduction is permitted.......... 421 211 --
Alternative minimum tax............ 151 -- 10
Loss for which no tax benefit
is currently recognizable....... 1,006 3,468 1,830
--------- --------- ---------
$151 $ -- $10
========= ========= =========
</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):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...... $9,423 $10,800
Research & development tax
credit carryforwards............... 1,345 1,172
Alternative minimum tax credit
carryforwards...................... 162 10
Capitalized research and
development expenditures........... 1,319 616
Deferred revenue...................... 4,182 912
Reserves and accruals................. 324 --
Other, net............................ 599 708
Valuation allowance................... (17,354) (14,218)
--------- ---------
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, 1998 and 1997 has been established to reflect these
uncertainties. The change in the valuation allowance was a net increase
of approximately $3,136,000 and $2,661,000 for the fiscal years ended
December 31, 1998 and 1997, respectively.
As of December 31, 1998, the Company had federal and California net
operating loss carryforwards of approximately $27,680,000 and $190,000,
respectively, which will expire at various dates from 2002 through 2012,
if not utilized. As of December 31, 1998, the Company also had federal
and California research and development tax credit carryforwards of
approximately $1,096,000 and $249,000, respectively, which will expire at
various dates from 2007 through 2018, if not utilized.
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. Utilization of federal and California net operating losses
and credit carryforwards incurred prior to February 1994 is limited on an
annual basis under the Internal Revenue Code of 1986, as amended, as a
result of an ownership change in 1994.
9. Obligations under Operating Leases
In August 1993, the Company entered into a noncancelable operating
lease for facilities which expires on July 31, 2003. In 1998, the Company
entered into an agreement to sublease a portion of this space. The term
of the sublease is twenty-four months, commencing in March 1998. The
sublessee has the option to extend the term of the sublease through July
2003, subject to certain conditions. In January 1999, the Company entered
into a second agreement to sublease the remaining portion of its facilities
under the 1993 lease. The term of this second sublease is fifty-four
months, commencing in February 1999, and runs through July 2003.
Rent from the two subleases is sufficient to support the rent and
other operating expenses incurred by Lynx under the terms of the 1993
Lease.
In February 1998, the Company entered into a noncancelable
operating lease for facilities. The term of the lease commenced 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 is recognizing rent expense on a straight-line basis
over the 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 the option.
Additionally, the Company has an option (the "Expansion Option"),
exercisable on or prior to January 1, 2000, to lease additional building
space. 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.
The Company also leases equipment under various operating lease
agreements subject to minimum annual lease payments.
<TABLE>
<CAPTION>
Minimum annual rental commitments and sublease income under operating
leases are as follows (in thousands):
Commit- Sublease
Years ending December 31: ments Income
- ---------------------------------- --------- ---------
<S> <C> <C>
1999................................. $1,580 $1,009
2000................................. 1,862 913
2001................................. 2,142 891
2002................................. 2,211 914
2003................................. 2,029 546
Thereafter........................... 10,831 --
--------- ---------
$20,655 $4,273
========= =========
</TABLE>
Rent expense for facilities and equipment under operating leases was
$738,000, $649,000, and $722,000 for the years ended December 31, 1998,
1997, and 1996, respectively. Rental income for the facility under
sublease was $186,000 for the year ended December 31, 1998. There was no
rental income in the years ended December 31, 1997 and 1996.
10. 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 1998 calendar year was $10,000.
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 1998, 1997 and 1996, the Company contributed $49,383,
42,088 and $37,073, respectively.
11. Equipment Debt Financing
In late 1998, the Company entered into an agreement with a financial
institution ("Lender") whereby the Company may borrow from the Lender up
to $5.0 million for the purchase of equipment and certain other capital
expenditures. The Lender will obtain a security interest in all items
financed by it under this agreement. The Company paid to the Lender a fee
that will be applied to loan transaction costs and expenses and to
payments due by the Company under its borrowings. The term of each loan
under the arrangement is forty-eight months, with a right of prepayment.
As of the date each loan term commences, the interest rate and monthly
payment under such loan are fixed for the entire loan term. As of December
31, 1998, the Company had not financed any equipment under this
arrangement.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers, directors and certain employees, and
their ages as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Name Age Company Positions
- -------------------------------- ---- -------------------------------------
<S> <C> <C>
Sam Eletr, Ph.D ................ 59 Chief Executive Officer and
Chairman of the Board
Edward C. Albini ............... 41 Chief Financial Officer and Secretary
Stephen C. Macevicz, Ph.D. ..... 49 Vice President, Intellectual Property
William K. Bowes, Jr.(1) ....... 72 Director
Sydney Brenner, M.B., D. Phil .. 71 Director
James C. Kitch(1) .............. 51 Director
Kathleen D. La Porte(2) ........ 37 Director
Craig C. Taylor(2) ............. 48 Director
</TABLE>
- -----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Sam Eletr 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., 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. 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.
Stephen C. Macevicz 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, 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 the University of California, Berkeley (Boalt
Hall) in 1984 and his Ph.D. in Biophysics from the University of
California, Berkeley in 1979.
William K. Bowes, Jr. 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.
Sydney 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.
James C. 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 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.
Kathleen D. 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 Keravision, Inc., a medical device company, Gentle
Dental Service Corporation, a healthcare service company, and several
private companies.
Craig C. 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, 1998, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent (10%) beneficial owners
were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the
Company during the calendar years ended December 31, 1998, 1997 and 1996,
to its Chief Executive Officer and the two other most highly compensated
executive officers whose compensation exceeded $100,000 (the "Named
Executive Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term All Other
Annual Compensation Compen-
Name and Principal Position Year Salary(1) Options(#) sation(2)
- ------------------------------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Sam Eletr, Ph.D. 1998 $230,460 -- $ --
Chief Executive Officer 1997 196,131 -- --
and Chairman of the Board 1996 176,121 32,500 --
Edward C. Albini 1998 $147,336 50,000 $750
Chief Financial Officer 1997 100,244 (3) 50,000 --
Stephen C. Macevicz, Ph.D. 1998 $167,611 -- $750
Vice President, 1997 155,886 -- 750
Intellectual Property 1996 144,505 -- 750
<FN>
(1) Includes amounts earned but deferred at the election of the Named
Executive Officer pursuant to the Company's 401(k) Plan.
(2) Contributions made by the Company to the Company's 401(k) Plan on
behalf of such employee.
(3) Mr. Albini joined the Company on April 17, 1997.
</FN>
</TABLE>
Except as disclosed above, no compensation characterized as long-
term compensation, including restricted stock awards issued at a price
below fair market value or long-term incentive plan payouts, was paid by
the Company during the year ended December 31, 1998, to any of the Named
Executive Officers.
Stock Option Grants and Exercises
The following table sets forth, for each of the Named Executive
Officers in the Summary Compensation Table, certain information regarding
options granted during the year ended December 31, 1998.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of
Number of Granted Exercise Stock Price
Securities to or Base Appreciation for
Underlying Employees Price per Expir- Option Term (3)
Options in Fiscal Share ation -----------------------
Name Granted(1) Year(2) ($/sh) Date(1) 5%($) 10%($)
- ------------------------ ------------ ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Albini 50,000 12.59% $15.00 02/26/08 471,671 1,195,307
</TABLE>
- -------------
(1) Officers 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. Options granted generally vest over a five-year period.
The term of the options is ten years.
(2) Based on an aggregate of 397,500 options granted to employees of,
and consultants to, the Company during the year ended December 31,
1998, including the Named Executive Officer.
