As filed with the Securities and Exchange Commission on March 24, 2005
Registration Number 333-122454
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DexCom, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
3841
(Primary Standard Industrial Classification Code Number) |
33-0857544
(I.R.S. Employer Identification Number) |
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DexCom, Inc. 5555 Oberlin Drive San Diego, California 92121 (858) 200-0200 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) |
Andrew P. Rasdal
President and Chief Executive Officer
DexCom, Inc.
5555 Oberlin Drive
San Diego, California 92121
(858) 200-0200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to: |
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Gordon K. Davidson, Esq.
Robert A. Freedman, Esq. Nicholas S. Khadder, Esq. FENWICK & WEST LLP 801 California Street Mountain View, California 94041 (650) 988-8500 |
Charles Ruck, Esq.
Shayne Kennedy, Esq. LATHAM & WATKINS LLP 650 Town Center Drive Suite 2000 Costa Mesa, California 92626 (714) 540-1235 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o
CALCULATION OF REGISTRATION FEE
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Title of Each Class of
Securities to be Registered |
Amount to
be Registered(1) |
Proposed Maximum
Offering Price Per Share |
Proposed Maximum
Aggregate Offering Price(2) |
Amount of
Registration Fee(3) |
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Common Stock, $0.001 par value(4) | 5,405,000 | $14.00 | $75,670,000 | $8,907 | ||||
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated March 24, 2005
4,700,000 Shares
DEXCOM, INC. |
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Common Stock
$ per share
This investment involves risk. See "Risk Factors" beginning on page 8.
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Per Share |
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Total |
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Initial public offering price | $ | $ | ||||
Underwriting discount | $ | $ | ||||
Proceeds, before expenses, to DexCom, Inc. | $ | $ | ||||
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The underwriters have a 30-day option to purchase up to 705,000 additional shares of common stock from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone's investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Piper Jaffray |
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SG Cowen & Co. |
William Blair & Company |
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First Albany Capital |
The date of this prospectus is , 2005.
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Page
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Summary | 1 | |
Risk Factors | 8 | |
Information Regarding Forward-Looking Statements | 28 | |
Use of Proceeds | 29 | |
Dividend Policy | 29 | |
Capitalization | 30 | |
Dilution | 32 | |
Selected Financial Data | 34 | |
Management's Discussion and Analysis of Financial Condition and
Results of Operations |
35 | |
Business | 42 | |
Management | 75 | |
Related Party Transactions | 88 | |
Principal Stockholders | 90 | |
Description of Capital Stock | 93 | |
Shares Eligible for Future Sale | 99 | |
Underwriting | 101 | |
Material United States Federal Tax Considerations for
Non-U.S. Holders of Common Stock |
104 | |
Legal Matters | 107 | |
Experts | 107 | |
Where You Can Find More Information | 107 | |
Index to Financial Statements | F-1 |
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover of this prospectus, but the information may have changed since that date.
The items in the following summary are described in more detail later in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should carefully read the more detailed information set out in this prospectus, especially the risks of investing in our common stock that we discuss under the "Risk Factors" section, as well as the financial statements and the related notes to those statements included elsewhere in this prospectus. References in this prospectus to "we," "us," "our" and "DexCom" refer to DexCom, Inc. unless the context requires otherwise.
Our Business
We are a medical device company focused on the design and development of continuous glucose monitoring systems for people with diabetes. We have developed proprietary technology and expertise that are enabling us to develop two continuous glucose monitoring systems: a short-term system with a sensor that can be inserted by a patient and used continuously for three days, and a long-term system with a sensor that can be implanted by a physician in a short outpatient procedure requiring only local anesthesia. When fully developed, our long-term sensor is expected to be used continuously for up to one year. Both sensors wirelessly transmit the patient's blood glucose, or blood sugar, levels to a small cell phone-sized receiver, which allows the patient to view real-time and trended blood glucose information with the touch of a button and alerts the patient when glucose levels are inappropriately high or low.
We filed an application for premarket approval, or PMA, with the Food and Drug Administration, or FDA, for our short-term system in March 2005. Premarket approval is the FDA process of scientific and regulatory review to evaluate the safety and efficacy of medical devices like those we are developing. We have received an investigational device exemption, and are conducting an 80-patient clinical trial, of our long-term system, and we expect to submit a PMA application to the FDA for this system in 2006. To date, we have data from over 1,500 patient days of real-time usage of our continuous glucose monitoring systems from over 200 patients in clinical trials. It could take one to three years, or longer, from the date of our PMA application filing to obtain any approval from the FDA. Even once we obtain approval from the FDA, it could take another fiscal quarter or more before we commence marketing our products commercially.
We are a development stage company, and to date we have not generated any revenue. We have incurred net losses in each year since our inception in May 1999 and, through December 31, 2004, we had a deficit accumulated during the development stage of $52.9 million. We expect our losses to continue and increase as we expand our clinical trial activities and initiate commercialization activities. Our continuous glucose monitoring systems must receive FDA approval, which we may never receive, before we can market these products and generate revenue.
Market Opportunity
Diabetes is a chronic, life-threatening disease for which there is no known cure. The disease is caused by the body's inability to produce or effectively utilize the hormone insulin. This inability prevents the body from adequately regulating blood glucose levels. Worldwide, approximately 171 million people suffer from the disease. In 2002, there were an estimated 13 million diagnosed diabetes patients in the United States. This number is expected to rise by more than 1.3 million people each year as a result of an aging population, inappropriate diets and increasingly sedentary lifestyles. Diabetes is the fifth leading cause of death by disease in the United States, and complications related to diabetes include heart disease, limb amputations, loss of kidney function and blindness.
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Diabetes is typically classified into two major groups: Type 1 and Type 2. Type 1 diabetes patients suffer from an absence of insulin and require frequent insulin injections in order to regulate and maintain blood glucose levels. Type 2 diabetes patients are unable to produce sufficient levels of insulin or become insulin resistant and, depending on the severity, may require dieting, exercise, oral medications or insulin injections to regulate blood glucose levels. The American Diabetes Association, or ADA, estimates that there are 1.3 million Type 1 diabetes patients and 2.8 million Type 2 diabetes patients who use insulin in the United States. In addition to Type 1 and Type 2 diabetes patients, pregnant women who have never had diabetes before may begin to have high blood glucose levels during pregnancy. According to the ADA, this condition, known as gestational diabetes, affects approximately 135,000 women in the United States each year.
The ADA estimates that the direct medical costs and indirect expenditures attributable to diabetes in the United States were $132 billion in 2002 and are expected to increase to $156 billion by 2010. Of the $132 billion in overall expenses, the ADA estimates that approximately $23 billion were associated with diabetes care. According to industry sources, the worldwide market for personal glucose monitoring systems and related disposables, which include test strips and lancets, was approximately $5.1 billion in 2003, and is expected to grow at an annual compound rate of approximately 11.6% to $8.9 billion in 2008. While we believe our systems will be adopted broadly in this market as a way to manage glucose levels more effectively, we do not expect that our systems will appeal to all types of diabetes patients, or that the worldwide market for personal glucose monitoring systems and related disposables is a direct indication of our market opportunity. In a study of Type 2 diabetes patients, fewer than 15% of all study patients and 39% of all insulin dependent study patients tested their glucose levels one or more times per day. If patients do not perceive our systems to be more convenient and effective for managing their blood glucose levels than other devices on the market, our market may be limited.
Importance of Glucose Monitoring
Blood glucose levels can be affected by the carbohydrate and fat content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin absorption and changes in the effects of insulin in the body. As a result, blood glucose levels may fluctuate throughout the day and patients are often unaware that their levels are too high, a condition referred to as hyperglycemia, or too low, a condition referred to as hypoglycemia. According to the ADA, an important component of effective diabetes management is frequent monitoring of blood glucose levels. The landmark 1993 Diabetes Control and Complications Trial, or DCCT, consisting of patients with Type 1 diabetes, and the 1998 UK Prospective Diabetes Study, consisting of patients with Type 2 diabetes, demonstrated that patients who intensely managed blood glucose levels significantly reduced the incidence and severity of diabetes-related complications. In the DCCT, a major component of intensive management was monitoring blood glucose levels at least four times per day. Despite evidence that tightly managing blood glucose levels reduces long-term complications associated with diabetes, industry sources estimate that people with diabetes test, on average, less than twice per day.
Limitations of Existing Glucose Monitoring Products
Single-point finger stick devices are the most prevalent devices for glucose monitoring. These devices require taking a blood sample with a finger stick, placing a drop of blood on a test strip and inserting the strip into a glucose meter that yields a single-point in time blood glucose measurement. We believe that these devices suffer from several limitations, including:
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Several companies have attempted to address the limitations of single-point finger stick devices by developing continuous glucose monitoring systems. To date, three continuous glucose monitors have received FDA approval. One of such devices, the GlucoWatch produced by Cygnus, employs non-invasive technology to test glucose levels. Cygnus recently ceased operations and sold its remaining assets to Animas, and we believe that the GlucoWatch is no longer actively marketed. Another continuous glucose monitor is approved for physician interpretation only, not allowing patients to see their blood glucose trends in real time. Finally, a third continuous monitoring device is only approved to alert the patient at inappropriately high or low levels. We believe that none of the products that has received FDA approval are approved for more than three days of use or for use as a replacement for single-point finger stick devices. A number of other companies are developing next-generation real-time continuous glucose monitoring systems or sensing devices and technologies, including several that are developing non-invasive continuous glucose monitoring products. Progress in the development of these products is difficult to assess, but we know that two companies have submitted applications for real-time continuous monitors or sensors to the FDA.
We believe a significant market opportunity exists for a glucose monitoring system that provides continuous blood glucose information and that is convenient and easy-to-use.
The DexCom Solution
We are developing blood glucose monitoring systems that continuously measure a patient's blood glucose level and transmit that information to a small cell phone-sized receiver. Relying on our broad-based technology platform, we are developing, and testing in clinical trials, short-term and long-term continuous blood glucose monitoring systems that are designed to offer the following advantages to diabetes patients:
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information that may be used to attain better glucose control. Additionally, our continuous blood glucose monitoring systems alert patients when their blood glucose approaches inappropriately high or low levels so that they may intervene.
In a clinical trial using our first generation long-term sensor, patients reduced the amount of time they spent hyperglycemic by 25% and the time they spent hypoglycemic by 47%. Correspondingly, these patients increased the time they spent at target blood glucose levels by 88%. These results were published in a peer-reviewed article in the March 2004 issue of Diabetes Care . Although the article indicates that the results of the trial could, potentially, have been attributable to the high frequency of visits required for the trial compared to routine patient care, the article indicates that the results were more likely due to the patients' real-time viewing of continuous glucose data and trends. DexCom sponsored the trial that is the subject of this article. Two of the authors of the article receive consulting fees from DexCom for serving on its clinical advisory board and all three authors received grant research funds from DexCom for conducting the trial. None of the authors received consulting or other fees from DexCom in exchange for conducting the trial or for authoring the article.
While we believe our glucose monitoring systems offer these advantages, patients may not perceive the benefits of continuous glucose monitoring and may be unwilling to change their current treatment regimens. Our products, and in particular our long-term continuous glucose monitoring system, can be more invasive than current self-monitored glucose testing systems, including single-point finger stick devices. Our short-term continuous glucose monitoring system requires a patient to insert a sensor electrode under their skin at least every three days. Patients could find this process to be uncomfortable or inconvenient. Patients may be unwilling to insert or implant a sensor in their body, especially if their current diabetes management involves no more than two finger sticks per day. Even among patients who are advised to test their glucose levels frequently, testing at least twice per day is uncommon. Also, our systems may not be approved as replacement devices for single-point finger stick devices, and may be more costly to use.
Our Strategy
Our objective is to become the leading provider of continuous glucose monitoring systems and related products to enable people with diabetes to manage their disease more conveniently and effectively. To achieve this objective, we are pursuing the following business strategies:
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Corporate Information
We were incorporated in Delaware in May 1999. Our principal offices are located at 5555 Oberlin Drive, San Diego, California 92121, and our telephone number is (858) 200-0200. Our World Wide Web address is http://www.dexcom.com. The information found on, or accessible through, our website is not a part of this prospectus.
We are seeking to register our trademark, DexCom, with the U.S. Patent and Trademark Office. All other trademarks, tradenames and service marks appearing in this prospectus are the property of their respective owners.
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The Offering
Common stock offered by us | 4,700,000 shares | |
Common stock to be outstanding after this offering |
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25,186,761 shares |
Initial public offering price |
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$ per share |
Use of proceeds |
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We intend to use the net proceeds of this offering for clinical trials and other research and development, building our commercialization infrastructure, working capital and general corporate purposes. See "Use of Proceeds." |
Proposed NASDAQ National Market symbol |
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DXCM |
The number of shares of common stock to be outstanding after this offering is based on 20,486,761 shares outstanding as of February 28, 2005, and excludes:
Except as otherwise noted, all information in the prospectus assumes:
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Summary Financial Data
The following table summarizes our financial data. The statements of operations data for the years ended December 31, 2002, 2003 and 2004 and for the period from May 13, 1999 (inception) through December 31, 2004 and the balance sheet data as of December 31, 2004 have been derived from our audited financial statements included elsewhere in this prospectus. You should read this data together with our financial statements and related notes to those statements included elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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Period from
May 13, 1999 (inception) through December 31, 2004 |
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Years Ended December 31,
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2002
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2003
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2004
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(in thousands, except share and per share data)
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Statements of Operations Data: | |||||||||||||||
Costs and expenses: | |||||||||||||||
Research and development | $ | 6,311 | $ | 8,934 | $ | 12,179 | $ | 36,113 | |||||||
General and administrative | 1,860 | 1,250 | 1,440 | 7,590 | |||||||||||
Stock-based compensation: | |||||||||||||||
Research and development | | | 291 | 291 | |||||||||||
General and administrative | | | 157 | 157 | |||||||||||
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Total costs and expenses | 8,171 | 10,184 | 14,067 | 44,151 | |||||||||||
Interest and other income, net |
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463 |
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270 |
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121 |
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1,405 |
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Net loss | (7,708 | ) | (9,914 | ) | (13,946 | ) | (42,746 | ) | |||||||
Accretion to redemption value of Series B and Series C redeemable convertible preferred stock | (2,451 | ) | (3,235 | ) | (3,235 | ) | (10,139 | ) | |||||||
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Net loss attributable to common stockholders | $ | (10,159 | ) | $ | (13,149 | ) | $ | (17,181 | ) | $ | (52,885 | ) | |||
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Basic and diluted net loss per share attributable to common stockholders (1) | $ | (4.96 | ) | $ | (6.06 | ) | $ | (7.51 | ) | ||||||
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Shares used to compute basic and diluted net loss per share attributable to common stockholders (1) | 2,046,208 | 2,169,922 | 2,286,320 | ||||||||||||
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Pro forma basic and diluted net loss per share (unaudited) (1) | $ | (0.88 | ) | ||||||||||||
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Shares used to compute pro forma basic and diluted net loss per share (unaudited) (1) | 15,845,239 | ||||||||||||||
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As of December 31, 2004 |
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Actual
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Pro Forma
As Adjusted (2) |
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(in thousands)
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Balance Sheet Data: | ||||||
Cash and cash equivalents | $ | 27,229 | $ | 82,152 | ||
Working capital | 25,705 | 80,628 | ||||
Total assets | 29,358 | 84,281 | ||||
Redeemable convertible preferred stock | 76,974 | | ||||
Total stockholders' equity (deficit) | (49,310 | ) | 82,587 |
(1) See Note 2 of the notes to our financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share.
(2) On a pro forma as adjusted basis to give effect to the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering and to reflect the sale of 4,700,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the range on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
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Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would suffer. In that case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our operations and business results.
We are a development stage company and we do not have, and may never have, any products.
We are a development stage medical device company with a limited operating history, and we currently do not have any commercialized products or any source of revenue. We have invested all of our time and resources in developing our continuous glucose monitoring systems, which we initially intend to commercialize in the form of a short-term continuous glucose monitoring system, and subsequently, in the form of a long-term continuous glucose monitoring system. Our existing products under development will require additional clinical evaluation, regulatory approval, significant marketing efforts and substantial additional investment before they can provide us with any revenue. Our efforts may not lead to commercially successful products for a number of reasons, including:
We do not expect to be able to commercialize our short-term continuous glucose monitoring system or long-term continuous glucose monitoring system before 2006 and 2007, respectively. If we are unable to develop, obtain regulatory approval for or successfully commercialize our continuous glucose monitoring systems, we will be unable to generate revenue.
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We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future.
We have incurred net losses in each year since our inception in May 1999, including net loss attributable to common stockholders of $17.2 million for the year ended December 31, 2004. As of December 31, 2004, we had a deficit accumulated during the development stage of $52.9 million. We have financed our operations primarily through private placements of our equity securities and have devoted substantially all of our resources to research and development relating to our continuous glucose monitoring systems. We expect our research and development expenses to increase in connection with our clinical trials and other development activities related to our products. If we receive approval for marketing of a product by the Food and Drug Administration, or FDA, we expect to incur significant sales and marketing expenses, and manufacturing expenses. Additionally, if we complete our initial public offering, we expect that our general and administrative expenses will increase due to the additional operational and regulatory burdens applicable to public companies. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. These losses, among other things, have had and will continue to have an adverse effect on our stockholders' equity.
We have not received, and may never receive, FDA approval to market our continuous glucose monitoring systems.
We do not have the necessary regulatory approvals to market our continuous glucose monitoring systems or any other product in the United States or in any foreign market. We plan initially to launch our products, once approved, in the United States. The regulatory approval process for our continuous glucose monitoring systems involves, among other things, successfully completing clinical trials and obtaining a premarket approval, or PMA, from the FDA. The PMA process requires us to prove the safety and efficacy of our continuous glucose monitoring systems to the FDA's satisfaction. This process can be expensive and uncertain, requires detailed and comprehensive scientific and human clinical data, generally takes one to three years after a PMA application is filed and may never result in the FDA granting a PMA. For example, there is no guarantee that the PMA application we recently submitted for our short-term continuous glucose monitoring system will result in any approval of the system by the FDA. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
Even if approved, our continuous glucose monitoring systems may not be approved for the indications that are necessary or desirable for successful commercialization of our systems. We may not obtain the necessary regulatory approvals to market our continuous glucose monitoring systems in the United States or anywhere else. Any delay in, or failure to receive or maintain, approval for our continuous glucose monitoring systems could prevent us from generating revenue or achieving profitability.
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We expect to operate in a highly competitive market, we face competition from large, well-established medical device manufacturers with significant resources, and we may not be able to compete effectively.
The market for glucose monitoring devices is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. If our products are approved for marketing, we will compete directly with Roche Disetronic, a division of Roche Diagnostics; LifeScan, Inc., a division of Johnson & Johnson; the MediSense and TheraSense divisions of Abbott Laboratories; and Bayer Corporation, each of which manufactures and markets products for the single-point finger stick device market. Collectively these companies currently account for substantially all of the glucose monitoring market. Several companies are developing or marketing early generation short-term continuous glucose monitoring products that will compete directly with our planned products. These devices include the Guardian Continuous Glucose Monitoring System and the CGMS System Gold, both of which have received FDA approval for limited applications and are currently marketed by Medtronic, Inc., and the Freestyle Navigator Glucose System, which has not yet received FDA approval and is being developed by TheraSense. In August 2004, Medtronic announced that it had filed a PMA supplement for its Guardian device that, if approved, will allow it to show real-time glucose measurements to patients. Furthermore, several other companies are developing non-invasive continuous glucose monitoring products. One of these non-invasive devices, the Cygnus GlucoWatch, now owned by Animas Corporation, has received FDA approval. Most of the companies developing or marketing competing devices are publicly traded or divisions of publicly-traded companies, and these companies enjoy several competitive advantages, including:
As a result, we may not be able to compete effectively against these companies or their products.
No continuous glucose monitoring system has yet received FDA clearance as a replacement for single-point finger stick devices, and our products may never be approved for that indication.
We do not expect our initial products will eliminate the need for single-point finger stick devices. We believe that our initial products, if approved, will be indicated for use by patients to obtain real-time blood glucose levels, trend information and alerts, but not as a substitute for single-point finger stick devices. No precedent for FDA approval of continuous glucose monitoring systems as a substitute for such devices has been established. Accordingly, there is no established study design or agreement regarding performance requirements or measurements in clinical trials for continuous glucose monitoring systems. To our knowledge, the only company to attempt to obtain approval from the FDA for the replacement of single-point finger stick devices with a continuous glucose monitoring system
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has experienced substantial delays, and there can be no guarantee that we will not also experience such delays.
If we are unable to successfully complete the pre-clinical studies or clinical trials necessary to support additional PMA applications, our ability to commercialize our continuous glucose monitoring systems and our financial position will be impaired.
Before submitting any PMA application, we must successfully complete pre-clinical studies and clinical trials that we believe will demonstrate that the product is safe and effective. Product development, including pre-clinical studies and clinical trials, is a long, expensive and uncertain process and is subject to delays and failure at any stage. Furthermore, the data obtained from the trial may be inadequate to support approval of a PMA application. While we obtained an Investigational Device Exemption, or IDE, prior to commencing the current clinical trial for our long-term continuous glucose monitoring system, FDA approval of an IDE application permitting us to conduct testing does not mean that the FDA will consider the data gathered in the trial sufficient to support approval of a PMA application, even if the trial's intended safety and efficacy endpoints are achieved.
The commencement or completion of any of our clinical trials may be delayed or halted, or be inadequate to support approval of a PMA application, for numerous reasons, including, but not limited to, the following:
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The results of pre-clinical studies do not necessarily predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. We believe the data and performance from each of our last three clinical trials relating to our long-term system were likely insufficient to support a PMA application. While these previous trials were not designed or intended to be used to support a PMA application, our ongoing and future clinical trials that are designed to support a PMA application may not be sufficient to do so. Additionally, the FDA may disagree with our interpretation of the data from our pre-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay the approval of our products. If we are unable to demonstrate the safety and efficacy of our products in our clinical trials, we will be unable to obtain regulatory approval to market our products. The data we collect from our current clinical trials, our pre-clinical studies and other clinical trials may not be sufficient to support FDA approval. If we are unsuccessful in either filing a PMA application or receiving FDA approval for a PMA application related to our long-term system, our business strategy may have to be altered to rely solely on our short-term system.
If we are unable to obtain acceptable prices or adequate reimbursement for our products from third-party payors, we will be unable to generate significant revenue.
The availability of insurance coverage and reimbursement for newly approved medical devices is uncertain. In the United States, patients using existing single-point finger stick devices are generally reimbursed all or part of the product cost by Medicare or other third-party payors. The commercial success of our continuous glucose monitoring systems in both domestic and international markets will be substantially dependent on whether third-party coverage and reimbursement is available for patients that use our systems. Third-party coverage may be particularly difficult to obtain if our systems are not approved by the FDA as replacements for existing single-point finger stick devices. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new medical devices, and, as a result, they may not cover or provide adequate payment for our systems. In order to obtain reimbursement arrangements, we may have to agree to a net sales price lower than the net sales price we might charge in other sales channels. The continuing efforts of government and third-party payors to contain or reduce the costs of healthcare may limit our revenue. Our initial dependence on the commercial success of our short-term continuous glucose monitoring system makes us particularly susceptible to any cost containment or reduction efforts. Accordingly, even if our short-term continuous glucose monitoring system or future products we develop are approved for commercial sale, unless government and other third-party payors provide adequate coverage and reimbursement for our products, patients may not use them.
In some foreign markets, pricing and profitability of medical devices are subject to government control. In the United States, we expect that there will continue to be federal and state proposals for similar controls. Also, the trends toward managed healthcare in the United States and proposed legislation intended to reduce the cost of government insurance programs could significantly influence the purchase of healthcare services and products and may result in lower prices for our products or the exclusion of our products from reimbursement programs.
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Our continuous glucose monitoring systems may never achieve market acceptance even if we obtain regulatory approvals.
To date, only those patients and physicians involved in our clinical trials have used our products and, even if we obtain regulatory approval, people with diabetes or the medical community may not endorse our short-term or long-term continuous glucose monitoring systems. The degree of market acceptance of our products will depend on a number of factors, including:
Our products, and in particular our long-term continuous glucose monitoring system, can be more invasive than current self-monitored glucose testing systems, including single-point finger stick devices, and patients may be unwilling to insert or implant a sensor in their body, especially if their current diabetes management involves no more than two finger sticks per day. Moreover, patients may not perceive the benefits of continuous glucose monitoring and may be unwilling to change their current treatment regimens. In addition, physicians tend to be slow to change their medical treatment practices because of perceived liability risks arising from the use of new products and the uncertainty of third party reimbursement. Physicians may not recommend or prescribe our products until there is long-term clinical evidence to convince them to alter their existing treatment methods and there are recommendations from prominent physicians that our products are effective in monitoring blood glucose levels. We cannot predict when, if ever, physicians may adopt the use of our products. If our continuous glucose monitoring systems are approved but do not achieve an adequate level of acceptance by patients, physicians and healthcare payors, we may not generate significant product revenue and we may not become profitable.
We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control.
We rely on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trial and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to ensure compliance by patients with clinical protocols, we will be unable to
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complete these trials, which could prevent us from obtaining regulatory approvals for our products. Our agreements with clinical investigators and clinical sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our products.
We may be unable to complete the development and commercialization of our continuous glucose monitoring systems or other products without additional funding.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts on research and development, including conducting clinical trials for our continuous glucose monitoring systems. Even before we receive approval to market one of our continuous glucose monitoring systems, we expect to spend significant additional amounts on commercializing the product, including development of a direct sales force and expansion of manufacturing capacity. In 2004, our net cash used in operating activities was $12.4 million. We expect that our cash used by operations will increase significantly in each of the next several years, and we may need additional funds to complete the development and commercialization of both our short-term and long-term continuous glucose monitoring systems. Additional financing may not be available on a timely basis on terms acceptable to us, or at all. Any additional financing may be dilutive to stockholders or may require us to grant a lender a security interest in our assets. The amount of funding we will need will depend on many factors, including:
If adequate funds are not available, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products. Any of these factors could harm our financial condition.
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If we are unable to establish sales, marketing and distribution capabilities or enter into and maintain arrangements with third parties to sell, market and distribute our continuous glucose monitoring systems, our business may be harmed.
We do not have a sales organization and have no experience as a company in the sale, marketing and distribution of glucose monitoring products. To achieve commercial success for any approved product we must either develop a sales and marketing force or enter into arrangements with others to market and sell our products. Following product approval, we currently plan to establish a small direct sales force to market our products in the United States. Our sales force will be competing with the experienced and well-funded marketing and sales operations of our competitors. Developing a sales force is expensive and time consuming and could delay or limit the success of any product launch. We may not be able to develop this capacity on a timely basis or at all. If we are unable to establish sales and marketing capabilities, we will need to contract with third parties to market and sell our approved products in the United States. To the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services in the United States, our product revenue could be lower than if we directly marketed and sold our continuous glucose monitoring systems. Furthermore, to the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate product revenue and may not become profitable.
We have limited manufacturing capabilities and manufacturing personnel, and if our manufacturing capabilities are insufficient to produce an adequate supply of products, our growth could be limited and our business could be harmed.
We currently have limited resources, facilities and experience to commercially manufacture our products. In order to produce our continuous glucose monitoring systems in the quantities we anticipate to meet market demand, we will need to increase our manufacturing capacity by a significant factor over the current level. There are technical challenges to increasing manufacturing capacity, including equipment design and automation, material procurement, problems with production yields, and quality control and assurance. Developing commercial-scale manufacturing facilities will require the investment of substantial additional funds and the hiring and retaining of additional management and technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase in manufacturing capacity in a timely manner or at all. Even if our products receive regulatory approval, if we are unable to manufacture a sufficient supply of product, maintain control over expenses or otherwise adapt to anticipated growth, or if we underestimate growth, we may not have the capability to satisfy market demand and our business will suffer.
Additionally, the production of our continuous glucose monitoring systems must occur in a highly controlled and clean environment to minimize particles and other yield- and quality-limiting contaminants. Weaknesses in process control or minute impurities in materials may cause a substantial percentage of defective products in a lot. If we are not able to maintain stringent quality controls, or if contamination problems arise, our clinical development and commercialization efforts could be delayed, which would harm our business and our results of operations.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business.
We rely on Flextronics to manufacture and supply the handheld personal receiver included as part of our continuous glucose monitoring systems and the circuit boards for our short-term and long-term
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sensors; we rely on AMI Semiconductor to manufacture and supply the application specific integrated circuit, or ASIC, that is incorporated into the transmitter for our continuous glucose monitoring systems; we rely on Quallion to manufacture and supply the battery included in our short-term sensor and the third generation of our long-term sensor; and we rely on Vita Needle to manufacture and supply the insertion needle in our short-term continuous glucose monitoring system. Each of these suppliers is a sole-source supplier. Our contract manufacturers also rely on sole-source suppliers to manufacture some of the components used in our products. Our manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also subjects us to other risks that could harm our business, including:
Any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products.
Technological breakthroughs in the glucose monitoring market could render our products obsolete.
The glucose monitoring market is subject to rapid technological change and product innovation. Our products are based on our proprietary technology, but a number of companies and medical researchers are pursuing new technologies for the monitoring of glucose levels. FDA approval of a commercially viable continuous glucose monitor or sensor produced by one of our competitors could significantly reduce market acceptance of our systems. Several of our competitors are in various stages of developing continuous glucose monitors or sensors, including non-invasive and invasive devices, and the FDA has approved three of these products. In addition, the National Institutes of Health and other supporters of diabetes research are continually seeking ways to prevent, cure or improve treatment of diabetes. Therefore, our products may be rendered obsolete by technological breakthroughs in diabetes monitoring, treatment or prevention.
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Potential long-term complications from our continuous glucose monitoring systems may not be revealed by our clinical experience to date.
If unanticipated long-term side-effects result from the use of either of our systems, we could be subject to liability and our systems would not be widely adopted. Our clinical trials have been limited to seven months of continuous use with our first generation long-term sensor, six months of continuous use with our second generation long-term sensor and three days of continuous use with our short-term sensor. Additionally, we have not clinically tested repeated use of our long-term sensor in the same patient, and we have limited clinical experience with repeated use of our short-term sensor in the same patient. We cannot assure you that long-term use would not result in unanticipated complications. Furthermore, the interim results from our current pre-clinical studies and clinical trials may not be indicative of the clinical results obtained when we examine the patients at later dates. It is possible that repeated use of our short-term or long-term systems, or implantation of our long-term sensor for more than seven months, will result in unanticipated adverse effects, potentially even after the device is removed.
Even if our products are approved by regulatory authorities, if we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. In particular we and our suppliers are required to comply with the quality system regulation, or QSR, and other regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products. The FDA enforces the QSR through unannounced inspections. We have not yet been inspected by the FDA and will have to successfully complete such an inspection before we ship any commercial products. Failure by us or one of our suppliers to comply with statutes and regulations administered by the FDA and other regulatory bodies, or failure to take adequate response to any observations, could result in, among other things, any of the following actions:
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If any of these actions were to occur, it would harm our reputation and cause our product sales and profitability to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements.
Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as the QSR, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.
We face the risk of product liability claims and may not be able to maintain or obtain insurance.
Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those which may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if our products cause, or merely appear to have caused, an injury. Claims may be made by patients, healthcare providers or others selling our products. Although we have product liability and clinical trial liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverages may not be adequate to protect us against any future product liability claims. In addition, if any of our products are approved for marketing, we may seek additional insurance coverage. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.
We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to perform the medical procedure and related processes to implant our long-term sensor into patients. If these medical personnel are not properly trained or are negligent, the capabilities of our products may be diminished or the patient may suffer critical injury, which may subject us to liability. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers or result in reduced acceptance of our products in the market.
We conduct business in a heavily regulated industry and if we fail to comply with these laws and government regulations, we could suffer penalties or be required to make significant changes to our operations.
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:
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These laws and regulations are extremely complex and, in some cases, still evolving. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. If our operations are found to be in violation of any of the federal, state or local laws and regulations which govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. The risk of being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's time and attention from the operation of our business.
In addition, healthcare laws and regulations may change significantly in the future. Any new healthcare laws or regulations may adversely affect our business. A review of our business by courts or regulatory authorities may result in a determination that could adversely affect our operations. Also, the healthcare regulatory environment may change in a way that restricts our operations.
We are not aware of any governmental healthcare investigations involving our executives or us. However, any future healthcare investigations of our executives, our managers or us could result in significant liabilities or penalties to us, as well as adverse publicity.
Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.
Our success and ability to compete is dependent, in part, upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, copyright and trademark law, and trade secrets and nondisclosure agreements to protect our intellectual property. However, such methods may not be adequate to protect us or permit us to gain or maintain a competitive advantage. Our patent applications may not issue as patents in a form that will be advantageous to us, or at all. Our issued patents, and those that may issue in the future, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products.
To protect our proprietary rights, we may in the future need to assert claims of infringement against third parties to protect our intellectual property. The outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable, could result in substantial costs and diversion of resources, and could have a material adverse effect on our financial condition and results of operations regardless of the final outcome of such litigation. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, invalid or unenforceable, and could award attorney fees.
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Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not be successful in doing so or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary. Additionally, third parties may be able to design around our patents. Furthermore, the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.
We do not currently have any registered trademarks. We recently filed for the registration of a trademark for the name "DexCom" but our application has been preliminarily rejected. If we cannot obtain a trademark registration for DexCom, we may have to change our company name or market our products under a different name, which could result in significant expense.
We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.
Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Our competitors may assert that our continuous glucose monitoring systems or the methods we employ in the use of our systems are covered by U.S. or foreign patents held by them. This risk is exacerbated by the fact that there are numerous issued patents and pending patent applications relating to self-monitored glucose testing systems and implantable sensors in the medical technology field. Because patent applications may take years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that our products infringe. There could also be existing patents of which we are unaware that one or more components of our system may inadvertently infringe. As the number of competitors in the market for self-monitored glucose testing systems grows, the possibility of inadvertent patent infringement by us or a patent infringement claim against us increases.
Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources, divert management's attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our product that is found to infringe unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling, offering to sell or importing our products, or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.
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The prosecution and enforcement of patents licensed to us by third parties are not within our control, and without these technologies, our products may not be successful and our business would be harmed.
We rely on a license from SM Technologies, LLC to use various technologies that are material to our business. We do not own the patents that underlie this license. This license grants us exclusive rights under specific patents related to our biointerface membranes and our sensor membranes and allows us to use those rights only in the field of diabetes treatment and management. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to our abiding by the terms of the license. In addition, we do not control the prosecution of the patents subject to this license or the strategy for determining when such patents should be enforced. As a result, we are largely dependent upon our licensor to determine the appropriate strategy for prosecuting and enforcing those patents.
We do not currently comply with Federal Communications Commission, or FCC, regulations for the radio transmissions used by our products, and will need to change the frequencies we use, or obtain exemptions for our systems, before we can commercialize our products.
Our continuous glucose monitoring systems rely on radio transmissions from the sensor to a handheld receiver. Our long-term continuous glucose monitoring system operates in the band of frequencies allocated to the Medical Implant Communications Service, or MICS, which is an ultra-low power, unlicensed, mobile radio service for transmitting data in support of diagnostic or therapeutic functions associated with implanted medical devices. However, our long-term continuous glucose monitoring system does not fully comply with the requirements imposed by the FCC on MICS devices. We anticipate applying for an exemption, but may not obtain such an exemption in time for our potential product release, if at all. If we cannot obtain an exemption, we may be required to re-engineer our sensors to transmit over a different frequency that is not restricted. Any change to our transmission frequency may require changes to our regulatory approvals. We have not tested, in a clinical setting, any of our current generation systems on a frequency other than that allocated to the MICS. While other frequencies are available, traffic on those frequencies may be significant given the lack of restrictions, and we cannot predict the effect such traffic would have on the operation of our sensors.
All of our operations are conducted at a single location. Any disruption at our facility could increase our expenses.
All of our operations are conducted at a single location in San Diego, California. We take precautions to safeguard our facility, including insurance, health and safety protocols, and off-site storage of computer data. However, a natural disaster, such as a fire, flood or earthquake, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.
We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.
Our research and development and clinical processes involve the handling of potentially harmful biological materials as well as hazardous materials. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over
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time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.
Following commercial launch of our products in the United States, we may market our products internationally. Outside the United States, we can market a product only if we receive a marketing authorization and, in some cases, pricing approval, from the appropriate regulatory authorities. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval in addition to other risks. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We have not taken any actions to obtain foreign regulatory approvals. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market on a timely basis, or at all.
Our success will depend on our ability to attract and retain our personnel.
We are highly dependent on our senior management, especially Andrew P. Rasdal, our President and Chief Executive Officer, and each of Andrew K. Balo, our Vice President of Clinical and Regulatory Affairs and Quality Systems, Mark Brister, our Vice President, Advanced Development Teams, James H. Brauker, our Vice President of Research and Development, and Steven J. Kemper, our Chief Financial Officer. Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the future, including scientists, clinicians, engineers and other highly skilled personnel. Competition for senior management personnel, as well as scientists, clinicians and engineers, is intense and we may not be able to retain our personnel. The loss of the services of members of our senior management, scientists, clinicians or engineers could prevent the implementation and completion of our objectives, including the development and introduction of our products. The loss of a member of our senior management or our professional staff would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement. Each of our officers may terminate their employment at any time without notice and without cause or good reason.
We expect to rapidly expand our operations and grow our research and development, product development and administrative operations. This expansion is expected to place a significant strain on our management and will require hiring a significant number of qualified personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.
We will incur increased costs as a result of recently enacted and proposed changes in laws and regulations relating to corporate governance matters.
Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted or proposed by the
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Securities and Exchange Commission, or SEC, will result in increased costs to us as we evaluate the implications of any new rules and regulations and respond to new requirements under such rules and regulations. We will be required to comply with these rules and regulations after the completion of this offering. For example, we are evaluating our internal controls systems in order to allow us to report on, and our independent registered public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is no precedent available by which to measure compliance adequacy. As a development stage company with limited capital and human resources, we will need to divert management's time and attention away from our business in order to ensure compliance with these regulatory requirements. This diversion of management's time and attention may have a material adverse effect on our business, financial condition and results of operations.
Changes in or interpretations of accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.
Accounting methods and policies for business and market practices, including policies regarding expensing stock options, are subject to further review, interpretation and guidance from relevant accounting authorities, including the SEC. For example, we currently are not required to record stock-based compensation charges if the employee's stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. In December 2004 the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), Share-Based Payment which will require all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. The transition methods include retroactive and prospective adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning in the first period restated. If we elect to adopt the retroactive provisions and to restate all prior periods presented our operating expenses and reported losses will increase. We rely heavily on stock options to compensate existing employees and attract new employees. Upon the adoption, we may choose to reduce our reliance on stock options as a compensation tool. If we reduce our use of stock options, it may be more difficult for us to attract and retain qualified employees. Although we believe that our accounting practices are consistent with current accounting pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements.
Risks Relating to this Offering
An active trading market for our common stock may not develop.
Prior to this offering, there has been no public market for our common stock. An active trading market for our shares may never develop or be sustained following this offering. Accordingly, you may not be able to sell your shares quickly or at the market price if trading in our stock is not active. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. The initial public offering price may vary from the market price of our common stock after this offering. You may not be able to sell their common stock at or above the initial public offering price.
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The market price for our common stock is likely to be volatile and could result in a decline in the value of your investment.
Our stock price is likely to be volatile. The stock market in general and the securities of medical device companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. This has been especially true for development stage companies such as ours. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The following factors, in addition to other risk factors described in this section and general market and economic conditions, may have a significant impact on the market price of our common stock:
A decline in the market price of our common stock could cause you to lose some or all of your investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in "Use of Proceeds." Accordingly, you will have to rely upon the
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judgment of our management with respect to the use of the proceeds, with only limited information concerning management's specific intentions. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
Concentration of ownership among our existing directors, executive officers, and principal stockholders may prevent new investors from influencing significant corporate decisions.
Upon closing of this offering, based upon beneficial ownership as of February 28, 2005, our current directors, executive officers, holders of more than 5% of our common stock, and their affiliates will, in the aggregate, beneficially own approximately 62.4% of our outstanding common stock. As a result, these stockholders, subject to any fiduciary duties owed to our other stockholders under Delaware law, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant control over our management and policies. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of DexCom or otherwise discourage a potential acquirer from attempting to obtain control of DexCom, which in turn could reduce the price of our common stock. In addition, these stockholders, some of whom have representatives sitting on our board of directors, could use their voting influence to maintain our existing management and directors in office, delay or prevent changes of control of DexCom, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.
If there are substantial sales of our common stock, our stock price could decline.
If our existing stockholders sell a large number of shares of our common stock or the public market perceives that these sales may occur, the market price of our common stock could decline. Based on shares outstanding on February 28, 2005, upon the closing of this offering, assuming no outstanding options are exercised prior to the closing of this offering, we will have approximately 25,186,761 shares of common stock outstanding. All of the shares offered under this prospectus will be freely tradable without restriction or further registration under the federal securities laws, unless purchased by our affiliates. Taking into consideration the effect of lock-up agreements entered into by our stockholders, the remaining 20,486,761 shares outstanding upon the closing of this initial public offering will be available for sale pursuant to Rules 144 and 701, and the volume, manner of sale and other limitations under these rules, as follows:
Existing stockholders holding an aggregate of 19,618,721 shares of common stock and one warrantholder holding a warrant to purchase 43,729 shares of our common stock, based on shares outstanding as of February 28, 2005, have rights with respect to the registration of these shares of common stock with the Securities and Exchange Commission. See "Description of Capital Stock
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Registration Rights." If we register their shares of common stock following the expiration of the lock-up agreements, they can immediately sell those shares in the public market.
Promptly following this offering, we intend to register up to approximately 6,120,359 shares of common stock that are authorized for issuance under our stock option plans and employee stock purchase plan. As of February 28, 2005, 2,970,359 shares were subject to outstanding options, of which 908,608 shares were vested. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above and restrictions on our affiliates.
You will incur immediate and substantial dilution as a result of this offering.
The initial public offering price is substantially higher than the book value per share of our common stock. As a result, purchasers in this offering will experience immediate and substantial dilution of $9.66 per share in the tangible book value of our common stock from the initial public offering price, based on the number of shares outstanding as of December 31, 2004. This is due in large part to earlier investors in the company having paid substantially less than the assumed initial public offering price when they purchased their shares. Investors who purchase shares of common stock in this offering will contribute approximately 46.1% of the total amount we have raised to fund our operations but will own only approximately 19.0% of our common stock, based on the number of shares outstanding as of December 31, 2004. In addition, the exercise of currently outstanding options to purchase common stock and future equity issuances, including future public or private securities offerings and any additional shares issued in connection with acquisitions, will result in further dilution.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.
Upon the closing of this offering, provisions of our restated certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:
26
In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirors at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.
We have also adopted a stockholder rights plan, which will become effective upon the consummation of this offering, that may discourage, delay or prevent a change of control and make any future unsolicited acquisition attempt more difficult. Under the rights plan:
See "Description of Capital StockAnti-Takeover ProvisionsRights Agreement" for a more detailed description of these provisions.
27
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and uncertainties, principally in the sections entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds" and "Business." All statements other than statements of historical fact contained in this prospectus, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should" or "will" or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors" or elsewhere in this prospectus, which may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.
You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this prospectus. Before you invest in our common stock, you should be aware that the occurrence of the events described in the section entitled "Risk Factors" and elsewhere in this prospectus could negatively affect our business, operating results, financial condition and stock price. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this prospectus to conform our statements to actual results or changed expectations.
28
We estimate the net proceeds to us from the sale of 4,700,000 shares of common stock that we are selling in this offering will be approximately $54.9 million, assuming an initial public offering price of $13.00 per share, the midpoint of the range on the front cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate we will receive net proceeds of approximately $63.4 million.
Of the net proceeds from this offering and existing cash, we expect to use approximately:
The amounts actually spent for these purposes may vary significantly and will depend on a number of factors, including our operating costs, capital expenditures and other factors described under "Risk Factors." While we have no present understandings, commitments or agreements to enter into any potential acquisitions, we may also use a portion of the net proceeds for the acquisition of, or investment in, technologies or products that complement our business. Accordingly, management will retain broad discretion as to the allocation of the net proceeds of this offering.
Pending the uses described above, we will invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. We cannot predict whether the proceeds will yield a favorable return.
We have never declared or paid cash dividends on our capital stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our board of directors may deem relevant.
