-----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, A+eK6aOH+/lVOIzAAlCV7XVJdOJX+ycwDdTUiosY9N1DVAm7wg4sNLYYeiiRObuO 3D4/g5OT926NczJKdYMieA== 0000950005-97-000339.txt : 19970415 0000950005-97-000339.hdr.sgml : 19970415 ACCESSION NUMBER: 0000950005-97-000339 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYNX THERAPEUTICS INC CENTRAL INDEX KEY: 0000913275 STANDARD INDUSTRIAL CLASSIFICATION: 2833 IRS NUMBER: 943161073 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-22570 FILM NUMBER: 97564388 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: 74545 10-K405 1 FORM 10-K405 ================================================================================ 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, 1996 ------------------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-22570 LYNX THERAPEUTICS, INC. (Exact name of Registrant as specified in its charter) Delaware 94-3161073 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3832 Bay Center Place, Hayward, CA 94545 (Address of principal executive offices, including zip code) (510) 670-9300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Common Stock, $.001 Par Value Section 12(g) of the Act: Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x --- The number of shares of Common Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock outstanding as of December 31, 1996, was 3,152,148, 332,288, 123,299 and 40,000, respectively. The Series B, Series C and Series D Preferred Stock are convertible into Common Stock on a ten-for-one basis. Information regarding the aggregate market value of the Registrant's voting stock is not included because there is currently no established public trading market for the Company's voting stock. PART I ITEM 1. BUSINESS Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the section entitled "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Lynx Therapeutics, Inc. ("Lynx" or the "Company") was formed in late 1992 to discover and target inappropriate gene expression in disease. The Company's early efforts relied on academic collaborations for the discovery and understanding of altered or inappropriate gene function and on its own expertise in synthetic DNA ("oligodeoxynucleotide" or "ODN") chemistry for the development of compounds aimed at modulating undesirable gene expression. These early collaborations resulted in a number of compounds. One compound for the prevention of restenosis following balloon angioplasty is in Phase II clinical trials in Europe and is the object of development and commercialization agreements with two pharmaceutical companies. The other compounds, aimed at certain leukemias and cancers, are currently the objects of in-vivo preclinical studies. As successful as these programs have been, their progress has been generally constrained by the inherent difficulties of elucidating gene functions with current technologies. As a result, the Company has undertaken to acquire and develop novel gene identification technologies that promise to accelerate the discovery and validation of important new targets. In addition, the Company has recently initiated an internal biology-based drug discovery program designed around in vitro and in vivo models of acute biological stress or injury. This program is currently focused on models relevant to diseases resulting from brain and spinal cord injuries. Its aim is to better define and characterize gene function and inappropriate gene expression in the diseases of interest. LYNX TECHNOLOGIES Target Discovery Technologies Massively Parallel Signature Sequencing ("MPSS") In 1994 the Company established a group to focus on the development of new and proprietary DNA sequencing technologies that would be capable of accelerating the discovery and validation of targets for drug discovery. Foremost among these are the Massively Parallel Signature Sequencing ("MPSS") and the Massively Parallel Genomic Sequencing ("MPGS") technologies. The first is designed to enable researchers to identify a majority of all genes expressed by a cell (or tissue) from the simultaneous sequencing of up to a million molecules representing that cell's (or tissue's) full gene expression. The second is designed to enable the simultaneous sequencing of up to a million genomic fragments in order to arrive rapidly at genomic sequences. The Company is currently refining various aspects of the biochemistries and instrumentation needed to implement these technologies. Barring unforeseen obstacles, the Company expects to deploy MPSS in its internal research programs as well as in the programs of its customers and research partners during 1997, and MPGS for its own programs shortly thereafter. 2. Biology-based Target Discovery Programs In 1995 the Company established a target discovery and early development program designed to capitalize eventually on the power of MPSS, but which could develop nevertheless with expertise and intermediate technologies currently resident within Lynx. The initial projects are centered on the medically important field of neurovascular diseases, in areas for which good in vitro and in vivo models exist, and that are well suited to eventual analyses with the Company's gene sequencing and target discovery MPSS technologies. Various forms of sub-lethal stress or challenge that will not cause cellular or tissue injury are known to lead to states wherein certain cells become protected from subsequent injury. It is as if the cells have protective reserves which are quiescent under normal resting conditions, but which become activated upon sub-lethal challenges. Examples include ischemic conditioning of myocardial muscle cells, liver cells, neurons, and depolarization-induced conditioning of neurons. Therefore, analyzing the genes induced by such challenges could reveal endogenous protective mechanisms which could then serve as targets for drug development. Animal models of hypoxic ischemic nervous system injuries (stroke, global ischemias) reproduce similar human conditions reasonably well. Experiments in these models can be planned and timed conveniently. Stroke, for example, can be modeled by blocking flow in a specific cerebral artery. Tissues can then be collected from various brain regions, and at desired time points following the original insult. Thus, progression of post-ischemic events can be monitored in affected and unaffected hemispheres to gain insight into the molecular pathologies of the modeled disease. Similar models exist which reproduce certain psychiatric disorders such as depression. Lynx is in the process of studying such models of neurological and psychiatric diseases using differential molecular analysis techniques. These models include, but are not limited to, those of hypoxic ischemic brain injury, epilepsy, central nervous system trauma, depression, and age-related memory deficits. By deciphering the mechanisms involved, Lynx expects to identify potential targets for drug developments. Oligodeoxynucleotide Chemistries Oligodeoxynucleotides or ODNs are short, synthetic DNA or DNA analog fragments. Interest in their use stems from their ability, when synthesized with the appropriate sequence, to bind to target mRNA molecules (the antisense mode), or, in special cases, to double stranded DNA (the antigene mode), and thereby block or interfere with gene expression. ODN analogs are usually preferred over "natural" ODNs as the latter are readily degraded by cellular enzymes. Lynx has expertise with two types of ODN analogs, phosphorothioates, a class of compounds licensed from the United States National Institute of Health, and phosphoramidates, a proprietary class of compounds developed by the Company. ODNs can be used both as therapeutic compounds or as tools in model experiments to block expression of a given gene in order to validate a hypothesized function. Lynx expects its ODN expertise and proprietary technologies to play a significant role in the discovery of gene function and in the early and specific validation of potential drug targets. CLINICAL AND PRE-CLINICAL PROGRAMS Oligodeoxynucleotide Therapeutic Programs Lynx's ODN drug clinical development program is currently focused on evaluating in humans the efficacy observed earlier in porcine models, of a proprietary phosphorothioate ODN antisense compound, LR-3280, in coronary artery restenosis following balloon angioplasty. 3. The target of LR-3280 is the c-myc oncogene whose dynamic expression suggests that it plays a causal role in the pathologic process of arterial restenosis. Lynx's restenosis program is an early example of intervening in a specific disease process by targeting inappropriate gene expression. Lynx has completed a Phase I safety study of LR-3280 in humans and has commenced a Phase II efficacy study in Europe. The Company has also completed two corporate development and marketing partnerships to fully support clinical development of this compound in North America, Europe, Japan and certain Asian countries. The Company and its collaborators are now conducting in vitro and in vivo pre-clinical studies of a number of phosphoramidate drug candidates targeting proliferative diseases and viruses. The potential utility of phosphoramidate ODNs as direct antigene drugs is especially promising since the number of copies of a target gene in a cell is usually two, not hundreds or thousands as with many target mRNA molecules and viruses. Thus, the effective intracellular concentration required of an "antigene" ODN may be many times lower than that of an "antisense" ODN drug. Antigene ODNs also have interesting implications for treating viral diseases that involve the viral genome integrating itself into the host genome once or a few times--as does HIV. Process Development and Manufacturing The development of ODN-based drugs requires the ability to produce amounts of synthetic DNA far larger than those which can be obtained from research-oriented DNA synthesizers. Few other sources can match the quantity and quality of phosphorothioate compounds that Lynx's process chemistry and synthetic technology have made available for in vitro, in vivo, and now human, testing. This manufacturing technology traces its origins to the beginning of Lynx as a division of Applied Biosystems Inc., ("ABI"), now a division of Perkin Elmer Corporation. Lynx retains royalty-free licenses to ABI's DNA synthesis technologies and holds exclusive positions in the therapeutics field for some of them. The development of phosphoramidate analogs has necessitated extensive process development research to enable their manufacture as their synthesis requires different chemistries than those developed previously for DNA and other analogs. Progress to date has resulted in making the phosphoramidates a practical alternative in addition to being a more potent and versatile one. Business Risks Technological Uncertainty; Government Regulation All of Lynx's products are in a research and development phase; no significant revenues have been generated from services or product sales. There is no assurance that Lynx's technologies will be successfully developed or, if they are, that they can be successfully marketed. Certain Lynx products depend on the continuance of outside collaborations and/or the development of in-house expertise to complement the efforts of such collaborators. There can be no assurance that Lynx will successfully maintain these collaborations or that it will be able to develop such in-house expertise. Moreover, Lynx's products in research or development may prove to have undesirable and unintended side effects or other characteristics that may prevent or limit their commercial use. Pharmaceutical or biotechnology based products, if any, resulting from Lynx's research and development programs are not expected to be commercially available for a number of years. The FDA and comparable agencies in foreign countries impose substantial pre-market approval requirements upon the introduction of therapeutic pharmaceutical products through lengthy and detailed preclinical and clinical testing procedures and other costly and time-consuming procedures. Satisfaction of these requirements, which includes demonstrating to the satisfaction of the FDA that the product is both safe and effective, typically takes several years or more, depending on the type, complexity and novelty of the product. There can be no assurance that government approval will be obtained for any of Lynx's products. Even if obtained, regulatory approval of a product may not be granted on a timely basis, may impose limitations on the indicated uses for which the product may be marketed or may impose costly compliance procedures, all of 4. which could diminish any competitive advantage that Lynx may obtain. Further, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections and discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product manufacturer, including withdrawal of the product from the market. Also, additional government regulation, legislation or administrative action may be established which could also prevent or delay regulatory approval of Lynx's products. Loss History; Uncertainty of Future Profitability; Need for Additional Funds Lynx had an accumulated deficit of approximately $31.5 million through December 31, 1996 and expects to incur substantial operating losses for at least the next several years. There can be no assurance that Lynx will ever be able to achieve or sustain profitability. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Lynx's operations to date have consumed substantial amounts of cash. Negative cash flow from operations is expected to continue and to increase over the foreseeable future. Lynx anticipates that its existing capital resources will enable Lynx to maintain its current and planned operations through 1997. Lynx intends to seek additional funding through future equity or debt offerings in the public or private markets or through collaborative arrangements. Lynx's ability to obtain additional financing will depend on the progress in its research and development efforts, its financial condition and business prospects, and conditions prevailing in the relevant capital markets at the time financing is sought. 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. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Failure to obtain such additional funds would have a material adverse effect on the Company. Competition Lynx is subject to competition from many directions including complementary DNA ("cDNA") cloning and sequencing technologies, ODN chemistry and drug development, and the discovery and development of pharmaceutical and biotechnology drugs. Competition in the latter arena includes all of the world's pharmaceutical and biotechnology companies that have research programs pursuing the same general targets as Lynx, including cardiovascular diseases, cancers and leukemias and neurovascular diseases. There are several companies that are now actively engaged in technology developments and discovery programs pertaining to genomic elucidation and gene function determination. Key to these efforts are cDNA cloning and DNA sequencing techniques. However, there can be no assurance that combinations of novel cloning and sequencing techniques will not be discovered or developed elsewhere. See "Lynx Technologies." Patents and Proprietary Rights Lynx's success will depend in part on its ability to obtain patent protection for its products both in the U.S. and other countries. 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 compounds. Some of the patent applications owned by Lynx have already issued, but 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 technology. In addition, no assurance can be given that any patents issued to or licensed by Lynx will not be challenged, invalidated, infringed or circumvented, or that the rights granted thereunder will provide competitive advantages to Lynx. The commercial success of Lynx will also depend in part on Lynx not infringing patents issued to competitors and on others not breaching the technology licenses upon which Lynx's products might be based. There can be no assurance that Lynx will be able to obtain a license to any third party technology that it may require to conduct its business or that, if obtainable, such technology can be licensed at a reasonable cost. Failure 5. by Lynx to obtain a license to any technology that it may require to commercialize its technologies or products may have a material adverse effect on Lynx. Litigation, which could result in substantial costs to Lynx, may also be necessary to enforce any patents issued to Lynx or to determine the scope and validity of other parties' proprietary rights. If the outcome of any such litigation is adverse to Lynx, Lynx's business could be adversely affected. Lynx may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office, which could result in substantial cost to Lynx to determine the priority of inventions. Furthermore, Lynx may have to participate at substantial cost in International Trade Commission proceedings to abate the importation of products which would compete unfairly with products of Lynx. Lynx also relies on trade secrets and proprietary expertise, 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. Need to Establish Collaborative Relationships; Dependence on Partners Lynx's business strategy includes entering into strategic alliances or licensing arrangements with corporate partners, primarily pharmaceutical and biotechnology companies, relating to the development and commercialization of certain of its potential technologies, databases and products. There can be no assurance that Lynx will be able to negotiate attractive collaborative arrangements or that such collaborations will be available to Lynx on acceptable terms so that any such relationships, once established, will be scientifically or commercially successful. In addition, there can be no assurance that the Company will be able to maintain its existing collaborations, or that the Company's partners will perform under such collaborations. Attraction and Retention of Key Employees and Consultants Lynx is highly dependent on the principal members of its management and scientific staff, the loss of whose services could have a material adverse effect on Lynx. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future will also be critical to Lynx's success. Lynx believes it will be successful in attracting and retaining skilled and experienced scientific personnel, although 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. See "Employees." Manufacturing Capability The manufacture of Lynx's products will be a time consuming and complex process and will be subject to good manufacturing practice ("GMP") prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There can be no assurance that Lynx will be able to manufacture products in a timely fashion, at acceptable quality and cost and in sufficient quantities. Absence of Sales and Marketing Experience; Product Liability Exposure and Insurance; Hazardous Materials Lynx has no experience in the sales, marketing or distribution of pharmaceutical products and does not expect to establish a direct sales capability for at least several years. To market any of its products directly, Lynx must develop a substantial sales and marketing force with technical expertise and with supporting distribution capability. There can be no assurance that Lynx will desire to or be able to build such a sales force or that its direct sales and marketing efforts will be successful. The use of any of Lynx's products in clinical trials and the sale of any products may expose Lynx to liability claims resulting from the use of such products. These claims might be made directly by consumers, 6. health care providers, pharmaceutical companies or others selling such products. Lynx intends to obtain product liability insurance coverage. No assurance can be given that Lynx will be able to obtain such insurance or, if obtainable, that such insurance can be acquired at reasonable cost or in sufficient amounts to protect Lynx against losses that could have a material adverse effect on Lynx. Lynx's research and development may involve the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. In the event of such an accident, Lynx could be held liable for any damages that result, and any liability could exceed the resources of Lynx. Non-Corporate Collaborations/Sponsored Research Lynx's R&D strategy has been to leverage its know-how with the expertise of extramural experts active in a variety of disease areas. When appropriate, the Company has provided financial support for its collaborators' work and, in most cases, has secured the full commercial rights for any resulting drugs and targets. The resulting research has thus drawn on resources and skills far greater than the Company could have assembled alone in its short history and with its limited finances. This strategy has allowed the Company to defer investing in expensive skills and technologies until it could ascertain their relevance to specific product developments. Lynx has entered into a number of collaborations aimed at enhancing and extending its research and development activities. The following describes the Company's current academic collaborations: o A Sponsored Research Agreement with the Department of Neurosciences of the Johns Hopkins University Medical Center is directed at the molecular characterization of genes induced in the brain by neural activation. o A Sponsored Research Agreement with Thomas Jefferson University is directed at in vivo mouse experiments in CML and acute leukemias utilizing the Company's phosphoramidate ODNs. Basic research is also aimed at identifying mRNA targets that are products of nuclear proto-oncogenes and oncogenes, and at characterizing receptor-mediated mechanisms associated with signal transduction pathways in cancer. o A Sponsored Research Agreement with the Thomas Jefferson University is directed at understanding the role of the IGF-1 receptor in protecting cancer cells from dying. Phosphoramidate ODN anti-mRNA compounds targeting the receptor are being optimized in vitro and in vivo. o A Sponsored Research Agreement with the Interventional Cardiology Group at the Thomas Jefferson University Medical Center is focused on in vivo experiments using pigs to continue the exploration of the mechanism of action of LR-3280, and its possible applicability to prevention of restenosis in vein grafts and related clinical indications. o A Sponsored Research Agreement with the Polish Academy of Sciences is aimed at developing chiral phosphorothioate synthesis technology. o A Sponsored Research Agreement with the Hungarian Academy of Sciences is aimed at the development of an informatics system compatible with MPSS analyses as well as the detailed analysis of novel genes identified at Lynx. o A Sponsored Research Agreement with the Applied Biosystems Division of Perkin Elmer Corporation is aimed at the application of new nucleotide sequencing techniques to novel genes identified at Lynx. o A Sponsored Research Agreement with The Molecular Sciences Institute is aimed at conducting feasibility research on Massively Parallel Genomic Sequencing ("MPGS"). 7. Corporate Collaborations o In October 1996, Lynx entered into two agreements with BASF AG aimed at exploiting Lynx's proprietary MPSS technology. The first agreement commits the two companies to form a new biotechnology Joint Venture ("JV") called BASF-LYNX Bioscience AG in Heidelberg, Germany, which will be governed by a detailed operating agreement developed jointly between the Company and BASF. Initial ownership of the JV will be split 51%-49% between BASF and Lynx respectively. Under the sponsorship of BASF and Lynx the JV will seek to identify novel drug targets in certain central nervous system diseases; it will attempt to determine whether the safety of chemicals can be correlated with, and anticipated by, their effects on gene expression; and, finally, it will seek to optimize microorganisms used in the fermentation production of chemicals such as vitamins or amino acids. BASF will provide research funding of up to 50 million DM (approximately $33 million at current exchange rates) over the next 5 years, as well as access to certain of its technologies, and Lynx will provide access to its MPSS technology for use in the JV's research programs. The second agreement is a service agreement through which BASF may exploit the expected power of Lynx's MPSS technology for its own internal and proprietary research, independent of the JV's objectives. For access to this service, which commits Lynx to provide BASF with a certain number of MPSS analyses per year, BASF agreed to pay Lynx an access fee of $5.5 million on execution of the agreement, an additional fee of $5.5 million on the achievement of a certain milestone, and a subscription fee of $8 million for the first two years of the subscription agreement. o In September 1996, Lynx entered into a collaboration agreement with Schwarz Pharma AG to develop and market Lynx's LR 3280 drug candidate for the European and North American markets. The agreement calls for Schwarz Pharma to pay Lynx $4.0 million and $16.0 million in sign-up and milestone fees respectively, and for Schwarz Pharma to bear the costs of development, regulatory approval and sales in the specified territories. Schwarz Pharma will also purchase the drug from Lynx, which retains all manufacturing rights. o In July 1996, Lynx entered into a collaboration agreement with Tanabe Seiyaku Co., Ltd. to develop and market Lynx's LR 3280 drug candidate for the Japanese and certain other Asian markets. The agreement calls for Tanabe to pay Lynx $3.5 million and $8.0 million in sign-up and milestone fees respectively, and for Tanabe to bear the costs of development, regulatory approval and sales in specified territories. Tanabe will also purchase the drug from Lynx, which retains all manufacturing rights. o In October 1995, Lynx entered into an agreement with Hoechst AG and Hoechst Marion Roussel (collectively referred to as "Hoechst") which provides Hoechst access to Lynx's MPSS technology. Under the terms of the agreement, Lynx received funds to accelerate the development of its MPSS technology plus an equity investment. In return, Lynx will clone and sequence cDNA libraries from samples of interest to Hoechst. The agreement also stipulates that not more than two additional companies may similarly access the MPSS technology for a specified period. The combined equity, R&D support payments, and subscription fees could reach $35 million by the end of 1998, depending upon the achievement of certain milestones and the quantity of samples submitted for analyses. Research and Development Expenditures Lynx has devoted its efforts primarily to research and development. Research and development expenses were $12.3 million for the year ended December 31, 1996, $11.0 million for the year ended December 31, 1995 and $7.7 million for the year ended December 31, 1994. 8. 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 La Jolla, California. Until his retirement in 1996, Dr. Brenner was Honorary Professor of Genetic Medicine, University of Cambridge School of Clinical Medicine, Cambridge, England. Dr. Brenner is known for his work on the genetic code and information transfer from genes to proteins, and for his pioneering research on the genetics and development of the nematode. Dr. Brenner is a Fellow of the Royal Society (1955) and a Foreign Associate of the U.S. National Academy of Sciences (1977) and has received numerous awards of recognition, including the Albert Lasker Medical Research Award (1991), the Genetics Society of America Medal (1987), and the Kyoto Prize (1990). Dennis Choi, M.D., Ph.D. Chairman of the Department of Neurology and Director of the Center for the Study of Nervous System Injury at Washington University School of Medicine, St. Louis, Missouri. Dr. Choi is an internationally recognized leader in the area of cellular and molecular neuroscience with a specific focus on understanding the mechanisms of brain and nervous system injury. Robert L. Letsinger, Ph.D. holds joint appointments in the Departments of Chemistry and Molecular Biology and is also Professor of Chemistry at the Northwestern University in Evanston, Illinois. Dr. Letsinger is known for his pioneering work in solid phase synthesis of DNA and the phosphite method for assembly of oligonucleotides. Dr. Letsinger's achievements in these areas laid much of the conceptual groundwork for current automated technologies to produce synthetic DNA. Laszlo Patthy, Ph.D., D.Sc. Director of the Institute of Enzymology, Hungarian Academy of Sciences, Budapest, Hungary. Dr. Patthy, a leading structural and evolutionary biologist, has made seminal discoveries in the area of modular protein evolution. Dr. Patthy has developed a sophisticated protein sequence informatics technology that is making unique contributions to the structural and functional aspects of proteins and their genes. Peter H. Seeburg, Ph.D., D.Sc. Professor, University of Heidelberg, Germany. Dr. Seeburg is an internationally recognized pioneer in molecular biology who developed several essential molecular biological techniques and was the sixth most cited scientific author of the 1980's. He was also a principal scientist in the early phase of Genentech, Inc. In recent years, Dr. Seeburg has made seminal discoveries in molecular neuroscience. In 1996, he assumed the directorship of the Max Planck Institute of Heidelberg. Wojciech J. Stec, Ph.D. Professor and Head of the Department of Bioorganic Chemistry, Center of Molecular and Macromolecular Studies, Polish Academy of Sciences, in Lodz, Poland. Professor Stec is known for his contributions to organophosphorus chemistry and seminal work on stereochemistry including phosphorothioate analogs of DNA. Prof. Stec was recognized by a Fogarty Scholar-in-Residence award (1992-1993) at the National Institutes of Health in Bethesda, Maryland. Paul F. Worley, M.D. Associate Professor, Department of Neuroscience and Neurology at Johns Hopkins University Medical School. Dr. Worley, a neurologist and molecular biologist, is a pioneer in applying differential cloning techniques to understand the molecular basis of neuronal plasticity. Employees As of December 31, 1996, Lynx employed 63 full-time employees, of which 51 were engaged in research and development and manufacturing activities and 12 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. 9. ITEM 2. PROPERTIES Lynx's corporate headquarters and principal research and development facilities are located in Hayward, California, in a building totaling approximately 43,000 square feet. The building is leased through July 2003, and the Company has options to renew the lease for two additional periods of five years each. Lynx believes it is positioned to obtain the space needed to accommodate its anticipated growth on commercially reasonable terms. 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 On December 22, 1995, the Company commenced the solicitation of proxies and written consents pursuant to Regulation 14 under the Securities Exchange Act of 1934. The stockholders of the Company voted by written consent on the following proposal: to approve an amendment to the Company's Restated Certificate of Incorporation to effect a reverse stock split of the Company's Common Stock and Preferred Stock, so that every ten shares of Common Stock would be converted into one share of Common Stock, and every ten shares of Preferred Stock would be converted into one share of the appropriate series of Preferred Stock. The foregoing proposal was approved in January 1996 by the Company's stockholders. On October 7, 1996, the Company commenced the solicitation of proxies and written consents pursuant to Regulation 14 under the Securities Exchange Act of 1934. Only certain holders of record of Common Stock, Series B, Series C and Series D Preferred Stock of the Company voted by written consent on the following proposal: to approve an amendment to the Company's Amended and Restated Certificate of Incorporation solely to decrease the authorized number of shares of the Company's Common Stock from 120,000,000 shares to 20,000,000 shares and the authorized number of the Company's Preferred Stock from 25,000,000 shares to 2,000,000 shares. The decrease in the number of authorized shares had no effect on the rights of existing security holders. The foregoing proposal was approved in December 1996 by the Company's stockholders. 10. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Although the Company's Common Stock has been registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company has not listed its Common Stock on any exchange or on the Nasdaq National Market. There is currently no established public trading market for the Company's voting stock. The Company also has outstanding Series B, Series C and Series D Preferred Stock, the shares of which are convertible into Common Stock on a ten-for-one basis (i.e., ten shares of Common Stock for each share of Preferred Stock). The Company's Series B, Series C and Series D Preferred Stock has not been registered pursuant to the Exchange Act and has not been listed on any exchange or on the Nasdaq National Market. There is currently no established trading market for the Company's Preferred Stock. As of February 28, 1997, there were 3,005 stockholders of record of the Company's Common Stock, 26 stockholders of record of the Company's Series B Preferred Stock, 28 stockholders of record of the Company's Series C Preferred Stock and 1 stockholder of record of the Company's Series D Preferred Stock. 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. 11. ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended June 30, ------------------------- Six-Month Predecessor Year Ended December 31, Period Ended Division(1) ---------------------------------- December 31, ----------- 1996 1995 1994 1993(2) 1993 1992 ---- ---- ---- ------ ---- ---- Consolidated Statements of Operations (in thousands, except net loss per share data) Revenues $ 9,749 $ 680 $ 4,699 $ 183 $ 1,238 $ 998 Operating costs and expenses: Costs of product sales and other revenues 291 265 742 110 2 644 Research and development 12,254 11,036 7,715 3,321 6,194 2,004 Selling, general and administrative 3,170 1,591 1,768 650 1,102 470 -------- -------- -------- -------- -------- -------- Total operating costs and expenses 15,715 12,892 10,225 4,081 7,298 3,118 -------- -------- -------- -------- -------- -------- Loss from operations (5,966) (12,212) (5,526) (3,898) (6,060) (2,120) Interest income 585 744 506 75 243 -- Provision for income taxes 10 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net loss $ (5,391) $(11,468) $ (5,020) $ (3,823) $ (5,817) $ 2,120) ======== ======== ======== ======== ======== ======== Net loss per share (3) $ (2.19) $ (5.00) $ (4.83) $ (5.60) $ (8.23) ======== ======== ======== ======== ======== Shares used in per share computation (3) 2,467 2,294 1,039 683 707
June 30, ---------------------- Predecessor December 31, Division(1) ------------------------------------------ ---------------------- 1996 1995 1994 1993(2) 1993 1992 --------------------------------------------------------------------- Consolidated Balance Sheets (in thousands) Cash, cash equivalents and short-term investments $14,082 $13,779 $12,246 $2,383 $7,014 $ 5 Working capital 12,993 12,730 11,702 891 6,408 133 Total assets 18,412 17,685 15,142 4,857 7,396 452 Stockholders' equity 10,732 13,742 14,044 2,930 6,744 342 (1) Consolidated Balance Sheet data as of June 30, 1992, and Consolidated Statements of Operations data for the period ended June 30, 1992, are for the Company's predecessor, the Therapeutics Division of Applied Biosystems, Inc., (ABI is now a wholly-owned subsidiary of Perkin Elmer Corporation). Share and per share data for 1992 are not presented for the predecessor because the predecessor was a division and such information is not meaningful. 12. (2) In July 1993, the Company changed its fiscal year end from a year ending June 30 to a calendar year. (3) In February 1996, the Company filed an amendment to its Certificate of Incorporation effecting a one-for-ten reverse stock split of all outstanding Common and Preferred Stock, warrants and options to purchase Common and Preferred Stock. The reverse stock split was approved by the majority of its stockholders in January 1996. The net loss per share computations and number of shares have been adjusted retroactively to reflect the stock split for all periods presented.
