<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 2000
REGISTRATION NO. 333-34668
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DELTAGEN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8731 94-3260659
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
DELTAGEN, INC.
1003 HAMILTON AVENUE
MENLO PARK, CALIFORNIA 94025
(650) 752-0200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
WILLIAM MATTHEWS, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DELTAGEN, INC.
1003 HAMILTON AVENUE
MENLO PARK, CALIFORNIA 94025
(650) 752-0200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
<TABLE>
<S> <C>
CAMEO F. JONES, ESQ. JULIE SPELLMAN, ESQ.
PILLSBURY MADISON & SUTRO LLP CRAVATH, SWAINE & MOORE
50 FREMONT STREET WORLDWIDE PLAZA
SAN FRANCISCO, CALIFORNIA 94105 825 EIGHTH AVENUE
(415) 983-1000 NEW YORK, NEW YORK 10019
(415) 983-1200 (FAX) (212) 474-1000
(212) 474-3700 (FAX)
</TABLE>
----------------
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. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________________
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. / / ________________
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. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 2, 2000
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING OFFERS
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
7,000,000 SHARES
[DELTAGEN LOGO]
DELTAGEN, INC.
COMMON STOCK
---------
We are selling all the shares of common stock in this offering. We have
granted the underwriters a 30-day option to purchase up to 1,050,000 shares of
common stock to cover over-allotments.
This is the initial public offering of our common stock. We currently expect
that the initial public offering price will be between $13.00 and $15.00 per
share. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "DGEN."
--------------
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------- --------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Deltagen, Inc. (before expenses) $ $
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about
, 2000.
--------------
Salomon Smith Barney Robertson Stephens
U.S. Bancorp Piper Jaffray
, 2000.
<PAGE>
[DESCRIPTION OF ARTWORK]
[DELTAGEN SYMBOL] DELTAGEN
[THREE PICTURES OF THE DELTABASE COMPUTER PAGES]
Providing gene function
information to advance
the discovery of new medicines
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Information Regarding Forward-Looking Statements............ 20
Use of Proceeds............................................. 21
Our Policy Regarding Dividends.............................. 21
Capitalization.............................................. 22
Dilution.................................................... 24
Selected Financial Data..................................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 32
Management.................................................. 48
Relationships and Related Party Transactions................ 58
Principal Stockholders...................................... 60
Description of Capital Stock................................ 64
Shares Eligible for Future Sale............................. 69
U.S. Tax Consequences to Non-U.S. Holders................... 71
Underwriting................................................ 74
Legal Matters............................................... 76
Experts..................................................... 76
Where You Can Find Additional Information................... 76
Index to Financial Statements............................... F-1
</TABLE>
Until , 2000, all dealers that buy, sell or trade our common
stock, 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.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE
BUYING SHARES IN THIS OFFERING. THEREFORE, YOU SHOULD READ THIS ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE RISKS OF PURCHASING OUR COMMON STOCK
DISCUSSED UNDER THE "RISK FACTORS" SECTION AND OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES.
DELTAGEN
We have developed technology to convert raw genetic data into mammalian gene
function information to help pharmaceutical and biotechnology companies expedite
the drug discovery process. Our technology enables us to select genes believed
to be relevant to disease and delete, or knockout, these genes in mice, which
allows us to gather information about the role of these genes in disease. We
then use an extensive analysis program to assess the function and potential
pharmaceutical relevance of these genes. Our technology allows us to generate
targeted gene knockouts in mice on a large scale and at a fast rate. To promote
more efficient use of our data, we have developed DeltaBase, a proprietary,
searchable database that will provide immediate access to gene function
information contained in the database and potential targets for drug discovery.
OUR OPPORTUNITY
Pharmaceutical and biotechnology companies are continually challenged to
develop and market increased numbers of drugs. Recent advances have led to the
identification of approximately 140,000 genes of which 3,000 to 10,000 are
believed to have potential as drug targets. This is a significant increase over
the approximate 500 targets that are currently the primary focus of drug
development. Seeking to capitalize upon the opportunity to discover new drug
targets, pharmaceutical, biotechnology and genomics companies are rapidly
pursuing genomics-based drug discovery programs to identify genes that represent
commercially viable drug targets. We believe traditional target discovery
methods are likely to be insufficient to evaluate such a large number of genes
as potential drug targets. Consequently, we believe pharmaceutical and
biotechnology companies would benefit from a more rapid and high-volume approach
for the selection of genes that represent valid drug targets.
OUR APPROACH
We have developed a fully integrated system to validate drug targets. Our
approach moves rapidly from gene identification to the determination of gene
function in a mammalian organism. Additionally, we pursue patents to protect the
intellectual property rights that we generate relating to gene function. To
commercialize our technology, we have developed the following programs:
DELTABASE is our proprietary database that we designed to provide
subscribers with immediate access to target validation information on genes that
we have selected for their relevance to the drug discovery process. This
searchable database will enable our subscribers to make decisions regarding the
selection of drug targets and pursue those targets they consider to have the
highest degree of commercial relevance. In addition, subscribers to DeltaBase
will have the right to access our intellectual property on gene function. By
providing earlier access to extensive mammalian gene function information, we
believe that we can improve the efficiency of the drug discovery process by
allowing subscribers to make earlier decisions regarding drug target viability.
We recently launched our DeltaBase product with Glaxo Wellcome as our initial
subscriber.
DELTASELECT is our target validation program that we provide to potential
DeltaBase subscribers. Under this program, our customers select genes for entry
into our target validation system and receive the resulting gene function
information utilizing the same information technology platform employed in
DeltaBase. We also intend to use DeltaSelect to advance potential new database
product offerings with
1
<PAGE>
our customers. Currently, our DeltaSelect customers are Merck & Co.,
Pfizer, Inc., Roche Biosciences, Schering-Plough Research Institute and Glaxo
Wellcome.
DELTA-GT is our program that simultaneously identifies and determines the
function of proteins that are secreted in a mammalian organism. Examples of
secreted proteins that have already allowed other companies to develop
successful drugs include insulin, human growth hormone, and erythropoeitin, or
EPO. We believe that our Delta-GT technology represents a system for developing
potential drug candidates. We are currently not seeking to commercialize any
drug candidates through our Delta-GT program.
OUR STRATEGY
Our goal is to be the leading provider of data on the function, role and
disease relevance of mammalian genes. The key elements of our strategy to
achieve this goal include:
- becoming the most comprehensive source of information on mammalian gene
function and target validation by expanding our proprietary technologies
and developing systems to increase the scale, scope and depth of our
database content;
- focusing on the commercial needs of our customers by delivering valuable
information and facilitating real-time access and searching of DeltaBase;
- continuing to pursue intellectual property rights for what we believe to
be our commercially relevant inventions, products and methods and offering
our customers access to our intellectual property portfolio;
- pursuing early stage development of targets found through our Delta-GT
program; and
- acquiring technologies to meet the target validation needs of our
customers.
As we are a development stage company with a limited operating history and
an unproven business strategy, there can be no assurance that we will succeed in
achieving our goal. Moreover, we face serious competition from others attempting
to determine gene function and cannot assure you that our technology and product
offerings will be commercially viable.
--------------
We were incorporated in Delaware in January 1997 under the name
Deltagen, Inc. Our principal executive offices and primary research facilities
are located at 1003 Hamilton Avenue, Menlo Park, California 94025, and our
telephone number is (650) 752-0200.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered................................. 7,000,000 shares
Common stock reserved................................ 700,000 shares of the common stock included in
this offering have been reserved for sale to
our directors, officers and employees, as well
as to clients, vendors and individuals
associated with us.
Common stock outstanding after this offering......... 28,804,437 shares
Use of proceeds...................................... For expansion of product and technology
development, growth of our sales and marketing
organization, investment in intellectual
property protection, working capital and
general corporate purposes.
Nasdaq National Market symbol........................ "DGEN"
</TABLE>
Unless otherwise indicated, all information in this prospectus:
- assumes an 8-for-7 forward split of our capital stock prior to the
completion of this offering;
- assumes no exercise of the underwriters' option to purchase up to
1,050,000 additional shares of common stock to cover over-allotments; and
- reflects the conversion of each of the 18,137,486 outstanding shares of
our preferred stock into 18,137,486 shares of our common stock
automatically upon the closing of this offering.
The number of shares of common stock to be outstanding immediately after the
offering:
- is based upon 21,804,437 shares outstanding as of March 31, 2000;
- does not take into account 1,266,230 shares of common stock issuable upon
the exercise of options outstanding as of March 31, 2000, at a weighted
average exercise price of $0.67 per share, 222,256 shares of common stock
issuable upon exercise of options granted on May 26, 2000, at a weighted
average exercise price of $7.88 and 621,313 shares of common stock
issuable upon exercise of options granted on July 7, 2000, at a weighted
exercise price of $12.60;
- does not take into account 43,101 shares of Series B preferred stock,
convertible into common stock upon the closing of this offering and
issuable upon the exercise of warrants outstanding as of March 31, 2000,
at an exercise price of $1.53 per share;
- does not take into account 457,143 shares of Series C preferred stock,
convertible into common stock upon the closing of this offering and
issuable upon the exercise of a warrant outstanding as of July 31, 2000,
at an exercise price of $3.13; and
- does not take into account 13,931 unissued shares authorized for future
awards under our 1998 Stock Incentive Plan, 5,485,714 unissued shares
authorized for future awards under our 2000 Stock Incentive Plan and
1,142,857 unissued shares authorized for future issuance under our
Employee Stock Purchase Plan.
--------------
Deltagen-Registered Trademark- is our company's registered trademark.
DeltaBase-TM-, DeltaSelect-TM-, Delta-GT-TM- and DeltaXpress-TM- are our common
law trademarks. This prospectus also contains brand names, logos, service marks
and trademarks of other companies.
3
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28, 1997
(DATE OF INCEPTION) YEARS ENDED THREE MONTHS
TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------- -------------------
1997 1998 1999 1999 2000
------------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Contract revenue............................... $ -- $ 381 $ 1,240 221 286
------- ------- -------- ------- --------
Operating expenses:
Research and development..................... 879 3,360 12,144 2,236 5,627
General and administrative................... 416 638 2,932 248 2,045
------- ------- -------- ------- --------
Total operating expenses................... 1,295 3,998 15,076 2,484 7,672
------- ------- -------- ------- --------
Loss from operations........................... (1,295) (3,617) (13,836) (2,263) (7,386)
Interest income (expense), net................. 40 265 (11) 68 91
------- ------- -------- ------- --------
Net loss....................................... (1,255) (3,352) (13,847) (2,195) (7,295)
Deemed dividend related to beneficial
conversion of preferred stock................ -- -- -- -- (22,360)
------- ------- -------- ------- --------
Net loss attributable to common stockholders... $(1,255) $(3,352) $(13,847) $(2,195) $(29,655)
======= ======= ======== ======= ========
Net loss per common share, basic and diluted... $ -- $ (8.00) $ (12.82) $ (2.44) $ (18.56)
======= ======= ======== ======= ========
Shares used in computing net loss per common
share, basic
and diluted (unaudited)...................... -- 419 1,080 898 1,598
======= ======= ======== ======= ========
Pro forma net loss per share, basic and
diluted...................................... $ (1.15) $ (1.64)
======== ========
Shares used in computing pro forma net loss per
share, basic and diluted (unaudited)......... 12,018 18,136
======== ========
</TABLE>
Pro forma basic and diluted net income per share have been calculated
assuming the conversion of all outstanding shares of convertible preferred stock
as of March 31, 2000 into 18,137,486 shares of common stock as if the stock had
been converted immediately upon its issuance.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 17,961 $17,961 $107,901
Working capital............................................. 12,732 12,732 102,672
Total assets................................................ 25,075 25,075 115,015
Capital lease obligations, less current portion............. 14 14 14
Loans payable, less current portion......................... 2,051 2,051 2,051
Redeemable convertible preferred stock...................... 36,807 -- --
Total stockholders' equity (deficit)........................ (19,327) 17,480 107,420
</TABLE>
The pro forma balance sheet reflects the automatic conversion of 18,137,486
outstanding shares of convertible preferred stock as of March 31, 2000 into
18,137,486 shares of common stock. The pro forma as adjusted balance sheet
reflects this automatic conversion and the sale of 7,000,000 shares of common
stock offered at an assumed initial public offering price of $14.00 after
deducting estimated underwriting discounts, commissions and offering expenses.