29
You should read this capitalization table together with the sections of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the financial statements and related notes to those statements included elsewhere in this prospectus.
The following table sets forth our capitalization as of December 31, 2004:
|
As of December 31, 2004
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Actual
|
Pro Forma
As Adjusted |
||||||||||
|
|
(unaudited)
|
||||||||||
|
(in thousands, except share data)
|
|||||||||||
Redeemable convertible Series B preferred stock, $0.001 par value, 11,304,114 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted | $ | 20,878 | $ | | ||||||||
Redeemable convertible Series C preferred stock, $0.001 par value, 13,043,478 shares authorized, actual; 12,790,870 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted | 34,740 | | ||||||||||
Redeemable convertible Series D preferred stock, $0.001 par value, 8,700,000 shares authorized, actual; 8,355,886 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted | 21,356 | | ||||||||||
|
|
|||||||||||
Stockholders' equity (deficit): | ||||||||||||
Preferred stock, $0.001 par value, no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted | | | ||||||||||
Convertible Series A preferred stock, $0.001 par value, 3,000,000 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted | 3 | | ||||||||||
Common stock, $0.001 par value, 50,000,000 shares authorized, 2,323,300 shares issued and outstanding, actual; 100,000,000 shares authorized, 24,748,701 shares issued and outstanding, pro forma as adjusted | 2 | 22 | ||||||||||
Additional paid-in capital | 6,218 | 138,098 | ||||||||||
Deferred stock-based compensation | (2,648 | ) | (2,648 | ) | ||||||||
Deficit accumulated during the development stage | (52,885 | ) | (52,885 | ) | ||||||||
|
|
|||||||||||
Total stockholders' equity (deficit) | (49,310 | ) | 82,587 | |||||||||
|
|
|||||||||||
Total capitalization | $ | 27,664 | $ | 82,587 | ||||||||
|
|
30
The information in the table above excludes, as of December 31, 2004:
31
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.
As of December 31, 2004, we had a negative net tangible book value of $(49.3) million, or $(21.22) per share of common stock, not taking into account the conversion of our outstanding preferred stock. Net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of outstanding shares of our common stock. Our pro forma net tangible book value as of December 31, 2004 was approximately $27.7 million, or $1.38 per share of common stock. Our pro forma net tangible book value and pro forma net tangible book value per share give effect to the conversion of all outstanding shares of our preferred stock into common stock.
Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and pro forma net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to the conversion of all of our preferred stock and the sale of 4,700,000 shares of common stock offered by this prospectus at the assumed initial public offering price of $13.00 per share, the midpoint of the range on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2004 was approximately $82.6 million, or approximately $3.34 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $1.96 per share to our common stockholders and an immediate dilution of $9.66 per share to new investors in this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share | $ | 13.00 | |||||
Historical net tangible book value per share as of December 31, 2004 | $ | (21.22 | ) | ||||
Pro forma increase in net tangible book value per share attributable to conversion of redeemable convertible preferred stock | 22.60 | ||||||
|
|||||||
Pro forma net tangible book value per share as of December 31, 2004 | 1.38 | ||||||
Increase in pro forma net tangible book value per share attributable this offering | 1.96 | ||||||
|
|||||||
Pro forma as adjusted net tangible book value per share after this offering | 3.34 | ||||||
|
|||||||
Dilution per share to new investors in this offering | $ | 9.66 | |||||
|
If the underwriters exercise their over-allotment option to purchase up to 705,000 additional shares in this offering, our pro forma as adjusted net tangible book value per share as of December 31, 2004 will be $3.58, representing an immediate increase in pro forma net tangible book value per share attributable to this offering of $2.20 to our existing investors and an immediate dilution per share to new investors in this offering of $9.42.
Assuming the exercise in full of the 3,353,133 outstanding options and the issuance of 43,729 shares of common stock upon exercise of an outstanding warrant at December 31, 2004, pro forma net tangible book value before this offering at December 31, 2004 would be $1.32 per share, representing an immediate dilution of $0.06 per share to our existing stockholders, and, after giving effect to the
32
sale of 4,700,000 shares of common stock in this offering, there would be an immediate dilution of $9.95 per share to new investors in this offering.
The following table sets forth, on a pro forma as adjusted basis, as of December 31, 2004, the differences between the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering, before deducting underwriting discounts and commissions and estimated expenses at an assumed initial public offering price of $13.00 per share, the mid-point of the range on the front cover of this prospectus.
|
Shares Purchased
|
Total Consideration
|
Weighted
Average Price Per Share |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Number
|
Percent
|
Amount
|
Percent
|
|||||||||
Existing stockholders | 20,048,701 | 81.0 | % | $ | 71,351,738 | 53.9 | % | $ | 3.56 | ||||
New investors | 4,700,000 | 19.0 | 61,100,000 | 46.1 | 13.00 | ||||||||
|
|
|
|
||||||||||
Total | 24,748,701 | 100.0 | % | $ | 132,451,738 | 100.0 | % | ||||||
|
|
|
|
If the underwriters exercise their over-allotment option in full, our existing stockholders would own 78.8% and our new investors would own 21.2% of the total number of shares of our common stock outstanding after this offering.
Assuming all outstanding options and the outstanding warrant are fully exercised, the shares purchased by the new investors would constitute 16.7% of all shares purchased from us, and the total consideration paid by new investors would constitute 45.0% of the total consideration paid for all shares purchased from us. In addition, the weighted average price per share paid by new investors would be $13.00, and the weighted average price per share paid by existing stockholders would be $3.18.
In the preceding tables, the shares of common stock outstanding exclude, as of December 31, 2004:
33
The statements of operations data for the years ended December 31, 2002, 2003 and 2004 and for the period from May 13, 1999 (inception) through December 31, 2004 and the balance sheet data as of December 31, 2003 and 2004 have been derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the years ended December 31, 2000 and 2001 and the balance sheet data as of December 31, 2000, 2001 and 2002 have been derived from our audited financial statements not included in this prospectus. The following selected financial data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and financial statements and related notes to those statements included elsewhere in this prospectus.
|
|
|
|
|
|
Period from
May 13, 1999 (inception) through December 31, 2004 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31,
|
||||||||||||||||||||
|
2000
|
2001
|
2002
|
2003
|
2004
|
||||||||||||||||
|
(in thousands, except share and per share data)
|
||||||||||||||||||||
Statements of Operations Data: | |||||||||||||||||||||
Costs and expenses: | |||||||||||||||||||||
Research and development | $ | 2,902 | $ | 5,039 | $ | 6,311 | $ | 8,934 | $ | 12,179 | $ | 36,113 | |||||||||
General and administrative | 1,112 | 1,685 | 1,860 | 1,250 | 1,440 | 7,590 | |||||||||||||||
Stock-based compensation: | |||||||||||||||||||||
Research and development | | | | | 291 | 291 | |||||||||||||||
General and administrative | | | | | 157 | 157 | |||||||||||||||
|
|
|
|
|
|
||||||||||||||||
Total costs and expenses | 4,014 | 6,724 | 8,171 | 10,184 | 14,067 | 44,151 | |||||||||||||||
Interest and other income, net |
|
|
49 |
|
|
451 |
|
|
463 |
|
|
270 |
|
|
121 |
|
|
1,405 |
|
||
|
|
|
|
|
|
||||||||||||||||
Net loss | (3,965 | ) | (6,273 | ) | (7,708 | ) | (9,914 | ) | (13,946 | ) | (42,746 | ) | |||||||||
Accretion to redemption value of Series B and Series C redeemable convertible preferred stock | (93 | ) | (1,126 | ) | (2,451 | ) | (3,235 | ) | (3,235 | ) | (10,139 | ) | |||||||||
|
|
|
|
|
|
||||||||||||||||
Net loss attributable to common stockholders | $ | (4,058 | ) | $ | (7,399 | ) | $ | (10,159 | ) | $ | (13,149 | ) | $ | (17,181 | ) | $ | (52,885 | ) | |||
|
|
|
|
|
|
||||||||||||||||
Basic and diluted net loss per share attributable to common stockholders (1) | $ | (2.35 | ) | $ | (3.90 | ) | $ | (4.96 | ) | $ | (6.06 | ) | $ | (7.51 | ) | ||||||
|
|
|
|
|
|||||||||||||||||
Shares used to compute basic and diluted net loss per share attributable to common stockholders (1) | 1,727,024 | 1,896,494 | 2,046,208 | 2,169,922 | 2,286,320 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
Pro forma basic and diluted net loss per share (unaudited) (1) | $ | (0.88 | ) | ||||||||||||||||||
|
|||||||||||||||||||||
Shares used to compute pro forma basic and diluted net loss per share (unaudited) (1) | 15,845,239 | ||||||||||||||||||||
|
|||||||||||||||||||||
|
As of December 31, |
|
|||||||||||||||||||
|
2000
|
2001
|
2002
|
2003
|
2004
|
|
|||||||||||||||
|
(in thousands)
|
|
|||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||||
Cash and cash equivalents | $ | 13,897 | $ | 7,777 | $ | 29,844 | $ | 20,016 | $ | 27,229 | |||||||||||
Working capital | 13,542 | 7,280 | 29,079 | 19,152 | 25,705 | ||||||||||||||||
Total assets | 14,362 | 8,640 | 30,611 | 20,767 | 29,358 | ||||||||||||||||
Redeemable convertible preferred stock | 16,989 | 16,989 | 49,356 | 52,384 | 76,974 | ||||||||||||||||
Total stockholders' deficit | (3,191 | ) | (8,930 | ) | (19,485 | ) | (32,601 | ) | (49,310 | ) |
(1) See Note 2 of the notes to our financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives and intentions, as set forth under "Information Regarding Forward-Looking Statements." Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the following discussion and under "Risk Factors," "Business" and elsewhere in this prospectus.
Overview
We are a development stage medical device company focused on the design and development of continuous glucose monitoring systems for people with diabetes. Since inception we have devoted substantially all of our resources to start-up activities, raising capital and research and development, including product design, testing, manufacturing and clinical trials. We have focused our development activities on two continuous glucose monitoring systems: a short-term system with a sensor that can be inserted by a patient and a long-term system with a sensor that can be implanted by a physician. Our glucose monitoring systems are designed to provide real-time continuous blood glucose values, trend data and alerts to assist patients in managing their blood glucose levels. We have not generated any revenue from our development activities and will not be able to generate revenue until one of our products is approved, if ever.
To date, we have data from over 1,500 patient days of real-time usage of our continuous glucose monitoring systems in over 200 patients in clinical trials. Based on clinical trial data from a recently-completed 91-patient clinical trial of our short-term system, we filed an application for premarket approval, or PMA, with the Food and Drug Administration, or FDA, in March 2005. Premarket approval is the FDA process of scientific and regulatory review to evaluate the safety and efficacy of medical devices like those we are developing. Additionally, we are conducting an 80-patient clinical trial for our second generation long-term system and expect its results to support a PMA application in 2006. Our clinical trials may be delayed due to scheduling issues with patients and investigators, institutional review boards, sensor performance and manufacturing supply constraints, among other factors. Support of these clinical trials requires significant resources in research and development, manufacturing, quality assurance, and clinical and regulatory personnel.
In anticipation of approval of our products, we plan to increase our manufacturing capacity and personnel to enable us to produce commercial quantities of our devices. Due to the lead-time associated with increases in capacity, this expansion will be initiated prior to the anticipated approval of our products by the FDA. Our capacity expansion could be constrained by the lack of readily available laboratory and manufacturing space, equipment design, production and validation, regulatory approval of our factory and personnel staffing. Prior to obtaining regulatory approval, we may also begin to hire sales and marketing personnel. If we obtain the necessary regulatory approvals, we plan to launch our products in the United States with our own direct sales force.
To date, we have not generated any revenue, and we have incurred net losses in each year since our inception in May 1999. Through December 31, 2004, we had a deficit accumulated during the development stage of $52.9 million. We expect our losses to continue and increase as we expand our clinical trial activities and initiate commercialization activities. We have financed our operations primarily through private placements of equity securities. In December 2004, we raised aggregate net
35
cash proceeds of approximately $21.4 million in a private placement of shares of our Series D preferred stock.
Financial Operations
Revenue
To date, we have not generated any revenue from the sale of our continuous glucose monitoring systems. We do not expect to generate any revenue from our systems until at least 2006.
Research and Development
Our research and development expenses primarily consist of engineering and research expenses related to our continuous glucose monitoring technology, clinical trials, regulatory expenses and manufacturing expenses incurred to build our clinical trial sensors and receivers. These expenses are primarily related to employee compensation, including salary, fringe benefits, recruitment, relocation and temporary employee expenses. We also incur significant expenses to operate our clinical trials including trial design, clinical site reimbursement, data management and associated travel expenses. Our research and development expenses also include fees for outside design services, contractors and materials, and assembly expenses for our sensors and receivers. From our inception through December 31, 2004, we have incurred $36.1 million in research and development expenses.
General and Administrative
Our general and administrative expenses primarily consist of compensation for our executive, financial and administrative functions. Other significant expenses include professional fees for our outside legal counsel and our independent auditors and expenses for board meetings. From our inception through December 31, 2004, we have incurred $7.6 million for general and administrative expenses.
Stock-Based Compensation
Stock-based compensation consists of compensation expense related to employee stock option programs. This compensation expense is reflected separately in our financial statements and is allocated among our research and development expenses and general and administrative expenses. Stock-based compensation expense, which is a non-cash charge, results from employee stock option grants at exercise prices that, for financial reporting purposes, are deemed to be below the estimated fair value of the underlying common stock on the date of grant. Given the absence of an active market for our common stock, our board of directors determined the estimated fair value of our common stock on the date of grant. Stock-based compensation equals the difference between the reassessed estimated fair value per share of our common stock on the date of grant and the exercise price per share and is amortized on an accelerated basis over the vesting period of the stock option. From inception through December 31, 2004, we have incurred $449,000 in stock-based compensation expense.
Results of Operations
Years Ended December 31, 2002, 2003 and 2004
Revenue. We generated no revenue during 2002, 2003 and 2004.
Research and Development. Research and development expenses, excluding stock-based compensation expenses, were $6.3 million in 2002, $8.9 million in 2003 and $12.2 million in 2004. The $2.6 million increase from 2002 to 2003 was primarily due to increases of $1.2 million for the addition of 13 full-time employees, $588,000 for semiconductor design and $289,000 for receiver
36
design. The $3.3 million increase from 2003 to 2004 was primarily due to increases of $1.1 million for the addition of 15 full-time employees and seven temporary employees to support development of our continuous glucose monitoring systems, $862,000 for clinical trials expenses, $480,000 for sensor design, $460,000 related to our new facility and $339,000 for tooling, fixtures and process improvement. In total, during 2004 we incurred approximately $1.4 million in clinical trial expenses and approximately $1.5 million for materials and assembly of our systems. We began development of our short-term continuous glucose monitoring system in April 2004, and all research and development expenses prior to that date primarily related to our long-term system. We expect research and development expenses for future periods to increase as we continue the development of our continuous glucose monitoring systems, conduct additional clinical trials, research and develop new product opportunities and hire additional employees. We had no stock-based compensation expense related to research and development in December 31, 2002 and 2003, and we had stock-based compensation expense of $291,000 related to research and development in 2004.
General and Administrative. General and administrative expenses, excluding stock-based compensation expenses, were $1.9 million in 2002, $1.2 million in 2003 and $1.4 million in 2004. The $611,000 decline from 2002 to 2003 was primarily related to the elimination of marketing and consulting expenses. The $190,000 increase from 2003 to 2004 was primarily related to increased finance and accounting, board meeting, insurance and travel expenses. We expect our general and administrative expenses to increase significantly as we prepare for commercialization and also due to expenses associated with operating as a publicly-traded company. We had no stock-based compensation expense related to general and administrative in 2002 and 2003, and we had stock-based compensation expense of $157,000 related to general and administrative in 2004.
Interest and Other Income, Net. Interest and other income, net, was $463,000 in 2002, $270,000 in 2003 and $121,000 in 2004. The declines were primarily due to lower interest rates and lower average cash balances in 2003 and 2004.
Liquidity and Capital Resources
We are in the development stage and have incurred losses since our inception in May 1999. As of December 31, 2004 we had a deficit accumulated during the development stage of $52.9 million. We have funded our operations solely from the private placement of equity securities, raising aggregate net proceeds of $69.9 million through December 31, 2004. As of December 31, 2004, we had working capital of $25.7 million, including $27.2 million in cash and cash equivalents.
Net Cash Used in Operating Activities. Net cash used in operating activities was $7.0 million in 2002, $9.5 million in 2003 and $12.4 million in 2004. The net cash used reflects operating losses during each period and is primarily related to payroll and fringe benefits, facilities, supplies and outside services used to support our clinical trials and other development programs. From 2002 to the end of 2004 we added 28 full time employees and 13,000 square feet of additional leased space.
Net Cash Provided by (Used in) Investing Activities. Net cash used in investing activities was $8.0 million in 2002. Net cash provided by investing activities was $7.4 million in 2003 and net cash used in investing activities was $1.7 million in 2004. The net cash used in 2002 and provided in 2003 was primarily related to the purchase and subsequent sale of short-term marketable securities. The net cash used in 2004 was primarily driven by $830,000 for sensor development equipment and $575,000 for leasehold improvements in our facility. We invested $262,000 in property and equipment during 2002 and $409,000 during 2003.
37
Net Cash Provided by Financing Activities. Net cash provided by financing activities was $29.3 million in 2002, $33,000 in 2003 and $21.4 million in 2004. The net cash provided was primarily from our Series C preferred stock financing in 2002 and our Series D preferred stock financing in 2004.
Operating Capital and Capital Expenditure Requirements
To date, we have not commercialized any products. We anticipate that we will continue to incur net losses for the next several years as we develop our products, expand our clinical development team and corporate infrastructure, and prepare for the potential commercial launch of our continuous glucose monitoring systems.
We do not expect to generate significant product revenue until we successfully obtain marketing approval for and begin selling our continuous glucose monitoring systems. We believe that the net proceeds from this offering, together with our cash and cash equivalent balances and interest we earn on these balances, will be sufficient to meet our anticipated long term cash requirements with respect to the clinical trials, PMA applications and any initial commercial launches of our long-term and short-term continuous glucose monitoring systems, and to meet our anticipated cash requirements for at least the next 12 months. If our available cash and cash equivalents and net proceeds from this offering are insufficient to satisfy our liquidity requirements, or if we develop additional products, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.
Because of the numerous risks and uncertainties associated with the development of continuous glucose monitoring technologies, such as our short-term and long-term systems, we are unable to estimate the exact amounts of capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, including, but not limited to:
38
Contractual Obligations
The following table summarizes our outstanding contractual obligations as of December 31, 2004 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:
|
Payments Due by Period
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations
|
Total
|
Less than
1 Year |
1-3 Years
|
3-5 Years
|
More than
5 Years |
|||||||||||
Operating leases | $ | 2,180,000 | $ | 338,000 | $ | 703,000 | $ | 748,000 | $ | 391,000 | ||||||
Royalty obligations | 1,392,000 | 116,000 | 232,000 | 232,000 | 812,000 | |||||||||||
|
|
|
|
|
||||||||||||
Total | $ | 3,572,000 | $ | 454,000 | $ | 935,000 | $ | 980,000 | $ | 1,203,000 | ||||||
|
|
|
|
|
Our long-term obligations are primarily related to our facility lease and a license agreement that requires us to pay minimum annual royalties.
Related Party Transactions
For a description of our related party transactions, see the "Related Party Transactions" section of this prospectus.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1 to our financial statements included elsewhere in this prospectus, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.
Stock-Based Compensation
We account for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees , Financial Accounting Standards Board, or FASB, Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation , an interpretation of APB No. 25, and related
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interpretations. We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation , as amended.
The information regarding net loss as required by SFAS No. 123, presented in Note 1 to our financial statements, has been determined as if we had accounted for our employee stock options under the fair value method. The resulting effect on net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in future years, since future years are likely to include additional grants and the irregular impact of future years' vesting.
Stock-based compensation expense, which is a non-cash charge, results from employee stock option grants at exercise prices that, for financial reporting purposes, are deemed to be below the estimated fair value of the underlying common stock on the date of grant. Given the absence of an active market for our common stock, our board of directors determined the estimated fair value of our common stock on the date of grant based on several factors, including progress and milestones achieved in our business, sales of convertible preferred stock and valuation of existing comparable publicly-traded companies. Stock-based compensation expense per share equals the difference between the fair value per share of our common stock on the date of grant and the exercise price per share, and is amortized on an accelerated basis over the vesting period of the option, which is generally four years.
From inception through December 31, 2004, we recorded deferred stock-based compensation of $3.1 million. At December 31, 2004, we had a total of $2.6 million remaining to be amortized. Total unamortized deferred stock-based compensation recorded for all option grants through December 2008, is expected to be amortized as follows:
For the Years Ending December 31,
|
Amount
|
|||
---|---|---|---|---|
2005 | $ | 1,533,000 | ||
2006 | 702,000 | |||
2007 | 328,000 | |||
2008 | 85,000 | |||
|
||||
Total | $ | 2,648,000 | ||
|
Clinical Trial Accounting
We record accruals for estimated clinical study expenses, comprising payments for work performed by contract research organizations, physicians and participating hospitals. These expenses are a significant component of research and development expenses. We accrue expenses for clinical studies performed by contract research organizations based on estimates of work performed under the contracts. Expenses for setting up clinical trial sites are accrued immediately. Clinical expenses related to patient enrollment are accrued as patients are enrolled in the trial.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised in 2004), Share-Based Payment , or SFAS No. 123R, which replaces SFAS No. 123, Accounting for Stock-Based Compensation , and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees . SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at
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date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning in the first period restated. We are evaluating the requirements of SFAS No. 123R and expect that the adoption of SFAS No. 123R will have a material impact on our results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.
Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, including money market funds and corporate debt securities. Due to the short-term nature of our investments, we believe that we have no material exposure to interest rate risk.
To date we have recorded no product sales and have not entered into any agreements denominated in other than U.S. dollars. Accordingly we believe we have no material exposure to risk from changes in foreign currency exchange rates.
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Overview
We are a medical device company focused on the design and development of continuous glucose monitoring systems for people with diabetes. We have developed proprietary technology and expertise that are enabling us to develop two continuous glucose monitoring systems: a short-term system with a sensor that can be inserted by a patient and used continuously for three days, and a long-term system with a sensor that can be implanted by a physician in a short outpatient procedure requiring only local anesthesia. When fully developed, our long-term sensor is expected to be used continuously for up to one year. Both sensors wirelessly transmit the patient's blood glucose, or blood sugar, levels to a small cell phone-sized receiver, which allows the patient to view real-time and trended blood glucose information with the touch of a button and alerts the patient when glucose levels are inappropriately high or low. We are also designing and developing our glucose monitoring systems to offer convenience and comfort to diabetes patients, and to have an intuitive user interface. Currently, none of our products are approved for sale in the United States or elsewhere.
Worldwide, approximately 171 million people suffer from diabetes. In 2002, there were an estimated 13 million diagnosed diabetes patients in the United States and approximately 4.1 million of these patients were insulin-dependent. The number of diagnosed diabetes patients is expected to rise by more than 1.3 million people each year as a result of an aging population, inappropriate diets and increasingly sedentary lifestyles. Diabetes is the fifth leading cause of death by disease in the United States, and complications related to diabetes include heart disease, limb amputations, loss of kidney function and blindness. According to the American Diabetes Association, or ADA, the direct medical costs and indirect expenditures attributable to diabetes in the United States were an estimated $132 billion in 2002 and are expected to increase to $156 billion by 2010. Of the $132 billion in overall expenses, the ADA estimates that approximately $23 billion were associated with diabetes care. According to industry sources, the worldwide market for personal glucose monitoring systems and related disposables, which include test strips and lancets, was approximately $5.1 billion in 2003, and is expected to grow at an annual compound rate of approximately 11.6% to $8.9 billion in 2008. While we believe our systems will be adopted broadly in this market as a way to manage glucose levels more effectively, we do not expect that our systems will appeal to all types of diabetes patients, or that the worldwide market for personal glucose monitoring systems and related disposables is a direct indication of our market opportunity. In a study of Type 2 diabetes patients, fewer than 15% of all study patients and 39% of all insulin dependent study patients who were insulin dependent tested their glucose levels one or more times per day. If patients do not perceive our systems to be more convenient and effective for managing their blood glucose levels than other devices on the market, our market may be limited.
Clinical evidence suggests that intensive glucose management with the goal of reducing time patients spend in hyperglycemic states, or above target glucose levels, and hypoglycemic states, or below target glucose levels, reduces serious long-term complications. In our clinical trial using our long-term sensor, patients reduced the amount of time they spent in a hyperglycemic state by 25% and the time they spent in a hypoglycemic state by 47%. Correspondingly, these patients increased the time they spent at target blood glucose levels by 88%. These results were published in a peer-reviewed article in the March 2004 issue of Diabetes Care . Although the article indicates that the results of the trial could, potentially, have been attributable to the high frequency of visits required for the trial compared to routine patient care, the article indicates that the results were more likely due to the patients' real-time viewing of continuous glucose data and trends. DexCom sponsored the trial that is the subject of this article. Two of the authors of the article receive consulting fees from DexCom for serving on its clinical advisory board and all three authors received grant research funds from DexCom for
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conducting the trial. None of the authors received consulting or other fees from DexCom in exchange for conducting the trial or for authoring the article.
We filed an application for premarket approval, or PMA, with the Food and Drug Administration, or FDA, for our short-term system in March 2005. We have received an investigational device exemption, and are conducting an 80-patient clinical trial, for our second generation long-term system and we expect to submit a PMA application to the FDA for this system in 2006. To date, we have data from over 1,500 patient days of real-time usage of our systems by over 200 patients in clinical trials. After we submit a PMA application for one of our systems, it could take one to three years, or longer, to obtain any approval from the FDA and to begin to market our products commercially.
Market Opportunity
Diabetes
Diabetes is a chronic, life-threatening disease for which there is no known cure. The disease is caused by the body's inability to produce or effectively utilize the hormone insulin. This inability prevents the body from adequately regulating blood glucose levels. Worldwide, approximately 171 million people suffer from the disease. In 2002, there were an estimated 13 million diagnosed diabetes patients in the United States. This number is expected to rise by more than 1.3 million people each year as a result of an aging population, inappropriate diets and increasingly sedentary lifestyles. According to a report published in Diabetes Care in 2003, diabetes is the fifth leading cause of death by disease in the United States. Complications related to diabetes include heart disease, limb amputations, loss of kidney function and blindness.
Glucose, the primary source of energy for cells, must be maintained at certain concentrations in the blood in order to permit optimal cell function and health. Normally, the pancreas provides control of blood glucose levels by secreting the hormone insulin to lower blood glucose levels when concentrations are too high. In people with diabetes, the body does not produce sufficient levels of insulin, or fails to utilize insulin effectively, causing blood glucose to rise above normal. This condition is called hyperglycemia and often results in chronic long-term complications such as heart disease, limb amputations, loss of kidney function and blindness. When blood glucose levels are high, patients often administer insulin in an effort to drive blood glucose levels down. Unfortunately, insulin administration can drive blood glucose levels below the normal range resulting in hypoglycemia. In cases of severe hypoglycemia, diabetes patients risk acute complications, such as loss of consciousness or death. Due to the drastic nature of acute complications associated with hypoglycemia, many patients are afraid of driving down blood glucose levels. Consequently, patients often remain in a hyperglycemic state, exposing themselves to long-term chronic complications.
Diabetes is typically classified into two major groups: Type 1 and Type 2. According to the ADA, in 2002 there were approximately 1.3 million diagnosed Type 1 diabetes patients in the United States. Type 1 diabetes usually develops in early childhood and is characterized by an absence of insulin resulting from destruction of the insulin producing cells of the pancreas. Individuals with Type 1 diabetes must rely on frequent insulin injections in order to regulate and maintain blood glucose levels. Also, in 2002, there were approximately 12 million people in the United States who had been diagnosed with Type 2 diabetes, which results when the body is unable to produce sufficient levels of insulin or becomes insulin resistant. Depending on the severity of Type 2 diabetes, individuals may require dieting, exercise, oral medications or insulin injections to regulate blood glucose levels. As of 2002, approximately 2.8 million Type 2 patients were estimated to be using insulin injections. In addition to Type 1 and Type 2 diabetes patients, pregnant women who have never had diabetes before may develop high blood glucose levels during pregnancy. This condition is known as gestational diabetes and is caused in some pregnant women by hormonal changes that block the action of insulin in the mother's body. Uncontrolled glucose levels can adversely affect the fetus, leading to neonatal
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complications. According to the ADA, approximately 135,000 cases of gestational diabetes occur in the United States each year. Gestational diabetes usually resolves after pregnancy, but, according to the ADA, there is a 67% probability that it will return in future pregnancies. Treatment for gestational diabetes includes special meal plans and scheduled physical activity, and may also include daily blood glucose testing and insulin injections.
The ADA estimates that the direct medical costs and indirect expenditures attributable to diabetes in the United States were $132 billion in 2002, and could reach $156 billion by 2010. Of the $132 billion in overall expenses, the ADA estimates that approximately $23 billion were associated with diabetes care. A portion of that amount is attributable to the costs associated with monitoring blood glucose levels. According to industry sources, the worldwide market for personal glucose monitoring systems and related disposables, which includes test strips and lancets, was approximately $5.1 billion in 2003, and is expected to grow at an annual compound rate of approximately 11.6% to $8.9 billion in 2008. While we believe our systems will be adopted broadly in this market as a way to manage glucose levels more effectively, we do not expect that our systems will appeal to all types of diabetes patients, or that the worldwide market for personal glucose monitoring systems and related disposables is a direct indication of our market opportunity. In a study of Type 2 diabetes patients, fewer than 15% of all study patients and 39% of all insulin dependent study patients who were insulin dependent tested their glucose levels one or more times per day. If patients do not perceive our systems to be more convenient and effective for managing their blood glucose levels than other devices on the market, our market may be limited.
Importance of Glucose Monitoring
Blood glucose levels can be affected by the carbohydrate and fat content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin absorption and changes in the effects of insulin in the body. Given the many factors that affect blood glucose levels, maintaining glucose within a normal range is difficult, resulting in frequent excursions above or below normal blood glucose levels that can be unpredictable. Patients manage their blood glucose levels by administering insulin or ingesting carbohydrates throughout the day in order to maintain blood glucose within normal ranges. Patients frequently overcorrect and fluctuate between hyperglycemic and hypoglycemic states, often multiple times during the same day. As a result, many patients with diabetes are routinely outside the normal blood glucose range. Patients are often unaware that their glucose levels are either too high or too low, and their inability to completely control glucose levels and the associated serious complications can be frustrating and, at times, overwhelming.
In an attempt to maintain blood glucose levels within the normal range, patients with diabetes must first measure their glucose levels. Often after measuring their blood glucose levels, patients make therapeutic adjustments. As adjustments are made, additional blood glucose measurements may be necessary to gauge the individual's response to the adjustments. More frequent testing of blood glucose levels provides patients with information that can be used to better understand and manage their diabetes. The ADA recommends that patients test their blood glucose levels at least three or four times per day.
According to the ADA, an important component of effective diabetes management is frequent monitoring of blood glucose levels. The landmark 1993 Diabetes Control and Complications Trial, or DCCT, consisting of patients with Type 1 diabetes, and the 1998 UK Prospective Diabetes Study, consisting of patients with Type 2 diabetes, demonstrated that patients who intensely managed blood glucose levels significantly reduced the incidence and severity of diabetes-related complications. In the DCCT, a major component of intensive management was monitoring blood glucose levels at least four times per day. The DCCT demonstrated that intensive management reduced the risk of complications by 76% for eye disease, 60% for nerve disease and 50% for kidney disease. However, the DCCT also
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found that intensive management led to a three-fold increase in the frequency of hypoglycemic events. Despite evidence that intensive glucose management reduces the long-term complications associated with diabetes, industry sources estimate that people with diabetes test, on average, less than twice per day.
Limitations of Existing Glucose Monitoring Products
Single-point finger stick devices are the most prevalent devices for glucose monitoring. These devices require taking a blood sample with a finger stick, placing a drop of blood on a test strip and inserting the strip into a glucose meter that yields a single-point in time blood glucose measurement. We believe that these devices suffer from several limitations, including:
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The following graph shows the limited information provided by four single-point measurements during a single day using a traditional single-point finger stick device, compared to the data provided by our continuous sensor. The data presented in the graph is from a clinical trial we completed in 2003 with our long-term continuous glucose monitoring system, where the patient was blinded to the continuous glucose data. The continuous data indicates that, even with four finger sticks in one day, the patient's blood glucose levels were above the target range of 80-140 mg/dl, or milligrams per deciliter, for a period of 13.5 hours.
Several companies have attempted to address the limitations of single-point finger stick devices by developing continuous glucose monitoring systems. To date, three continuous glucose monitors have received FDA approval. We believe that one of the products is no longer actively marketed. Another continuous glucose monitor is approved for physician interpretation only, not allowing patients to see their blood glucose trends real-time. Finally, a third continuous monitoring device is only approved to alert the patient at inappropriately high or low glucose levels. We believe that none of the products
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that have received FDA approval are approved for more than three days of use or for use as a replacement for single-point finger stick devices.
We believe a significant market opportunity exists for a glucose monitoring system that provides continuous blood glucose information and that is convenient and easy-to-use.
The DexCom Solution
We are developing blood glucose monitoring systems that continuously measure a patient's blood glucose level and transmit that information to a small cell phone-sized receiver. Relying on our broad-based technology platform, we are developing, and testing in clinical trials, short-term and long-term continuous blood glucose monitoring systems that are designed to offer the following advantages to diabetes patients:
In a clinical trial using our first generation long-term sensor, patients reduced the amount of time they spent in a hyperglycemic state by 25% and the time they spent in a hypoglycemic state by 47%. Correspondingly, these patients increased the time they spent at target blood glucose levels by 88%. These results were published in a peer-reviewed article in the March 2004 issue of Diabetes Care . Although the article indicates that the results of the trial could, potentially, have been attributable to the high frequency of visits required for the trial compared to routine patient care, the article indicates
47
that the results were more likely due to patients' real-time viewing of continuous glucose data and trends. DexCom sponsored the trial that is the subject of this article. Two of the authors of the article receive consulting fees from DexCom for serving on its clinical advisory board and all three authors received grant research funds from DexCom for conducting the trial. None of the authors received consulting or other fees from DexCom in exchange for conducting the trial or for authoring the article.
While we believe our glucose monitoring systems offer these advantages, patients may not perceive the benefits of continuous glucose monitoring and may be unwilling to change their current treatment regimens. Our products, and in particular our long-term continuous glucose monitoring system, can be more invasive than current self-monitored glucose testing systems, including single-point finger stick devices. Our short-term continuous glucose monitoring system requires a patient to insert a sensor electrode under their skin at least every three days. Patients could find this process to be uncomfortable or inconvenient. Patients may be unwilling to insert or implant a sensor in their body, especially if their current diabetes management involves no more than two finger sticks per day. Additionally, our systems may not be approved as replacement devices for single-point finger stick devices and may be more costly to use.
Our Strategy
Our objective is to become the leading provider of continuous glucose monitoring systems and related products to enable people with diabetes to more conveniently and effectively manage their disease. To achieve this objective, we are pursuing the following business strategies:
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initially in the United States and then to expand distribution into selected European and Asian markets.
Our Technology Platform
The development of a continuous glucose monitor requires successful coordination and execution of a wide variety of technology disciplines, including biomaterials, membrane systems, electrochemistry, low power microelectronics, telemetry, software, algorithms, implant tools and sealed protective housings. We have developed in-house expertise in these disciplines. We believe we have a broad technology platform that will support the development of multiple products for glucose monitoring.
Sensor Technology
The key enabling technologies for our sensors are biomaterials, membrane systems, electrochemistry and low power microelectronics. We have applied our biomaterials expertise by developing a polymeric biointerface membrane system that modifies the human body's foreign body response, which is inherently hostile to implanted objects. When an implant is placed into the body, it triggers the body to respond by encapsulating and isolating the implanted object with scar tissue, known as the foreign body response. Typically, this complete response takes between three and four weeks, although sensor function may be severely hampered much sooner. Historically, the challenge with implantable sensors has been their inability to operate due to the foreign body response because glucose is blocked from reaching the sensor. Our proprietary polymer membrane technology is designed to modify the human body's response, providing for the continual transport of glucose and oxygen to the sensor. This technology is currently used in our long-term sensor. While our membrane technology has significantly improved functionality in our implanted long-term sensors, the technology is still under development and we have encountered some premature sensor failures in our clinical trials due to the foreign body response.
Complementing the biointerface membrane, our sensing membrane technology consists of multiple polymer layers configured to selectively allow the appropriate mix of glucose and oxygen to travel through the membrane. Within the sensing membrane, the glucose and oxygen react with a specific enzyme to create an extremely low level electrical signal, measured in pico-amperes. This electrical signal is then translated into glucose measurements. We believe that the capability to measure very low levels of current and to accurately translate those measurements into glucose values is also a unique and distinguishing feature of our technology. These technologies are used in both our long-term and short-term sensors. We have also developed technology to allow sensitive electronics to be packaged in a fully-contained, sealed unit that can be quickly and safely implanted by a physician with our long-term sensor, or inserted by a patient with our short-term sensor. Our sensors are designed to function without damage from fluids or other substances in the body and to be quickly and safely removed.
Receiver Technology
Both our short-term and long-term glucose monitoring systems use radiofrequency telemetry to wirelessly transmit information from the sensor to our platform receiver. We have developed the technology for reliable transmission and reception and have consistently demonstrated a high degree of
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capture of transmissions from sensor to receiver in our clinical trials. Our receiver then processes and displays real-time and trended glucose values, and provides alerts. We have used our extensive database of continuous glucose data from our clinical trials to create software and algorithms for the display of data to patients.
Other Technology Applications
We have gained our technology expertise by learning to design implants that can withstand the rigors of functioning within the human body for extended periods of time. In addition to the foreign body response, we have overcome other problems related to operating within the human body, such as device sealing, miniaturization, durability, sensor geometry and surgical techniques. We believe the expertise gained in overcoming these problems will support the development of additional products beyond glucose sensing.
Our Products Under Development
We are developing short-term and long-term continuous blood glucose monitoring systems. These systems include either a small insertable sensor or an implantable sensor that continuously measures glucose levels in subcutaneous tissue, and a handheld receiver to which the sensor wirelessly transmits glucose levels at specified intervals. Our short-term and long-term systems are based on many of the same underlying core technologies and are being designed to offer several performance and ease-of-use advantages to provide continuous blood glucose monitoring to patients. Our research and development expenses were $6.3 million in 2002, $8.9 million in 2003 and $12.2 million in 2004, excluding stock-based compensation expenses.
Short-Term Continuous Glucose Monitoring Sensor
Our short-term insertable sensor includes a tiny wire-like electrode coated with our sensing membrane system. This sensor comes packaged with an integrated insertion device and is contained in a small plastic housing platform, or pod. The base of the pod has adhesive that attaches it to the skin. The electrode is intended to be easily and reliably inserted by the patient by exposing the adhesive, placing the pod against the surface of the skin of the abdomen and pushing down on the insertion device. The insertion device extends a narrow gauge needle containing the electrode into the subcutaneous tissue and retracts the needle, leaving behind the electrode in the tissue and the pod adhered to the skin. The patient then disposes of the insertion device. After a stabilization period of a few hours, the patient is required to calibrate the receiver with data from a single-point finger stick device and the sensor begins wirelessly transmitting the continuous glucose data to the handheld receiver. We anticipate that patients will be required to calibrate the short-term sensor with finger sticks throughout the three-day usage period to ensure reliable operation. At this time, we do not believe our first generation short-term sensor will eliminate the need for finger sticks, although in the future we intend to seek a claim from the FDA that allows our short-term system to replace the use of finger stick devices.
Our short-term sensor is expected to function for three days before being replaced. After three days, the patient simply removes the pod and attached electrode from the skin and discards them. A new sensor and pod can then be inserted and used with the same receiver. We filed a PMA application with the FDA for our short-term continuous glucose monitoring system in March 2005.
Long-Term Continuous Glucose Monitoring Sensor
Our long-term implantable sensor consists of a multi-layer membrane system, circuit board, microprocessor, radio transmitter and a battery sealed in a self-contained unit. Our long-term sensor is currently implanted under the skin in the lower abdomen by a surgeon using local anesthesia. In the future we expect that the implant will be performed by trained endocrinologists. Once the sensor is implanted, it requires a stabilization period of a few weeks before becoming operational. After the
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stabilization period, the patient is required to calibrate the receiver with data from a single-point finger stick device. We anticipate that patients will be required to calibrate the long-term sensor with finger sticks throughout the usage period. At this time, we do not believe our long-term sensor will eliminate the need for finger sticks, although in the future we intend to seek a claim from the FDA that allows our long-term system to replace the use of finger stick devices.
We are designing our long-term sensor to function for up to one year. We have demonstrated nearly seven months of functional life in a clinical trial with our first generation long-term sensor and six months of functional life in a clinical trial with our second generation long-term sensor. At the end of its life, the sensor can be removed by a physician in a short procedure, and another sensor inserted. We expect to file a PMA application for our long-term system in 2006.
Handheld Receiver
We have designed our receiver to be used with both our short-term and long-term sensors. Our small cell phone-sized receiver is carried by the patient and wirelessly receives continuous glucose values data from either sensor. Proprietary algorithms and software, developed from our extensive database of continuous glucose data from clinical trials, are programmed into the receiver to process the glucose data from the sensor and display it on a user-friendly graphical user interface. With a push of a button, the patient can access their current glucose value and one-, three- and nine-hour trended data. Additionally, when glucose values are inappropriately high or low, the receiver provides an audible alert or vibrates. The receiver is a self-contained, durable unit with a rechargeable battery.
Clinical Development Program
Evaluating Continuous Glucose Monitoring Systems
Continuous glucose monitoring is an emerging technology. There are no clearly established guidelines or universally accepted measures for evaluating the performance of continuous glucose monitoring products, especially with respect to accuracy. As a result, analyses of continuous glucose monitoring products have generally utilized traditional single-point accuracy measures that were derived from the field of analytical chemistry to evaluate conventional single-point finger stick devices. However, we do not know whether the FDA, other regulatory bodies or physicians will consider these single-point measures to be the appropriate means to demonstrate the safety and efficacy of continuous glucose monitoring systems for real-time monitoring of glucose values and trends by patients or as a replacement for conventional blood glucose meters, nor do we know what threshold levels of these measures the FDA or others will determine to constitute acceptable performance. The FDA or others analyzing our clinical results may determine that different measures from those we have used are better indicators of accuracy, clinical utility and safety. In reporting data from our clinical trials, we report those measurements that we believe most appropriately characterize the performance of our continuous blood glucose systems in three primary areas: accuracy, clinical utility and safety.
Accuracy Measures. Typically, to measure accuracy in our clinical trials, we compare the output from our continuous glucose monitoring systems at a specific point in time to a reference measurement at the same point in time. These two measurements are called paired points. The reference value is usually measured by a laboratory instrument, such as a Yellow Springs Instrument, or a conventional blood glucose meter using samples from finger sticks. These paired points are then compared to each other using statistical analyses intended to measure accuracy.
The primary statistical analyses we use include the following:
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single-point finger stick device. A device with a lower bias is generally considered to be more accurate.
Clinical Utility Measures. We have designed some of our clinical trials to measure whether the use of real-time continuous glucose data reduces the time a patient spends in abnormally high and low glucose ranges, and increases the time spent in the target range. In our studies, we measure a patient's blood glucose level continuously for a defined period of time, using our continuous glucose monitoring systems, but do not permit the patient to view the data. These measurements are used to establish a baseline. Subsequently, we measure the same patient's blood glucose level continuously for a similar or longer period of time, but the patient is allowed to view and utilize the data. These unblinded glucose levels are then compared to the baseline glucose levels to determine whether the use of the data from our continuous glucose monitoring system affected the amount of time the patient's blood glucose level was high, low and within the target range.
Safety Measures. The safety profile of any new product must be clearly established before it can be approved for commercial use. Data must be collected to demonstrate that patients can use the device safely, the device operates safely and any procedure associated with the device is also safe. We typically record adverse events related to the implant or insertion and removal of our sensors, related to the operation of the systems or related to the patient's use of the data from the systems. Of most concern is the occurrence of serious or unexpected adverse events. The desired result is that adverse events are not more serious and do not occur more frequently than similar products currently commercially available and utilized by patients for the same purpose.