(3) The potential realizable value is calculated based on the term of
the option at its time of grant (ten years). It is calculated by
assuming that the stock price on the date of grant appreciates at
the indicated annual rate, compounded annually for the entire term
of the option, and that option is exercised and sold on the last day
of the term for the appreciated stock price.
The following table sets forth certain information concerning the
number of options exercised by the Named Executive Officers during the
year ended December 31, 1998, and the number of shares covered by both
exercisable and unexercisable stock options held by the Named Executive
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, 1998 ($11.44 per share).
Aggregated Option Exercises in the Year Ended December 31, 1998 and
Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired Options at Year-End at Year-End(1)
on Value ------------------------- -------------------------
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ --------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sam Eletr............. -- $ -- 189,333 28,167 $1,774,297 $278,853
Edward C. Albini...... -- -- -- 50,000 -- --
Stephen C. Macevicz... -- -- 26,000 28,000 285,252 311,657
<FN>
(1) Based on the fair market value of the Company's common stock
at December 31, 19978($11.44), 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, 1998.
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 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of the common stock as of March 1, 1999, by (i) each
stockholder who is known by the Company to own beneficially more than 5%
of the common stock; (ii) each Named Executive Officer of the Company
listed on the Summary Compensation Table; (iii) each director of the
Company; and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
Common Stock(1)
Name and Address ---------------------
of Beneficial Owners Number Percent(2)
- ------------------------------------------- ---------- ----------
<S> <C> <C>
Entities affiliated with
U.S. Venture Partners IV, L.P.(3) 730,000 6.6%
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Entities affiliated with the
Sprout Group(4) 729,980 6.6%
3000 Sand Hill Road, Suite 270
Menlo Park, CA 94025
Cannon Street Fund Ltd. 565,000 5.1%
c/o Meridian Venture Group
R.R. Box 272
Charlottesville, VA 22314
Asset Management Associates 1989 L.P.(5) 360,000 3.2%
Sam Eletr, Ph.D.(6) 460,759 4.1%
Edward C. Albini(7) 100,000 **
William K. Bowes, Jr.(8) 747,720 6.7%
U.S. Venture Partners IV, L.P.
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Sydney Brenner, M.B., D. Phil.(9) 309,057 2.8%
James C. Kitch(10) 9,787 **
Kathleen D. La Porte(4) 729,980 6.6%
Sprout Group
3000 Sand Hill Road, Suite 270
Menlo Park, CA 94025
Stephen C. Macevicz, Ph.D(11) 99,651 **
Craig C. Taylor(12) 371,497 3.3%
All directors and officers as a 2,828,451 25.4%
group (8 persons)(13)
<FN>
(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.
(2) Percentage of beneficial ownership is based on 11,132,815 shares of
common stock outstanding as of March 1, 1999, except as otherwise
noted in the footnotes. 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 March 1, 1999, 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 730,000 shares of common 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 shares,
except to the extent of his pro-rata interest therein.
(4) Includes 729,980 shares of common 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 360,000 shares of common 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.
(6) Includes 217,500 shares of common stock issuable upon exercise of
Lynx stock options held by Dr. Eletr that are exercisable within 60
days.
(7) Includes 50,000 shares of common stock issuable upon exercise of
Lynx stock options held by Mr. Albini.
(8) See Note 3 above. Common stock amount also includes 17,720 shares
held by Mr. Bowes.
(9) Includes 49,057 shares of common stock issuable upon exercise of
Lynx stock options held by Dr. Brenner that are exercisable
within 60 days.
(10) Includes 2,287 shares of common stock and 7,500 shares of common
stock issuable upon the exercise of Lynx stock options held by Mr.
Kitch on behalf of GC&H Investments, an investment partnership of
which Mr. Kitch is a general partner. 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.
(11) Includes 54,000 shares of common stock issuable upon exercise of
Lynx stock options held by Dr. Macevicz that are exercisable within
60 days.
(12) See Note 5 above. Includes 11,497 shares of common stock held by
Mr. Taylor.
(13) Common stock amount includes 1,839,980 shares held by entities
affiliated with certain directors and 324,057 shares of common stock
issuable upon exercise of the Company's stock options held by
directors and officers that are exercisable within 60 days. See
Notes 6 through 12 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 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.
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 note and all interest
receivable was paid in full according to the terms of the agreement in
April 1998.
For legal services rendered during the calendar year ended December
31, 1998, the Company paid approximately $239,000 to Cooley Godward LLP,
the Company's counsel, of which Mr. Kitch, a director of the Company, is a
partner.
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, 1998 and 1997.
(iii) Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
(iv) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996.
(v) Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
(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:
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, incorporated by
reference to the indicated exhibit of the Registrant's Form 10-K for
the period ended December 31, 1997.
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 Amendment of Designation of Preferences of Series B
Convertible Preferred Stock of the Company, incorporated by reference
to Exhibit 3.4 of the registrant's Form 10-Q for the period ended
March 31, 1995.
3.3.1 Certificate of Amendment to Certificate of Designation of Preferences
of Series B Convertible Preferred Stock of the Company, incorporated
by reference to Exhibit 3.4.1 of the Registration's Form 10-K for the
period ended December 31, 1997.
3.3.2 Certificate of Amendment to Certificate of Designation of Preferences
of Series B Convertible Preferred Stock of the Company dated
September 30, 1997, incorporated by reference to Exhibit 3.4.2 of the
Registrant's Form 10-K for the period ended December 31, 1997.
3.4 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.
3.4.1 Certificate of Amendment to Certificate of Designation of Preferences
of Series C Convertible Preferred Stock of the Company dated
September 30, 1997, incorporated by reference to exhibit 3.5.1 of the
registrant's Form 10-K for the period ended December 31, 1997.
3.4.2 Certificate of Amendment to Certificate of Designation of Preferences
of Series C Convertible Preferred Stock of the Company dated
September 30, 1997, incorporated by reference to exhibit 3.5.2 of
the Registrant's Form 10-K for the period ended December 31, 1997.
3.5 Certificate of Amendment to Certificate of Designation of Preferences
of Series D Convertible Preferred Stock of the Company dated
September 30, 1997, incorporated by reference to exhibit 3.6 of
the Registrant's Form 10-K for the period ended December 31, 1997.
4.1 Form of Common Stock Certificate, incorporated by reference to
Exhibit 4.2 of the Registrant's statement Form 10 (File No. 0-22570),
as amended.
10.1 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.
10.2+ 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.
10.3+ 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.
10.4+ 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.
10.5 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.
10.6 Amended and Restated Investor Rights Agreement, dated as of
November 1, 1995, incorporated by reference to the Exhibit 10.30 of
the Registrant's Form 10-K for the period ended December 31, 1995.
10.7+ 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.), incorporated by reference to
Exhibit 10.25 of the Registrant's Form 10-K for the period ended
December 31, 1996.
10.8 Joint Venture Agreement dated as of October 23, 1996, between the
Company and BASF Aktiengesellschaft, incorporated by reference to
the indicated exhibit of the Registrant's Form 10-K for the
period ended December 31, 1996.**
10.8.1 First Amendment to Joint Venture Agreement dated as of October 23,
1998, between the Company and BASF Aktiengesellschaft.**
10.9+ Stock Purchase Agreement dated as of April 14, 1997, between the
Company and Edward C. Albini, incorporated by reference to Exhibit
10.32 of the Registran't Form 10-K for the period ended December 31,
1997
10.10 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 Exhibit 4.1 of the Registrant's
Registration Statement on Form S-3, filed on October 31, 1997 (File
No. 333-39171).