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS DESCRIBED BELOW AND THE OTHER INFORMATION
IN THIS PROSPECTUS INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES BEFORE
YOU DECIDE TO BUY OUR COMMON STOCK. THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE DUE TO ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES AND WE MAY NEVER ACHIEVE
PROFITABILITY, WHICH IN TURN MAY HARM OUR FUTURE OPERATING PERFORMANCE AND MAY
CAUSE THE MARKET PRICE OF OUR STOCK TO DECLINE
We have had net losses every year since our inception in 1997 and, as of
March 31, 2000, had an accumulated deficit of $25.7 million. We had net losses
of $1.3 million, $3.4 million, $13.8 million and $29.7 million in 1997, 1998,
1999 and the first quarter of 2000, respectively and net losses of $7.3 million
before a dividend related to the beneficial conversion of our preferred stock.
Because we anticipate significant additional expenditures for our research and
development programs and for the development, implementation and support of our
gene function database, we expect to report substantial net losses through at
least the next several years. We may never achieve profitability. If we do not
become profitable within the time frame expected by securities analysts or
investors, the market price of our stock will likely decline. If we do achieve
profitability, we may not sustain or increase profitability in the future.
We expect that our expenditures will continue to increase, due in part to:
- continued investment in the research and development of our new and
existing products and our technology, including increased investment for
the development, implementation and support of our gene function database,
our standard and conditional knockout programs and our gene trap programs;
- obligations under existing and future fee-for-service agreements; and
- our increasing investment in management and other employees, sales and
marketing programs, customer service and operational and financial
controls.
WE ARE A DEVELOPMENT-STAGE COMPANY WITH AN UNPROVEN BUSINESS STRATEGY, AND OUR
LIMITED HISTORY OF OPERATIONS MAKES EVALUATION OF OUR BUSINESS AND PROSPECTS
DIFFICULT
We have had a limited operating history and are at an early stage of
development. Our strategy of offering a gene function database and using
knockout mice to enable our customers to pursue promising candidates for drug
target development is unproven. Additionally, our pricing models for offering
our products and services are unproven. We currently have one subscriber for our
gene function database. We have generated only limited revenues from customers
for the development and analysis of knockout mice, amounting to approximately
$1.2 million and $381,000 for the fiscal years ended 1999 and 1998,
respectively. For the three months ended March 31, 2000 and 1999, we recognized
revenues of $286,000 and $221,000, respectively. We recognized no revenue in
1997. Our success will depend upon, among other things, our ability to enter
into licensing and other agreements on favorable terms, our ability to determine
and generate information on those genes which have potential use as drug targets
and the commercialization of products using our data. Moreover, we have no
experience selling our data, and we have never provided a gene database before.
Our sales force may not succeed in marketing our database product, and our
employees may not succeed in implementing and operating our database in a manner
that is satisfactory to our subscribers. Furthermore, the plans for our gene
trap and conditional knockout programs are unproven, and we cannot be sure that
we will ever be able to develop these programs or that any program that we
develop will be commercially successful. As a result of these factors, it is
difficult to evaluate our
5
<PAGE>
prospects, and our future success is more uncertain than if we had a longer or
more proven history of operations.
WE CURRENTLY HAVE ONLY SIX CUSTOMERS AND WILL NOT SUCCEED UNLESS WE CAN ATTRACT
MANY MORE CUSTOMERS
We currently have only one subscriber to our gene function database, and we
have only six customers for our DeltaSelect knockout program. We expect to enter
into only a limited number of future DeltaSelect agreements. To succeed we must
attract customers for our database and other programs. Our existing and future
agreements may not be renewed and may be terminated without penalty in the event
either party fails to fulfill its obligations under one of these agreements.
Failure to renew or the cancellation of these agreements by one of our customers
could result in a significant loss of revenues. In 1999, Pfizer accounted for
64% of our revenues and two of our other current customers each accounted for
greater than 10% of our revenues. Our current customers are Merck, Pfizer, Roche
Biosciences, Schering-Plough, Glaxo Wellcome and Tularik. Our agreement with
Tularik expired in February 2000 and our agreements with Roche and Pfizer expire
in November and December 2000, respectively. In the first quarter of 2000,
Schering-Plough accounted for 52% of our revenues and two other customers
accounted for the remaining 15% and 33%, respectively.
Over the past several years, companies in the pharmaceutical industry have
undergone significant consolidation. If two or more of our present or future
customers merge, we may not be able to receive the same fees under agreements
with the combined entities that we were able to receive under agreements with
these customers prior to their merger. Moreover, if one of our customers merges
with an entity that is not a customer, the new combined entity may prematurely
terminate our agreement. Any of these developments could harm our business or
financial condition.
BECAUSE WE HAVE ONLY RECENTLY BEGUN TO OFFER OUR DATABASE, WHICH WE EXPECT TO BE
OUR PRINCIPAL PRODUCT, OUR FUTURE PROSPECTS ARE UNCERTAIN
We believe the majority of our revenues will be derived from fees under
agreements with our database users. We may also derive revenues from royalties
received from these users. We have entered into one agreement with a subscriber
to our database, however, we cannot be sure of the terms under which we may
enter into future agreements, such as fees payable to us or the term of the
agreements, if any. Our agreement which expires three years after our first
delivery of data to Glaxo Wellcome provides for termination for any reason
within the first three months after the one-year anniversary of the effective
date upon the payment of a specified termination fee.
Our database has not been tested by customers, and it may not perform
adequately or provide information in a manner that is useful for our customers.
If our database is not acceptable to our prospective customers, it may not
generate revenues and our business and financial condition will be materially
harmed.
We may not be able to comply with minimum performance levels or restrictive
provisions or other obligations that may be contained in any agreements, such as
minimum data delivery requirements. In addition, we may experience unforeseen
technical complications in the processes we use to generate functional data for
our gene database and functional genomics resources. These complications could
materially delay or limit the use of our gene function database, substantially
increase the anticipated cost of generating data or prevent us from implementing
our processes at appropriate quality and scale levels, thereby causing our
business to suffer.
NO DRUGS HAVE BEEN DEVELOPED AND COMMERCIALIZED USING GENOMICS-BASED RESEARCH
AND THEREFORE THE FUTURE OF OUR PRODUCTS AND PROGRAMS IS UNCERTAIN
None of the limited number of drugs developed to date using genomics-based
research have reached the commercial market. We cannot assure you that
genomics-based drug development efforts
6
<PAGE>
will ultimately be successful. We have not proven our ability either to identify
drug targets with commercial potential or commercialize drug targets that we do
identify. We cannot assure you that a particular gene function in a mouse will
have any correlation to a patient's response to a particular drug. It is
difficult to successfully select those genes with the most potential for
commercial development. Furthermore, we do not know that any products based on
genes that are the subject of our research can be successfully developed or
commercialized. If commercial opportunities are not realized from genomic-based
research, our existing customers could stop using our products or we could have
difficulty attracting or retaining customers and, in any event, we would not
realize any product royalties.
OUR CUSTOMERS WILL CONTROL THE DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS
BASED ON GENES THAT WE IDENTIFY, WHICH MAY MEAN THAT OUR RESEARCH EFFORTS WILL
NEVER RESULT IN ANY ROYALTY PAYMENTS OR THIRD PARTY PRODUCT SALES
We intend for our agreements with our customers to provide us with rights to
obtain royalties from the commercial development of compounds or therapeutic
approaches derived from access to our database, technology or intellectual
property. We may not be able to obtain these rights under future agreements. Our
ability to obtain these rights depends in part on the advantages and novelty of
our technologies, the validity of our intellectual property, the usefulness of
our data and our negotiating position relative to each potential customer.
We will have limited or no control over the resources that any customer may
devote to the development of compounds or therapeutic approaches derived from
our access to our database. These customers may breach or terminate their
agreements with us, and they are not obligated to conduct any product discovery,
development or commercialization activities at all. Further, our customers may
decide not to develop products arising out of our customer agreements or may not
devote sufficient resources to the development, approval, manufacture, marketing
or sale of these products. If any of these events occurs, our customers may not
develop or commercialize any products based on our gene function research,
technologies or intellectual property, we would not receive royalties on product
sales and our results of operations would suffer. Furthermore, our customers may
resist sharing revenue derived from the successful commercialization of a drug
through royalty payments or others may have competing claims to all or a portion
of such revenues.
THERE ARE A FINITE NUMBER OF GENE FAMILIES UPON WHICH PHARMACEUTICAL AND
BIOTECHNOLOGY COMPANIES FOCUS THEIR RESEARCH, WHICH LIMITS OUR POTENTIAL REVENUE
AND GROWTH
Our current and potential subscribers and customers traditionally focus
their research and development efforts on a finite number of gene families that
they view as reliable drug targets. Once we provide functional information on
these gene families, our ability to attract and retain subscribers to our
database will depend, in part, on the willingness of our subscribers to expand
their research and development activities to other gene families. If our
customers do not do this, we may lose existing subscribers or fail to attract
new subscribers for our database services, and as a result, our business and
financial condition may be harmed. In addition, we have made and will continue
to make significant investments in our database and knockout programs which we
may not recoup if we cannot find additional target opportunities.
WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE
The following are among the factors that could cause our operating results
to fluctuate significantly from period to period:
- changes in the demand for and pricing of our products and services;
7
<PAGE>
- the nature, pricing and timing of other products and services provided by
us or our competitors;
- changes in the research and development budgets of our customers;
- acquisition, licensing and other costs related to the expansion of our
operations;
- the timing of milestones, licensing and other payments under the terms of
our customer agreements and agreements pursuant to which others license
technology to us;
- expenses related to, and the results of, patent filings and other
proceedings relating to intellectual property rights; and
- our unpredictable revenue sources as described below.
We anticipate significant fixed expenses due in part to our need to continue
to invest in product development and potential extensive support for our gene
function database subscribers. We may be unable to adjust our expenditures if
revenues in a particular period fail to meet our expectations, which would harm
our operating results for that period.
As a result of these fluctuations, we believe that period-to-period
comparisons of our financial results will not necessarily be meaningful, and you
should not rely on these comparisons as an indication of our future performance.