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Clinical Trials
We began our first human clinical trial in 2001 and to date have completed numerous pre-clinical studies and clinical trials related to our long-term and short-term continuous glucose monitoring systems. Throughout these studies and trials we have experienced successes and failures, which we have relied upon in the continual design and development of our products. As a result, we have developed a first, second and third generation of our long-term sensor, referred to as G1, G2 and G3, respectively, and a short-term sensor, or STS, all of which have been or are currently being evaluated in human clinical trials. Throughout these trials, there have been no serious or unexpected adverse events reported related to the implant or explant of the devices or the use of our systems. Given the ongoing process of design and development, we believe that our more recent clinical trials are most relevant to an understanding of our current clinical performance. The table below and the following discussion summarize our clinical trials that were completed in 2003 or later, and our ongoing clinical trials:
Product
|
Clinical Trial
|
Type of
Trial |
Year
Completed |
Clinical Trial Sites
|
Patients
|
|||||
---|---|---|---|---|---|---|---|---|---|---|
G1 | Feasibility IDE Trial | Unblinded | 2003 | 3 Sites; United States | 15 | |||||
G2 | First Human Use #1 | Unblinded | 2003 | 1 Site; New Zealand | 10 | |||||
G2 | First Human Use #2 | Unblinded | 2004 | 1 Site; Australia | 5 | |||||
G2 | First Human Use #3 | Blinded | 2004 | 3 Sites; New Zealand | 11 | |||||
G2 | IDE Study | Unblinded | Ongoing | 8 Sites; United States | 80 | |||||
G3 | First Human Use | Blinded | 2004 | 1 Site; Australia | 5 | |||||
STS | First Human Use Trials | Blinded | 2004 | 3 Sites; United States | 45 | |||||
STS | Feasibility Trials | Unblinded | 2004-05 | 4 Sites; United States | 40 | |||||
STS | Approval Support Trial | Unblinded | 2005 | 4 Sites; United States | 91 |
Long-Term Implantable Sensor Trials
G1 Feasibility IDE Trial. In 2003, we completed an IDE trial designed to assess whether our G1 sensor could achieve the bias endpoint of a continuous glucose monitor that had already been approved by the FDA. No portion of the clinical trial was designed to directly compare our long-term system to any other continuous glucose monitor. The trial was also designed to measure the potential clinical benefit to patients of real-time blood glucose data. Fifteen patients at three sites in the United States were enrolled and implanted in the IDE trial. To determine whether our G1 sensor met the endpoint measurements of the previously approved device, we calculated the bias of our G1 sensor compared to reference points from a single-point finger stick device. In order to pass this bias endpoint, our sensor had to demonstrate a bias of less than 15 mg/dl, or milligrams per deciliter, when compared to reference finger stick values at 50 mg/dl, 80 mg/dl and 100 mg/dl, and a bias of less than 15% when compared to finger stick reference values at 150 mg/dl and 200 mg/dl. The graph below shows the bias of the sensor at each of the measurement values compared to the upper limit of the
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bias endpoint used by another device to support approval by the FDA. A device with lower bias is generally considered to be more accurate, and, in all cases, our device was below the upper limit.
Bias Requirement: Less Than 15
To measure the potential clinical benefit to patients of access to real-time blood glucose information, we divided the trial into two primary phases. In the blinded phase of the trial, data was collected by our G1 sensor, but patients were blinded to the continuous data from the G1 sensor, to establish a baseline control period. In the unblinded phase of the trial, the patients were unblinded to the continuous data from the G1 sensor and allowed to use this information in managing their glucose levels. The glucose values from the unblinded phase were then compared with the blinded phase to analyze whether glucose profiles were affected by access to continuous real-time data. The sensors in three patients did not function adequately in both blinded and unblinded phases of the trial to report
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meaningful comparison data and were excluded from the analysis. The results of this comparison are summarized in the figure below.
Improvement in Glucose Profiles (in 12 of 15 patients)
These data were presented at the 2003 Annual Meeting of the American Diabetes Association and subsequently published in a peer-reviewed article in Diabetes Care in March 2004. DexCom sponsored the trial that is the subject of this article. Two of the authors of the article receive consulting fees from DexCom for serving on its clinical advisory board and all three authors received grant research funds from DexCom for conducting the trial. None of the authors received consulting or other fees from DexCom in exchange for conducting the trial or for authoring the article.
G2 First Human Use #1. The primary goal for the first human use studies of our G2 sensor, which is 60% smaller in volume than the G1 sensor, was to characterize the G2 sensor's performance. In the first G2 sensor trial, we implanted 10 patients in New Zealand for an extended period of time. Accuracy of the G2 sensor was evaluated by comparing data points from the G2 sensor to points measured using single-point finger stick devices over the entire trial period using Clarke Error Grid and MARD analyses. The sensors in three patients did not function adequately over the trial period to report data and have been excluded from the analysis. The results of our accuracy analyses are summarized below.
Accuracy Measures: G2 Sensor versus Single-Point Finger Stick Device
(approximately 130 days in 7 of 10 patients)
|
Clarke Error Grid
A&B% |
Clarke Error Grid
D&E% |
MARD%
|
|||
---|---|---|---|---|---|---|
G2 Sensor versus Single-Point Finger Stick Device | 95.3 | 3.1 | 24.7 |
To measure the potential clinical benefit to patients of access to real-time blood glucose information, we divided the trial into two primary phases. After an initial evaluation period during which the G2 sensor data was blinded to the patients and physicians, continuous glucose data from the sensor was
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displayed to the patients and they were allowed to use that data to manage their glucose levels. Glucose excursion profiles were compared between the blinded and unblinded phases of the trial to analyze whether glucose excursions were affected by access to continuous real-time data. The sensors in three patients did not function adequately over the trial period to report data and have been excluded from the analysis. The results are summarized below.
Improvement in Glucose Profiles (approximately 130 days in 7 of 10 patients)
Hyperglycemic exposure is a calculation that seeks to quantify patients' exposure to sustained levels of hyperglycemia. The measure is an integration of how high a patients' blood glucose reaches combined with the time it stays high. The calculation takes the average value of each hyperglycemic excursion above 200 mg/dl, subtracts 200 mg/dl from it, and then multiplies that difference by the hours spent above 200 mg/dl. We believe that a reduction in hyperglycemic exposure would be beneficial to patients with diabetes.
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Hyperglycemic Exposure (approximately 130 days in 7 of 10 patients)
Results from this trial were presented at the 2004 meeting of the European Association for the Study of Diabetes.
G2 First Human Use #2. We implanted five patients in Australia with G2 sensors to investigate potential performance improvements by implanting in a location other than the lower abdomen, as in our previous G2 implants. We worked closely with a group of physicians, including surgeons experienced in subcutaneous implants and an exercise physiologist, to identify the new location and implant technique.
While the new location and implant techniques seemed to simplify the implant procedure, patients experienced more discomfort in the first few days immediately after surgery than we had observed with previous G1 and G2 implants in the lower abdomen. There were no serious or unanticipated adverse events related to these implants other than the higher degree of initial discomfort noted by patients. We evaluated the sensors for accuracy by comparing data points from the G2 sensor to data points from a single-point finger stick device.
The following table summarizes the data obtained during the trial.
Accuracy Measures: G2 Sensor versus Single-Point Finger Stick Device
(approximately 112 days in 5 of 5 patients)
|
Clarke Error Grid A&B%
|
Clarke Error Grid D&E%
|
MARD%
|
|||
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G2 Sensor versus Single-Point Finger Stick Device | 87.7 | 7.7 | 34.2 |
We have abandoned this alternate location for implanting sensors given the higher discomfort in the few days post-implant with no corresponding performance improvement. We continue to consider other implant site and technique options, but continue to concentrate on implants in the subcutaneous tissue of the lower abdomen.
G2 First Human Use #3. In a third G2 sensor clinical trial, we implanted eleven patients at three sites in New Zealand with a G2 sensor that was further reduced in volume by 33% from the first G2 sensors implanted. The sensors were evaluated for accuracy by comparing data points from the G2
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sensor to data points from a single-point finger stick device collected throughout the trial and also from a laboratory device collected during a 12 hour in-clinic trial. Patients remained blinded to the data throughout the study. All devices were removed at approximately three months, prior to planned trial completion, to investigate a change in performance.
The following table summarizes the data obtained during the trial.
Accuracy Measures: G2 Sensor versus Single-Point Finger Stick Device
(approximately 112 days in 11 of 11 patients)
|
Clarke Error Grid
A&B% |
Clarke Error Grid
D&E% |
MARD%
|
|||
---|---|---|---|---|---|---|
G2 Sensor versus Single-Point Finger Stick Device | 90.0 | 5.2 | 30.0 |
The following table summarizes the data obtained during the 12 hour in-clinic study. The sensors in four patients were not functioning at the time of the in-clinic trial and are not included in the analysis from that trial.
Accuracy Measures: 12 Hour In-Clinic Study (in 7 of 11 patients)
|
Clarke Error Grid
A&B% |
Clarke Error Grid
D&E% |
MARD%
|
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G2 Sensor versus In-Clinic Single-Point Finger Stick Device | 97.3 | 0.9 | 24.7 | |||
G2 Sensor versus Lab Reference | 94.6 | 2.7 | 28.5 |
G3 First Human Use. The goal of our first human use trial of the G3 sensor, which is approximately 50% smaller in volume than the G2 sensor, was to evaluate the impact of the G3 sensor's reduced size on overall device performance. We implanted five patients with G3 sensors at one site in Australia by an endocrinologist who had no formal surgical training or experience. We believe our G3 sensor implantations were the first ever implants performed by an endocrinologist.
The glucose monitoring performance of the G3 sensor was lower than expected. The devices were explanted and analyzed. Improvements to the G3 sensor are being verified in animal studies, and our next human feasibility trial implants are targeted for the first half of 2005.
Short-Term Insertable Sensor Feasibility Studies
We have conducted 15 clinical feasibility trials of our short-term sensor. The objective of these trials was to assess the performance of the sensor in patients, especially the ability of the sensor to accurately measure blood glucose levels. Each feasibility trial consisted of between four and 12 patients. In most cases, two sensors were inserted in each patient. The initial studies were performed over a period of 12 hours, which we subsequently increased to 24 hours and then to 72 hours. Collectively, we have inserted over 160 sensors in over 70 patients in our feasibility studies. Over 35 of these patients in the latest studies were unblinded to the data from the short-term sensor and allowed to use that data to manage their glucose levels. In the unblinded studies, patients inserted the sensors by themselves and wore the sensors at home and at work in their daily routines.
Alpha Prototype Feasibility Trials. The first seven trials in this study involved a prototype or alpha version of the sensor pod. As expected, we experienced some deployment and connectivity failures in these early trials, which we substantially corrected in the beta version of the pod.
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To evaluate the accuracy of the short-term sensor, paired values from our short-term sensor and the single-point finger stick device were compared. For each feasibility trial, the table below provides the results of the R-value, MARD and, in the early trials, Clarke Error Grid A&B% and Clarke Error Grid D&E% analyses of the paired points. The table also summarizes, for each feasibility trial, the duration of the trial, the number of patients enrolled, the number of short-term sensors inserted, or deployed, and the number of short-term sensors analyzed, which includes those sensors that we determined were successfully deployed and reliably generating data.
Alpha Prototype StudiesPatients Blinded to Continuous Sensor Data
(Median Values Reported)
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Clarke Error Grid
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Trial
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|
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Sensors
Deployed |
Sensors
Analyzed |
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Duration
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Patients
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R-Value
|
MARD%
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A&B%
|
D&E%
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|||||||||||
Alpha 1 | 12 hours | 5 | 8 | 6 | 0.94 | 12.7 | 100.0 | 0.0 | ||||||||
Alpha 2 | 12 hours | 5 | 9 | 5 | 0.93 | 14.1 | 100.0 | 0.0 | ||||||||
Alpha 3 | 24 hours | 5 | 11 | 5 | 0.95 | 14.4 | 97.4 | 0.0 | ||||||||
Alpha 4 | 24 hours | 5 | 10 | 9 | 0.96 | 13.6 | 97.1 | 2.9 | ||||||||
Alpha 5 | 12 hours | 6 | 5 | 3 | 0.95 | 17.4 | 95.7 | 4.4 | ||||||||
Alpha 6 | 24 hours | 5 | 8 | 6 | 0.97 | 10.9 | 100.0 | 0.0 | ||||||||
Alpha 7 | 72 hours | 4 | 9 | 8 | 0.95 | 12.5 | 98.6 | 1.0 |
Beta Product Version Feasibility Studies. After the initial seven trials using the alpha prototype pod, we completed a second or beta version of the pod and conducted further feasibility studies. The objective of these feasibility studies was to test the improved version of the pod and continue to assess the performance and accuracy of the system.
For each trial in our beta version feasibility study, the table below provides the results of the R-value and MARD analyses of the paired points. The table also summarizes, for each trial, the duration of the trial, the number of patients enrolled, the number of short-term sensors deployed and the number of short-term sensors included in the analysis.
Beta Product Version StudiesPatients Blinded to Continuous Sensor Data
(Median Values Reported)
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R-Value
|
MARD%
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Trial
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Sensors
Deployed |
Sensors
Analyzed |
||||||||||||||||
Duration
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Patients
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Day 1
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Day 2
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Day 3
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Day 1
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Day 2
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Day 3
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Beta 1 | 72 hours | 4 | 8 | 8 | 0.93 | 0.94 | 0.97 | 19.2 | 10.0 | 10.1 | ||||||||||
Beta 2 | 72 hours | 6 | 12 | 12 | 0.92 | 0.88 | 0.94 | 15.0 | 17.1 | 10.3 |
Beta Product Version StudiesPatients Unblinded to Continuous Sensor Data
(Median Values Reported)
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R-Value
|
MARD%
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Trial
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Sensors
Deployed |
Sensors
Analyzed |
||||||||||||||||
Duration
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Patients
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Day 1
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Day 2
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Day 3
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Day 1
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Day 2
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Day 3
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|||||||||||||
Beta 3 | 72 hours | 5 | 10 | 8 | 0.97 | 0.96 | 0.97 | 12.3 | 10.3 | 10.0 | ||||||||||
Beta 4 | 72 hours | 5 | 12 | 8 | 0.93 | 0.97 | 0.94 | 14.9 | 7.6 | 13.2 | ||||||||||
Beta 5 | 72 hours | 5 | 10 | 10 | 0.95 | 0.97 | 0.97 | 15.3 | 10.3 | 7.5 | ||||||||||
Beta 6 | 72 hours | 5 | 12 | 9 | 0.94 | 0.97 | 0.96 | 9.9 | 7.4 | 8.3 | ||||||||||
Beta 7 | 72 hours | 8 | 17 | 16 | 0.96 | 0.98 | 0.98 | 8.4 | 7.4 | 6.0 | ||||||||||
Beta 8 | 72 hours | 12 | 24 | 22 | 0.91 | 0.98 | 0.98 | 12.1 | 6.3 | 8.3 |
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Approval Support Trial
Ninety-one patients at four sites in the United States were enrolled in a two-arm randomized trial intended to support the filing of a PMA application. A PMA has been submitted and the data from the trial, as reported in the PMA submission, is summarized below. The trial was designed to measure the accuracy, safety and possible clinical benefit of the short-term sensor. Patients were randomized to either a blinded group, or control, which wore three successive short-term sensors for 72 hours each, for a total of nine days, but was blinded to the data, or an unblinded group, which wore three successive short-term sensors for 72 hours each, also for a total of nine days, but was allowed to view and utilize the real-time continuous data for the last two periods, or six days. Patients in both groups inserted the short-term sensors themselves and wore them at home and at work in their daily activities.
The primary efficacy endpoint for the trial was bias. In order to pass the primary efficacy endpoint, our short-term sensor had to demonstrate a bias of less than 15 mg/dl when compared to finger-stick values at 50 mg/dl and 80 mg/dl and less than 15% when compared to finger-stick values at 100 mg/dl, 150 mg/dl and 200 mg/dl. Bias is a measure of accuracy used to help determine if there is systematic error in the device being evaluated.
The graph below shows the bias of the sensor at each of the measurement values compared to the upper limit. Our sensor met the primary endpoint of bias. The results are shown in the graph below.
The trial's primary safety endpoint was the incidence of adverse events. There were no serious or unanticipated adverse events related to the insertion, wearing or removal of, or use of data from, our short-term sensor.
In addition to the primary efficacy endpoint of bias, we also measured the accuracy of our short-term sensor using the traditional single-point measures of R-value, MARD and Clarke Error Grid. The data as reported in our PMA application is shown in the table below.
|
|
|
|
|
|
|
Clarke Error Grid
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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|
|
Sensors
Deployed |
Sensors
Analyzed |
|
|
||||||||||
Trial
|
Duration
|
Patients
|
R-Value
|
MARD%
|
A&B%
|
D&E%
|
||||||||||
Approval Support |
9 Days
(216 Hours) |
91 | 287 | 273 | 0.88 | 21.2 | 95.4 | 2.1 |
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To measure the potential clinical benefit to patients of access to real-time continuous glucose data, we compared blood glucose data obtained from patients in the blinded group to blood glucose data obtained from patients in the unblinded group. The results of the comparison are summarized in the figure below.
Differences in Glucose ProfilesUnblinded Group Compared to Blinded Group
As an additional measure of the potential clinical benefit to patients of access to real-time continuous glucose data, we also analyzed blood glucose data obtained only from the unblinded group. The unblinded group had both a blinded and unblinded period. We compared blood glucose data for the first three-day period, during which patients were blinded to the continuous glucose data, and the last three-day period, during which patients were unblinded to the continuous glucose data. The results of the comparison are summarized in the figure below.
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Improvement in Glucose ProfilesUnblinded Period Compared to Blinded Period
We have submitted a PMA application for our short-term sensor. We do not expect that this PMA, if approved, will completely eliminate the need for finger-sticks. However, in the future, we intend to develop products, conduct clinical trials and submit for regulatory approvals which move progressively toward eliminating the need or requirement for finger sticks.
On-Going Trials
Long-Term Sensor Trials. We received approval from the FDA to conduct an 80-patient trial in the United States with our G2 sensor. Twenty patients were enrolled in the first phase of the trial, and 25 more were implanted in the second phase during the first quarter of 2005. Patients are viewing and utilizing the continuous glucose data from the sensors during the trial. We are using bias as a primary endpoint to measure efficacy and adverse events as a primary safety endpoint. The G2 sensors are being evaluated for accuracy by comparing data points from the G2 sensor to reference points from a single-point finger stick device collected throughout the trial. This trial is intended to generate data that we believe will support a PMA application with the FDA. Initially, we expect to request approval for continuous use of our long-term system for a period of less than one year and in the future we intend to seek an indication for use of up to one year. We do not expect to report data from this trial until after the entire trial has reached its completion. Our long-term system may not be approved as a replacement device for single-point finger stick devices.
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We enter into contracts with clinical investigators, surgeons and clinical trial sites to conduct our clinical trials. These contracts include terms requiring the parties to comply with regulations and guidelines issued for the type of study being performed. Generally, we contract with clinical trial sites to screen and enroll patients, schedule visits for implants or insertions, conduct in-clinic studies, prepare patient report forms and collect and aggregate trial data. Clinical trial site fees generally include a set-up fee, a per-patient trial management fee and an overhead charge. We contract with surgeons for the implantation and explantation of our long-term implantable sensor, and we pay a set fee for these services. We contract with clinical investigators to implement our trial protocol, acquire institutional review board approval, and generally ensure that the study is conducted in a safe and ethical manner while complying with all regulations and guidelines related to the clinical trial.
Sales and Marketing
We do not have a sales and marketing organization and have no experience as a company in the sale, marketing and distribution of glucose monitoring products. To achieve commercial success for any approved product we must either develop a sales and marketing organization or enter into arrangements with others to market and sell our products. We believe that referrals by physicians and diabetes educators, together with self-referrals by patients, will drive initial adoption of our continuous glucose monitoring systems. Following product approval, we currently plan to establish a small, specialized sales force to directly market our products in the United States primarily to endocrinologists, diabetes care educators and patients. Although the number of diabetes patients is significant, the number of physicians and educators influencing these patients is relatively small. There are an estimated 3,700 endocrinologists in the United States. As a result, we believe a direct, highly-specialized and focused sales force will be effective for us to reach our target market.
We intend to use a variety of marketing tools to drive initial adoption, ensure continued usage and establish brand loyalty for our continuous glucose monitoring systems by:
Our sales force will be competing with the experienced and well-funded marketing and sales operations of our competitors. Developing a sales force is expensive and time consuming and could delay or limit the success of any product launch.
Competition
The market for blood glucose monitoring devices is intensely competitive, subject to rapid change and significantly affected by new product introductions. Four companies, Roche Disetronic, a division of Roche Diagnostics; LifeScan, Inc., a division of Johnson & Johnson; the MediSense and TheraSense divisions of Abbott Laboratories; and Bayer Corporation, currently account for substantially all of the worldwide sales of self-monitored glucose testing systems. These competitors' products use a meter and disposable test strips to test blood obtained by pricking the finger or, in some cases, the forearm. In
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addition, other companies are developing or marketing minimally invasive or noninvasive glucose testing devices and technologies that could compete with our devices. There are also a number of academic and other institutions involved in various phases of our industry's technology development.
To date, the FDA has approved, for limited applications, three continuous monitors or sensorstwo by Medtronic, the CGMS System Gold and Guardian System, and one by Cygnus, the GlucoWatch. All of these products have been approved for limited indications.
Only the Medtronic CGMS System Gold and the Cygnus GlucoWatch are currently in commercial use. However, Cygnus recently ceased operations and sold its remaining assets to Animas. Medtronic's CGMS system does not provide patients real-time blood glucose measurements, but rather stores these values for later retrieval by a healthcare professional to obtain historical trending information. Medtronic's Guardian System, which received FDA approval in February 2004, does not show real-time glucose measurements but rather has the capability to notify the patient when it detects dangerously high or low levels of blood glucose. In August 2004, Medtronic announced that it had filed a PMA supplement for a Guardian device that, if approved, will allow it to show real-time glucose measurements to patients.
A number of companies are developing next-generation real-time continuous glucose monitoring or sensing devices and technologies, including several companies that are developing non-invasive continuous glucose monitoring products to measure the patient's blood glucose level. The majority of these non-invasive technologies do not pierce the skin, but instead typically analyze signatures reflected back from energy that has been directed into the patient's skin, tissue or bodily fluids. Progress of others developing continuous glucose monitors is difficult to assess, but we know that TheraSense and Medtronic have submitted applications for real-time continuous monitors or sensors to the FDA. There can be no assurance when, if ever, any continuous monitor or sensor will be approved as a replacement for single-point finger stick devices.
Many of our competitors are either publicly traded or are divisions of publicly-traded companies, and they enjoy several competitive advantages, including:
As a result, we cannot assure you that we will be able to compete effectively against these companies or their products.
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We believe that the principal competitive factors in our market include:
Manufacturing
We manufacture our continuous glucose monitoring systems with components supplied by outside vendors and with parts manufactured by us internally. Key components that we manufacture internally include the electrodes and membranes for our short-term sensors, and our proprietary biointerface and sensing membranes for our long-term sensors. The remaining components and assemblies are purchased from outside vendors. We then assemble, test, package and ship the finished clinical trial sensors and receivers, which consist of a sensor, a radio-frequency transmitter and a receiver and, in the case of our short-term sensor, an insertion device.
We purchase certain components and materials from single sources due to quality considerations, costs or constraints resulting from regulatory requirements. Currently, those single sources are AMI Semiconductor, Inc., which produces the application specific integrated circuits used in our sensors and transmitters; Flextronics International Ltd., which assembles the printed circuit boards for our sensors and receivers; Quallion LLC, which produces the batteries for our third generation implantable long-term sensor and our short-term sensor; and Vita Needle, which manufactures the insertion needle for our short-term continuous glucose monitoring system. Generally, agreements with these and our other suppliers can be terminated by either party upon short notice. We may not be able to quickly establish additional or replacement suppliers for our single-source components, especially after our products are commercialized, in part because of the FDA approval process and because of the custom nature of the parts we designed. Any supply interruption from our vendors or failure to obtain alternate vendors for any of the components would limit our ability to manufacture our systems, and could have a material adverse effect on our business.
Our manufacturing facility is located in our headquarters in San Diego, California, where we have more than 3,500 square feet of laboratory space and approximately 3,000 square feet of class 100K clean rooms. This facility was approved for medical device manufacturing in July 2004 by the Food and Drug Branch of the State of California Department of Health Services. We have not been inspected by the FDA and will have to successfully complete an FDA inspection before we can ship any commercial products.
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We believe that our current facility will be adequate to manufacture our products at least through the first year of commercial production. We currently have limited resources, facilities and experience to commercially manufacture our products. In order to produce our continuous glucose monitoring systems in the quantities we anticipate to meet market demand, we will need to increase our manufacturing capacity by a significant factor over the current level. There are technical challenges to increasing manufacturing capacity, including equipment design and automation, material procurement, problems with production yields, and quality control and assurance. Additionally, the production of our continuous glucose monitoring systems must occur in a highly controlled and clean environment to minimize particles and other yield- and quality-limiting contaminants. Developing commercial-scale manufacturing facilities will require the investment of substantial additional funds and the hiring and retaining of additional management and technical personnel who have the necessary manufacturing experience. We plan to use approximately $10.0 million in proceeds from this offering to fund expansion of the facilities, equipment and personnel we may require to scale our manufacturing capacity. Even if our products receive regulatory approval, if we are unable to manufacture a sufficient supply of product, maintain control over expenses or otherwise adapt to anticipated growth, or if we underestimate growth, we may not have the capability to satisfy market demand and our business will suffer.
In order to develop facilities adequate to sustain manufacturing beyond the first year of commercial production, we plan to lease additional facilities in the future. Our existing facility lease includes a right of first offer with respect to an adjacent facility that would become available if the current tenant exits the facility at the end of its lease in 2007 or earlier. In addition, our facility is located in a large industrial district, and we believe there are several other existing sites that could be leased for expansion.
Intellectual Property
Protection of our intellectual property is a strategic priority for our business. We rely on a combination of patent, copyright and other intellectual property laws, trade secrets, nondisclosure agreements and other measures to protect our proprietary rights. As of March 18, 2005, we had obtained seven issued U.S. patents, and had 52 additional U.S. patent applications pending. We believe it will take up to five years, and possibly longer, for these pending U.S. patent applications to result in issued patents. Our issued patents expire between 2006 and 2021. We have filed 21 foreign patent applications seeking rights corresponding to aspects of our issued U.S. patents and pending U.S. patent applications.
We also rely on licenses to use various patented technologies that are material to our business. In addition to our own patents, we have entered into an exclusive license agreement in the field of implantable devices for diabetes for nine U.S. patents that cover portions of the biointerface technologies used in our sensors. We do not own the patents that underlie these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to our abiding by the terms of those licenses. In addition, we do not control the prosecution of the patents subject to this license or the strategy for determining when such patents should be enforced. As a result, we are largely dependent upon our licensor to determine the appropriate strategy for prosecuting and enforcing those patents.
Together, our patents, patent applications and exclusive licenses of patents protect aspects of our core membrane and sensor technologies, and our patent applications cover product concepts for continuous glucose monitoring. We believe that our patent and license position will provide us with sufficient rights to develop, sell and protect our proposed commercial products. However, our patent applications may not result in issued patents, and we cannot assure you that any patents that have issued or might issue will protect our intellectual property rights. Furthermore, we cannot assure you
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that all of our patents will be upheld. Any patents issued to us may be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that avoids our patents. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
The medical device industry in general, and the glucose testing sector of this industry in particular, are characterized by the existence of a large number of patents and frequent litigation based on assertions of patent infringement. We are aware of numerous patents issued to third parties that relate to aspects of our business, including the design and manufacture of continuous glucose monitoring sensors and membranes, as well as methods for continuous glucose monitoring. The owners of each of these patents could assert that the manufacture, use or sale of our continuous glucose monitoring systems infringes one or more claims of their patents. Each of these patents contains multiple claims, any one of which may be independently asserted against us on commercialization of our product. There may be patents of which we are presently unaware that relate to aspects of our technology that could materially and adversely affect our business. In addition, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that materially and adversely affect our business.
Any adverse determination in litigation or interference proceedings to which we may become a party relating to patents could subject us to significant liabilities to third parties or require us to seek licenses from other third parties. Furthermore, if we are found to willfully infringe third-party patents, we could, in addition to other penalties, be required to pay treble damages. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may not be able to redesign our products to avoid infringement. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a significant adverse impact on our business.
We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary information and other intellectual property by generally requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure and assignment of invention agreements on commencement of their employment or engagement. Agreements with our employees also forbid them from bringing the proprietary rights of third parties to us. We also generally require confidentiality or material transfer agreements from third parties that receive our confidential data or materials. We cannot provide any assurance that employees and third parties will abide by the confidentiality or assignment terms of these agreements. Despite measures taken to protect our intellectual property, unauthorized parties might copy aspects of our products or obtain and use information that we regard as proprietary.
We do not currently have any registered trademarks. We recently filed for the registration of a trademark for the name "DexCom" but our application was rejected. If we cannot obtain a trademark registration for DexCom, we may have to change our company name or market our products under a different name, which could result in significant expense.
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Government Regulation
Our products are medical devices subject to extensive and ongoing regulation by the Food and Drug Administration, or FDA, and regulatory bodies in other countries. The Federal Food, Drug and Cosmetic Act, or FDCA, and the FDA's implementing regulations govern product design and development, pre-clinical and clinical testing, premarket clearance or approval, product manufacturing, product labeling, product storage, advertising and promotion, product sales and distribution, and post-market clinical surveillance. We do not have the necessary regulatory approval to market our continuous glucose monitoring systems or any other products in the United States or in any foreign market.
FDA Regulation
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either prior 510(k) clearance or prior premarket approval, or PMA, from the FDA. The FDA classifies medical devices into one of three classes. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are subject to general controls such as labeling, premarket notification, and adherence to the FDA's Quality System Regulation, or QSR. Class II devices are subject to special controls such as performance standards, postmarket surveillance, FDA guidelines, as well as general controls. Some Class I and Class II devices are exempted by regulation from the premarket notification, or 510(k) clearance requirement or the requirement of compliance with the QSR. Devices are placed in Class III, which requires approval of a PMA application, if they are deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or to be "not substantially equivalent" either to a previously 510(k) cleared device or to a "preamendment" Class III device in commercial distribution before May 28, 1976 for which PMA applications have not been required. We believe our long and short-term continuous glucose monitoring systems will require premarket approval, which requires a demonstration of the safety and efficacy of the device, and is a more time-consuming and expensive process than a 510(k) clearance.
A PMA application must be supported by valid scientific evidence, which typically requires extensive data, including technical, pre-clinical, clinical, manufacturing and labeling data, to demonstrate to the FDA's satisfaction the safety and efficacy of the device. A PMA application also must include a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. After a PMA application is submitted and found to be sufficiently complete, the FDA begins an in-depth review of the submitted information. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA generally will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures.
FDA review of a PMA application generally takes between one and three years, but may take significantly longer. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
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If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter, or approvable letter, which usually contains a number of conditions which must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device for certain indications. If the FDA's evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and then the data submitted in an amendment to the PMA. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.
New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling and device specifications, materials or design of a device that is approved through the PMA process. PMA approval supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory panel.
Clinical trials are almost always required to support a PMA application and are sometimes required for a 510(k) clearance. These trials generally require submission of an application for an investigational device exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites. The FDA's approval of an IDE allows clinical testing to go forward, but does not bind the FDA to accept the results of the trial as sufficient to prove the product's safety and efficacy, even if the trial meets its intended success criteria. All clinical trials must be conducted in accordance with the FDA's IDE regulations which govern investigational device labeling, prohibit promotion, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply with the FDA's regulations for institutional review board approval and for informed consent. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. The commencement or completion of any of our clinical trials may be delayed or halted, or be inadequate to support approval of a PMA application, for numerous reasons, including, but not limited to, the following:
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We filed a PMA application for our short-term continuous glucose monitoring system in March 2005, and we expect to file a PMA application for our second generation long-term continuous glucose monitoring system in 2006. We do not expect our short-term system to be approved for sale before 2006 at the earliest, and do not expect our long-term system to be approved for sale before 2007. Our clinical trials may not generate favorable data to support any further PMA applications, and we may not be able to obtain such approvals on a timely basis, or at all. Delays in receipt of or failure to receive such approvals, the loss of previously received approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations. Even if granted, the approvals may include significant limitations on the intended use and indications for use for which our products may be marketed.
After a device is approved and placed in commercial distribution, numerous regulatory requirements apply. These include:
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Also, the FDA may require us to conduct postmarket surveillance studies or order us to establish and maintain a system for tracking our products through the chain of distribution to the patient level. The FDA and the Food and Drug Branch of the California Department of Health Services enforce regulatory requirements by conducting periodic, unannounced inspections and market surveillance. Inspections may include the manufacturing facilities of our subcontractors.
Failure to comply with applicable regulatory requirements, including those applicable to the conduct of our clinical trials, can result in enforcement action by the FDA, which may lead to any of the following sanctions:
We and our contract manufacturers, specification developers, and some suppliers of components or device accessories, are also required to manufacture our products in compliance with current Good Manufacturing Practice, or GMP, requirements set forth in the QSR. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping. The FDA enforces the QSR through periodic unannounced inspections that may include the manufacturing facilities of our subcontractors. If the FDA believes we or any of our contract manufacturers or regulated suppliers is not in compliance with these
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requirements, it can shut down our manufacturing operations, require recall of our products, refuse to approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations, or assess civil and criminal penalties against us or our officers or other employees. Any such action by the FDA would have a material adverse effect on our business. We cannot assure you that we will be able to comply with all applicable FDA regulations.
International Regulation
International sales of medical devices are subject to foreign government regulations, which may vary substantially from country to country. The time required to obtain approval in a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various other industrialized countries.
The primary regulatory environment in Europe is that of the European Union, which includes most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third party assessment by a "Notified Body." This third party assessment may consist of an audit of the manufacturer's quality system and specific testing of the manufacturer's product. An assessment by a Notified Body of one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. Outside of the European Union, regulatory approval needs to be sought on a country-by-country basis in order for us to market our products.
Third-Party Reimbursement
The availability of insurance coverage and reimbursement for newly approved medical devices is uncertain. In the United States, patients using existing single-point finger stick devices are generally reimbursed all or part of the product cost by Medicare or other third-party payors. The commercial success of our products in both domestic and international markets will be substantially dependent on whether third-party coverage and reimbursement is available for patients that use our products. Third-party coverage may be particularly difficult to obtain if our systems are not approved by the FDA as replacements for existing single-point finger stick devices. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new medical devices, and, as a result, they may not cover or provide adequate payment for our products. In order to obtain reimbursement arrangements, we may have to agree to a net sales price lower than the net sales price we might charge in other sales channels. The continuing efforts of government and third-party payors to contain or reduce the costs of healthcare may limit our revenue. Our initial dependence on the commercial success of our short-term continuous glucose monitoring system makes us particularly susceptible to any cost containment or reduction efforts. Accordingly, even if our short-term continuous glucose monitoring system or future products are approved for commercial sale, unless government and other third-party payors provide adequate coverage and reimbursement for our products, patients may not use them.
In some foreign markets, pricing and profitability of medical devices are subject to government control. In the United States, we expect that there will continue to be federal and state proposals for similar
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controls. Also, the trends toward managed healthcare in the United States and proposed legislation intended to reduce the cost of government insurance programs could significantly influence the purchase of healthcare services and products and may result in lower prices for our products or the exclusion of our products from reimbursement programs.
Environmental Regulation
Our research and development and clinical processes involve the handling of potentially harmful biological materials as well as hazardous materials. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.
Advisory Boards
Clinical Advisory Board
We have established a clinical advisory board, consisting of individuals with recognized expertise in related fields. Our members advise us concerning product development and clinical trial design. Members of our clinical advisory board meet formally and informally with us. Several members of our clinical advisory board are employed by academic institutions and may have commitments to, or agreements with, other entities that may limit their availability to us. Members of our clinical advisory board may also serve as consultants to other medical product companies, including those that may be competitive with ours. The following persons are members of our clinical advisory board:
Name
|
Affiliation
|
|
---|---|---|
Richard Bergenstal, M.D. | International Diabetes Center | |
Bruce Bode, M.D. | Atlanta Diabetes Associates | |
Patrick Boyle, M.D. | University of New Mexico | |
John Buse, M.D. | University of North Carolina | |
Steven Edelman, M.D. | University of California, San Diego | |
Satish Garg, M.D. | Barbara Davis Center | |
Lois Jovanovic, M.D. | Sansum Research Foundation | |
Christopher Saudek, M.D. | Johns Hopkins University | |
William Tamborlane, M.D. | Yale University |
Scientific Advisory Board
We have established a scientific advisory board, consisting of individuals with recognized expertise in related fields. Our members advise us concerning technical approaches to product design and development. Members of our scientific advisory board meet formally and informally with us. Several members of our scientific advisory board are employed by academic institutions and may have commitments to, or agreements with, other entities that may limit their availability to us. Members of our scientific advisory board may also serve as consultants to other medical product companies,
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including those that may be competitive with ours. The following persons are members of our scientific advisory board:
Name
|
Affiliation
|
|
---|---|---|
James M. Anderson, M.D., Ph.D. | Case Western University | |
Clark Colton, Ph.D. | Massachusetts Institute of Technology | |
Polly Matzinger, Ph.D. | National Institute of Health, Department of Immunology | |
Buddy D. Ratner, Ph.D. | University of Washington, Department of Bioengineering |
Members of these boards are paid a stipend for attending meetings. In 2004, we paid an aggregate of $26,000 in stipends for attending meetings and consulting fees for specific projects we have requested, and reimbursed an aggregate of $7,000 in expenses, for all of the members of the clinical advisory board, and we paid an aggregate of $16,000 in stipends for attending meetings and consulting fees for specific projects we have requested, and reimbursed an aggregate of $3,000 in expenses, for all of the members of the scientific advisory board. None of the members of these boards owns any of our capital stock or has any options or warrants to purchase any of our capital stock.
Employees
As of February 28, 2005, we had 63 employees. Approximately 32 employees are engaged in research and development, 12 in manufacturing, 13 in clinical, regulatory and quality assurance, and 6 in general and administrative functions. None of our employees is represented by a labor union or is covered by a collective bargaining agreement. We have never experienced any employment-related work stoppages and consider our employee relations to be good.
Facilities
We maintain our headquarters in San Diego, California in one leased facility of approximately 23,000 square feet, which includes our laboratory, research and development, manufacturing and general administration functions. The lease for this facility expires in 2010. We have the right to extend the term of this lease for one period of five years, and a right of first offer for an adjacent facility as space becomes available in that facility. We believe that our existing facility is adequate to meet our needs through at least 2006, and that suitable additional space will be available in the future on commercially reasonably terms as needed.
Legal Proceedings
We are not party to any material pending or threatened litigation.
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Directors and Executive Officers
The following table presents information regarding our directors and executive officers as of February 28, 2005.
Name
|
Age
|
Position
|
||
---|---|---|---|---|
Andrew P. Rasdal | 46 | President, Chief Executive Officer and Director | ||
Steven J. Kemper | 50 | Chief Financial Officer | ||
James H. Brauker, Ph.D. | 54 | Vice President of Research and Development | ||
Andrew K. Balo | 57 | Vice President of Clinical and Regulatory Affairs and Quality Systems | ||
Mark Brister | 43 | Vice President, Advanced Development Teams | ||
Donald L. Lucas (1)(3) | 74 | Chairman of the board of directors | ||
Brent Ahrens (2)(3) | 41 | Director | ||
Kim D. Blickenstaff (1) | 52 | Director | ||
Sean Carney (1)(2) | 35 | Director | ||
Donald A. Lucas (1)(2) | 42 | Director | ||
Glen D. Nelson, M.D. (3) | 67 | Director | ||
Jay S. Skyler, M.D. (3) | 58 | Director |
(1)
Member
of the Audit Committee.
(2)
Member of the Compensation Committee.
(3)
Member of the Nominating and Governance Committee.
Andrew P. Rasdal has served as our President and Chief Executive Officer and on our board of directors since January 2002. From April 2000 to December 2001, Mr. Rasdal served as Senior Vice President of Medtronic, Inc., a medical technology company, and as President of Medtronic, Inc., Vascular Division. From February 1999 to April 2000, Mr. Rasdal served as General Manager of Medtronic, Inc., Vascular Division. Mr. Rasdal received a B.S. from San Jose State University and an M.B.A. from the Kellogg Graduate School of Management, Northwestern University.
Steven J. Kemper has served as our Chief Financial Officer since March 2003. From November 2001 to March 2003, Mr. Kemper served as Chief Financial Officer and Treasurer of CryoGen, Inc., a medical technology company. From November 1999 to August 2001, Mr. Kemper served as Chief Financial Officer of Proflowers, Inc., an online flower company. From 1996 to March 2003, Mr. Kemper also served as President of Pacific Financial Consulting. Mr. Kemper received a B.A. from the University of California, San Diego, an M.B.A. from Loyola Marymount University and an M.S. from San Diego State University. Mr. Kemper is a licensed C.P.A.
James H. Brauker, Ph.D. has served as our Vice President of Research and Development since April 2000. From October 1999 to March 2000, Dr. Brauker served as a consultant to us. Dr. Brauker received a B.S. and an M.S. from Central Michigan University and a Ph.D. from Michigan State University.
Andrew K. Balo has served as our Vice President of Clinical and Regulatory Affairs and Quality Systems since February 2002. From June 1999 to February 2002, Mr. Balo served as Vice President, Regulatory and Clinical Affairs of Innercool Therapies, Inc., a medical technology company. Mr. Balo received a B.S. from the University of Maryland.
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Mark Brister has served as our Vice President, Advanced Development Teams since May 2003. From February 1999 to May 2003, Mr. Brister served in various capacities, including Vice President, Research and Development, Vice President, Advanced Development Teams and Vice President, Peripheral Products of Medtronic, Inc., a medical technology company.
Donald L. Lucas has served as Chairman of our board of directors since September 2002 and as a director since May 2002. In 1960, Mr. Lucas began a seven-year participation, including acting as both a general partner and a limited partner, with Draper, Gaither & Anderson, the first venture capital firm organized on the West Coast in the United States. Since 1967, Mr. Lucas has been actively engaged in venture capital activities as a private individual. Mr. Lucas currently serves as a director of Cadence Design Systems, Inc., Macromedia, Inc., Oracle Corporation, PDF Solutions, Inc. and 51job, Inc. Mr. Lucas also serves as a director for several privately held companies. Mr. Lucas received a B.A. from Stanford University and an M.B.A. from the Stanford Graduate School of Business. Mr. Lucas is also trustee of Santa Clara University and Chairman Emeritus of the Stanford Institute for Economic Policy Research.
Brent Ahrens has served on our board of directors since December 2000. Mr. Ahrens is currently a General Partner of Canaan Partners, a venture capital firm, and has served in various capacities at Canaan Partners since July 1999. Mr. Ahrens received a B.S. and an M.S. from the University of Dayton and an M.B.A. from the Amos Tuck School of Business at Dartmouth College.
Kim D. Blickenstaff has served on our board of directors since June 2001. Mr. Blickenstaff is the co-founder of Biosite Incorporated, a medical technology company, and since April 1988 has served as its President, Chief Executive Officer and director. Mr. Blickenstaff received a B.A. and an M.B.A. from Loyola University.
Sean Carney has served on our board of directors since December 2004. Since 1996, Mr. Carney has been employed by Warburg Pincus LLC, a private equity firm, and has served as a Managing Director of Warburg Pincus LLC and General Partner of Warburg Pincus & Co. since January 2001. Mr. Carney also serves as a director of Arch Capital Group Ltd. Mr. Carney received an A.B. from Harvard College and an M.B.A. from Harvard Business School.
Donald A. Lucas has served on our board of directors since May 2002. Mr. Lucas is the Founding Managing Director of RWI Group, a venture capital firm founded in 1995. Mr. Lucas also serves as a Director of KhiMetrics, Inc., Chakshu Research, Inc. and the Silicon Valley Chapter of the Juvenile Diabetes Research Foundation. Mr. Lucas received a B.A. from Santa Clara University. Mr. Lucas is also a member of the University of California, San Francisco, Diabetes Center Leadership Council.