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 Since its inception in July 1989 (as a division of Applied Biosystems, Inc. "ABI"), Lynx Therapeutics, Inc. ("Lynx") has devoted its efforts toward research, drug discovery and development programs. Lynx has been unprofitable since its inception and expects to incur substantial losses for the next several years, due primarily to the expansion of its research and development programs, including development of its Massively Parallel Signature Sequencing ("MPSS") and Massively Parallel Genomic Sequencing ("MPGS") technologies, phosphoramidate chemistry and preclinical studies and clinical trials. As of December 31, 1996, Lynx's accumulated deficit was approximately $31.5 million (the accumulated deficit including Lynx's operations as a division of ABI as of December 31, 1996 was approximately $35.7 million). Lynx may generate revenues based on its agreements with collaborative partners as a result of achievement of the milestones defined in the agreements. However, there is no guarantee that the milestones will be achieved or that the technologies will be proven successful. Lynx does not anticipate that it will generate significant revenues and profits, if any, from the commercial sale of its products and services for several years if not more. There can be no assurance that Lynx will ever successfully develop and market any of its proposed products or that it will ever be able to achieve or sustain profitability. Lynx's business is subject to significant risks, including the risks inherent in its research and development efforts, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process, and possible competition from other products. The MPSS program is dependent upon the successful integration of independent technologies, each of which has its own development risks. In addition, Lynx's MPSS technology could face competition from the development of similarly efficient, or better, combinations of novel cloning and sequencing techniques. Further, even if Lynx's products appear promising at an early stage of development, they may not reach the market for a number of reasons. Such reasons include, but are not limited to, the possibilities that the Company's compounds are found to be toxic or ineffective during clinical trials, the failure to receive necessary regulatory approvals, the difficulty to manufacture on a large scale or the inability to market a compound due to proprietary rights of third parties. 13. Results of Operations Years Ended December 31, 1996 and 1995 Revenue Lynx had total revenues of $9.7 million and $680,000 for the years ended December 31, 1996 and 1995, respectively. The 1996 revenue included $7.5 million in sign-up fees under the Tanabe and Schwarz Pharma agreements; approximately $2.0 million earned under the collaborative agreements with Hoechst and BASF; and approximately $291,000 from a government grant. The 1995 revenue included $375,000 of revenue earned under the collaborative agreement with Hoechst and approximately $305,000 generated from compound sales and grant revenue. Operating Expenses Costs of product sales and other revenues were $291,000 for the year ended December 31, 1996, compared to $265,000 for the year ended December 31, 1995. The 1996 cost is related to activity under the government grant, while the 1995 cost is related both to grant activity and cost of compounds sold. Research and development expenses were $12.3 million for the year ended December 31, 1996 compared to $11.0 million for the year ended December 31, 1995. The increase was due to expenses associated with the issuance of Lynx Common Stock and stock options to certain employees and one consultant pursuant to the Agreement of Merger between Lynx and its majority-owned subsidiary, Spectragen Inc., increased spending in support of clinical trials and increased depreciation on lab equipment used in research. A portion of this increase was offset by reduced funding to various laboratories under collaborative research agreements and lower patent and related legal expense. Lynx expects to continue to incur substantial research and development expenses due to planned spending for ongoing research activities and new research applications. General and administrative expenses were $3.2 million for the year ended December 31, 1996, compared to $1.6 million for the year ended December 31, 1995. The increase was due primarily to increased legal fees, investment banking fees, and travel expenses incurred in conjunction with the Tanabe, Schwarz-Pharma and BASF agreements and to higher salary expense relating to increased headcount and the settlement agreement associated with the termination of a corporate officer. Lynx expects to continue to incur substantial general and administrative expenses in support of its research and corporate development efforts. Other Interest income was $585,000 for the year ended December 31, 1996 compared to $744,000 for the year ended December 31, 1995. The decrease was due primarily to somewhat lower interest rates despite slightly higher average cash balances during the year ended December 31, 1996 as compared to the prior fiscal year. Income Taxes The provision for income taxes for the year ended December 31, 1996 of $10,000 consisted entirely of alternative minimum tax. There was no tax provision for the year ended December 31, 1995. 14. Years Ended December 31, 1995 and 1994 Revenue Lynx had total revenues of $680,000 for the year ended December 31, 1995, including $375,000 of revenue earned under the collaborative agreement with Hoechst. In addition, approximately $305,000 was generated from compound sales and grant revenue. This compared to total revenues of $4.7 million for the year ended December 31, 1994 which consisted of a $4.0 million license fee received in connection with Lynx's collaborative research and development agreement with The Wellcome Foundation Limited ("Wellcome"), approximately $600,000 in sales of compound relating to the Wellcome agreement and approximately $100,000 in grant revenue. During the year ended December 31, 1995, Wellcome and its parent company, the Burroughs Wellcome Co., merged with Glaxo plc and formed Glaxo Wellcome plc. Lynx was subsequently notified by Glaxo Wellcome of its intention to terminate Wellcome's agreement with Lynx effective in March 1996. Operating Expenses Costs of product sales and other revenue were $265,000 for the year ended December 31, 1995, compared to $742,000 for the year ended December 31, 1994. The decrease is due primarily to lower costs associated with lower sales of compounds and grant revenue. Research and development expenses were $11.0 million for the year ended December 31, 1995 compared to $7.7 million for the year ended December 31, 1994. The increase was due primarily to higher spending for chemicals, supplies and prototype materials, increases in personnel, expanded funding to various laboratories under collaborative research agreements and higher patent and licensing expenses. General and administrative expenses were $1.6 million for the year ended December 31, 1995, compared to $1.8 million for the year ended December 31, 1994. The decrease in expenses was due primarily to a decrease in legal services for corporate general matters offset in part by increases in personnel and increases in corporate development activities. Other Interest income was $744,000 for the year ended December 31, 1995, compared to $506,000 for the year ended December 31, 1994. The increase was due primarily to higher interest rates during the year ended December 31, 1995, as compared to the prior fiscal year. Liquidity and Capital Resources Since inception, Lynx has funded its operations through advances from ABI, sales of Preferred and Common Stock to venture capital investors and collaborative partners, revenues from collaborative research and development arrangements, interest income, product sales and government grants. Lynx may receive additional collaborative research payments from BASF, Schwarz Pharma, Tanabe and Hoechst, and equity investments from Hoechst, subject to Lynx achieving the milestones as specified in the various agreements. Net cash provided in operating activities of $1.3 million for the year ended December 31, 1996 differs from the net loss for the same period for several reasons: receipt of an access fee related to the collaboration with BASF, the non-cash expense related to stock issuance in the Lynx/Spectragen merger, depreciation and amortization expenses and changes in working capital. Net cash used in investing activities of $3.1 million for the year ended December 31, 1996, was primarily due to the purchase of short-term investments, the expansion of facilities and capital equipment purchases. Net cash provided by financing activities in 1996 consisted primarily of the exercise of stock options for cash by employees. Cash and cash equivalents were $12.1 million at December 31, 1996. 15. Lynx is currently utilizing its available funds for supporting development of its MPSS technology, funding preclinical research and clinical trials and the planned growth in Lynx's internal efforts toward research, drug discovery and development programs. Pending such uses as described above, Lynx intends to invest its excess cash in short-term, investment grade, interest-bearing securities or certificates of deposit. 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, the scope and results of preclinical research and clinical trials, the cost and timing of regulatory approvals, administrative and legal costs, the establishment of corporate partnerships and the availability of alternate methods of financing. Lynx believes that its current capital resources and interest income thereon will enable it to maintain its current and planned operations through the end of 1997. 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. 16. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Lynx Therapeutics, Inc. Index to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors....................... 18 Audited Consolidated Financial Statements: Consolidated Balance Sheets............................................. 19 Consolidated Statements of Operations................................... 20 Consolidated Statement of Stockholders' Equity.......................... 21 Consolidated Statements of Cash Flows................................... 22 Notes to Consolidated Financial Statements.............................. 23 17. Report of Ernst & Young, LLP, Independent Auditors The Board of Directors and Stockholders Lynx Therapeutics, Inc. We have audited the accompanying consolidated balance sheets of Lynx Therapeutics, Inc. as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lynx Therapeutics, Inc. at December 31, 1996 and 1995 and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996, in conformity with generally accepted accounting principles. Palo Alto, California February 4, 1997 18. Lynx Therapeutics, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts)
December 31, Assets 1996 1995 ------------------------ Current assets: Cash and cash equivalents $ 12,109 $ 13,779 Short-term investments 1,973 -- Accounts receivable 118 88 Other current assets 158 79 ------------------------ Total current assets 14,358 13,946 Property and equipment: Leasehold improvements 3,193 2,501 Laboratory and other equipment 2,976 2,157 ------------------------ 6,169 4,658 Less accumulated depreciation (2,290) (1,461) ------------------------ Net property and equipment 3,879 3,197 Notes receivable from officers and employees 175 542 ------------------------ $ 18,412 $ 17,685 ======================== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 429 $ 693 Accrued compensation 394 206 Accrued professional fees 169 187 Other accrued liabilities 373 130 ------------------------ Total current liabilities 1,365 1,216 Deferred revenue from related party 6,167 2,625 Other noncurrent liabilities 148 102 Stockholders' equity: Preferred Stock, issuable in series, $.001 par value; 2,000,000 shares authorized, all shares designated represent convertible Preferred Stock: Series B, 400,000 shares designated; 332,288 shares issued and outstanding at December 31, 1996 and 1995; aggregate liquidation value of $16,614 at December 31, 1996 and 1995; 16,091 16,091 Series C, 145,000 shares designated; 123,299 shares issued and outstanding at December 31, 1996 and 1995; aggregate liquidation value of $6,165 at December 31, 1996 and 1995; 6,109 6,109 Series D, 40,000 shares designated; 40,000 shares issued and outstanding at December 31, 1996 and 1995; aggregate liquidation value of $5,000 at December 31, 1996 and 1995; 4,989 4,989 Common Stock, $.001 par value; 20,000,000 shares authorized, 3,152,148 and 2,334,524 shares issued and outstanding at December 31, 1996 and 1995, respectively; 17,361 13,394 Notes receivable from stockholders (210) (660) Deferred compensation (2,092) (51) Unrealized gain/(loss) on marketable securities 3 (2) Accumulated deficit (31,519) (26,128) ------------------------ Total stockholders' equity 10,732 13,742 ------------------------ $ 18,412 $ 17,685 ======================== See accompanying notes.
19. Lynx Therapeutics, Inc. Consolidated Statements of Operations (In thousands, except share and per share amounts)
Year Ended December 31, ---------------------------------------------- 1996 1995 1994 ---------------------------------------------- Net revenues: License fees $ 7,500 $ -- $ 4,000 Revenues from collaborative arrangements with related parties 1,958 375 -- Product sales and other revenues 291 305 699 ---------------------------------------------- Total revenues 9,749 680 4,699 Operating costs and expenses: Costs of product and other revenues 291 265 742 Research and development 12,254 11,036 7,715 Selling, general and administrative 3,170 1,591 1,768 ---------------------------------------------- Total operating costs and expenses 15,715 12,892 10,225 ---------------------------------------------- Loss from operations (5,966) (12,212) (5,526) Interest income 585 744 506 Provision for income taxes 10 -- -- ---------------------------------------------- Net loss $(5,391) $(11,468) $(5,020) ============================================== Net loss per share $ (2.19) $ (5.00) $ (4.83) ============================================== Shares used in per share computation 2,466,891 2,293,975 1,039,105 ============================================== See accompanying notes.
20. Lynx Therapeutics, Inc. Consolidated Statement of Stockholders' Equity For the Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share numbers)
Preferred Stock Common Stock Notes --------------- ------------ Receivable Shares Amount Shares Amount From Officers ---------------------- -------------------- ------------- Balance at December 31, 1993 1,135,865 $ 11,358 703,513 $ 1,332 $ -- Issuance of Series B Preferred Stock for cash, net of issuance costs of $524 332,288 16,091 -- -- -- Conversion of Series A Preferred Stock to Common Stock in September 1994 (1,135,865) (11,358) 1,135,865 11,358 -- Exercise of Chiron option for cash -- -- 150,000 15 -- Exercise of employee stock options for cash -- -- 18,513 16 -- Issuance of Common Stock for services -- -- 2,438 2 -- Amortization of deferred compensation -- -- -- -- -- Net unrealized loss on securities available for sale -- -- -- -- -- Net loss -- -- -- -- -- -------------------------------------------------------------------------- Balance at December 31, 1994 332,288 16,091 2,010,329 12,723 0 Issuance of Series C Preferred Stock for cash, net of issuance costs of $56 123,299 6,109 -- -- -- Issuance of Series D Preferred Stock for cash, net of issuance costs of $11 40,000 4,989 -- -- -- Exercise of employee stock options for cash and note receivable -- -- 324,410 675 (660) Issuance of Common Stock for services -- -- 812 1 -- Cash paid in lieu of fractional shares for reverse stock split -- -- (1,027) (5) -- Amortization of deferred compensation -- -- -- -- -- Net unrealized gain on securities available for sale -- -- -- -- -- Net loss -- -- -- -- -- -------------------------------------------------------------------------- Balance at December 31, 1995 495,587 27,189 2,334,524 13,394 (660) Exercise of employee stock options for cash -- -- 9,663 12 -- Repurchase of Common Stock -- -- (157,500) (297) 450 Issuance of Common Stock in connection with Lynx/Spectragen merger -- -- 959,182 4,221 -- Issuance of Common Stock for services -- -- 6,279 31 -- Amortization of deferred compensation -- -- -- -- -- Net unrealized gain on securities -- -- -- -- -- Net loss -- -- -- -- -- -------------------------------------------------------------------------- Balance at December 31, 1996 495,587 $ 27,189 3,152,148 $ 17,361 $ (210) ========================================================================== See accompanying notes.
Unrealized Gain/(Loss) on Total Deferred Marketable Accumulated Stockholders' Compensation Securities Deficit Equity -------- -------- -------- -------- Balance at December 31, 1993 $ (120) $ -- $ (9,640) $ 2,930 Issuance of Series B Preferred Stock for cash, net of issuance costs of $524 -- -- -- 16,091 Conversion of Series A Preferred Stock to Common Stock in September 1994 -- -- -- -- Exercise of Chiron option for cash -- -- -- 15 Exercise of employee stock options for cash -- -- -- 16 Issuance of Common Stock for services -- -- -- 2 Amortization of deferred compensation 34 -- -- 34 Net unrealized loss on securities available for sale -- (24) -- (24) Net loss -- -- (5,020) (5,020) --------------------------------------------------------------- Balance at December 31, 1994 (86) (24) (14,660) 14,044 Issuance of Series C Preferred Stock for cash, net of issuance costs of $56 -- -- -- 6,109 Issuance of Series D Preferred Stock for cash, net of issuance costs of $11 -- -- -- 4,989 Exercise of employee stock options for cash and note receivable -- -- -- 15 Issuance of Common Stock for services -- -- -- 1 Cash paid in lieu of fractional shares for reverse stock split -- -- -- (5) Amortization of deferred compensation 35 -- -- 35 Net unrealized gain on securities available for sale -- 22 -- 22 Net loss -- -- (11,468) (11,468) --------------------------------------------------------------- Balance at December 31, 1995 (51) (2) (26,128) 13,742 Exercise of employee stock options for cash -- -- -- 12 Repurchase of Common Stock -- -- -- 153 Issuance of Common Stock in connection with Lynx/Spectragen merger (2,076) -- -- 2,145 Issuance of Common Stock for services -- -- -- 31 Amortization of deferred compensation 35 -- -- 35 Net unrealized gain on securities -- 5 -- 5 Net loss -- -- (5,391) (5,391) --------------------------------------------------------------- Balance at December 31, 1996 $ (2,092) $ 3 $(31,519) $ 10,732 =============================================================== See accompanying notes.
Lynx Therapeutics, Inc. Consolidated Statements of Cash Flows Net increase (decrease) in cash and cash equivalents (In thousands)
Year Ended December 31, --------------------------------------------- 1996 1995 1994 --------------------------------------------- Cash flows from operating activities Net loss $ (5,391) $(11,468) $ (5,020) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 829 608 404 Loss on disposal of fixed assets -- 6 -- Deferred compensation 35 34 34 Issuance of Common Stock expensed in connection with the Lynx/Spectragen merger 2,145 -- -- Issuance of Common Stock for services 31 1 2 Changes in operating assets and liabilities: Accounts receivable (30) 174 (95) Other current assets (79) 157 4 Accounts payable (264) 334 189 Accrued liabilities 413 (160) (292) Deferred revenue from related parties 3,542 2,625 -- Other noncurrent liabilities 46 46 28 --------------------------------------------- Net cash provided by (used in) in operating activities 1,277 (7,643) (4,746) Cash flows from investing activities Purchases of short-term investments (6,903) -- (12,024) Maturities of short-term investments 4,935 8,022 4,000 Purchases of property and equipment, net of retirements (1,511) (1,430) (1,489) Notes receivable from officers 367 (524) -- --------------------------------------------- Net cash provided by (used in) investing activities (3,112) 6,068 (9,513) Cash flows from financing activities Issuance of Preferred Stock, net of repurchases -- 11,098 16,091 Issuance of Common Stock, net of repurchases 165 10 31 --------------------------------------------- Net cash provided by investing activities 165 11,108 16,122 --------------------------------------------- Net increase (decrease) in cash and cash equivalents (1,670) 9,533 1,863 Cash and cash equivalents at beginning of period 13,779 4,246 2,383 --------------------------------------------- Cash and cash equivalents at end of period $ 12,109 $ 13,779 $ 4,246 ============================================= Supplemental schedule of non-cash financing activities Accounts payable for construction-in-progress $ -- $ -- $ (754) ============================================= See accompanying notes.
24. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements December 31, 1996 1. Summary of Significant Accounting Policies and Basis of Presentation Ownership and Basis of Presentation Lynx Therapeutics, Inc. ("Lynx" or the "Company"), was incorporated in February 1992 under the laws of the State of Delaware. Lynx was capitalized in June 1992 and, effective July 1, 1992, commenced operations. Lynx is focused on exploiting novel, proprietary DNA cloning, sequencing and synthesis technologies to identify targets for drug discovery. Foremost among the Company's proprietary assets is a set of novel cDNA cloning and sequencing technologies, collectively dubbed "massively parallel signature sequencing" ("MPSS") which is being developed to be used to identify and quantify, in a single analysis, a complete representative sampling of all the mRNA molecules present in a tissue sample. The rapidity (days, instead of months or years) of this new analytical approach, if successful, should allow for the first time the analysis of the changes in gene expression that occur during the progression of a disease. Lynx's second set of proprietary technologies is an outgrowth of the expertise on which Lynx was originally founded. This expertise relates to synthetic DNA ("oligodeoxynucleotide" or "ODN") chemistry and the manufacture and use of synthetic ODN analogues for the pursuit of their therapeutic applications. Diseases that have been targeted for the application of these potential therapeutic agents include cardiovascular diseases, cancers and leukemias, and neurovascular diseases. In November 1996, Lynx and its majority owned subsidiary, Spectragen, Inc. ("Spectragen"), a Delaware corporation, entered into an Agreement of Merger, whereby Lynx acquired the outstanding 17% minority interest in Spectragen and Spectragen was merged with and into Lynx and the separate corporate existence of Spectragen ceased (the "Merger"). Each share of Spectragen Common Stock outstanding at the time of Merger was converted into 1.3 shares of Lynx Common Stock and all vested and unvested options to purchase shares of Spectragen Common Stock were assumed by Lynx and converted into options to purchase Lynx Common Stock at the same ratio. In February 1996, the Company filed an amendment to its Certificate of Incorporation effecting a one-for-ten reverse stock split of all outstanding Common and Preferred Stock, warrants and options to purchase Common Stock. The reverse stock split was approved by the majority of its stockholders in January 1996. All references to the number of shares and share prices throughout this document reflect post-split activity. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, LYNXNebraska. All significant intercompany balances and transactions have been eliminated. The Company has sustained continuing operating losses and expects such losses to continue for at least the next several years. The Company plans to finance operations through equity offerings to existing and new investors and through arrangements with corporate partners. Should the financing plans contemplated by management not be consummated, the Company may have to seek alternative sources of capital or reevaluate its operating plans. 23. 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 a remaining maturity at the date of purchase of 90 days or less as cash equivalents. Investments with remaining 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, 1996 and 1995, 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 amortized 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 are included in interest income or expense. The cost of securities sold is based on the specific identification method. Property and Equipment Property and equipment are stated at original cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which is generally three years. Leasehold improvements are amortized over the lessor of the useful life of the asset or the remaining term of the facility lease. Revenue Recognition Payments under collaborative arrangements are recognized as revenue when earned as defined under the terms of the respective agreements. Payments received which are related to future performance are deferred until earned. Non-refundable license fees are generally recorded as revenue upon execution of the agreement. Revenues from the sales of products are recognized upon shipment. During 1996, revenue from three collaborative partners represented 92% of total revenue. During 1995 and 1994, revenue from one collaborative partner represented 55% and 85% of total revenue, respectively. Net Loss per Share Net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Common equivalent shares from stock options, warrants and convertible Preferred Stock are excluded from the computation as their effect is antidilutive. Stock-Based Compensation As permitted by Statements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected to account for stock options granted to employees using the intrinsic value method and, accordingly, does not recognize compensation expense for options granted to employees with exercise prices equal to the fair market value of the Company's Common Stock. 24. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 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, 1996 Money market mutual funds $ 979 $ - $ - $ 979 Commercial paper 12,964 3 - 12,967 ------------------------------------------------------------ 13,943 3 - 13,946 December 31, 1995 Money market mutual funds 4,362 - - 4,362 Commercial paper 9,478 - (2) 9,476 ------------------------------------------------------------ $13,840 $ - $ (2) $13,838
During the years ended December 31, 1996 and 1995, the Company did not sell any securities. As of December 31, 1996, $11.9 million of the marketable securities were classified as cash equivalents, and the balance of $2.0 million was classified as short-term investments. As of December 31, 1995, all marketable securities were classified as cash equivalents. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. 3. Collaborative Arrangements In October 1996, Lynx entered into two agreements with BASF AG aimed at exploiting Lynx's proprietary MPSS technology. The first agreement commits the two companies to form a new biotechnology Joint Venture ("JV") called BASF-LYNX Bioscience AG in Heidelberg, Germany. Initial ownership of the JV will be split 51%-49% between BASF and Lynx respectively. Under the sponsorship of BASF and Lynx the JV will seek to identify novel drug targets in certain central nervous system diseases; it will attempt to determine whether the safety of chemicals can be correlated with, and anticipated by, their effects on gene expression and, finally, it will seek to optimize microorganisms used in the fermentation production of chemicals such as vitamins or amino acids. BASF will provide research funding of up to 50 Million DM (approximately $33 million at current exchange rates) over the next five years, as well as access to certain of its technologies, and Lynx will provide access to its MPSS technology for use in the JV's research programs. The second agreement is a service agreement through which BASF may exploit the expected power of Lynx's MPSS for its own internal and proprietary research, independently of the JV's objectives. For access to this service, which commits Lynx to provide BASF with a certain number of MPSS analyses per year, BASF agreed to pay Lynx an access fee of $5.5 million upon execution of the agreement, of which $458,000 was recognized as revenue in the year ended December 31, 1996. BASF will pay an additional access fee of $5.5 million on the achievement of a certain milestone and a subscription fee of $8 million for the first two years of the subscription agreement. 25. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 3. Collaborative Arrangements (continued) In September 1996, Lynx entered into a collaboration agreement with Schwarz Pharma AG to develop and market Lynx's LR 3280 drug candidate for the European and North American markets. The agreement calls for Schwarz Pharma to pay Lynx certain sign-up and milestone fees, and for Schwarz Pharma to bear the costs of development, regulatory approval and sales in the specified territories. Schwarz Pharma will also purchase the drug from Lynx, which retains all manufacturing rights. In July 1996, Lynx entered into a collaboration agreement with Tanabe Seiyaku Co., Ltd. to develop and market Lynx's LR 3280 drug candidate for the Japanese and certain other Asian markets. The agreements calls for Tanabe to pay Lynx certain sign-up and milestone fees and for Tanabe to bear the costs of development, regulatory approval and sales in the specified territories. Tanabe will also purchase the drug from Lynx, which retains all manufacturing rights. In July and October 1996, Lynx received the sign-up fees of $3.5 and $4.0 million from the agreements with Tanabe and Schwarz Pharma, respectively. These payments were recorded as revenue in the period received. The Company could receive an additional $24.0 million in the form of milestone payments under the agreements. In October 1995, Lynx entered into an agreement with Hoechst AG and Hoechst Marion Roussel (collectively referred to as "Hoechst"), which provides Hoechst with access to Lynx's MPSS technology. Under the terms of the agreement, Lynx will receive funding to accelerate the development of its MPSS technology, and in return, it will clone and sequence cDNA libraries from samples of interest to Hoechst as soon as the technology is reduced to practice. This agreement allows for no more than two additional companies to access this technology for a specified period. In October 1995, Lynx received $3.0 million in development payments from Hoechst, of which $1.5 million and $375,000 were recognized as revenue for the years ended December 31, 1996 and 1995, respectively. In addition, the Company received $5.0 million in November 1995 relating to the closing of a private placement offering to Hoechst 40,000 shares of its Series D Preferred Stock at $125.00 per share. The Company could receive up to an additional $27.0 million through the end of 1998 in the form of milestone payments, subscription fees and additional equity investments. 4. License Agreements University of Nebraska In June 1992, Lynx entered into an agreement with the University of Nebraska under which the University agreed to fund most aspects of certain clinical trials and grant licenses to certain technology to Lynx. In exchange, Lynx issued 10,000 shares of its Common Stock, and an additional 5,000 shares upon achievement of a clinical trial milestone by the University. The costs associated with the issuance of the Common Stock were included in research and development expense and are recorded at its deemed fair market value at the date of issuance. In January 1996, this agreement was terminated. 26. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 4. License Agreements (continued) Other Lynx or its predecessor, ABI, has entered into various other license agreements with other 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. 5. Transaction with Related Parties Hoechst AG and Hoechst Marion Roussel. See Note 3. Collaborative Arrangements Notes Receivable from Officers In May and June 1995, the Company entered into three separate loan agreements with an officer of the Company. The first loan of $450,000 was a promissory note secured by a second mortgage on real property. The principal and interest on this loan were repaid according to the terms of the note in September 1996, upon sale of the property. The second loan of $450,000 was issued under a stock purchase agreement for the purchase of 250,000 shares of Common Stock whereby all the shares issued under the agreement were pledged as collateral. Of the 250,000 shares, 225,000 shares were subject to the Company's right of repurchase which lapsed ratably over five years. The loan agreement specified that upon termination, after the Company's right of repurchase was exercised, the remaining principal and interest on the loan were due and payable. In November 1996, the officer left the Company and the stock purchase loan was repaid in full. The third loan was a line of credit agreement whereby the officer could borrow from the Company up to $25,000 per calendar quarter during the first two years of employment. The line was secured by shares of the Company's stock owned by the officer. The principal and accrued interest due on the line of credit, an aggregate of $157,862, was forgiven upon the officer's separation from the Company. In October 1995, the Company entered into a loan agreement with another officer of the Company. The note receivable of $210,000 was issued under a stock purchase agreement for the purchase of 60,000 shares of Common Stock whereby all the shares issued under the agreement are pledged as collateral. The outstanding principal amount is due and payable in full on October 1, 2000, subject to an obligation to prepay under specified circumstances. Interest is payable upon the expiration or termination of the note and accrues at the rate of 6.38% per annum. 6. Stockholders' Equity Preferred Stock Each share of Series B, Series C and Series D Preferred Stock is convertible into ten shares of Common Stock at the option of the holder (subject to adjustment for certain changes in the effective conversion price). The Series B, Series C and Series D preferred shares have voting rights equal to the voting rights of the common shares issuable upon conversion. Conversion is automatic upon the earlier of (i) the closing of an underwritten public offering of Common Stock under the Securities Act of 1933 in which the Company receives at least $15,000,000 in gross proceeds and a price per share of at least $15.00 per share (subject to adjustment for stock splits or similar events), or (ii) the vote or written consent of the holders of a majority of the outstanding Series B, Series C and Series D convertible Preferred Stock. Series B, Series C and Series D stockholders are entitled to receive noncumulative dividends, amounts to be determined if and when declared by the Board of Directors. In addition, no dividend other than a stock dividend shall be paid on Common Stock unless a dividend in an equal amount per share (based on the then-current conversion rate) is first declared and paid on the Series B, Series C and Series D Preferred Stock. In the event of liquidation, holders of Series B and Series C Preferred Stock shall be entitled to receive an amount equal to $50.00 per share, and Series D Preferred Stock, $125.00 per share (all of which are subject to adjustment), plus all declared but unpaid dividends before any payments are made to holders of Common Stock. 27. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) Common Stock In 1992, Lynx issued approximately 140,000 shares of Common Stock to certain employees of and consultants to the Company. These shares are subject to repurchase rights which expire ratably over a five-year period from the date of issuance. Lynx has recorded deferred compensation expense for the difference between the purchase price and the deemed value of certain of these shares for financial statement purposes. At December 31, 1996, approximately 5,083 shares were subject to repurchase at $0.10 per share. In November 1996, Lynx issued 959,182 shares of Lynx Common Stock to certain officers, employees and one consultant in exchange for 737,832 shares of Spectragen, Inc. Common Stock pursuant to Merger between Lynx and Spectragen (See "Note 1 of Notes to Financial Statements"). A portion of the shares are subject to repurchase rights which expire ratably through 2006. Lynx recorded compensation and consultant expense of $2.0 million and deferred compensation expense of $1.4 million 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. At December 31, 1996, Lynx has reserved 10,652,862 shares of Common Stock for issuance upon conversion of the Series B, Series C and Series D Preferred Stock, upon the achievement of certain established milestones by a research collaborator and upon the exercise of outstanding employee and nonemployee stock options. 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 January 1995 and May 1996, the stockholders approved amendments to the 1992 Plan to increase the number of shares reserved for issuance to 1,400,000 and 2,100,000, respectively. The number of shares available for option grants has been reduced by the 140,000 shares of Common Stock which were issued to certain employees and consultants, as discussed above. 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 November 1996, Lynx issued 524,355 options to purchase Lynx Common Stock in exchange for 403,350 options to purchase Spectragen Common Stock pursuant to the Agreement of Merger between the Company and Spectragen. In accordance with APB 25, Accounting for Stock Issued to Employees, Lynx recognized compensation costs and deferred compensation 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 Company recorded approximately $29,000 as compensation expense for the year ended December 31, 1996, for the portion of the options that had vested during fiscal year 1996, and deferred compensation of approximately $683,000 for the portion of the grants that will vest in future periods. The deferred compensation will be charged to expense over the vesting period of the grants. 28. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) The stock option activity under the Plan was as follows:
Options Outstanding ----------------------------------------------------------------------- Number of Weighted Available Shares Subject Option Price Average for Grant to Options per Share Exercise Price --------- -------------- ------------ -------------- Balance at December 31, 1993 141,498 102,871 $0.10-$2.00 $1.11 Options authorized 1,000,000 -- -- Options granted (369,500) 369,500 $1.00-$2.00 1.01 Options exercised -- (18,513) $0.10-$2.00 .98 Options canceled 9,157 (9,157) $0.10-$2.00 1.36 ---------- ---------- Balance at December 31, 1994 781,155 444,701 $0.10-$2.00 1.03 Options granted (678,436) 678,436 $1.00-$5.00 2.55 Options exercised -- (324,410) $1.00-$5.00 2.08 Options canceled 66,316 (66,316) $1.00-$2.00 1.06 ---------- ---------- Balance at December 31, 1995 169,035 732,411 $0.10-$5.00 1.97 Options authorized 1,224,355 -- -- Options granted (859,858) 859,858 $0.15-$6.00 2.75 Options exercised -- (9,663) $0.10-$6.00 1.23 Options canceled 64,954 (65,004) $0.10-$6.00 2.76 ---------- ---------- Balance at December 31, 1996 598,486 1,517,602 $0.10-$6.00 2.39 ========== =========
To date, all options granted under the Plan are nonqualified options. Options to purchase a total of 682,254 shares were exercisable under the Plan at December 31, 1996. 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, 1996, 438,384 shares were subject to repurchase. 29. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) The options outstanding at December 31, 1996 have been segregated into ranges for additional disclosure as follows (option amounts are recorded in thousands):
Options Outstanding Options Exercisable -------------------------------------------------------- ------------------------------------- Weighted- average Options Options remaining currently outstanding at contractual Weighted- exercisable at Weighted- Range of` December 31, life average December 31, average exercises prices 1996 (in years) exercise price 1996 exercise price - - ---------------- --------------- ------------- -------------- --------------- -------------- $0.10 - 0.15 101 4.8 $0.13 99 $0.13 $0.38 - 0.77 94 9.5 0.39 7 0.39 $1.00 - 2.00 832 8.5 1.28 402 1.07 $3.50 - 6.00 491 9.2 5.10 174 4.82 ------ --- 1,518 8.7 $2.39 682 $1.88 ===== ===
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 fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model for the multiple option approach with the following weighted-average assumptions: a risk-free interest rate of 6.26% and 6.36% for 1995 and 1996 respectively, a weighted-average expected life of 4.4 years for 1995 grants and 4.1 years for 1996 grants; an expected dividend yield of zero for both years. The Company believes that due to the low trading volume of Lynx stock, particularly in 1995, the calculated volatility of the expected market price of the Company's Common Stock does not provide a representative picture of future volatility. Consequently, an industry average volatility of 73% was used in the calculations. 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. 30. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to pro forma net loss over the options' vesting period. The Company's historical and pro forma information follows (in thousands, except for net loss per share information): Years Ended December 31, 1996 1995 ---------------------- (in thousands) Net loss Historical $5,391 $11,468 Pro forma $5,940 $11,665 Net loss per share Historical $2.19 $5.00 Pro Forma $2.41 $5.09 Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, future pro forma net income and earnings/loss, per share results may be materially different from actual amounts presented. Warrants As of December 31, 1996, warrants to purchase 6,300 shares of Common Stock were outstanding at an exercise price of $12.50 per share. The warrants expired on February 14, 1997. 7. Income Taxes The Company accounts for income taxes under the Statement Financial Accounting Standards No. 109, "Accounting for Income Taxes." Lynx's losses through November 20, 1992 were included in the consolidated income tax returns of ABI or ABI's parent (Perkin Elmer Corporation). As a result, Lynx's net operating loss carryforwards available to offset future taxable income consist only of losses incurred after November 20, 1992. The provision for income taxes for 1996 in the amount of $10,000 consists entirely of alternative minimum tax. As of December 31, 1996, the Company has federal and state loss carryforwards of approximately $20.3 million and $1.2 million, respectively. The Company also has federal and state research and development tax credit carryforwards of approximately $634,000 and $297,000, respectively. The federal net operating loss and federal and state credit carryforwards will expire at various dates beginning in the years 2007 through 2010, if not utilized. The state net operating loss will expire in 2000, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The federal net operating loss carryforwards differ from the accumulated deficit principally due to losses incurred while the Company was a division of ABI, and timing differences in the recognition of certain expense items for financial and federal tax reporting purposes, consisting primarily of certain accrued expenses that are not currently deductible for income tax purposes. 31. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 7. Income Taxes (continued) Deferred income taxes reflect the tax effects of net operating loss and credit carryforwards and of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amount used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes as of December 31 are as follows:
1996 1995 --------------------------- (In thousands) Deferred tax assets: Net operating losses $ 6,980 $ 6,837 Research and development credit carryforwards 830 669 Capitalized research and development expenditures 1,031 1,197 Deferred revenue 2,475 -- Other 241 81 Valuation allowance (11,557) (8,784) ------------------------------ $ - $ -- ==============================
The change in valuation allowance was a net increase of $2.8 million and $3.2 million in 1996 and 1995, respectively. 32. Lynx Therapeutics, Inc. Notes to Consolidated Financial Statements (continued) 8. Obligations under Operating Leases The Company entered into a noncancelable operating lease for facilities which commenced on August 1, 1993 and expires on July 31, 2003. Under the terms of the lease, rental payments commenced in the third month of the lease and increase on a graduated scale beginning with the second year of the lease as the Company occupies additional space. The Company is recognizing rent expense on a straight-line method over the lease period. The Company has the option to extend the lease for two additional periods of five years each, with payments to be determined when the option is exercised. The Company also leases equipment under various operating lease agreements subject to minimum annual lease payments. Minimum annual rental commitments under operating leases are as follows: (in thousands) Years ending December 31: 1997 $ 578 1998 539 1999 560 2000 560 2001 561 Thereafter 783 -------- $ 3,581 ======== Rent expense for facilities and equipment under operating leases was $676,000 $637,000 and $424,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 9. 401(k) Plan In October 1992, Lynx adopted a 401(k) Plan covering all of its employees. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by Lynx to the 401(k) Plan are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by Lynx, if any, will be deductible by Lynx when made. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to 15% (subject to an annual limit prescribed by the Code as described below) and have the amount of such reduction contributed to the 401(k) Plan. Under limitations imposed by the Code, the maximum amount of compensation reduction a participant could elect to have contributed to the 401(k) Plan for the 1996 calendar year was $9,500. This amount is subject to annual adjustments for increases in the cost of living, as determined under Internal Revenue Service regulations. The 401(k) Plan permits, but does not require, additional contributions to the 401(k) Plan by Lynx on behalf of all participants in the 401(k) Plan. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 33. 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, 1996 are as follows:
NAME AGE POSITION ------------------------------ ---- --------------------------------------------------- Sam Eletr, Ph.D. 57 Chief Executive Officer and Chairman of the Board Timothy G. Geiser, Ph.D. 54 Vice President, Business Development Stephen C. Macevicz, Ph.D. 47 Vice President, Intellectual Property Karoly Nikolich, Ph.D. 48 Vice President, Research Gerald Zon, Ph.D. 51 Vice President, Medicinal Chemistry William K. Bowes, Jr.(2) 70 Director Sydney Brenner, M.B., D. Phil. 69 Director James C. Kitch(2) 49 Director Kathleen D. La Porte(1) 35 Director Craig C. Taylor(1) 46 Director and Acting Chief Financial Officer - - --------------------- (1) Member of Compensation Committee (2) Member of Audit Committee
Dr. 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., ("ABI"), a manufacturer of instruments and consumables for life science research and related applications, now a wholly-owned subsidiary of Perkin Elmer Corporation, and served as Chairman of the Board of Directors and in various executive positions at ABI from its inception until March 1987. Dr. Eletr acted as a consultant to ABI from September 1990 until July 1992, during which time he undertook to assume the leadership of the Company. Dr. Geiser has served as Vice President, Business Development of Lynx since May 1996 and Vice President, Manufacturing and Operations from July 1992 to May 1996. Prior to that time, he was a Senior Scientist of ABI from May 1981 to July 1992 where he had earlier directed DNA chemistry and peptide chemistry R&D activities and later joined with Dr. Zon in 1987 to co-direct the establishment of the DNA Therapeutics Group which led to the formation of Lynx Therapeutics, Inc. He received his Ph.D. in Organic Chemistry from Cornell University. Dr. Macevicz joined the Company in September 1995, as Vice President, Intellectual Property. He was Senior Patent Attorney and chief patent counsel of ABI from 1992 to August 1995 and, prior to that, from 1986 to 1992, Patent Counsel of DNAX Research Institute of Molecular and Cellular Biology, a research subsidiary of Schering-Plough Corporation. He received his law degree from University of California, Berkeley (Boalt Hall) in 1984 and his Ph.D. in Biophysics from the University of California, Berkeley in 1979. Dr. Nikolich has served as Vice President, Research of the Company since November 1996 and was Vice President, Biological Research from October 1995 to November 1996. Prior to that time he was a Senior Scientist and Head of the Neuroscience Research Program at Genentech, Inc. from 1989 to 1995, and a scientist from 1985 to 1989. Dr. Nikolich established the neuroscience program at Genentech and is a widely published and recognized expert in neurotropic factor research. After receiving his doctorate from Eotvos University of Budapest, he was a postdoctoral fellow at Tulane University and a visiting scientist at the Hormone Research Laboratory, University of California, San Francisco. 34. Dr. Zon has served as Vice President, Medicinal Chemistry and Head of Quality Control and Regulatory Affairs of Lynx since January 1993. Dr. Zon joined Lynx in July 1992. Prior to that time, he served as Senior Scientist at ABI from November 1986 to July 1992, and directed the Food and Drug Administration's Pharmacology Laboratory from 1981 to 1986. Dr. Zon received his Ph.D. in Organic Chemistry from Princeton University, and has over 200 publications in the areas of organic, medicinal and oligonucleotide chemistry. Mr. Bowes has served as a director of the Company since March 1994. He has been a general partner of U.S. Venture Partners, a venture capital partnership, since 1981. He currently serves as a director of Amgen, Inc., XOMA Corporation and a number of U.S. Venture Partners' privately owned portfolio companies. Dr. Brenner has served as a director of the Company since October 1993. In July 1996 he was appointed the Director and President of the Molecular Sciences Institute, a non-profit research institute in La Jolla, California. In September 1996 he retired from his position of Honorary Professor of Genetic Medicine, University of Cambridge Clinical School. From 1986 to his retirement in 1991, Dr. Brenner directed the Medical Research Council Unit of Molecular Genetics. He was a member of the Scripps Research Institute in La Jolla, California until December 1994. Mr. Kitch has served as a director of the Company since February 1993 and Secretary of Lynx since February 1992. He was a director of ABI, Lynx's predecessor, from August 1986 to February 1993. He is a partner at Cooley Godward LLP, a law firm which has provided legal services to the Company. Ms. La Porte has served as a director of the Company since March 1994. She is a general partner of the Sprout Group, the venture capital affiliate of Donaldson, Lufkin and Jenrette. From 1987 to 1993, Ms. La Porte was a principal at Asset Management Company. She currently serves as a director of Onyx Pharmaceuticals, Inc., Fem Rx, Inc. and several private companies. Mr. Taylor has served as a director of the Company since March 1994 and Acting Chief Financial Officer since July 1994. 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., Pharmacyclics, Inc. and several private companies. Pursuant to the terms of the Shareholders Agreement between Lynx and Applied Biosystems, Applied Biosystems has the right to nominate one member for election to the Board of Directors of Lynx as long as it holds at least 200,000 shares of Lynx Common Stock. No nominee of Applied Biosystems currently serves on the Board of Directors. 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, 1996, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent (10%) beneficial owners were complied with, except for Mr. Taylor's acquisition of 239 shares through the exercise of a stock option which was reported late. 35. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain compensation paid by the Company during the calendar year ended December 31, 1996, 1995 and 1994, to its Chief Executive Officer and each of the four other most highly compensated executive officers whose compensation exceeded $100,000 (the "Named Executive Officers"):
Summary Compensation Table Long Term Compensation Awards ------------- Securities Annual Underlying All Other Name and Principal Position Year Salary($)(1) Options (#) Compensation($) - - ---------------------------- ---- ------------ ------------- --------------- Sam Eletr, Ph.D. 1996 176,121 32,500 0 Chief Executive Officer and 1995 170,484 105,000 0 Chairman of the Board 1994 160,990 80,000 0 David W. Martin, Jr., M.D.(2) 1996 206,229 32,500 158,612(3) President and Chief 1995 133,713(4) 250,000 750(5) Executive Officer 1994 0 0 0 Timothy G. Geiser, Ph.D. 1996 153,818 0 750(5) Vice President, Business 1995 142,674 60,000 750(5) Development 1994 132,176 60,000 750(5) Karoly Nikolich, Ph.D. 1996 150,210 30,000 750(5) Vice President, Research 1995 37,085(6) 70,000 0 1994 0 0 0 Gerald Zon, Ph.D. 1996 154,168 0 750(5) Vice President, Medicinal Chemistry 1995 143,130 60,000 750(5) 1994 132,468 60,000 750(5) (1) Includes amounts earned but deferred at the election of the Named Executive Officer pursuant to the Company's 401(k) Plan. (2) Dr. Martin terminated his relationship with the Company in November 1996. The Company will continue to pay Dr. Martin's annual base salary for a period of time not to exceed (12) months pursuant to the terms of the Separation Agreement between the Company and Dr. Martin. (3) Includes $157,862 in principal and accrued interest due on the line of credit that was forgiven as part of the Separation Agreement. Also includes $750 in contributions made by the Company to the Company's 401(k) Plan on behalf of such employee. (4) Dr. Martin joined the Company in May 1995. The 1995 annual salary represents a partial year and is not comparable to 1996. (5) Contributions made by the Company to the Company's 401(k) Plan on behalf of such employee. (6) Dr. Nikolich joined the Company in October 1995. The 1995 annual salary represents a partial year and is not comparable to 1996.