10.11 Lease, dated as of February 27, 1998, between the Company and
SimFirst, L.P., Limited Partnership, incorporated by reference to
Exhibit 10.35 of the Registrant's Form 10-Q for the period ended
March 31, 1998.
10.12 Technology License and Development Agreement, dated as of January 1,
1997, between the Company and BASF-LYNX Bioscience AG.**
10.12.1 First Amendment to Technology License and Development Agreement,
dated as of January 1, 1997, between the Company and BASF-LYNX
Bioscience AG.**
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 50.
27 Financial Data Table for the period ended December 31, 1998.
- ---------------
(+) 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
<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 31st day of
March 1999.
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.
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ------------------------------ ---------------
<S> <C> <C>
/s/ Sam Eletr Chief Executive Officer and March 31, 1999
- --------------------------- Chairman of the Board
Sam Eletr (Principal Executive Officer)
/s/ Edward C. Ablini Chief Financial Officer and March 31, 1999
- --------------------------- Secretary (Principal Financial
Edward C. Albini and Accounting Officer)
/s/ William K. Bowes, Jr. Director March 31, 1999
- ---------------------------
William K. Bowes, Jr.
/s/ Sydney Brenner Director March 31, 1999
- ---------------------------
Sydney Brenner
/s/ James C. Kitch Director March 31, 1999
- ---------------------------
James C. Kitch
/s/ Kathleen D. La Porte Director March 31, 1999
- ---------------------------
Kathleen D. La Porte
/s/ Craig C. Taylor Director March 31, 1999
- ---------------------------
Craig C. Taylor
</TABLE>
Exhibit 10.8.1
First Amendment to Joint Venture Agreement between
the Company and BASF Aktiengescellschaft
FIRST AMENDMENT TO
JOINT VENTURE AGREEMENT
between
LYNX Therapeutics, Inc., 3832 Bay Center Place, Hayward, California,
94545, USA (hereinafter referred to as "LYNX")
and
BASF Aktiengesellschaft, 67056 Ludwigshafen, Federal Republic of Germany
(hereinafter referred to as "BASF")
WHEREAS, LYNX and BASF are parties to that certain Joint Venture
Agreement dated October 23, 1996 (the "Agreement"), pursuant to which
LYNX and BASF agreed to establish and operate, through German
subsidiaries, a Joint Venture Company (the "JVC") in Germany to exploit
certain complementary assets for the purpose of evaluating the
applicability of dynamic gene expression analyses for the toxico-
pharmacology of chemicals, for discovering novel drug targets and drugs
for unmet medical needs, and the development of production strains of
microorganisms for fermentations; and
WHEREAS, LYNX and BASF are interested in amending the terms of the
Agreement to expand the objectives of such Joint Venture Company, and to
provide certain additional funding and technology to the JVC;
NOW, THEREFORE, LYNX and BASF hereby agree that the terms of the
Agreement are amended as follows:
1. Article 2.2 of the Agreement is deleted and replaced in its entirety
with the following:
"2.2 Object
The JVC will apply collaboratively the technologies and knowledge
made available primarily by the Holding Companies for characterizing
the dynamics of gene expression and gene product (protein)
activities starting with, but not limited to:
(a) [.***.]* the [.***.] of the [.***.] approach to [.***.], and
(b) [.***.]* for [.***.] associated with the [.***.], such as but
not limited to [.***.]; and
(c) [.***.].
In [.***.] set forth in subsections (a)-(c) above, the JVC shall
[.***.] from [.***.] to the JVC and its potential customers with
[.***.] and [.***.] for the [.***.] of the [.***.] by the JVC."
2. BASF`s subsidiary BASF Biotechnologies Beteiligungs- und
Verwertungsgesell-schaft mbH shall increase its funding commitment
according to Article 5 of the Agreement (as further described in
Article 3 of the Technology License and Development Agreement dated
January 1, 1997) by the sum of [.***.], to enable the JVC, inter
alia, to purchase certain assets from LYNX as provided in Section 3
of this Amendment and to conduct expanded work based on the
expansion of its objectives as provided in Section 1 above.
3. LYNX hereby agrees to sell and assign to the JVC, and upon payment
of [.***.] by the JVC, certain assets of LYNX described in Appendix
A attached hereto relating to LYNX`s neurological disorders program,
pursuant to an asset purchase agreement to be entered into by LYNX
and the JVC.
4. Article 1.5 of the Agreement is modified to change [.***.] to
[.***.].
5. Article 5.7 of the Agreement is hereby deleted.
IN WITNESS WHEREOF, LYNX and BASF have executed this Amendment as of
October 23, 1998.
LYNX THERAPEUTICS, INC. BASF AKTIENGESELLSCHAFT
\s\ Sam Eletr, Ph.D. \s\ Joachim Scholz \s\ Dr. Werner Kusters
- --------------------- -------------------- -------------------------
- --------------
* Confidential Treatment Request
<PAGE>
Exhibit A
1. Information
1.1 [.***.].
1.2 [.***.].
1.3 [.***.].
1.4 [.***.].
2. Materials
2.1 [.***.].
2.2 Electronic and physical files containing the information described
under points #1.1 through 1.4.
3. License opportunities
[.***.].
- --------------
* Confidential Treatment Request
Exhibit 10.12
Technology License and Development Agreement between the
Company and BASF-LYNX Bioscience AG
TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT
THIS TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT (the "Agreement") is
made and entered into as of January 1, 1997 (the "Effective Date"), by and
between BASF-Lynx Bioscience AG, a corporation established under the laws
of Germany, with its principal place of business at Heidelberg, Germany
("The Joint Venture"), LYNX THERAPEUTICS GMBH, a limited liability company
established under the laws of Germany ("Lynx Germany"), and BASF
BIOTECHNOLOGIE BETEILIGUNGS- UND VERWERTUNGSGESELLSCHAFT MBH, a limited
liability company established under the laws of Germany ("BASF GmbH").
RECITALS
WHEREAS, Lynx Therapeutics, Inc. ("Lynx USA"), the parent company of
Lynx Germany, and BASF AG have agreed to form, through Lynx GmbH and BASF
GmbH, respectively, the Joint Venture as a joint venture to conduct a
research program in the area of epilepsy, toxico-pharmacology, and the
development of production strains of microorganisms for fermentations;
WHEREAS, Lynx USA owns the rights to certain inventions and
technology, and related instruments and methods, including a novel
technique for determining cDNA sequence information rapidly from a sample,
which is potentially useful for identifying genes and drug targets of
interest, and Lynx USA has licensed such inventions and technology to Lynx
Germany and has committed certain materials and resources to support the
use thereof;
WHEREAS, BASF AG owns the rights to certain inventions and
technology, and BASFAG will, upon request of Lynx USA, license such
inventions and technology to BASF GmbH and has committed up to [.***.]* in
funding to support the research program;
WHEREAS, The Joint Venture desires to obtain a license under such
Lynx and BASF inventions and technology and to utilize Lynx instruments
and reagents, and to receive funding from BASF GmbH to conduct such
research; and
WHEREAS, Lynx Germany is willing to grant such licenses to The Joint
Venture and to provide The Joint Venture the use of inventions, know-how,
instruments, reagents, technical support and service as necessary to
conduct the research program, and BASF GmbH is willing to grant such
licenses to The Joint Venture and to contribute funding, in accordance
with the terms and conditions hereinafter specified.