Glen D. Nelson, M.D. has served on our board of directors since October 2002. Since 2002, Dr. Nelson has served as Chairman of GDN Holdings, LLC, an aviation, health services and medical device company. From 1988 to 2002, Dr. Nelson served as Vice Chairman of Medtronic, Inc., a medical device company. Dr. Nelson also serves as a director of The St. Paul Travelers Companies, Inc. and Angiotech Pharmaceuticals, Inc. Dr. Nelson received a B.A. from Harvard University and an M.D. from the University of Minnesota.
Jay S. Skyler, M.D. has served on our board of directors since September 2002. Dr. Skyler is a Professor of Medicine, Pediatrics and Psychology and the Director of the General Clinical Research Center at the University of Miami in Florida, where he has been employed since 1976. Dr. Skyler also serves as the Chairman of the Planning Committee of the Clinical Research Institute, University of Miami Miller School of Medicine and as Study Chairman for the National Institute of Diabetes & Digestive & Kidney Diseases of the Type 1 Diabetes TrialNet clinical trial network. Dr. Skyler also
76
serves as a director of Amylin Pharmaceuticals, Inc. and Precision Medical Devices, Inc. Dr. Skyler received a B.S. from Pennsylvania State University and an M.D. from Jefferson Medical College.
Each of our executive officers will serve in his office until he resigns or is removed from office. Donald A. Lucas is the son of Donald L. Lucas. With the exception of such relationship, there are no family relationships among any of our directors and executive officers.
Board of Directors Composition
Our charter documents authorize up to nine directors. We currently have eight directors. Our current directors were elected pursuant to voting provisions contained in a voting agreement that we entered into with certain holders of our common stock and preferred stock. Upon the closing of this offering, the voting agreement will be terminated and none of our stockholders will have any special rights regarding board representation.
Upon the consummation of this offering, we will file our restated certificate of incorporation. The restated certificate of incorporation will divide our board of directors into three classes, each with staggered three-year terms:
At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. Upon the consummation of this offering, the Class I directors will consist of Brent Ahrens and Kim Blickenstaff; the Class II directors will consist of Donald L. Lucas, Donald A. Lucas and Jay Skyler; and the Class III directors will consist of Glen Nelson, Sean Carney and Andrew Rasdal. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.
In addition, we intend to amend our bylaws upon the consummation of this offering to provide that only the board of directors may fill vacancies on the board of directors until the next annual meeting of stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.
This classification of the board of directors and the provisions described above may have the effect of delaying or preventing changes in our control or management. See "Description of Capital StockAnti-Takeover ProvisionsRestated Certificate of Incorporation and Restated Bylaw Provisions."
Committee Composition
Our board of directors has established three standing committees: the audit committee, the compensation committee and the nominating and governance committee.
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Audit Committee. The audit committee reviews and evaluates our financial statements, accounting practices and our internal accounting procedures, selects and engages the appointment of our independent auditors and reviews the results and scope of the audit and other services provided by our independent auditors. The members of our audit committee are Kim Blickenstaff, Sean Carney, Donald A. Lucas and Donald L. Lucas, each of whom we believe will satisfy the independence requirements of the NASDAQ National Market and the SEC.
Compensation Committee. The compensation committee reviews and makes recommendations to our board of directors regarding the compensation and benefits of our officers and directors, administers our equity compensation and employee benefits plans and reviews our general policies relating to compensation and benefits. The members of our compensation committee are Brent Ahrens, Sean Carney and Donald A. Lucas, each of whom we believe will satisfy the independence requirements of the NASDAQ National Market. Each member of this committee is a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986.
Nominating and Governance Committee. The nominating and governance committee makes recommendations to our board of directors concerning candidates for election to our board of directors and other corporate governance matters. The members of our nominating and governance committee are Brent Ahrens, Donald L. Lucas, Glen Nelson and Jay Skyler, each of whom we believe will satisfy the independence requirements of the NASDAQ National Market.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers serves or in the past has served as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving on our board of directors or our compensation committee.
Mr. Ahrens, one of our directors, is a General Partner of Canaan Partners. Entities associated with Canaan Partners purchased 2,158,152 shares of our Series C preferred stock in May 2002 and 561,240 shares of our Series D preferred stock in December 2004. Entities associated with Canaan Partners collectively represent approximately 15.1% of our outstanding capital stock as of February 28, 2005. Mr. Ahrens disclaims beneficial ownership of all shares held by entities associated with Canaan Partners.
Mr. Carney, one of our directors, is a Managing Director of Warburg Pincus LLC and General Partner of Warburg Pincus & Co. Entities associated with Warburg Pincus Private Equity VIII, L.P. purchased 5,384,928 shares of our Series D preferred stock in December 2004. Entities associated with Warburg Pincus Private Equity VIII, L.P. collectively represent 13.1% of our outstanding capital stock as of February 28, 2005. Mr. Carney disclaims beneficial ownership of all shares owned by the Warburg Pincus entities.
Director Compensation
In March 2004, each of Kim Blickenstaff, Donald L. Lucas, Glen Nelson and Jay Skyler received an option to purchase 12,500 shares of our common stock at an exercise price of $0.50 per share. Each option vests ratably over a 48-month period and has a 10-year term.
Upon the consummation of this offering, each of our non-employee directors will receive an option to purchase 25,000 shares of our common stock at the initial public offering price, and Donald L. Lucas will receive an option to purchase 12,500 additional shares of our common stock as Chairman of the
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Board of Directors. None of our employee directors have received cash compensation for their services as directors. Following this offering, each non-employee director will receive an annual retainer of $20,000. In addition, each non-employee director will receive $1,500 per meeting and $1,000 per telephone meeting of the Board and committees on which they serve and each committee chair will receive an additional $1,500 per meeting and $1,000 per telephone meeting of their respective committees. The Chairman of the Board and the Chairman of the Audit Committee will also receive additional annual retainers of $10,000 and $5,000, respectively. All of our directors, including our non-employee directors, are reimbursed for their reasonable expenses in attending board of directors and board of directors committee meetings.
Each eligible non-employee director who first becomes a member of our board of directors after the completion of this offering will be granted an option to purchase 25,000 shares of our common stock. Following each annual meeting of our stockholders, each non-employee director that continues as a non-employee director will automatically be granted an additional option to purchase 10,000 shares of our common stock and the Chairman of the Board will be granted an additional option to purchase 5,000 shares of our common stock. Each option has or will have an exercise price equal to the fair market value of our common stock on the date of grant, will have a 10-year term and will terminate six months following the date the director ceases to be one of our directors for any reason other than death, and 12 months following that date if the termination is due to death. We expect that all initial options granted under the plan will vest as to one-third of the shares on the first anniversary of the date of grant and the balance of the shares will vest ratably over the next 24 months and that all additional options granted will vest ratably over a 36-month period.
Executive Compensation
The following table presents compensation information for the year ended December 31, 2004 for our chief executive officer and each of our four other most highly compensated executive officers whose salary and bonus for 2004 was more than $100,000. We refer to these five executive officers as our named executive officers elsewhere in this prospectus.
|
|
Long-term
Compensation Awards |
|
|||||
---|---|---|---|---|---|---|---|---|
|
2004
Annual Compensation |
|
||||||
Name and Principal Position
|
Securities
Underlying Options |
All Other
Compensation (1) |
||||||
Salary
|
||||||||
Andrew P. Rasdal
President and Chief Executive Officer |
$ | 323,400 | 411,000 | $ | 9,819 | |||
Steven J. Kemper Chief Financial Officer |
|
|
212,635 |
|
69,816 |
|
|
9,682 |
Andrew K. Balo Vice President of Clinical and Regulatory Affairs and Quality Systems |
|
|
202,250 |
|
112,638 |
|
|
9,644 |
James H. Brauker Vice President of Research and Development |
|
|
202,250 |
|
69,816 |
|
|
6,760 |
Mark Brister Vice President, Advanced Development Teams |
|
|
195,325 |
|
116,103 |
|
|
9,641 |
(1) Represents life insurance and health insurance benefits.
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Option Grants in Last Fiscal Year
The following table presents information regarding grants of stock options during the year ended December 31, 2004 to the named executive officers. We granted these options to the named executive officers under our 1999 stock option plan. These options either vest as to 25% of the shares on the first anniversary of the date of grant with the remainder vesting ratably over a 36-month period thereafter or vest ratably over a 48-month period. Some of these options become exercisable as they vest, and others are exercisable in advance of vesting, with unvested shares subject to a right of repurchase by us at the exercise price. All of the options listed on the following table expire ten years after the date of grant and were granted at an exercise price equal to the fair market value of our common stock as determined by our board of directors on the date of grant. The percentage of total options granted to employees in 2004 is based on options to purchase a total of 1,449,252 shares of our common stock granted in 2004.
The potential realizable values identified below are calculated based on an assumed initial public offering price of $13.00 per share, the midpoint of the range on the front cover of this prospectus, compounded at the annual 5% or 10% rate shown in the table until the expiration of the option, less the per share exercise price, multiplied by the number of shares issuable upon exercise of the option. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock.
2004 Option Grants
|
Individual Grants
|
|
|
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
|
||||||||||||
|
Number of
Securities Underlying Options Granted |
Percent of
Total Options Granted to Employees in 2004 |
|
|
|||||||||||
Name
|
Exercise
Price Per Share |
Expiration
Date |
|||||||||||||
5%
|
10%
|
||||||||||||||
Andrew P. Rasdal |
78,000
150,000 183,000 |
5.4
10.4 12.6 |
%
|
$
|
0.50
0.50 2.40 |
02/09/14
03/10/14 12/23/14 |
$
|
1,612,699
3,101,345 3,435,940 |
$
|
2,591,055
4,982,798 5,731,313 |
|||||
Steven J. Kemper |
|
20,555 49,261 |
|
1.4 3.4 |
|
|
0.50 2.40 |
|
02/09/14 12/23/14 |
|
|
424,988 924,906 |
|
|
682,809 1,542,788 |
Andrew K. Balo |
|
15,416 97,222 |
|
1.1 6.7 |
|
|
0.50 2.40 |
|
02/09/14 12/23/14 |
|
|
318,736 1,825,404 |
|
|
512,099 3,044,862 |
James H. Brauker |
|
20,555 49,261 |
|
1.4 3.4 |
|
|
0.50 2.40 |
|
02/09/14 12/23/14 |
|
|
424,988 924,906 |
|
|
682,809 1,542,788 |
Mark Brister |
|
15,000 101,103 |
|
1.0 7.0 |
|
|
0.50 2.40 |
|
02/09/14 12/23/14 |
|
|
310,134 1,898,273 |
|
|
498,280 3,166,410 |
Aggregate Option Exercises in 2004 and Year-End Option Values
The following table sets forth certain information regarding unexercised options held as of December 31, 2004, by each of the named executive officers. These values have been calculated based on the assumed initial public offering price of $13.00 per share, the midpoint of the range on the front cover of the prospectus, less the applicable exercise price per share, multiplied by the number of shares issued or issuable, as the case may be, on the exercise of the option. All options were granted under
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our 1999 stock option plan. None of the named executive officers exercised any stock options during the year ended December 31, 2004.
2004 Year-End Option Values
|
Number of Securities
Underlying Unexercised Options at December 31, 2004 |
Value of Unexercised
In-the-Money Options at December 31, 2004 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Name
|
||||||||||
Exercisable
(1)
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|||||||
Andrew P. Rasdal | 800,000 | 261,000 | $ | 10,130,000 | $ | 2,914,800 | ||||
Steven J. Kemper | 171,288 | 69,816 | 2,141,100 | 779,104 | ||||||
Andrew K. Balo | 93,087 | 148,017 | 1,173,588 | 1,665,491 | ||||||
James H. Brauker | 107,076 | 106,945 | 1,355,325 | 1,243,217 | ||||||
Mark Brister | 50,105 | 190,998 | 626,313 | 2,195,379 |
(1) Includes options for an aggregrate of 800,000 shares, 171,288 shares, 50,000 shares and 50,000 shares for Mr. Rasdal, Mr. Kemper, Mr. Balo and Dr. Brauker, respectively, that are immediately exercisable, and, when and if exercised, will be subject to a repurchase right held by us, which right lapses in accordance with the respective vesting schedules for such options.
Employment, Severance and Change of Control Arrangements
In January 2005, we entered into a restated letter agreement with Mr. Rasdal. Under the letter agreement, in the event we terminate Mr. Rasdal's employment without cause or he is constructively terminated, he will receive 12 months salary as severance.
In January 2005, we entered into a restated executive change of control agreement with Mr. Rasdal. Under this agreement, if a change of control occurs and either (1) Mr. Rasdal is serving as an employee, director or consultant of ours immediately prior to the effective date of the change of control or (2) Mr. Rasdal's service as an employee, director or consultant has been terminated without cause in the period of time beginning 90 days prior to the earlier of (a) the execution of a letter of intent relating to the change of control or (b) the execution of a definitive agreement with respect to the change of control and ending upon the effective date of the change of control; in either case, provided that the change of control with the party to the letter of intent or definitive agreement is consummated within two years following such execution, then the vesting and exercisability of the shares of our common stock subject to each option granted to Mr. Rasdal shall be accelerated in full and any reacquisition or repurchase rights held by us with respect to such shares shall lapse in full.
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The following options to purchase our common stock are subject to the provisions of the executive change of control agreement:
Grant Date
|
Shares of Common Stock
Subject to Option |
Vesting Schedule
|
||
---|---|---|---|---|
December 12, 2001 | 500,000 | Vests as to 25% of the shares on the first anniversary of the date of grant with the remainder vesting ratably over a 36-month period thereafter. | ||
December 12, 2001 |
|
150,000 |
|
Vests as to 25% of the shares on the first anniversary of the date of grant with the remainder vesting ratably over a 36-month period thereafter. |
February 10, 2004 |
|
78,000 |
|
Vests as to 25% of the shares on the first anniversary of the vesting commencement date with the remainder vesting ratably over a 36-month period thereafter. |
March 11, 2004 |
|
150,000 |
|
Vests ratably over a 48-month period. |
December 24, 2004 |
|
183,000 |
|
Vests as to 25% of the shares on the first anniversary of the date of grant with the remainder vesting ratably over a 36-month period thereafter. |
We have also entered into change of control arrangements with Mr. Balo, Dr. Brauker, Mr. Brister and Mr. Kemper that provide that in the event of a change of control and in connection with, or 12 months following, the change of control, we terminate their employment without cause or constructively terminate Mr. Balo, Dr. Brauker, Mr. Brister or Mr. Kemper, all unvested shares of our common stock subject to all options granted to such terminated individual will fully vest. We have also agreed that in the event we terminate Mr. Balo, Dr. Brauker, Mr. Brister or Mr. Kemper's employment without cause, such terminated individual will receive six months salary as severance. In each case, our obligation to make any severance payments is expressly conditioned upon such terminated individual's execution and delivery of a general release and waiver of all claims.
Employee Benefit Plans and Option Grants
1999 Stock Option Plan
Our board of directors adopted, and our stockholders approved, our 1999 stock option plan in August 1999. As of February 28, 2005, options to purchase 2,970,359 shares of our common stock were outstanding under our 1999 stock option plan. The options outstanding under the plan had a weighted average exercise price of $1.23 per share. Our employees, consultants and directors were eligible to receive awards under the 1999 stock option plan. Our 1999 stock option plan will terminate upon the effective date of our 2005 equity incentive plan. However, any outstanding options granted under our 1999 stock option plan will remain outstanding and subject to our 1999 stock option plan and related stock option agreements until they are exercised or until they terminate or expire by their terms.
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Our 1999 stock option plan is administered by the compensation committee of our board of directors, each member of which is an outside director as defined under applicable federal tax laws. Our compensation committee has the authority to interpret this plan and any agreement entered into under the plan, grant awards and make all other determinations for the administration of the plan.
With respect to stock options, our 1999 stock option plan provides for the grant of both incentive stock options that qualify for favorable tax treatment under Section 422 of the Internal Revenue Code for their recipients and nonqualified stock options. Incentive stock options may be granted only to our employees or employees of any of our subsidiaries. Nonqualified stock options may be granted to our employees, officers, directors, consultants, independent contractors and advisors and those of any of our subsidiaries. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair market value of our common stock on the date of grant. Nonqualified stock options are granted with an exercise price at least equal to the fair market value of our common stock on the date of grant. The maximum permitted term of options granted under our 1999 stock option plan is ten years.
In the event of a change in control, this plan provides that options held by current employees, directors and consultants that are not assumed or substituted, will immediately vest in full and become exercisable prior to such change in control and all options shall expire on the consummation of the change in control.
2005 Equity Incentive Plan
Our board of directors adopted in January 2005 and our stockholders approved in March 2005, our 2005 equity incentive plan. The 2005 equity incentive plan will serve as the successor to our 1999 stock option plan. The 2005 equity incentive plan will become effective on the date of our initial public offering and will terminate on the tenth anniversary of our initial public offering, unless terminated earlier by our board. The plan will authorize the award of options, restricted stock awards, stock appreciation rights, restricted stock units and stock bonuses. No awards have been granted under this plan.
Our 2005 equity incentive plan will be administered by the compensation committee of our board of directors, each member of which is an outside director as defined under applicable federal tax laws. Our compensation committee has the authority to interpret this plan and any agreement entered into under the plan, grant awards and make all other determinations for the administration of the plan.
With respect to stock options, our 2005 equity incentive plan provides for the grant of both incentive stock options that qualify for favorable tax treatment under Section 422 of the Internal Revenue Code for their recipients and nonqualified stock options. Incentive stock options may be granted only to our employees or employees of any of our subsidiaries. No more than 3,000,000 shares may be issued pursuant to the exercise of incentive stock options under the 2005 equity incentive plan. Nonqualified stock options, and all awards other than incentive stock options, may be granted to our employees, officers, directors, consultants, independent contractors and advisors and those of any of our subsidiaries. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair market value of our common stock on the date of grant. Nonqualified stock options and restricted stock generally will, but need not, be granted with an exercise price at least equal to the fair market value of our common stock on the date of grant. The maximum permitted term of options granted under our 2005 equity incentive plan is ten
83
years. Automatic grants of stock options to our non-employee directors are provided for under this plan as described above under "Director Compensation."
A restricted stock award is an offer by us to sell shares of our common stock subject to restrictions. The price of a restricted stock award will be determined by the compensation committee. Unless otherwise determined by the compensation committee at the time of award, vesting ceases on the date the participant no longer provides services to us and unvested shares are forfeited to us.
Stock bonuses are granted as additional compensation for performance, and therefore, are not issued in exchange for cash.
Stock appreciation rights provide for a payment, or payments, in cash or shares of common stock, to the holder based upon the difference between the fair market value of our common stock on the date of exercise over the stated exercise price up to a maximum amount of cash or number of shares. Stock appreciation rights may vest based on time or achievement of performance conditions.
Restricted stock units represent the right to receive shares of our common stock at a specified date in the future, subject to forfeiture of such right due to termination of employment or failure to achieve certain performance conditions. If the restricted stock unit has not been forfeited, then on the date specified in the restricted stock unit agreement, we will deliver to the holder of the restricted stock unit whole shares of our common stock, cash or a combination of our common stock and cash.
Awards granted under this plan generally may not be transferred in any manner other than by will or by the laws of descent and distribution. Our compensation committee, however, may permit nonqualified stock options to be transferred by domestic relations order or, in limited circumstances, by gift. In the event of a liquidation, dissolution or change in control transaction, except for options granted to non-employee directors, awards may be assumed or substituted by the successor company. Awards that are not assumed or substituted will immediately vest as to 100% of the common stock shares subject thereto, at such time and on such conditions as our board of directors shall determine, and the awards will expire at the time of liquidation, dissolution or closing of the change in control transaction.
There will be 3,000,000 shares of our common stock reserved for issuance under our 2005 equity incentive plan, which will include the shares of our common stock reserved under our 1999 stock option plan that were not already issued, or subject to outstanding grants, on the date of our initial public offering. The number of shares reserved for issuance under this plan will automatically be increased by any shares issued under our 1999 stock option plan and outstanding on the effective date of this registration statement that are forfeited or that are issuable upon exercise of options granted pursuant to our 1999 stock option plan that expire without having been exercised in full.
In addition, under the terms of our 2005 equity incentive plan, the number of shares of our common stock reserved for grant and issuance under the plan will increase automatically on January 1 of each of the years starting from 2006 through 2015 by an amount equal to the lesser of 3% of our total issued and outstanding shares as of the immediately preceding December 31st or the number of shares determined by our board of directors. Our board of directors or compensation committee may reduce the amount of any increase in any particular year.
84
Shares available for grant and issuance under our 2005 equity incentive plan include:
During any calendar year, no person will be eligible to receive more than 500,000 shares, or, in the case of new employees during their first fiscal year of employment, 1,000,000 shares under our 2005 equity incentive plan.
2005 Employee Stock Purchase Plan
Our board of directors adopted in February 2005 and our stockholders approved in March 2005, our 2005 employee stock purchase plan. The 2005 employee stock purchase plan will become effective on the date of our initial public offering and is designed to enable eligible employees to purchase shares of our common stock at a discount on a periodic basis following the date of this prospectus. Our compensation committee administers the 2005 employee stock purchase plan. Our employees generally are eligible to participate in this plan if they are employed by us, or a subsidiary of ours that we designate, for more than 20 hours per week, more than five months in a calendar year and for at least three months prior to the first day of an offering period. Our employees are not eligible to participate in our 2005 employee stock purchase plan if they are 5% stockholders or would become 5% stockholders as a result of their participation in the plan. Under the 2005 employee stock purchase plan, eligible employees acquire shares of our common stock through payroll deductions, or, in the case of the first offering period, through cash payments on each purchase date within such period. Our eligible employees may select a rate of payroll deduction between 1% and 10% of their cash compensation. For the first offering period, employees will be automatically granted an option based on 10% of their cash compensation during the first offering period. An employee's participation in this plan will end automatically upon termination of employment for any reason. In the event of a change of control transaction, this plan will terminate upon the effective date of such transaction and any funds in a participant's account as of such date will be used to purchase shares of our common stock on such date, unless otherwise provided by our compensation committee.
No participant will be able to accrue the right to purchase shares having a fair market value of more than $25,000, determined as of the first day of the applicable offering period, for each calendar year covered by the applicable offering period. Except for the first offering period, each offering period will be for one year and will consist of two six-month purchase periods. The first offering period will begin on the date this registration statement is declared effective by the SEC and shall end on July 31, 2006, and may consist of up to three purchase periods. The purchase periods in the first offering period may be each more or less than six months long. Subsequently, offering periods will begin on each February 1 and August 1 commencing with August 1, 2005. The purchase price for shares of our common stock purchased under the 2005 employee stock purchase plan will be 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the fair market value of our common stock on the last day of the applicable purchase period. Our compensation committee has the power to change the starting date of any later offering period, the purchase date of a purchase period and the duration of any offering period or purchase period without
85
stockholder approval if this change is announced before the relevant offering period or other time period. Our 2005 employee stock purchase plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code.
We have reserved 150,000 shares of our common stock for issuance under the 2005 employee stock purchase plan. The number of shares reserved for issuance under the plan will increase automatically on January 1 of each year, starting in 2006, by an amount equal to 1% of our total outstanding shares as of the immediately preceding December 31. Our board of directors or compensation committee may reduce the amount of the increase in any particular year. The aggregate number of shares issued over the term of the plan may not exceed 3,000,000 shares. The 2005 employee stock purchase plan will terminate on the tenth anniversary of our initial public offering, unless it is terminated earlier by our board of directors or when all of the shares reserved for issuance under this plan have been issued.
401(k) Plan
We sponsor a retirement plan intended to qualify for the favorable tax treatment afforded under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended, or the Code. Employees who have attained at least 18 years of age are generally eligible to become participants in the plan on the first day of the calendar month coinciding with or next following the date they become employed by us. Participants may make pre-tax contributions to the plan from their eligible earnings up to the statutorily prescribed annual limit on pre-tax contributions under the Code. Participants may also make after-tax contributions subject to the statutory limit on annual additions to defined contribution plans and applicable nondiscrimination tests under the Code. We currently make no company contributions on behalf of participants to the plan, but can do so in our discretion. Pre-tax contributions by participants to the plan and the income earned on such contributions are generally not taxable to participants until withdrawn. The income earned on after-tax contributions made by participants to the plan is generally not taxable to participants until withdrawn. Participant contributions are held in trust as required by law. Each participant's retirement benefit under the plan is determined solely on the basis of contributions made on such participant's behalf and earnings thereon. No minimum benefit is provided under the plan.
Indemnification of Directors and Officers and Limitation of Liability
Our restated certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages resulting from breach of fiduciary duty as directors, except for liability:
These provisions are permitted under Delaware law.
86
Our restated bylaws provide that:
These provisions are permitted under Delaware law.
Prior to the completion of this offering, we intend to enter into indemnity agreements with each of our current directors and executive officers to provide additional contractual assurances regarding the scope of the indemnification provided for in our restated certificate of incorporation and restated bylaws and to provide additional procedural protections. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought.
We have liability insurance for our directors and officers, including coverage for public securities matters.
87
Preferred Stock Financings
In July 1999, we sold an aggregate of 3,000,000 shares of our Series A preferred stock at $1.00 per share for an aggregate purchase price of $3.0 million. In December 2000 and March 2001, we sold an aggregate of 11,304,114 shares of our Series B preferred stock at $1.44 per share for an aggregate purchase price of $16.3 million. In May and June of 2002, we sold an aggregate of 12,790,870 shares of our Series C preferred stock at $2.30 per share for an aggregate purchase price of $29.4 million. In December 2004, we sold an aggregate of 8,355,886 shares of our Series D preferred stock at $2.69 per share for an aggregate purchase price of $22.5 million. Each share of preferred stock will convert automatically into one share of our common stock upon the closing of this offering. The purchasers of these shares of preferred stock are entitled to certain registration rights. See "Description of Capital StockRegistration Rights." The investors in these financings included the directors and holders of more than 5% of our outstanding stock identified in the table below. The terms of these purchases were the same as those made available to unaffiliated purchasers.
Investor
|
Series A
Preferred Stock |
Series B
Preferred Stock |
Series C
Preferred Stock |
Series D
Preferred Stock |
||||
---|---|---|---|---|---|---|---|---|
Directors | ||||||||
Kim Blickenstaff | | | 108,696 | | ||||
Donald A. Lucas | | | 130,434 | 22,368 | ||||
Donald L. Lucas | | | 652,174 | 65,298 | ||||
Glen Nelson | | | | 37,137 | ||||
Jay Skyler | | | | 37,137 | ||||
5% Stockholders |
|
|
|
|
|
|
|
|
Entities affiliated with The St. Paul Travelers Companies, Inc. | 3,000,000 | 3,752,029 | 1,726,087 | 892,487 | ||||
Entities affiliated with Canaan Partners (1) | | 3,467,883 | 2,158,152 | 561,240 | ||||
Entities affiliated with Warburg Pincus Private Equity VIII, L.P (2) | | | | 5,384,928 | ||||
Entities affiliated with The Kaufmann Fund | | 2,083,333 | 434,783 | 252,130 | ||||
Entities affiliated with RWI Group (3) | | | 2,086,955 | 255,505 |
(1) Brent Ahrens, one of our directors, is a General Partner of Canaan Partners.
(2) Sean Carney, one of our directors, is a Partner of Warburg Pincus & Co., the sole general partner of Warburg Pincus Private Equity VIII, L.P.
(3) Donald A. Lucas, one of our directors, is a Founding Managing Director of RWI Group.
88
Issuances of Common Stock
The following table sets forth information regarding our issuances of common stock to our early investors and founders. None of the individuals listed below are currently our employees.
Date
|
Name
|
Number of
Shares of Common Stock |
Price Per
Share |
Type of Consideration
|
|||||
---|---|---|---|---|---|---|---|---|---|
5/13/1999 | John F. Burd | 370,000 | $ | 0.002 | Cash | ||||
5/13/1999 | Scott L. Glenn | 200,000 | 0.002 | Cash | |||||
5/13/1999 | Bret Megargel | 20,000 | 0.002 | Cash | |||||
5/13/1999 | Lauren Otsuki | 10,000 | 0.002 | Cash | |||||
5/13/1999 | Windamere Venture Partners LLC | 150,000 | 0.002 | Cash | |||||
6/30/1999 | Markwell Medical Institute, Inc. | 950,000 | 0.02 | Patents, patent applications, copyrights, copyright applications and other technology. |
Other Arrangements
In the year ended December 31, 2002, we paid Windamere Venture Partners $285,563 to perform management services. Windamere Venture Partners is controlled by St. Paul Venture Capital, its sole limited partner. St. Paul Venture Capital was a holder of approximately 22.9% of our common stock as of February 28, 2005.
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The following table presents information as to the beneficial ownership of our common stock as of February 28, 2005 and as adjusted to reflect the sale of the common stock in this offering by:
The percentage of shares beneficially owned prior to the offering is based on 20,486,761 shares of common stock outstanding as of February 28, 2005, assuming that all outstanding preferred stock has been converted into common stock. The percentage of shares beneficially owned after this offering includes shares of common stock being offered but does not include the shares that are subject to the underwriters' over-allotment option. Percentage ownership figures after the offering do not include shares that may be purchased by each person in this offering.
Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. Unless indicated above, the persons and entities named below have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of February 28, 2005 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address for each listed stockholder is c/o DexCom, Inc., 5555 Oberlin Drive, San Diego, California, 92121.
|
|
Percentage of Shares Outstanding
|
|||||
---|---|---|---|---|---|---|---|
Name and Address of Beneficial Owner
|
Number of Shares
Beneficially Owned |
Before Offering
|
After Offering
|
||||
Directors and Named Executive Officers | |||||||
Brent Ahrens (1) | 3,093,635 | 15.1 | % | 12.3 | % | ||
Andrew Balo (2) | 100,909 | * | * | ||||
Kim Blickenstaff (3) | 116,848 | * | * | ||||
James H. Brauker (4) | 148,435 | * | * | ||||
Mark Brister (5) | 61,773 | * | * | ||||
Sean Carney (6) | 2,692,462 | 13.1 | 10.7 | ||||
Steven J. Kemper (7) | 178,139 | * | * | ||||
Donald A. Lucas (8) | 1,171,229 | 5.7 | 4.7 | ||||
Donald L. Lucas (9) | 1,097,311 | 5.4 | 4.4 | ||||
Glen D. Nelson (10) | 81,068 | * | * | ||||
Andrew P. Rasdal (11) | 824,375 | 4.0 | 3.3 | ||||
Jay S. Skyler | 81,068 | * | * | ||||
All 12 directors and executive officers as a group (12) | 9,647,252 | 47.1 | 38.3 | ||||
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All 5% Stockholders |
|
|
|
|
|
|
|
Entities affiliated with The St. Paul Travelers Companies, Inc. (13) | 4,685,297 | 22.9 | 18.6 | ||||
Entities affiliated with Canaan Partners (1) | 3,093,635 | 15.1 | 12.3 | ||||
Entities affiliated with Warburg Pincus Private Equity VIII, L.P. (6) | 2,692,462 | 13.1 | 10.7 | ||||
Entities affiliated with The Kaufmann Fund (14) | 1,385,122 | 6.8 | 5.5 | ||||
Entities affiliated with RWI Group (8) | 1,171,229 | 5.7 | 4.7 |
*Represents less than 1% of the outstanding shares of our common stock.
(1) Represents 2,026,331 shares held by Canaan Equity II L.P., 906,435 shares held by Canaan Equity II L.P. (QP) and 160,869 shares held by Canaan Equity II Entrepreneurs LLC. Mr. Ahrens is a General Partner of Canaan Partners, which is the General Partner of Canaan Equity II L.P., Canaan Equity II L.P. (QP) and Canaan Equity II Entrepreneurs LLC. As a General Partner, Mr. Ahrens shares voting and investment power of the shares held by the entities affiliated with Canaan Partners. Mr. Ahrens, Eric Young, Deepak Kamra, John Balen, Guy Russo, Gregory Kopchinsky, and Stephen Green share voting and investment power over shares owned by Canaan Equity II, L.P., Canaan Equity II, L.P. (QP), and Canaan Equity II Entrepreneurs LLC. Mr. Ahrens disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest in the named funds. Mr. Ahrens' address is c/o Canaan Partners, 2765 Sand Hill Road, Menlo Park, CA 94025.
(2) Represents options to purchase 100,909 shares of our common stock that are exercisable within 60 days of February 28, 2005, 9,376 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005.
(3) Includes options to purchase 62,500 shares of our common stock that are exercisable within 60 days of February 28, 2005, 19,897 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005.
(4) Includes options to purchase 65,935 shares of our common stock that are exercisable within 60 days of February 28, 2005, 11,457 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005.
(5) Includes options to purchase 61,773 shares of our common stock that are exercisable within 60 days of February 28, 2005, none of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005.
(6) Represents 2,692,462 shares held by Warburg Pincus Private Equity VIII, L.P., including two affiliated limited partnerships. Warburg Pincus & Co. is the sole general partner of Warburg Pincus Private Equity VIII, L.P. Warburg Pincus Private Equity VIII, L.P. is managed by Warburg Pincus LLC. Mr. Carney is a partner of Warburg Pincus & Co. and a managing director and member of Warburg Pincus LLC. All shares indicated as owned by Mr. Carney are included because of his affiliation with the Warburg Pincus entities. Mr. Carney disclaims beneficial ownership of all shares owned by the Warburg Pincus entities. Mr. Carney's address is 466 Lexington Avenue, New York, NY 10017.
(7) Includes options to purchase 103,138 shares of our common stock that are exercisable within 60 days of February 28, 2005, 78,507 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005.
(8) Represents 121,646 shares held by RWI Group III, L.P., 973,182 shares held by RWI Group IV, L.P. and 76,401 shares held by Pronghorn Ventures IV, LLC. Mr. Lucas is the founding managing director of the RWI Group. As a Founding Managing Director of RWI Group, Mr. Lucas shares voting and investment power of the shares held by the RWI Group affiliates. Donald A. Lucas and William Baumel share voting and investment power over RWI Group III, L.P. Donald A. Lucas, William Baumel and Mark Foley share voting and investment power over RWI Group IV, L.P. Donald A. Lucas retains sole voting and investment power over Pronghorn Ventures IV, LLC. Mr. Lucas disclaims beneficial ownership of the shares held by RWI Group III, L.P., RWI Group IV, L.P. and Pronghorn Ventures IV, LLC, except to the extent of his pecuniary interest in the named funds. Mr. Lucas' address is c/o RWI Group, 835 Page Mill Road, Palo Alto, CA 94304-1011.
(9) Represents 116,144 shares held by Sand Hill Financial Company, 119,578 shares held by The Richard M. Lucas Foundation, 459,933 shares held by Teton Capital Company, 326,656 shares held by various trusts in which Mr. Lucas is a trustee and options to purchase 75,000 shares of our common stock that are exercisable within 60 days of February 28, 2005, 61,459 of which would, if they were exercised, be subject to our right of repurchase within 60 days of February 28, 2005. Mr. Lucas disclaims beneficial ownership of the shares held in the various trusts in which he is a trustee, except to the extent that he is the beneficiary of any of such trusts. Mr. Lucas disclaims beneficial ownership of the shares held by Sand Hill Financial Company, Teton Capital Company and The Richard M. Lucas Foundation, except to the extent of his pecuniary interest in the named funds. Mr. Lucas' address is c/o Sand Hill Financial Company, 3000 Sand Hill Road, Building 3-210, Menlo Park, CA 94025.
(10) Includes options to purchase 62,500 shares of our common stock that are exercisable within 60 days of February 28, 2005, 26,561 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005. Mr. Nelson's address is c/o GDN Holdings, LLC, 301 Carlson Parkway, #315, Minnetonka, MN 55305.
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(11) Includes options to purchase 824,375 shares of our common stock that are exercisable within 60 days of February 28, 2005, 214,582 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005.
(12) Shares beneficially owned by all executive officers and directors as a group includes options to purchase 1,356,130 shares of our common stock that are exercisable within 60 days of February 28, 2005, 421,839 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of February 28, 2005.
(13) Represents 1,633,017 shares held by St. Paul Venture Capital V, LLC, 819,749 shares held by St. Paul Venture Capital VI, LLC, 30,937 shares held by St. Paul Venture Capital Affiliates Fund I, LLC, 375,000 shares held by Windamere, LLC, 469,003 shares held by Windamere II, LLC and 217,391 shares held by Windamere III, LLC and 1,140,200 shares held by Fog City Fund, LLC. The St. Paul Travelers Companies, Inc., a publicly-traded company, owns 100% of St. Paul Fire and Marine Insurance Company. St. Paul Fire and Marine Insurance Company owns a controlling interest and has appointed a majority of the members of the board of directors of each of St. Paul Venture Capital V, LLC and St. Paul Venture Capital VI, LLC. St. Paul Fire and Marine Insurance Company also owns a controlling interest of Windamere, LLC, Windamere II, LLC, Windamere III, LLC and Fog City Fund, LLC. St. Paul Venture Capital V, LLC, St. Paul Venture Capital VI, LLC and St. Paul Venture Capital Affiliates Fund I, LLC are jointly managed by Split Rock Partners, LLC and Vesbridge Partners, LLC, however, voting and investment power with respect to our shares have been delegated solely to Split Rock Partners, LLC. Split Rock Partners, LLC has appointed a majority of the members of the board of directors of each of Windamere, LLC, Windamere II, LLC, Windamere III, LLC and Fog City Fund, LLC. Split Rock Partners, LLC has delegated voting and investment decisions to four individuals who require a two-thirds vote to act: Michael Gorman, James Simons, David Stassen and Allan Will. Windamere, LLC, Windamere II, LLC, and Windamere III, LLC have delegated voting and investment decisions to Scott Glenn; however, investments or dispositions in excess of certain amounts must be approved by the board of directors of each entity. Fog City Fund, LLC has delegated voting and investment decisions to Nancy Olson; however, investments or dispositions in excess of certain amounts must be approved by its board of directors. Voting and investment power over the shares held by each named fund is shared with each of the above named individuals and The St. Paul Travelers Companies, Inc., St. Paul Fire and Marine Insurance Company and Split Rock Partners, LLC due to the affiliate relationships described above. Each of these individuals and entities disclaim beneficial ownership of the shares except to the extent of any pecuniary interest in each named fund. The address for The St. Paul Travelers Companies, Inc. and St. Paul Fire and Marine Insurance Company is 385 Washington Street. The address for Split Rock Partners, LLC is 10400 Viking Drive, Suite 550, Eden Prairie, MN 55344.
(14) Represents 217,391 shares held by the Federated Kaufmann Fund, 126,065 shares held by Federated Kaufmann Fund, portfolio of Federated Equity Funds, and 1,041,666 shares held by the Kaufmann Fund. The address of the Kaufmann Fund is 140 East 45th Street, 43rd Floor, New York, NY 10017.
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Upon the closing of this offering, our authorized capital stock, after giving effect to the conversion of all outstanding preferred stock into common stock and the filing of our restated certificate of incorporation, will consist of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of undesignated preferred stock, $0.001 par value per share. The following description summarizes the most important terms of our capital stock. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description you should refer to our restated certificate of incorporation and restated bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the provisions of applicable Delaware law.
Common Stock
As of February 28, 2005, there were 20,486,761 shares of common stock outstanding held by 138 shareholders of record. This amount assumes the conversion of all outstanding shares of our preferred stock, which will occur immediately upon the closing of this offering. After this offering, there will be 25,186,761 shares of our common stock outstanding, or 25,891,761 shares if the underwriters exercise their overallotment option.
Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board of directors may from time to time determine.
Voting Rights. Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our restated certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election.
No preemptive or similar rights. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution or winding-up of DexCom, the assets legally available for distribution to stockholders will be distributable ratably among the holders of our common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.
Preferred Stock
As of February 28, 2005, there were 35,450,870 shares of preferred stock outstanding. Upon the closing of this offering, each outstanding share of preferred stock will be converted into one-half of one share of common stock. Immediately following the closing of this offering, we will file our restated certificate of incorporation, which will delete all references to the prior series of preferred stock, and will authorize 5,000,000 shares of undesignated preferred stock.
Following this offering, our board of directors will be authorized, subject to the limits imposed by Delaware law, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. Our board of directors can also increase or decrease the number of shares of any series,
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but not below the number of shares of a given series then outstanding, without any further vote or action by the stockholders.
The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of DexCom and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock.
Our certificate of incorporation in effect upon the closing of this offering will authorize 500,000 shares of Series A junior participating preferred stock that are purchasable upon exercise of the rights under our rights agreement. See "Description of Capital StockAnti-Takeover ProvisionsRights Agreement." These shares are:
Warrants
As of February 28, 2005, we had outstanding one warrant exercisable for 43,729 shares of our common stock at an exercise price of $5.38 per share. This warrant is exercisable until two years after the date of this offering. The warrant has a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of our common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. The warrant also contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations and reclassifications and consolidations.
Registration Rights
Pursuant to the terms of our second amended and restated investors' rights agreement, after this offering, holders of approximately 19,618,721 shares of common stock and one warrantholder holding a warrant to purchase 43,729 shares of our common stock or their respective transferees have the right to require us to register such shares with the Securities and Exchange Commission so that those shares may be publicly resold, subject to certain limitations in such agreement.
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Right to demand registration. Holders of 17,725,401 shares of common stock have demand registration rights. At any time six months after the closing of this offering, these stockholders can request that we file a registration statement so they can publicly sell their shares. The underwriters of any underwritten offering will have the right to limit the number of shares to be included in a registration statement.
Who may make a demand. At any time six months after the closing of this offering, the holders of at least 40% of the shares with the registration rights described above have the right to demand that we file a registration statement on a form other than Form S-3, so long as the amount of securities to be sold in that registration will result in aggregate proceeds of at least $7,500,000, net of any underwriters' fees, discounts or commissions. If we are eligible to file a registration statement on Form S-3, the holders of 10% of the shares with the registration rights described above will have the right to demand that we file a registration statement on Form S-3, so long as the amount of securities to be sold in that registration will result in an aggregate price to the public of not less than $1,000,000, net of any underwriters' fees, discounts or commissions.
Number of times holders can make demands. We will only be required to file an aggregate of two registration statements on demand, provided such registration statements have been declared or ordered effective, on a form other than Form S-3. If we are eligible to file a registration statement on Form S-3, we are not required to file more than two such registration statements during any 12-month period.
Postponement. We may postpone the filing of a registration statement on a form other than Form S-3 for up to 120 days once in a 12-month period if we determine that the filing would be seriously detrimental to us and our stockholders. In the case of a registration statement on Form S-3, our postponement period is limited to no more than 120 days once in a 12-month period.
Piggyback registration rights. If we register any securities for public sale, holders of approximately 19,618,721 shares of common stock and one warrantholder holding a warrant to purchase 43,729 shares of our common stock will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit or exclude the number of shares to be included in a registration statement, provided that no such limitation shall reduce the amount of securities held by the holders of shares with registration rights below 30% of the total amount of securities included in such registration.
Expenses of registration. We will pay all of the expenses relating to any demand, piggyback or Form S-3 registration. However, we will not pay for any expenses of any demand or Form S-3 registration if the request is subsequently withdrawn by the holders requesting that we file such registration statement, subject to limited exceptions. We are not obligated to pay any underwriting discounts or selling commission applicable to any such registration.
Expiration of registration rights. The registration rights described above will expire seven years after this offering is completed. The registration rights will terminate earlier with respect to a particular stockholder to the extent the shares held by and issuable to such holder may be sold under Rule 144 of the Securities Act in any 90 day period.
Anti-Takeover Provisions
Provisions of Delaware law and our restated certificate of incorporation and restated bylaws could make the acquisition of DexCom and the removal of incumbent directors more difficult. These provisions are expected to discourage certain types of coercive takeover practices and inadequate
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takeover bids and to encourage persons seeking to acquire control of DexCom to negotiate with us first.
Delaware Law
Following the closing of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, the statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date that the person became an interested stockholder, subject to exceptions, unless the business combination or the transaction in which the person became an interested stockholder is approved by our board of directors in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior, did own, 15% or more of the corporation's voting stock. These provisions may have the effect of delaying, deferring or preventing a change in control of us without further action by the stockholders.