36. Except as disclosed above, no compensation characterized as long-term compensation, including restricted stock awards issued at a price below fair market value or long-term incentive plan payouts, were paid by the Company during the year ended December 31, 1996, to any of the Named Executive Officers. 1992 Stock Option Plan In June 1992, Lynx adopted the 1992 Stock Option Plan (the "1992 Plan"), under which 400,000 shares, less any shares of Lynx's Common Stock remaining outstanding which were originally issued to employees, officers of, or consultants to Lynx pursuant to Stock Purchase Agreements approved by Lynx's Board of Directors, were initially reserved for issuance upon exercise of options granted to employees and consultants of Lynx or its affiliates. In January 1995 and May 1996, the stockholders approved amendments to the 1992 Plan to increase the number of shares reserved for issuance to 1,400,000 and 2,100,000, respectively In May 1996, the stockholders also approved an amendment to the 1992 Plan to extend the term of the Plan to March 2006. The 1992 Plan provides for the grant of both incentive stock options intended to qualify as such under Section 422 of the Internal Revenue Code of 1986 (the "Code") and nonstatutory stock options, which are options that do not qualify as incentive stock options. In November 1996, pursuant to the Agreement of Merger between the Company and Spectragen, options to purchase 403,350 shares of Spectragen Common Stock were assumed by the Company and converted into options to purchase 524,355 shares of Lynx Common Stock. The 1992 Plan is administered by the Board of Directors. Subject to the provision of the 1992 Plan, the Board has the authority to select the persons to whom grants are to be made, to designate the number of shares to be covered by each option, to determine whether an option is an incentive stock option or a nonstatutory stock option, to establish vesting schedules, to specify the type of consideration to be paid to Lynx upon exercise or purchase and, subject to certain restrictions, to specify other terms. The maximum term of options granted under the 1992 Plan is ten years. The aggregate fair market value of the stock with respect to which incentive stock options are first exercisable in any calendar year may not exceed $100,000. Options granted under the 1992 Plan generally are non-transferable and expire three months after the termination of any optionee's employment, directorship or consulting relationship with Lynx. However, in general, if such termination of employment is due to the optionee's permanent and total disability, such person's option may be exercised up to one year following such disability, and if such termination of employment is due to the optionee's death, such person's option may be exercised up to eighteen (18) months following death. The exercise price of incentive stock options must be at least the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options must be at least 85% of the fair market value of the Common Stock on the date of grant. The exercise price of options granted to any person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock must be at least 110% of the fair market value of such stock on the date of grant, and the term of these options cannot exceed five years. Shares covered by currently outstanding options under the 1992 Plan typically vest over a five-year period following the date of grant. 37. Stock Option Grants and Exercises Option Grants in the Year Ended December 31, 1996 The following table sets forth, for each of the Named Executive Officers in the Summary Compensation Table, certain information regarding options granted during the year.
OPTION GRANTS IN LAST FISCAL YEAR Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term(4) ------------------------------------------------------------ ------------------------ % of Total Number of Options Securities Granted to Underlying Employees Exercise or Options in Fiscal Base Price Expiration Name Granted (1) Year (2) ($/sh)(3) Date 5%($) 10%($) - - ---------------------- ----------- -------- --------- ------------- ----------- ------ Sam Eletr, Ph.D. 32,500 3.78% $1.54 08/06/2006 $373,463 $624,323 David W. Martin, Jr., M.D. 32,500(5) Timothy G. Geiser, Ph.D. -- Karoly Nikolich, Ph.D. 30,000 3.49% $4.00 11/18/2006 $75,467 $191,249 Gerald Zon, Ph.D. -- (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 859,858 options granted to employees of and consultants to the Company during the year ended December 31, 1996, including the Named Executive Officers. (3) The exercise price per share of each option is equal to the fair market value as determined by the Board of Directors, except for the grants pursuant to the Merger, the exercise price is the original Spectragen grant price, as adjusted pursuant to the terms of the Agreement of Merger. (4) 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 fair market value of the stock as determined by the Board of Directors on the date of grant appreciated at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These amounts represent certain assumed rates of appreciation only, in accordance with the rules of the SEC, and do not reflect the Company's estimate or projection of future stock price performance. Actual gains, if any, are dependent on the actual future performance of the Company's Common Stock and no gain to the optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. (5) Dr. Martin's shares were canceled in November 1996 due to the termination of his relationship with the Company.
38. AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1996 AND OPTION VALUES The following table sets forth, for each of the Named Executive Officers in the Summary Compensation Table, the shares acquired and the value realized on each exercise of stock options during the year and number of unexercised options:
Value of Number of Unexercised Unexercised In-the-Money Options Options at at Year-End Year-End ($)(1) Shares ----------------- ---------------- Acquired on Value (Exercisable/ (Exercisable/ Name Exercise(#) Realized($)(1) Unexercisable)(2) Unexercisable) - - --------------------------- ------------ -------------- ----------------- ---------------- Sam Eletr, Ph.D. 130,000(3) 630,500 217,500/0 489,950/0 David W. Martin, Jr., M.D. -- -- -- -- Timothy G. Geiser, Ph.D. -- -- 123,500/0 288,150/0 Karoly Nikolich, Ph.D. -- -- 40,000/0 5,000/0 Gerald Zon, Ph.D. -- -- 130,750/0 311,925/0 - - ------------------ (1) Represents the fair market value of the Company's Common Stock on the date of exercise, as determined by the Board of Directors, minus the exercise price of the option, multiplied by the number of shares underlying the option. (2) Includes unvested shares from grants which allow exercises of unvested shares. (3) Shares exercised are subject to a Stock Purchase Agreement between the optionee and the Company. The shares are subject to repurchase by the Company at the original purchase price in the event of termination of employment. The shares will be released from the Company's repurchase option ratably over a five year period.
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, 1996. 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 39. 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. 40. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of each class of the Company's voting stock as of February 28, 1997, by (i) each stockholder who is known by the Company to own beneficially more than 5% of the Common Stock; Series B Preferred Stock; Series C Preferred Stock and Series D Preferred Stock; (ii) each Named Executive Officer of the Company; (iii) each director of the Company; and (iv) all directors and executive officers of the Company as a group. All Series D Preferred Stock is held by Hoechst Marion Roussel as reflected in the Common Stock table and as noted in footnote (5).
Series B Series C Common Stock(1) Preferred Stock(1) Preferred Stock(1) Name and Address ---------------------- ---------------------- ----------------------- of Beneficial Owners Number Percent(2) Number Percent(2) Number Percent(2) - - -------------------- ------ ---------- ------ ---------- ------ ---------- Entities affiliated with the Sprout Group(3) 729,980 18.9% 49,999 15.0% 22,999 18.7% 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 Entities affiliated with U.S. Venture Partners IV, L.P.(4) 730,000 18.9% 50,000 15.0% 23,000 18.7% 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Cannon Street Fund Ltd. 565,000 15.3% 40,000 12.0% 16,500 13.4% c/o Meridian Venture Group R.R. Box 272 Charlottesville, VA 22314 Biotechnology Investments Limited 545,000 14.8% 40,000 12.0% 14,500 11.8% c/o Old Court Limited P.O. Box 58 St. Julian's Court St. Peter Port Guernsey, Channel Islands Singapore Bio-Innovations Pte, Ltd. 420,000 11.8% 42,000 12.6% 0 ** 250 North Bridge Road 24-00 Raffles City Tower Singapore 0617 Hoechst Marion Roussel(5) 400,000 11.3% 0 ** 0 ** 9300 Ward Parkway Kansas City, MO 64114 Asset Management Associates 360,000 10.3% 36,000 10.8% 0 ** 1989 L.P.(6) 2275 East Bayshore Rd., #150 Palo Alto, CA 94303 Applied Biosystems a Division of 353,800 10.7% 0 ** 0 ** Perkin Elmer Corporation(7) 850 Lincoln Centre Drive Foster City, CA 94404 Chiron Corporation 300,000 9.6% 0 ** 0 ** 4360 Horton Street Emeryville, CA 94608
41.
Series B Series C Common Stock(1) Preferred Stock(1) Preferred Stock(1) Name and Address ----------------- ------------------- ------------------- of Beneficial Owners Number Percent(2) Number Percent(2) Number Percent(2) - - ---------------------------------- ------ --------- -------- ----------- -------- ---------- Entities affiliated with Partech International(8) 300,000 8.7% 15,000 4.5% 15,000 12.2% 101 California Ave., Suite 3150 San Francisco, CA 94111 New York Life Insurance Company 270,000 7.9% 20,000 6.0% 7,000 5.7% 51 Madison Avenue, Room 203 New York, NY 10010 Becton Dickinson & Company 233,689 7.4% 0 ** 0 ** One Becton Drive Franklin Lakes, NJ 07417 Sam Eletr, Ph.D.(9) 413,759 12.3% 0 ** 0 ** William K. Bowes, Jr.(10) 747,721 19.3% 50,000 15.0% 23,000 18.7% Sydney Brenner, M.D., D. Phil.(11) 275,375 8.7% 0 ** 0 ** Timothy G. Geiser(12) 160,327 4.9% 0 ** 0 ** James C. Kitch(13) 15,818 ** 700 ** 300 ** Kathleen D. La Porte(3) 729,980 18.9% 49,999 15.0% 22,999 18.7% David W. Martin, Jr., M.D. 92,500 2.9% 0 ** 0 ** Karoly Nikolich, Ph.D.(14) 100,000 3.1% 0 ** 0 ** Craig C. Taylor(15) 371,499 10.6% 36,000 10.8% 0 ** Gerald Zon, Ph.D.(16) 160,806 4.9% 0 ** 0 ** All directors and officers 3,175,303 57.0% 136,699 41.1% 46,299 37.6% as a group (11 persons)(17) **Less than one percent. (1) Except as otherwise noted, and subject to community property laws where applicable, each person or entity named in the table has sole voting and investment power with respect to all shares shown as beneficially owned by him, her or it. Beneficial ownership of Common Stock reflects beneficial ownership of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock as set forth in the table or, with respect to Hoechst Marion Roussel, as set forth in footnote (5). (2) Percentage of beneficial ownership is based on 3,140,672 shares of the Company's Common Stock, 332,288 shares of the Company's Series B Preferred Stock, 123,299 shares of the Company's Series C Preferred Stock and 40,000 shares of the Company's Series D Preferred Stock outstanding as of February 28, 1997, except as otherwise noted in the footnotes. The Series B, Series C and Series D Preferred Stock is convertible into Common Stock on a ten-for-one basis. (3) Includes 49,999 shares of Series B Preferred Stock and 22,999 shares of Series C Preferred Stock held by entities affiliated with Sprout Group. Ms. La Porte, a director of the Company, is a general partner of the Sprout Group, an entity affiliated with Sprout Capital VI, Sprout Capital VII and DLJ Capital. Ms. La Porte shares the power to vote and control the disposition of shares held by Sprout Capital VI, Sprout Capital VII and DLJ Capital and therefore may be deemed to be the beneficial owner of such shares. Ms. La Porte disclaims beneficial ownership of such shares, except to the extent of her prorata interest therein. 42. (4) Includes 50,000 shares of Series B Preferred Stock and 23,000 shares of Series C Preferred Stock held by entities affiliated with U.S. Venture Partners IV, L.P. ("U.S.V.P. IV") Mr. Bowes, a director of the Company, is a general partner of Presidio Management Group IV, the general partner of U.S.V.P. IV. Mr. Bowes shares the power to vote and control the disposition of shares held by U.S.V.P. IV and therefore may be deemed to be the beneficial owner of such shares. Mr. Bowes disclaims beneficial ownership of such shares, except to the extent of his prorata interest therein. (5) Consists solely of 40,000 shares of Series D Preferred Stock, which constitutes 100% of the shares of Series D Preferred Stock outstanding. (6) Includes 36,000 shares of Series B Preferred Stock held by Asset Management Associates 1989 L.P. ("Asset 1989 L.P."). Mr. Taylor, a director of the Company, is a general partner of AMC Partners 89, which is the general partner of Asset 1989 L.P. Mr. Taylor shares the power to vote and control the disposition of shares held by Asset 1989 L.P. and therefore may be deemed to be the beneficial owner of such shares. Mr. Taylor disclaims beneficial ownership of such shares, except to the extent of his prorata interest therein. (7) Includes 152,400 shares of Common Stock issuable upon exercise of Lynx option held by Applied Biosystems that is exercisable immediately. (8) Includes 15,000 shares of Series B Preferred Stock and 15,000 shares Series C Preferred Stock held by entities affiliated with Partech International. (9) Includes 217,500 shares of Common Stock issuable upon exercise of Lynx stock options held by Dr. Eletr that are exercisable within 60 days. (10) See Note 4 above. Common Stock amount also includes 608 shares of Common Stock issuable upon exercise of Perkin Elmer Option held by Mr. Bowes that are fully vested and exercisable. (11) Includes 15,375 shares of Common Stock issuable upon exercise of Lynx stock options held by Sydney Brenner that are exercisable within 60 days. (12) Includes 123,500 shares of Common Stock issuable upon exercise of Lynx stock options held by Dr. Geiser that are exercisable within 60 days. Also includes 4 shares of Common Stock held of record by Dr. Geiser's wife, to which shares Dr. Geiser disclaims beneficial ownership. (13) Includes 700 shares of Series B Preferred Stock and 300 shares of Series C Preferred Stock held by GC&H Investments, an investment partnership of which Mr. Kitch is a general partner. Also includes 3,833 shares of Common Stock issuable upon the exercise of Lynx stock option held by Mr. Kitch on behalf of GC&H Investments. Mr. Kitch shares the power to vote and control the disposition of such shares and therefore may be deemed to be the beneficial owner of such shares. Mr. Kitch disclaims beneficial ownership of such shares, except to the extent of his prorata interest therein. (14) Includes 40,000 shares of Common Stock issuable upon exercise of Lynx stock options held by Dr. Nikolich that are exercisable within 60 days. (15) See Note 6 above. Common Stock amount also includes 1,000 shares of Series C Preferred Stock held by Mr. Taylor and 369 shares of Common Stock issuable upon exercise of Perkin Elmer Option that are fully vested and exercisable. (16) Includes 130,750 shares of Common Stock issuable upon exercise of Lynx stock options held by Dr. Zon that are exercisable within 60 days. Also includes 105 shares of Common Stock held of record by Dr. Zon's wife and 64 shares of Common Stock issuable upon exercise of Perkin Elmer Options held by Dr. 43. Zon's wife that are fully vested and exercisable, as to which shares Dr. Zon disclaims beneficial ownership. (17) Common Stock amount includes 1,839,980 shares of Series B and Series C Preferred Stock (common equivalent) held by entities affiliated with certain directors and 585,999 shares of Common Stock issuable upon exercise of the Company's stock options and Perkin Elmer Options held by directors and officers that are exercisable within 60 days. See Notes 9 through 16 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, may 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. Thereafter, through the termination of the option in September 1997, ABI may exercise such option provided that it promptly sells or otherwise disposes of any shares received upon such exercise. At December 31, 1996, there were 152,400 shares available for exercise. Transactions with Directors and Executive Officers In November 1996, Lynx and its majority owned subsidiary, Spectragen, Inc. ("Spectragen"), a Delaware corporation, entered into an Agreement of Merger pursuant to which Spectragen was merged with and into Lynx and the separate corporate existence of Spectragen ceased (the "Merger"). Each share of Spectragen Common Stock outstanding at the time of Merger was converted into 1.3 shares of Lynx Common Stock and all vested and unvested options to purchase shares of Spectragen Common Stock were assumed by Lynx and converted into options to purchase Lynx Common Stock at the same ratio. Dr. Eletr, a former stockholder and optionholder of Spectragen, received 130,000 shares of Lynx Common Stock and an option to purchase 32,500 shares of Lynx Common Stock as a result of the merger. Dr. Brenner, a former stockholder and optionholder of Spectragen, received 260,000 shares of Lynx Common Stock and an option to purchase 65,000 shares of Lynx Common Stock as a result of the merger. In May and June 1995, the Company entered into three separate loan agreements with David W. Martin, Jr., M.D., who was then the Company's President. The first loan of $450,000 was a promissory note secured by a second mortgage on real property. The principal and interest on this loan were repaid according to the terms of the note in September 1996, upon sale of the property. The second loan of $450,000 was issued under a Stock Purchase Agreement for the purchase of 250,000 shares of Common Stock whereby all the shares issued under the agreement were pledged as collateral. Of the 250,000 shares, 225,000 shares were subject to the Company's right of repurchase which lapsed ratably over five years. The loan agreement specified that upon termination, after the Company's right of repurchase was exercised, the remaining principal and interest on the loan were due and payable. In November 1996, the officer left the Company and the stock purchase loan was repaid in full. The third loan was a line of credit agreement whereby Dr. Martin could borrow from the Company up to $25,000 per calendar quarter during the first two years of employment. The line was secured by shares of the Company's Common Stock owned by Dr. Martin. The principal and accrued interest due on the line of credit, an aggregate of $157,862, was forgiven upon Dr. Martin's separation from the Company. In October 1995, the Company entered into a loan agreement with another officer of the Company. The note receivable of $210,000 was issued under a Stock Purchase Agreement for the purchase of 60,000 shares of Common Stock whereby all the shares issued under the agreement are pledged as collateral. The outstanding principal amount is due and payable in full on October 1, 2000, subject to an obligation to prepay under specified circumstances. Interest is payable upon the expiration or termination of the note and accrues at the rate of 44. 6.38% per annum. As of February 28, 1997, the outstanding principal and accrued interest under the note was $228,906. The Company currently has no other employment contracts with any Named Executive Officers, and the Company has no other compensatory plan or arrangement with Named Executive Officers where the amounts to be paid exceed $100,000 and which are activated upon resignation, termination or retirement of any such executive officer or upon a change in control of the Company. For legal services rendered during the calendar year ended December 31, 1996, the Company paid approximately $468,937 to Cooley Godward LLP, the Company's counsel, of which Mr. Kitch, a director of the Company, is a partner. 45. 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 18 through 22 of this report: (i) Report of Ernst & Young LLP, Independent Auditors. (ii) Consolidated Balance Sheets as of December 31, 1996 and 1995. (iii) Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994. (iv) Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. (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 - - -------- ----------------------- 3.1.1 Certificate of Amendment of Certificate of the Amended and Restated Certificate of Incorporation of the Company. 3.2 Bylaws of the Company, as amended, incorporated by reference to the indicated exhibit of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 3.3 Certificate of Designation of Preferences of Series B Convertible Preferred Stock of the Company, incorporated by reference to the indicated exhibit of the Registrant's Form 10-K for the transition period ended December 31, 1993. 3.4 Certificate of Amendment of Certificate of Designation of Preferences of Series B Convertible Preferred Stock of the Company, incorporated by reference to the indicated exhibit of the Registrant's Form 10-Q for the period ended March 31, 1995. 3.4.1 Certificate of Amendment to Certificate of Designation of Preferences of Series B Convertible Preferred Stock of the Company. 3.5 Certificate of Designation of Preferences of Series C Convertible Preferred Stock, incorporated by reference to the indicated exhibit of the Registrant's Form 10-Q for the period ended March 31, 1995. 3.5.1 Certificate of Amendment to Certificate of Designation of Preferences of Series C Convertible Preferred Stock of the Company. 3.6 Certificate of Amendment to Certificate of Designation of Preferences of Series D Convertible Preferred Stock of the Company. 4.1 Shareholders Agreement, dated as of October 1, 1992, by and among the Company, Applied Biosystems, Inc. ("ABI") and Chiron Corporation ("Chiron"), incorporated by reference to the indicated exhibit of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 4.2 Form of Common Stock Certificate, incorporated by reference to the indicated exhibit of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 4.3 Form of Series B Preferred Stock Certificate, incorporated by reference to Exhibit 4.4 of the Registrant's Form 10-K for the transition period ended December 31, 1993. 4.4 Form of Series C Preferred Stock Certificate, incorporated by reference to Exhibit 4.5 of the Registrant's Form 10-K for the period ended December 31, 1995. 46. 4.5 Form of Series D Preferred Stock Certificate, incorporated by reference to Exhibit 4.6 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.1 Preferred Stock Purchase Agreement, dated as of October 1, 1992, between the Company and ABI, incorporated by reference to the indicated exhibit of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.2 Stock Purchase Agreement, dated as of June 30, 1992, between the Company and Timothy Geiser, incorporated by reference to the indicated exhibit of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.3 Stock Purchase Agreement, dated as of June 30, 1992, between the Company and Gerald Zon, incorporated by reference to the indicated exhibit of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.4 Stock Purchase Agreement, dated as of August 25, 1992, between the Company and Sam Eletr, incorporated by reference to Exhibit 10.6 of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.5 Form of Indemnity Agreement entered into between the Company and its directors and officers, incorporated by reference to Exhibit 10.7 of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.6+ The Company's 1992 Stock Option Plan (the "Stock Option Plan"), incorporated by reference to Exhibit 10.8 of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.7+ Form of Incentive Stock Option Grant under the Stock Option Plan, incorporated by reference to Exhibit 10.9 of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.8+ Form of Nonstatutory Stock Option Grant under the Stock Option Plan, incorporated by reference to Exhibit 10.10 of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.9 Agreement of Assignment and License of Intellectual Property Rights, dated June 30, 1992, between the Company and ABI, incorporated by reference to Exhibit 10.11 of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.10 Lease, dated as of June 28, 1993, by and between the Company and Spieker-Singleton #87, Limited Partnership, incorporated by reference to Exhibit 10.14 of the Registrant's Statement Form 10 (File No. 0-22570), as amended. 10.11 Series B Convertible Preferred Stock Purchase Agreement, dated as of February 15, 1994, between the Company and the Purchasers, incorporated by reference to the Exhibit 10.16 of the Registrant's Form 10-K for the transition period ended December 31, 1993. 10.12 Investor Rights Agreement, dated as of February 15, 1994, between the Company and the Purchasers, incorporated by reference to the Exhibit 10.17 of the Registrant's Form 10-K for the transition period ended December 31, 1993. 10.13 Series C Convertible Preferred Stock Purchase Agreement, dated as of March 24, 1995, incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.14 Investors Rights Agreement, dated as of March 24, 1995, incorporated by reference to Exhibit 10.20 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.15 Spectragen Formation Agreement, dated as of March 24, 1995, incorporated by reference to Exhibit 10.21 of the Registrant's Form 10-Q for the period ended March 31, 1996. 10.16+ Spectragen Stockholder's Agreement, dated as of August 21, 1995, incorporated by reference to Exhibit 10.22 of the Registrant's Form 10-Q for the period ended March 31, 1996. 10.17+ Employment Agreement, dated as of May 1, 1995 between the Company and David W. Martin, Jr., M.D., incorporated by reference to Exhibit 10.23 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.18+ Stock Purchase Agreement dated as of May 1, 1995, between the Company and David W. Martin, Jr. M.D., incorporated by reference to Exhibit 10.24 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.19+ Loan Agreement, dated as of May 1, 1995, between the Company and David W. Martin, Jr., M.D. incorporated by reference to Exhibit 10.25 of the Registrant's Form 10-K for the period ended December 31, 1995. 47. 10.20+ Promissory Note Secured by Mortgage, dated as of June 12, 1995, to the Company by David W. and Kathleen M. Martin Revocable Trust, incorporated by reference to Exhibit 10.26 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.21+ Stock Purchase Agreement dated as of October 2, 1995, between the Company and Karoly Nikolich, incorporated by reference to Exhibit 10.27 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.22 Technology Development and Services Agreement, dated as of October 2, 1995, between the Company and Hoechst Aktiengesellschaft and its subsidiary, Hoechst Marion Roussel, incorporated by reference to Exhibit 10.28 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.23 Series D. Convertible Preferred Stock Purchase Agreement, dated as of October 2, 1995, incorporated by reference to Exhibit 10.29 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.24 Amended and Restated Investor Rights Agreement, dated as of November 1, 1995, incorporated by reference to Exhibit 10.30 of the Registrant's Form 10-K for the period ended December 31, 1995. 10.25+ Stock Purchase Agreement, dated as of June 13, 1996, between Spectragen, Inc. and Sam Eletr. (The Stock Purchase Agreement was assumed by the Company pursuant to the Agreement of Merger between the Company and Spectragen, Inc. 10.26 Collaboration Agreement , dated as of July 9, 1996, between the Company and Tanabe Seiyaku Co., Ltd., incorporated by reference to Exhibit 10.31 of the Registrant's Form 10-Q for the period ended June 30, 1996. 10.27 Collaboration Agreement , dated as of September 30, 1996, between the Company and Schwarz Pharma AG., incorporated by reference to Exhibit 10.32 of the Registrant's Form 10-Q for the period ended September 20, 1996. 10.28 Technology Services Agreement, dated October 23, 1996, between the Company and BASF Aktiengesellschaft.** 10.29 Joint Venture Agreement, dated as of October 23, 1996, between the Company and BASF Aktiengesellschaft.** 10.30 Agreement of Merger, dated as of October 23, 1996, between the Company and Spectragen, Inc. 10.31+ Separation Agreement, dated as of November 1, 1996, between the Company and David W. Martin, Jr., M.D. 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 49. - - ------------------ (+) 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 N/A 48. 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 24th day of March 1997. 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 24, 1997 - - ------------------------------------------ Chairman of the Board Sam Eletr (Principal Executive Officer) /s/ William K. Bowes, Jr. Director March 24, 1997 - - ------------------------------------------ William K. Bowes, Jr. /s/ Sydney Brenner Director March 24, 1997 - - ------------------------------------------ Sydney Brenner /s/ James C. Kitch Director March 24, 1997 - - ------------------------------------------ James C. Kitch /s/ Kathleen D. La Porte Director March 24, 1997 - - ------------------------------------------ Kathleen D. La Porte /s/ Craig C. Taylor Director and Acting Chief Financial Officer March 24, 1997 - - ------------------------------------------ (Principal Financial and Accounting Officer) Craig C. Taylor Officer