OUR REVENUES WILL BE UNPREDICTABLE AND THIS MAY HARM OUR FINANCIAL CONDITION
The amount and timing of revenues that we may have from our business will be
unpredictable because:
- the timing of our DeltaSelect program agreements, gene function database
subscriber agreements and installations are determined by our customers
and subscribers;
- whether any products are commercialized and generate royalty payments
depends on the efforts, timing and willingness of our customers;
- we do not expect to receive any milestone or royalty payment under
licenses and other arrangements for a substantial period of time, if ever;
- to date, we have entered into only one customer agreement for our gene
function database and may not enter into any additional agreements;
- the time required to complete custom orders for our database programs can
vary significantly; and
- our sales cycle is lengthy, as described below.
As a result, our revenue may significantly vary from quarter to quarter, and
our quarterly results may be below market expectations. If this happens, the
price of our common stock may decline.
WE EXPECT THAT OUR SALES CYCLE WILL BE LENGTHY, WHICH WILL CAUSE OUR REVENUES TO
BE UNPREDICTABLE AND OUR BUSINESS TO BE DIFFICULT TO MANAGE
Our ability to identify and obtain subscribers for our gene function
database product and other services depends upon whether customers believe that
our products and services can help accelerate drug discovery efforts. Our sales
cycle will be lengthy because of the need to educate potential customers and
sell the benefits of our products and services to a variety of constituencies
within potential subscriber companies. These companies are large organizations
with many different layers and types of decision-makers. In addition, each
database subscription and development program or services agreement will involve
the negotiation of unique terms and issues which will take a significant amount
of time. We may expend substantial funds and management effort with no assurance
that a subscription
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program or services agreement will result. Actual or proposed mergers or
acquisitions of our prospective customers may also affect the timing and
progress of our sales efforts. Any of these developments could harm our business
or financial condition.
WE MAY HAVE CONFLICTS OR BE IN COMPETITION WITH OUR CUSTOMERS, WHICH WILL HURT
OUR BUSINESS PROSPECTS
We may pursue opportunities in fields, such as secreted proteins, that could
conflict with those of our customers. Moreover, disagreements could arise with
our customers or their partners over rights to our intellectual property or our
rights to share in any of the future revenues of compounds or therapeutic
approaches developed by our customers. These kinds of disagreements could result
in costly and time-consuming litigation and could have a negative impact on our
relationship with existing customers. Any conflict with our customers could
reduce our ability to attract additional customers or enter into future customer
agreements. Some of our customers could also become competitors in the future.
Our customers could develop competing products, preclude us from entering into
agreements with their competitors or terminate their agreements with us
prematurely.
WE EXPERIENCE INTENSE COMPETITION FROM OTHER ENTITIES ENGAGED IN THE STUDY OF
GENES, AND THIS COMPETITION COULD ADVERSELY AFFECT OUR BUSINESS
The human and mouse genomes contain a finite number of genes. The human
genome has been mapped and identified. Our competitors have identified and will
continue to identify the sequence of numerous genes in order to obtain
proprietary positions with respect to those genes. In addition, our competitors
may seek to identify and determine the biological function of numerous genes in
order to obtain intellectual property rights with respect to specific uses of
these genes, and they may accomplish this before we do. We believe that the
first company to determine the functions of commercially relevant genes or the
commercially relevant portions of the genome will have a competitive advantage.
A number of companies, institutions and government-financed entities are
engaged in gene sequencing, gene discovery, gene expression analysis, gene
function determination and other gene-related service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do and have been conducting research longer than we have. In particular,
a significant portion of this research is being conducted by private companies
and under the international Human Genome Project, a multi-billion dollar program
funded, in part, by the U.S. government, which completed and released its
initial rough draft of the human genome in June of this year. Furthermore, other
entities have and will continue to discover and establish a patent position in
genes or gene sequences that we wish to study. Significant competition also
arises from entities using standard target identification approaches,
traditional knockout mouse technology and other functional genomics
technologies. These competitors may have intellectual property rights in
functional or other data which are superior to our rights. These competitors may
also develop products earlier than we do, obtain regulatory approvals faster
than we can and invent products and techniques that are more effective than
ours. Furthermore, other methods for conducting functional genomics research may
ultimately prove more advanced, in some or all respects, to the use of knockout
mice. In addition, technologies more advanced than or superior to our gene trap
technology and gene function identification technology may be developed, thereby
rendering our gene trap and gene function identification technologies obsolete.
As we expand our range of products and services, such as our gene trap program,
we will compete with additional companies, some of which may be our customers at
that time or our potential customers.
Some of our competitors have developed commercially available databases
containing gene sequence, gene expression, gene function, genetic variation or
other functional genomic information and are marketing or plan to market their
data to pharmaceutical and biotechnology companies. Additional competitors may
attempt to establish databases containing this information in the future. We
expect that competition in our industry will continue to intensify. We also
believe that some
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pharmaceutical and biotechnology companies are discussing the possibility of
working together to discover the functions of genes and share gene
function-related data among themselves. The formation of this type of consortium
could reduce the prospective customer base for our gene function-related
business. Moreover, the pharmaceutical industry has undergone significant
mergers and this trend is expected to continue. This concentration of the
industry could further limit our potential customer base and therefore harm our
business.
IF WE FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS COULD BE ADVERSELY
AFFECTED
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations, including an increase in the scale of
our mouse knockout program. As of December 31, 1999, we had 113 full-time
employees, and as of March 31, 2000, we had 138 full-time employees. We expect
our number of employees to continue to increase for the foreseeable future. In
addition, we have substantially increased the scale of our knockout mouse
production in the last year and expect to continue doing so for the foreseeable
future. Our overall growth and need to develop many different areas of our
company have placed, and may continue to place, a strain on our management and
operations. If we are unable to manage our growth effectively, our losses could
increase. The management of our growth will depend, among other things, upon our
ability to broaden our management team and attract, hire, train and retain
skilled employees. Our success will also depend on the ability of our officers
and key employees to continue to implement and improve our operational and other
systems. We will also be required to expend funds, which may be substantial, to
improve our operational, financial and management controls, reporting systems
and procedures.
In addition, we will have to invest in additional customer support
resources. Our current and potential database subscribers typically have
worldwide operations and may require support at multiple U.S. and foreign sites
and in multiple languages. To provide this support, we may need to open offices
in addition to our Menlo Park and San Carlos, California facilities, which will
result in additional burdens on our systems and resources and require additional
capital expenditures.
WE MAY ENGAGE IN FUTURE ACQUISITIONS, WHICH COULD ADVERSELY AFFECT YOUR
INVESTMENT IN US AS WE MAY NEVER REALIZE ANY BENEFITS FROM SUCH ACQUISITIONS,
WHICH ALSO COULD BE EXPENSIVE AND TIME CONSUMING
We intend to acquire and license additional products and programs, if we
determine that these products or programs complement our existing technology or
augment our existing information technology platforms. We currently have no
commitments or agreements with respect to any material acquisitions. If we do
undertake any transactions of this sort, the process of integrating an acquired
business, technology, service or product may result in operating difficulties
and expenditures and may absorb significant management attention that would
otherwise be available for ongoing development of our business. Moreover, we may
never realize the anticipated benefits of any acquisition. Future acquisitions
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could adversely affect our
results of operations and financial condition.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE, WHICH COULD
ADVERSELY AFFECT OUR OPERATIONS
Our products and services may not produce revenues that, together with our
existing cash and other resources, are adequate to meet our cash needs.
Initially, we plan to fund our operations with proceeds from this offering, and
we may in the future seek to raise additional funds from the sale of stock or
from debt financing. Our cash requirements depend on numerous factors,
including:
- our ability to attract and retain customers for our gene function database
and other products and services;
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- unexpected expenses in connection with the development of our gene
function database, our gene trap program or other products and services;
- expenditures in connection with license agreements and acquisitions of and
investments in complementary technologies and businesses;
- the need to increase research and development spending to keep up with
competing technologies and market developments; and
- unexpected expenditures as we expand our sales, marketing and customer
service organizations and improve our management, operational and
financial systems.
If we need additional funding, we may be unable to obtain it on favorable
terms, or at all. If adequate funds are not available, we may have to curtail
operations significantly or obtain funds by entering into arrangements requiring
us to relinquish rights to certain technologies, products or markets. In
addition, if we raise funds by selling stock or convertible securities, our
existing stockholders could suffer dilution.
WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL, AND
WITHOUT ADDITIONAL EMPLOYEES, WE CANNOT GROW OR ACHIEVE PROFITABILITY
We are highly dependent on the principal members of our management,
operations and scientific staff, including William Matthews, Ph.D., our
President and Chief Executive Officer, and Mark W. Moore, Ph.D., our Chief
Scientific Officer and Treasurer. The loss of either of their services would
harm our business.
Our future success also will depend in part on the continued service of our
key scientific, software, consultant and management personnel and our ability to
identify, hire and retain additional personnel, including customer service,
marketing and sales staff. We experience intense competition for qualified
personnel. We may be unable to attract and retain personnel necessary for the
development of our business. Moreover, our business is located in the San
Francisco Bay Area of California, where demand for personnel with the skills we
seek is extremely high and is likely to remain high. Because of this
competition, our compensation costs may increase significantly.
WE CURRENTLY HAVE NO PATENTS, AND IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY
INFORMATION, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Our business and competitive position depends upon our ability to protect
and exploit our proprietary techniques, methods, compositions, inventions,
database information and software technology. However, our strategy of obtaining
such proprietary rights around as many genes as possible is unproven.
Unauthorized parties may attempt to obtain and use information that we regard as
proprietary. Although we intend for our gene function database subscription
agreements to require our potential subscribers to control access to our
database and information, policing unauthorized use of our database information
and software may be difficult.
We currently have no issued patents or registered copyrights. Patents have
issued to other entities based on claims relating to knockout mice. In addition,
many applications have been filed seeking to protect partial human gene
sequences, many of which are based primarily on gene sequence information alone.
Some of these applications have issued as patents. Some of these may claim
sequences which we have used or may use in the future to generate knockout mice
in our gene knockout program. In addition, other applications have been filed
which seek to protect methods of using genes and gene expression products, some
of which attempt to assign biological function to the DNA sequences based on
laboratory experiments, computer predictions, mathematical algorithms and other
methods. The issuance of these applications as patents will depend, in part,
upon whether practical utility can be sufficiently established for the claimed
sequences and whether sufficient
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correlation exists between the experimental results predictions, algorithms and
other methods and actual functional utility. The patent application process
before the United States Patent and Trademark Office and other similar agencies
in other countries is confidential in nature. As each application is evaluated
independently and confidentially, we cannot predict whether applications have
been filed or which, if any, will ultimately issue as patents. However, it is
probable that patents will be issued to our competitors claiming knockout mice,
partial human gene sequences and methods of using genes and gene expression
products.
Numerous applications have been filed by other entities claiming gene
sequences. Many patents have already issued and we expect more will issue in the
future. In addition, others may discover uses for genes or proteins other than
uses covered in any patents issued to us, and these other uses may be separately
patentable. We may not be able to obtain issued patents on our patent
applications because our patent applications may not meet the requirements of
the patent office. The holder of a patent covering a particular use of a gene or
a protein, isolated gene sequence or deduced amino acid sequence could exclude
us from using that gene, protein or sequence. In addition, a number of entities
make gene information, techniques and methods publicly available, which may
affect our ability to obtain patents.
