-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GSrHx9FDWvAgSVEQ3On223YhEZF9nWarZeG6H75fC9S3V/HT2ceRvXfa+FDUHV1g WRnMEWA9H521WdiAmRIZ1w== 0000913275-99-000003.txt : 19990402 0000913275-99-000003.hdr.sgml : 19990402 ACCESSION NUMBER: 0000913275-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYNX THERAPEUTICS INC CENTRAL INDEX KEY: 0000913275 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 943161073 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22570 FILM NUMBER: 99581474 BUSINESS ADDRESS: STREET 1: 3832 BAY CENTER PL CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: 5106709300 MAIL ADDRESS: STREET 1: 3832 BAY CENTER PLACE CITY: HAYWARD STATE: CA ZIP: 94545 10-K405 1 FORM 10-K405 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. 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:
High Low --------- --------- 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.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31, -------------------------------------------------- 1998 1997 1996 1995 1994 -------- --------- -------- --------- -------- 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 December 31, -------------------------------------------------- 1998 1997 1996 1995 1994 -------- --------- -------- --------- -------- 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
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. 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 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 Consolidated Balance Sheets (In thousands, except share and per share amounts)
December 31, --------------------- 1998 1997 ---------- ---------- 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 ========== ==========
See accompanying notes. Consolidated Statements of Operations (In thousands, except per share amounts)
Years Ended December 31, -------------------------------- 1998 1997 1996 ---------- ---------- ---------- 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 ========== ========== ==========
See accompanying notes. Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1996, 1997 and 1998 (In thousands, except share numbers)
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 ---------------------------------------------------------------------------------------------- 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 ==============================================================================================
See accompanying notes. Consolidated Statements of Cash Flows Net increase (decrease) in cash and cash equivalents (In thousands)
Years Ended December 31, -------------------------------- 1998 1997 1996 ---------- ---------- ---------- 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 $ -- $ --
========== ========== ========== See accompanying notes. 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):
Years Ended December 31, -------------------------------- 1998 1997 1996 ---------- ---------- ---------- North America............ $401 $176 $291 Europe................... 6,542 4,401 5,958 Japan.................... 62 5 3,500 ---------- ---------- ---------- $7,005 $4,582 $9,749 ========== ========== ==========
2. Investments The following is a summary of available-for-sale securities:
Available-for-Sale Securities ------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (In thousands) 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 ========== ========== ========== ==========
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: 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 ==========
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:
Options Outstanding ------------------------------------ Number of Weighted Shares Exercise Average Available Subject Price Exercise for Grant to Options per Share Price ----------- ----------- --------------- -------- 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 =========== ===========
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:
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 - --------------- ------------ ------------ --------- ------------ --------- $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 ============ ============
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:
Years Ended December 31, ----------------------------- 1998 1997 1996 --------- --------- --------- 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)
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):
Years Ended December 31, ----------------------------- 1998 1997 1996 --------- --------- --------- 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 ========= ========= =========
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):
December 31, ------------------- 1998 1997 --------- --------- 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.................. $ -- $ -- ========= =========
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.
Minimum annual rental commitments and sublease income under operating leases are as follows (in thousands): Commit- Sublease Years ending December 31: ments Income - ---------------------------------- --------- --------- 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 ========= =========
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. 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:
Name Age Company Positions - -------------------------------- ---- ------------------------------------- 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
- ----------- (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"):
Summary Compensation Table Long-Term All Other Annual Compensation Compen- Name and Principal Position Year Salary(1) Options(#) sation(2) - ------------------------------- ------- ---------- ------------ ----------- 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 -- $750 Vice President, 1997 155,886 -- 750 Intellectual Property 1996 144,505 -- 750 (1) Includes amounts earned but deferred at the election of the Named Executive Officer pursuant to the Company's 401(k) Plan. (2) Contributions made by the Company to the Company's 401(k) Plan on behalf of such employee. (3) Mr. Albini joined the Company on April 17, 1997.
Except as disclosed above, no compensation characterized as long- term compensation, including restricted stock awards issued at a price below fair market value or long-term incentive plan payouts, was paid by the Company during the year ended December 31, 1998, to any of the Named Executive Officers. Stock Option Grants and Exercises The following table sets forth, for each of the Named Executive Officers in the Summary Compensation Table, certain information regarding options granted during the year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants -------------------------------------------- Potential Realizable % of Total Value at Assumed Options Annual Rates of Number of Granted Exercise Stock Price Securities to or Base Appreciation for Underlying Employees Price per Expir- Option Term (3) Options in Fiscal Share ation ----------------------- Name Granted(1) Year(2) ($/sh) Date(1) 5%($) 10%($) - ------------------------ ------------ ----------- --------- --------- ----------- ----------- Edward C. Albini 50,000 12.59% $15.00 02/26/08 471,671 1,195,307
- ------------- (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
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 - ------------------------ --------- ------------ ----------- ------------- ----------- ------------- 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 (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.
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.
Common Stock(1) Name and Address --------------------- of Beneficial Owners Number Percent(2) - ------------------------------------------- ---------- ---------- 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) (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.
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 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.
Signature Title Date - --------------------------- ------------------------------ --------------- /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
EX-10.8.1 2 FIRST AMENDMENT TO JOINT VENTURE AGREEMENT DATED AS OF OCTOBER 23, 1998, BETWEEN THE COMPANY AND BASF AKTIENGESELLSCHAFT 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 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 EX-10.12 3 TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT BETWEEN THE COMPANY AND BASF-LYNX BIOSCIENCE AG 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 - -------------- * Confidential Treatment Request 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. - -------------- * Confidential Treatment Request EX-10.12.1 4 FIRST AMENDMENT TO TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT BETWEEN THE COMPANY AND BASF-LYNX BIOSCIENCE AG 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 Exhibit A [.***.] Validation Lynx Technologies Joint proposal [.***.]* 1. [.***.] cells MPSS [.***.] [.***.] Comparator [.***.] Exhibit A 2. [.***.]* [.***.] 3. [.***.] [.***.] [.***.]. - -------------- * Confidential Treatment Request EX-21.1 5 SUBSIDIARY OF THE COMPANY Exhibit 21.1 Subsidiary of the Company Lynx GmbH EX-23.1 6 CONSENT OF ERNST & YOUNG, LLP 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 EX-27.0 7 ARTICLE 5 FIN. DATA SCHEDULE FOR 10-K
5 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. 1000 DEC-31-1998 JAN-01-1998 DEC-31-1998 12-MOS 16,170 7,692 5,316 0 0 29,856 13,167 3,530 40,334 9,022 0 0 0 74,329 (50,872) 40,334 0 7,005 0 0 15,307 0 0 (4,196) 151 (7,212) 0 0 0 (4,347) ($0.45) ($0.45)
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