NOW, THEREFORE, Lynx Germany, BASF GmbH and The Joint Venture hereby
agree as follows:
1. DEFINITIONS
1.1 "BASF Licensed Technology" shall mean the TET Technology, the
Incyte Database and the BASF AG toxicology database.
1.2 "Beads" shall mean the combitag beads that have covalently
attached to their surface [.***.] of at least [.***.],* which beads
are useful in the conduct of MPSS analysis.
1.3 "CNS Database" shall mean the neurobiological sequence database
owned or controlled by Lynx USA on the Effective Date and derived
from nervous system tissues.
1.4 "Field" shall mean the treatment or prevention of diseases or
disorders in area of epilepsy, the toxico-pharmacology of chemical
substances in microbial and metazoan organisms, and the development
of production strains of microorganisms for fermentation.
1.5 "Future BASF Technology" shall mean inventions, discoveries and
developments owned or controlled by BASF AG, relating to or derived
from the BASF Licensed Technology.
1.6 "Future Gene Technology" shall mean inventions, discoveries and
developments owned or controlled by Lynx USA, relating to or derived
from the MPSS, MPGS, or MPH techniques or analysis, that are useful
for gathering gene or cDNA sequence information rapidly and/or
analyzing gene expression via sequence information.
1.7 "Incyte Database" means the database with BASF AG may, according
to the Collaborative Agreement between BASF AG and Incyte dated June
27, 1996 (the "Incyte Agreement"), make available to The Joint
Venture [.***.] having to [.***.] therefor.
1.8 "Instrument Improvements" shall mean all modifications and
improvements to the MPSS equipment that are made by or on behalf of
Lynx USA and incorporated in the then current standard model of such
MPSS equipment for production or commercial use during the term of
this Agreement.
1.9 "The Joint Venture Inventions" shall mean any invention,
discovery, development, concept, or idea, whether or not patentable
or copyrightable, that is made by or on behalf of The Joint Venture
(including by any of its employees, agents, contractors or
collaborators) during the term of the Agreement, and including
without limitation processes, methods, software, formulae, data,
techniques, compositions of matter, and devices, and all
improvements thereof and know-how and trade secrets relating
thereto, but excluding The Joint Venture's rights from academic
collaborations contemplated in Section 2.4 below.
1.10 "Lynx Licensed Technology" shall mean the MPSS Patents and the
MPSS Know-How, the Lynx Bioinformatics, the Future Gene Technology,
the CNS Database, and the Phosphoramidate Patents.
1.11 "Lynx Bioinformatics" shall mean the software and other
proprietary means owned or controlled by Lynx USA during the term of
the Agreement that is useful for analyzing MPSS sequence data for
simulating and analyzing dynamic patterns of gene expression and for
genomic analyses.
1.12 "Massively Parallel Genomic Sequencing" or "MPGS" means the
acquisition of [.***.]* sequences from the genome of an organism by
proprietary technologies based on Lynx Licensed Technology.
1.13 "Massively Parallel Hybridization" or "MPH" means the use of
gridded solid phase arrays of cloned cDNAs for the purpose of
analyzing by [.***.] the levels of gene expression in tissue or cell
samples.
1.14 "Massively Parallel Signature Sequencing" or "MPSS" means the
parallel acquisition, of at least [.***.] (a "Signature Sequence")
from each of at least [.***.] templates sampled from a given cell
culture or tissue cDNA library.
1.15 "MPSS Know-How" shall mean the information, data, knowledge,
methods, procedures, processes, and techniques owned or controlled
by Lynx USA that comprise the method of MPSS sequencing or that are
directly related to using the MPSS Instruments in conducting MPSS
analyses. The term "MPSS Know-How" shall not include any
information or trade secrets relating to the manufacture of the
Beads or other proprietary Reagents and which are not necessary to
know in order to practice the MPSS analyses.
1.16 "MPSS Instrument" shall mean the equipment, designed and developed
by Lynx USA, that can conduct MPSS analyses of templates sampled
from a given cell culture or tissue cDNA library, and all Instrument
Improvements to such equipment made or acquired by Lynx USA during
the term of the Agreement.
1.17 "MPSS Patents" shall mean (a) any and all U.S. and corresponding
foreign patent applications, whether now existing or hereafter
filed, that are owned or controlled by Lynx USA and that claim MPSS
Instruments and/or reagents, or the use thereof, or the method of
MPSS, and (b) any divisions, continuations, continuations-in-part,
reissues or substitute applications arising from, and based upon,
any of the foregoing patent applications, and (c) any patent(s)
issuing from any of the foregoing, and including all reexamination,
reissues or extensions of such patents.
1.18 "Phosphoramidate Patents" shall mean the issued patents owned or
Controlled by Lynx USA during the term of the Agreement that claim
[.***.].*
1.19 "Reagents" shall mean the Beads and such other proprietary
reagents, diluents, or materials that are necessary for operating
the MPSS Instruments and conducting the MPSS sequence analyses of
template samples, to the extent that such materials are not
reasonably available for purchase on the open market.
1.20 "Research Program" shall mean the research and drug discovery
program to be conducted by The Joint Venture, that shall
characterize the dynamics of gene expression and gene product
activities, initially limited to the areas of: (a) discovering novel
drug targets for identifying drugs useful in the area of epilepsy;
(b) evaluating the use of "dynamic imaging" approach to predicting
the toxico-pharmacology of known chemical substances; and (c)
generating dynamic gene expression databases from tissues and cells
of interest in the Field; (d) developing production strains of
microorganisms for fermentation.
1.21 "TET-Technology" means a method of [.***.] or [.***.] operating
via [.***.] or [.***.] or [.***.] or [.***.] to the extent BASF AG
may make such technology available to The Joint Venture Without
having to make additional payments therefor.
1.22 "Toxicology Database" means BASF AG's comprehensive collection of
non-proprietary toxicological data as well as the toxicological
expertise of BASF AG's department of toxicology.
2. LICENSES AND RIGHTS
2.1 Lynx MPSS License Grant. Lynx Germany hereby grants to The
Joint Venture, during the term of the Agreement, [.***.], without
the right to assign or to grant sublicenses, under the MPSS Patents
and the MPSS Know-How to use the MPSS Instruments provided by Lynx
Germany hereunder and to practice the method of MPSS with said MPSS
Instruments, all solely in order to conduct the Research Program.
Lynx Germany also grants The Joint Venture, during the term of the
Agreement, [.***.] without the right to assign or to grant
sublicenses, under the Future Gene Technology, solely in order to
conduct the Research Program.
2.2 Lynx Research Licenses. Lynx Germany hereby grants The Joint
Venture, during the term of the Agreement, [.***.]* without the
right to assign or to grant sublicenses, to use the Lynx
Bioinformatics and the CNS Database provided by Lynx Germany
hereunder, solely in order to conduct the Research Program. Lynx
Germany also grant The Joint Venture the right under the
Phosphoramidate Patents to utilize [.***.] containing [.***.] solely
in conducting research work under the Research Program, for example
as necessary to validate drug targets identified under the Research
Program.
2.3 BASF License Grant. BASF GmbH hereby grants to The Joint
Venture, during the term of the Agreement, [.***.], without the
right to assign or to grant sublicenses to use and practice the TET-
Technology and to use and access the Incyte Database and the
Toxicology Database, all solely in order to conduct the Research
Program. BASF GmbH also grants The Joint Venture, during the term
of the Agreement, [.***.], without the right to assign or to grant
sublicenses, under the Future BASF Technology.