Some of our patent applications may claim compositions, methods or uses that
may also be claimed in patent applications filed by others. In some or all of
these applications, a determination of priority of inventorship may need to be
decided in an interference proceeding before the U.S. Patent and Trademark
Office. Regardless of determined outcome, this process is time-consuming and
expensive.
Issued patents may not provide commercially-meaningful protection against
competitors. Other companies or institutions may challenge our or our customers'
patents or independently develop similar products that could result in an
interference proceeding in the U.S. Patent and Trademark Office or a legal
action. In the event any researcher or institution infringes upon our or our
customers' patent rights, enforcing these rights may be difficult and can be
time-consuming. Others may be able to design around these patents or develop
unique products providing effects similar to our products.
Our ability to use our patent rights to limit competition in the creation
and use of knockout mice, as well as our ability to obtain patent rights, may be
more limited in certain markets outside of the United States because the
protections available in other jurisdictions may not be as extensive as those
available domestically.
We pursue a policy of having our employees, consultants and advisors execute
proprietary information and invention agreements when they begin working for us.
However, these agreements may not be enforceable or may not provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure. We also cannot prevent others from
independently developing technology or software that might be covered by
copyrights issued to us, and trade secret laws do not prevent independent
development.
WE MAY BE SUBJECT TO LITIGATION AND INFRINGEMENT CLAIMS WHICH MAY BE COSTLY AND
DIVERT MANAGEMENT'S ATTENTION
The technology we use in our business may subject us to claims that we
infringe on the patents or proprietary rights of others. The risk of this
occurring will tend to increase as the genomics, biotechnology and software
industries expand, more patents are issued and other companies attempt to
discover gene function through mouse gene knockouts and engage in other
genomics-related businesses. Furthermore, many of our competitors and other
companies performing research on genes have already applied for patents covering
some of the genes upon which we perform research, and many patents have already
been issued which cover these genes, as well as genes we may wish to use in the
future.
In 1998, Lexicon Genetics Incorporated, one of our competitors, informed us
that it was a coexclusive licensee under a patent covering certain isogenic DNA
technology that may be used to
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modify the genome of a target cell. On May 24, 2000, Lexicon filed a lawsuit
against us in the United States District Court for the District of Delaware. The
complaint in the lawsuit alleges that our methods of making knockout mice
infringe United States Patent No. 5,789,215 under which Lexicon claims to be an
exclusive licensee. The complaint seeks a judgment that we have infringed this
patent, a permanent injunction against further infringement of the patent and an
award of damages in an unspecified amount that, under certain circumstances, may
be tripled. On June 13, 2000, we responded to Lexicon's complaint by filing an
answer and seeking a declaratory judgment in our favor. Our response seeks a
judgment declaring the patent invalid and that we have not infringed and are not
infringing the patent. We intend to defend the action vigorously.
The litigation against us is in the early stages and its outcome cannot be
predicted. If Lexicon prevails and obtains an injunction, we would be required
to obtain a license in order to continue to use the methods covered by the
patent. We may not be able to obtain this license on favorable terms or at all.
If we are unable to obtain a license, we would be required to redesign our
processes to use alternative methods of making knockout mice and expect we would
experience a significant disruption in our ability to generate revenue during
this redesign period and as we develop a gene function database using these new
methods. This redesign and development would involve significant time and costs,
and the alternative methods available to us may not be as effective as our
current methods. We estimate the average time from the date we begin to create a
knockout mouse until the date the data from that knockout mouse is added to the
gene function database to be 12 months. The addition of new data points to our
gene function database could be significantly delayed. We may fail to attract
customers for a gene function database that uses the alternative methods, and
the marketing of our existing database and DeltaSelect program may be
significantly affected. If Lexicon prevails, we could also incur significant
financial liabilities which could materially affect our business and operating
results.
In addition, on July 13, 2000, we received a letter from Lexicon stating
that they believe we may be involved in activities that conflict with four
patents licensed to Lexicon. Lexicon's letter states that these patents cover
certain methods for producing gene targeted cells and transgenic, or knockout,
mice. We believe our methods do not infringe these patents. If Lexicon asserts
its rights under these patents as the basis for a lawsuit against us and Lexicon
prevails in any such lawsuit, we would be prevented from using our methods
unless we obtained a license. We may be unable to obtain a license on favorable
terms or at all, or we may choose not to seek a license. We believe we could use
alternative methods, with which we have experience and which we believe are as
effective as our current methods. Developing a gene function database using
these alternative methods would involve significant time and costs. An adverse
determination of any lawsuit with Lexicon involving these patents could also
significantly affect the marketing of our existing gene function database and
DeltaSelect program. We expect that, during the period prior to development of a
comparable gene function database using these alternative methods, we would
experience a significant disruption in our ability to generate revenue. If
Lexicon prevails in any lawsuit involving these patents, we could also incur
significant financial liabilities which could materially affect our business and
operating results.
We may be involved in future lawsuits alleging patent infringement or other
intellectual property rights violations. In addition, litigation may be
necessary to:
- assert claims of infringement;
- enforce our patents, if any;
- protect our trade secrets or know-how; and
- determine the enforceability, scope and validity of the proprietary rights
of others.
We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation, including our litigation with Lexicon, can be very
costly, can divert management's efforts and
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could materially affect our business and operating results. An adverse
determination may subject us to significant liabilities or restrict or prohibit
us from selling our products.
BECAUSE WE DO NOT HAVE ANY ISSUED PATENTS, AND BECAUSE KNOCKOUT MOUSE AND
GENE-RELATED PATENTS EVEN IF OBTAINED MAY NOT BE ENFORCEABLE, OUR INTELLECTUAL
PROPERTY MAY NOT HAVE ANY MATERIAL VALUE, WHICH WOULD DIMINISH OUR BUSINESS
PROSPECTS
One of our strategies is to obtain proprietary rights around as many gene
knockouts as possible. Although we have filed patent applications covering the
knockout mice we produce, we do not currently have any issued patents. We rely
on a combination of copyright and trademark law, trade secrets, non-disclosure
agreements and contractual provisions in our agreements with our customers to
establish and maintain intellectual property rights. While the U.S. Patent and
Trademark Office in the past has issued patents to others covering function of
genes, knockout mice, types of cells, gene sequences and methods of testing
cells, we do not know whether or how courts may enforce those patents, if that
becomes necessary. If a court finds these types of inventions to be
unpatentable, or interprets them narrowly, the benefits of our strategy may not
materialize and our business and financial condition could be harmed.
OUR RIGHTS TO THE USE OF TECHNOLOGIES LICENSED TO US BY THIRD PARTIES ARE NOT
WITHIN OUR CONTROL, AND WITHOUT THESE TECHNOLOGIES, OUR PRODUCTS AND PROGRAMS
MAY NOT BE SUCCESSFUL AND OUR BUSINESS PROSPECTS COULD BE HARMED
We rely, in part, on licenses to use certain technologies which are material
to our business, including a secreted protein gene trap which we license
exclusively from the University of Edinburgh. 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 licensors abiding
by the terms of those licenses and not terminating them. In most cases, we do
not control the prosecution or filing of the patents to which we hold licenses.
Instead we rely upon our licensors to prevent infringement of those patents.
Some of the licenses under which we have rights, such as the license from the
University of Edinburgh, provide us with exclusive rights in specified fields,
but we cannot assure you that the scope of our rights under these and other
licenses will not be subject to dispute by our licensors or third parties.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIAL AND MAY SUBJECT US TO ENVIRONMENTAL
LIABILITY, WHICH WOULD SERIOUSLY HARM OUR FINANCIAL CONDITION
Our research and development activities involve the controlled use of
hazardous and radioactive materials and generate biological waste. We are
subject to federal, state and local laws and regulations governing the storage,
handling and disposal of these materials and waste products. Although we believe
that our safety procedures for handling and disposing of these materials and
wastes comply with legally prescribed standards, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. We
may be sued for any injury or contamination that results from our use or the use
by third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Future environmental regulations could require us
to incur significant costs.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS COULD INCREASE OUR OPERATING COSTS OR
ADVERSELY AFFECT OUR CUSTOMERS' ABILITY TO OBTAIN GOVERNMENTAL APPROVAL OF GENE
BASED PRODUCTS, WHICH WOULD ADVERSELY AFFECT THE COMMERCIALIZATION OF OUR
TECHNOLOGY
The Animal Welfare Act, or AWA, is the federal law that currently covers
animals in laboratories. It applies to institutions or facilities using any
regulated live animals for research, testing, teaching or experimentation,
including diagnostic laboratories and private companies in the pharmaceutical
and biotechnology industries. The AWA currently does not cover rats or mice.
However, the United States
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Department of Agriculture, which enforces the AWA, is presently considering
changing the regulations issued under the AWA to include mice within its
coverage.
The Department of Agriculture is reconsidering the regulations in response
to a January 1999 petition filed by several parties requesting that mice, rats
and birds be added to the list of animals regulated under the AWA. These parties
also have a lawsuit pending which seeks the inclusion of mice, rats, and birds
in the AWA regulations.
Currently, the AWA imposes a wide variety of specific regulations which
govern the humane handling, care, treatment and transportation of certain
animals by producers and users of research animals, most notably personnel,
facilities, sanitation, cage size, feeding, watering and shipping conditions. We
cannot assure you that the USDA will not decide to include mice in its
regulations and that we will not become subject to registration, inspections and
reporting requirements. Compliance with the AWA could be expensive, and current
or future regulations could impair our research and production efforts.
Since we develop animals containing changes in their genetic make-up, we may
become subject to a variety of laws, guidelines, regulations and treaties
specifically directed at genetically modified organisms, or GMOs. The area of
environmental releases of GMOs is rapidly evolving and is currently subject to
intense regulatory scrutiny, particularly internationally. If we become subject
to these laws we could incur substantial compliance costs. For example, the
Biosafety Protocol, or the BSP, a recently adopted treaty, is expected to cover
certain shipments from the U.S. to countries abroad that have signed the BSP.
The BSP is also expected to cover the importation of living modified organisms,
a category that could include our animals. If our animals are not contained as
described in the BSP, our animals could be subject to the potentially extensive
import requirements of countries that are signatories to the BSP.
We also are subject to a variety of other federal, state and local laws and
regulations in the U.S. and in other countries pertaining to our facilities, the
shipment, exportation and importation of various articles, safe working
conditions, production practices, fire hazard control and other health concerns.
There can be no assurance that we will avoid incurring significant costs to
comply with these laws and regulations or that we will be able to comply with
them in the future. Failure to comply with relevant laws and regulations may
have a material adverse effect on our business, financial condition and results
of operation. Unanticipated changes in existing legal and regulatory
requirements or the adoption of new requirements also could have a material
adverse effect on us.
Drugs and diagnostic products are subject to an extensive and uncertain
regulatory approval process by the Food and Drug Administration and comparable
agencies in other countries. Regulatory requirements ultimately imposed on our
products or products developed by our customers could limit our or our
customers' ability to test, manufacture and, ultimately, commercialize products,
including products for which we are entitled to receive royalty payments.