49. EX-3.1.1 2 EXHIBIT 3.1.1 EXHIBIT 3.1.1 CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LYNX THERAPEUTICS, INC. Lynx Therapeutics, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: The name of the corporation is Lynx Therapeutics, Inc. (the "Corporation"). SECOND: The date on which the Certificate of Incorporation of the Corporation first was filed with the Secretary of State of the State of Delaware is February 18, 1992. THIRD: The Board of Directors, acting in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware, adopted resolutions to amend Article 4 of the Restated Certificate of Incorporation of the Corporation to read in its entirety as follows: "4. A. This Corporation is authorized to issue two classes of shares to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Twenty-two Million (22,000,000) shares. Twenty Million (20,000,000) shares shall be Common Stock, par value one cent ($.01) per share (the "Common Stock") and Two Million (2,000,000) shares shall be Preferred Stock, par value one cent ($.01) per share (the "Preferred Stock")." B. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the corporation is expressly authorized to provide for the issue of all or any of the shares of Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such shares and as may be permitted by the General Corporation Law of the State of Delaware. The Board of Directors is also expressly authorized to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. FOURTH: Thereafter, pursuant to a resolution of the Board of Directors, this Certificate of Amendment was submitted to the stockholders of the Corporation for their approval and approved by the stockholders in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Lynx Therapeutics, Inc. has caused this Certificate of Amendment to be signed by its Chief Executive Officer and attested by its Secretary this 23rd day of December, 1996. LYNX THERAPEUTICS, INC. /s/ Sam Eletr ------------------------------------- Sam Eletr, Ph.D. Chief Executive Officer ATTEST: /s/ James C. Kitch - - ---------------------------------- James C. Kitch Secretary 2. EX-3.4.1 3 EXHIBIT 3.4.1 EXHIBIT 3.4.1 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF DESIGNATION OF PREFERENCES OF SERIES B CONVERTIBLE PREFERRED STOCK OF LYNX THERAPEUTICS, INC. Lynx Therapeutics, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: The name of the corporation is Lynx Therapeutics, Inc. (the "Corporation"). SECOND: The date on which the Certificate of Incorporation of the Corporation first was filed with the Secretary of State of the State of Delaware is February 18, 1992. THIRD: The Board of Directors, acting in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, adopted resolutions to decrease the number of shares of Preferred Stock designated as "Series B Convertible Preferred Stock" to the number of such shares currently outstanding, by amending Section A of Article THIRD and the first paragraph of Section B of Article THIRD of the "Certificate of Designation of Preferences of Series B Convertible Preferred Stock of Lynx Therapeutics, Inc." to read in their entirety as follows: "A. Three Hundred Thirty-Two Thousand Two Hundred Eighty-Eight (332,288) of the authorized shares of Preferred Stock hereby are designated "Series B Convertible Preferred Stock." B. The powers, preferences, rights, restrictions and other matters relating to the Three Hundred Thirty-Two Thousand Two Hundred Eighty-Eight (332,288) shares of Series B Convertible Preferred Stock are as follows:" IN WITNESS WHEREOF, Lynx Therapeutics, Inc. has caused this Certificate of Amendment to be signed by its Chief Executive Officer and attested by its Secretary this 23rd day of December, 1996. LYNX THERAPEUTICS, INC. /s/ Sam Eletr ------------------------------- Sam Eletr, Ph.D. Chief Executive Officer ATTEST: /s/ James C. Kitch - - ---------------------------- James C. Kitch Secretary 2. EX-3.5.1 4 EXHIBIT 3.5.1 EXHIBIT 3.5.1 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF DESIGNATION OF PREFERENCES OF SERIES C CONVERTIBLE PREFERRED STOCK OF LYNX THERAPEUTICS, INC. Lynx Therapeutics, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: The name of the corporation is Lynx Therapeutics, Inc. (the "Corporation"). SECOND: The date on which the Certificate of Incorporation of the Corporation first was filed with the Secretary of State of the State of Delaware is February 18, 1992. THIRD: The Board of Directors, acting in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, adopted resolutions to decrease the number of shares of Preferred Stock designated as "Series C Convertible Preferred Stock" to the number of such shares currently outstanding, by amending Section A of Article THIRD and the first paragraph of Section B of Article THIRD of the "Certificate of Designation of Preferences of Series C Convertible Preferred Stock of Lynx Therapeutics, Inc." to read in their entirety as follows: "A. One Hundred Twenty-Three Thousand Two Hundred Ninety-Nine (123,299) of the authorized shares of Preferred Stock hereby are designated "Series C Convertible Preferred Stock." B. The powers, preferences, rights, restrictions and other matters relating to the One Hundred Twenty-Three Thousand Two Hundred Ninety-Nine (123,299) shares of Series C Convertible Preferred Stock are as follows:" IN WITNESS WHEREOF, Lynx Therapeutics, Inc. has caused this Certificate of Amendment to be signed by its Chief Executive Officer and attested by its Secretary this 23rd day of December, 1996. LYNX THERAPEUTICS, INC. /s/ Sam Eletr --------------------------- Sam Eletr, Ph.D. Chief Executive Officer ATTEST: /s/ James C. Kitch - - ------------------------- James C. Kitch Secretary 2. EX-3.6 5 EXHIBIT 3.6 EXHIBIT 3.6 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF DESIGNATION OF PREFERENCES OF SERIES D CONVERTIBLE PREFERRED STOCK OF LYNX THERAPEUTICS, INC. Lynx Therapeutics, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: The name of the corporation is Lynx Therapeutics, Inc. (the "Corporation"). SECOND: The date on which the Certificate of Incorporation of the Corporation first was filed with the Secretary of State of the State of Delaware is February 18, 1992. THIRD: The Board of Directors, acting in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, adopted resolutions to decrease the number of shares of Preferred Stock designated as "Series D Convertible Preferred Stock" to the number of such shares currently outstanding, by amending Section A of Article THIRD and the first paragraph of Section B of Article THIRD of the "Certificate of Designation of Preferences of Series D Convertible Preferred Stock of Lynx Therapeutics, Inc." to read in their entirety as follows: "A. Forty Thousand (40,000) of the authorized shares of Preferred Stock hereby are designated "Series D Convertible Preferred Stock." B. The powers, preferences, rights, restrictions and other matters relating to the Forty Thousand (40,000) shares of Series D Convertible Preferred Stock are as follows:" IN WITNESS WHEREOF, Lynx Therapeutics, Inc. has caused this Certificate of Amendment to be signed by its Chief Executive Officer and attested by its Secretary this 23rd day of December, 1996. LYNX THERAPEUTICS, INC. /s/ Sam Eletr ------------------------------ Sam Eletr, Ph.D. Chief Executive Officer ATTEST: /s/ James C. Kitch - - ---------------------------- James C. Kitch Secretary 2. EX-10.25 6 STOCK PURCHASE AGREEMENT EXHIBIT 10.25 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made by and between SPECTRAGEN, INC., a Delaware corporation (the "Company"), and SAM ELETR ("Purchaser"). WITNESSETH: WHEREAS, Purchaser holds a non-statutory stock option to purchase shares of common stock of the Company pursuant to the Company's 1995 Stock Option Plan (the "Plan") which Purchaser desires to exercise; and WHEREAS, Purchaser wishes to take advantage of the early exercise provision of his option and therefore to enter into this Agreement; NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Purchaser, an aggregate of One Hundred Thousand (100,000) shares of the Company's Common Stock (the "Stock"), for an exercise price of Twenty Cents ($0.20) per share (total exercise price: (Twenty Thousand Dollars ($20,000)), payable in cash. The closing hereunder shall occur at the offices of the Company on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. At the closing, Purchaser shall deliver one (1) stock assignment in the form of Exhibit A, duly endorsed (with date and number of shares left blank), joint escrow instructions (the "Joint Escrow Instructions") in the form of Exhibit B, duly executed by Purchaser, and the total exercise price. At the closing or as soon thereafter as practicable, the Company shall deliver to the Escrow Agent (as defined in paragraph 8 below) a share certificate for all of the Stock that is to be subject to the Purchase Option (as defined in paragraph 2 below). 2. In accordance with the provisions of Section 408(b) of the California General Corporation Law, the Stock to be purchased by Purchaser pursuant to this Agreement shall be subject to the following option ("Purchase Option"): (a) In the event that Purchaser shall cease to be an employee of the Company for any reason (including his death), or no reason, with or without cause, the Purchase Option may be exercised. The Company shall have the right at any time within the ninety (90) day period after Purchaser's termination of service with the Company and all related companies or such longer period as may be agreed to by the Company and Purchaser (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Internal Revenue Code) to purchase from Purchaser or his personal representative, as the case may be, at the price per share paid by Purchaser pursuant to this Agreement ("Option Price"). (b) The Stock shall vest as follows: One-twentieth (1/20) of the total number of shares of Stock shall vest one year from the first date of employment and one-sixtieth (1/60) will vest monthly thereafter, so that upon the date that is five years from the Commencement Date, all of the shares of Stock shall have vested. Shares of Stock that have vested shall not be subject to the Purchase Option. (c) In addition, and without limiting the foregoing Purchase Option, if at any time during the term of the Purchase Option, there occurs: (a) a dissolution or liquidation of the Company; (b) a merger or consolidation involving the Company in which the Company is not the surviving Company; (c) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of other securities, cash or otherwise; or (d) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then: (i) if there is no successor to the Company, the Company shall have the right to exercise its Purchase Option as to all or any portion of the Stock then subject to the Purchase Option set forth above to the same extent as if Purchaser's employment by the Company had ceased on the date preceding the date of consummation of said event or transaction, or (ii) the Purchase Option may be assigned to any successor of the Company, and the Purchase Option shall apply if Purchaser shall cease for any reason to be an employee of such successor on the same basis as set forth above. In that case, references herein to the "Company" shall be deemed to refer to such successor. (d) As used herein, employment with the Company shall include employment with an affiliate of the Company. (e) This Agreement is not an employment contract and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on the part of Purchaser to continue in the employ of the Company, or of the Company to continue Purchaser in the employ of the Company. (f) In the event that the Stock's Fair Market Value (as defined in the Plan) is equal to or exceeds the Option Price on the date that the Purchaser ceases to be employed, the Company shall exercise its Purchase Option to the extent permitted by law. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 14. Upon providing of such notice and payment or tender of the purchase price, the Company shall become the legal and beneficial owner of the Stock being purchased and all rights and interests therein or related thereto. 2. 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Stock will be immediately subject to the Purchase Option and be included in the word "Stock" for all purposes of the Purchase Option with the same force and effect as the shares of Stock then subject to the Purchase Option. While the total Option Price shall remain the same after each such event, the Option Price per share of Stock upon exercise of the Purchase Option shall be appropriately adjusted. 5. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon legends in substantially the following form: (i) "The shares represented by this certificate are subject to an option set forth in an agreement between the Company and the registered holder, or his predecessor in interest, a copy of which is on file at the principal office of this Company. Any transfer or attempted transfer of any shares subject to such option is void without the prior express written consent of the issuer of these shares." (ii) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or an opinion of counsel satisfactory to the Company that such registration is not required." (iii) Any legend required to be placed thereon by the California Commissioner of Corporations. 6. Purchaser acknowledges that he is aware that the Stock to be issued to him by the Company pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Company is relying on the following representations: Purchaser warrants and represents to the Company that he is acquiring the Stock for investment and not with any present intention of distributing or selling the Stock and he does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him to sell the Stock. Purchaser recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available and, further, recognizes that the Company is under no obligation to register the Stock or to comply with any exemption from such registration. 7. Purchaser is aware that the Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met and until Purchaser has held the Stock for at least two (2) years. Among the conditions for use of Rule 144 is the availability 3. of specified current public information about the Company. Purchaser recognizes that the Company presently has no plans to make such information available to the public. Whether or not the Purchase Option is exercised or has lapsed, Purchaser further agrees not to make any disposition of any of the Stock in any event unless and until; (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) Purchaser shall have given the Corporation an opinion of counsel, which opinion and counsel shall be satisfactory to the Company, to the effect that such disposition will not require registration of the Stock under the Act. 8. As security for his faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Stock upon exercise of the Purchase Option herein provided for, Purchaser agrees, at the closing hereunder (or as soon thereafter as practicable), to deliver (or have the Company deliver on the Purchaser's behalf) to and deposit with the Secretary of the Company ("Escrow Agent"), as Escrow Agent in this transaction, one (1) stock assignment duly endorsed (with date and number of shares left blank) in the form attached hereto as Exhibit A, together with a certificate or certificates evidencing all of the Stock subject to the Purchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit B attached hereto and incorporated herein by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder (or as soon thereafter as practicable). 9. Purchaser shall not sell or transfer any of the Stock subject to the Purchase Option or any interest therein so long as such Stock is subject to the Purchase Option. 10. The Company shall not be required (i) to transfer on its books any shares of Stock of the Company which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 11. Subject to the provisions of paragraphs 9 and 10 above, Purchaser (but not any unapproved transferee) shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Stock. 12. Purchaser acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Administrative Code, attached hereto as Exhibit C. 4. 13. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such part may designate by ten (10) days' advance written notice to the other part hereto. 15. This Agreement shall bind and inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser, his heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of the Company hereunder shall be assignable by the Company at any time or from time to time, in whole or in part. Should the right of repurchase be assigned by the Company, the assignee shall pay to the Company cash equal to the excess, if any, of the Stock's Fair Market Value (as defined in the Plan) over the Option Price. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 13th day of June, 1996. SPECTRAGEN, INC. By /s/ Craig C. Taylor ---------------------------- Address: 3832 Bay Center Place Hayward, CA 94545 PURCHASER /s/ Sam Eletr ---------------------------- Address: ---------------------------- ATTACHMENTS: Exhibit A Assignment Separate from Certificate Exhibit B Joint Escrow Instructions Exhibit C Cal. Admin. Code, Title 10, Section 260.141.11 5. Exhibit A ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, ____________________________________ hereby sells, assigns and transfers unto Spectragen, Inc. ("Lynx") a total of (_____) shares of Common Stock of Spectragen, Inc. (the "Company") standing in its name on the books of said corporation represented by Certificate No. _______ herewith and does hereby irrevocably constitute and appoint Secretary (or his successor) of Spectragen, Inc. as Attorney to transfer such stock on the books of the within named Company with full power of substitution in the premises. This Assignment may be used only in connection with and subject to the terms and conditions of that certain Stockholders Agreement dated as of August 21, 1995 by and among the Company, Lynx and certain stockholders of the Company, to which the undersigned stockholder(s) became party as of June 1, 1996. Dated: -------------------- Signature ------------------------- Print Name: ------------------------- 6. Exhibit B JOINT ESCROW INSTRUCTIONS Secretary Spectragen, Inc. 3832 Bay Center Place Hayward, CA 94545 Dear Sir: As Escrow Agent for Spectragen, Inc., a Delaware corporation ("Company"), Lynx Therapeutics, Inc., a Delaware corporation ("Lynx") and the undersigned purchaser of stock of the Company ("Stockholder"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Stockholders Agreement ("Agreement"), dated, August 21, 1995, to which the Stockholder became a party on, June 12, 1996, in accordance with the following instructions: 1. In the event that Lynx exercises the Purchase Right set forth in the Agreement, Lynx or its assignee will give written notice to Stockholder and you pursuant to the terms of the Agreement. Stockholder, Lynx and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of the Agreement. 2. At the closing you are directed to: (a) date any stock assignments necessary for the transfer in question, (b) fill in the number of shares being transferred, and (c) deliver same, together with the certificate evidencing the shares of stock to be transferred, to Lynx against the simultaneous delivery to you of the consideration for the exercise of the Purchase Right set forth in the Agreement. 3. Stockholder irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to such shares as specified in the Agreement. Stockholder does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and to complete any transaction herein contemplated, including but not limited to any appropriate filing with government or bank officials. Subject to the provisions of this Section 3, Stockholder shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you. 4. This escrow shall terminate upon expiration or exercise in full of the Purchase Right, whichever occurs first. 7. 5. If, at the time of termination of this escrow, you should have in your possession any documents, securities, or other property belonging to Stockholder, you shall deliver all of same to any pledgee entitled thereto or, if none, to Stockholder and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Stockholder while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and you are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel (including without limitation the firm of Cooley Godward Castro Huddleson & Tatum) and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Stockholder hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment. 8. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you may (but are not obligated to) retain in your possession without liability to anyone all or any part of such securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Box, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten (l0) days' written notice to each of the other parties hereto: COMPANY: Spectragen, Inc. 3832 Bay Center Place Hayward, CA 94545 Attn: President LYNX: Lynx Therapeutics, Inc. 3832 Bay Center Place Hayward, CA 94545 Attn: President STOCKHOLDER: ___________________________________ ___________________________________ ___________________________________ ESCROW AGENT: Secretary Spectragen, Inc. 3832 Bay Center Place Hayward, CA 94545 16. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of such Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and 9. all successor Escrow Agents. It is understood and agreed that the Company and Lynx may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. Very truly yours, SPECTRAGEN, INC. By: /s/ Craig C. Taylor ----------------------------- Title: Director ----------------------------- STOCKHOLDER: /s/ Sam Eletr ----------------------------- ESCROW AGENT: James C. Kitch - - ------------------------- Secretary Spectragen, Inc. 10. Exhibit C STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE TITLE 10. Investment- Chapter 3. Commissioner of Corporations 260.141.11: RESTRICTION ON TRANSFER. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of sift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or a member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, . 5113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25 140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; 11. (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at S the sale that transfer of the securities is restricted under rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser: (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) In by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security is issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial is upon or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: *IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURlTY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. COMMISSIONER'S RULES. "20856238 020695 12. EX-10.28 7 EXHIBIT 10.28 EXHIBIT 10.28 MPSS TECHNOLOGY SERVICES AGREEMENT THIS MPSS TECHNOLOGY SERVICES AGREEMENT (the "Agreement") is made and entered into as of October 23, 1996 (the "Effective Date") by LYNX THERAPEUTICS, INC., a Delaware corporation ("Lynx"), and BASF AKTIENGESELLSCHAFT, a corporation organized under the laws of Germany ("BASF"). RECITALS WHEREAS, Lynx owns certain inventions, methods and intellectual property relating to a novel technique for determining cDNA sequence information from a sample; and WHEREAS, Lynx is commercializing such techniques for use in the analysis of cDNA libraries for research and commercial purposes; and WHEREAS, BASF desires to secure access to Lynx's library analysis capabilities and services on the terms set forth herein and is willing to provide financial support for Lynx's development work; NOW THEREFORE, in consideration of the foregoing premises and the covenants and promises contained in this Agreement, the parties hereto agree as follows: 1. DEFINITIONS Capitalized terms use in this Agreement shall have the meanings ascribed to them in the following sections of this Article 1, unless otherwise defined in this Agreement. 1.1 "Affiliate" means a corporation, partnership, entity, person, firm, company, or joint venture that controls, is controlled by or is under the common control with the referenced Party. For the purposes of this definition the word "control" (including, with correlative meaning, the terms "controlled by" or "is under the common control with") means the power to direct or cause the direction of the management and policies of such entity, or the ownership of a least fifty percent (50%) of the voting stock of such entity; provided, however, that, if the applicable law of the jurisdiction of organization of such entity prohibits ownership by a Party of fifty percent (50%) or more, then "control" shall mean the ownership of the maximum percentage of the voting stock of such entity allowed by such applicable law. 1.2 "Massively Parallel Signature Sequencing" or "MPSS" means the parallel acquisition of at least [REDACT] contiguous bases (a "Signature Sequence") from each of at least [REDACT] templates sampled from a given cell culture or tissue cDNA library. CONFIDENTIAL TREATMENT REQUESTED 1.3 "Milestone" means the achievement by Lynx of the technical parameters with respect to MPSS performance that are set forth in Exhibit A hereto. 1.4 "MPSS Library Analysis" means a report containing each [REDACT] base sequence and its abundance within the [REDACT] or more cDNA templates extracted from a given sample. 2. LYNX MPSS SERVICES 2.1 Access Fee. In consideration of Lynx's commitment to provide BASF with the services hereinafter described, BASF agrees to pay to Lynx five and one-half million U.S. dollars ($5,500,000) within thirty (30) days of the Effective Date (the "Initial Payment"). BASF shall pay Lynx an additional five and one-half million U.S. dollars ($5,500,000) within thirty (30) days after Lynx notifies BASF that the Milestone has been achieved and provides BASF with the data demonstrating achievement of such milestone (the "Milestone Payment"). The obligations of BASF to make such additional payment and any subsequent payments under this Agreement shall only come into effect if the patent due diligence of BASF does not reveal by January 15, 1997 that Lynx could be blocked from performing MPSS Library Analyses in the United States. If such payment obligations do not come into effect due to the foregoing, then this Agreement shall terminate on January 15, 1997. 2.2 Initial Subscription Period. Within thirty (30) days after BASF delivers to Lynx the Milestone Payment required under Section 2.1, BASF shall make a payment to Lynx of four million U.S. dollars ($4,000,000) in respect of MPSS analysis services to be provided during the first half of an initial subscription period (the "First Subscription Payment"). On the first anniversary of the commencement of the initial subscription period, BASF shall make an additional payment to Lynx of four million U.S. dollars ($4,000,000) in respect of the MPSS analysis services to be performed hereunder. The initial subscription period shall commence on the date the First Subscription Payment is due, and shall terminate on the date that is twenty-four (24) months after such date. During such initial subscription period, BASF shall be entitled to receive from Lynx, without further charge, MPSS Library Analyses for up to [REDACT] separate cDNA library samples delivered to Lynx by BASF during such period. In addition, during the same period, BASF shall be entitled to order from Lynx up to [REDACT] additional MPSS Library Analyses, for which BASF shall pay Lynx [REDACT] per additional MPSS Library Analysis. If at the end of the initial subscription period, BASF submits for MPSS analysis less than [REDACT] cDNA library samples, BASF may submit the balance, but in any case not more than [REDACT], for analysis during the following 24 months [REDACT] (the "Carry Over Period"). 