2.4 Restriction on Use of Lynx Technology. The Joint Venture
covenants that The Joint Venture shall not utilize the MPSS
Instruments and shall not use or practice the MPSS Technology, the
Future Gene Technology, the Lynx Bioinformatics, or the CNS
Database, except as specifically required to conduct the Research
Program, as established and under the direction of the Advisory
Board. In particular, but without limiting the foregoing, The Joint
Venture agrees that it shall not use the MPSS Instruments or use or
practice the MPSS Technology to provide sequence analysis services
for any third party, including BASF AG and/or BASF GmbH and/or Lynx
USA and/or Lynx Germany, provided, however, that approximately
[.***.] of the research and development efforts of The Joint Venture
under the Research Program may be devoted to projects as part of
academic collaborations in the Field approved by the The Joint
Venture Advisory Board, provided that The Joint Venture retains all
rights resulting from such collaborative work. The Joint Venture
shall not, and shall not engage, permit or encourage any third party
to, reverse engineer or modify the MPSS Instruments or decompile,
translate or otherwise attempt to obtain the source code for any
software included in the MPSS Instruments or the Lynx
Bioinformatics.
2.5 Lynx Rights Retained. Lynx USA shall retain all rights to
use the Lynx Licensed Technology, the Lynx Bioinformatics, the CNS
Database, and to use and practice MPSS and the Phosphoramidate
Patents, for all research or commercial purposes, subject to Section
5.7 of The Joint Venture Agreement, provided that the scope of any
R&D project undertaken by the Joint Venture subject to that section
is set forth in the minutes of the Advisory Board.
2.6 Bioinformatics. As part of The Joint Venture's research and
development efforts under the Research Program, The Joint Venture
shall develop, acquire and/or integrate the bioinformatics
technologies as necessary for the analysis, interpretation and use
of the gene expression information generated by The Joint Venture in
practicing the MPSS method as permitted hereunder.
3. FUNDING
3.1 BASF GmbH Funding. BASF GmbH hereby agrees to provide
research funding (the "Funding Commitment") for The Joint Venture
according to the following schedule:
(a) As promptly as is practical after the Effective Date, BASF GmbH
shall provide The Joint Venture with an initial contribution of
[.***.]* to enable The Joint Venture to initiate the Research
Program.
(b) BASF promises to provide up to [.***.] on a quarterly basis
according to research budgets prepared by the The Joint Venture
Executive Board, subject to review and unanimous approval by the
The Joint Venture Advisory Board. Operating shortfalls resulting
from the budgeting process set forth above shall be added to the
budget for the following quarter. BASF hereby agrees and promises
that such funds shall be contributed within [.***.] of budget
approval by the The Joint Venture Advisory Board.
4. INSTRUMENTS, REAGENTS AND SERVICES
4.1 Lynx loan of MPSS Instruments. As promptly as is practical
after the Effective Date, Lynx Germany shall provide The Joint
Venture with a fully operational MPSS Instrument for use as
permitted in Section 2.1. During the term of the Agreement, if The
Joint Venture demonstrates that it has the capability, need, and
resources to utilize, consistent with the Research Program plans and
goals, additional MPSS Instruments, Lynx Germany shall at such time
use reasonable efforts to arrange to provide The Joint Venture with
one or more additional MPSS Instruments for use under Section 2.1.
Lynx USA shall retain the entire right, title and interest in and to
all MPSS Instruments provided by Lynx Germany hereunder. The Joint
Venture shall use, and shall require all its employees, agents or
contractors to use, all reasonable efforts to keep such MPSS
Instruments in good working order and not to modify or permit
modification of or cause harm or loss to come to such equipment, or
any software associated with such equipment provided by Lynx
Germany.
4.2 Lynx Reagents Supply. During the term of the Agreement, Lynx
Germany shall supply The Joint Venture with its reasonable
requirements of Reagents for use in performing the Research Program
as permitted under Section 2.1. Delivery of the Reagents will be
based on orders made by The Joint Venture in writing, with delivery
times and methods of delivery to be agreed by the parties. In the
event that The Joint Venture in any calendar year desires to order
amounts of Reagents in excess of that amount needed to perform
[.***.] analyses, then with respect to ` such additional amounts of
Reagents that Lynx Germany is able to provide, Lynx Germany shall
charge The Joint Venture for such supply [.***.] equal to [.***.]
for such Reagents, plus reasonable shipping and insurance.
4.3 Lynx Training and Technical Assistance. Lynx Germany shall
provide technical assistance to The Joint Venture as reasonably
requested by The Joint Venture to assist in the transfer of the Lynx
Licensed Technology, to the extent The Joint Venture has rights to
use or practice such Lynx Licensed Technology as provided in Article
2 hereof. On a reasonable schedule after the Effective Date, Lynx
Germany shall also provide such documents and supporting materials
relating to the Lynx Licensed Technology as are necessary in order
for The Joint Venture to utilize such Lynx Licensed Technology as
permitted in Article 2. Lynx Germany, or Lynx USA as appropriate
shall also provide reasonable training for up to [.***.] of The
Joint Venture in the use, operation and maintenance of the MPSS
Instruments and the practice of the MPSS analysis methods. The
Joint Venture shall pay for all travel and living expenses of its
employees related to receiving such training.
4.4 BASF Training and Technical Assistance. BASF GmbH shall
provide technical assistance to The Joint Venture as reasonably
requested by The Joint Venture to assist in the transfer of the BASF
Licensed Technology, to the extent The Joint Venture has rights to
use or practice such BASF Licensed Technology as provided in `
Article 2 hereof.
4.5 Lynx Maintenance of MPSS Instruments. The Joint Venture
shall be responsible for the day-to-day maintenance and upkeep of
all MPSS Instruments as directed by Lynx Germany and provided
hereunder. Lynx Germany shall provide, or shall arrange to be
provided, reasonable service and repair of such MPSS Instruments to
the extent The Joint Venture, using reasonable efforts, is not able
to address any such service or maintenance needs of the MPSS
Instruments.
5. INVENTIONS AND RESULTS
5.1 Disclosure of Inventions. On a regular basis, and in any
event at least [.***.]*, The Joint Venture shall provide to Lynx
Germany and BASF GmbH a written summary of all The Joint Venture
Inventions made during the term of the Agreement. For any such The
Joint Venture Inventions that The Joint Venture believes may be
patentable (the "Patentable Invention"), The Joint Venture shall
include in such report a complete written disclosure for each and
every such Patentable Invention. The Joint Venture also shall, at
Lynx Germany's or BASF GmbH's request, provide Lynx Germany and BASF
GmbH copies of, and/or the right to inspect and copy, all results
and raw data of the Research Program and other activities of The
Joint Venture that may pertain to inventions or patentable
discoveries.
5.2 Recording of Results and Data. The Joint Venture shall
require that all its employees, consultants and collaborators
performing work for The Joint Venture, whether pursuant to the
Research Program or otherwise, shall record all results and raw data
from such work, and all The Joint Venture Inventions, in laboratory
notebooks owned and maintained by The Joint Venture. Such
laboratory notebooks shall be regularly reviewed, witnessed and
dated by appropriate senior scientists at The Joint Venture. The
Joint Venture shall maintain such notebooks in its control at all
times and shall use reasonable efforts to keep such notebooks
confidential and in a secure manner. As used herein, "results and
raw data" means all results, information and data resulting from or
derived from research or development work, and all conclusions based
upon analysis or such results, information and data, including
without limitation all materials such as films, printouts, graphs
and photographs that generate, comprise or analyze such results,
information or data and are typically included in laboratory
notebooks.