ETHICAL AND SOCIAL ISSUES MAY LIMIT OR DISCOURAGE THE USE OF KNOCKOUT MICE OR
OTHER GENETIC PROCESSES WHICH COULD REDUCE OUR REVENUES AND ADVERSELY AFFECT OUR
BUSINESS
Governmental authorities could, for social or other purposes, limit the use
of genetic processes or prohibit the practice of our gene trap and knockout
mouse technologies. Public attitudes may be influenced by claims that
genetically engineered products are unsafe for consumption or pose a danger to
the environment. The subject of genetically modified organisms, like knockout
mice, has received negative publicity and aroused public debate. In addition,
animal rights activists could protest or make threats against our facilities,
which may result in property damage. Ethical and other concerns about our
methods, particularly our use of knockout mice, could adversely affect our
market acceptance.
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ALL OUR RESEARCH IS CONDUCTED AT TWO FACILITIES, AND A NATURAL DISASTER AT THESE
FACILITIES IS POSSIBLE AND COULD RESULT IN A PROLONGED INTERRUPTION OF OUR
BUSINESS
We conduct all our scientific and management activities at two facilities in
California. Both locations are in seismically active areas. We have taken
precautions to safeguard our mouse colony including through insurance, storage
of animals off-site at a back-up facility in Massachusetts, the freezing of
sperm and the storing of embryonic stem cells, or ES cells, to allow for the
regeneration of mice. However, a natural disaster, such as an earthquake, fire,
flood or outbreak of infectious disease, could cause substantial delays. This
could interrupt mouse breeding, cause us to incur additional expenses and
adversely affect our reputation with customers.
SECURITY RISKS IN ELECTRONIC COMMERCE OR UNFAVORABLE INTERNET REGULATIONS MAY
DETER FUTURE USE OF OUR PRODUCTS AND SERVICES
We may provide access to our gene function database on the Internet. A
fundamental requirement to conduct our business over the Internet is the secure
transmission of confidential information over public networks. Advances in
computer capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise or breach of the security measures we
use to protect the content in our gene function database. Anyone who is able to
circumvent our security measures could misappropriate our proprietary
information or confidential customer information or cause interruptions in our
operations. We may be required to incur significant costs to protect against
security breaches or to alleviate problems caused by breaches, and these efforts
may not be successful. Further, a well-publicized compromise of security could
deter people from using the Internet to conduct transactions that involve
transmitting confidential information. For example, recent attacks by computer
hackers on major e-commerce web sites have heightened concerns regarding the
security and reliability of the Internet.
Because of the growth in electronic commerce, the U.S. Congress has held
hearings on whether to further regulate providers of services and transactions
in the electronic commerce market, and federal and state authorities could enact
laws, rules and regulations affecting our business and operations. If enacted,
these laws, rules and regulations could make our business and operations more
costly and burdensome as well as less efficient.
WE RELY ON THIRD-PARTY DATA SOURCES, AND WITHOUT THESE SOURCES, OUR PRODUCTS AND
PROGRAMS WOULD BE INCOMPLETE AND LESS APPEALING TO CUSTOMERS, SERIOUSLY HARMING
OUR BUSINESS PROSPECTS
We may rely on scientific and other data supplied by third parties, and all
of our gene sequence data comes from public genomics data. This data could be
defective, be improperly generated or contain errors or other defects, which
could corrupt our gene function database and our other programs and services. In
addition, we cannot guarantee that our sources acquired this data in compliance
with legal requirements. In the event of any such defect, corruption or finding
of nonconformance, our business prospects could be adversely affected.
OUR COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS, WHICH
COULD LEAD TO COSTLY LITIGATION FOR US AND MAKE AN INVESTMENT IN US LESS
APPEALING
The market price of our common stock may fluctuate substantially due to a
variety of factors, including:
- announcements of technological innovations or new products by us or our
competitors;
- developments or disputes concerning patents or proprietary rights,
including announcements with respect to our litigation with Lexicon or of
infringement, interference or other litigation against us or our
licensors;
- the timing and development of our products and services;
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- media reports and publications about genetics and gene-based products;
- changes in pharmaceutical and biotechnology companies' research and
development expenditures;
- announcements concerning our competitors, or the biotechnology or
pharmaceutical industry in general;
- changes in government regulation of genetic research or gene-based
products, and the pharmaceutical or medical industry in general;
- general and industry-specific economic conditions;
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates or recommendations by securities analysts;
- changes in accounting principles; and
- the loss of any of our key scientific or management personnel.
In addition, the stock market has experienced extreme price and volume
fluctuations. The market prices of the securities of biotechnology companies,
particularly companies like ours without consistent product revenues and
earnings, have been highly volatile and may continue to be highly volatile in
the future. This volatility has often been unrelated to the operating
performance of particular companies. For example, the stock prices of many
biotechnology companies, even those that would benefit from publicly available
gene sequence information, declined on news of the announcement by President
Clinton and British Prime Minister Blair that, as their respective governments
had each advocated before, gene sequence information should be freely available
in the public domain. In the past, securities class action litigation has often
been brought against companies that experience volatility in the market price of
their securities. Moreover, market prices for stocks of biotechnology-related
and technology companies, particularly following an initial public offering,
frequently reach levels that bear no relationship to the operating performance
of such companies. These market prices generally are not sustainable and are
subject to wide variations. Whether or not meritorious, litigation brought
against us could result in substantial costs, divert management's attention and
resources and harm our financial condition and results of operations.
THE FUTURE SALE OF COMMON STOCK COULD NEGATIVELY AFFECT OUR STOCK PRICE
After this offering, we will have approximately 28,804,437 shares of common
stock outstanding, or 29,854,437 shares if the underwriters' over-allotment is
exercised in full. The 7,000,000 shares sold in this offering, or 8,050,000
shares if the underwriters' over-allotment is exercised in full, will be freely
tradeable without restriction or further registration under the federal
securities laws unless purchased by our affiliates. The remaining 21,804,437
shares of common stock outstanding after this offering will be available for
sale in the public market 180 days after the effective date of the registration
statement containing this prospectus, subject in some cases to volume and other
limitations.
The previous sentence assumes the effectiveness of the lock-up agreements
with the underwriters under which holders of substantially all of our common
stock have agreed not to sell or otherwise dispose of their shares of common
stock. Most of the shares that will be available for sale after the expiration
of the lock-up period will be subject to volume restrictions because they are
held by our affiliates. In addition, Salomon Smith Barney Inc. may waive these
lock-up restrictions prior to the expiration of the lock-up period without prior
notice. Salomon Smith Barney Inc. has informed us that it has no current
intentions of releasing any shares subject to the lock-up agreements. Any
determination by Salomon Smith Barney Inc. to release any shares subject to the
lock-up restrictions would be based on a number of factors at the time of
determination, including the market price of the common stock, the liquidity of
the trading market for the common stock, the general market
17
<PAGE>
conditions, the number of shares proposed to be sold and the timing, purpose and
terms of the proposed sale.
If our common stockholders sell substantial amounts of common stock in the
public market, or the market perceives that such sales may occur, the market
price of our common stock could fall. After this offering, the holders of
approximately 18,180,856 shares of our common stock will have rights, subject to
some conditions, to require us to file registration statements covering their
shares or to include their shares in registration statements that we may file
for ourselves or other stockholders. Furthermore, if we were to include in a
company-initiated registration statement shares held by those holders pursuant
to the exercise of their registration rights, those sales could impair our
ability to raise needed capital by depressing the price at which we could sell
our common stock. Please see "Shares Eligible for Future Sale."
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
We expect the initial public offering price of our shares to be
substantially higher than the book value per share of the outstanding common
stock. Accordingly, investors purchasing shares of common stock in this offering
will
- pay a price per share that substantially exceeds the value of our assets
after subtracting liabilities; and
- contribute 72% of the total amount invested to date to fund us, but will
own only 24% of the shares of common stock outstanding.
To the extent outstanding stock options or warrants are exercised, there
will be further dilution to new investors.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS OWN A SIGNIFICANT
PERCENTAGE OF OUR STOCK, AND AS A RESULT, THE TRADING PRICE FOR OUR SHARES MAY
BE DEPRESSED AND THESE STOCKHOLDERS CAN TAKE ACTIONS THAT MAY BE ADVERSE TO YOUR
INTERESTS
Our executive officers and directors and entities affiliated with them will,
in the aggregate, beneficially own approximately 67.6% of our common stock
following this offering. This significant concentration of share ownership may
adversely affect the trading price for our common stock because investors often
perceive disadvantages in owning stock in companies with controlling
shareholders. These stockholders, acting together, will have the ability to
exert substantial influence over all matters requiring approval by our
stockholders, including the election and removal of directors and any proposed
merger, consolidation or sale of all or substantially all of our assets. In
addition, they could dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination that could be favorable to you.
OUR INCORPORATION DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT
STOCKHOLDERS CONSIDER FAVORABLE AND COULD ALSO LIMIT THE MARKET PRICE OF YOUR
STOCK
Our amended and restated certificate of incorporation and bylaws will
contain provisions that could delay or prevent a change in control of our
company. Some of these provisions:
- authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;
- provide for a classified board of directors; and
- prohibit stockholder action by written consent.
In addition, we are governed by the provisions of Section 203 of Delaware
General Corporate Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our
18
<PAGE>
outstanding voting stock, from merging or combining with us. These and other
provisions in our amended and restated certificate of incorporation and bylaws
and under Delaware law could reduce the price that investors might be willing to
pay for shares of our common stock in the future and result in the market price
being lower than it would be without these provisions.
WE MAY SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU DO NOT
AGREE AND WHICH ARE NOT BENEFICIAL TO YOUR INVESTMENT IN US
We have not designated any specific uses for the offering proceeds.
Accordingly, management will have significant flexibility in applying the net
proceeds of the offering. The failure of management to apply the net proceeds
effectively could have a material adverse effect on our business, financial
condition and results of operations.
19
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
- limitations in the drug discovery process;
- the capabilities, development and marketing of our products and services;
- the benefits of knockout mice programs and, in particular, our technology
and methods;
- the requirements of pharmaceutical and biotechnology companies;
- our future revenues and profitability;
- our estimates regarding our capital requirements and needs for additional
financing;
- plans for future products and services and for enhancements of existing
products and services;
- our patent applications, licensed technology and proposed patents;
- the litigation between us and Lexicon Genetics Incorporated;
- our ability to attract customers and establish licensing and other
agreements; and
- sources of revenues and anticipated revenues, including contributions from
customers, license agreements and other collaborative efforts for the
development and commercialization of products, and the continued viability
and duration of those agreements and efforts.
This prospectus contains statistical data regarding the biotechnology and
pharmaceutical industries that we obtained from private and public industry
publications. These publications generally indicate that they have obtained
their information from sources believed to be reliable, but do not guarantee the
accuracy and completeness of their information. Although we believe that the
publications are reliable, we have not independently verified their data.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus and have filed as exhibits to the registration statement, of which
this prospectus is a part, completely and with the understanding that our actual
future results may be materially different from what we expect. We qualify all
of our forward-looking statements by these cautionary statements.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
20
<PAGE>
USE OF PROCEEDS
We expect that we will receive net proceeds of approximately $89.9 million
from the sale of the 7,000,000 shares of common stock we are offering, based on
an assumed initial public offering price of $14.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters exercise their over-allotment option in full, we will
receive net proceeds of approximately $103.6 million. We currently intend to use
the net proceeds of this offering as follows:
- to expand product and technology development;
- to grow our sales and marketing organization;
- to invest in intellectual property protection; and
- for working capital and general corporate purposes.