2.3 Renewal of Subscription. BASF may, at its option and upon 30 days prior written notice, elect to extend its subscription on the terms set forth in Section 2.2 above for additional subsequent one year periods, by making in respect of each renewal period a payment to Lynx of [REDACT] prior to expiration of the then current subscription period. CONFIDENTIAL TREATMENT REQUESTED 2. Each renewal shall be subject to increases annually to reflect increases in the U.S. Producer Price Index--All Urban Producers during the prior subscription period. This Agreement shall expire at the end of the last subscription period paid for by BASF as provided for in Sections 2.2 and 2.3, if BASF fails to so renew its subscription for MPSS services for the subsequent period as provided in this Section 2.3. 2.4 Informatics. The parties acknowledge that Lynx intends to develop software to facilitate the analysis of data secured from MPSS Library Analyses. Lynx agrees that BASF may at its election obtain for its own use during the term of this Agreement object copies of such software [REDACT]. 2.5 Ownership of Technology. Subject to 2.7 below, BASF acknowledges and agrees that any and all inventions (patentable or unpatentable), information, know-how, techniques, methods, materials or other technology developed, discovered or made by Lynx during the development work shall be owned entirely by Lynx and shall be disclosed to BASF only to the extent Lynx elects to do so. Lynx shall own and have the sole and exclusive right to prosecute and maintain all patents and patent applications covering any such technology. 2.6 Access to Lynx Reference Data Base. Lynx will build and maintain a reference data base containing MPSS information and data derived from MPSS analyses of a variety of reference tissue and cell types. Lynx agrees that BASF shall have access to this reference data base in order to enable BASF, by comparing the results of MPSS Library Analyses with data generated from MPSS Library Analyses of pertinent reference samples, to minimize the work that BASF may need to do to validate data obtained from its samples. Lynx agrees to make this reference data base available to BASF as it is built during the term of this Agreement [REDACT] to BASF. 2.7 BASF Intellectual Property. BASF shall own the entire right, title and interest in and to the cDNA libraries that it sends to Lynx for analysis and the results of the MPSS Library Analyses of such libraries prepared for BASF pursuant to this Agreement. Lynx agrees that it shall treat the identity and nature of such cDNA libraries delivered to Lynx by BASF hereunder and the results of the related MPSS Library Analyses as the "Confidential Information" of BASF pursuant to Article 3 hereof. Nevertheless, BASF agrees to give appropriate credit to Lynx in any scientific publication of its research that relies on such results. 3. CONFIDENTIALITY 3.1 Confidentiality. All knowledge, know-how, practices, processes or other information (hereinafter referred to as "Confidential Information") disclosed by one party to the other (the "Receiving Party") and which is designated in writing as Confidential Information or, if disclosed orally, is reduced to writing within thirty (30) days of disclosure CONFIDENTIAL TREATMENT REQUESTED 3. and designated as Confidential Information, shall be received and maintained by such party in strict confidence and shall not be disclosed to any third party. The Receiving Party shall not use said Confidential Information for any purpose other than those purposes specified in this Agreement. The Receiving Party may disclose Confidential Information for the purposes of this Agreement to Affiliates, employees or consultants who are obliged to comply with this confidentiality provision. This Section 3.1 shall survive for a period of five (5) years from expiration or termination of this Agreement. The nondisclosure obligations of this Section 3.1 shall not apply to Confidential Information which the Receiving Party can establish by competent evidence (i) is in the public domain prior or subsequent to disclosure without breach by the Receiving Party, (ii) was in the Receiving Party's possession at the time of disclosure, (iii) is received by Receiving Party from a third party who has the lawful right to disclose it or (iv) is disclosed as required by law or regulation or with the written consent of the other party. 4. TERM AND TERMINATION 4.1 Term. This Agreement shall expire two years from the Effective Date if the Milestone has not been achieved as of such date. If such milestone is achieved before such date, this Agreement shall expire at the end of the initial subscription period or the Carry Over Period both as provided for in Section 2.2 or, if the subscription period is renewed under Section 2.3, at the end of the last subscription period to be paid for by BASF under Section 2.3. 4.2 Termination for Material Breach. Each party shall have the right to terminate this Agreement, in addition to pursuing any remedies available under law or in equity, upon sixty (60) days written notice to the other party if the other party is in material breach of this Agreement. Such termination shall not be effective if the other party cures such breach within sixty (60) days of receiving written notice of breach; thirty (30) days where the alleged breach is failure to pay money when due. 4.3 Effect of Termination; Survival. Upon any expiration or termination of this Agreement, BASF will pay to Lynx all amounts that have been earned by Lynx through the expiration or termination date. Lynx will return any remaining samples provided by BASF, supply BASF with any MPSS Library Analyses of BASF samples generated prior to the expiration or termination date, and, in the case of termination, shall return to BASF any advance payment to the extent such advance payment was intended to serve as payment for services subsequent to the termination date. Section 3.1 shall survive for five (5) years following expiration or termination with respect to Confidential Information disclosed prior to expiration or termination. 4. 5. REPRESENTATIONS AND WARRANTIES 5.1 Lynx. Lynx hereby represents and warrants that it has full corporate power and authority to enter into this Agreement, that this Agreement has been duly and validly executed and delivered by it and constitutes a legal, valid and binding obligation of Lynx, enforceable in accordance with its terms. Lynx represents and warrants that the "Initial Payment" made to Lynx under Section 2.1 above shall be used to further develop, refine, and improve the MPSS and related technologies, capabilities, and methods. 5.2 BASF. BASF hereby represents and warrants that it has full corporate power and authority to enter into this Agreement, that this Agreement has been duly and validly executed and delivered by it and constitutes a legal, valid and binding obligation of BASF, enforceable in accordance with its terms. 5.3 Disclaimer. All materials, technology and information exchanged between the parties or used in performing this Agreement is provided "as is" and the party providing or using such technology expressly disclaims any and all warranties of any kind, express or implied, including without limitation the WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, noninfringement of the intellectual property rights of third parties or arising from a course of dealing, usage or trade practices, in all cases with respect thereto. 6. MISCELLANEOUS 6.1 Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld, provided, however, that either party may assign this Agreement without such consent to any Affiliate or to any successor by way of merger, acquisition or sale or transfer of substantially all of its business assets to which this Agreement relates, in a manner such that the assignee shall assume and be responsible for the performance and observance of all of such party's duties and obligations hereunder. This Agreement will be binding upon and inure to the benefit of all permitted successors and assigns of the parties hereunder, and the heirs and personal representatives of the individual parties hereunder. The name of each party appearing herein will be deemed to include the names of such party's successors and assigns to the extent necessary to carry out the intent of this Agreement. 6.2 Amendment. No amendment, modification or supplement of any provision of the Agreement will be valid or effective unless made in writing and signed by a duly authorized representative of each party. 6.3 Waiver. No provision of the Agreement (unless such provision otherwise provides) will be waived by any act, omission or knowledge of a party or its agents or 5. employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized representative or representatives of the waiving party. 6.4 Headings. The headings for each article and section in this Agreement have been inserted for the convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular article or section. 6.5 Force Majeure. Any delays in performance by any party under this Agreement shall not be considered a breach of this Agreement if and to the extent caused by occurrences beyond the reasonable control of the party affected, including but not limited to acts of God, embargoes, governmental restrictions, strikes or other concerted acts of workers, failure of suppliers, fire, flood, explosion, earthquake, riots, wars, civil disorder, rebellion or sabotage. The party suffering such occurrence shall immediately notify the other party and any time for performance hereunder shall be extended by the actual time of delay caused by the occurrence. 6.6 Notices. Any notices given pursuant to this Agreement shall be in writing and sent to the address below by one day delivery service or by express mail or facsimile (receipt confirmed) and shall be deemed to have been properly served to the addressee only upon receipt of such written communication. Notices shall be delivered to the respective parties as indicated below, or at such other locations as such parties specify by like notice: If to Lynx: Lynx Therapeutics, Inc. 3832 Bay Center Place Hayward, California 94545 Attn: President If to BASF: BASF Aktiengesellschaft Central Patent Department, Building C6 67056 Ludwigshafen, Germany Attn: Dr. Andreas Bieberbach 6.7 Severability. Whenever possible, each provision of the Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 6. 6.8 Entire Agreement of the Parties. This Agreement constitutes and contains the complete, final and exclusive understanding and agreement of the parties with respect to the subject matter hereof and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether oral or written, between the parties respecting the subject matter hereof. 6.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts entered into and to be performed in California, without reference to conflicts of laws. Each party hereby consents to the jurisdiction of the courts of the State of California and the Federal District Court for the Northern District of California for resolution of any disputes that arise hereunder. 6.10 Withholding. If required to do so by applicable law, BASF may withhold and pay over to the relevant tax authority any withholding tax due in respect of payments to Lynx hereunder. In the event any such withholding is required, the parties will cooperate in preparing and delivering to such tax authority any documentation that may be reasonably necessary to secure the release of such withheld monies to Lynx or to enable Lynx to obtain the appropriate refund or credit in respect thereof. 6.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. LYNX THERAPEUTICS, INC. BASF AKTIENGESELLSCHAFT By: /s/ Sam Eletr By: /s/ H.J Quadbeck-Seeger -------------------------------- ----------------------------- SAM ELETR, PH.D. Title: Title: ------------------------------ ------------------------------ CHAIRMAN OF THE BOARD 7. 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 [REDACT], for a specified period, such as [REDACT]. 3. Lynx will take [REDACT] samples from the "uninduced" and [REDACT] from the "induced" system or culture, following its internal protocols for sampling. 4. Lynx will extract the cDNA contained in each of the [REDACT] such samples, using its internal protocols for cDNA extraction. 5. The cDNA extracted from each of the [REDACT] samples will be divided into [REDACT] parts, and a separate MPSS Library Analysis will be conducted on all of the resulting cDNA samples. 6. If the data generated from all [REDACT] analyses of each of the [REDACT] cultures are within the set (induced or uninduced) substantially identical, but yet between the sets substantially different, then the Milestone has been achieved. CONFIDENTIAL TREATMENT REQUESTED 8. EX-10.29 8 EXHIBIT 10.29 EXHIBIT 10.29 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 own or control potentially complementary technologies and expertises, and WHEREAS, LYNX and BASF desire to have exploited 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 microorgnisms for fermentations, and WHEREAS, LYNX can offer contract research and development by exploitation of its various gene sequencing and identification platforms, THEREFORE, LYNX and BASF are interested in forming an industrial collaboration including a Joint Venture Company, which shall benefit both parties and hereby agree as follows: Article 1 Definitions For purposes of this Agreement, the following terms shall have the meanings indicated below. 1.1 A-GmbH (limited liability company) is a 100% subsidiary of BASF with a nominal capital of DM 50,000 to be paid in cash. A-GmbH is formed under the laws of the Federal Republic of Germany. 1.2 B-GmbH (limited liability company) is a 100% subsidiary of LYNX with a nominal capital of DM 50,000 to be paid in cash. B-GmbH is formed under the laws of the Federal Republic of Germany. -2- 1.3 Holding Company means individually A-GmbH or B-GmbH, Holding Companies means collectively A-GmbH and B-GmbH. 1.4 Partner means individually BASF or LYNX, Partners means collectively BASF and LYNX. 1.5 Massively Parallel Signature Sequencing or MPSS means the parallel acquisition of at least [REDACT] contiguous bases (a "Signature Sequence") from each of at least [REDACT] templates sampled from a given cell culture or tissue cDNA library. 1.6 Massively Parallel Genomic Sequencing or MPGS means the acquisition of deoxynucleotide sequences from the genome of an organism by proprietary technologies based on LYNX intellectual property. 1.7 Massively Parallel Hybridization or MPH means the use of gridded solid phase arrays of cloned cDNAs for the purpose of analyzing by nucleic acid hybridization the levels of gene expression in tissue or cell samples. 1.8 TET-Technology means a method for tetracycline or tetracycline-derivative inducible or repressible gene regulation operating via tetracycline repressors or derivatives or tetracycline repressor or derivative fusion proteins to the extent BASF may make such technology available to the Joint Venture Company contemplated in this Agreement without having to make additional payments therefor. 1.9 Incyte Database means the database BASF may, according to the Collaborative Agreement between BASF and Incyte dated June 27, 1996 (the Incyte Agreement), make available to the Joint Venture Company contemplated in this Agreement without having to make additional payments therefor. Article 2 The Joint Venture Company 2.1 Formation 2.1.1 The Joint Venture Company (hereinafter referred to as the "JVC") shall be established in the form of a stock corporation (Aktiengesellschaft-AG) by the Holding Companies in accordance with the laws applicable in the Federal Republic of Germany. CONFIDENTIAL TREATMENT REQUESTED - 3 - 2.1.2 The corporate name of the JVC shall be "BASF-LYNX Bioscience AG". 2.1.3 Place of business and registered head office of the JVC shall be in Heidelberg. 2.1.4 The JVC shall be established according to the Articles of Association attached hereto as Annex 1. 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. The initial objectives shall be to Evaluate the applicability of the "Dynamic Imaging" approach to predicting the toxico-pharmacology of chemicals, and Discover novel drug targets for intervening in diseases or disorders of epilepsy, and Develop production strains of microorganisms for fermentations, and Generate dynamic gene expression databases from tissues and cells (e. 9. during development and aging) of interest to the JVC and its potential customers, and Develop, acquire and integrate the bioinformatics technologies for the analyses, interpretation, storage and distribution of the databases generated by the JVC. Other objectives of the JVC can be defined by mutual agreement of the Partners. 2.3 Share capital 2.3.1 The share capital of the JVC shall at the time of incorporation be DM 100,000 (Deutsche Mark: one hundred thousand), to be fully paid in cash by AGmbH (DM 51,000) and B-GmbH (DM 49,000). The ratio of their participation shall be 51:49 in favour of A-GmbH. 2.3.2 The nominal value of a share shall be DM 5 (Deutsche Mark: five). 3,000 shares (i.e. 15 (fifteen) percent of the share capital) shall be preferred shares without / voting rights with a guaranteed minimum dividend of 4 (four) percent, which are to be offered to the JVC's employees and others according to the terms described in Article 4. - 4 - 2.3.3 According to its Articles of Association the JVC's shares shall be registered shares that can be transferred only with the permission of the Supervisory Board of the JVC (vinkulierte Namensaktien, * 68 11 Aktiengesetz). 2.4 Bodies of the JVC 2.4.1 In addition to the following bodies of the JVC required according to the applicable laws of the Federal Republic of Germany for stock corporations (Aktiengesetz) (1) the Shareholders Meeting (Haul ptversammlung) (2) the Executive Board (Vorstand) (3) the Supervisory Board (Aufsichtsrat) the JVC shall have (4) an Advisory Board (Beirat) and (5) a Scientific Advisory Board The rules for the Executive Board, the Supervisory Board and the Advisory Board are laid down in Annex 2.1 to 2.3. 2.4.2 Shareholders Meeting: The Shareholders Meeting shall decide on the matters on which it has exclusive competence according to the binding regulations under the Stock Corporation Act - Aktiengesetz (presently listed in *1 1 9 Aktiengesetz) with the majority requirements stipulated in the Aktiengesetz, unless otherwise provided in this Agreement. If the Advisory Board has dealt with a matter which has to be decided by the Shareholders Meeting, the Partners shall vote or cause their Holding. Companies to vote in accordance with the decision or recommendation made by the Advisory Board in that matter. 2.4.3 Executive Board: Unless otherwise agreed by the Shareholders Meeting the Executive Board shall consist of two members: the Chief Executive Officer (CEO) and the Chief Scientific Officer (CSO). The members of the Executive Board are appointed by the Supervisory Board which also determines the term of their appointment. The regular term of their appointment shall be at least one and not more than five years. The Executive Board shall require the prior approval of the Advisory Board for the following matters: - 5 - a) the appointment of the upper management (i.e. senior scientists and supervisory personnel) and the termination of contracts with the upper management b) granting of "Prokura" c) major decisions concerning the use of the technology provided by A-GmbH and B-GmbH or the Partners, major changes of the scientific direction, focus, scope and business development or the commencement of significant operations in new fields of technology; d) the annual budget and the two year operating plan; e) all contracts concerning an amount exceeding DM 250.000 or a term exceeding two years or extending beyond December 31, 2001, whichever is shorter; f) the general terms and conditions of all employment-contracts and benefits granted to employees; g) all capital expenditures beyond DM 100.000 unless explicitly approved by the Advisory Board as part of the budget under c) above; h) the establishment and dissolution of branches; i) the acquisition of companies or interests in them and the disposal hereof; j) the acquisition, disposal or mortgaging of real estate, rights similar to real estate, and rights regarding real estate; k) the issuing of loans and the taking of credits to the extent in excess of the amounts specifically set forth in the budget approved by the Advisory Board; l) entering into license and/or collaboration contracts or any other strategic alliances; m) initiating or settling lawsuits. 2.4.4 Supervisory Board: Unless otherwise resolved by the Shareholders Meeting the Supervisory Board shall consist of three members to be elected by the Shareholders Meeting with a 3/4 majority for a period ending with the Shareholders Meeting voting on their discharge from responsibility ("Entlastung") for the financial year in which they were elected. - 6 - The appointment of members of the Executive Board and the determination of their term of office by the Supervisory Board has to be unanimous; provided, however, that either Partner may request a unanimous resolution of the Supervisory Board to terminate a member of the Executive Board after an appropriate grace period of attempted remedy and a replacement proposal. The Partners shall then use their best efforts to have a corresponding unanimous resolution of the Supervisory Board taken as soon as reasonably possible. 2.4.5 Advisory Board: The Advisory Board shall consist of four members. Each Partner may appoint two members (which it may replace at its discretion by giving written notice to the other Partner specifying the member to be replaced, the identity of the successor and the effective date of such replacement). The Executive Board reports on a regular basis to the Chairman of the Advisory Board who shall keep the other members of the Advisory Board informed. The tasks and authority of the Advisory Board are: (1) Recommendation to the Supervisory Board of the members of the Executive Board to be appointed by the Supervisory Board which recommendation has to be unanimous; (2) The appointment of the members of the Scientific Advisory Board (SAB); which appointment has to be unanimous; (3) Review of annual performance of upper management; (4) Decisions concerning the use of technology made available to the JVC by the Holding Companies and/or the Partners, change of scientific direction, focus and scope and business development, which decisions shall require unanimity; (5) Decision on approvals required by the Executive Board. 2.4.6 Scientific Advisory Board (SAB): The SAB shall consist of five to seven members with staggered appointments of up to three years. The members of the SAB shall be prominent scientists to support the CSO in recruiting and assessing suitable scientists and optimizing the JVC's R&D activities. - 7 - 2.5 Reporting and Accounting The JVC shall establish an appropriate financial and cost accounting system as well as a reporting system being in line with generally accepted international standards and practices and the applicable legal regulations in the Federal Republic of Germany as required by the applicable reporting standards of the Holding Companies and/or the Partners. 2.6 Inspection of Books Each Holding Company and/or Partner is entitled during normal business hours to inspect or have inspected the books and accounts of the JVC at its own expense preferably through its internal auditing department. 2.7 Business Year The business year of the JVC shall be the calendar year. Article 3 Sale or Transfer of Shares 3.1 If a Partner desires to transfer shares in A-GmbH or B-GmbH or have its Holding Company transfer shares of the JVC, during the first five years after their establishment he needs the approval of the other Partner, being at the discretion of the other Partner. 3.2 After the five-year-term all or portion of the shares in the JVC and/or a majority interest in the Holding Company may be transferred, provided that the transferor first delivers to the other Partner a written offer to sell such shares to the other Partner or its Holding Company at a price and on terms described in such written offer. 3.2.1 If such offer is not accepted within [REDACT] months after receipt thereof, the transferor shall be free to sell the offered shares in the JVC to a third party at the same or a higher price and the same or less favourable terms as offered to the other Partner or its Holding Company. CONFIDENTIAL TREATMENT REQUESTED - 8 - 3.2.2 If such shares are to be offered to a third party at a lower price or on more favourable terms as offered to the other Partner or its Holding Company, the transferor must first offer the shares to the other Partner or its Holding Company again at such lower price and more favourable terms; provided that, the other Partner has to accept this new offer within [REDACT] days after receipt thereof. Any offer to a third party which is not consummated within [REDACT] months after the end of the period within which the other Partner or its Holding Company could have accepted such offer must be withdrawn and the shares reoffered to the other Partner or its Holding Company by the transferor in accordance with this sub-section 3.2.2. 3.3 Unless otherwise agreed between the Parties, shares in the JVC may only be transferred to a third party (except to employees of the JVC or as part of ordinary trading in a stock exchange) if such third party is bound to the terms of this Agreement. Article 4 JVC Shares held by Employees and Others 4.1 Object: In order to best incentivize the JVC's employees, members of the Executive Board and the Scientific Advisory Board and certain other collaborators (e.g. consultants), the Partners regard it as desirable that a substantial interest in the JVC (not exceeding 15 percent unless otherwise agreed by the Partners) be held by such persons. 4.2 The Partners therefore agree to have made available a sufficient number of preferred shares for the purpose described in Article 4.1, either from the preferred shares held by them (in proportion to their interest in the JVC) or by respective capital increase(s). 4.3 Terms of offer to the JVC's employees (to be incorporated in the JVC's employees' employment contracts): 4.3.1 The price of the offered shares shall be established by the Advisory Board in advance for every calendar year. 4.3.2 Within the first five years of employment the transfer of the shares shall not be permitted. 4.3.3 If the employment terminates before the end of the five-year period, the JVC has the right to acquire the shares at the price established by the Advisory Board according to 4.3.1. CONFIDENTIAL TREATMENT REQUESTED - 9- 4.3.4 After five years of employment the shares may be transferred with a right of first refusal for the JVC at market price or, in the absence of a market price according to a procedure comparable in substance to the provisions of Article 3.2. 