Restated Certificate of Incorporation and Restated Bylaw Provisions
Our restated certificate of incorporation and our restated bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management team, including the following:
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stockholders, to issue up to 5,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the board of directors. The existence of authorized but unissued shares of preferred stock enables our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
Rights Agreement
Under our rights agreement, each share of our common stock has associated with it one preferred stock purchase right. Each of these rights entitles its holder to purchase, at a price of $150 for each one one-hundredth of a share of Series A junior participating preferred stock (subject to adjustment) under circumstances provided for in the rights agreement. The purpose of our rights agreement is to:
The exercise of the rights under our rights agreement would cause substantial dilution to a person attempting to acquire us on terms not approved by our board of directors, and therefore would significantly increase the price that such person would have to pay to complete the acquisition. Our rights agreement may deter a potential acquisition or tender offer. Until a distribution date occurs, the rights will:
The rights will expire at the close of business on the closing of the ten-year anniversary of this offering, which we expect to be in or around April 2015, unless earlier redeemed or exchanged by us. Following a distribution date, the rights would become exercisable and we would issue separate certificates representing the rights, which would trade separately from the shares of our common stock. A distribution date would occur upon the earlier of:
A holder of rights will not, as such, have any rights as a stockholder, including the right to vote or receive dividends.
Under our rights agreement, a person becomes an acquiring person if the person, alone or together with a group, acquires beneficial ownership of 15% or more of the outstanding shares of our common stock. St. Paul Venture Capital is not an acquiring person because we have exempted St. Paul Venture Capital from the application of our rights agreement until its beneficial ownership represents 25% or
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more of the outstanding shares of our common stock. Canaan Partners is not an acquiring person because we have exempted Canaan Partners from the application of our rights agreement until its beneficial ownership represents 17% or more of the outstanding shares of our common stock. In addition, an acquiring person shall not include us, any of our subsidiaries, or any of our employee benefit plans or any person or entity holding shares of our common stock pursuant to such employee benefit plans. Our rights agreement also contains provisions designed to prevent the inadvertent triggering of the rights by institutional or certain other stockholders.
If any person becomes an acquiring person, each holder of a right, other than the acquiring person, will be entitled to purchase, at the purchase price, a number of our shares of common stock having a market value of two times the purchase price. If, a person becomes an acquiring person and either:
each holder of a right, other than the acquiring person, will be entitled to purchase a number of shares of common stock of the acquiring entity having a market value of two times the purchase price.
After a person becomes an acquiring person, but prior to such person acquiring more than 50% of our outstanding common stock, our board of directors may exchange each right, other than rights owned by the acquiring person, for
At any time before a person becomes an acquiring person, our board of directors may redeem all of the rights at a redemption price of $0.0001 per right. On the redemption date, the rights will expire and the only entitlement of the holders of rights will be to receive the redemption price.
At any time before a person becomes an acquiring person, our board of directors may amend any provision in the rights agreement without stockholder consent. After the rights are no longer redeemable, our board of directors may only amend the rights agreement without stockholder consent if such amendment would not adversely affect the interests of the holders of rights, or cause the rights to again become redeemable.
The adoption of the rights agreement and the distribution of the rights should not be taxable to our stockholders or us. Our stockholders may recognize taxable income when the rights become exercisable in accordance with the rights agreement.
NASDAQ National Market Listing
We have applied to list our common stock on the NASDAQ National Market under the proposed trading symbol "DXCM."
Transfer Agent
The Transfer Agent and Registrar for our common stock is American Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.
Upon the completion of this offering, we will have 25,186,761 shares of our common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants after February 28, 2005. Of these outstanding shares, the 4,700,000 shares sold in this offering will be freely tradable, except that any shares held by our "affiliates" as that term is defined in Rule 144 promulgated under the Securities Act may only be sold in compliance with the limitations described below. The remaining 20,486,761 shares of our common stock will continue to be deemed "restricted securities" as defined under Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act, both of which are summarized below. In addition, all of our stockholders have entered into market stand-off agreements with us or lock-up agreements with the underwriters under which they have agreed, subject to specified exceptions, not to sell any of their stock for at least 180 days following the date of this prospectus. Subject to the provisions of Rules 144 and 701, shares will be available for sale in the public market as follows:
Lock-Up Agreements
All of our directors and officers and all of our securityholders are subject to lock-up agreements or market standoff provisions that prohibit them from offering for sale, selling, contracting to sell, granting any option for the sale of, transferring or otherwise disposing of any shares of our common stock, options or warrants to acquire shares of our common stock or any security or instrument related to such common stock, option or warrant for a period of at least 180 days following the date of this prospectus without the prior written consent of Piper Jaffray & Co. or, in limited circumstances, us.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of this offering, a person, or group of persons whose shares are required to be aggregated, including an affiliate of DexCom, who has beneficially owned shares for at least one year, is entitled to sell within any three-month period, a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock, or the average weekly trading volume in our common
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stock during the four calendar weeks preceding the date on which notice of the sale is filed. In addition, a person who is not deemed to have been an affiliate at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell those shares under Rule 144(k) without regard to the requirements described above. When a person acquires shares from one of our affiliates, that person's holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. However, any such shares that are eligible for sale under Rule 144 are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or waiver of those agreements.
Rule 701
In general, under Rule 701 of the Securities Act, an employee, officer, director, consultant or advisor who purchased shares from us in connection with a compensatory stock or option plan or other written agreement in compliance with Rule 701 is eligible, 90 days after the issuer becomes subject to the reporting requirements of the Exchange Act, to resell those shares in reliance on Rule 144, but without compliance with certain restrictions, including the holding period contained in Rule 144. However, the shares issued pursuant to Rule 701 are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or waiver of those agreements.
Registration of Shares Issued Pursuant to Benefits Plans
We intend to file registration statements under the Securities Act as promptly as possible after the effective date of this offering to register shares to be issued pursuant to our employee benefit plans. As a result, any options or rights exercised under our 1999 stock option plan, our 2005 equity incentive plan, our 2005 employee stock purchase plan or any other benefit plan after the effectiveness of the registration statements will also be freely tradable in the public market, subject to the market stand-off and lock-up agreements discussed above. However, such shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144. As of February 28, 2005, there were outstanding options under our benefit plans for the purchase of 2,970,359 shares of common stock, with an average exercise price of $1.23.
Registration Rights
Pursuant to the terms of our second amended and restated investors' rights agreement, which is attached as an exhibit to this registration statement, holders of approximately 19,618,721 shares of common stock and one warrantholder holding a warrant to purchase 43,729 shares of our common stock or their transferees, have registration rights with respect to those shares of common stock. For a discussion of these rights please see "Description of Capital StockRegistration Rights." After such shares are registered, they will be freely tradable without restriction under the Securities Act.
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The underwriters named below have agreed to buy, subject to the terms of the purchase agreement, the number of shares listed opposite their names below. Piper Jaffray & Co. is acting as book-running manager for this offering and, together with SG Cowen & Co., LLC, William Blair & Company, L.L.C. and First Albany Capital Inc., is acting as representative of the underwriters. The underwriters are committed to purchase and pay for all of the shares if any are purchased, other than those shares covered by the over-allotment option described below.
Underwriters
|
Number of
Shares |
||
---|---|---|---|
Piper Jaffray & Co. | |||
SG Cowen & Co., LLC | |||
William Blair & Company, L.L.C. | |||
First Albany Capital Inc. | |||
|
|||
Total | |||
|
The underwriters have advised us that they propose to offer the shares to the public at $ per share. The underwriters propose to offer the shares to certain dealers at the same price less a concession of not more than $ per share. The underwriters may allow and the dealers may reallow a concession of not more than $ per share on sales to certain other brokers and dealers. After the offering, these figures may be changed by the underwriters.
At our request, the underwriters have reserved a number of shares that will not exceed 5% of the shares of common stock to be sold in this offering for sale at the initial public offering price to directors, employees and persons having business relationships with or otherwise related to DexCom. The number of shares of common stock available for sale to the general public will be reduced to the extent that such individuals purchase all or a portion of these reserved shares. Any reserved shares which are not purchased will be offered by the underwriters to the general public on the same basis as the shares of common stock offered hereby.
We have granted to the underwriters an option to purchase up to an additional 705,000 shares of common stock from us at the same price to the public, and with the same underwriting discount, as set forth above. The underwriters may exercise this option any time during the 30-day period after the date of this prospectus, but only to cover over-allotments, if any. To the extent the underwriters exercise the option, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares as it was obligated to purchase under the purchase agreement.
We estimate that the total fees and expenses payable by us, excluding underwriting discounts and commissions, will be approximately $1.9 million. The following table shows the underwriting fees to be paid to the underwriters by us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.
|
No Exercise
|
Full Exercise
|
||||
---|---|---|---|---|---|---|
Per Share | $ | $ | ||||
Total | $ | $ |
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We have agreed to indemnify the underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.
The underwriters have informed us that neither they, nor any other underwriter participating in the distribution of the offering, will make sales of the common stock offered by this prospectus to accounts over which they exercise discretionary authority without the prior specific written approval of the customer.
All of our directors and officers and substantially all of our securityholders are subject to lock-up agreements or market standoff provisions that prohibit them from offering for sale, selling, contracting to sell, granting any option for the sale of, transferring or otherwise disposing of any shares of our common stock, options or warrants to acquire shares of our common stock or any security or instrument related to such common stock, option or warrant for a period of at least 180 days following the date of this prospectus without the prior written consent of Piper Jaffray & Co. or, in limited circumstances, us.
In addition, we are subject to a lock-up agreement that prohibits us from offering for sale, selling, contracting to sell, granting any option for the sale of, pledging, transferring, establishing an open put equivalent position or otherwise disposing of any shares of our common stock, options or warrants to acquire shares of our common stock or any security or instrument related to such common stock, option or warrant for a period of at least 180 days following the date of this prospectus without the prior written consent of Piper Jaffray & Co.
Prior to the offering, there has been no established trading market for our common stock. The initial public offering price for the shares of common stock offered by this prospectus will be negotiated by us and the underwriters. The factors to be considered in determining the initial public offering price include:
The initial public offering price of our common stock may not correspond to the price at which the common stock will trade in the public market subsequent to this offering, and an active public market for the common stock may never develop or, if it does develop, may not continue after this offering.
To facilitate the offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock during and after the offering. Specifically, the underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than we have sold to them. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the
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offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are sales in excess of this option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering.
In addition, the underwriters may stabilize or maintain the price of the common stock by bidding for or purchasing shares of common stock in the open market and may impose penalty bids. If penalty bids are imposed, selling concessions allowed to syndicate members or other broker-dealers participating in the offering are reclaimed if shares of common stock previously distributed in the offering are repurchased, whether in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of the common stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales of the common stock. The magnitude or effect of any stabilization or other transactions is uncertain. These transactions may be effected on the NASDAQ National Market or otherwise and, if commenced, may be discontinued at any time.
Some underwriters and selling group members may also engage in passive market making transactions in our common stock. Passive market making consists of displaying bids on the NASDAQ National Market limited by the prices of independent market makers and effecting purchases limited by those prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of the common stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically.
From time to time in the ordinary course of their respective businesses, certain of the underwriters and their affiliates have engaged in and may in the future engage in commercial banking or investment banking transactions with us and our affiliates. They receive customary fees and commissions for these services. Piper Jaffray & Co., one of the underwriters, served as the placement agent in our December 2004 Series D preferred stock offering and received a warrant to purchase 87,458 shares of our Series D preferred stock at an exercise price of $2.69 per share, as partial consideration for its services. Upon the consummation of this offering, this warrant will be exercisable for 43,729 shares of our common stock at an exercise price of $5.38 per share.
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MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
This section summarizes certain material U.S. federal income and estate tax considerations relating to the ownership and disposition of our common stock. This summary does not provide a complete analysis of all potential tax considerations. The information provided below is based on existing authorities. These authorities may change, or the Internal Revenue Service, or IRS, might interpret the existing authorities differently. In either case, the tax considerations of owning or disposing of our common stock could differ from those described below. For purposes of this summary, a "non-U.S. holder" is any holder (other than a partnership) that is not for U.S. federal income tax purposes any of the following:
This summary is based upon provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and judicial decisions as of the date of this prospectus. Those authorities may be changed, perhaps retroactively, so as to result in U.S. federal income and estate tax consequences different from those summarized below. In addition, the summary does not represent a detailed description of the U.S. federal income and estate tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws (including if you are a U.S. expatriate, "controlled foreign corporation," "passive foreign investment company," or a corporation that accumulates earnings to avoid U.S. federal income tax). We cannot assure you that a change in law will not alter significantly the tax considerations that we describe in this summary. If a partnership or other flow-through entity is a beneficial owner of our common stock, the tax treatment of a partner in the partnership or an owner of the entity will depend upon the status of the partner or other owner and the activities of the partnership or other entity. If you are a partner in a partnership holding our common stock, you should consult your tax advisors. Finally, the summary does not describe the effects of any applicable foreign, state, or local laws.
INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCAL LAWS, AND TAX TREATIES.
Dividends
Any dividend paid to a non-U.S. holder in respect of our common stock will generally be subject to U.S. withholding tax at a 30 percent rate. The withholding tax might not apply, however, or might apply at a reduced rate, under the terms of an applicable income tax treaty between the United States and the non-U.S. holder's country of residence. A non-U.S. holder must demonstrate its entitlement to treaty benefits by certifying its nonresident status. A non-U.S. holder can meet this certification requirement by providing a Form W-8BEN or appropriate substitute form to us or our paying agent. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the holder's
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behalf, the holder will be required to provide appropriate documentation to the agent. The holder's agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. For payments made to a foreign partnership or other flow-through entity, the certification requirements generally apply to the partners or other owners rather than to the partnership or other entity, and the partnership or other entity must provide the partners' or other owners' documentation to us or our paying agent. Special rules, described below, apply if a dividend is effectively connected with a U.S. trade or business conducted by the non-U.S. holder. A non-U.S. holder eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service.
Sale of Common Stock
Non-U.S. holders will generally not be subject to U.S. federal income tax on any gains realized on the sale, exchange, or other disposition of our common stock. This general rule, however, is subject to several exceptions. For example, the gain would be subject to U.S. federal income tax if:
The FIRPTA rules may apply to a sale, exchange or other disposition of our common stock if we are, or were within five years before the transaction, a "U.S. real property holding corporation," or USRPHC. In general, we would be a USRPHC if interests in U.S. real estate comprised most of our assets. We do not believe that we are a USRPHC or that we will become one in the future.
Dividends or Gain Effectively Connected With a U.S. Trade or Business
If any dividend on our common stock, or gain from the sale, exchange or other disposition of our common stock, is effectively connected with a U.S. trade or business conducted by the non-U.S. holder, then the dividend or gain will be subject to U.S. federal income tax at the regular graduated rates. If the non-U.S. holder is eligible for the benefits of a tax treaty between the United States and the holder's country of residence, any "effectively connected" dividend or gain would generally be subject to U.S. federal income tax only if it is also attributable to a permanent establishment or fixed base maintained by the holder in the United States. Payments of dividends that are effectively connected with a U.S. trade or business will not be subject to the 30 percent withholding tax. To claim exemption from withholding, the holder must certify its qualification, which can be done by filing a Form W-8ECI. If the non-U.S. holder is a corporation, that portion of its earnings and profits that is effectively connected with its U.S. trade or business would generally be subject to a "branch profits tax." The branch profits tax rate is generally 30 percent, although an applicable income tax treaty might provide for a lower rate.
105
U.S. Federal Estate Tax
The estates of nonresident alien individuals are generally subject to U.S. federal estate tax on property with a U.S. situs. Because we are a U.S. corporation, our common stock will be U.S. situs property and therefore will be included in the taxable estate of a nonresident alien decedent. The U.S. federal estate tax liability of the estate of a nonresident alien may be affected by a tax treaty between the United States and the decedent's country of residence.
Backup Withholding and Information Reporting
The Code and the Treasury regulations require those who make specified payments to report the payments to the IRS. Among the specified payments are dividends and proceeds paid by brokers to their customers. The required information returns enable the IRS to determine whether the recipient properly included the payments in income. This reporting regime is reinforced by "backup withholding" rules. These rules require the payors to withhold tax from payments subject to information reporting if the recipient fails to cooperate with the reporting regime by failing to provide his taxpayer identification number to the payor, furnishing an incorrect identification number, or repeatedly failing to report interest or dividends on his returns. The withholding tax rate is currently 28 percent. The backup withholding rules do not apply to payments to corporations, whether domestic or foreign.
Payments to non-U.S. holders of dividends on our common stock will generally not be subject to backup withholding, and payments of proceeds made to non-U.S. holders by a broker upon a sale of our common stock will not be subject to information reporting or backup withholding, in each case so long as the non-U.S. holder certifies its nonresident status and the payor does not have actual knowledge or reason to know that such holder is a U.S. person as defined under the Code or such holder otherwise establishes an exemption. Some of the common means of certifying nonresident status are described under "Material United States Federal Tax Considerations for Non-U.S. Holders of Common StockDividends." We must report annually to the IRS any dividends paid to each non-U.S. holder and the tax withheld, if any, with respect to such dividends. Copies of these reports may be made available to tax authorities in the country where the non-U.S. holder resides.
Any amounts withheld from a payment to a holder of our common stock under the backup withholding rules can be credited against any U.S. federal income tax liability of the holder.
THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
106
Fenwick & West LLP, Mountain View, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. The underwriters have been represented by Latham & Watkins LLP, Costa Mesa, California.
Ernst & Young LLP, independent registered public accounting firm, have audited our financial statements at December 31, 2003 and 2004 and for each of the three years in the period ended December 31, 2004 and for the period from May 13, 1999 (inception) through December 31, 2004, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, of which this prospectus is a part, under the Securities Act with respect to the common stock offered in this offering. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement or the accompanying exhibits. For additional information about us and our common stock, you should refer to the registration statement and the accompanying exhibits. Statements contained in this prospectus regarding the contents of any contract, agreement or other document to which we make reference are not necessarily complete. In each instance, we make reference to the copy of the contract, agreement or other document filed as an exhibit to the registration statement, of which this prospectus is a part.
You may also read and copy the registration statement, the related exhibits and the other materials we file with the SEC at its public reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of those documents at prescribed rates by writing to the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The site's address is www.sec.gov.
Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934 and, accordingly, will file periodic reports, proxy statements and other information with the SEC. Our periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms and on the SEC's website.
107
DEXCOM, INC.
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm | F-2 | |
Balance Sheets | F-3 | |
Statements of Operations | F-4 | |
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) | F-5 | |
Statements of Cash Flows | F-7 | |
Notes to Financial Statements | F-8 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders
DexCom, Inc.
We have audited the accompanying balance sheets of DexCom, Inc. (a development stage company) as of December 31, 2003 and 2004, and the related statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004 and the period from May 13, 1999 (inception) through December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DexCom, Inc. at December 31, 2003 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 and the period from May 13, 1999 (inception) through December 31, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San
Diego, California
January 22, 2005
except for Note 10, as to which the date is
March 23, 2005
F-2
DEXCOM, INC.
(a development stage company)
BALANCE SHEETS
|
|
|
Pro forma
Redeemable Convertible Preferred Stock and Stockholders' Equity at December 31, 2004 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
|
||||||||||
|
2003
|
2004
|
|||||||||
|
|
|
(Unaudited)
|
||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 20,016,186 | $ | 27,229,208 | |||||||
Prepaid and other current assets | 119,653 | 43,781 | |||||||||
|
|
||||||||||
Total current assets | 20,135,839 | 27,272,989 | |||||||||
Property and equipment, net |
|
|
611,079 |
|
|
1,851,892 |
|
|
|
|
|
Restricted cash | | 200,000 | |||||||||
Other assets | 20,063 | 33,000 | |||||||||
|
|
||||||||||
Total assets | $ | 20,766,981 | $ | 29,357,881 | |||||||
|
|
||||||||||
Liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) | |||||||||||
Current liabilities: | |||||||||||
Accounts payable and accrued liabilities | $ | 692,045 | $ | 1,018,879 | |||||||
Accrued payroll and related expenses | 219,525 | 328,476 | |||||||||
Accrued clinical trials | 72,329 | 220,875 | |||||||||
|
|
||||||||||
Total current liabilities | 983,899 | 1,568,230 | |||||||||
Deferred rent |
|
|
|
|
|
125,241 |
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible Series B preferred stock, $.001 par value, 12,000,000 and 11,304,114 shares authorized at December 31, 2003 and 2004, respectively; 11,304,114 shares issued and outstanding at December 31, 2003 and 2004; liquidation preference and redemption value of $19,775,269 and $20,914,724 at December 31, 2003 and 2004, respectively; no shares authorized, issued or outstanding pro forma |
|
|
19,726,069 |
|
|
20,878,086 |
|
$ |
|
|
|
Redeemable convertible Series C preferred stock, $.001 par value, 13,043,478 shares authorized, 12,790,870 shares issued and outstanding at December 31, 2003 and 2004; liquidation preference and redemption value of $32,748,598 and $34,807,928 at December 31, 2003 and 2004, respectively; no shares authorized, issued or outstanding pro forma | 32,657,865 | 34,740,360 | | ||||||||
Redeemable convertible Series D preferred stock, $.001 par value, 8,700,000 shares authorized, 8,355,886 shares issued and outstanding at 2004; liquidation preference and redemption value of $22,499,894 at December 31, 2004; no shares authorized, issued or outstanding pro forma | | 21,355,894 | | ||||||||
Stockholders' equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
Convertible Series A preferred stock, $.001 par value, 3,000,000 shares authorized; 3,000,000 shares issued and outstanding at December 31, 2003 and 2004; liquidation preference of $3,000,000 at December 31, 2003 and 2004 | 3,000 | 3,000 | | ||||||||
Common stock, $.001 par value, 50,000,000 shares authorized, 2,244,088 and 2,323,300 shares issued and outstanding at December 31, 2003 and 2004, respectively; 20,048,701 shares issued and outstanding pro forma (unaudited) | 2,244 | 2,323 | 20,049 | ||||||||
Additional paid-in capital | 3,097,857 | 6,218,012 | 83,177,626 | ||||||||
Deferred stock-based compensation | | (2,648,336 | ) | (2,648,336 | ) | ||||||
Deficit accumulated during the development stage | (35,703,953 | ) | (52,884,929 | ) | (52,884,929 | ) | |||||
|
|
|
|||||||||
Total stockholders' equity (deficit) | (32,600,852 | ) | (49,309,930 | ) | $ | 27,664,410 | |||||
|
|
|
|||||||||
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) | $ | 20,766,981 | $ | 29,357,881 | |||||||
|
|
See accompanying notes.
F-3
DEXCOM, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
|
|
|
|
Period from
May 13, 1999 (inception) through December 31, 2004 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31,
|
||||||||||||||
|
2002
|
2003
|
2004
|
||||||||||||
Costs and expenses: | |||||||||||||||
Research and development | $ | 6,310,907 | $ | 8,934,631 | $ | 12,178,728 | $ | 36,112,734 | |||||||
General and administrative | 1,860,552 | 1,249,960 | 1,439,700 | 7,590,319 | |||||||||||
Stock-based compensation: | |||||||||||||||
Research and development | | | 291,114 | 291,114 | |||||||||||
General and administrative | | | 157,575 | 157,575 | |||||||||||
|
|
|
|
||||||||||||
Total costs and expenses | 8,171,459 | 10,184,591 | 14,067,117 | 44,151,742 | |||||||||||
Interest and other income, net |
|
|
463,430 |
|
|
270,000 |
|
|
120,653 |
|
|
1,405,350 |
|
||
|
|
|
|
||||||||||||
Net loss | (7,708,029 | ) | (9,914,591 | ) | (13,946,464 | ) | (42,746,392 | ) | |||||||
Accretion to redemption value of Series B and Series C redeemable convertible preferred stock | (2,451,068 | ) | (3,234,512 | ) | (3,234,512 | ) | (10,138,537 | ) | |||||||
|
|
|
|
||||||||||||
Net loss attributable to common stockholders | $ | (10,159,097 | ) | $ | (13,149,103 | ) | $ | (17,180,976 | ) | $ | (52,884,929 | ) | |||
|
|
|
|
||||||||||||
Basic and diluted net loss per share attributable to common stockholders | $ | (4.96 | ) | $ | (6.06 | ) | $ | (7.51 | ) | ||||||
|
|
|
|||||||||||||
Shares used to compute basic and diluted net loss per share attributable to common stockholders | 2,046,208 | 2,169,922 | 2,286,320 | ||||||||||||
|
|
|
|||||||||||||
Pro forma basic and diluted net loss per share (unaudited) | $ | (0.88 | ) | ||||||||||||
|
|||||||||||||||
Shares used to compute pro forma basic and diluted net loss per share (unaudited) | 15,845,239 | ||||||||||||||
|
See accompanying notes.
F-4
DEXCOM, INC.
(a development stage company)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
|
Redeemable Convertible
Preferred Stock |
Convertible
Preferred Stock |
|
|
|
|
Deficit
Accumulated During the Development Stage |
|
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Common Stock
|
|
|
Total
Stockholders' Equity (Deficit) |
|||||||||||||||||||||||||
|
Additional
Paid-In Capital |
Deferred
Stock-Based Compensation |
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||
Balance at May 13, 1999 (inception) | | $ | | | $ | | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Issuance of common stock to founders at $.001 per share for cash in May 1999 | | | | | 750,000 | 750 | 750 | | | 1,500 | |||||||||||||||||||
Issuance of common stock at $.01 per share for technology in June 1999 | | | | | 950,000 | 950 | 18,050 | | | 19,000 | |||||||||||||||||||
Issuance of Series A convertible preferred stock at $1.00 per share for cash in July 1999, net of financing costs of $65,656 | | | 3,000,000 | 3,000 | | | 2,931,344 | | | 2,934,344 | |||||||||||||||||||
Compensation expense associated with stock options issued to consultants | | | | | | | 793 | | | 793 | |||||||||||||||||||
Net loss and comprehensive loss | | | | | | | | (938,817 | ) | (938,817 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
Balance at December 31, 1999 | | | 3,000,000 | 3,000 | 1,700,000 | 1,700 | 2,950,937 | | (938,817 | ) | 2,016,820 | ||||||||||||||||||
Issuance of Series B redeemable convertible preferred stock at $1.44 per share for cash in December 2000, net of financing costs of $80,703 | 9,589,121 | 13,727,631 | | | | | | | | | |||||||||||||||||||
Issuance of Series B redeemable convertible preferred stock upon conversion of notes payable in December 2000 | 1,437,215 | 2,069,589 | | | | | | | | | |||||||||||||||||||
Issuance of common stock for cash | | | | | 175,938 | 176 | 27,011 | | | 27,187 | |||||||||||||||||||
Compensation expense associated with stock options issued to consultants | | | | | | | 14,771 | | | 14,771 | |||||||||||||||||||
Imputed dividends on Series B redeemable convertible preferred stock | | 92,621 | | | | | | | (92,621 | ) | (92,621 | ) | |||||||||||||||||
Net loss and comprehensive loss | | | | | | | | | (3,965,121 | ) | (3,965,121 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
Balance at December 31, 2000 | 11,026,336 | 15,889,841 | 3,000,000 | 3,000 | 1,875,938 | 1,876 | 2,992,719 | | (4,996,559 | ) | (1,998,964 | ) | |||||||||||||||||
Issuance of Series B redeemable convertible preferred stock at $1.44 per share for cash in March 2001, net of financing costs of $6,971 | 277,778 | 393,029 | | | | | | | | | |||||||||||||||||||
Exercise of stock options for cash | | | | | 120,574 | 121 | 24,493 | | | 24,614 | |||||||||||||||||||
Compensation expense associated with stock options issued to consultants | | | | | | | 23,483 | | | 23,483 | |||||||||||||||||||
Imputed dividends on Series B redeemable convertible preferred stock | | 1,125,824 | | | | | | | (1,125,824 | ) | (1,125,824 | ) | |||||||||||||||||
Net loss and comprehensive loss | | | | | | | | | (6,273,370 | ) | (6,273,370 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
Balance at December 31, 2001 | 11,304,114 | $ | 17,408,694 | 3,000,000 | $ | 3,000 | 1,996,512 | $ | 1,997 | $ | 3,040,695 | $ | | $ | (12,395,753 | ) | $ | (9,350,061 | ) |
See accompanying notes.
F-5
DEXCOM, INC.
(a development stage company)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
|
Redeemable Convertible
Preferred Stock |
Convertible
Preferred Stock |
|
|
|
|
Deficit
Accumulated During the Development Stage |
|
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Common Stock
|
|
|
Total
Stockholders' Equity (Deficit) |
|||||||||||||||||||||||||
|
Additional
Paid-In Capital |
Deferred
Stock-Based Compensation |
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||
Balance at December 31, 2001 | 11,304,114 | $ | 17,408,694 | 3,000,000 | $ | 3,000 | 1,996,512 | $ | 1,997 | $ | 3,040,695 | $ | | $ | (12,395,753 | ) | $ | (9,350,061 | ) | ||||||||||
Issuance of Series C redeemable convertible preferred stock at $2.30 per share for cash in May and June 2002, net of financing costs of $129,341 | 12,790,870 | 29,289,660 | | | | | | | | | |||||||||||||||||||
Imputed dividends on Series B redeemable convertible preferred stock | | 1,139,445 | | | | | | | (1,139,445 | ) | (1,139,445 | ) | |||||||||||||||||
Imputed dividends on Series C redeemable preferred stock | | 1,270,267 | | | | | | | (1,270,267 | ) | (1,270,267 | ) | |||||||||||||||||
Accretion of stock issuance costs on redeemable convertible preferred stock | | 41,356 | | | | | | | (41,356 | ) | (41,356 | ) | |||||||||||||||||
Exercise of stock options for cash | | | | | 88,860 | 89 | 23,880 | | | 23,969 | |||||||||||||||||||
Net loss and comprehensive loss | | | | | | | | | (7,708,029 | ) | (7,708,029 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
Balance at December 31, 2002 | 24,094,984 | 49,149,422 | 3,000,000 | 3,000 | 2,085,372 | 2,086 | 3,064,575 | | (22,554,850 | ) | (19,485,189 | ) | |||||||||||||||||
Imputed dividends on Series B redeemable convertible preferred stock | | 1,139,455 | | | | | | | (1,139,455 | ) | (1,139,455 | ) | |||||||||||||||||
Imputed dividends on Series C redeemable convertible preferred stock | | 2,059,330 | | | | | | | (2,059,330 | ) | (2,059,330 | ) | |||||||||||||||||
Accretion of stock issuance costs on redeemable preferred stock | | 35,727 | | | | | | | (35,727 | ) | (35,727 | ) | |||||||||||||||||
Exercise of stock options for cash | | | | | 158,716 | 158 | 33,282 | | | 33,440 | |||||||||||||||||||
Net loss and comprehensive loss | | | | | | | | | (9,914,591 | ) | (9,914,591 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
Balance at December 31, 2003 | 24,094,984 | 52,383,934 | 3,000,000 | 3,000 | 2,244,088 | 2,244 | 3,097,857 | | (35,703,953 | ) | (32,600,852 | ) | |||||||||||||||||
Issuance of Series D redeemable convertible preferred stock at $2.69 per share for cash in December 2004, net of financing costs of $1,144,000 | 8,355,886 | 21,355,894 | | | | | | | | | |||||||||||||||||||
Imputed dividends on Series B redeemable convertible preferred stock | | 1,139,455 | | | | | | | (1,139,455 | ) | (1,139,455 | ) | |||||||||||||||||
Imputed dividends on Series C redeemable preferred stock | | 2,059,330 | | | | | | | (2,059,330 | ) | (2,059,330 | ) | |||||||||||||||||
Accretion of stock issuance costs on redeemable convertible preferred stock | | 35,727 | | | | | | | (35,727 | ) | (35,727 | ) | |||||||||||||||||
Exercise of stock option for cash | | | | | 79,212 | 79 | 23,130 | | | 23,209 | |||||||||||||||||||
Deferred stock compensation related to employee stock option grants | | | | | | | 3,097,025 | (3,097,025 | ) | | | ||||||||||||||||||
Amortization of deferred stock-based compensation | | | | | | | | 448,689 | | 448,689 | |||||||||||||||||||
Net loss and comprehensive loss | | | | | | | | | (13,946,464 | ) | (13,946,464 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
Balance at December 31, 2004 | 32,450,870 | $ | 76,974,340 | 3,000,000 | $ | 3,000 | 2,323,300 | $ | 2,323 | $ | 6,218,012 | $ | (2,648,336 | ) | $ | (52,884,929 | ) | $ | (49,309,930 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
DEXCOM, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
|
|
|
|
Period from
May 13, 1999 (inception) through December 31, 2004 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31,
|
||||||||||||||
|
2002
|
2003
|
2004
|
||||||||||||
Operating activities | |||||||||||||||
Net loss | $ | (7,708,029 | ) | $ | (9,914,591 | ) | $ | (13,946,464 | ) | $ | (42,746,392 | ) | |||
Adjustments to reconcile net loss to cash used in operating activities: | |||||||||||||||
Depreciation and amortization | 388,686 | 353,550 | 486,805 | 1,462,152 | |||||||||||
Amortization of stock-based compensation | | | 448,689 | 448,689 | |||||||||||
Interest on converted notes | | | | 70,480 | |||||||||||
Loss on disposal of equipment | 25,053 | | 29,905 | 65,767 | |||||||||||
Compensation expense associated with stock options issued to consultants | | | | 39,047 | |||||||||||
Changes in operating assets and liabilities: | |||||||||||||||
Prepaid and other assets | (98,523 | ) | 62,255 | 42,872 | (76,781 | ) | |||||||||
Restricted cash | | | (200,000 | ) | (200,000 | ) | |||||||||
Accounts payable and accrued liabilities | 270,886 | 58,062 | 475,380 | 1,239,754 | |||||||||||
Accrued payroll and related expenses | 94,776 | (21,011 | ) | 108,951 | 328,476 | ||||||||||
Deferred rent | | | 125,241 | 125,241 | |||||||||||
|
|
|
|
||||||||||||
Net cash used in operating activities | (7,027,151 | ) | (9,461,735 | ) | (12,428,621 | ) | (39,243,567 | ) | |||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Purchase of short-term marketable securities | (7,765,280 | ) | | | (7,765,280 | ) | |||||||||
Proceeds from sale of short-term marketable securities | | 7,765,280 | | 7,765,280 | |||||||||||
Purchase of property and equipment | (261,602 | ) | (408,609 | ) | (1,757,523 | ) | (3,361,528 | ) | |||||||
Proceeds on sale of equipment | | | | 1,017 | |||||||||||
Other assets | 41,703 | 9,065 | 20,063 | | |||||||||||
|
|
|
|
||||||||||||
Net cash provided by (used in) investing activities | (7,985,179 | ) | 7,365,736 | (1,737,460 | ) | (3,360,511 | ) | ||||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Proceeds from convertible notes payable | | | | 2,000,000 | |||||||||||
Proceeds from issuance of common stock | 23,969 | 33,440 | 23,209 | 133,619 | |||||||||||
Net proceeds from issuance of preferred stock | 29,289,663 | | 21,355,894 | 67,699,667 | |||||||||||
|
|
|
|
||||||||||||
Net cash provided by financing activities | 29,313,632 | 33,440 | 21,379,103 | 69,833,286 | |||||||||||
|
|
|
|
||||||||||||
Increase (decrease) in cash and cash equivalents | 14,301,302 | (2,062,559 | ) | 7,213,022 | 27,229,208 | ||||||||||
Cash and cash equivalents, beginning of period | 7,777,443 | 22,078,745 | 20,016,186 | | |||||||||||
|
|
|
|
||||||||||||
Cash and cash equivalents, ending of period | $ | 22,078,745 | $ | 20,016,186 | $ | 27,229,208 | $ | 27,229,208 | |||||||
|
|
|
|
||||||||||||
Non-cash investing and financing transactions: | |||||||||||||||
Purchase of technology in exchange for common stock | $ | | $ | | $ | | $ | 19,000 | |||||||
|
|
|
|
||||||||||||
Conversion of notes payable into Series B preferred stock | $ | | $ | | $ | | $ | 2,000,000 | |||||||
|
|
|
|
||||||||||||
Accretion to redemption value of Series B and Series C redeemable convertible preferred stock | $ | 2,451,068 | $ | 3,234,512 | $ | 3,234,512 | $ | 10,138,537 | |||||||
|
|
|
|
See accompanying notes.
F-7
DEXCOM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
1. Organization and Summary of Significant Accounting Policies
Organization and Business
DexCom, Inc., or the Company, is a development stage medical device company focused on the design and development of continuous glucose monitoring systems for people with diabetes. Since inception the Company has devoted substantially all of its resources to start-up activities, raising capital and research and development, including product design, testing, manufacturing and clinical trials. The Company has focused its development activities on two continuous glucose monitoring systems: a short-term system with a sensor that can be inserted by a patient, and a long-term system with a sensor that can be implanted by a physician. The Company's glucose monitoring systems are designed to provide real-time continuous blood glucose values, trend data and alerts to assist patients in managing their blood glucose levels. The Company has not generated any revenue from its development activities and will not be able to generate revenue until one of its products is approved, if ever.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 these estimates.
Significant estimates include estimated clinical study expenses that are comprised of payments for work performed by contract research organizations, physicians and participating hospitals. Expenses are accrued for clinical studies performed by contract research organizations based on estimates of work performed under contracts. Expenses for setting up clinical trial sites are accrued immediately. Clinical expenses related to patient enrollment are accrued as patients are enrolled in a trial.
Unaudited Pro Forma Information
The Company has filed a registration statement with the Securities and Exchange Commission to sell shares of its common stock to the public. If the initial public offering is completed under the terms presently anticipated, each share of the Series A convertible preferred stock and the Series B, Series C and Series D redeemable convertible preferred stock outstanding at December 31, 2004 will automatically convert into one-half of one share of common stock. Unaudited pro forma redeemable convertible preferred stock and stockholders' equity, as adjusted for the assumed conversion of all Series A convertible preferred stock and Series B, Series C and Series D of redeemable convertible preferred stock, is set forth in the accompanying balance sheets.
Cash and Cash Equivalents
The Company invests its excess cash in bank deposits and money market accounts. The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents.
F-8
Letter of Credit
At December 31, 2004, the Company had an irrevocable letter of credit outstanding with a commercial bank for approximately $200,000, securing its facility lease. The Company has deposited an aggregate of $200,000 of certificates of deposit securing the letter of credit. An equal amount of restricted cash has been separately disclosed in the accompanying balance sheets.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets, generally three to five years, using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the estimated useful lives of the assets or the lease term.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards, or SFAS No. 144, Accounting for the Impairment of Disposable Long-Lived Assets , the Company will record impairment losses on long-lived assets used in operations when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. To date, the Company has not experienced any impairment losses on its long-lived assets used in operations.
Stock-Based Compensation
The Company accounts for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees , Financial Accounting Standards Board, or FASB, Interpretation, or FIN No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25 , and related interpretations and has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Options or stock awards issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services and recognized over the related service period.
The information regarding net loss as required by SFAS No. 123, as amended, has been determined as if the Company had accounted for its employee stock options under the fair-value method. The resulting effect on net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on
F-9
net loss pursuant to SFAS No. 123 in future years, since future years are likely to include additional grants and the irregular impact of future years' vesting.
The following table illustrates the weighted-average assumptions for the Black-Scholes option pricing model used in determining the fair value of options granted to employees:
|
Years Ended December 31,
|
|||||
---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||
Dividend Yield | 0% | 0% | 0% | |||
Risk-free interest rate | 4.5% | 3.0% | 3.7% | |||
Volatility | | | 60% | |||
Expected life | 4 years | 4 years | 5 years |
The Company has used the minimum value method to determine the fair value of options granted prior to its initial filing in a registration statement under the Securities Act of 1933 relating to an initial public offering of the Company's common stock. This method does not consider the expected volatility of the underlying stock, and is only available to non-public entities. Accordingly, the Company has used an estimated volatility factor of 60% for option grants issued during the year ended December 31, 2004 in anticipation to the filing of its registration statement.
In connection with the grant of certain stock options to employees during the year ended December 31, 2004, the Company recorded deferred stock-based compensation within stockholders' equity (deficit) of $3,097,025, which represents the difference between the fair value of the common stock and the option exercise price at the date of grant. Such amount will be amortized over the vesting period of the applicable options on an accelerated basis. The Company recorded stock-based compensation expense of $448,689 for the year ended December 31, 2004. The expected future amortization expense for deferred stock-based compensation for stock options granted through December 31, 2004, is as follows:
Years Ending December 31,
|
|
||
---|---|---|---|
2005 | $ | 1,533,630 | |
2006 | 702,138 | ||
2007 | 327,712 | ||
2008 | 84,856 | ||
|
|||
$ | 2,648,336 | ||
|
F-10
The table below illustrates the effect on net loss and net loss per share attributable to common stockholders had the Company applied the fair value provisions of SFAS No. 123 to employee stock compensation.
|
|
|
|
Period from
May 13, 1999 (inception) through December 31, 2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
Net loss attributable to common stockholders, as reported | $ | (10,159,097 | ) | $ | (13,149,103 | ) | $ | (17,180,976 | ) | $ | (52,884,929 | ) | |
Add: Stock-based employee compensation expense included in net loss | | | 448,689 | 448,689 | |||||||||
Deduct: Stock-based employee compensation expense determined under fair-value method | (28,332 | ) | (43,419 | ) | (609,685 | ) | (702,082 | ) | |||||
|
|
|
|
||||||||||
Pro forma net loss attributable to common stockholders | $ | (10,187,429 | ) | $ | (13,192,522 | ) | $ | (17,341,972 | ) | $ | (53,138,322 | ) | |
|
|
|
|
||||||||||
Basic and diluted net loss per share attributable to common stockholders | $ | (4.96 | ) | $ | (6.06 | ) | $ | (7.51 | ) | ||||
|
|
|
|||||||||||
Pro forma basic and diluted net loss per share attributable to common stockholders | $ | (4.98 | ) | $ | (6.08 | ) | $ | (7.59 | ) | ||||
|
|
|
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities, are carried at cost, which management believes approximates fair value given their short-term nature.
Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income , requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. Comprehensive loss was not different than net loss for the period from May 13, 1999 (inception) through December 31, 2004.
F-11
Deferred Rent
Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense accrued and amounts paid under the lease agreement is recorded as deferred rent in the accompanying balance sheets.
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes , a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123R, which replaces SFAS No. 123, and supercedes APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning in the first period restated. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a material impact on the Company's results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.
2. Net Loss Per Common Share
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, redeemable convertible preferred stock, convertible preferred stock, stock options and the outstanding warrant are considered
F-12
to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
The calculation of unaudited pro forma basic and diluted net loss per share attributable to common stockholders assumes the conversion of all shares of Series A convertible preferred stock, Series B, Series C and Series D redeemable convertible preferred stock into shares of common stock using the as-if-converted method, as if such conversion had occurred as of January 1, 2004, or the original issuance date, if later. The calculation of pro forma net loss per share attributable to common stockholders excludes incremental common stock issuable upon exercise of options and the warrant, as their effect would be antidilutive.
|
Years Ended December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||||||
Historical | ||||||||||
Numerator: | ||||||||||
Net loss | $ | (7,708,029 | ) | $ | (9,914,591 | ) | $ | (13,946,464 | ) | |
Accretion to redemption value of Series B and Series C redeemable convertible preferred stock | (2,451,068 | ) | (3,234,512 | ) | (3,234,512 | ) | ||||
|
|
|
||||||||
Net loss attributable to common stockholders | $ | (10,159,097 | ) | $ | (13,149,103 | ) | $ | (17,180,976 | ) | |
|
|
|
||||||||
Denominator: | ||||||||||
Denominator for basic and diluted net loss per share attributable to common stockholders | 2,046,208 | 2,169,922 | 2,286,320 | |||||||
|
|
|
||||||||
Basic and diluted net loss per share attributable to common stockholders | $ | (4.96 | ) | $ | (6.06 | ) | $ | (7.51 | ) | |
|
|
|
||||||||
Pro forma | ||||||||||
Pro forma net loss (unaudited) | $ | (13,946,464 | ) | |||||||
|
||||||||||
Pro forma basic and diluted net loss per share (unaudited) | $ | (0.88 | ) | |||||||
|
||||||||||
Shares used above |
|
|
|
|
|
|
|
|
2,286,320 |
|
Pro forma adjustments to reflect assumed weighted-average effect of conversion of preferred stock (unaudited) | 13,558,919 | |||||||||
|
||||||||||
Pro forma shares used to compute basic and diluted net loss per share (unaudited) | 15,845,239 | |||||||||
|
F-13
Historical outstanding anti-dilutive securities not included in diluted net loss per share attributable to common stockholders calculation:
|
Years Ended December 31,
|
|||||
---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||
Redeemable convertible preferred stock | 24,094,984 | 24,094,984 | 32,450,870 | |||
Convertible preferred stock | 3,000,000 | 3,000,000 | 3,000,000 | |||
Series D redeemable convertible preferred stock warrant | | | 87,458 | |||
Options to purchase common stock | 1,451,797 | 2,039,337 | 3,353,133 | |||
|
|
|
||||
28,546,781 | 29,134,321 | 38,891,461 | ||||
|
|
|
3. Property and Equipment
Property and equipment consist of the following:
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2003
|
2004
|
|||||
Furniture and fixtures | $ | 121,227 | $ | 350,300 | |||
Computer equipment | 433,353 | 459,851 | |||||
Machinery and equipment | 672,645 | 1,233,079 | |||||
Leasehold improvements | 315,842 | 652,459 | |||||
|
|
||||||
1,543,067 | 2,695,689 | ||||||
Accumulated depreciation and amortization | (931,988 | ) | (843,797 | ) | |||
|
|
||||||
Property and equipment, net | $ | 611,079 | $ | 1,851,892 | |||
|
|
Depreciation expense for the years ended December 31, 2002, 2003 and 2004 and for the period from May 13, 1999 (inception) through December 31, 2004 was $388,686, $353,550, $486,805 and $1,462,152, respectively.