5.3 Assignment of The Joint Venture Inventions. The Joint
Venture hereby assigns and conveys to Lynx Germany and BASF GmbH
jointly all right, title and interest in and to all The Joint
Venture Inventions, subject only to The Joint Venture's right to
continue to use and practice the The Joint Venture Inventions,
solely as needed to further conduct the Research Program during the
term of this Agreement. Lynx Germany and BASF GmbH hereby
acknowledge and agree that each possesses [.***.]* in The Joint
Venture Inventions which may not be conveyed, transferred or severed
without the permission of the other, as provided in The Joint
Venture Operating Agreement. The Joint Venture agrees to execute
all documents and instruments and take all other reasonable actions,
at its expense, as are necessary to assign and transfer to Lynx
Germany and BASF GmbH, and to perfect title in Lynx Germany and BASF
GmbH, all such The Joint Venture Inventions. The Joint Venture,
Lynx Germany, and BASF GmbH further agree that as to any Joint
Venture Invention or any invention arising out of any academic
collaboration contemplated by paragraph 2.4, relating to Future Gene
Technology, MPSS, MPH, or MPGS processes, instruments, or reagents,
the Joint Venture and BASF GmbH hereby respectively grant to Lynx
Germany and Lynx USA worldwide [.***.], with full rights to
sublicense, under their respective rights, to make, have made, use,
sell, or otherwise commercialize such inventions, subject to section
5.7 of the Joint Venture Agreement.
5.4 Non-Encumbrance. The Joint Venture hereby covenants and
agrees that The Joint Venture shall not permit any lien,
encumbrance, burden or claim by any Third Party upon The Joint
Venture Inventions, except for any rights therein under the R&D
Agreement and statutory rights of its employees.
6. CONFIDENTIALITY AND PUBLICATION
6.1 Publication. The parties agree that it may be beneficial to
a party to publish or present at academic conferences or symposia,
or similar events, certain of the The Joint Venture Inventions.
However, to preserve commercial value and rights in such The Joint
Venture Inventions, The Joint Venture agrees that, prior to the
submission for publication of any article or abstract or the public
disclosure at a scientific meeting, of any information related to
the The Joint Venture Inventions, The Joint Venture shall notify
Lynx Germany and BASF GmbH and provide Lynx Germany and BASF GmbH a
copy of the proposed manuscript, abstract, speech or other
disclosure, for Lynx Germany's and BASF GmbH's prior review and
approval at least [.***.]* to submission or release. The Joint
Venture, and any of its employees, agents, or collaborators, shall
not make any such publication or disclosure unless Lynx Germany and
BASF GmbH give their prior approval, which approval shall not be
unreasonably withheld. Lynx Germany shall have the right to publish
articles on the The Joint Venture Inventions. As part of any
article or other disclosure, The Joint Venture shall not publish or
disclose any information relating to the BASF Licensed Technology,
Future BASF Technology, TET-Technology, or Toxicology Database,
unless given prior written approval from BASF GmbH, and the Joint
Venture shall not publish or disclose any information relating to
Lynx Licensed Technology, Future Gene Technology, Beads, CNS
Database, Instrument Improvements, Lynx Bioinformatics, MPGS, MPSS,
MPSS Know-How, MPSS Instrument, MPSS Patents, or Reagents, unless
given prior written approval from Lynx Germany.
6.2 Confidentiality. The Joint Venture shall use its best
efforts to keep the Lynx Licensed Technology and BASF Licensed
Technology and all information relating thereto, and, except as
provided in Section 5.1, all The Joint Venture Inventions strictly
confidential and shall only use such information to the extent
reasonably necessary to further the purposes of this Agreement. The
Joint Venture may disclose the Lynx Licensed Technology, the BASF
Licensed Technology and/or the The Joint Venture Inventions only to
those of its employees and collaborators with a need to know such
information in order to perform the Research Program as contemplated
herein. Confidential Disclosure Agreements related to the
disclosure or distribution of confidential information by The Joint
Venture or its employees may be executed only by the Executive
Board.
6.3 Non-Disclosure Agreements. All employees of The Joint
Venture shall be required to enter into non-disclosure agreements
governing the use of Confidential information.
6.4 Survival. Except as otherwise provided in Article 9, the
provisions of this Article 5 shall survive any termination of this
Agreement for a period of [.***.]* such [.***.].
7. WARRANTIES AND REPRESENTATIONS
7.1 BASF Representation. BASF GmbH represents that to the best
of its knowledge it has the unencumbered right to grant the licenses
to The Joint Venture under the BASF Licensed Technology granted
hereunder and that to the best of its knowledge it has the authority
and capacity to enter into this Agreement and to perform its
obligations hereunder.
7.2 Lynx Representation. Lynx Germany represents that to the
best of its knowledge it has the unencumbered right to grant the
licenses to The Joint Venture under the Lynx Licensed Technology
granted hereunder and that to the best of its knowledge it has the
authority and capacity to enter into this Agreement and to perform
its obligations hereunder.
7.3 Joint Representation. Each Party represents and warrants to
the best of its knowledge that the use by The Joint Venture of its
technology as provided for hereunder will not infringe the
intellectual property rights of third parties.
7.4 OTHER THAN THE REPRESENTATION IN SECTIONS 7.1 TO 7.3, LYNX GERMANY
AND BASF GMBH MAKE NO OTHER, AND HEREBY DISCLAIM ALL,
REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, REGARDING
THE LYNX AND/OR BASF LICENSED TECHNOLOGY, INCLUDING WITHOUT
LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, OR NON-INFRINGEMENT, AND ALL SUCH INFORMATION AND MATERIALS
ARE PROVIDED "AS IS."
8. INDEMNITY
8.1 Indemnifications. The Joint Venture shall defend, indemnify
and hold harmless Lynx Germany and BASF GmbH from and against any
and all claims, damages, losses and expenses of any nature
(including reasonable attorney's fees), included, but not limited to
death, personal injury, illness, property damage or products
liability arising from or in connection with any of the following:
(a) the use by The Joint Venture of any method or process related to
MPSS, the MPSS Instruments, the Lynx Licensed Technology or the BASF
Licensed Technology except for negligence or willful conduct by the
Parties or the Parents; or
(b) the breach by The Joint Venture or its employees, agents or
collaborators of any material obligation under this Agreement.
(c) any third party patent infringement actions brought against The
Joint Venture which are not based on Lynx or BASF Licensed
Technology.
9. TERM AND TERMINATION
9.1 Term. This Agreement shall enter in force from and after the
Effective Date hereof and expires on [.***.], unless sooner
terminated in accordance with the provisions of Paragraphs 9.2 or
9.3 below.
9.2 Termination. Lynx Germany may terminate this Agreement upon
written notice of termination to BASF GmbH and The Joint Venture in
the event that:
(a) BASF GmbH has failed to make its initial capital contribution of
[.***.];
(b) BASF GmbH has materially failed to contribute to The Joint Venture
amounts it is required to contribute under its obligation under this
Agreement, and such failure has not been cured [.***.] of receiving
written notice from Lynx Germany or The Joint Venture of such failure;
and BASF GmbH may terminate this Agreement upon written notice
of termination to Lynx Germany and The Joint Venture in the event that
Lynx Germany has failed to achieve by [.***.] the Milestone described
in Exhibit A.