In addition, we also may use a portion of the net proceeds of this offering
for the acquisition of complementary businesses, products or technologies. While
we evaluate these types of opportunities from time to time, there are currently
no agreements or negotiations with respect to any specific transaction.
We have not yet determined all of our expected expenditures, and we cannot
estimate the amounts to be used for each purpose set forth above. Accordingly,
our management will have significant flexibility in applying the net proceeds of
this offering.
OUR POLICY REGARDING DIVIDENDS
We have never declared or paid any cash dividends on our capital stock, and
we do not currently intend to pay any cash dividends on our common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any.
21
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis after giving effect to the automatic conversion of
18,137,486 outstanding shares of convertible preferred stock as of
March 31, 2000 into 18,137,486 shares of common stock; and
- on a pro forma as adjusted basis to give effect to the conversion and the
sale of common stock offered by us at an assumed initial offering price of
$14.00 per share, after deducting the estimated underwriting discounts,
commissions and offering expenses.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations, less current portion............. $ 14 $ 14 $ 14
Loans payable, less current portion......................... 2,051 2,051 2,051
-------- -------- --------
Total long-term debt...................................... 2,065 2,065 2,065
-------- -------- --------
Redeemable convertible preferred stock, $0.001 par value:
18,995,920 shares authorized, actual; none authorized, pro
forma and pro forma as adjusted; 18,137,486 shares issued
and outstanding, actual; none issued and outstanding, pro
forma and pro forma as adjusted........................... 36,807 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: none authorized,
actual; 5,000,000 shares authorized, pro forma and pro
forma as adjusted; none issued and outstanding, actual,
pro forma and pro forma as adjusted..................... -- -- --
Common stock, $0.001 par value: 28,571,429 shares
authorized, actual; 80,000,000 shares authorized, pro
forma and pro forma as adjusted; 3,666,951 shares issued
and outstanding, actual; 21,804,437 shares issued and
outstanding, pro forma; 28,804,437 shares issued and
outstanding, pro forma as adjusted...................... 4 22 29
Additional paid-in capital................................ 22,530 59,319 149,252
Unearned stock-based compensation......................... (15,307) (15,307) (15,307)
Notes receivable from stockholders........................ (805) (805) (805)
Deficit accumulated during the development stage.......... (25,749) (25,749) (25,749)
-------- -------- --------
Total stockholders' equity (deficit).................... (19,327) 17,480 107,420
-------- -------- --------
Total capitalization.................................. $ 19,545 $ 19,545 $109,485
======== ======== ========
</TABLE>
The actual, pro forma and pro forma as adjusted information set forth in the
table excludes:
- 1,050,000 shares of common stock issuable upon the exercise of the
underwriters' over-allotment option;
- 1,266,230 shares of common stock issuable upon the exercise of stock
options outstanding, as of March 31, 2000, at a weighted average exercise
price of $0.67 per share, 222,256 shares of
22
<PAGE>
common stock granted on May 26, 2000 at a weighted average exercise price
of $7.88 per share and issuable upon exercise of options 621,313 shares of
common stock issuable upon exercise of options granted to three of our
officers on July 7, 2000 at a weighted average exercise price of $12.60
per share.
- 43,101 shares reserved for issuance upon the exercise of warrants
outstanding as of March 31, 2000, at an exercise price of $1.53 per share;
- 457,143 shares reserved for issuance upon the exercise of a warrant
outstanding as of July 31, 2000, at an exercise price of $3.13 per share;
and
- 13,931 unissued shares authorized for future awards under our 1998 Stock
Incentive Plan, 5,485,714 unissued shares authorized for future awards
under our 2000 Stock Incentive Plan and 1,142,857 unissued shares
authorized for future issuances under our Employee Stock Purchase Plan.
23
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$17.5 million, or $0.80 per share of common stock. Pro forma net tangible book
value per share represents the amount of our pro forma total tangible assets
less total liabilities, divided by the pro forma number of shares of common
stock outstanding of 21,804,437 shares, assuming the conversion of all shares of
convertible preferred stock outstanding as of March 31, 2000. Pro forma net
tangible book value reflects the conversion of the 18,137,486 shares of
convertible preferred stock into 18,137,486 shares of common stock. This has the
effect of increasing the actual net tangible book value of $(19.3) million by
the carrying value of the convertible preferred stock of $36.8 million to give
the pro forma net tangible book value of $17.5 million. Pro forma net tangible
book value dilution per share represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after
completion of this offering on a pro forma as adjusted basis. After giving
effect to the sale of the 7,000,000 shares of common stock by us at an assumed
initial public offering price of $14.00 per share, and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of March 31, 2000 would have
been $107.4 million, or $3.73 per share of common stock. This represents an
immediate increase in net tangible book value of $2.93 per share of common stock
to existing common stockholders and an immediate dilution in pro forma net
tangible book value of $10.27 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $14.00
Pro forma net tangible book value per share before this
offering................................................ $0.80
Increase in pro forma net tangible book value per share
attributable to this offering........................... 2.93
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.73
------
Dilution per share to new investors......................... $10.27
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000,
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before deducting
underwriting discounts and commissions and offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 21,804,437 76% $ 37,732,000 28% $ 1.73
New investors................ 7,000,000 24 98,000,000 72 14.00
---------- ----- ------------ -----
Total...................... 28,804,437 100% $135,732,000 100%
========== ===== ============ =====
</TABLE>
The tables and calculations above assume no exercise of the underwriter's
over-allotment option to purchase up to an additional 1,050,000 shares of common
stock. If the underwriters' overallotment option is exercised in full, the
number of shares of common stock held by existing stockholders will be reduced
to 73% of the total number of shares of common stock outstanding after this
offering and the number of shares of common stock held by new investors will be
increased to 8,050,000, or 27% of the total number of shares of common stock
outstanding after this offering.
The information also assumes no exercise of any outstanding stock options or
warrants. As of March 31, 2000, there were 1,266,230 shares of common stock
reserved for issuance upon the exercise of outstanding options at a weighted
average exercise price of $0.67 per share and 43,101 shares of common stock
reserved for issuance upon the exercise of outstanding warrants at a weighted
average price of $1.53 per share. In addition, options to purchase 222,256
shares of common stock were granted on May 26, 2000 at a weighted average
exercise price of $7.88 per share and 621,313 shares of common stock were
granted to three of our officers on July 7, 2000 at a weighted average exercise
price of $12.60 per share. As of July 31, 2000, there were 457,143 shares of
common stock reserved for issuance upon exercise of an outstanding warrant at an
exercise price of $3.13 per share. To the extent that any of these options or
warrants are exercised, there will be further dilution to new investors.
24
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
the financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. The statement of operations data for the period from
January 28, 1997 (date of inception) to December 31, 1997 and for each of the
two years in the period ended December 31, 1999, and the balance sheet data at
December 31, 1998 and 1999, are derived from the audited financial statements
included in this prospectus. The balance sheet data at December 31, 1997 is
derived from audited financial statements not included in this prospectus. The
selected results of operations for the three months ended March 31, 1999 and
2000 and the selected balance sheet data as of March 31, 2000 are derived from
unaudited financial statements included in this prospectus. The diluted net loss
per share computation excludes potential shares of common stock (preferred
stock, options and warrants to purchase common stock and common stock subject to
repurchase rights that we hold), since their effect would be antidilutive. See
the notes to our financial statements for a detailed explanation of the
determination of the shares used to compute actual and pro forma basic and
diluted net loss per share. Our historical results are not necessarily
indicative of results to be expected for future periods.
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM YEARS ENDED ENDED
JANUARY 28, 1997 DECEMBER 31, MARCH 31,
(DATE OF INCEPTION) TO ------------------- -------------------
DECEMBER 31, 1997 1998 1999 1999 2000
---------------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Contract revenue..................................... $ -- $ 381 $ 1,240 $ 221 $ 286
------- ------- -------- ------- --------
Operating expenses:
Research and development........................... 879 3,360 12,144 2,236 5,627
General and administrative......................... 416 638 2,932 248 2,045
------- ------- -------- ------- --------
Total operating expenses......................... 1,295 3,998 15,076 2,484 7,672
------- ------- -------- ------- --------
Loss from operations................................. (1,295) (3,617) (13,836) (2,263) (7,386)
Interest income (expense), net....................... 40 265 (11) 68 91
------- ------- -------- ------- --------
Net loss............................................. (1,255) (3,352) (13,847) (2,195) (7,295)
Deemed dividend related to beneficial conversion of
preferred stock.................................... -- -- -- -- (22,360)
------- ------- -------- ------- --------
Net loss attributable to common stockholders......... $(1,255) $(3,352) $(13,847) $(2,195) $(29,655)
======= ======= ======== ======= ========
Net loss per common share, basic and diluted......... $ -- $ (8.00) $ (12.82) $ (2.44) $ (18.56)
======= ======= ======== ======= ========
Weighted average shares used in computing net loss
per common share, basic and diluted (unaudited).... -- 419 1,080 898 1,598
======= ======= ======== ======= ========
Pro forma net loss per share, basic and diluted
(unaudited)........................................ $ (1.15) $ (1.64)
======== ========
Weighted average shares used in computing pro forma
net loss per share, basic and diluted
(unaudited)........................................ 12,018 18,136
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1997 1998 1999 2000
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 987 $ 8,635 $ 848 $ 17,961
Working capital............................................. 829 7,741 (3,801) 12,732
Total assets................................................ 1,958 11,280 6,774 25,075
Capital lease obligations, less current portion............. -- 65 22 14
Loans payable, less current portion......................... -- -- 2,233 2,051
Redeemable convertible preferred stock...................... 2,980 14,447 14,447 36,807
Total stockholders' deficit................................. (1,213) (4,545) (15,367) (19,327)
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We were formed in 1997 to discover and provide mammalian gene function
information for use by pharmaceutical and biotechnology companies to expedite
the drug discovery process. Since our inception, we have engaged primarily in
research and development efforts related to our technology which enables us to
select genes with therapeutic potential and delete, or knockout, these genes in
mice. We then use an extensive, integrated analysis program to determine the
function and potential pharmaceutical relevance of these genes. We have a
limited operating history and are at an early stage of development. Our strategy
and pricing models related to offering our products and programs are unproven.
To date we have derived all of our revenue from the development and analysis
of knockout mice under our DeltaSelect program. As of March 31, 2000, we had an
accumulated deficit of $25.8 million. We had net losses of $1.3 million,
$3.4 million and $13.8 million in 1997, 1998 and 1999 respectively. We had net
operating losses of $2.2 million and $7.3 million for the first quarter of 1999
and 2000, respectively. The net loss attributable to common stockholders for the
three months ended March 31, 2000 was $29.7 million, after deducting a dividend
of $22.4 million relating to a beneficial conversion feature of our preferred
stock. Our losses have resulted primarily from costs incurred in connection with
research and development activities and from general and administrative costs
associated with our operations. Research and development expenses consist
primarily of salaries and related personnel costs, material costs, legal
expenses resulting from intellectual property filings and other expenses related
to the development of our gene function database, DeltaSelect and our gene trap
program. We expense our research and development costs as they are incurred.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, professional
and other corporate expenses including business development and general legal
activities. In connection with the development and expansion of our gene
function database, DeltaSelect and our gene trap program, we expect to incur
increasing research and development and general and administrative costs. As a
result, we will need to generate significantly higher revenues to achieve
profitability. We expect to report substantial net losses through the next
several years.