F-14
4. Commitments and contingencies
Leases
The Company leases its primary facilities under a seven-year operating lease agreement that expires on January 13, 2011. Future minimum lease payments related to the newly executed lease commitment are as follows:
Year Ending December 31,
|
|
|||
---|---|---|---|---|
2005 | $ | 338,169 | ||
2006 | 345,485 | |||
2007 | 357,573 | |||
2008 | 368,660 | |||
2009 | 379,748 | |||
Thereafter | 390,835 | |||
|
||||
Total | $ | 2,180,470 | ||
|
Rent expense for the years ended December 31, 2002, 2003 and 2004 and for the period from May 13, 1999 (inception) through December 31, 2004 was $174,586, $165,451, $503,006 and $1,170,466, respectively.
5. License Agreement
In August 2001, the Company acquired the exclusive right to manufacture and sell products using the SM Technologies, LLC intellectual property in the field of diabetes. The Company is required to make minimum advanced royalty payments as noted in the table below. In addition, the Company shall pay a royalty of $12.00 per unit (subject to an annual 3% increase after product commercialization), per licensed product sold by the Company. The intellectual property is currently used in the Company's long-term sensor. The license expires concurrent with the last patent to expire.
Future minimum advanced royalties are as follows:
Year Ending December 31,
|
|
|||
---|---|---|---|---|
2005 | $ | 116,000 | ||
2006 | 116,000 | |||
2007 | 116,000 | |||
2008 | 116,000 | |||
2009 | 116,000 | |||
Thereafter | 812,000 | |||
|
||||
Total | $ | 1,392,000 | ||
|
6. Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
In December 2004, the Company issued 8,355,886 shares of Series D redeemable convertible preferred stock at a price of $2.69 per share for net cash proceeds of $21,355,894.
F-15
In December 2004, in connection with the issuance of the Series D redeemable convertible preferred stock, the Company issued a warrant to Piper Jaffray & Co. to purchase 87,458 shares of Series D redeemable convertible preferred stock at an exercise price of $2.69 per share. The warrant is exercisable for a period of 10 years.
The authorized, issued and outstanding shares of convertible preferred stock and redeemable convertible preferred stock by series are as follows:
|
December 31, 2003
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Shares
Authorized |
Shares
Issued and Outstanding |
Carrying Amount
|
Aggregate
Liquidation Preference |
||||||
Series A Convertible Preferred Stock | 3,000,000 | 3,000,000 | $ | 3,000,000 | $ | 3,000,000 | ||||
Series B Redeemable Convertible Preferred Stock | 12,000,000 | 11,304,114 | 19,726,069 | 19,775,269 | ||||||
Series C Redeemable Convertible Preferred Stock | 13,043,478 | 12,790,870 | 32,657,865 | 32,748,598 | ||||||
|
|
|
|
|||||||
28,043,478 | 27,094,984 | $ | 55,383,934 | $ | 55,523,867 | |||||
|
|
|
|
|||||||
|
|
December 31, 2004 |
||||||||
|
Shares
Authorized |
Shares
Issues and Outstanding |
Carrying Amount
|
Aggregate
Liquidation Preference |
||||||
Series A Convertible Preferred Stock | 3,000,000 | 3,000,000 | $ | 3,000,000 | $ | 3,000,000 | ||||
Series B Redeemable Convertible Preferred Stock | 11,304,114 | 11,304,114 | 20,878,086 | 20,914,724 | ||||||
Series C Redeemable Convertible Preferred Stock | 13,043,478 | 12,790,870 | 34,740,360 | 34,807,928 | ||||||
Series D Redeemable Convertible Preferred Stock | 8,700,000 | 8,355,886 | 21,355,894 | 22,499,894 | ||||||
|
|
|
|
|||||||
36,047,592 | 35,450,870 | $ | 79,974,340 | $ | 81,222,546 | |||||
|
|
|
|
The holders of Series B, Series C and Series D preferred stock are entitled to receive non-cumulative dividends at a rate of 7% per annum when, as and if declared by the Board of Directors. Subject to the rights of the holders of Series B, Series C and Series D preferred stock, the holders of Series A preferred stock are entitled to receive annual non-cumulative dividends of $0.075 per share, when, as and if declared by the Board of Directors. As of December 31, 2004, no dividends had been declared. The holders of Series B, Series C and Series D preferred stock shall participate, pro rata, on an as-converted to common stock basis, in any distribution made with respect to any class or series of stock having any preference or priority inferior to or parity with any preference or priority of the Series B, Series C and Series D preferred stock.
F-16
The Series A, Series B, Series C and Series D preferred stock is convertible, at the option of the holder, at anytime after the date of issuance, into shares of common stock at initial conversion prices of $2.00, $2.88, $4.60 and $5.38 per share, respectively, subject to adjustment. The Series A, Series B, Series C and Series D preferred stock will automatically convert into shares of common stock at the then effective conversion price upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 with aggregate proceeds of at least $25,000,000 and a price to the public not less than $8.30 per share. The Series A and Series B preferred stock will automatically convert into shares of common stock at the then effective conversion price upon the date specified by written consent or agreement of the holders of at least a majority of the voting power of the then outstanding shares of Series A and Series B preferred stock, voting together as a single class. The Series C and Series D preferred stock will automatically convert into shares of common stock at the then effective conversion price upon the dates specified by written consent or agreement of the holders of at least a majority of the voting power of the then outstanding shares of Series C and Series D preferred stock, voting as a single class. The Series C preferred stock will automatically convert into shares of common stock at the then effective conversion price upon the date specified by written consent or agreement of the holders of at least a majority of the then holders of Series C preferred stock, voting as a separate class. The Series D preferred stock will automatically convert into shares of common stock at the then effective conversion price upon the date specified by written consent or agreement of the holders of at least a majority of the then holders of Series D preferred stock, voting as a separate class.
At any time after December 1, 2007, the Series B, Series C and Series D stockholders may elect to have the Company redeem all outstanding shares of Series B, Series C and Series D preferred stock. The corporation must effect the redemptions by paying the holders of Series B, Series C and Series D preferred stock, in cash, a sum per share equal to the Series B liquidation amount, Series C liquidation amount and Series D liquidation amount.
In the event of any liquidation, dissolution or winding up of the Company, the Series D preferred stock shall be the first entitled to be paid out of the assets of the Company in an amount equal to their liquidation value of $2.69 per share plus all accrued and unpaid dividends. Next in preference, the holders of Series C preferred stock are entitled to receive $2.30 per share plus (i) $0.42 per share and (ii) all accrued and unpaid dividends. Next in preference, the holders of Series B preferred stock are entitled to receive $1.44 per share plus (i) $0.41 per share and (ii) all accrued and unpaid dividends. After payments to the holders of Series D, Series C and Series B preferred stock, the holders of Series A preferred stock are entitled to receive $1.00 per share plus all accrued and unpaid dividends. If upon the occurrence of such event, the assets and funds distributed among the holders of preferred stock are insufficient to permit full payment, the entire assets and funds of the Company would be distributed among the preferred shareholders in proportion to the product of the liquidation preference of each such share and the number of such shares owned by each such holder. After the full payment of the liquidation value of Series A, Series B, Series C and Series D preferred stock, the remaining assets of the Company will be available for distribution on a pro rata basis among the holders of common stock and preferred stock based on the number of shares of common stock such holders would be entitled to receive if they converted their preferred stock into common at such time.
F-17
In December 2004 the Company's Certificate of Incorporation was amended in connection with the issuance of the Series D redeemable convertible preferred stock. The amended Certificate of Incorporation modified the dividend provisions of the Series B and Series C redeemable convertible preferred stock. Prior to the amendment, the holders of the Series B and Series C redeemable convertible preferred stock were entitled to receive cumulative dividends at a rate of 7% per annum (i) when, as and if declared by the Board of Directors and (ii) upon a liquidation, redemption or otherwise conversion of the Series B redeemable convertible preferred stock. For the years ended December 31, 2002, 2003 and 2004 and the period from May 13, 1999 (inception) through December 31, 2004 the Company accrued dividends of $2,409,712, $3,198,785, $3,198,785 and $10,025,727, in connection with the dividend provisions.
1999 Stock Plan
In 1999, the Company adopted the 1999 Incentive Stock Plan, or the Plan, as amended and reserved 5,037,761 shares of common stock for grants under the Plan. The Plan provides for the grant of incentive and nonstatutory stock options, stock bonuses and rights to purchase stock to employees, directors or consultants of the Company. The Plan provides that incentive stock options will be granted at no less than fair value of the Company's common stock and nonstatutory stock options will be granted at no less than 85% of the fair market value of the common stock, as determined by the Board of Directors at the date of the grant. Options generally vest 25% one year from date of grant and ratably each month thereafter for a combined total period of 48 months and expire up to ten years from date of grant.
F-18
A summary of the Company's stock option activity, and related information for the period from May 13, 1999 (inception) through December 31, 2004 follows:
|
Options Outstanding
and Exercisable |
|||||
---|---|---|---|---|---|---|
|
Number of Shares
|
Weighted-Average
Exercise Price |
||||
Outstanding at May 13, 1999 (inception) | | $ | | |||
Granted | 383,250 | $ | 0.20 | |||
Cancelled | (2,500 | ) | $ | 0.20 | ||
|
||||||
Outstanding at December 31, 1999 | 380,750 | $ | 0.20 | |||
Granted | 307,000 | $ | 0.24 | |||
Exercised | (35,937 | ) | $ | 0.20 | ||
|
||||||
Outstanding at December 31, 2000 | 651,813 | $ | 0.22 | |||
Granted | 246,500 | $ | 0.30 | |||
Exercised | (120,574 | ) | $ | 0.20 | ||
Cancelled | (65,833 | ) | $ | 0.20 | ||
|
||||||
Outstanding at December 31, 2001 | 711,906 | $ | 0.24 | |||
Granted | 853,751 | $ | 0.30 | |||
Exercised | (88,860 | ) | $ | 0.26 | ||
Cancelled | (25,000 | ) | $ | 0.30 | ||
|
||||||
Outstanding at December 31, 2002 | 1,451,797 | $ | 0.28 | |||
Granted | 958,670 | $ | 0.50 | |||
Exercised | (158,716 | ) | $ | 0.22 | ||
Cancelled | (212,414 | ) | $ | 0.26 | ||
|
||||||
Outstanding at December 31, 2003 | 2,039,337 | $ | 0.28 | |||
Granted | 1,504,254 | $ | 1.56 | |||
Exercised | (79,212 | ) | $ | 0.30 | ||
Cancelled | (111,246 | ) | $ | 0.44 | ||
|
||||||
Outstanding at December 31, 2004 | 3,353,133 | $ | 0.92 | |||
|
F-19
The following table summarizes information about stock options outstanding at December 31, 2004:
Options Outstanding
|
Options Vested
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Price
|
Number
Outstanding |
Weighted
Average Remaining Contractual Life |
Weighted
Average Exercise Price |
Number
Vested |
Weighted
Average Exercise Price |
|||||||
$0.20 | 81,250 | 4.8 | $ | 0.20 | 81,250 | $ | 0.20 | |||||
$0.30 | 894,667 | 6.9 | $ | 0.30 | 628,460 | $ | 0.30 | |||||
$0.50 | 1,533,532 | 8.7 | $ | 0.50 | 439,930 | $ | 0.50 | |||||
$2.40 | 843,684 | 10.0 | $ | 2.40 | | | ||||||
|
|
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3,353,133 | 1,149,640 | |||||||||||
|
|
Deferred Stock-Based Compensation
No employee stock compensation expense was reflected in the Company's reported net loss in any period prior to 2004, as all options granted had an exercise price equal to the estimated fair value of the underlying common stock on the date of grant. During 2004, stock options were granted with exercise prices that were equal to the estimated fair value of the common stock at the date of grant as determined by the Board of Directors. Subsequent to the commencement of the initial public offering process, the Company determined that certain of the stock options granted during 2004 were granted at exercise prices that were below the reassessed fair value of the common stock on the date of grant. With respect to these options granted, the Company has recorded deferred stock-based compensation of $3,097,025 during the year ended December 31, 2004. Deferred stock-based compensation is recognized and amortized on an accelerated basis in accordance with FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans , over the vesting period of the related awards, which is generally four years.
Reserved Shares
The Company has reserved shares of common stock for future issuance as follows:
|
December 31,
|
||||
---|---|---|---|---|---|
|
2003
|
2004
|
|||
Conversion of Series A convertible preferred stock | 1,499,999 | 1,499,999 | |||
Conversion of Series B redeemable convertible preferred stock | 5,652,050 | 5,652,050 | |||
Conversion of Series C redeemable convertible preferred stock | 6,395,423 | 6,395,423 | |||
Conversion of Series D redeemable convertible preferred stock | | 4,177,929 | |||
Series D redeemable convertible preferred stock warrant | | 43,729 | |||
Stock options under the Company's plans: | |||||
Granted and outstanding | 2,039,337 | 3,353,133 | |||
Reserved for future grant | 119,338 | 1,201,329 | |||
|
|
||||
15,706,147 | 22,323,592 | ||||
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|
F-20
7. Income Taxes
At December 31, 2004, the Company has federal and state tax net operating loss carryforwards of approximately $41.4 million and $40.0 million, respectively. The federal and state tax loss carryforwards will expire in 2019 and 2007, respectively, unless previously utilized. The Company also has federal and state research and development tax credit carryforwards of approximately $852,000 and $842,000, respectively. The federal research and development tax credit will begin to expire in 2019, unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% has occurred within a three-year period.
Significant components of the Company's deferred tax assets as of December 31, 2004 are shown below. A valuation allowance of approximately $18,453,000 has been established as of December 31, 2004 to offset the deferred tax assets, as realization of such assets is uncertain.
|
December 31,
|
|||||||
---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 11,358,000 | $ | 16,801,000 | ||||
Research and development credit carryforwards | 1,121,000 | 1,399,000 | ||||||
Other, net | 189,000 | 253,000 | ||||||
|
|
|||||||
Total deferred tax assets | 12,668,000 | 18,453,000 | ||||||
Valuation allowance for deferred tax assets | (12,668,000 | ) | (18,453,000 | ) | ||||
|
|
|||||||
Net deferred taxes | $ | | $ | | ||||
|
|
8. Related Party Transaction
The Company has paid fees for management services totaling $285,563, $0, $0 and $1,743,604 for the years ended December 31, 2002, 2003 and 2004, and for the period from May 13, 1999 (inception) through December 31, 2004 to a venture capital firm, which owns an equity interest in the Company.
9. Employee Benefit Plan
The Company has a defined contribution 401(k) retirement plan, or the 401(k) Plan, covering substantially all employees that meet certain age requirements. Employees may contribute up to 90% of their compensation per year (subject to a maximum limit by federal tax law). Under the 401(k) Plan, the Company may elect to match a discretionary percentage of contributions. No such matching contributions have been made to the 401(k) Plan since its inception.
F-21
10. Recent Events
Changes in capitalization
On March 11, 2005, the Company's Board of Directors adopted a stockholder rights plan, which will be effective upon the consummation of the initial public offering contemplated by this prospectus.
On March 21, 2005, the Company's Stockholders approved the following:
F-22
4,700,000 Shares
DEXCOM, INC.
Common Stock
PROSPECTUS
Until , 2005, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Piper Jaffray
SG Cowen & Co.
William Blair & Company
First Albany Capital
, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by the Registrant in connection with the sale of the shares of common stock being registered hereby. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the NASDAQ National Market filing fee.
Securities and Exchange Commission registration fee | $ | 8,907 | ||
NASD filing fee | 8,067 | |||
NASDAQ National Market filing fee | 100,000 | |||
Accounting fees and expenses | 500,000 | |||
Legal fees and expenses | 900,000 | |||
Printing and engraving expenses | 200,000 | |||
Blue sky fees and expenses | 10,000 | |||
Transfer agent and registrar fees and expenses | 30,000 | |||
Miscellaneous | 143,026 | |||
|
||||
Total | $ | 1,900,000 | ||
|
ITEM 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's restated certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability:
As permitted by the Delaware General Corporation Law, the Registrant's restated bylaws provide that:
II-1
Prior to the completion of the offering, the Registrant intends to enter into Indemnification Agreements with each of its current directors and officers to provide such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's restated certificate of incorporation and restated bylaws and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Registrant regarding which indemnification is sought. Reference is also made to Section 6 of the Underwriting Agreement, which provides for the indemnification of officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provision in the Registrant's restated certificate of incorporation, restated bylaws and the indemnification agreements entered into or to be entered into between the Registrant and each of its directors and officers may be sufficiently broad to permit indemnification of the Registrant's directors and officers for liabilities arising under the Securities Act.
The Registrant has directors' and officers' liability insurance for securities matters.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document
|
Number
|
|
---|---|---|
Underwriting Agreement | 1.01 | |
Registrant's Restated Certificate of Incorporation | 3.02 | |
Registrant's Restated Bylaws | 3.05 | |
Second Amended and Restated Investors' Rights Agreement dated December 30, 2004 | 4.02 | |
Form of Indemnity Agreement | 10.01 |
ITEM 15. Recent Sales of Unregistered Securities.
1. Since January 1, 2002, we have granted stock options to purchase 3,398,175 shares of our common stock at exercise prices ranging from $0.20 to $10.00 per share per share to our employees, consultants and directors under our 1999 stock option plan. Since January 1, 2002, we have issued and sold an aggregate of 745,098 shares of our common stock to employees and consultants at prices ranging from $0.20 to $0.50 per share pursuant to exercises of options granted under our 1999 stock option plan.
2. In May and June of 2002, we issued and sold an aggregate of 12,790,870 shares of our Series C redeemable convertible preferred stock to 18 venture capital funds and 18 individual investors for an aggregate purchase price of approximately $29,419,001 in cash. These shares of Series C redeemable convertible preferred stock are convertible into 6,395,423 shares of common stock.
II-2
3. In December 2004, we issued and sold an aggregate of 8,355,886 shares of our Series D redeemable convertible preferred stock to 21 venture capital funds and 24 individual investors for an aggregate purchase price of approximately $22,499,894 in cash. These shares of Series D redeemable convertible preferred stock are convertible into 4,177,929 shares of common stock.
4. In December 2004, we issued a warrant to purchase up to 87,458 shares of our Series D redeemable convertible preferred stock at an exercise price of $2.69 per share to Piper Jaffray & Co. Upon completion of this offering, this warrant will be exercisable for 43,729 shares of our common stock at an exercise price of $5.38 per share.
The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Registrant, to information about the Registrant.
ITEM 16. Exhibits and Financial Statement Schedules.
Number
|
Exhibit Title
|
|
---|---|---|
1.01 | ** | Form of Underwriting Agreement. |
3.01 | ** | Registrant's Amended and Restated Certificate of Incorporation. |
3.02 | Certificate of Amendment of Registrant's Amended and Restated Certificate of Incorporation. | |
3.03 | ** | Registrant's Restated Certificate of Incorporation (to be effective immediately after the closing of this offering). |
3.04 | ** | Registrant's Amended and Restated Bylaws. |
3.05 | ** | Registrant's Restated Bylaws (to be effective immediately after the closing of this offering). |
4.01 | Form of Specimen Certificate for Registrant's common stock. | |
4.02 | ** | Second Amended and Restated Investors' Rights Agreement, dated December 30, 2004. |
4.03 | Form of Rights Agreement, between DexCom, Inc. and American Stock Transfer & Trust Company, including the Certificate of Designations of Series A Junior Participating Preferred Stock, Summary of Stock Purchase Rights and Forms of Right Certificate attached thereto as Exhibits A, B and C, respectively (to be effective immediately after the closing of this offering). | |
5.01 | * | Opinion of Fenwick & West LLP regarding legality of the securities being registered. |
10.01 | ** | Form of Indemnity Agreement between Registrant and each of its directors and executive officers. |
10.02 | ** | 1999 Stock Option Plan and related agreements. |
10.03 | 2005 Equity Incentive Plan and forms of stock option agreement and stock option exercise agreements. | |
10.04 | 2005 Employee Stock Purchase Plan and form of subscription agreement. | |
II-3
Financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or the notes thereto.
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to
II-4
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-5
Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on this 24 th day of March, 2005.
DEXCOM, INC. | |||
|
|
By: |
/s/ ANDREW P. RASDAL Andrew P. Rasdal President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Name
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Title
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Date
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---|---|---|---|---|
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Principal Executive Officer: | ||||
/s/ ANDREW P. RASDAL Andrew P. Rasdal |
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President, Chief Executive Officer and Director |
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March 24, 2005 |
Principal Financial Officer and Principal Accounting Officer: |
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/s/ STEVEN J. KEMPER Steven J. Kemper |
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Chief Financial Officer |
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March 24, 2005 |
Additional Directors: |
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|
* DONALD L. LUCAS Donald L. Lucas |
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Chairman of the Board of Directors |
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March 24, 2005 |
* BRENT AHRENS Brent Ahrens |
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Director |
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March 24, 2005 |
* KIM BLICKENSTAFF Kim Blickenstaff |
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Director |
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March 24, 2005 |
* SEAN CARNEY Sean Carney |
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Director |
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March 24, 2005 |
* DONALD A. LUCAS Donald A. Lucas |
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Director |
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March 24, 2005 |
* GLEN D. NELSON Glen D. Nelson, M.D. |
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Director |
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March 24, 2005 |
II-6
* JAY SKYLER Jay Skyler, M.D. |
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Director |
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March 24, 2005 |
*By: |
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/s/ STEVEN J. KEMPER Steven J. Kemper Attorney-in-fact |
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II-7
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DEXCOM, INC.
DexCom, Inc., a Delaware corporation, does hereby certify that the following amendments to the corporation's Amended and Restated Certificate of Incorporation have been duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law, with the approval of such amendments by the corporation's stockholders having been given by written consent without a meeting in accordance with Sections 228 and 242 of the Delaware General Corporation Law:
Section A of Article IV of the Amended and Restated Certificate of Incorporation, relating to Authorization of Shares is amended to include the following paragraph immediately following the first paragraph:
"Effective upon the filing of this Certificate of Amendment, each outstanding share of the Common Stock of the corporation will be combined, changed and reclassified into one-half ( 1 / 2 ) of a share of Common Stock. No fractional shares shall be issued in connection with the foregoing combination; all shares of Common Stock so combined that are held by a stockholder will be aggregated subsequent to the foregoing combination and each fractional share resulting from such aggregation held by a stockholder shall be paid in cash the value of such fractional shares."
IN WITNESS WHEREOF, said corporation has caused this Certificate of Amendment to be signed by its duly authorized officer this day of , 2005 and the foregoing facts stated herein are true and correct.
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DEXCOM, INC. |
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By: |
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Andrew P. Rasdal President and Chief Executive Officer |
[GRAPHIC] | DEXCOM, INC. | [GRAPHIC] | ||
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE |
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COMMON STOCK |
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COMMON STOCK |
THIS CERTIFIES THAT |
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CUSIP 252131 10 7 SEE REVERSE FOR CERTAIN DEFINITIONS |
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IS THE OWNER OF |
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FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK $0.001 PAR VALUE OF |
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DEXCOM, INC. |
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transferable on the books of the Corporation in person or by duly authorized attorney in fact upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. |
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WITNESS the facsimile signatures of its duly authorized officers. |
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Dated: |
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/s/ STEVEN J. KEMPER ASSISTANT SECRETARY |
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[SEAL] |
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/s/ ANDREW P. RASDAL PRESIDENT AND CHIEF EXECUTIVE OFFICER |
COUNTERSIGNED AND REGISTERED: | ||||
AMERICAN STOCK TRANSFER & TRUST COMPANY | ||||
TRANSFER AGENT
AND REGISTRAR |
||||
BY | ||||
AUTHORIZED SIGNATURE |
AMERICAN BANK NOTE COMPANY
711 ARMSTRONG LANE COLUMBIA, TENNESSEE 38401 (931) 388-3003 |
PRODUCTION COORDINATOR: MIKE PETERS: 931-490-1714
PROOF OF MARCH 22, 2005 DEXCOM, INC. TSB 19169 FACE |
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SALES: J. DICKINSON: 773-429-0698 |
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OPERATOR: TERESA |
ETHER 19 / LIVE JOBS / D / DEXCOM / 19169 FACE |
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NEW |
COLORS SELECTED FOR PRINTING: Intaglio prints in SC-3 dark green.
COLOR: This proof was printed from a digital file or artwork on a graphics quality, color laser printer. It is a good representation of the color as it will appear on the final product. However, it is not an exact color rendition, and the final printed product may appear slightly different from the proof due to the difference between the dyes and printing ink.
PLEASE INITIAL THE APPROPRIATE SELECTION FOR THIS PROOF: OK AS IS OK WITH CHANGES MAKE CHANGES AND SEND ANOTHER PROOF
The Corporation shall furnish without charge to each shareholder who so requests a statement of the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM | | as tenants in common | UNIF GIFT MIN ACT | |
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Custodian |
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TEN ENT | | as tenants by the entireties | (Cust) | (Minor) | |||||||
JT TEN | | as joint tenants with right of | under Uniform Gifts to Minors | ||||||||
survivorship and not as tenants | Act |
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in common | (State) | ||||||||||
UNIF TRF MIN ACT | |
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Custodian (until age |
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) | ||||||
(Cust) | |||||||||||
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under Uniform Transfers | ||||||||||
(Minor) | |||||||||||
to Minors Act |
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(State) |
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE |
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(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) |
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Shares | |
of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint | ||
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Attorney | |
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. |
Dated |
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X |
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Signature(s) Guaranteed | X |
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NOTICE: | THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. | |||||
By |
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THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. |
PLEASE INITIAL THE APPROPRIATE SELECTION FOR THIS PROOF: OK AS IS OK WITH CHANGES MAKE CHANGES AND SEND ANOTHER PROOF
Exhibit 4.03
RIGHTS AGREEMENT
BETWEEN
DEXCOM, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY,
AS RIGHTS AGENT
DATED AS OF , 2005
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Page
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Section 1. | Certain Definitions | 1 | ||
Section 2. |
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Appointment of Rights Agent |
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4 |
Section 3. |
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Evidence of Rights Before Distribution Date; Transfer; Legends |
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4 |
Section 4. |
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Evidence of Rights After Distribution Date; Form of Right Certificates; Countersignatures |
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5 |
Section 5. |
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Distribution of Certificates; Registration |
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6 |
Section 6. |
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Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates |
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6 |
Section 7. |
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Exercise of Rights; Purchase Price; Expiration Date of Rights |
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6 |
Section 8. |
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Cancellation and Destruction of Right Certificates |
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8 |
Section 9. |
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Status and Availability of Preferred Shares |
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8 |
Section 10. |
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Preferred Shares Record Date |
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8 |
Section 11. |
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Adjustment of Purchase Price, Number of Shares or Number of Rights |
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9 |
Section 12. |
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Certificate of Adjusted Purchase Price or Number of Shares |
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14 |
Section 13. |
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Consolidation, Merger or Sale or Transfer of Assets or Earning Power |
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14 |
Section 14. |
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Fractional Rights and Fractional Shares |
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15 |
Section 15. |
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Rights of Action |
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16 |
Section 16. |
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Agreement of Right Holders |
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16 |
Section 17. |
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Right Certificate Holder Not Deemed a Stockholder |
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16 |
Section 18. |
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Compensation and Indemnity of the Rights Agent |
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17 |
Section 19. |
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Merger or Consolidation or Change of Name of Rights Agent |
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17 |
Section 20. |
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Rights and Duties of Rights Agent |
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18 |
Section 21. |
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Change of Rights Agent |
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20 |
Section 22. |
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Issuance of New Right Certificates |
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20 |
Section 23. |
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Redemption |
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21 |
Section 24. |
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Exchange |
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21 |
Section 25. |
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Notice of Certain Events |
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22 |
Section 26. |
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Notices |
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23 |
Section 27. |
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Supplements and Amendments |
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23 |
Section 28. |
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Successors |
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24 |
Section 29. |
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Benefits of this Agreement |
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Section 30. |
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Severability |
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Section 31. |
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Governing Law |
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Section 32. |
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Counterparts |
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Section 33. |
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Descriptive Headings |
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Section 34. |
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Entire Agreement |
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Signatures |
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Exhibit A |
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Form of Certificate of Designations of Series A Junior Participating Preferred Stock |
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Exhibit B |
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Summary of Rights to Purchase Preferred Shares |
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Exhibit C |
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Form of Right Certificate |
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This Agreement, dated as of , 2005, between DexCom, Inc., a Delaware corporation (the " Company "), and American Stock Transfer & Trust Company, a New York company, as Rights Agent (the " Rights Agent ").
The Board of Directors of the Company has authorized and declared a dividend of one preferred share purchase right (a " Right ") for each Common Share (as hereinafter defined) of the Company outstanding at the Close of Business (as hereinafter defined) on , 2005 (the " Record Date "), each Right representing the right to purchase one one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding (i) between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined) or (ii) following the Distribution Date and prior to the Redemption Date or Final Expiration Date, pursuant to the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion or exchange of other securities of the Company, which options or securities were outstanding prior to the Distribution Date.
Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated:
(a) " Acquiring Person " shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% (the " Designated Percentage ") or more of the Common Shares of the Company then outstanding, but shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan of the Company or of any Subsidiary of the Company or (iv) any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing,
(i) No Person shall become an Acquiring Person if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an Acquiring Person has become such inadvertently, and such Person as promptly as practicable takes such actions as may be necessary so that such Person would no longer be considered an Acquiring Person.
(ii) No Person shall become an Acquiring Person as the result of an acquisition of Common Shares by the Company that, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person and such Person's Affiliates and Associates to the Designated Percentage or more of the Common Shares of the Company then outstanding; provided , however , that if a Person, together with such Person's Affiliates and Associates, shall become the Beneficial Owner of the Designated Percentage or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and such Person, together with its Affiliates and Associates, shall, after public announcement of such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person."
(iii) St. Paul Venture Capital (" St. Paul ") shall not be deemed an "Acquiring Person" until such time as St. Paul and its Affiliates and Associates shall be the Beneficial Owner of more than 25% of the Common Shares then outstanding or until such time as St. Paul or its Affiliates or Associates shall be required to file a report of beneficial ownership on Schedule 13D reporting holdings in excess of 25% of the Company's Common Shares.
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(iv) Canaan Partners (" Canaan ") shall not be deemed an "Acquiring Person" until such time as Canaan and its Affiliates and Associates shall be the Beneficial Owner of more than 17% of the Common Shares then outstanding or until such time as Canaan or its Affiliates or Associates shall be required to file a report of beneficial ownership on Schedule 13D reporting holdings in excess of 17% of the Company's Common Shares.
(b) " Affiliate " and " Associate " shall have the following meanings:
(i) An " Affiliate " of, or a Person " affiliated " with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. For this purpose, " control " (including the terms " controlling ," " controlled by " and " under common control with ") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise;
(ii) The term " Associate " used to indicate a relationship with any Person shall mean (A) any corporation or organization (other than the Company or a majority-owned subsidiary of the Company) of which such Person is an officer or partner or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of equity securities, (B) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (C) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Company or of any of its parents or Subsidiaries.
(c) A Person shall be deemed the " Beneficial Owner " of and shall be deemed to " beneficially own " any securities:
(i) that such Person owns, directly or indirectly;
(ii) that such Person has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), written or otherwise, or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided , however , that a Person shall not be deemed to be the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided , however , that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or
(iii) that are beneficially owned, directly or indirectly, by any other Person with which such Person has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), written or otherwise, for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of any securities of the Company.
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Notwithstanding anything in this definition of Beneficial Ownership to the contrary, (A) the phrase " then outstanding ," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding that such Person would be deemed to own beneficially hereunder, and (B) a Person who is a director or officer of the Company or who is an Affiliate or Associate of a director or officer of the Company (each, an " Exempted Person ") shall not be deemed to "beneficially own" Common Shares held by another Exempted Person solely by reason of any agreement, arrangement or understanding, written or otherwise, entered into in opposition to a transaction that, at the time such agreement, arrangement or understanding was entered into, has not been approved or recommended by the Board of Directors to the stockholders of the Company.
(d) " Business Day " shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of California are not open for business.
(e) " Close of Business " on any given date shall mean 5:00 p.m., California Time, on such date; provided , however , that if such date is not a Business Day it shall mean 5:00 p.m., California Time, on the next succeeding Business Day.
(f) " Common Shares " when used with reference to the Company shall mean the shares of common stock, par value $0.001 per share, of the Company. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, of the Person or Persons that ultimately control such first-mentioned Person.
(g) " Designated Percentage " shall have the meaning set forth in Section 1(a) hereof.
(h) " Distribution Date " shall mean the earlier of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth Business Day (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any Person becomes an Acquiring Person) after the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) to commence a tender or exchange offer the consummation of which would result in any such Person becoming an Acquiring Person (including any such date that is after the date of this Agreement and prior to the issuance of the Rights).
(i) " Exchange Act " shall mean the Securities Exchange Act of 1934, as amended.
(j) " Final Expiration Date " shall have the meaning set forth in Section 7(a) hereof.
(k) " Person " shall mean any individual, firm, corporation, partnership, limited partnership, business trust, limited liability company, unincorporated association or any other entity, and shall include any successor (by merger or otherwise) of such entity.
(l) " Purchase Price " shall have the meaning set forth in Section 7(b) hereof.
(m) " Preferred Shares " shall mean shares of Series A Junior Participating Preferred Stock, par value $0.001 per share, of the Company having the rights and preferences set forth in the Certificate of Designations attached to this Agreement as Exhibit A .
(n) " Redemption Date " shall have the meaning set forth in Section 7(a) hereof.
(o) " Rights " shall have the meaning set forth in the second paragraph of this Agreement, provided , however , that none of the following shall be deemed "Rights" or "outstanding Rights" for any purpose under this Agreement from and after the effective time of the event indicated: (i) Rights that have become Void Rights pursuant to Section 7(f) hereof, and upon such
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occurrence, all Right Certificates therefor shall be null and void and shall not be deemed "outstanding Right Certificates"; (ii) all rights that have been redeemed pursuant to Section 23 hereof, and upon such occurrence, all Right Certificates therefor shall represent only the right to receive the consideration provided in Section 23 hereof and shall not be deemed "outstanding Right Certificates", and (iii) any Rights that have been exchanged pursuant to Section 24 hereof, and upon such occurrence, all Right Certificates therefor shall represent only the right to receive the consideration provided in Section 24 and shall not be deemed "outstanding Right Certificates".
(p) " Shares Acquisition Date " shall mean the earlier of the date of (i) the public announcement by the Company or an Acquiring Person that an Acquiring Person has become such or (ii) the public disclosure of facts by the Company or an Acquiring Person indicating that an Acquiring Person has become such.
(q) " Subsidiary " of any Person shall mean any Person of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person.
(r) A " Successor " shall mean the estate or legal representative of a deceased individual, the beneficiary of a deceased individual's estate, a trust created by a deceased individual as grantor, or the beneficiary of a trust created by a deceased individual as grantor.
(s) " Void Rights " shall have the meaning set forth in Section 7(f).
Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable upon ten days' prior written notice to the Rights Agent. The Rights Agent shall have no duty to supervise, and shall in no event be liable for, the acts or omissions of any such co-Rights Agent.
Section 3. Evidence of Rights Before Distribution Date; Transfer; Legends.
(a) From the Record Date until the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date, (x) Rights will be evidenced by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Right Certificates) and not by separate Right Certificates (as defined below), and (y) Rights will be transferable only in connection with the transfer of Common Shares. On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Stock Purchase Rights, in substantially the form of Exhibit B hereto (the " Summary of Rights "), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company. Until the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date, the surrender for transfer of any certificate for Common Shares outstanding on the Record Date, with or without a copy of the Summary of Rights attached thereto, shall also constitute the surrender for transfer of the Rights associated with the Common Shares represented thereby.
(b) Certificates for Common Shares that become outstanding (including, without limitation, reacquired Common Shares referred to in the last sentence of this Section 3(b)) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend:
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN RIGHTS (THE " RIGHTS ") AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN DEXCOM, INC. (THE " COMPANY ") AND AMERICAN STOCK TRANSFER & TRUST COMPANY, AS RIGHTS AGENT, DATED AS OF , 2005, AS SUCH
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MAY SUBSEQUENTLY BE AMENDED (THE " RIGHTS AGREEMENT "), THE TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE COMPANY WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR. AS DESCRIBED IN SECTION 7(F) OF THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED BY ANY PERSON WHO BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN OTHER PERSONS SHALL BECOME NULL AND VOID.
In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares that are no longer outstanding.
Section 4. Evidence of Rights After Distribution Date; Form of Right Certificates; Countersignatures.
(a) From and after the Distribution Date until the earlier of the Redemption Date or the Final Expiration Date, Rights will be evidenced solely by Right Certificates that, together with the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof, shall be substantially in the form set forth as Exhibit C hereto (each, a " Right Certificate "), which may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and which do not affect the rights, duties or responsibilities of the Rights Agent and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the other provisions of this Agreement, the Right Certificates shall entitle the holders thereof to purchase such number of one one-hundredths of a Preferred Share as shall be set forth therein at the Purchase Price, but the number of such one one-hundredths of a Preferred Share and the Purchase Price shall be subject to adjustment as provided herein.
(b) The Right Certificates shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, any of its Vice Presidents, or its Treasurer, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or any Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent (unless applicable exchange rules and law permit facsimile signature, in which case the Rights Agent signature may be by facsimile) and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the individual who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any individual who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such individual was not such an officer.
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Section 5. Distribution of Certificates; Registration.
(a) As soon as practicable after the Distribution Date (and so long as the Redemption Date and the Final Expiration Date shall not have occurred), the Company will prepare and execute, the Rights Agent will countersign and the Company will send or cause to be sent (and the Rights Agent will, if requested and provided with all necessary information, send) by first-class, insured, postage-prepaid mail to each record holder of Common Shares as of the Close of Business on the Distribution Date (other than the holder of Void Rights (as defined in Section 7(f) hereof), at the address of such holder shown on the records of the Company, Rights Certificates evidencing one Right for each Common Share so held.
(b) Following the Distribution Date and receipt by the Rights agent of all relevant information, the Rights Agent will keep or cause to be kept, at its office, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Section 14 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Void Rights or Rights that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a Preferred Share as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent. Thereupon the Company shall execute and the Rights Agent shall countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient for all taxes and governmental charges that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. The Rights Agent shall have no duty or obligation under this Section 6 unless and until it is satisfied that all such taxes and/or charges have been paid.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and, (i) in case of loss, theft or destruction, of indemnity or security satisfactory to them, or (ii) in the case of mutilation, upon surrender to the Rights Agent and cancellation of the Right Certificate, then, in either such case, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date; Void Rights.
(a) The registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent, together with payment of the Purchase Price for each one one-hundredth of a Preferred Share as to which the
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Rights are exercised and payment of all transfer taxes and governmental charges required to be paid by the holder of such Right Certificate as provided in Section 9 hereof, at or prior to the earliest of (i) the Close of Business on , 2015 (the " Final Expiration Date "), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the " Redemption Date "), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof.
(b) The purchase price for each one one-hundredth of a Preferred Share pursuant to the exercise of a Right (the " Purchase Price ") shall initially be $150.00, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with Section 7(c) hereof.
(c) Upon receipt of a Right Certificate representing exercisable Rights within the time permitted in Section 7(a), with the form of election to purchase and certificate duly executed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to all applicable taxes and governmental charges required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall promptly (i)(A) requisition from any transfer agent of the Preferred Shares certificates for the number of one-one hundredths of a Preferred Share to be purchased, and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) requisition from any depositary agent for the Preferred Shares depositary receipts representing such number of one one-hundredths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent), and the Company hereby directs the depositary agent to comply with all such requests, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional Preferred Shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, deliver such cash to or upon the order of the registered holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to such holder's duly authorized assigns, subject to the provisions of Section 6 and Section 14 hereof.
(e) The Company covenants and agrees that it will cause to be reserved and kept available, out of its authorized and unissued Preferred Shares or any Preferred Shares held in its treasury, the number of Preferred Shares that will be sufficient to permit the exercise in full of all Rights in accordance with this Section 7.
(f) From and after the time that any Person becomes an Acquiring Person, (i) all Rights that are or were acquired or beneficially owned by such Acquiring Person (and all Rights that are or were acquired or beneficially owned by each Associate and by each Affiliate of such Acquiring Person) shall be null and void without any further action on the part of the Company, the Rights Agent or any other Person (all such Rights, " Void Rights ") and (ii) any holder thereof shall thereafter have no right to exercise such Void Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Sections 5 or 6 that represents Rights beneficially owned by an Acquiring Person whose Rights have become Void Rights pursuant to the preceding sentence or by any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights have become Void Rights pursuant to the preceding sentence or to any Associate or Affiliate thereof or to any nominee of
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such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights have become Void Rights pursuant to the preceding sentence or for transfer to any Associate or Affiliate thereof shall be cancelled. This Section 7(f) shall apply not only to an initial Acquiring Person, and each of its Affiliates and Associates, but also to all subsequent Acquiring Persons, and each of their Affiliates and Associates.
(g) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) properly completed and signed the certificate following the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company or the Rights agent shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Right Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Status and Availability of Preferred Shares. The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares delivered upon valid exercise of Rights in compliance with Section 7 shall, at the time of delivery of the certificates for such Preferred Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and non-assessable shares.
The Company further covenants and agrees that it will pay when due and payable any and all taxes and governmental charges that may be payable in respect of the issuance or delivery of the Right Certificates or of any Preferred Shares upon the exercise of Rights. The Company shall not, however, be required (i) to pay any tax or governmental charge that may be payable in respect of any transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or (ii) to deliver any certificates or depositary receipts for Preferred Shares upon the exercise of any Rights until all such taxes and governmental charges shall have been paid (all such taxes and governmental charges being payable by the holder of such Right Certificate at the time of surrender for exercise) or until it has been established to the Company's reasonable satisfaction that no such tax or governmental charge is due.
Section 10. Preferred Shares Record Date. Each Person in whose name any certificate for Preferred Shares is issued upon the valid exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable taxes and governmental charges) was made. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a holder of Preferred Shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive
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rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights. The Purchase Price, the number of Preferred Shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11, provided , however , that no adjustment, payment or distribution of securities or other change in the Rights or securities issuable upon exercise of any Rights as provided in this Section 11 shall apply to any Void Rights.
(a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such dividend, subdivision, combination or reclassification, and the number and kind of shares of capital stock that would be issuable upon exercise of a Right on such date (if such Rights were then exercisable), shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock that, if such Right had been exercised immediately prior to such date, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided , however , that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of the class or series of capital stock of the Company issuable upon exercise of one Right.
(ii) Subject to Section 7(f) and Section 24 of this Agreement, in the event that any Person shall become an Acquiring Person, unless the event causing the Designated Percentage threshold to be crossed and the Person to thereby become an Acquiring Person is a transaction set forth in Section 13 hereof, each holder of a Right shall thereafter have a right to receive, upon exercise of such Right at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the Company's Common Shares (determined pursuant to Section 11(d) hereof) on the date such Person became an Acquiring Person.