9.3 Termination for Breach. Any party may terminate the
Agreement upon [.***.] written notice in the event the other party
breaches a material term of the `"Agreement and fails to cur*e such
breach within such [.***.] after receiving such notice.
10. MISCELLANEOUS
10.1 Non-Assignment. This Agreement and the rights and benefits
conferred upon a party hereunder, or any part hereof, may not be
assigned or transferred by such party without the express written
consent of the other party, except pursuant to a merger or other
acquisition of such party or all of its relevant business assets.
10.2 Binding. This Agreement shall be binding upon and inure to
the benefit of the permitted successors, representatives and assigns
of the parties hereto.
10.3 Notices. Any payment, notice or other communication required
or permitted to be given by either party hereto shall be deemed to
have been properly given and be given and be effective on the date
of delivery if delivered, in writing, in person, by facsimile
transmission or by first class mail to the respective addresses set
forth below, or to such other address as either party shall
designate by written notice given to the other party:
In the case of BASF-Lynx
Bioscience AG: As communicated to Lynx
Germany and BASF GmbH
from time to time
In the case of Lynx Germany: [.***.]*
with a copy to:
Lynx Therapeutics, Inc.
3832 Bay Center Place
Hayward, CA 94545
USA
Attn: [.***.]
In the case of BASF GmbH: As communicated to
BASF-Lynx Bioscience AG and
Lynx Germany from time to time
10.4 Governing Law. This Agreement shall be construed in
accordance with, and its performance shall be governed by, the laws
of the Federal Republic of Germany.
10.5 Dispute Resolution. In the event that Lynx Germany and BASF
GmbH cannot reach agreement on any matter pursuant to this
Agreement, the matter will be referred to further review,
discussion, and resolution between a senior officer of BASF AG and
Lynx USA (the "Decision-Makers"). The Decision-Makers will
attempt in good faith to resolve the matter in dispute for a period
of [.***.]. If no successful resolution of the dispute has been
mutually agreed to, the dispute will be settled according to the
arbitration procedures of Sections 10.6 and 10.7 of this Agreement.
10.6 Arbitration. Any controversy arising which cannot be
resolved pursuant' to Section 10.5 of this Agreement will be
submitted to arbitration pursuant to the Arbitration Rules of the
Deutsche Institution fur Schiedsgerichstbarkeit e.V., then in
effect, by three arbitrators knowledgeable as to pharmaceutical
industry standards. The place of arbitration shall be Heidelberg,
Germany. The arbitrators will be appointed by mutual agreement of
the Decision-Makers within [.***.]* of the filing of the arbitration
claim. In the event the Decision-Makers fail to mutually agree to
the arbitrators, three qualified arbitrators will be appointed by
the Deutsche Institution fur Schiedsgerichstbarkeit. The
arbitrators will be instructed to consider, in making any
determination, the customary practices in the biotechnology and
pharmaceutical industry to the extent such practices exist. The
language of the arbitration shall be English.
10.7 Arbitration Rules. The arbitrators will be instructed to
issue detailed written findings of fact and law. The arbitrators
will be authorized to provide for interim and final injunctive
relief and the parties acknowledge and agree that such arbitration
will be the sole forum for such interim and final injunctive relief.
The arbitrators will have the right but not the obligation to award
to the prevailing party the cost of resolving any dispute regarding
this Agreement or the formation, breach, enforcement or performance
hereof, including any reasonable fees of attorneys, accountants and
expert witnesses incurred by the prevailing party. Punitive damages
will not be recoverable in any arbitration initiated pursuant to
this Agreement. Judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction thereof.
10.8 Headings. The headings of the several sections of this
Agreement are inserted for convenience and reference only and are
not intended to be a part of or to affect the meaning or
interpretation of this Agreement.
10.9 Amendment. No amendment or modification hereof shall be
valid or binding upon the parties unless made in writing signed by
both parties.
10.10 Integration. This Agreement embodies the entire, complete
and exclusive understanding of the parties hereto and supersedes all
previous communications, representations or understandings, either
oral or written, between the parties hereto relating to the subject
matter hereof.
10.11 Waiver. Any waiver by either party of any breach of this
Agreement shall not constitute a waiver of any subsequent or other
breach.
10.12 Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions
shall not be in any way affected or impaired thereby.
IN WITNESS WHEREOF, Lynx Germany, BASF GmbH, and The Joint Venture
Bioscience AG have executed this Agreement, in triplicate originals but
collectively evidencing only a single contract.
BASF BIOTECHNOLOGIE BETEILIGUNGS-UND
VERWERTUNGSGESELLSCHAFT MBH
By: \s\ Dr. Joerg Buchmuller
Title: Managing Director
LYNX THERAPEUTICS GMBH
By: \s\ Edward C. Albini
Title: Managing Director
BASF-LYNX BIOSCIENCE AG
By: \s\ Alfred Bach, Ph.D.
Title: Chief Executive Officer
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* Confidential Treatment Request
<PAGE>
EXHIBIT A
MILESTONE
The achievement of the Milestone will be demonstrated as follows:
1. The parties will jointly select a cell system or cell culture
suitable for this demonstration experiment.
2. One portion of the cell culture will be "induced" using an agreed
upon inducer, such as a [.***.],* for a specified period, such as
[.***.].
3. Lynx will take [.***.] from the "uninduced" and [.***.] from the
"induced" system or culture, following its internal protocols for
sampling.
4. Lynx will extract the [.***.] contained in each of the [.***.] such
samples, using its internal protocols for [.***.] extraction.
5. The cDNA extracted from each of the [.***.] will be divided into
[.***.], and a separate MPSS Library Analysis will be conducted on
all of the resulting [.***.] samples.
6. If the data generated from all [.***.] of each of the [.***.] are
within the set (induced or uninduced) substantially identical, but
yet between the sets substantially different, then the Milestone has
been achieved.
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* Confidential Treatment Request
Exhibit 10.12.1
First Amendment to Technology License and Development Agreement
between the Company and BASF-LYNX Bioscience AG
FIRST AMENDMENT TO TECHNOLOGY LICENSE AND
DEVELOPMENT AGREEMENT
This First Amendment (the "Amendment") is made and entered into by and
among BASF-LYNX Bioscience AG, a corporation established under the laws
of Germany (the "Joint Venture"), Lynx Therapeutics GmbH, a limited
liability company established under the laws of Germany ("Lynx
Germany"), and BASF Biotechnologies Beteiligungs- und
Verwertungsgesellschaft mbH, a limited liability company established under
the laws of Germany ("BASF GmbH"), in order to amend the terms of that
certain Technology License and Development Agreement entered into by the
Joint-Venture, Lynx Germany and BASF GmbH as of January 1, 1997 (the
"Technology Agreement").
The Joint Venture, Lynx Germany and BASF GmbH hereby agree to amend the
terms of the Technology Agreement as follows:
1. A new Section 4.6 is added to the Technology Agreement, reading
in its entirety as follows:
"4.6 Provision of Interim Services. The parties acknowledge that
[.***.]* Lynx Germany will be able to establish at the Joint Venture
in Heidelberg the capability to perform experiments using Lynx's
[.***.]* in [.***.]*. Since [.***.], Lynx USA has been providing
interim services to the Joint Venture based on the [.***.] to
perform [.***.] experiments on DNA samples relevant to the Research
Program provided by the Joint Venture to Lynx USA, in order to
enable the Joint Venture to conduct its research under the Research
Program, [.***.]. Lynx USA will continue to provide such interim
services until Lynx Germany has provided to the Joint Venture the
capability to do such [.***.] work in Heidelberg. Lynx Germany
commits to provide such capability to the Joint Venture no later
than [.***.]. Lynx Germany further commits that Lynx USA will
provide to the JVC on or before [.***.]. The [.***.] that, [.***.]
at [.***.] has been [.***.]; such [.***.] will [.***.] of [.***.] as
[.***.] in [.***.]. Accordingly, Lynx USA will continue to develop
and improve the [.***.] and update the JVC as progress is made."