We had DeltaSelect agreements as of March 31, 2000 with the following
companies: Merck & Co., Pfizer, Inc., Roche Biosciences and Schering-Plough
Research Institute. Under these agreements, we create knockout mice and perform
phenotypic analysis of these mice when requested by our customers. A customer
compensates us based on milestones reached in the creation and analysis of each
knockout mouse it requests. Under our agreements with Merck, we received an
initial fee of $555,000 and have recognized revenues of $68,000, $179,000 and
$93,000 in 1998, 1999 and for the three months ended March 31, 2000,
respectively. Under the Pfizer agreement, we received an initial fee of $300,000
and have recognized revenues of $790,000 in 1999. Under the Roche agreement, we
received an initial fee of $78,000 and have recognized revenues of $105,000,
$249,000 and $42,000 in 1998, 1999 and for the three months ended March 31,
2000, respectively. Under the Schering-Plough agreement, we received an up front
fee of $500,000 and have recognized revenues of $150,000 for the three months
ended March 31, 2000. Under an agreement with Tularik that expired in March
2000, we received an initial fee of $250,000 and have recognized additional
revenues of $208,000 and $22,000 in 1998 and 1999.
For most contracts, revenue is recognized using the contract method of
accounting. The contracts specify milestones to be met and the payments
associated with meeting each milestone. Revenue is recognized on completion of
each milestone. Where the contract does not specify milestones and
26
<PAGE>
payment is for completion of the contract, revenue is recognized based on a
percentage of completion method accounting. The portion of payments received in
advance of the completion of milestones is reflected in deferred revenue. Where
revenues are recognized on a percentage of completion basis, but based on the
terms of the contract, the receivable cannot yet be billed, these unbilled
amounts are shown as deferred revenue.
We anticipate that the majority of our future revenues will be derived from
periodic subscription fees under agreements with subscribers to our gene
function database. However, we currently have only one subscriber, Glaxo
Wellcome, for our gene function database. Our future operating results will
depend upon many factors, including the initiation and expiration of
subscriptions to our gene function database and customer agreements and general
and industry-specific economic conditions which may affect pharmaceutical and
biotechnology companies' research and development expenditures. As a
consequence, our operating results have fluctuated in the past and are likely to
do so in the future.
We account for stock-based employee compensation arrangements in accordance
with provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock issued to Employees" and Financial Accounting Standards
Board Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans" and comply with the disclosure provisions
of Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation."
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of our stock and the exercise
price. SFAS No. 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity investment. The pro forma disclosures of
the difference between compensation expense included in net loss and the related
cost measured by the fair value method are presented in Note 9 of the notes to
our financial statements.
We account for equity instruments issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
During 1997, 1998 and 1999, we recorded unearned stock compensation of
approximately $40,000, $9,000 and $10.4 million, respectively. For the first
quarter of 1999 and 2000, we recorded unearned stock compensation of
approximately $910,000 and $10.5 million, respectively. These amounts are being
amortized as charges to operations over the respective vesting period of the
individual stock options, generally four years. We recorded amortization of
unearned compensation of $17,000, $19,000 and $2.8 million during the fiscal
years ended December 31, 1997, 1998 and 1999, respectively. For three months
ended March 31, 1999 and March 31, 2000, we recorded amortization of unearned
compensation of $162,000 and $2.8 million, respectively.
We expect to record amortization expense for the unearned compensation as at
March 31, 2000 as follows for the coming fiscal years: $7.3 million for the
remaining nine months of 2000, $5.0 million for 2001, $2.3 million for 2002,
$690,000 for 2003 and $11,000 for 2004.
On May 26, 2000, options to purchase 222,256 shares of common stock under
the 1998 Plan were granted at an exercise price of $7.88 per share. The total
unearned compensation related to these grants amounts to $875,000 of which
$201,000 have been amortized to expense in the second quarter of fiscal year
2000.
On July 7, 2000, options to purchase 621,313 shares of common stock under
the 1998 Plan were granted at an exercise price of $12.60 per share. The total
unearned compensation related to these grants amounts to $249,000, of which
$56,000 will be amortized to expense in the third quarter of fiscal year 2000.
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We may incur additional stock based compensation expense in the future as a
result of both options or other securities granted at below fair market value
and fluctuations in the market value of our stock which have a direct impact on
the value of options and warrants held by non employees.
We had federal and state net operating loss carryforwards as of
December 31, 1999 and 1998 of approximately $32.0 million and $8.3 million,
respectively. We also had federal and state research and development tax credit
carryforwards as of December 31, 1999 and 1998 of approximately $1.2 million and
$393,000, respectively. The net operating loss and credit carryforwards will
expire at various dates beginning in 2005, if not utilized. Due to the
uncertainty regarding the ultimate utilization of the net operating loss
carryforwards, we have not recorded any benefit for losses, and a valuation
allowance has been recorded for the entire amount of the net deferred asset.
Utilization of net operating losses and credits may be substantially limited due
to the change in ownership provisions of the Internal Revenue Code of 1986 and
similar state provisions. While this offering is not subject to the change in
ownership provisions, certain future sales of our stock could restrict our
ability to utilize our net operating loss carryforwards. The annual limitation
may result in the expiration of net operating losses and credits before
utilization.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Contract revenue increased by $65,000 to $286,000 in the first quarter of
2000 from $221,000 in the first quarter of 1999. The increase was derived
entirely from revenue associated with agreements for the development and
analysis of knockout mice. In the first quarter of 1999 and 2000, all of our
revenue came from contracts with Merck, Pfizer, Roche, Schering-Plough and
Tularik. Our contract with Schering-Plough produced no revenue in 1999 and our
agreement with Tularik expired in February 2000.
Research and development expenses increased by $3.4 million to $5.6 million
in the first quarter of 2000 from $2.2 million in the first quarter of 1999. The
increase was attributable to continued expansion of research and development
activities, including $1.5 million related to increased personnel and laboratory
supply costs to support development of our gene function database and our
DeltaSelect and gene trap programs and $455,000 in higher depreciation and
amortization and facilities expenses related to the addition of a second
facility in July 1999. The amortization of unearned stock compensation
represents $1.4 million of the increase in research and development expenses.
General and administrative expenses increased by $1.8 million to $2.0
million during the first quarter of 2000 from $248,000 for the first quarter of
1999. The increase included $378,000 related to compensation for business
development, finance and administrative personnel and $119,000 related to legal
and business consulting fees. The amortization of unearned stock compensation
contributed to $1.3 million of the increase in general and administrative
expenses.
Interest income (expense), net increased by $23,000 to $91,000 in the first
quarter of 2000 from $68,000 for the first quarter of 1999. This increase
resulted from increasing cash and investment balances as a result of additional
private equity financing during 2000. Interest expense was $89,000 in the first
quarter of 2000, as compared to $30,000 in the first quarter of 1999. This
increase resulted from the incurrence of additional debt in 1999.
A dividend relating to a beneficial conversion feature of our preferred
stock of $22.4 million was recorded in the quarter ended March 31, 2000. This
arose due to the issuance of 7,198,709 shares of Series C redeemable convertible
preferred stock in January 2000, for net proceeds of $22.4 million.
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YEARS ENDED DECEMBER 31, 1999 AND 1998
Contract revenue increased by $859,000 to $1.2 million in 1999 from $381,000
in 1998. The increase was derived entirely from revenue associated with
agreements for the development and analysis of knockout mice. In 1999, all of
our revenue came from contracts with Merck, Pfizer, Roche and Tularik. Our
contract with Schering-Plough produced no revenues in 1999.
Research and development expenses increased by $8.8 million to
$12.1 million in 1999 from $3.4 million in 1998. The increase was attributable
to continued growth of research and development activities, including
$5.7 million related to increased personnel and laboratory supply costs to
support development of our gene function database and our DeltaSelect and gene
trap programs and $1.3 million in higher depreciation and amortization and
facilities expenses related to the addition of a second facility in July 1999.
The amortization of unearned stock compensation represents $1.6 million of the
increase in research and development expenses. The remainder of the increase was
due to expansion in operating activities.
General and administrative expenses increased by $2.3 million to
$2.9 million during 1999 from $638,000 for 1998. The increase included $408,000
related to compensation for business development, finance and administrative
personnel and $299,000 related to legal and business consulting fees. The
amortization of unearned stock compensation contributed to $1.2 million of the
increase in general and administrative expenses. The remainder of the increase
was due to expansion in operating activities.
Interest income (expense), net changed by $276,000 to net interest expense
of $11,000 in 1999 from net interest income of $265,000 in 1998. This change
resulted from a declining cash and investment balance due to cash used in
operating activities and higher debt balances during 1999. The amortization of
the deferred interest expenses related to the issuance of warrants in 1999
amounted to $37,000.
YEAR ENDED DECEMBER 31, 1998 AND PERIOD FROM JANUARY 28, 1997 (DATE OF
INCEPTION) TO DECEMBER 31, 1997
Contract revenue was $381,000 in 1998 compared to no revenue in 1997. The
entire $381,000 was derived from revenue associated with three DeltaSelect
agreements for the development and analysis of knockout mice.
Research and development expenses increased by $2.5 million to $3.4 million
in 1998 from $879,000 in 1997. The increase of $2.5 million was attributable to
growth of research and development activities, including $2.1 million related to
increased personnel and laboratory supply costs to support development of our
gene function database, DeltaSelect and gene trap programs and $327,000 related
to increased depreciation and amortization and facilities expenses related to
the expansion of our operations. The remainder was due to expansion in operating
activities.
General and administrative expenses increased by $222,000 to $638,000 in
1998 from $416,000 for 1997. The increase of $222,000 included $73,000 related
to compensation for business development, finance and administrative personnel
and $136,000 related to legal and business consulting fees. The remainder was
due to expansion in operating activities.
Interest income (expense), net increased by $225,000 to $265,000 in 1998
from $40,000 for 1997. This increase resulted from increasing cash and
investment balances as a result of additional private equity financing during
1998. Interest expense was $3,000 in 1998 with no interest expense in 1997. This
increase resulted from the addition of debt in 1998.
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LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through private
sales of common and preferred stock and contract payments to us under our
DeltaSelect agreements and equipment financing arrangements. As of March 31,
2000, we had received net proceeds of $37.5 million from issuances of common and
preferred stock. In addition, from our inception through March 31, 2000, we
received $2.7 million in cash payments from our agreements for the development
and analysis of knockout mice, of which $1.9 million had been recognized as
revenues through March 31, 2000.
As of March 31, 2000, we had $18.0 million in cash and cash equivalents, as
compared with $848,000 as of December 31, 1999. We used $4.2 million for
operating activities in the first quarter of 2000. This consisted of the net
loss for the period of $7.3 million offset in part by non-cash charges of
$245,000 related to depreciation and amortization expenses and $2.8 million
related to the amortization of unearned stock compensation. We used
$1.4 million in investing activities in the first quarter of 2000, which
consisted of capital expenditures. We received $22.8 million from financing
activities in the first quarter of 2000, which consist primarily of net proceeds
from the sale of convertible preferred stock and common stock for $22.4 million
and $573,000, respectively. This was offset by loan repayments of $138,000.