(iii) In the event that the number of Common Shares that are authorized by the Company's certificate of incorporation and not outstanding or subscribed for, or reserved or otherwise committed for issuance for purposes other than upon exercise of the Rights, is not sufficient to permit the holder of each Right to purchase the number of Common Shares to which such holder would be entitled upon the exercise in full of the Rights in accordance with Section 11(a)(ii), the Company shall: (A) determine the excess of (1) the value of the Common Shares issuable upon the exercise of a Right (calculated as provided in the last sentence of this Section 11(a)(iii)) pursuant to Section 11(a)(ii) hereof (the " Current Value ") over (2) the Purchase Price (such excess, the " Spread "), and (B) with respect to each Right, make adequate provision to substitute for such Common Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or other equity securities of the Company (including, without limitation, shares of the Company's Preferred Stock, or units of shares of the Company's capital stock) that the Board of Directors of the Company has determined to have the same value as Common Shares (such equity securities, " common stock equivalents ")), (4) debt securities of the
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Company, (5) other assets or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company in good faith; provided , however , if the Company shall not have made adequate provision to deliver value pursuant to clause (B) of this paragraph within thirty (30) days following the first occurrence of an event triggering the rights to purchase Common Shares described in Section 11(a)(ii) (the " Section 11(a)(ii) Trigger Date "), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right without requiring payment of the Purchase Price, Common Shares (to the extent available) and then, if necessary, cash, which shares and cash have an aggregate value equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is likely that sufficient additional Common Shares could be authorized for issuance upon exercise in full of the Rights, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such period, as it may be extended, the " Substitution Period "). To the extent that the Company determines that some action needs to be taken pursuant to the first and/or second sentences of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(g) hereof, that such action shall apply uniformly to all Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall make a public announcement, and shall deliver to the Rights Agent a statement, stating that the exercisability of the Rights has been temporarily suspended. At such time as the suspension is no longer in effect, the Company shall make another public announcement, and deliver to the Rights Agent a statement, so stating. For purposes of this Section 11(a)(iii), the value of the Common Shares shall be the current per share market price (as determined pursuant to Section 11(d)(i) hereof) of the Common Shares on the Section 11(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be deemed to have the same value as the Common Shares on such date.
(b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares (" equivalent preferred shares ")) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares (as defined in Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying (x) the Purchase Price in effect immediately prior to such record date by (y) a fraction, (1) the numerator of which shall be the sum of (A) number of Preferred Shares outstanding on such record date plus (B) the number of Preferred Shares that the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and (2) the denominator of which shall be the sum of (A) number of Preferred Shares outstanding on such record date plus (B) the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided , however , that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the class or series of shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement
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filed with the Rights Agent and shall be conclusive for all purposes. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price that would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying (x) the Purchase Price in effect immediately prior to such record date by (y) a fraction, (1) the numerator of which shall be the difference of (A) then current per share market price of the Preferred Shares on such record date, less (B) the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and (2) the denominator of which shall be such current per share market price of the Preferred Shares; provided , however , that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the class or series of shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price that would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the " current per share market price " of any security (a " Security " for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided , however , that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market (" Nasdaq ") or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. The term " Trading Day " shall mean a day on which the principal national securities exchange on which the Security is
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listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Shares shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be the current per share market price of the Common Shares as determined pursuant to Section 11(d)(i) (appropriately adjusted to reflect each stock split, stock combination, stock dividend or similar transaction occurring after the date hereof), multiplied by one hundred. If neither the Common Shares nor the Preferred Shares are publicly held or so listed or traded, "current per share market price" shall mean the fair value per share thereof as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes.
(e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided , however , that any adjustments that by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-millionth of a Preferred Share or one one-thousandth of any other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than three years from the date of the transaction that, but for such sentence of this Section 11(e), would have required such adjustment.
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, the number of such other shares so receivable upon exercise of any Right shall thereafter be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c), inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one one-hundredths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights in substitution for any adjustment in the number of one one-hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights and
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outstanding thereafter shall become that number of Rights (calculated to the nearest one one-thousandth) obtained by dividing (x) the Purchase Price in effect immediately prior to adjustment of the Purchase Price by (y) the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement (with prompt notice thereof to the Rights Agent) of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been distributed, shall be at least ten days later than the date of the public announcement. If Right Certificates have been distributed, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date, Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates to be so distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-hundredths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-hundredths of a Preferred Share that were expressed in the initial Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-hundredth of the then par value of the Preferred Shares issuable upon exercise of the Rights, the Company shall take any corporate action that may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer (and shall promptly notify the Rights Agent of any such elections), until the occurrence of such event, the issuing to the holder of any Right exercised after such record date, the additional Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided , however , that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any (i) subdivision, combination or consolidation of the Preferred Shares, (ii) issuance wholly for cash of Preferred Shares or securities that by their terms are convertible into or exchangeable for Preferred Shares, (iii) dividends on Preferred Shares payable in Preferred Shares or (iv) issuance of any rights, options or warrants referred to hereinabove in Section 11(b), hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such stockholders.
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(n) In the event that at any time after the date of this Agreement, the Company shall (i) declare or pay any dividend on the Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise other than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case (i) the number of one one-hundredths of a Preferred Share purchasable after such event upon proper exercise of each Right shall be determined by multiplying (x) the number of one one-hundredths of a Preferred Share so purchasable immediately prior to such event by (y) a fraction, (1) the numerator of which is the number of Common Shares outstanding immediately before such event and (2) the denominator of which is the number of Common Shares outstanding immediately after such event, and (ii) each Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights that each Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected.
(o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Sections 23, 24 and 27, take (or permit any Subsidiary to take) any action if the purpose of such action is to, or if at the time such action is taken it is reasonably foreseeable that such action will, diminish substantially or eliminate the benefits intended to be afforded by the Rights.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Sections 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts and computations accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares or the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall have no duty with respect to and shall not be deemed to have knowledge of any adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. In the event that any Person shall become an Acquiring Person, and, directly or indirectly, (a) the Company shall consolidate with, or merge with and into, an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, (b) an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (c) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, then, and in each such case, proper provision shall be made so that (i) each holder of a Right (other than Rights that have become Void Rights) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Person in the transaction (including the Company as successor thereto or as the surviving corporation) who is issuing the consideration with the greatest fair market value to the Company and its stockholders in connection with such transaction (the " Principal Issuer ") as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one-hundredths of a
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Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of the Principal Issuer (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the Principal Issuer shall be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to the Principal Issuer; and (iv) the Principal Issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares thereafter deliverable upon the exercise of the Rights. The Company covenants and agrees that it shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and the Principal Issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements that, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates that evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by Nasdaq or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions that are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates that evidence fractional Preferred Shares (other than fractions that are integral multiples of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided , that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by
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such depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of one one-hundredth of a Preferred Share, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fractions of the current market value of one Preferred Share. For the purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly waives any right to receive fractional Rights or fractional shares upon exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action of the Rights Agent and the Company, are vested in the respective registered holders of the Rights; and any registered holder of any Right may, without the consent of the Rights Agent or of the holder of any other Right, in such holder's own behalf and for such holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such holder's right to exercise the Rights in the manner provided in this Agreement and in any issued and outstanding Right Certificate representing such Right. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are transferable only on the registry books maintained by the Rights Agent if surrendered at the office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer and payment of taxes and governmental changes, all as otherwise provided in Section 6; and
(c) the Company and the Rights Agent shall deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice (other than notice provided by transfer documentation properly completed and tendered in accordance with this Agreement) to the contrary.
(d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its failure to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree, judgment or ruling (whether interlocutory final) issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority prohibiting or otherwise restraining performance of such obligation.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Right shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company that may at any time be issuable on the exercise of such Rights nor shall anything contained herein or in any Right Certificate be construed to confer upon the
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holder of any Rights, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until such Right shall have been properly exercised in accordance with the provisions hereof.
Section 18. Compensation and Indemnity of the Rights Agent. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the preparation, delivery, amendment, administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent (including employees, directors, officers and agents of the Rights Agent (the Rights Agent together with such Persons, the " Agent Indemnitees ")) for, and to hold each Agent Indemnitee harmless against, any loss, liability, damage, judgment, fine, penalty, claim, demand, settlement, cost or expense (each an " Agent Loss "), incurred on the part of such Agent Indemnitee for any action taken, suffered or omitted by any of the Agent Indemnitees in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises, provided, however, that the Company shall not be required to indemnify any Agent Indemnitee hereunder for any Agent Loss that resulted from any action taken, suffered or omitted by the Agent Indemnitee in bad faith or through gross negligence or willful misconduct of the Rights Agent or any other Agent Indemnity, as each is finally determined by a court of competent jurisdiction, and the respective Agent Indemnitee shall promptly refund to the Company all sums advanced to such Agent Indemnitee as or against indemnification for Agent Losses upon such judicial determination. If an Agent Indemnitee brings an action to enforce its right to indemnification under this Section 18, the Company shall pay the costs of such action to the extent that such Agent Indemnitee is a prevailing party in such litigation. Anything to the contrary notwithstanding, in no event shall any Agent Indemnitee be liable for special, punitive, indirect, consequential or incidental loss or damage of any kind whatsoever (including but not limited to lost profits), even if such Agent Indemnitee has been advised of the likelihood of such loss or damage. Any liability of an Agent Indemnitee under this Rights Agreement will be limited to the amount of fees paid by the Company to the Rights Agent. The provisions of this Section 18 and Section 20 below shall survive the termination of this Agreement, the exercise or expiration of the Rights and the resignation or removal of the Rights Agent.
(b) The Rights Agent shall be authorized to rely on, shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with the acceptance and administration of this Agreement or the exercise or performance of its duties hereunder in reliance upon any Right Certificate or certificate for Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, instruction, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any Person into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any Person resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any Person succeeding to the shareholder service business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such Person would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall
17
succeed to the agency created by this Agreement any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.
Section 20. Rights and Duties of Rights Agent. The Rights Agent undertakes only the duties and obligations expressly imposed by this Agreement upon the following terms and conditions, by all of which the Company and, by their acceptance of Rights, the holders of Rights shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitted by it in good faith and in accordance with such advice or opinion.
(b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking, suffering or omitting any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the General Counsel, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization and protection to the Rights Agent and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitting in good faith by it under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own bad faith, gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. The Rights Agent makes no representation or warranty with respect to and is not responsible or liable for the validity, value or availability of the Rights, the Right Certificates or the Preferred Shares.
(d) The Rights Agent shall be protected and shall incur no liability for any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the advice or opinion of counsel as set forth in this Section 20.
(e) The Rights Agent shall not be assumed to have knowledge of and shall not be required to take note of or act upon any fact or circumstance including, without limitation, the occurrence of facts or circumstances leading to the Shares Acquisition Date or the Distribution Date, facts or circumstances relating to whether any Person may be an Affiliate or an Associate of any other Person, facts or circumstances relevant to an adjustment to the Purchase Price, facts or
18
circumstances relevant to events described in Section 13 (mergers, etc.), Section 23 (redemption) and Section 24 (exchange) that may be relevant to performance by the Rights Agent under this Agreement unless the Company has provided written notice thereof to the Rights Agent; and the Company agrees that it will (i) promptly notify the Rights Agent in writing of the occurrence of the Shares Acquisition Date (including the identity of the Acquiring Person and the date on which the Shares Acquisition Date occurred), the Distribution Date, the Redemption Date, and of any events described in Section 13 (merger), and (ii) promptly provide the Rights Agent with such other information as the Rights Agent may reasonably request in connection with the performance of its duties under this Agreement.
(f) The Rights Agent shall not have any liability for or be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due authorization and execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming null and void pursuant to Section 7(f) hereof) or any change or adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after receipt of the certificate described in Section 12 hereof, upon which the Rights Agent may rely); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable.
(g) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement.
(h) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the General Counsel, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent with respect to its duties or obligations under this Rights Agreement and the date on and/or after which such action shall be taken or omitted and the Rights Agent shall not be liable for any action taken, suffered or omitted in accordance with a proposal included in any such application on or after the date specified therein (which date shall not be less than three Business Days after the date any such officer actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking or omitting any such action, the Rights Agent has received written instructions in response to such application specifying the action to be taken or omitted.
(i) The Rights Agent and any stockholder, director, Affiliate, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other Person.
19
(j) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and, with regard to acts performed through its attorneys, the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or for any loss to the Company resulting from any such act, default, neglect or misconduct, absent bad faith, gross negligence or willful misconduct of the Rights Agent (as finally determined by a court of competent jurisdiction) in the selection and continued employment of such attorneys.
(k) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if it reasonably believes that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it.
Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right (who shall, with such notice, submit such holder's Right Certificate or, before the Distribution Date, certificate representing Common Shares, for inspection by the Company), then the registered holder of any Right may apply to any court of the United States or of any state thereof having competent jurisdiction over such matter for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (i) a Person organized and doing business under the laws of the United States or of the State of California (or of any other state of the United States), so long as such Person in good standing, which is authorized under such laws to exercise shareholder service powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million dollars or (ii) an Affiliate of a Person described in clause (i) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares or Preferred Shares, and mail a notice thereof in writing to the registered holders of Rights. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights made in accordance with the provisions of this Agreement. In addition, following the Distribution Date and prior to the Redemption Date or Final
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Expiration Date, in connection with the issuance or sale of Common Shares pursuant to the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion or exchange of other securities of the Company, in each case, which options or securities are outstanding prior to the Distribution Date, the Board of Directors shall issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided , however , that (i) no such Right Certificate shall be issued and this sentence shall be null and void ab initio if, and to the extent that, such issuance or this sentence would create a significant risk of or result in material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued or would create a significant risk of or result in such options' or employee plans' or arrangements' failing to qualify for otherwise available special tax treatment and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option, at any time from and after the Record Date and prior to such time as any Person becomes an Acquiring Person (the " Redemption Period "), redeem all but not less than all the then outstanding Rights at a redemption price of $0.0001 per Right, appropriately adjusted to reflect each stock split, stock combination, stock dividend or similar transaction occurring after the date hereof (such redemption price, as so adjusted, being hereinafter referred to as the " Redemption Price "). After the Redemption Period has expired, the Board of Directors may not extend the period for redemption of the Rights or otherwise provide for their redemption. The redemption of the Rights by the Board of Directors may be made effective at such time during the Redemption Period, on such basis and subject to such conditions as the Board of Directors in its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to Section 23(a), and without any further action and without any notice, the right to exercise all then outstanding Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give notice to the Rights Agent and public notice of any such redemption; provided , however , that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within ten days after such action of the Board of Directors ordering the redemption of the Rights pursuant to Section 23(a), the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice that is mailed in the manner herein provided shall be deemed given upon mailing, whether or not the holder receives the notice. If the payment of the Redemption Price is not included in such notice, each such notice shall state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than (i) as specifically set forth in this Section 23 or in Section 24 hereof, or (ii) in connection with the purchase of Common Shares prior to the Distribution Date.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any time after any Person becomes an Acquiring Person, authorize and direct the exchange of all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become Void Rights) for Common Shares at an exchange ratio (the " Exchange Ratio ") of one Common Share per Right, appropriately adjusted to reflect each stock split, stock combination, stock dividend or similar transaction occurring after the date hereof. Notwithstanding the foregoing, the Board of Directors
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shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of a majority of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant Section 24(a) hereof and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give notice to the Rights Agent and public notice of any such exchange; provided , however , that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice that is mailed in the manner herein provided shall be deemed given when mailed, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights that will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights that have become Void Rights) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its option, may substitute Preferred Shares (or common stock equivalents, as such term is defined in Section 11(a)(iii) hereof) for Common Shares exchangeable for Rights, at the initial rate of one one-hundredth of a Preferred Share (or common stock equivalents) for each Common Share, as appropriately adjusted to reflect adjustments in the voting rights of the Preferred Shares pursuant to the terms thereof, so that the fraction of a Preferred Share delivered in lieu of each Common Share shall have the same voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common Shares, Preferred Shares or common stock equivalents authorized by the Company's certificate of incorporation and not outstanding or subscribed for, or reserved or otherwise committed for issuance for purposes other than upon exercise of Rights, to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares, Preferred Shares or common stock equivalents for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of Common Shares or to distribute certificates that evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Common Shares would otherwise be issuable, an amount in cash equal to the same fraction of the current per share market value of a whole Common Share. For the purposes of this Section 24(e), the current per share market value of a whole Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares
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or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to the Rights Agent and each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least ten days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least ten days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier.
(b) If any event set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows:
DexCom, Inc.
5555 Oberlin Drive
San Diego, California 92121
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows:
American
Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
Attention: Herbert J. Lemmer, Vice President, General Counsel
Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. The Company may, by resolution of its Board of Directors, from time to time, and the Rights Agent shall, if the Company directs, supplement or amend
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this Agreement without the approval of any holders of Rights in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions or changes with respect to the Rights that the Company may deem necessary or desirable, including, without limitation, to modify or amend the definition of Acquiring Person set forth in Section 1(a) hereof, to change the Purchase Price set forth in Section 7(b), or to extend or shorten the period for redemption of the Rights; provided , however , that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner that would adversely affect the interests of the holders of Rights (other than Void Rights of an Acquiring Person and its Affiliates and Associates), including, without limitation, to extend the period for redemption of the Rights, or otherwise provide for their redemption, or to provide for an earlier Final Expiration Date. Any such supplement or amendment will be evidenced by a writing signed by the Company and the Rights Agent. Upon the delivery of a certificate from an appropriate officer of the Company and, if requested by the Rights Agent, an opinion of counsel, that states that the proposed supplement or amendment complies with this Section 27, the Rights Agent shall execute such supplement or amendment, provided , however , the Rights Agent shall not be obligated to enter into any amendment or supplement to this Agreement that in the opinion of the Rights Agent, may adversely affect the rights, duties, liabilities of the Rights Agent.
Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights.
Section 30. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, then such term, provision, covenant or restriction shall be enforced to the maximum extent permissible, and the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
Section 34. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof.
[Signatures on Following Page]
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IN WITNESS WHEREOF, the parties hereto have caused this Rights Agreement to be duly executed and attested, all as of the day and year first above written.
Company: | ||||
DEXCOM, INC. |
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Name: |
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Andrew P. Rasdal |
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Title: |
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President and Chief Executive Officer |
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Rights Agent: |
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AMERICAN STOCK TRANSFER & TRUST COMPANY |
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By: |
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Name: |
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Herbert J. Lemmer |
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Title: |
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Vice President |
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[SIGNATURE PAGE TO RIGHTS AGREEMENT]
25
FORM
of
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
DEXCOM, INC.
(Pursuant
to Section 151 of the
Delaware General Corporation Law)
DexCom, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the " Corporation "), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law at a meeting duly called and held on March 11, 2005:
RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the " Board of Directors " or the " Board ") in accordance with the provisions of the Certificate of Incorporation of the Corporation, the Board of Directors hereby creates a series of Preferred Stock, par value $0.001 per share (the " Preferred Stock "), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be designated as " Series A Junior Participating Preferred Stock " (the " Series A Preferred Stock ") and the number of shares constituting the Series A Preferred Stock shall be 500,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided , that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any other stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a " Quarterly Dividend Payment Date "), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount (if any) per share (rounded to the nearest cent), subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock, par value $0.001 per share (the " Common Stock "), of the Company or a subdivision of the
1
outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying (x) such amount by (y) a fraction, (1) the numerator of which is the number of shares of Common Stock outstanding immediately after such event and (2) the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock).
(C) Dividends due pursuant to paragraph (A) of this Section shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying (x) such number by (y) a fraction, (1) the numerator of which is the number of shares of Common Stock outstanding immediately after such event and (2) the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A
2
Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of Common Stock, the amount of $1.00 per share for each share of Series A Preferred Stock then held by them. Thereafter, the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock plus an amount equal to any accrued and unpaid dividends. In the event the Corporation shall at any time declare or pay any dividend
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on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying (x) such amount by (y) a fraction (1) the numerator of which is the number of shares of Common Stock outstanding immediately after such event and (2) the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) If the assets of the Corporation legally available for distribution to the holders of shares of Series A Preferred Stock upon liquidation, dissolution or winding up of the Corporation are insufficient to pay the full preferential amount set forth in the first sentence of paragraph (A) above, then the entire assets of the Corporation legally available for distribution to the holders of Series A Preferred Stock shall be distributed among such holders in proportion to the shares of Series A Preferred Stock then held by them.
(C) The foregoing rights upon liquidation, dissolution or winding up provided to the holders of Series A Preferred Stock shall be subject to the rights of the holders of any other series of Preferred Stock (or any other stock) ranking prior and superior to the Series A Preferred Stock upon liquidation, dissolution or winding up.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying (x) such amount by (y) a fraction, (1) the numerator of which is the number of shares of Common Stock outstanding immediately after such event and (2) the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable.
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IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation this day of , 2005.
DEXCOM, INC. | ||||
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Andrew P. Rasdal President and Chief Executive Officer |
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[SIGNATURE PAGE TO CERTIFICATE OF DESIGNATIONS]
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SUMMARY OF STOCK PURCHASE RIGHTS
On March 11, 2005, the Board of Directors of DexCom, Inc. (the " Company ") declared a dividend of one stock purchase right (a " Right ") for each outstanding share of common stock, par value $0.001 per share (the " Common Shares "), of the Company. The dividend is payable to stockholders of record on , 2005 (the " Record Date "). In addition, one Right will be issued with each share of Company common stock that becomes outstanding (i) between the Record Date and the earliest of the Distribution Date (as defined below), the date the Rights are redeemed and the date the Rights expire or (ii) following the Distribution Date and prior to the date the Rights are redeemed and the date the Rights expire, pursuant to the exercise of employee stock options or upon the exercise, conversion or exchange of other securities of the Company, outstanding prior to the Distribution Date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock (the " Preferred Shares ") at a price of $150.00 per one one-hundredth of a Preferred Share (the " Purchase Price "), subject to adjustment. A complete description of the terms of the Rights is set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent.
Until the earlier to occur of (i) ten days following a public announcement or disclosure that a person or group of affiliated or associated persons (an " Acquiring Person "), has acquired beneficial ownership of 15% or more of the Company's outstanding common stock or (ii) ten business days (or a later date determined by the Company's Board of Directors before a person or group becomes an Acquiring Person) following the announcement of an intention to make a tender offer or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person (the earlier of such dates being called the " Distribution Date "), the Rights will be represented by common stock certificates with a copy of this Summary of Rights attached. No person or group will become an Acquiring Person if the Company's Board of Directors determines that such person crossed the ownership threshold inadvertently, and such person or group promptly sells shares of Company common stock until they own less than 15% of the outstanding common stock.
However, with respect to St. Paul Venture Capital (" St. Paul "), St. Paul shall not be deemed an "Acquiring Person" until such time as St. Paul and its Affiliates and Associates shall be the Beneficial Owner of more than 25% of the Common Shares then outstanding or until such time as St. Paul or its Affiliates or Associates shall be required to file a report of beneficial ownership on Schedule 13D reporting holdings in excess of 25% of the Company's Common Shares. With respect to Canaan Partners (" Canaan "), Canaan shall not be deemed an "Acquiring Person" until such time as Canaan and its Affiliates and Associates shall be the Beneficial Owner of more than 17% of the Common Shares then outstanding or until such time as Canaan or its Affiliates or Associates shall be required to file a report of beneficial ownership on Schedule 13D reporting holdings in excess of 17% of the Company's Common Shares.
The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred only with Company common stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new common stock certificates issued after the Record Date will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the transfer of any common stock certificates, even without such notation or a copy of this Summary of Rights being attached, will also constitute the transfer of the Rights associated with the Company common stock represented by such certificate. After the Distribution Date, separate certificates representing the Rights will be mailed to record holders of Company common stock on the Distribution Date and such separate certificates alone will evidence the Rights. If shares of Company common stock are issued or sold after the Distribution Date (but prior to the
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redemption or expiration of the Rights) in connection with the exercise of stock options or upon the exercise, conversion or exchange of other securities of the Company outstanding prior to the Distribution Date, the Company shall issue the appropriate number of Rights in connection with such issuance or sale.
The Rights are not exercisable until the Distribution Date. The Rights will expire on , 2015, unless the expiration date is extended or unless the Rights are earlier redeemed or exchanged by the Company, as described below. Until a Right is exercised, the holder of a Right, as such, will have no rights as a stockholder of the Company.
The purchase price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. The number of Rights and the number of one one-hundredths of a Preferred Share issuable upon exercise of each Right are also subject to adjustment upon certain events occurring before the Distribution Date.
The Preferred Shares have been structured so that each Preferred Share has dividend, liquidation and voting rights equal to those of 100 shares of Company common stock. Because of this, the value of the one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share. The Preferred Shares are not redeemable.
In the event that any person or group becomes an Acquiring Person, unless the event causing the person to become an Acquiring Person is a merger, acquisition or other business combination described in the next paragraph, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise and payment of the exercise price that number of shares of common stock having a market value of two times the exercise price of the Right. If the Company does not have enough authorized but unissued shares of common stock to satisfy this obligation to issue common shares, the Company will deliver upon payment of the exercise price of a Right an amount of cash or other securities equivalent in value to the common stock issuable upon exercise of a Right.
In the event that any person or group becomes an Acquiring Person and the Company merges into or engages in certain other business combinations with an Acquiring Person, or 50% or more of its consolidated assets or earning power are sold to an Acquiring Person, each holder of a Right, other than Rights owned by an Acquiring Person, will thereafter have the right to receive, upon exercise and payment of the exercise price, that number of shares of common stock of the acquiring company that at the time of such transaction will have a market value of two times the exercise price of the Right.
At any time after a person or group becomes an Acquiring Person and prior to such person acquiring a majority of the outstanding Company common stock, the Company Board of Directors may exchange all or some of the Rights (other than Rights owned by the Acquiring Person), at an exchange ratio of one Common Share, or one one-hundredth of a Preferred Share (or other equivalent securities), per Right.
At any time before a person or group becomes an Acquiring Person, the Company Board of Directors may redeem all (but not some) of the Rights at a price of $0.0001 per Right and on such terms and conditions as the Board of Directors may establish. After the period for redemption of the Rights has expired, the Board may not amend the Rights Agreement to extend the period for redemption of the Rights. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price.
The terms of the Rights may be amended by a resolution of the Board of Directors without the consent of the holders of the Rights, except that after a person or group becomes an Acquiring Person,
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no such amendment may adversely affect the interests of the holders of the Rights (other than an Acquiring Person).
A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A filed , 2005. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is deemed to be incorporated into this summary.
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FORM OF RIGHT CERTIFICATE
Certificate No. R- | Rights |
NOT EXERCISABLE AFTER , 2015, OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.0001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
DEXCOM, INC.
This certifies that or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of , 2005 (the " Rights Agreement "), between DexCom, Inc., a Delaware corporation (the " Company "), and American Stock Transfer & Trust Company (the " Rights Agent "), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 p.m., Pacific Time, on , 2015 at the office of the Rights Agent, or at the office of its successor as Rights Agent, one one-hundredth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, par value $0.001 per share (the " Preferred Shares "), of the Company, at a purchase price of One Hundred Fifty Dollars ($150.00) per one one-hundredth of a Preferred Share (the " Purchase Price "), upon presentation and surrender of this Right Certificate with the Certification and the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-hundredths of a Preferred Share that may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of , based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of one one-hundredths of a Preferred Share that may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Company at a redemption price of $0.0001 per Right or (ii) may be exchanged in whole or in part for Preferred Shares or shares of the Company's Common Stock, par value $0.001 per share.
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No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions that are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depository receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company that may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and its corporate seal.
Dated as of
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DEXCOM, INC. |
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AMERICAN STOCK TRANSFER & TRUST COMPANY |
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Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please print name and address of transferee) this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint , Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution.
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SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15
The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement).
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Form of Reverse Side of Right Certificatecontinued
FORM OF ELECTION TO PURCHASE
(To
be executed if holder desires to
exercise the Right Certificate)
To :
The undersigned hereby irrevocably elects to exercise Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of:
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If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to:
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SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15
Form of Reverse Side of Right Certificatecontinued
The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as such terms are defined in the Rights Agreement).
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NOTICE
The signature in the foregoing Forms of Assignment and Election must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or any change whatsoever.
In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will not be honored.
DEXCOM INC.
2005 EQUITY INCENTIVE PLAN
Approved by Stockholders on March 21, 2005
1. PURPOSE . The purpose of the Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent or Subsidiaries by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock, Stock Bonuses Stock Appreciation Rights ("SARs") and Restricted Stock Units ("RSUs"). Capitalized terms not defined in the text are defined in Section 26.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available . Subject to Sections 2.2 and 21 below, 3,000,000 Shares are available for grant and issuance under the Plan. The number of shares authorized for issuance under this Plan and all other share amounts set forth in this Plan reflect the 1-for-2 reverse split of the Company's Common Stock to be effected on or before the Effective Date. In addition, any shares issued under the Dexcom 1999 Stock Option Plan (the "1999 Plan") on the Effective Date (as defined below) that are forfeited or that are issuable upon exercise of options granted pursuant to the 1999 Plan that expire without having been exercised in full, will no longer be available for grant and issuance under the 1999 Plan but will be available for grant and issuance under this Plan. Shares that are subject to: (a) issuance upon exercise of an Option or SAR granted under this Plan but cease to be subject to the Option or SAR for any reason other than exercise of the Option or SAR; (b) Awards granted under this Plan but are forfeited or are repurchased by the Company at the original issue price; or (c) Awards granted under this Plan that otherwise terminate without Shares being issued, will return to the pool of Shares available for grant and issuance under this Plan. The number of Shares available for grant and issuance under the Plan shall be increased on the first day of each January 2006 through 2015, by the lesser of: (i) three percent (3%) of the number of Shares issued and outstanding on the preceding December 31, and (ii) a lesser number of Shares determined by the Board. In order that ISOs may be granted under this Plan, no more than 3,000,000 Shares shall be issued as ISOs. The Company may issue Shares that are authorized but unissued or treasury shares pursuant to the Awards granted under this Plan. At all times the Company will reserve and keep available a sufficient number of Shares to satisfy the requirements of all outstanding Options and SARs granted under the Plan and all other outstanding but unvested Awards granted under the Plan.
2.2 Adjustment of Shares . If the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company, without consideration, then (a) the number of Shares reserved for issuance and future grant under the Plan set forth in Section 2.1, (b) the Exercise Prices of and number of Shares subject to outstanding Options and SARs, (c) the number of Shares subject to other outstanding Awards, (d) the maximum number of shares that may be issued as ISOs set forth in Section 2.1; (e) the maximum number of shares that may be issued to an individual in any one calendar year set forth in Section 3; and (f) the number of Shares that are granted as Options to Non-Employee Directors as set forth in Section 8, will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up (down in the case of ISOs) to the nearest whole Share, as determined by the Committee; and provided further that the Exercise Price of any Option may not be decreased to below the par value of the Shares.
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3. ELIGIBILITY . ISOs may be granted only to employees (including officers and directors who are also employees) of the Company or of a corporation that is Parent or Subsidiary. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary; provided that such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The Committee (or its designee under Section 4.1(c)) will from time to time determine and designate among the eligible persons who will be granted one or more Awards under the Plan. A person may be granted more than one Award under the Plan. However, no person will be eligible to receive more than 500,000 Shares issuable under Awards granted in any calendar year, other than new employees of the Company or of a Parent or Subsidiary (including new employees who are also officers and directors of the Company or any Parent or Subsidiary), who are eligible to receive up to a maximum of 1,000,000 Shares issuable under Awards granted in the calendar year in which they commence their employment.
4. ADMINISTRATION.
4.1 Committee Authority . The Plan shall be administered by the Committee or by the Board acting as the Committee. Except for automatic grants to Non-Employee Directors pursuant to Section 8 hereof, and subject to the general purposes, terms and conditions of the Plan, the Committee will have full power to implement and carry out the Plan. Without limiting the previous sentence, the Committee will have the authority to:
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4.2 Committee Interpretation and Discretion . Except for automatic grants to Non-Employee Directors pursuant to Section 8 hereof, any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. Any dispute regarding the interpretation of the Plan or any Award shall be submitted by the Participant or Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Participant. The Committee may delegate to one or more Executive Officers, the authority to review and resolve disputes with respect to Awards held by Participants who are not Insiders, and such resolution shall be final and binding on the Company and Participant.
5. OPTIONS . The Committee may grant Options to Participants and will determine (a) whether the Options will be ISOs or NSOs; (b) the number of Shares subject to the Option, (c) the Exercise Price of the Option, (d) the period during which the Option may be exercised, (e) the exercisibility of the Option and (f) all other terms and conditions of the Option, subject to the provisions of the Plan. With respect to Options granted to Non-Employee Directors pursuant to Section 8 in the event of a conflict between the provisions of Section 8 and this Section 5, the provisions of Section 8 shall prevail.
5.1 Form of Option Grant . Each Option granted under the Plan will be evidenced by a Stock Option Agreement that will expressly identify the Option as an ISO or NSO. Except as otherwise required by Section 8 regarding the terms of Options to Non-Employee Directors, the Stock Option Agreement will be substantially in a form and contain such provisions (which need not be the same for each Participant) that the Committee has from time to time approved, and will comply with and be subject to the terms and conditions of the Plan.
5.2 Date of Grant . The date of grant of an Option will be the date on which the Committee makes the determination to grant the Option, unless a later date is otherwise specified by the Committee. The Stock Option Agreement, and a copy of the Plan (plus any additional documents required to be delivered under applicable laws), will be delivered to the Participant within a reasonable time after the Option is granted. The Stock Option Agreement, Plan, and other documents may be delivered in any manner (including electronic distribution or posting) that meets applicable legal requirements.
5.3 Exercise Period and Expiration Date . An Option will vest and become exercisable within the times or upon the occurrence of events determined by the Committee and set forth in the Stock Option Agreement governing such Option, subject to the provisions of Section 5.6, and subject to Company policies established by the Committee from time to time. The Committee may provide for Options to vest and become exercisable at one time or from time to time, periodically or otherwise (including, without limitation, upon the attainment during a Performance Period of performance goals based on Performance Factors), in such number of Shares or percentage of Shares subject to the Option as the Committee determines. The Stock Option Agreement shall set forth the Expiration Date; provided that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a Ten Percent Stockholder will be exercisable after the expiration of five years from the date the Option is granted.
An Option may only be exercised by the personal representative of a Participant or an Authorized Transferee or by the person or persons to whom a Participant's rights under the Option shall pass by such person's will or by the laws of descent and distribution of the state of such person's domicile at the time of death, and then only as and to the extent that such person was entitled to exercise the Option on the date of death.
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5.4 Exercise Price . The Exercise Price of an Option will be determined by the Committee when the Option is granted and, in the case of an ISO will not be less than the Fair Market Value of the Shares on the date of grant provided that the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased must be made in accordance with Section 11 of the Plan and the Stock Option Agreement.
5.5 Procedures for Exercise . A Participant or Authorized Transferee may exercise Options by following the procedures established by the Company's Stock Administration Department, as communicated and made available to Participants.
5.6 Termination . Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following:
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5.7 Limitations on Exercise . The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option; provided that the minimum number will not prevent a Participant from exercising an Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISOs . The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under the Plan or under any other incentive stock option plan of the Company or any Parent or Subsidiary) shall not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, the Options for the first $100,000 worth of Shares to become exercisable in that calendar year will be ISOs, and the Options for the Shares with a Fair Market Value in excess of $100,000 that become exercisable in that calendar year will be NSOs. If the Code is amended to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit shall be automatically incorporated into the Plan and will apply to any Options granted after the effective date of the Code's amendment.
5.9 Notice of Disqualifying Dispositions of Shares Acquired on Exercise of an ISO . If a Participant sells or otherwise disposes of any Shares acquired pursuant to the exercise of an ISO on or before the later of (a) the date two years after the Date of Grant, and (b) the date one year after the exercise of the ISO (in either case, a "Disqualifying Disposition"), the Company may require the Participant to immediately notify the Company in writing of such Disqualifying Disposition.
5.10 Modification, Extension or Renewal . The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor; provided that any such action may not, without the written consent of Participant, impair any of Participant's rights under any Option previously granted; and provided, further that without stockholder approval, the modified, extended, renewed or new Option may not have a lower Exercise Price than the outstanding Option. Any outstanding ISO that is modified, extended, renewed or otherwise altered shall be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected, by a written notice to them.
5.11 No Disqualification . Notwithstanding any other provision in the Plan, no term of the Plan relating to ISOs will be interpreted, amended or altered, and no discretion or authority granted under the Plan will be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.
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6. RESTRICTED STOCK AWARDS.
6.1 Awards of Restricted Stock . A Restricted Stock Award is an offer by the Company to sell to a Participant Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the Purchase Price, the restrictions under which the Shares will be subject and all other terms and conditions of the Restricted Stock Award, subject to the following:
6.2 Restricted Stock Purchase Agreement . All purchases under a Restricted Stock Award will be evidenced by a Restricted Stock Purchase Agreement, which will be in substantially a form (which need not be the same for each Participant) that the Committee has from time to time approved, and will comply with and be subject to the terms and conditions of the Plan. A Participant accepts a Restricted Stock Award by signing and delivering to the Company a Restricted Stock Purchase Agreement with full payment of the Purchase Price, within thirty days from the date the Restricted Stock Purchase Agreement was delivered to the Participant. If the Participant does not accept the Restricted Stock Award within thirty days, then the offer of the Restricted Stock Award will terminate, unless the Committee determines otherwise. The Restricted Stock Award, Plan and other documents may be delivered in any manner (including electronic distribution or posting) that meets applicable legal requirements.
6.3 Purchase Price . The Purchase Price for a Restricted Stock Award will be determined by the Committee and, may be less than Fair Market Value (but not less than the par value of the Shares) on the date the Restricted Stock Award is granted. Payment of the Purchase Price must be made in accordance with Section 11 of the Plan and the Restricted Stock Purchase Agreement, and in accordance with any procedures established by the Company's Stock Administration Department, as communicated and made available to Participants.
6.4 Terms of Restricted Stock Awards . Restricted Stock Awards will be subject to such restrictions as the Committee may impose. These restrictions may be based on completion of a specified number of years of service with the Company or upon completion of the performance goals based on Performance Factors during any Performance Period as set out in advance in the Participant's Restricted Stock Purchase Agreement. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment for Shares to be purchased under any Restricted Stock Award, the Committee shall determine the extent to which such Restricted Stock Award has been earned. Performance Periods may overlap and a Participant may participate simultaneously with respect to Restricted Stock Awards that are subject to different Performance Periods and having different performance goals and other criteria.
6.5 Termination During Performance Period . Except as set forth in the Participant's Restricted Stock Award, any Restricted Stock Award vesting will cease to vest on the Participant's Termination Date.
7. STOCK BONUS AWARDS.
7.1 Awards of Stock Bonuses . A Stock Bonus Award is an award to an eligible person of Shares (which may consist of Restricted Stock or Restricted Stock Units) for services to be rendered or for past services already rendered to the Company or any Parent or Subsidiary. All Stock Bonus Awards shall be made pursuant to a Stock Bonus Agreement, which shall be in substantially a form (which need not be the same for each Participant) that the Committee has from time to time approved, and will comply with and be subject to the terms and conditions of the Plan. No payment will be required for Shares awarded pursuant to a Stock Bonus Award.
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7.2 Terms of Stock Bonus Awards . The Committee will determine the number of Shares to be awarded to the Participant under a Stock Bonus Award and any restrictions thereon. These restrictions may be based upon completion of a specified number of years of service with the Company or upon satisfaction of performance goals based on Performance Factors during any Performance Period as set out in advance in the Participant's Stock Bonus Agreement. If the Stock Bonus Award is to be earned upon the satisfaction of performance goals, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Stock Bonus Award; (b) select from among the Performance Factors to be used to measure performance goals; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the issuance of any Shares or other payment to a Participant pursuant to a Stock Bonus Award, the Committee will determine the extent to which the Stock Bonus Award has been earned. Performance Periods may overlap and a Participant may participate simultaneously with respect to Stock Bonus Awards that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to a Stock Bonus Award to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment to Participant . The Stock Bonus Award will be paid to the Participant currently. Payment may be made in the form of cash, whole Shares, or a combination thereof, based on the Fair Market Value of the Shares earned under a Stock Bonus Award on the date of payment, either in a lump sum payment or in installments, all as the Committee determines.
7.4 Termination of Participant . In the event of a Participant's Termination during a Performance Period or vesting period, for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus Award only to the extent earned as of the date of Termination in accordance with the Stock Bonus Agreement, unless the Committee determines otherwise.
8. AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS.
8.1 Eligibility . Non-Employee Directors are eligible for Options granted pursuant to this Section 8.
8.2 Initial Grant . Each Non-Employee Director who is a member of the Board on the Effective Date will automatically be granted an Option to purchase 25,000 Shares on the Effective Date. Each Non-Employee Director who first becomes a member of the Board after the Effective Date will automatically be granted an Option to purchase 25,000 Shares on the date such Non-Employee Director first becomes a member of the Board. Each Option granted pursuant to this Section 8.2 shall be called an "Initial Grant".
8.3 Succeeding Grant . On each anniversary of the Effective Date, each Non-Employee Director who was a member of the Board on the Effective Date will automatically be granted an Option to purchase 10,000 Shares. Each Non-Employee Director who first becomes a member of the Board after the Effective Date will automatically be granted an Option for 10,000 Shares on each anniversary of the date he or she first became a Non-Employee Director. Each Option granted pursuant to this Section 8.3 shall be called a "Succeeding Grant".
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8.4 Chairman of the Board of Directors Grant . The Chairman of the Board as of the Effective Date will automatically be granted an Option to purchase 12,500 Shares on the Effective Date, and will automatically be granted an Option for 5,000 Shares on each anniversary of the Effective Date, provided that he or she is the Chairman of the Board on such date. Each succeeding Chairman of the Board who is a Non-Employee Director will automatically be granted an Option to purchase 12,500 Shares on the date such Non-Employee Director is appointed the Chairman of the Board, and on each anniversary of such Non-Employee Director's appointment as Chairman of the Board he or she will automatically be granted an Option to purchase 5,000 Shares, provided that he or she is the Chairman of the Board on such date. The Option granted pursuant to this Section 8.4 will be in addition to the Option granted pursuant to Sections 8.1 and 8.2. Each Option granted pursuant to this Section 8.4 upon the Effective Date or upon the Non-Employee Director becoming the Chairman of the Board shall be called a "Chairman's Initial Grant" and all other grants pursuant to this Section 8.4 shall be called "Chairman's Succeeding Grants." Chairman's Initial Grants and Chairman's Succeeding Grants shall collectively be called "Chairman's Grants."
8.5 Shares in Lieu Cash. Each Non-Employee may choose to receive fully vested Shares in lieu of all or a portion of any cash payment payable to such Non-Employee Director for his or her service on the Board. The number of Shares issued in lieu of any cash payment shall be based on the Fair Market Value of the Shares on the date the cash amount would otherwise become payable to such Non-Employee Director.
8.6 Vesting and Exercisability.
(a) Initial Grants shall become exercisable and vest as to 1 / 3 of the Shares upon the first anniversary of the date such Option is granted and as to an additional 1 / 36 on each monthly anniversary thereafter and become fully vested on the third anniversary of the date of grant, so long as the Non-Employee Director continuously remains a director or a consultant of the Company.
(b) Succeeding Grants shall become exercisable and vest as to 1 / 36 of the Shares on each monthly anniversary of the date such Option is granted and become fully vested on the third anniversary of the date of grant, so long as the Non-Employee Director continuously remains a director or a consultant of the Company.
(c) Each Chairman's Initial Grant shall become exercisable and vest as to 1 / 3 of the Shares upon the first anniversary of the date such Option is granted and an additional 1 / 36 of the shares on each monthly anniversary thereafter and become fully vested on the third anniversary of the date of grant, so long as the Non-Employee Director continuously remains Chairman of the Board. Each Chairman's Succeeding Grant shall become exercisable as they vest as to 1 / 36 of the Shares upon each monthly anniversary of the date of grant and become fully vested on the third anniversary of the date of grant, so long as the Non-Employee Director continuously remains Chairman of the Board.
(d) In the event of a Corporate Transaction, the vesting of all Options granted to Non-Employee Directors pursuant to this Section 8 will accelerate and such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised on or prior to the consummation of the Corporate Transaction, they shall terminate.
8.7 Form of Option Grant . Each Option granted under this Section 8 shall be a NSO and shall be evidenced by a Non-Employee Director Stock Option Grant Agreement in such form as the Committee shall from time to time approve and which shall comply with and be subject to the terms and conditions of this Plan.
8.8 Exercise Price. The Exercise Price per Share of each Option granted under this Section 8 shall be the Fair Market Value of the Share on the date the Option is granted.