2. The first, "Whereas"-Clause is hereby amended to read in its
entirety as follows:
"WHEREAS, Lynx Therapeutics, Inc. ("Lynx USA"), the parent company
of Lynx Germany, and BASF AG have agreed to form, through Lynx
Germany and BASF GmbH, respectively, the Joint Venture as a joint
venture to conduct a research program, inter alia, in the area of
certain neurological diseases, toxico-pharmacology, and the
development of production strains of micro-organisms for
fermentations;"
3. Section 1.4 of the Technology Agreement is hereby amended to read
in its entirety as follows:
"1.4 "Field" shall mean (a) the [.***.]* with the [.***.], such as
[.***.] and other [.***.]; (b) the [.***.]; and (c) the [.***.]."
4. Section 1.6 shall be deleted.
5. Section 1.10 shall be amended to read in its entirety as follows:
"1.10 "Lynx Licensed Technology" shall mean Lynx's proprietary
technologies for solid phase cloning on beads of genomic DNA or cDNA
and their analytical applications, such as library comparisons using
bead-based sorting or signature sequencing on beads, [.***.] on the
[.***.] and as [.***.] by [.***.] but not [.***.] the MPSS Patents
and the MPSS Know-How, the Lynx Bioinformatics, the CNS Database,
the Phosphoramidate Patents, the [.***.] and the [.***.]."
6. Section 1.14 shall be amended to read in its entirety as follows:
"1.14 "Massively Parallel Signature Sequencing" or "MPSS" means
the parallel acquisition of at least [.***.] contiguous bases (a
"Signature Sequence") from each of at least [.***.] templates
sampled from a given cell culture or tissue cDNA library."
7. Section 1.20 of the Technology Agreement is hereby amended to read
in its entirety as follows:
"1.20 "Research Program" shall mean the research and drug
discovery program to be conducted by the Joint Venture, that shall
characterize the dynamics of gene expression and gene product
activities starting with, but not limited to the areas of: (a)
[.***.]* for [.***.] useful in the [.***.] that are [.***.], such as
[.***.] and other [.***.]; (b) [.***.] the use of [.***.] approach
to [.***.]; (c) [.***.] from [.***.]; and (d) [.***.] of [.***.].
The Scope of the Research Program may be expanded by agreement of
the parties."
8. Section 2.1 shall be amended to read in its entirety as follows:
"2.1 Lynx License Grant. Lynx Germany hereby grants to The Joint
Venture, during the term of the Agreement, [.***.], without the
right to assign or to grant sublicenses, under the Lynx Licensed
Technology solely in order to conduct the Research Program [.***.],
to use the MPSS Instruments provided by Lynx Germany hereunder and
to practice the method of MPSS using said MPSS Instruments and the
Reagents."
9. Section 2.4 shall be amended to read in its entirety as follows:
"2.4 Restriction on Use of Lynx Licensed Technology. The Joint
Venture covenants that The Joint Venture shall not utilize the Lynx
Licensed Technology, the MPSS Instruments and any other
instrumentation provided to The Joint Venture by Lynx, except as
specifically required to conduct the Research Program, as
established and under the direction of the Advisory Board. In
particular, but without limiting the foregoing, The Joint Venture
agrees that it shall not use the MPSS Instruments or any such other
Lynx instrumentation, or use or practice the Lynx Licensed
Technology, to provide analysis services for any third party,
including BASF AG and/or BASF GmbH and/or Lynx USA and/or Lynx
Germany, provided, however, that approximately [.***.] of the
research and development efforts of The Joint Venture under the
Research Program may be devoted to projects as part of academic
collaborations in the Field approved by the The Joint Venture
Advisory Board, provided that The Joint Venture retains all rights
resulting from such collaborative work. The Joint Venture shall
not, and shall not engage, permit or encourage any third party to,
reverse engineer or modify the MPSS Instruments or any such other
Lynx instrumentation or decompile, translate or otherwise attempt to
obtain the source code for any software included therein or in the
Lynx Bioinformatics."
10. In the fourth sentence of Section 5.3 the words "Future Gene
Technology" shall be replaced by "Lynx Licensed Technology".
11. Section 9.1 of the Technology Agreement is hereby amended to read
in its entirety as follows:
"9.1 Term. This Agreement shall enter in force from and after the
Effective Date hereof and expires on the date [.***.]* years after
commencement of interim [.***.] services by Lynx USA pursuant to
Section 4.6 [.***.] or, if later, [.***.] after the capability to
perform [.***.] analyses has been established at the Joint Venture
in Germany pursuant to Sections 4.1 and 4.6 of this Agreement (as
amended), unless sooner terminated in accordance with the provisions
of Paragraph 9.2 or 9.3 below."
12. The reference in Section 9.2 of the Technology Agreement [.***.]*
is amended to read, [.***.]. The definition of the Milestone set forth
on Exhibit A to the Technology Agreement shall be replaced by
[.***.] described in Exhibit A to this Amendment. BASF GmbH shall
be deemed to have waived its right to terminate under Section 9.2
for [.***.] if such right is not exercised prior to [.***.].
The provisions of this Amendment shall be effective upon signing of
this Amendment by the parties hereto. Capitalized terms used and not
otherwise defined herein shall have the meaning assigned to them in
the Technology Agreement.
LYNX GERMANY BASF-LYNX BIOSCIENCE AG
\s\ Edward C. Albini \s\ Alfred Bach, Ph.D.
- --------------------- ------------------------
BASF GMBH
\s\ Dr. Joerg Buchmuller
- -------------------------
- --------------
* Confidential Treatment Request
<PAGE>
Exhibit A
[.***.]
Validation Lynx Technologies
Joint proposal [.***.]*
1. [.***.] cells
MPSS
[.***.]
[.***.]
Comparator
[.***.]
Exhibit A
2. [.***.]*
[.***.]
3. [.***.]
[.***.]
[.***.].
- --------------
* Confidential Treatment Request
Exhibit 21.1
Subsidiary of the Company
Lynx GmbH
Exhibit 23.1
Consent of Ernst & Young, LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
on Form S-3 (No. 333-39171) and the Registration Statements on Form S-8
(No. 333-59163, No. 333-59157, No. 333-21997, No. 33-86634, and No. 33-94872)
pertaining to the 1992 Stock Option Plan and to the 1998 Employee Stock
Purchase Plan of Lynx Therapeutics, Inc. of our report dated January 29, 1999,
with respect to the financial statements of Lynx Therapeutics, Inc. included
in its Annual Report (Form 10K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED DECEMBER, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 16,170
<SECURITIES> 7,692
<RECEIVABLES> 5,316
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,856
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<TOTAL-ASSETS> 40,334
<CURRENT-LIABILITIES> 9,022
<BONDS> 0
0
0
<COMMON> 74,329
<OTHER-SE> (50,872)
<TOTAL-LIABILITY-AND-EQUITY> 40,334
<SALES> 0
<TOTAL-REVENUES> 7,005
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<INCOME-PRETAX> (4,196)
<INCOME-TAX> 151
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