4.4 The terms of offer for other persons than the JVC's employees shall be established by the Advisory Board from case to case. Article 5 Operation of the JVC 5.1 During the first five years after the incorporation of the JVC AGmbH will fund the JVC's Research and Development Activities ("R&D") with up to DM 50,000,000 (Deutsche Mark: fifty million) according to the terms of the Technology License and Development Agreement attached as Annex 3 and upon request of LYNX, BASF shall cause A-GmbH to make available to the JVC Non-exclusive right to use the TET-technology, and Access to the Incyte Database, and Non-exclusive right to use its toxocological database, and Non-exclusive right to use its future technologies relevant to the object of the JVC and, in this case, the relevant provisions of the Technology License and Development Agreement attached as Annex 3 shall apply. However, neither the JVC nor A-GmbH shall be entitled to claim the above technology respectively from A-GmbH or BASF. 5.2 During the first five years after the incorporation of the JVC BGmbH will permit the use of the MPSS-technology as well as the use of the bio-information systems and of further LYNX-technology related to the purpose of the Joint Venture free of charge and BGmbH will further grant to the JVC Non-exclusive right to use its current gene technologies, informatics, patents, trade secrets and know-how relevant to the object of the JVC, Non-exclusive right to use its future gene technologies, informatics, patents, trade secrets and know-how (e. g. MPGS, MPH) relevant to the object of the JVC, - 10 - Providing, maintaining and updating of the operating MPSSinstruments, hardware and software for data generation, collection and analysis at LYNX's costs as needed, Non-exclusive right to use bio-informatics systems to simulate and analyse dynamic patterns of gene expression, Non-exclusive right to use LYNX's CNS database that exists as of the Effective Date and Non-exclusive right to use LYNX's phosphoramidate oligonucleotide technology for validation relevant to the object of the JVC all according to the terms of the Technology License and Development Agreement attached as Annex 3. 5.3 After the exhaustion of the initial financial and, if requested by LYNX, 5-year technology commitment by A-GmbH and of the 5-year technology commitment by B-GmbH, the Holding Companies or the Partners will fund or cause to be funded the continued activities of the JVC, if this is necessary to enable the JVC to acquire and/or retain the necessary resources and technologies for the future success. This financing will be according to the Partners'/A- and BGmbH's ratio of participation in the share capital of JVC. The decision about further financing will have to be made unanimously by the Holding Companies or the Partners. If further financing is agreed upon, it has to be used to buy the necessary equipment and technologies (as for example from BASF and LYNX). 5.4 BASF and LYNX shall make available to their respective Holding Company the technologies necessary to enable A-GmbH and B-GmbH to fulfill their functions under Articles 5.1 and 5.2. 5.5 The Holding Companies on the one side and the JVC on the other side shall conclude the Technology License and Development Agreement attached as Annex 3 according to which the JVC conducts R&D in projects defined by the Holding Companies who get coexclusive title to all results (except,pSept the JVC's right to continue using such results for its further R&D activities) 5.6 The JVC will reserve [REDACT] of its MPSS technology capacity for academic collaborations directly relevant to the charge and projects of the JVC. 5.7 Neither of the Partners nor any of their affiliates (i.e. companies controlling, controlled by or under common control with a Partner, where "control" shall mean ownership of more than 50 (fifty) percent of the voting rights) shall cooperate with third parties with regard to the subject of R&D projects undertaken by the JVC. CONFIDENTIAL TREATMENT REQUESTED - 11 - Article 6 Exploitation of the R&D Results 6.1 Prior to the merger contemplated in Article 7, the R&D results shall be commercially exploited pursuant to the terms of the JV Operating Agreement attached hereto as Annex 4. 6.2 After the merger the JVC's R&D results shall be commercially exploited as follows: (1) The JVC's Executive Board or a Partner makes a written proposal to the Advisory Board that a particular target or other JVC's R&D result is ready for commercialization or commercial exploitation (the "Marketable Results") and the Advisory Board shall inform the Partners or the other Partner hereof. (2) BASF shall have [REDACT] days, after receipt of the proposal under (1) to make an Offer to license the Marketable Results. For the purposes of this Article 6.2, an "Offer" shall mean a full written proposal to exclusively license with a right to sublicense the Marketable Results on a worldwide basis for the purposes of researching, developing and marketing products, comprising, based on, or discovered using the Marketable Results, including due diligence obligations, initial license payments, milestones and milestone payments, royalties, and other terms common to comparable technology licenses. (3) If BASF does not make an Offer within the [REDACT] day period, LYNX shall have an additional [REDACT] days thereafter to make an Offer as defined above. (4) Upon receipt of an Offer under (2) or (3) (the "First Offer") the Advisory Board shall have [REDACT] days to unanimously accept such First Offer. If the First Offer is not accepted within [REDACT] days, the First Offer shall be deemed to have been rejected. (5) If the First Offer is rejected under (4) the Partner that did not make the First Offer shall have [REDACT] days from the date of the rejection to make or obtain from a third party an Offer superior to the rejected offer in some material respect (the "Second" Offer"). (6) If a Second Offer is made within the [REDACT] day period, the Partner who made the First Offer may submit a new Offer within [REDACT] days of receipt of the Second Offer (the "Third Offer"). (7) The Advisory Board must accept the best Offer resulting from the above process, taking into account all material terms and circumstances. CONFIDENTIAL TREATMENT REQUESTED - 12 - (8) If and to the extent that milestone payments, royalties or similar payments become payable to third parties due to the commercialization or exploitation of Marketable Results, such payments shall be borne by the JVC. 6.3 A- and B-GmbH, or after the merger contemplated in Article 7, the JVC shall upon request of LYNX sell the exclusive access to LYNX to JVC's databases derived from normal, developing, differentiating and/or aging tissues and cells, and improvements in LYNX's bioinformatics systems. The terms and conditions of such sale shall be determined by A- and BGmbH or, after the merger contemplated in Aricle 7, the JVC, based on the cost of LYNX of acquiring comparable data. Such databases and improvements in bioinformatics systems shall not be disclosed by A- and B-GmbH or the JVC to any third party other than LYNX. Article 7 Merger 7.1 After the JVC has provided to A- and B-GmbH Results which are sold for projected revenues of more than [REDACT] million DM or generate actual revenues to A- and B-GmbH sufficient to cover more than [REDACT] of the JVC's expenses but not before December 31, 2001 the Partners envisage to merge Aand B-GmbH into the JVC in order to consolidate the assets and activities of the JVC and the Holding Companies. 7.2 The merger described in 7.1 above as well as a possible public offering shall require explicit unanimous decisions of the Partners. 7.3 In the case of a merger of the Holding Companies into the JVC the Partners shall procure that their respective Holding Company has no obligations or liabilities other than those resulting from activities fully covered by joint approval and decisions of A- and BGmbH and each Partner shall, in respect of its respective Holding Company, indemnify and hold harmless the other Partner accordingly. In the case of such merger the Holding Companies shall each have assets, as shown by an audited balance sheet, at least equal to the respective nominal capital and the Partners undertake to pay any shortfall in cash to their respective Holding Company prior to a merger. In order to avoid an evaluation of the R&D results owned by the Holding Companies, the Partners shall, in the case of such merger waive or cause their Holding Companies and the JVC to waive the merger report pursuant to ss. 8 (3) Umwandlungsgesetz. CONFIDENTIAL TREATMENT REQUESTED - 13 - Article 8 Secrecy The Partners and the Holding Companies agree and shall cause the JVC to agree not to use any know-how, technical or commercial information related to the technologies made available by the Partners for purposes other than those of this Agreement and not to disclose such know-how, technical and commercial information to third parties. The foregoing secrecy obligation shall not apply to know-how, technical and commercial information which was in the public domain or was in the recipient's possession at the time of disclosure to it, is acquired by it after the disclosure from third parties without restriction on disclose it or becomes public knowledge without no fault of the recipient or has to be disclosed according to applicable legal regulations. The Partners and the Holding Companies shall impose on its relevant directors and employees, as far as legally possible, a corresponding obligation. Article 9 Conflict Resolution 9.1 In the event that LYNX and BASF 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 each BASF and LYNX (the "Decision-Makers"). The Decision-Makers will attempt in good faith to resolve the matter in dispute for a period of [REDACT] days. If no successful resolution of the dispute has been mutually agreed to, the dispute will be settled according to the arbitration procedures of Sections 9.2 and 9.3 of this Agreement. 9.2 Any controversy arising which cannot be resolved pursuant to Section 9.1 of this Agreement will be submitted to arbitration pursuant to the Arbitration Rules of the Deutsche Institution fur Schiedsgerichtsbarkeit 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 thirty (30) days of the filing of an 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 Schiedsgerichtsbarkeit. 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. CONFIDENTIAL TREATMENT REQUESTED - 14 - 9.3 The arbitrators will be instructed to issue detailed written findings of fact and law. The arbitrators will be authorized to provided 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. Judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Article 10 Duration The JVC shall be established for an unlimited period. This Agreement shall continue in force for as long as the JVC is in corporate existence and the Partners remain as direct or indirect shareholders thereof. Article 11 Effective Date This Agreement shall become effective by being signed by both Partners (the "Effective Date"). Article 12 Miscellaneous 12.1 Any amendment, modification or supplement to this Agreement or its Annexes shall be void unless it is made by written documents duly signed by the Partners. 12.2 In the event that any of the provisions of this Agreement or its Annexes are invalid because they are inconsistent with the applicable laws this shall in no manner affect the validity of the other provisions of this Agreement or its Annexes. The Partners hereto shall be obliged to replace such invalid provisions by new provisions having similar economic effects. 12.3 This Agreement and any rights and obligations hereunder shall not be assigned either whole or in part by either Partner hereto without the prior written approval of the other Partner which shall not be unreasonably withheld. - 15 - 12.4 This Agreement shall be governed by, and construed in accordance with the laws of the Federal Republic of Germany. 12.5 Each Partner shall pay its own legal, accounting and other expenses incident to the preparation, negotiation and execution of this Agreement and the consummation of its obligations hereunder. Ludwigshafen, October 23, 1996 LYNX Therapeutics Inc. BASF Aktiengesellschaft /s/ Sam Eletr H.J. Quadbeck-Seeger - - --------------------------------- --------------------------------- /s/ David W. Martin, Jr. Werner Kusters - - --------------------------------- --------------------------------- Annex 1 Articles of Association Chapter 1 General Provisions Article 1 - Name and Registered Office 1. The name of the company is .... 2. The registered office of the company is at Heidelberg, Article 2 - Objects of the Company 1. Object of the company is the research and development as well as the exploitation of the results in the field of bio-technology. 2. The company is authorised to establish branches both in Germany and abroad and acquire undertakings the objectives of which are consistent with and related to those under para. 1 hereof, both in Germany and abroad or to acquire interests therein. 3. The company is authorised to all sorts of transactions that support the above mentioned field of business. Article 3 - Share Capital and Shares 1. The share capital amounts to 100.000 DM (in words: one hundred thousand (Deutsche Mark). 2. The share capital is divided into 20.000 shares of 5 DM nominal value each. 3. The shares shall be registered shares that can be transferred only with the permission of the Supervisory Board of the company. 4. The company shall be entitled to issue dividend coupons and talons. The form and contents of the share certificates and of the dividend coupons and talons shall be determined by the Executive Board. One share certificate may embody several shares. Article 4 - Duration of Company, Financial Year 1. The duration of the company is not limited to a definite period. 2. The financial year is the calendar year. Chapter 2 Organisation A Executive Board Article 5 - Composition, Rules of Procedure 1. The Executive Board shall consist of at least two members. The exact number will be determined by the Supervisory Board. 2. The Supervisory Board shall lay down the Rules of Procedure for the Executive Board. Article 6 - Representation The company is legally represented by two members of the Executive Board jointly. B Supervisory Board Article 7 - Composition, Elections, Term of Office 1 The Supervisory Board shall consist of three members. Members of the Supervisory Board have to be elected by the Shareholders Meeting with a 2/3 majority. Simultaneously substitute members may be elected with the same majority, who take the place of any prematurely retired members in the order determined in the election. 2. The members shall be elected for a period ending with the Shareholders Meeting voting on their discharge from responsibility for the fourth financial year after the beginning of their term of office. The financial year in which the term of office begins shall not be taken into account. 3. Elections for retired members not succeeded by a substitute member shall be effective for the remainder of the term of office of the member retired. 4. Any member of the Supervisory Board may, upon giving one month's notice in writing, resign from office at any time. Article 8 - Chairmanship 1. After being elected- by the ordinary Shareholders Meeting the Supervisory Board shall elect from its members a chairman and one deputy chairman for the term of its office in a meeting especially invited for. 2. In the event of any of these offices becoming vacant, a by-election shall take place for the remainder of the term of office of the member retired. 3 Declarations shall be made by the chairman or. if impeded, by his deputy on behalf of the Supervisory Board. 4. The Supervisory Board shall lay down its own Rules of Procedure Article 9 - Authority The Supervisory Board shall have the authority as provided by these Articles and by binding legal requirements. Resolutions of the Supervisory Board shall require a majority of the votes; the nomination of members of the Executive Board has to be unanimous. C Shareholders Meeting Article 10 - Place and Notice 1. Shareholders Meetings shall take place at the registered office of the company. 2. The Shareholders Meeting shall be called by the Executive Board. 3. The Shareholders Meeting shall be called with at least one month notice prior to the day of the meeting. This shall not include the day on which the notice is served and the final day for depositing shares. Article 11 - Chairman of Shareholders Meeting One member of the Supervisory Board, as a rule the chairman of the Supervisory Board, shall be designated to chair the Shareholders Meeting. Article 12 - Authority The Shareholders Meeting shall decide on those matters on which it has exclusive competence according to the binding regulations under the Stock Corporation Act (Aktiengesetz), presently listed in (delta)119 AktG. Article 13 - Resolutions 1. The vote connected with each share corresponds to its nominal value. 2. Resolutions of the Shareholders Meeting shall require a majority of the votes cast, unless a larger majority or further requirements are specifically stipulated by law or by these Articles. Chapter 3 Financial Statements, Annual Shareholders Meeting, Announcements Article 14 - Financial Statements and Annual Shareholders Meeting 1. The Executive Board shall, in the first three months of any financial year, prepare the financial statements and Management's Report for the preceding financial year and submit the same to the auditor. Immediately after receiving the auditors report the Executive Board shall submit the financial statements, Management's Report, the auditors report, and the proposal for the distribution of profit to the Supervisory Board. 2. An Annual Shareholders Meeting shall be held within the first eight months of each financial year. 3. The Shareholders Meeting shall decide in particular on the appointment of the auditor, on the discharge from responsibility of the members of the Executive Board and the Supervisory Board, on the appointment of the members of the Supervisory Board, and on the approval of the financial statements where required by the law Article 15 - Distribution of profit The profit shown in the financial statements after depreciation, deferred items provisions and reserves shall be distributed to the shareholders, unless the Shareholders Meeting decide otherwise. Article 16 - Announcements Announcements by the Company shall be made in the German Federal Gazette. Article 17 - Binding version The German version of these Articles is the binding one. Annex 2.1 Rules of Procedure of the Executive Board of the JVC Article 1 Members of the Executive Board Unless otherwise agreed by the Supervisory Board, the Executive Board shall consist of two members: - the Chief Executive Officer (CEO) - the Chief Scientific Officer (CSO) Section 2 Authority (1) The Executive Board has the authority provided by the Stock Corporation Act (Aktiengesetz). The prior approval of the Advisory Board is required for the following matters: a) the appointment of the upper management (i.e. senior scientists and supervisory personnel) and the termination of contracts with the upper management. b) granting of "Prokura" c) major decisions concerning the use of the technologies provided by A-GmbH and B-GmbH or the Partners, major changes of the scientific direction, focus, scope and business development or the commencement of significant operations in new fields of technology including the specific applications or use of MPSS by extra-mural third party collaborators of the JVC; d) the annual budget and the two year operating plan; e) all contracts concerning an amount exceeding DM 250.000 or a term exceeding two years or extending beyond December 31, 2001, whichever is shorter; - 2 f) the general terms and conditions of all employment- contracts and benefits granted to employees; g) all capital expenditures beyond DM 100.000 unless explicitly approved by the Advisory Board as part of the budget under d) above; h) the establishment and dissolution of branches; i) the acquisition of companies or interests in them and the disposal hereof; j) the acquisition, disposal or mortgaging of real estate, rights similar to real estate, and rights regarding real estate; k) the issuing of loans and the taking of credits to the extent in excess of the amounts specifically set forth in the budget approved by the Advisory Board; l) entering into license and/or collaboration contracts or any other strategic alliances; m) initiating or settling lawsuits. (2) The CEO reports on a regular basis to the chairman of the Advisory Board. - 3 Section 3 Convocation/Decision (1) The Executive Board shall meet whenever business so requires, at least at two weeks intervals. (2) Meetings shall be convened in the place determined by the CEO. The individual items on the agenda shall be so specified that it is possible to vote by correspondence. (3) The Executive Board shall only constitute a quorum if, after all members have been notified of the meeting, at least two of its members participate in the resolution. Resolutions shall be passed unanimously. If unanimity can't be reached, the CEO has to inform the chairman of the Advisory Board. The decision will then be made by the Advisory Board. (4) The members of the Executive Board may, if prevented from attending a meeting, arrange for their written votes to be given at the meeting of the Executive Board by other members of the Executive Board. (5) The CEO may cause a resolution of the Executive Board to be passed by obtaining declarations in writing, provided, that such procedure shall not be objected to by any member within a reasonable period of not more than one week set by the CEO. (6) Announcements shall be made by the CEO on behalf of the Executive Board. - 4 Section 4 Minutes Minutes of each meeting have to made and signed by the CEO and the secretary of the corresponding meeting. A copy of the minutes has to be sent to all members of the Executive Board. The minutes are considered to be approved if no member of the meeting within a reasonable of not more than two weeks after the receipt of the minutes objects by written notice. Section 5 Amendments Amendments of these Rules of Procedure shall require a resolution of the Supervisory Board. Annex 2.2 Rules of Procedure of the Supervisory Board of the JVC Article 1 Members of the Supervisory Board (1) The Supervisory Board shall consist of three members to be appointed by the Shareholders Meeting with a 3/4 majority. Simultaneously substitute members may be elected with the same majority who take the place of any prematurely retired member in the order fixed in the election. (2) The members shall be elected for a period ending with the Shareholders Meeting voting on their discharge from responsibility (,,Entlastung") for the financial year in which they were elected. (3) After being elected by the ordinary Shareholders Meeting the Supervisory Board shall for the term of its office in a meeting especially invited for elect a chairman and one deputy chairman being elected members of the Supervisory Board. In the event of any of these offices becoming vacant, a by-election shall take place for the remainder of the term of office of the member retired. Article 2 Authority The authority of the Supervisory Board shall be according to binding regulations of the Stock Corporation Act (Aktiengesek) and to the Articles of Association, as for example Page 2 - the nomination and termination of members of the Executive Board; - the control of the management of the company; and deciding on the permission to transfer the shares of the company as stipulated in the Articles of Association. Article 3 Notices, conduct of business, quorum, voting (1) The Supervisory Board shall meet whenever business so requires, at least at six-months intervals. (2) Meetings shall be convened in the place of such meeting determined by the chairpersons. All meetings shall be convened by at least a fortnights' notice in writing. The individual items on the agenda shall be so specified that it is possible to vote by correspondence. In urgent cases, the length of notice may be shortened. (3) The Supervisory Board shall only constitute a quorum if, after all members have been notified of the meeting, at least two of its members participate in the resolution. Unless the law provides otherwise, resolutions shall be passed by a majority of votes cast. The nomination of members of the Executive Board by the Supervisory Board has to be unanimous. (4) The members of the Supervisory Board may, if prevented from attending a meeting, arrange for their written votes to be cast at a meeting of a Supervisory Board by other members of the Supervisory Board. Page 3 (5) he chairman or, if impeded, his deputy may cause resolution of the Supervisory Board to be passed by obtaining declarations in writing provided that such procedure shall not be objected to by any member within at reasonable period of not more than one week set by the chairman or, if impeded, by his deputy. (6) Announcements shall be made by the chairman or, if impeded, by his deputy on behalf of the Supervisory Board. Article 4 Minutes Minutes of each meeting have to be made and signed by the chairman and the secretary of the corresponding meeting. A copy of the minutes have to be sent to all members of the Supervisory Board. The minutes are considered to be approved if no member of the meeting within a reasonable time of not more than two weeks after the receipt of the minutes object by written notice. Annex 2.3 Rules of Procedure of the Advisory Board of the JVC Section 1 Members of the Advisory Board The Advisory Board shall consist of four members. A-GmbH and BGmbH (or their successors) may appoint two members each (which they may replace at their discretion). Section 2 Authority of the Advisory Board (1) The Advisory Board shall decide on its approval required for the following actions of the Executive Board: a) the appointment of the upper management (i.e. senior scientists and supervisory personnel) and the termination of contracts with the upper management b) granting of "Prokura" c) major decisions concerning the use of the technology provided by A-GmbH and B-GmbH or the Partners, major changes of the scientific direction, focus, scope and business development or the commencement of significant operations in new fields of technology; d) the annual budget and the two year operating plan; - - - 2 e) all contracts concerning an amount exceeding DM 250.000 or a term exceeding two years or extending beyond December 31, 2001, whichever is shorter; f) the general terms and conditions of all employment-contracts and benefits granted to employees. g) all capital expenditures beyond DM 100.000 unless explicitly approved by the Advisory Board as part of the budget under d) above; h) the establishment and dissolution of branches; i) the acquisition of companies or interests in them and the disposal hereof; j) the acquisition, disposal or mortgaging of real estate, rights similar to real estate, and rights regarding real estate; k) the issuing of loans and the taking of credits to the extent in excess of the amounts specifically set forth in the budget approved by the Advisory Board; l) entering into license and/or collaboration contracts or any other strategic alliances; m) initiating or settling lawsuits. (2) The Advisory Board shall recommend the members of the Executive Board to be appointed by the Supervisory Board. - - - 3 (3) The Advisory Boards appoints the members of the Scientific Advisory Board. (4) The Advisory Board reviews the annual performance of the upper management. (5) The Advisory Board decides on the use of technology made available to the JVC by the Holding Companies and/or the Partners, change of scientific direction, focus and scope and business development. (6) The Advisory Board decides in all matters where the Executive Board is unable to reach unanimity. (7) Decisions on the matters described in (1) (a), (c), (i), (l) and (m), (2), (3) and (5) require unanimity. Section 3 Chairmanship (1) The Advisory Board has a chairperson and a deputy chairperson. The office of the chairperson as well as the office of the deputy chairperson shall rotate annually. (2) The chairman of the Advisory Board shall keep the other members of the Advisory Board informed on the reports received from the Executive Board. Section 4 Notices, Conduct of Business, Quorum, Voting (1) The Advisory Board shall as a rule meet at three-months intervals. A meeting of the Advisory Board shall furthermore be called whenever requested by any shareholder holding more than 25 % of the shares. - - - 4 - (2) Meetings of the Advisory Board shall be convened and the place of such meetings determined by the chairman or, if impeded, by the deputy chairman. All meetings shall be convened by at least a fortnight's notice in writing. The individual items on the agenda shall be so specified that it is possible to vote by correspondence. In urgent cases, the length of notice may be shortened. (3) The voting rights of the Advisory Board's members shall follow the voting rights the shareholder they represent has in the Shareholders Meeting. (4) The Advisory Board shall only constitute a quorum if, after all members have been notified of the meeting, at least one appointee of A- and B-GmbH (or their successors) participates in the resolution. Unless these Rules of Procedure provide otherwise, resolutions shall be passed by a majority vote. (5) The chairman or, if impeded, his deputy may cause a resolution of the Advisory Board to be passed by obtaining votes in writing provided that such procedure shall not be objected to by any member within a reasonable period of not more than one week set by the chairman or if impeded, by his deputy. (6) Declarations shall be made by the chairman or, if impeded, by his deputy on behalf of the Advisory Board. (7) Minutes of each meeting have to be made and signed by the chairman and the secretary of the corresponding meeting. A copy of the minutes has to be sent to all members of the Advisory Board. The minutes are considered to be approved if no member of the meeting within a reasonable period of not more than one month after the receipt of the minutes objects in writing. Section 5 Amendments Amendments of these Rules of Procedure shall require a unanimous resolution of the Advisory Board. EX-10.30 9 AGREEMENT OF MERGER EXHIBIT 10.30 AGREEMENT OF MERGER This AGREEMENT OF MERGER (the "Agreement") is made and entered into as of October 23, 1996 between LYNX THERAPEUTICS INC., a Delaware corporation ("Lynx") and SPECTRAGEN, INC., a Delaware corporation ("Spectragen"). RECITALS A. The Board of Directors of Spectragen and Lynx believe it is in the best interests of each company and their respective stockholders that Spectragen and Lynx combine into a single company through the Delaware statutory merger of Spectragen with and into Lynx (the "Merger") and, in furtherance thereof, have approved the Merger. B. Pursuant to the Merger, among other things, the outstanding shares of Common Stock of Spectragen ("Spectragen Common Stock"), other than those held by Lynx, shall be converted into shares of Common Stock of Lynx ("Lynx Common Stock") as determined herein. C. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the covenants promises, and representations set forth herein, and for other good and valuable consideration the parties agree as follows: 1. THE MERGER 1.1 Effective Time. As promptly as is reasonably practicable after the execution of this Agreement, the parties hereto shall cause the Merger to be consummated by filing this Agreement with the Secretary of State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, Delaware Law (the time of such filing being the "Effective Time"). The closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, California, on the date of the Effective Time (the "Closing Date"). 1.2 The Merger. At the Effective Time Spectragen shall be merged with and into Lynx, the separate corporate existence of Spectragen shall cease and Lynx shall continue as the surviving corporation. Lynx as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided under Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of Spectragen and Lynx shall vest in the Surviving Corporation, and all debts, liabilities and duties of Spectragen and Lynx shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Articles of Incorporation; Bylaws. (a) Unless otherwise determined by Lynx prior to the Effective Time, at the Effective Time the Certificate of Incorporation of Lynx, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Articles of Incorporation. (b) The Bylaws of Lynx, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended. 1.5 Directors and Officers. The directors of Lynx immediately prior to the Effective time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation, and the officers of Lynx immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. 1.6 Manner of Converting Stock. At the Effective Time, by virtue of the Merger and without any action on the part of Lynx, Spectragen, or the holder of any of the following securities: (a) Conversion of Spectragen Common Stock. Each share of common stock, par value $.001 per share, of Spectragen (the "Spectragen Common Stock") issued and outstanding immediately prior to the Effective Time (other than any shares of Spectragen Common Stock to be cancelled pursuant to Section 1.6(b) and any Dissenting Shares (as defined and to the extent provided in Section 1.7(a)) will be cancelled and extinguished and be converted automatically into the right to receive 1.3 shares of Lynx Common Stock. (b) Cancellation of Lynx-Owned and Spectragen-Owned Stock. Each share of Spectragen Common and/or Preferred Stock owned by Lynx or Spectragen immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof. (c) Stock Options. At the Effective Time, all options to purchase Spectragen Common Stock then outstanding under the Amended and Restated 1995 Spectragen Stock 2. Option Plan (the "Spectragen Stock Option Plan") shall be assumed by Lynx in accordance with Section 2.1. (d) Fractional Shares. No fraction of a share of Lynx Common Stock will be issued, but in lieu thereof each holder of shares of Spectragen Stock who would otherwise be entitled to a fraction of a share of Lynx Common Stock (after aggregating all fractional shares of Lynx Common Stock to be received by such holder) shall be entitled to receive from Lynx a whole share of Lynx Common Stock. 1.7 Dissenting Shares. (a) Notwithstanding any provision of this Agreement to the contrary, any shares of capital stock of Spectragen held by a holder who has demanded and perfected appraisal rights for such shares in accordance with Section 262 of the Delaware General Corporation Law and who, as of the Effective Time, has not effectively withdrawn such appraisal rights ("Dissenting Shares"), shall not be converted into or represent a right to receive Lynx Common Stock pursuant to Section 1.6, but the holder thereof shall only be entitled to such rights as are granted by Delaware Law. (b) Notwithstanding the provisions of subsection (a), if any holder of shares of capital stock of Spectragen who demands appraisal of such shares under Delaware Law shall effectively withdraw the right to appraisal, then, as of the later of the Effective Time and the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive Lynx Common Stock, without interest thereon, upon surrender of the certificate representing such shares. (c) Spectragen shall give Lynx (i) prompt notice of any written demands for appraisal of any shares of capital stock of Spectragen, withdrawals of such demands, and any other instruments served pursuant to Delaware Law and received by Spectragen and (ii) the opportunity to participate in all negotiations and proceedings which take place prior to the Effective Time with respect to demands for appraisal under Delaware Law. Spectragen shall not, except with the prior written consent of Lynx, voluntarily make any payment before the Effective Time with respect to any demands for appraisal of capital stock of Spectragen or offer to settle or settle any such demands. 1.8 Surrender of Certificates. (a) Exchange of Certificates. As soon as is practicable after the Effective Time, Lynx shall cause its transfer agent to prepare certificates representing the shares of Lynx Common Stock issuable pursuant to Section 1.6 in exchange for outstanding shares of Spectragen common stock (the "New Lynx Certificates"). All Certificates, which prior to the Effective Time represented shares of Spectragen Common Stock and were held in escrow pursuant to the Stockholders Agreement (the "Spectragen Certificates"), shall be transferred from Cooley Godward LLP ("the Escrow Agent") for completion of the exchange. The transfer agent shall then issue the appropriate New Lynx Certificates. The Spectragen Certificates shall then be cancelled. The transfer agent shall then redeliver the New Lynx Certificates to the Escrow Agent for distribution according to the terms set forth in the Stockholders Agreement and the applicable stock purchase agreement. (b) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Lynx Common Stock with a record date after the Effective time will be paid to the holder of any unsurrendered Certificate with respect to the shares of Lynx Common Stock represented thereby until the holder of record of such New Lynx Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such New Lynx Certificate, there shall be paid to the record holder of the certificates representing whole shares of Lynx Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective time theretofore paid with respect to such whole shares of Lynx Common Stock. (c) Transfers of Ownership. If any certificate for shares of Lynx Common Stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Lynx or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Lynx Common Stock in any name other than that of the registered holder of the certificate surrendered, or established to the satisfaction of Lynx or any agent designated by it that such tax has been paid or is not payable. (d) No Liability. Notwithstanding anything to the contrary in this Section 1.8, none of the Escrow Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Lynx Common Stock or Spectragen Common Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.9 No Further Ownership Rights in Spectragen Common Stock. All shares of Lynx Common Stock issued upon the surrender for exchange of shares of Spectragen Common Stock in accordance with the terms hereof (including any cash paid in respect thereof) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Spectragen Common Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Spectragen Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Section 1. 1.10 Lost, Stolen or Destroyed Certificates. In the event any certificates evidencing shares of Spectragen Common Stock shall have been lost, stolen or destroyed, the Escrow Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Lynx Common Stock and cash for fractional shares, if any, as may be required pursuant to Section 1.6; provided, however, that Lynx may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Lynx or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. 1.11 Tax Consequences and Accounting Treatment. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended. 1.12 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest in Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers, and Franchises of Spectragen, the Officers and Directors of Lynx and Spectragen are fully authorized in the name of their respective corporations, to take, and will take, all such lawful and necessary action. 2. STOCK OPTIONS. 2.1 Assumption of Spectragen Options by Lynx. At the Effective Time, each outstanding option to purchase shares of Spectragen Common Stock (each a "Spectragen Option") under the Spectragen Stock Option Plan, whether vested or unvested, shall be, in connection with the Merger, assumed by Lynx. Each Spectragen Option so assumed by Lynx under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Spectragen Stock Option Plan and as provided in the respective option agreements immediately prior to the Effective Time, except that (i) such Spectragen Option shall be exercisable only for that number of whole shares of Lynx Common Stock equal to the product of the number of shares of Spectragen Common Stock that were issuable upon exercise of such Spectragen Option immediately prior to the Effective Time multiplied by 1.3, rounded up to the nearest whole number of shares of Lynx Common Stock, and (ii) the per share exercise price for the shares of Lynx Common Stock issuable upon exercise of such assumed Company Option shall be equal the exercise price per share of Spectragen Common Stock at which such Spectragen Option was exercisable immediately prior to the Effective Time divided by 1.3, rounded up to the nearest whole cent, all in accordance with the rules of Section 424(a) of the Code, and the regulations promulgated thereunder, and such rules shall apply even with respect to options that are not "incentive stock options" (within the meaning of Section 424 of the Code). 2.2 Form S-8. Lynx will file a registration statement on Form S-8 for the outstanding Spectragen Common Stock Options (that are eligible for registration on Form S-8) within thirty (30) calendar days after the Closing. 3. CONDITIONS OF THE MERGER. 3.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) Approvals. This Agreement and the Merger and other transactions contemplated hereby shall have been approved and adopted by the requisite vote of the stockholders of Spectragen and the Board of Directors of Lynx. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority to instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. (c) Qualification for Exemption Under Regulation D. As of the Effective Time, counsel for Lynx shall be satisfied that the Merger qualifies for the terms of the exemption provided by Rule 505 of Regulation D promulgated under the Securities Act of 1933, as amended. 4. TERMINATION, AMENDMENT AND WAIVER. 4.1 Termination. This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time: (a) by mutual consent of Lynx and Spectragen; (b) by any party hereto if: (i) the Closing has not occurred by December 31, 1996; (ii) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Merger; (iii) there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any governmental entity which would make consummation of the Merger illegal; or (iv) there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any governmental entity, which would render Lynx or Spectragen unable to consummate the Merger, except for any waiting period provisions. Where action is taken to terminate this Agreement pursuant to this Section 4.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action. 4.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 4.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Lynx or Spectragen or their respective officers, directors or stockholders. 4.3 Amendment. This Agreement may be amended by the parties hereto at any time before or after approval of matters presented in connection with the Merger by the stockholders of those parties required by applicable law to so approve but, after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders of a party without obtaining such further approval. 4.4 Extension; Waiver. At any time prior to the Effective Time any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. 5. GENERAL PROVISIONS. 5.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via telecopy to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Lynx to: Lynx Therapeutics, Inc. 3832 Bay Center Place Hayward, CA 94545 Attention: David W. Martin Jr., M.D. Phone: (510) 670-9300 Fax: (510) 670-9302 and with a copy to: Cooley Godward LLP 5 Palo Alto Square Palo Alto, CA 94306 Attention: James C. Kitch Phone: (415) 843-5000 Fax: (415) 857-0663 (b) If to Spectragen, to: Spectragen, Inc. 3832 Bay Center Place Hayward, CA 94545 Attention: Sam Eletr, Ph.D. 5.2 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 5.3 Miscellaneous. This Agreement and the documents and instruments and other agreements among the parties hereto (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided. 5.4 Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Delaware. IN WITNESS WHEREOF, Lynx and Spectragen have caused this Agreement to be signed by themselves or their duly authorized respective officers, all as of the date first written above. LYNX THERAPEUTICS, INC. By: /s/ David W. Martin, Jr. -------------------------------------- SPECTRAGEN, INC. By: /s/ Sam Eletr -------------------------------------- EX-10.31 10 EXHIBIT 10.31 EXHIBIT 10.31 CONFIDENTIAL SEPARATION AGREEMENT This Confidential Separation Agreement (the "Agreement") is entered into between Lynx Therapeutics, Inc. (the "Company") and David W. Martin, Jr. ("Dr. Martin"). 1. SEPARATION. Dr. Martin's last day of work with the Company was November 1, 1996 (the "Separation Date"). Effective as of the Separation Date, Dr. Martin hereby resigns from any and all of his positions as an officer or director of the Company and its subsidiaries, including Spectragen, Inc. 2. ACCRUED SALARY AND PAID TIME OFF. The Company has paid Dr. Martin all accrued salary, and all accrued and unused vacation earned through the Separation Date, subject to standard payroll deductions and withholding, and Dr. Martin acknowledges receipt of such payment. 3. SEVERANCE. In lieu of the severance benefits provided for In Dr. Martin's Employment Agreement dated as of April 3, 1995 (the "Employment Agreement"), the Company agrees to provide Dr. Martin with the severance benefits described below: a. The Company will continue to pay Dr. Martin at the annual base salary rate of $200,000 in semi-monthly installments for twelve (12) months from the Separation Date. On or prior to the tenth day of each month, Dr. Martin shall provide the Company with a written statement of any income that has been earned by him from other sources of employment (but excluding for this purpose director fees paid to Dr. Martin in respect of directorships he currently holds), and fifty percent (50%) of any such earnings shall be applied to a reduction of payments due to Dr. Martin under this subparagraph. b. The Company will advance $17,333 to Dr. Martin within five (5) days of execution of this Separation Agreement pursuant to the Loan Agreement dated as of May 1, 1995, in order to bring the outstanding principal balance of such loan to $150,000. Such advance will be applied to the reduction of debt to the company as stated in Paragraph 5 below. No further advances will be made under such agreement, and the Company agrees to forgive the principal, and accrued interest, effective January 1, 1997 (an aggregate of $157,861.58). c. Because the Company believes, on the advice of its counsel, that the severance payment and the forgiven Promissory Note balance (as described in 3.b. above) may be treated as taxable income to Dr. Martin under current state and federal income tax statutes and regulations, the Company may deduct taxes from its cash payments due to Dr. Martin hereunder. 4. HEALTH INSURANCE. To the extent permitted by the federal COBRA law and by the Company's current group health insurance policies, Dr. Martin will be eligible to continue his medical and dental insurance benefits. Dr. Martin will be provided with a separate notice of his COBRA rights. If Dr. Martin elects continued coverage under COBRA, Dr. Martin will be responsible for the payment of the COBRA premiums. 5. EQUITY; PROMISSORY NOTE. In connection with the exercise of stock options granted to him, Dr. Martin and the Company entered into a Stock Purchase Agreement dated as of May 1, 1995 (the "Stock Purchase Agreement") pursuant to which Dr. Martin purchased 250,000 shares of Common Stock with a Promissory Note in the principal amount of $450,000. Together with accrued interest, the amount outstanding under such note was $498,060 at the Separation Date. Under the terms of the Stock Purchase Agreement 157,500 shares are currently unvested and subject to a repurchase option in favor of the Company at an aggregate price of $329,273. The Company hereby exercises its option, and the exercise price shall be applied to payment of the Promissory Note (reducing the balance to $168,787). The advance of $17,333 described in Paragraph 3.b above will also be applied to payment of the Promissory Note (reducing the balance to $151,454). Dr. Martin agrees to pay the remaining balance in full on or before November 30, 1996, and acknowledges and agrees that the Company can and will exercise its rights as a secured creditor (including execution of a sale of collateral in the market) if such balance is not paid when due. Upon payment in full of the Promissory Note, the Company agrees to cancel the Promissory Note and to deliver to Mr. Martin a stock certificate representing the balance of the Common Stock currently held in escrow pursuant to the Stock Purchase Agreement as soon as it can be processed by the Company's transfer agent. 6. OTHER COMPENSATION OR BENEFITS. Dr. Martin acknowledges that, except for the closing costs to which he is entitled per the April 1995 agreement and as expressly provided in this Agreement, he will not receive any additional compensation, severance or benefits after the Separation Date. 7. EXPENSE REIMBURSEMENTS. Dr. Martin agrees that, prior to November 30, 1996, he will submit his final documented expense reimbursement statement reflecting all business expenses he incurred through the Separation Date, if any, for which he seeks reimbursement. The Company will reimburse Dr. Martin for these expenses pursuant to its regular business practice. 8. RETURN OF COMPANY PROPERTY. By the date of execution of this Agreement, Dr. Martin agrees to return to the Company all Company documents (and all copies thereof) and other Company property which he has had in his possession at any time, including, but not limited to, Company files, notes and notebooks, drawings, records, business plans and forecasts, financial information, specifications, computer-recorded information, tangible property (including, but not limited to, computers), credit cards, entry cards, identification badges and keys; and, any materials of any kind which contain or embody any proprietary or confidential information of the Company (and all reproductions thereof). Dr. Martin has two notebooks in his possession in which he has maintained a diary of activities for the Company and otherwise. Dr. Martin will make these notebooks available to the Company for copying but may retain them, subject to his continuing obligations regarding confidentiality. 9. PROPRIETARY INFORMATION OBLIGATIONS. Dr. Martin acknowledges his continuing obligations, both during and after his employment, under his Employee Invention Agreement to disclose covered inventions and not to use or disclose any confidential or proprietary information of the Company without prior written authorization from a duly authorized representative of the Company. 10. SOLICITATION. Dr. Martin agrees that for one year following the Separation Date, he will not, either directly or through others, solicit or attempt to solicit any employee, consultant or independent contractor of the Company to terminate his or her relationship with the Company in order to become an employee, consultant or independent contractor to or for any other person or business entity. Dr. Martin agrees not to initiate any dialogue with any employee or consultant of the Company concerning the Company's management or business affairs. 11. CONFIDENTIALITY. The provisions of this Agreement shall be held in strictest confidence by Dr. Martin and the Company and shall not be publicized or disclosed in any manner whatsoever; provided, however, that: (a) the parties may disclose this Agreement in confidence to their respective attorneys, accountants, auditors, tax preparers, and financial advisors; (b) the Company may disclose this Agreement as necessary to fulfill standard or legally required corporate reporting or disclosure requirements; and (c) the parties may disclose this Agreement insofar as such disclosure may be necessary to enforce its terms or as otherwise required by law. The Company will, and Dr. Martin may, disclose that Dr. Martin has resigned as a result of differences over future corporate development priorities and management style. Dr. Martin agrees not to make any disclosure inconsistent with the foregoing. All inquiries from third parties regarding references for Dr. Martin shall be referred to Kathy San Roman (Human Resources), who shall respond only by stating that it is company policy to state no more then already disclosed and giving Dr. Martin's dates of employment, that his last position held was President and Chief Executive Officer, and his last salary. 12. DISPUTE RESOLUTION. Dr. Martin and the Company agree that all disputes, claims, and causes of action, in law or equity, arising from or relating to this Agreement or its enforcement, performance, breach, or interpretation shall be resolved solely and exclusively by confidential final and binding arbitration through Judicial Arbitration & Mediation Services/Endispute, Inc. ("JAMS"), in San Francisco, California, under the then-existing JAMS arbitration rules. However, nothing in this section is intended to prevent either party from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. 13. RELEASE. In exchange for the payments and other consideration under this Agreement to which he would not otherwise be entitled, Dr. Martin agrees to execute the Employee Agreement and Release attached hereto as Exhibit A. 14. MISCELLANEOUS. This Agreement, including Exhibit A, constitutes the complete, final and exclusive embodiment of the entire agreement between Dr. Martin and the Company with regard to this subject matter and expressly supersedes the Employment Agreement (but not Dr. Martin's Proprietary Information Agreement, which remains in full force and effect). It is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises, warranties or representations. This Agreement may not be modified or amended except in a writing signed by both Dr. Martin and a duly authorized officer of the Company. This Agreement shall bind the heirs, personal representatives, successors and assigns of both Dr. Martin and the Company, and inure to the benefit of both parties, their heirs, successors and assigns. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement and the provision in question shall be modified by the court so as to be rendered enforceable. Both parties acknowledge that they have had the opportunity to seek advice regarding this Agreement from their respective counsel. This Agreement shall be deemed to have been entered into and shall be construed and enforced in accordance with the laws of the State of California as applied to contracts made and to be performed entirely within California. LYNX THERAPEUTICS, INC. Dated: November 11, 1996 By: /s/ Craig Taylor ----------------------------- Craig Taylor Chief Financial Officer Dated: November 11, 1996 /s/ David W. Martin, Jr. ----------------------------- David W. Martin, Jr. Exhibit A - Employee Agreement and Release EXHIBIT A EMPLOYEE AGREEMENT AND RELEASE Except as otherwise set forth in this Agreement, I hereby release, acquit and forever discharge Lynx Therapeutics, Inc. (the "Company"), its parents and subsidiaries, and their officers, directors, agents, servants, employees, attorneys, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, and damages, in law, equity, or otherwise, arising out of or in any way related to events, acts or conduct at any time prior to and including the date this Agreement is signed or the Separation Date, whichever is later, and which arise out of or are in any way connected with wrongful termination of my employment with the Company or any compensatory damages therefor; claims or demands related to stock, stock options, or expense reimbursements (except as set forth in this agreement); and claims pursuant to any federal, state or local anti-discrimination law, statute or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of 1990, and the California Fair Employment and Housing Act, as amended. Not withstanding anything in this Agreement or this Exhibit A, the parties agree that this Agreement and Exhibit A shall not constitute a release of any rights or claims by me, whether pursuant to statute or insurance or otherwise, to indemnity and defense, and attorneys fees and costs of defense in connection with any claims regarding any acts or omissions within the course and scope of my employment and/or directorship with the Company, nor shall this Agreement or its Exhibit A constitute a release of any claim for breach of this Agreement By: /s/ David W. Martin, Jr. ----------------------------------------- David W. Martin, Jr. Date: November 14, 1996 ----------------------------------------- EX-21.1 11 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY LYNXNEbraska, Inc. EX-23.1 12 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 Nos. 333-21997, 33-86634 and 33-94872 pertaining to the 1992 Stock Option Plan of Lynx Therapeutics, Inc. of our report dated February 4, 1987, with respect to the financial statements of Lynx Therapeutics, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1996. Palo Alto, California March 25, 1997 EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FORM 10-K PERIOD ENDED DECEMBER 31, 1996 1,000 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 12,109 1,973 118 0 0 14,358 6,169 2,290 18,412 1,365 0 17,361 0 27,189 (33,818) 18,412 0 9,749 0 291 15,715 0 0 (5,381) 10 (5,391) 0 0 0 (5,391) (2.19) (2.19)
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