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8.9 Termination of Option . Except as provided in Section 8.6(d) or this Section 8.9, each Option granted under this Section 8 shall expire ten (10) years after its date of grant. The date on which the Non-Employee Director ceases to be a member of the Board or a consultant of the Company shall be referred to as the "Non-Employee Director Termination Date" for purposes of this Section 8.9. An Option may be exercised after the Non-Employee Director Termination Date only as set forth below:
(a) Termination Generally . If the Non-Employee Director ceases to be a member of the Board or consultant of the Company for any reason except death or Disability, then each Option, to the extent then vested pursuant to Section 8.6 above, then held by such Non-Employee Director may be exercised by the Non-Employee Director within six (6) months after the Non-Employee Director Termination Date, but in no event later than the Expiration Date.
(b) Death . If the Non-Employee Director ceases to be a member of the Board or consultant of the Company because of his or her death, then each Option, to the extent then vested pursuant to Section 8.6 above, then held by such Non-Employee Director may be exercised by the Non-Employee Director or his or her legal representative within twelve (12) months after the Non-Employee Director Termination Date, but in no event later than the Expiration Date.
(c) Disability . If the Non-Employee Director ceases to be a member of the Board or consultant of the Company because of his or her Disability, then each Option, to the extent then vested pursuant to Section 8.6 above, then held by such Non-Employee Director may be exercised by his or her legal representative within six (6) months after the Non-Employee Director Termination Date, but in no event later than the Expiration Date.
9. STOCK APPRECIATION RIGHTS .
9.1 Awards of SARs . A Stock Appreciation Right ("SAR") is an award to an eligible person that may be settled in cash, or Shares (which may consist of Restricted Stock), having a value equal to the value determined by multiplying the difference between the Fair Market Value on the date of exercise over the Exercise Price and the number of Shares with respect to which the SAR is being settled. The SAR may be granted for services to be rendered or for past services already rendered to the Company, or any Parent or Subsidiary. All SARs shall be made pursuant to a SAR Agreement, which shall be in substantially a form (which need not be the same for each Participant) that the Committee has from time to time approved, and will comply with and be subject to the terms and conditions of this Plan .
9.2 Terms of SARs . The Committee will determine the terms of a SAR including, without limitation: (a) the number of Shares deemed subject to the SAR; (b) the Exercise Price and the time or times during which the SAR may be settled; (c) the consideration to be distributed on settlement of the SAR; and (d) the effect on each SAR of the Participant's Termination. The Exercise Price of the SAR will be determined by the Committee when the SAR is granted and, may be less than Fair Market Value (but not less than the par value of the Shares. A SAR may be awarded upon satisfaction of such performance goals based on Performance Factors during any Performance Period as are set out in advance in the Participant's individual SAR Agreement. If the SAR is being earned upon the satisfaction of performance goals, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for each SAR; and (y) select from among the Performance Factors to be used to measure the performance, if any. Prior to settlement of any SAR earned upon the satisfaction of performance goals pursuant to a SAR Agreement, the Committee shall determine the extent to which such SAR has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to SARs that are subject to different performance goals and other criteria.
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9.3 Exercise Period and Expiration Date . A SAR will be exercisable within the times or upon the occurrence of events determined by the Committee and set forth in the SAR Agreement governing such SAR. The SAR Agreement shall set forth the Expiration Date; provided that no SAR will be exercisable after the expiration of seven years from the date the SAR is granted. The Committee may also provide for SARs to become exercisable at one time or from time to time, periodically or otherwise (including, without limitation, upon the attainment during a Performance Period of performance goals based on Performance Factors), in such number of Shares or percentage of the Shares subject to the SAR as the Committee determines.
9.4 Form and Timing of Settlement . The portion of a SAR being settled may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee determines, provided that the terms of the SAR and any deferral satisfy the requirements of Section 409A of the Code and any regulations or rulings promulgated by the Internal Revenue Service. Payment may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, as the Committee determines.
10. RESTRICTED STOCK UNITS.
10.1 Awards of Restricted Stock Units . A Restricted Stock Unit ("RSU") is an award to an eligible person covering a number of Shares that may be settled in cash, or by issuance of those Shares (which may consist of Restricted Stock) for services to be rendered or for past services already rendered to the Company or any Parent or Subsidiary. All RSUs shall be made pursuant to a RSU Agreement, which shall be in substantially a form (which need not be the same for each Participant) that the Committee or an officer of the Company (pursuant to Section 4.1(b)) has from time to time approved, and will comply with and be subject to the terms and conditions of the Plan.
10.2 Terms of RSUs . The Committee will determine the terms of a RSU including, without limitation: (a) the number of Shares deemed subject to the RSU; (b) the time or times during which the RSU may be exercised; (c) the consideration to be distributed on settlement, and the effect on each RSU of the Participant's Termination. A RSU may be awarded upon satisfaction of such performance goals based on Performance Factors during any Performance Period as are set out in advance in the Participant's individual RSU Agreement. If the RSU is being earned upon satisfaction of performance goals, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for the RSU; (y) select from among the Performance Factors to be used to measure the performance, if any; and (z) determine the number of Shares deemed subject to the RSU. Prior to settlement of any RSU earned upon the satisfaction of performance goals pursuant to a RSU Agreement, the Committee shall determine the extent to which such SAR has been earned. Performance Periods may overlap and participants may participate simultaneously with respect to RSUs that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the RSUs to take into account changes in law and accounting and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.
10.3 Form and Timing of Settlement . The portion of a RSU being settled shall be paid currently. To the extent permissible under law, the Committee may also permit a Participant to defer payment under a RSU to a date or dates after the RSU is earned provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of the Code and any regulations or rulings promulgated by the Internal Revenue Service. Payment may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee determines.
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11. PAYMENT FOR SHARE PURCHASES.
11.1 Payment . Payment for Shares purchased pursuant to the Plan may be made by any of the following methods (or any combination of such methods) that are described in the applicable Award Agreement and that are permitted by law:
11.2 Issuance of Shares . Upon payment of the applicable Purchase Price or Exercise Price (or a commitment for payment from the NASD Dealer designated by the Participant or Authorized Transferee in the case of an exercise by means of a "same-day sale" or "margin" commitment), and compliance with other conditions and procedures established by the Company for the purchase of shares, the Company shall issue the Shares registered in the name of Participant or Authorized Transferee (or in the name of the NASD Dealer designated by the Participant or Authorized Transferee in the case of an exercise by means of a "same-day sale" or "margin" commitment) and shall deliver certificates representing the Shares (in physical or electronic form, as appropriate). The Shares may be subject to legends or other restrictions as described in Section 15 of the Plan.
12. WITHHOLDING TAXES.
12.1 Withholding Generally . Whenever Shares are to be issued in satisfaction of Awards granted under the Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate(s) for the Shares. If a payment in satisfaction of an Award is to be made in cash, the payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.
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12.2 Stock Withholding . When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may, in its sole discretion, allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of whole Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose shall be made in accordance with the requirements established by the Committee and be in writing in a form acceptable to the Committee.
13. PRIVILEGES OF STOCK OWNERSHIP . No Participant or Authorized Transferee will have any rights as a stockholder of the Company with respect to any Shares until the Shares are issued to the Participant or Authorized Transferee. After Shares are issued to the Participant or Authorized Transferee, the Participant or Authorized Transferee will be a stockholder and have all the rights of a stockholder with respect to the Shares including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if the Shares are Restricted Stock, any new, additional or different securities the Participant or Authorized Transferee may become entitled to receive with respect to the Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided further, that the Participant or Authorized Transferee will have no right to retain such dividends or distributions with respect to Shares that are repurchased at the Participant's original Exercise Price or Purchase Price pursuant to Section 15.
14. TRANSFERABILITY . No Award and no interest therein, shall be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution, and no Award may be made subject to execution, attachment or similar process; provided, however that with the consent of the Committee a Participant may transfer a NSO to an Authorized Transferee. Transfers by the Participant for consideration are prohibited. Without such consent by the Committee, a NSO shall, like all other Awards under the Plan, be exercisable (a) during a Participant's lifetime only by the Participant or the Participant's guardian or legal representative; and (b) after Participant's death, by the legal representative of the Participant's heirs or legatees.
15. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase all or a portion of a Participant's Shares that are not "Vested" (as defined in the Award Agreement), following the Participant's Termination, at any time within ninety days after the later of (a) the Participant's Termination Date or (b) the date the Participant purchases Shares under the Plan, for cash or cancellation of purchase money indebtedness with respect to Shares, at the Participant's original Exercise Price or Purchase Price; provided that upon assignment of the right to repurchase, the assignee must pay the Company, upon assignment of the right to repurchase, cash equal to the excess of the Fair Market Value of the Shares over the original Purchase Price.
16. CERTIFICATES. All certificates for Shares or other securities delivered under the Plan (whether in physical or electronic form, as appropriate) will be subject to stock transfer orders, legends and other restrictions that the Committee deems necessary or advisable, including without limitation restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system on which the Shares may be listed.
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17. ESCROW. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other transfer instruments approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company, to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates.
18. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE . An Award shall not be effective unless the Award is in compliance with all applicable state, federal and foreign securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system on which the Shares may then be listed, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in the Plan, the Company shall have no obligation to issue or deliver certificates for Shares under the Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) completion of any registration or other qualification of such shares under any state, federal or foreign law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state, federal or foreign securities laws, stock exchange or automated quotation system, and the Company shall have no liability for any inability or failure to do so.
19. NO OBLIGATION TO EMPLOY . Nothing in the Plan or any Award granted under the Plan shall confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary or limit in any way the right of the Company or any Parent or Subsidiary to terminate Participant's employment or other relationship at any time, with or without cause.
20. REPRICING, EXCHANGE, BUYOUT OF AWARDS. The repricing of Options or SARs is permitted without prior stockholder approval, provided that the terms of the repricing satisfy the requirements of Section 409A of the Code and any regulations or rulings promulgated by the Internal Revenue Service. The Committee may, at any time or from time to time authorize the Company, in the case of an Option or SAR exchange without stockholder approval, and with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Option previously granted with payment in cash, Shares or other consideration, based on such terms and conditions as the Committee and the Participant shall agree.
21. CORPORATE TRANSACTIONS.
21.1 Assumption or Replacement of Awards by Successor . In the event of a Corporate Transaction any or all outstanding Awards may be assumed or replaced by the successor corporation, which assumption or replacement shall be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation, if any, refuses to assume or replace the Awards, as provided above, pursuant to a Corporate Transaction or if there is no successor corporation due to a dissolution or liquidation of the Company, such Awards shall immediately vest as to 100% of the Shares subject thereto at such time and on such conditions as the Board shall determine and the Awards shall expire at the closing of the transaction or at the time of dissolution or liquidation.
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21.2 Other Treatment of Awards . Subject to any greater rights granted to Participants under Section 21.1, in the event of a Corporate Transaction, any outstanding Awards shall be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets.
21.3 Assumption of Awards by the Company . The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under the Plan in substitution of such other company's award, or (b) assuming such award as if it had been granted under the Plan if the terms of such assumed award could be applied to an Award granted under the Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under the Plan if the other company had applied the rules of the Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award shall remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.
22. ADOPTION AND STOCKHOLDER APPROVAL. The Plan was adopted by the Board on February 9, 2005. The Plan shall become effective upon the Effective Date. The stockholders of the Company must approve the Plan in a manner consistent with applicable law within twelve (12) months of its approval by the Board.
23. TERM OF PLAN. The Plan will terminate ten years following the Effective Date.
24. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend the Plan in any respect, including without limitation grants to Non-Employee Directors pursuant to Section 8 of the Plan and amendment of any form of Award Agreement or instrument to be executed pursuant to the Plan. Notwithstanding the foregoing, neither the Board nor the Committee shall, without the approval of the stockholders of the Company, amend the Plan in any manner that requires such stockholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans, or pursuant to the Exchange Act or any rule promulgated thereunder. In addition, no amendment that is detrimental to a Participant may be made to any outstanding Award without the consent of the Participant.
25. NONEXCLUSIVITY OF THE PLAN; UNFUNDED PLAN. Neither the adoption of the Plan by the Board, the submission of the Plan to the stockholders of the Company for approval, nor any provision of the Plan shall be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. The Plan shall be unfunded. Neither the Company nor the Board shall be required to segregate any assets that may at any time be represented by Awards made pursuant to the Plan. Neither the Company, the Committee, nor the Board shall be deemed to be a trustee of any amounts to be paid under the Plan.
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26. DEFINITIONS. As used in the Plan, the following terms shall have the following meanings:
(a) " Authorized Transferee " means the permissible recipient, as authorized by this Plan and the Committee, of an NSO that is transferred during the Participant's lifetime by the Participant by gift or domestic relations order. For purposes of this definition a "permissible recipient" is: (i) a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of the Participant, including any such person with such relationship to the Participant by adoption; (ii) any person (other than a tenant or employee) sharing the Participant's household; (iii) a trust in which the persons in (i) or (ii) have more than fifty percent of the beneficial interest; (iv) a foundation in which the persons in (i) or (ii) or the Participant control the management of assets; or (v) any other entity in which the person in (i) or (ii) or the Participant own more than fifty percent of the voting interest.
(b) " Award " means any award under the Plan, including any Option, Restricted Stock, Stock Bonus, Stock Appreciation Right or Restricted Stock Unit.
(c) " Award Agreement " means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award.
(d) " Board " means the Board of Directors of the Company.
(e) " Cause " means termination of the Participant's employment on the basis of the Participant's conviction (or a plea of nolo contendere ) of fraud, misappropriation, embezzlement or any other act or acts of dishonesty constituting a felony and resulting or intended to result directly or indirectly in a substantial gain or personal enrichment to the Participant at the expense of the Company or any Subsidiary.
(f) " Code " means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
(g) " Committee " means the Compensation Committee of the Board or such other committee appointed by the Board to administer the Plan, or if no committee is appointed, the Board. Each member of the Committee shall be (i) a "non-employee director" for purposes of Section 16 and Rule 16b-3 of the Exchange Act, and (ii) an "outside director" for purposes of Section 162(m) of the Code, unless the Board has fewer than two such outside directors.
(h) " Company " means DexCom Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation.
(i) " Corporate Transaction " means (a) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company and the Awards granted under the Plan are assumed or replaced by the successor corporation, which assumption shall be binding on all Participants), (b) a dissolution or liquidation of the Company, (c) the sale of substantially all of the assets of the Company, (d) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company; or (e) any other transaction which qualifies as a "corporate transaction" under Section 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company).
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(j) " Disability " means a disability within the meaning of Section 22(e)(3) of the Code, as determined by the Committee.
(k) " Effective Date " means the date on which the Registration Statement covering the initial public offering of shares of the Company's common stock is declared effective by the SEC.
(l) " Exchange Act " means the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder.
(m) " Executive Officer " means a person who is an "executive officer" of the Company as defined in Rule 3b-7 promulgated under the Exchange Act.
(n) " Exercise Price " means the price at which a Participant who holds an Option or SAR may purchase the Shares issuable upon exercise of the Option or SAR.
(o) " Expiration Date " means the last date on which an Option or SAR may be exercised as determined by the Committee.
(p) " Fair Market Value " means, as of any date, the value of a share of the Company's Common Stock determined as follows:
(q) " Insider " means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act.
(r) " ISO " means an Incentive Stock Option within the meaning of Section 422 of the Code.
(s) " NASD Dealer " means broker-dealer that is a member of the National Association of Securities Dealers, Inc.
(t) " NSO " means a nonqualified stock option that does not qualify as an ISO.
(u) " Option " means an Award pursuant to Section 5 or Section 8 of the Plan.
(v) " Non-Employee Director " means a member of the Company's Board of Directors who is not a current employee of the Company or any Parent or Subsidiary.
(w) " Parent " means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under the Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain or such lesser percentage as determined by the Committee.
(x) " Participant " means a person who receives an Award under the Plan.
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(y) " Performance Factors " means the factors selected by the Committee from among the following measures (whether or not in comparison to other peer companies) to determine whether the performance goals established by the Committee and applicable to Awards have been satisfied:
(z) " Performance Period " means the period of service determined by the Committee, not to exceed five years, during which years of service or performance is to be measured for the Award.
(aa) " Plan " means this DexCom Inc. 2005 Equity Incentive Plan, as amended from time to time.
(bb) " Purchase Price " means the price to be paid for Shares acquired under the Plan, other than Shares acquired upon exercise of an Option.
(cc) " Restricted Stock Award " means an award of Shares pursuant to Section 6 of the Plan.
(dd) " Restricted Stock Purchase Agreement " means an agreement evidencing a Restricted Stock Award granted pursuant to Section 6 of the Plan.
(ee) " Restricted Stock Unit " means an Award granted pursuant to Section 10 of the Plan.
(ff) " RSU Agreement " means an agreement evidencing a Restricted Stock Unit Award granted pursuant to Section 10 of the Plan.
(gg) " SAR Agreement " means an agreement evidencing a Stock Appreciation Right granted pursuant to Section 9 of the Plan.
(hh) " SEC " means the Securities and Exchange Commission.
(ii) " Securities Act " means the Securities Act of 1933, as amended, and the regulations promulgated thereunder.
(jj) " Shares " means shares of the Company's Common Stock $0.001 par value, reserved for issuance under the Plan, as adjusted pursuant to Sections 2 and 21, and any successor security.
(kk) " Stock Appreciation Right " means an Award granted pursuant to Section 9 of the Plan.
(ll) " Stock Bonus " means an Award granted pursuant to Section 7 of the Plan.
(mm) " Stock Bonus Agreement " means an agreement evidencing a Stock Bonus Award granted pursuant to Section 7 of the Plan.
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(nn) " Stock Option Agreement " means the agreement which evidences a Stock Option, granted pursuant to Section 5 of the Plan.
(oo) " Subsidiary " means any entity directly or indirectly controlled by the Company, as determined by the Committee.
(pp) " Ten Percent Stockholder " means any person who directly or by attribution owns more than ten percent of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary.
(qq) " Termination " or " Terminated " means, for purposes of the Plan with respect to a Participant, that the Participant has ceased to provide services as an employee, director, consultant, independent contractor or adviser, to the Company or a Parent or Subsidiary; provided that a Participant shall not be deemed to be Terminated if the Participant is on a leave of absence approved by the Committee or by an officer of the Company designated by the Committee; and provided further, that during any approved leave of absence, vesting of Awards shall be suspended or continue in accordance with guidelines established from time to time by the Committee. Subject to the foregoing, the Committee shall have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the " Termination Date ").
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FORM OF DEXCOM, INC. 2005 EQUITY
INCENTIVE PLAN/STOCK OPTION AGREEMENT
No. ______________
DEXCOM, INC.
2005 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
This Stock Option Agreement (the " Agreement ") is made and entered into as of the date of grant set forth below (the " Date of Grant ") by and between Dexcom, Inc., a Delaware corporation (the " Company "), and the participant named below (the " Participant "). Capitalized terms not defined herein shall have the meaning ascribed to them in the Company's 2005 Equity Incentive Plan (the " Plan ").
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o Incentive Stock Option o Nonqualified Stock Option |
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otherwise specifically stated, all references herein to "sections" and "exhibits" will mean "sections" and "exhibits" to this Agreement.
IN WITNESS WHEREOF , the Company has caused this Agreement to be executed in triplicate by its duly authorized representative and Participant has executed this Agreement in triplicate , effective as of the Date of Grant.
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Attachment:
Exhibit AForm of Stock Option Exercise Agreement
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EXHIBIT A
FORM OF STOCK OPTION EXERCISE AGREEMENT
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No. __________
DEXCOM, INC.
2005 EQUITY INCENTIVE PLAN
STOCK OPTION EXERCISE AGREEMENT
This Stock Option Exercise Agreement (the " Exercise Agreement ") is made and entered into as of , (the " Effective Date ") by and between Dexcom, Inc., a Delaware corporation (the " Company "), and the purchaser named below (the " Purchaser "). Capitalized terms not defined herein shall have the meanings ascribed to them in the Company's 2005 Equity Incentive Plan (the " Plan ").
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1. EXERCISE OF OPTION .
1.1 Exercise . Pursuant to exercise of that certain option (the " Option ") granted to Purchaser under the Plan and subject to the terms and conditions of this Exercise Agreement, Purchaser hereby purchases from the Company, and the Company hereby sells to Purchaser, the Total Number of Shares set forth above (the " Shares ") of the Company's Common Stock, at the Exercise Price Per Share set forth above (the " Exercise Price "). As used in this Exercise Agreement, the term " Shares " refers to the Shares purchased under this Exercise Agreement and includes all securities received (i) in replacement of the Shares, (ii) as a result of stock dividends or stock splits with respect to the Shares, and (iii) all securities received in replacement of the Shares in a merger, recapitalization, reorganization or similar corporate transaction.
1.2 Title to Shares . The exact spelling of the name(s) under which Purchaser will take title to the Shares is:
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Purchaser desires to take title to the Shares as follows:
1.3 Payment . Purchaser hereby delivers payment of the Exercise Price in the manner permitted in the Stock Option Agreement as follows (check and complete as appropriate):
2. DELIVERY .
2.1 Deliveries by Purchaser . Purchaser hereby delivers to the Company (i) this Exercise Agreement and (ii) the Exercise Price and payment or other provision for any applicable tax obligations in the form of a check, a copy of which is attached hereto as Exhibit 1 .
2.2 Deliveries by the Company . Upon its receipt of the Exercise Price, payment or other provision for any applicable tax obligations and all the documents to be executed and delivered by Purchaser to the Company under Section 2.1, the Company will issue a duly executed stock certificate evidencing the Shares in the name of Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER . Purchaser represents and warrants to the Company that:
3.1 Agrees to Terms of the Plan . Purchaser has received a copy of the Plan and the Stock Option Agreement, has read and understands the terms of the Plan, the Stock Option Agreement and this Exercise Agreement, and agrees to be bound by their terms and conditions. Purchaser acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the Shares, and that Purchaser should consult a tax adviser prior to such exercise or disposition.
3.2 Access to Information . Purchaser has had access to all information regarding the Company and its present and prospective business, assets, liabilities and financial condition that Purchaser reasonably considers important in making the decision to purchase the Shares, and Purchaser has had ample opportunity to ask questions of the Company's representatives concerning such matters and this investment.
3.3 Understanding of Risks . Purchaser has received and reviewed the Form S-8 prospectus for the Plan and Shares and is fully aware of: (i) the highly speculative nature of the investment in the Shares; (ii) the financial hazards involved; (iii) the qualifications and backgrounds of the management of the Company; and (iv) the tax consequences of investment in the Shares. Purchaser is capable of evaluating the merits and risks of this investment, has the ability to protect Purchaser's own interests in this transaction and is financially capable of bearing a total loss of this investment.
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4. COMPLIANCE WITH SECURITIES LAWS . Purchaser understands and acknowledges that the exercise of any rights to purchase any Shares is expressly conditioned upon compliance with the Securities Act and all applicable state securities laws. Purchaser agrees to cooperate with the Company to ensure compliance with such laws.
5. RESTRICTED SECURITIES .
5.1 No Transfer Unless Registered or Exempt . Purchaser understands that Purchaser may not transfer any Shares except when such Shares are registered under the Securities Act or qualified under applicable state securities laws or unless, in the opinion of counsel to the Company, exemptions from such registration and qualification requirements are available. Purchaser understands that only the Company may file a registration statement with the SEC and that the Company is under no obligation to do so with respect to the Shares, and may withdraw any such registration statement at any time after filing. Purchaser has also been advised that exemptions from registration and qualification may not be available or may not permit Purchaser to transfer all or any of the Shares in the amounts or at the times proposed by Purchaser.
5.2 SEC Rule 144 . If Purchaser is an "affiliate" for purposes of Rule 144 promulgated under the Securities Act, then in addition, Purchaser has been advised that Rule 144 requires that the Shares be held for a minimum of one (1) year, and in certain cases two (2) years, after they have been purchased and paid for (within the meaning of Rule 144). Purchaser understands that Rule 144 may indefinitely restrict transfer of the Shares so long as Purchaser remains an "affiliate" of the Company or if "current public information" about the Company (as defined in Rule 144) is not publicly available.
6. RIGHTS AS A STOCKHOLDER . Subject to the terms and conditions of this Exercise Agreement, Purchaser will have all of the rights of a stockholder of the Company with respect to the Shares from and after the date that Shares are issued to Purchaser until such time as Purchaser disposes of the Shares.
7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS .
7.1 Legends . Purchaser understands and agrees that the Company will place any legends that may be required by state or U.S. Federal securities laws, the Company's Certificate of Incorporation or Bylaws, any other agreement between Purchaser and the Company or, subject to the assent of the Company, any agreement between Purchaser and any third party.
7.2 Stop-Transfer Instructions . Purchaser agrees that, to ensure compliance with any restrictions imposed by this Exercise Agreement, the Company may issue appropriate "stop-transfer" instructions to its transfer agent, if any, and if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
7.3 Refusal to Transfer . The Company will not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Agreement or (ii) to treat as owner of such Shares, or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares have been so transferred.
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8. TAX CONSEQUENCES . PURCHASER UNDERSTANDS AND REPRESENTS: (i) THAT PURCHASER HAS REVIEWED THE PROSPECTUS PREPARED FOR THE PLAN AND CONSULTED PURCHASER'S PERSONAL TAX ADVISER IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND (ii) THAT PURCHASER IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. SET FORTH BELOW IS A BRIEF SUMMARY AS OF THE DATE THE PLAN WAS ADOPTED BY THE BOARD OF SOME OF THE U.S. FEDERAL AND CALIFORNIA TAX CONSEQUENCES OF EXERCISE OF THE OPTION AND DISPOSITION OF THE SHARES. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PURCHASER SHOULD CONSULT THE PROSPECTUS AND PURCHASER'S PERSONAL TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
8.1 Exercise of Incentive Stock Option . If the Option qualifies as an ISO, there will be no regular U.S. Federal income tax liability or California income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as a tax preference item for U.S. Federal alternative minimum tax purposes and may subject Purchaser to the alternative minimum tax in the year of exercise.
8.2 Exercise of Nonqualified Stock Option . If the Option does not qualify as an ISO, there may be a regular U.S. Federal income tax liability and a California income tax liability upon the exercise of the Option. Purchaser will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Purchaser is or was an employee of the Company, the Company may be required to withhold from Purchaser's compensation or collect from Purchaser and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise.
8.3 Disposition of Shares . The following tax consequences may apply upon disposition of the Shares.
(a) Incentive Stock Options . If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to the exercise of an ISO and are disposed of more than two (2) years after the Date of Grant, any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. If Shares purchased under an ISO are disposed of within the applicable one (1) year or two (2) year period, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price.
(b) Nonqualified Stock Options . If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to the exercise of an NQSO, any gain realized on disposition of the Shares will be treated as long-term capital gain.
(c) Withholding . The Company may be required to withhold from the Purchaser's compensation or collect from the Purchaser and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income.
9. COMPLIANCE WITH LAWS AND REGULATIONS . The issuance and transfer of the Shares will be subject to and conditioned upon compliance by the Company and Purchaser with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company's Common Stock may be listed or quoted at the time of such issuance or transfer.
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10. SUCCESSORS AND ASSIGNS . The Company may assign any of its rights under this Exercise Agreement. No other party to this Exercise Agreement may assign, whether voluntarily or by operation of law, any of its rights and obligations under this Exercise Agreement, except with the prior written consent of the Company. This Exercise Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Agreement will be binding upon Purchaser and Purchaser's heirs, executors, administrators, legal representatives, successors and assigns.
11. GOVERNING LAW . This Exercise Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to that body of laws pertaining to conflict of laws.
12. NOTICES . Any and all notices required or permitted to be given to a party pursuant to the provisions of this Exercise Agreement will be in writing and will be effective and deemed to provide such party sufficient notice under this Exercise Agreement on the earliest of the following: (i) at the time of personal delivery, if delivery is in person; (ii) one (1) business day after deposit with an express overnight courier for United States deliveries, or two (2) business days after such deposit for deliveries outside of the United States, with proof of delivery from the courier requested; or (iii) three (3) business days after deposit in the United States mail by certified mail (return receipt requested) for United States deliveries. All notices for delivery outside the United States will be sent by express courier. All notices not delivered personally will be sent with postage and/or other charges prepaid and properly addressed to the party to be notified at the address set forth below the signature lines of this Exercise Agreement, or at such other address as such other party may designate by one of the indicated means of notice herein to the other parties hereto. Notices to the Company will be marked "Attention: Stock Plan Administration".
13. FURTHER ASSURANCES . The parties agree to execute such further documents and instruments and to take such further actions as may be reasonably necessary to carry out the purposes and intent of this Exercise Agreement.
14. TITLES AND HEADINGS . The titles, captions and headings of this Exercise Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Exercise Agreement. Unless otherwise specifically stated, all references herein to "sections" and "exhibits" will mean "sections" and "exhibits" to this Exercise Agreement.
15. ENTIRE AGREEMENT . The Plan, the Stock Option Agreement and this Exercise Agreement, together with all Exhibits thereto, constitute the entire agreement and understanding of the parties with respect to the subject matter of this Exercise Agreement, and supersede all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof.
16. COUNTERPARTS . This Exercise Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all of which together shall constitute one and the same agreement.
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17. SEVERABILITY . If any provision of this Exercise Agreement is determined by any court or arbitrator of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto. If such clause or provision cannot be so enforced, such provision shall be stricken from this Exercise Agreement and the remainder of this Exercise Agreement shall be enforced as if such invalid, illegal or unenforceable clause or provision had (to the extent not enforceable) never been contained in this Exercise Agreement. Notwithstanding the forgoing, if the value of this Exercise Agreement based upon the substantial benefit of the bargain for any party is materially impaired, which determination as made by the presiding court or arbitrator of competent jurisdiction shall be binding, then both parties agree to substitute such provision(s) through good faith negotiations.
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IN WITNESS WHEREOF , the Company has caused this Exercise Agreement to be executed in triplicate by its duly authorized representative and Purchaser has executed this Exercise Agreement in triplicate as of the Effective Date, indicated above.
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Signature page to Dexcom, Inc. Stock Option Exercise Agreement No. _____
EXHIBIT
Exhibit 1: Copy of Purchaser's Check
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EXHIBIT 1
COPY OF PURCHASER'S CHECK
DEXCOM, INC.
2005 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: FEBRUARY 9, 2005
APPROVED BY THE STOCKHOLDERS: MARCH 21, 2005
1. Establishment of Plan . Dexcom, Inc., a Delaware corporation (the " Company ") proposes to grant options for purchase of the Company's Common Stock to eligible employees of the Company and its Participating Corporations (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (this " Plan "). For purposes of this Plan, " Parent " and " Subsidiary " shall have the same meanings as "parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the " Code "). " Participating Corporations " are the Company and any Parents or Subsidiaries that the Board of Directors of the Company (the " Board ") designates from time to time as corporations that shall participate in this Plan. The Company intends this Plan to qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. A total of one hundred and fifty thousand (150,000) shares of the Company's Common Stock is reserved for issuance under this Plan. In addition, on each January 1 (commencing with January 1, 2006), the aggregate number of shares of the Company's Common Stock reserved for issuance under the Plan shall be increased automatically by a number of shares equal to 1% of the total number of outstanding shares of the Company Common Stock on the immediately preceding December 31; provided, that the Board or the Committee may in its sole discretion reduce the amount of the increase in any particular year; and, provided further , that the aggregate number of shares issued over the term of this Plan shall not exceed three million (3,000,000) shares of Common Stock. The number of shares reserved for issuance under this Plan and the maximum number of shares that may be issued under this Plan reflect the 1-for-2 reverse split of the Common Stock effected on or before the Company's initial public offering and shall be subject to adjustments effected in accordance with Section 14 of this Plan.
2. Purpose. The purpose of this Plan is to provide eligible employees of the Company and Participating Corporations with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees' sense of participation in the affairs of the Company and Participating Corporations, and to provide an incentive for continued employment.
3. Administration. This Plan shall be administered by the Compensation Committee of the Board (the " Committee "). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all participants. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company.
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4. Eligibility. Any employee of the Company or the Participating Corporations is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:
(a) employees who are not employed by the Company or a Participating Subsidiary prior to the beginning of such Offering Period or prior to such other time period as specified by the Committee, except that employees who are employed on the Effective Date of the Registration Statement filed by the Company with the Securities and Exchange Commission (" SEC ") under the Securities Act of 1933, as amended (the " Securities Act ") registering the initial public offering of the Company's Common Stock shall be eligible to participate in the first Offering Period under the Plan;
(b) employees who are customarily employed for twenty (20) hours or less per week;
(c) employees who are customarily employed for five (5) months or less in a calendar year;
(d) employees who have been an employee of the Company for less than three (3) months prior to the first day of an offering period;
(e) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Corporations or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Corporations; and
(f) individuals who provide services to the Company or any of its Participating Corporations as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes.
5. Offering Dates. The offering periods of this Plan (each, an " Offering Period ") shall be of twelve (12) months duration commencing on February 1 and August 1 of each year and respectively ending on July 31 and January 31 of each year; provided, however , that the first such Offering Period shall commence on the date on which the registration statement filed by the Company with the SEC under the Securities Act registering the initial public offering of the Company's Common Stock is declared effective by the SEC (the " First Offering Date ") and shall end on July 31, 2006 (the " First Offering Period "). Each Offering Period shall consist of two (2) six month purchase periods (individually, a " Purchase Period ") during which payroll deductions of the participants are accumulated under this Plan. The First Offering Period shall consist of no more than three (3) and no fewer than two (2) Purchase Periods, any of which may be greater or less than six months as determined by the Committee. The first business day of each Offering Period is referred to as the " Offering Date ." The last business day of each Purchase Period is referred to as the " Purchase Date ." The Committee shall have the power to change the Offering Dates, the Purchase Dates and the duration of Offering Periods or Purchase Periods without stockholder approval if such change is announced prior to the relevant Offering Period or prior to such other time period as specified by the Committee.
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6. Participation in this Plan. Eligible employees may become participants in an Offering Period under this Plan on the Offering Date after satisfying the eligibility requirements by delivering a subscription agreement to the Company prior to such Offering Date, or such other time period as specified by the Committee; provided, however , that all eligible employees employed on or before the First Offering Date will be automatically enrolled in the First Offering Period. Notwithstanding the foregoing, (i) an eligible employee may elect to decrease the number of shares of Common Stock that such employee would otherwise be permitted to purchase pursuant to Section 7 below for the First Offering Period and/or purchase shares of Common Stock for the First Offering Period through payroll deductions by delivering a subscription agreement to the Company within thirty (30) days following the First Offering Date after the filing of an effective registration statement pursuant to Form S-8 and (ii) the Committee may set a later time for filing the subscription agreement authorizing payroll deductions for all eligible employees with respect to a given Offering Period. Except as provided above with respect to the First Offering Period, an eligible employee who does not deliver a subscription agreement to the Company after becoming eligible to participate in an Offering Period shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in this Plan by filing a subscription agreement with the Company prior to such Offering Period, or such other time period as specified by the Committee. Once an employee becomes a participant in an Offering Period by filing a subscription agreement, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan.
7. Grant of Option on Enrollment. Enrollment by an eligible employee in this Plan with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by a fraction, the numerator of which is the amount accumulated in such employee's payroll deduction account during such Purchase Period and the denominator of which is the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date (but in no event less than the par value of a share of the Company's Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company's Common Stock), provided, however , that for each Purchase Period within the First Offering Period the numerator shall be ten percent (10%) of the eligible employee's compensation for such Purchase Period and provided , further , that the number of shares of the Company's Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(c) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(b) below with respect to the applicable Purchase Date. The fair market value of a share of the Company's Common Stock shall be determined as provided in Section 8 below.
8. Purchase Price. The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:
(a) The fair market value on the Offering Date; or
(b) The fair market value on the Purchase Date .
The term " fair market value " means, as of any date, the value of a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal ;
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(b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal ; or
(c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal .
Notwithstanding the foregoing, for purposes of the First Offering Date, fair market value shall be the price per share at which shares of the Company's Common Stock are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Common Stock pursuant to a registration statement filed with the SEC under the Securities Act.
9. Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of Shares.
(a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period, provided , however , that for the First Offering Period the purchase price of the shares shall be paid by the eligible employee in cash on each Purchase Date within the First Offering Period unless the eligible employee elects to purchase such shares through payroll deductions after the filing of an effective Form S-8 registration statement pursuant to the second sentence of Section 6 above within thirty (30) days following the First Offering Period. The deductions are made as a percentage of the participant's compensation in one percent (1%) increments not less than one percent (1%), nor greater than ten percent (10%) or such lower limit set by the Committee. Compensation shall mean all W-2 cash compensation, including, but not limited to, base salary, wages, commissions, overtime, shift premiums, bonuses and incentive compensation, plus draws against commissions, provided , however , that for purposes of determining a participant's compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Payroll deductions shall commence on the first payday of the Offering Period and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan.
(b) A participant may increase or decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing after the Company's receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) change may be made effective during any Purchase Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new authorization for payroll deductions prior to the beginning of such Offering Period, or such other time period as specified by the Committee.
(c) A participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions. Such reduction shall be effective beginning with the next payroll period after the Company's receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the participant's account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below. A participant may not resume making payroll deductions during the Offering Period in which he or she reduced his or her payroll deductions to zero.
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(d) All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.
(e) On each Purchase Date, so long as this Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant as of that date returned to the participant, the Company shall apply the funds then in the participant's account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of this Plan. Any cash remaining in a participant's account after such purchase of shares shall be refunded to such participant in cash, without interest; provided, however that any amount remaining in such participant's account on a Purchase Date which is less than the amount necessary to purchase a full share of the Company shall be carried forward, without interest, into the next Purchase Period or Offering Period, as the case may be. In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.
(f) As promptly as practicable after the Purchase Date, the Company shall issue shares for the participant's benefit representing the shares purchased upon exercise of his or her option.
(g) During a participant's lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised.
10. Limitations on Shares to be Purchased.
(a) No participant shall be entitled to purchase stock under this Plan at a rate which, when aggregated with participant's rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in this Plan. The Company shall automatically suspend the payroll deductions of any participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.
(b) The Committee may, in its sole discretion, set a new maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the " Maximum Share Amount "), which shall then be the Maximum Share Amount for subsequent Offering Periods. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period for which it is to be effective. The Maximum Share Amount shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Committee as set forth above.
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(c) If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant's option to each participant affected.
(d) Any payroll deductions accumulated in a participant's account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the applicable Purchase Period, without interest.
11. Withdrawal.
(a) Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a written notice to that effect on a form provided for such purpose. Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Committee.
(b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate. In the event a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan.
(c) If the Fair Market Value on the first day of the current Offering Period in which a participant is enrolled is higher than the Fair Market Value on the first day of any subsequent Offering Period, the Company will automatically enroll such participant in the subsequent Offering Period. Any funds accumulated in a participant's account prior to the first day of such subsequent Offering Period will be applied to the purchase of shares on the Purchase Date immediately prior to the first day of such subsequent Offering Period, if any.
12. Termination of Employment. Termination of a participant's employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee of the Company or of a Participating Subsidiary, immediately terminates his or her participation in this Plan. In such event, the payroll deductions credited to the participant's account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Subsidiary in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.
13. Return of Payroll Deductions. In the event a participant's interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the participant all payroll deductions credited to such participant's account. No interest shall accrue on the payroll deductions of a participant in this Plan.
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14. Capital Changes.
(a) Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under this Plan but have not yet been placed under option (collectively, the " Reserves "), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, and the Maximum Share Amount, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any consideration by the Company; provided, however , that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Committee , whose determination shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option.
(b) In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that this Plan shall terminate as of a date fixed by the Committee and give each participant the right to purchase shares under this Plan prior to such termination.
(c) In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the options under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all participants), (ii) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company or (iv) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, the Plan will terminate upon the effective date of such transaction and any funds in a Participant's account as of such date will be used to purchase shares of the Company on such date, unless otherwise provided by the Committee.
(d) The Committee may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being consolidated with or merged into any other corporation.
15. Nonassignability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 below) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.
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16. Reports. Individual accounts will be maintained for each participant in this Plan. Each participant shall receive promptly after the end of each Purchase Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be.
17. Notice of Disposition. Each participant shall notify the Company in writing if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the " Notice Period "). The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company's transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.
18. No Rights to Continued Employment. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Subsidiary, or restrict the right of the Company or any Participating Subsidiary to terminate such employee's employment.
19. Equal Rights And Privileges. All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an "employee stock purchase plan" within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan.
20. Notices. All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.
21. Term; Stockholder Approval. After this Plan is adopted by the Board, this Plan will become effective on the First Offering Date (as defined above). This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares pursuant to this Plan shall occur prior to such stockholder approval. This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) ten (10) years from the adoption of this Plan by the Board.
22. Designation of Beneficiary .
(a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under this Plan in the event of such participant's death subsequent to the end of an Purchase Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under this Plan in the event of such participant's death prior to a Purchase Date.
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(b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant's death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
23. Conditions Upon Issuance of Shares; Limitation on Sale of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.
24. Applicable Law. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of California.
25. Amendment or Termination of this Plan. The Plan shall terminate on the tenth anniversary of the First Offering Date. The Board may at any time amend, terminate or extend the term of this Plan, except that any such termination cannot affect options previously granted under this Plan other than to advance the final Purchase Date under any Offering Period, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the stockholders of the Company obtained in accordance with Section 21 above within twelve (12) months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would:
(a) increase the number of shares that may be issued under this Plan; or
(b) change the designation of the employees (or class of employees) eligible for participation in this Plan; or
(c) extend the term of the Plan.
Notwithstanding the foregoing, the Board may make such amendments to the Plan (including, without limitation, termination of the Plan and any Offering Period) as the Board determines to be advisable, if the continuation of the Plan or any Offering Period would result in financial accounting treatment for the Plan that is different from the financial accounting treatment in effect on the date this Plan is adopted by the Board.
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FORM OF DEXCOM, INC. 2005 EMPLOYEE
STOCK PURCHASE PLAN/ENROLLMENT/CHANGE FORM
DEXCOM, INC.
2005 EMPLOYEE STOCK PURCHASE PLAN ("ESPP") |
ENROLLMENT/CHANGE FORM |
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SECTION 1: | CHECK DESIRED ACTION: | AND COMPLETE SECTIONS: | ||
ACTIONS |
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o Enroll in the ESPP |
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2 + 3 + 4 + 6 |
o Change Contribution Percentage | 2 + 4 + 6 | |||
o Discontinue Contributions | 2 + 5 + 6 | |||
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SECTION 2: |
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Name: _______________________________________ |
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Department: |
PERSONAL DATA | Home Address: _______________________________ |
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Social Security No.: o o o - o o - o o o o | ||||
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SECTION 3:
ENROLL |
I hereby elect to participate in the ESPP, effective at the beginning of the next Offering Period. I elect to purchase shares of the Common Stock of Dexcom, Inc. (the "Company") pursuant to the ESPP. I understand that the stock certificate(s) for the shares purchased on my behalf will be issued in street name and deposited directly into my brokerage account. I hereby agree to establish an account with [ ] for this purpose and to sign all required forms. | |||
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My participation will continue as long as I remain eligible, unless I withdraw from the ESPP by filing a new Enrollment/Change Form with the Company. I understand that I must notify the Company of any disposition of shares purchased under the ESPP. |
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SECTION 4:
ELECT CONTRIBUTION PERCENTAGE |
I hereby authorize the Company to withhold % of my compensation (as defined in the ESPP) from each of my paychecks as long as I continue to participate in the ESPP. That amount will be applied to the purchase of shares of the Company's Common Stock pursuant to the ESPP. The percentage must be a whole number (from 1%, up to a maximum of 10%). | |||
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Note: You may change your contribution percentage up to two times within a Contribution Period. Each change will become effective as soon as reasonably practicable after the form is received by the Company. |
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SECTION 5:
DISCONTINUE CONTRIBUTIONS |
I hereby elect to stop my contributions under the ESPP, effective as soon as reasonably practicable after this form is received by the Company. The contributions that I have made to date during this Contribution Period should be applied as follows: | |||
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o Purchase shares of the Company's Common Stock at the end of the period. |
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o Refund all contributions to me in cash, without interest. I understand that I cannot resume participation until the start of the next Offering Period. |
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SECTION 6:
ACKNOWLEDGMENT AND SIGNATURE |
I acknowledge that I have received a copy of the Prospectus summarizing the major features of the ESPP. I have read the Prospectus and this form and hereby agree to be bound by the terms of the ESPP. | |||
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Signature: ______________________________________- |
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Date: ______________ |
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 22, 2005, except for Note 10, as to which the date is March 23, 2005, in Amendment No. 4 to the Registration Statement (Form S-1 No. 333-122454) and related Prospectus of Dexcom, Inc.
/s/ ERNST & YOUNG LLP | |
San Diego, California March 23, 2005 |
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