As of December 31, 1999, we had $848,000 in cash and cash equivalents, as
compared with $8.6 million as of December 31, 1998. We used $7.2 million for
operating activities in 1999. This consisted of the net loss for the period of
$13.8 million offset in part by non-cash charges of $705,000 related to
depreciation and amortization expenses and $2.8 million related to the
amortization of unearned stock compensation. We used $3.5 million in investing
activities in 1999 which consisted of capital expenditures. We received
$2.9 million from financing activities in 1999, which consisted primarily of net
proceeds from the sale of common stock for $83,000 and $3.3 million in loans
offset by repayments of $457,000.
In December 1998 and March 1999, we entered into loan agreements of
$1.8 million and $1.5 million, respectively, which were fully drawn down during
1999. As of December 31, 1999, the entire $2.9 million outstanding was secured
by property and equipment. Amounts outstanding under these loans accrue interest
at a weighted average rate of approximately 11.2% and are due in monthly
installments through 2003. In addition, as of December 31, 1999, we had $52,000
in capitalized lease obligations outstanding compared to $93,000 at
December 31, 1998.
Our capital requirements depend on numerous factors, including our ability
to obtain gene function database subscriptions and DeltaSelect agreements, the
amount and timing of payments under these subscriptions and agreements, the
level and timing of our research and development expenditures, market acceptance
of our product, the resources we devote to developing and supporting our
products and other factors, many of which are outside of our control. We expect
to devote substantial capital resources to continue and expand our research and
development efforts, to expand our sales and marketing organization and for
other general corporate activities. We believe that our current cash balances,
which include net proceeds from the Series C financing which raised
$22.4 million in January 2000, together with the net proceeds of this offering
and the revenues we believe will be derived from subscriptions to our gene
function database and collaborative research agreements, will be sufficient to
fund our operations through 2001. During or after this period, if cash generated
by operations is insufficient to satisfy our liquidity requirements or we make
acquisitions or other investments, we may need to sell additional equity or debt
securities or obtain additional credit arrangements. Additional financing may
not be available on terms acceptable to us or at all. The sale of additional
equity or convertible debt securities may result in additional dilution to our
stockholders. Any debt financing may have restrictive covenants that adversely
affect our operating plans and flexibility. The rights of any debt or preferred
stockholders will be senior to those of our common stockholders.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash primarily in U.S. government securities and
marketable debt securities of financial institutions and corporations with
strong credit ratings. These instruments have maturities of twenty-four months
or less when acquired. We do not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, we believe that,
while the instruments we hold are subject to changes in the financial standing
of the issuer of such securities, we are not subject to any material risks
arising from changes in interest rates, foreign currency exchange rates,
commodity prices, equity prices or other market changes that affect market risk
sensitive instruments.
To date, we have operated solely in the United States and all sales have
been made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Securities and
Exchange Commission. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We have complied with the guidance in SAB No. 101 for all
periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of relationship that exists. SFAS
No. 133 will be effective for fiscal years beginning after June 15, 2000. We do
not believe that the implementation of SFAS No. 133 will have any significant
impact on our financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN No. 44) "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of the Accounting Practice
Board Opinion No. 25 (APB No. 25). This interpretation clarifies the definition
of employee for purposes of applying APB No. 25, "Accounting for Stock Issued to
Employees," the criteria for determining whether a plan qualifies as a
noncompensatory plan, and the accounting for an exchange of stock compensation
awards in a business combination. This interpretation is effective July 1, 2000,
but certain conclusions in this interpretation cover specific events that occur
after either December 15, 1998 or January 12, 2000. We are in the process of
evaluating the impact of the implementation of FIN No. 44 on our financial
position, although we do not expect it to have a material effect on us.
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BUSINESS
OVERVIEW
We have developed technology to convert raw genetic data into mammalian gene
function information to help pharmaceutical and biotechnology companies expedite
the drug discovery process. Our technology enables us to select genes we believe
to be relevant to disease and delete, or knockout, these genes in mice. We then
use an extensive, integrated analysis program to assess the function and
potential pharmaceutical relevance of these genes. We believe that our
technology allows us to knockout genes in mice on a larger scale and at a faster
rate than has been previously possible. To promote more efficient use of our
data, we have developed DeltaBase, a proprietary, searchable database that will
provide immediate access to gene function information and potential targets for
drug discovery contained in the database.
BACKGROUND
OVERVIEW
Pharmaceutical and biotechnology companies are continually challenged to
develop and market increased numbers of drugs. This challenge has led to
increased research and development spending and the development of a new
research focus called genomics-based drug discovery. This new research effort
involves understanding the relationship between genes and the functions they
regulate. An organism's genetic information, or genome, is comprised of
deoxyribonucleic acid, or DNA molecules. DNA itself is comprised of four
different chemical subunits called nucleotide bases that are strung together in
a precise sequence. Encoded within a DNA sequence are discrete sets of
instructions, or genes, that collectively serve to regulate our biological
processes by producing proteins. Alterations in gene sequence, or mutations,
form the basis of many diseases.
Understanding the critical role that genes play in regulating biological
processes and disease has led to efforts to obtain information on all the genes
contained within the human genome and the genomes of other organisms.
International public and private genomics projects have generated vast amounts
of data and identified all the genes within the human genome. The first draft of
the complete human genome was released in June of this year. The human genome is
comprised of approximately three billion nucleotide bases that encode
approximately 100,000 genes. Approximately 3,000 to 10,000 of these genes may
have potential as drug targets. This is a significant increase over the
approximate 500 targets that currently are the focus of drug development.
Seeking to capitalize upon the opportunity to discover new drug targets,
pharmaceutical, biotechnology and genomic companies are rapidly pursuing
genomics-based drug discovery programs. We believe that a system that will
enable a more rapid commercialization of these newly discovered genes can be of
significant value to drug manufacturers.
Genomics-based drug discovery generally consists of:
- discovering and identifying DNA sequences that make up the genes within
the genome;
- determining the function of the discovered genes so that their role in
regulating biological processes and disease can be understood;
- using information on gene function and disease relevance to assess the
value of a particular gene or its protein product as a target for drug
discovery; and
- utilizing high-volume chemistry and other drug discovery methods to target
the relevant gene to produce a commercially viable drug.
Pharmaceutical, biotechnology and academic researchers have made
considerable progress in identifying genes. However, a significant current
impediment to genomics-based drug discovery is the
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difficulty of determining gene function. Determining gene function with respect
to a biological process or disease is a complex undertaking that requires
extensive and detailed physiological analysis.
DISCOVERING GENE FUNCTION
The scientific community has attempted to find efficient methods of
determining the functions of individual genes for several decades. This process
is particularly challenging for the pharmaceutical industry because drug
development requires a very precise understanding of potential drug discovery
targets. It is important that a pharmaceutical or biotechnology researcher
understands all the possible ramifications of targeting a gene or its associated
protein with a drug, including any potentially serious side effects of drug
administration. Consequently, before a gene is selected as a candidate for the
expensive and time consuming drug discovery and development process, its
complete functional role should be determined. Determining whether a gene is a
relevant target for drug discovery is a process termed target validation.
Currently, researchers generally use the standard or genetic approaches to drug
target discovery and validation described below.
[GRAPH SHOWING STEPS INVOLVED IN STANDARD AND GENETIC APPROACHES]
STANDARD APPROACH TO TARGET DISCOVERY AND VALIDATION
The objective of the standard approach to target discovery is to sort
through the tens of thousands of gene sequences to find ones that can be
analyzed using current techniques for determining IN VIVO biology, or the
function of the gene in a living organism. Under the standard approach,
researchers:
- identify a gene sequence;
- isolate and make an operational copy of the gene in order to facilitate
physiological analysis of its function;
- find the tissues where the gene is active, or expressed, which may provide
clues about the potential functional role of the gene;
- perform cell-based, or IN VITRO, experiments using potentially relevant
cell types to define a potential role for the gene; and
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- conduct studies in a living mammal, or IN VIVO studies, to determine the
role of the gene in a whole organism, a key step in providing confirmation
of the gene as a validated target for drug discovery.
The standard approach to target discovery is a time consuming, expensive and
multi-staged process in which only a limited number of genes reach the final
steps of the validation process. The lack of IN VIVO data early in this process
can lead to the selection of genes based on criteria that do not necessarily
reflect their functions in a living organism. This can lead to the rejection of
genes that represent valid targets.
GENETIC APPROACH TO TARGET DISCOVERY AND VALIDATION
Since the function of a gene in an animal can vary widely from its function
as determined by IN VITRO studies, it is preferable to obtain IN VIVO data at an
early stage in the drug discovery process. To accomplish this, some
pharmaceutical and biotechnology companies have employed a genetic approach
which initially uses non-mammalian organisms to determine IN VIVO function.
Under the genetic approach, researchers:
- choose a lower organism, such as a fly or worm, based on the compatability
of the organism with the specific organ system or function to be studied;
- create a functional mutation in the lower organism by using chemicals to
produce a permanent genetic alteration that is reflected by an observable
change in the organism;
- identify the mutated gene responsible for the observed change;
- find the equivalent gene in mammals; and
- conduct IN VIVO studies to determine the role of the gene in a whole
organism, a key step in providing confirmation of the gene as a validated
target for drug discovery.
The genetic approach to target discovery is subject to a number of
limitations. Under the genetic approach, researchers randomly mutate the genome.
This may result in the identification of genes with interesting functions;
however, these genes may not become valid drug targets because only a certain
subset of genes are amenable to current drug discovery methods. In addition,
since lower organisms are far less complex than mammals, they do not have many
of the mammalian genes and their corresponding physiological functions. Thus,
while lower organisms can provide information on gene function similarity with
humans, their ability to provide information concerning how genes control
mammalian physiology is limited. As a result, validation typically requires
mammalian studies which are traditionally time-consuming and costly.
DETERMINING MAMMALIAN GENE FUNCTION
During the past decade, the preferred method for determining a gene's
function in mammals has been to disrupt, or knockout, the gene in a mouse and to
assess the physiological, pathological and behavioral consequences of removing
the gene from the animal. The results of this analysis can determine the
function and disease relevance of a particular gene and the gene's potential as
a drug target.
Mice and humans are both higher mammals, and their genomes are similar in
size and gene content. Therefore, performing knockouts of genes in mice has
advantages over studies in non-mammalian organisms for defining the function and
disease relevance of human genes. Additionally, mice are one of the few mammals
for which approaches to genetic manipulation have been established. Because of
the high degree of physiological and genetic similarity between mice and humans,
the mouse gene knockout system has the potential to become an effective and
widely accepted model for target validation studies.
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A drawback of this model though has been the low-volume, high-cost and
commercially unfeasible time-frames for production. Traditional approaches to
create mouse knockouts allow a research team to create only a limited number of
knockouts per year. As a result, mouse knockouts have been used as the last step
of the target validation process, if at all.
Despite the time-frame and labor intensive nature of the process, the
academic scientific community has adopted the mouse knockout as a model for gene
function studies. Information from these studies is often publicly available.
However, this information is often fragmentary, difficult to obtain and is
selectively and non-uniformly reported. In addition, when such information is
available, it can be difficult to cross-reference or compare using standardized
medical/scientific vocabulary or to compare with pre-existing models of disease.
Collectively, these limitations have made mouse knockouts difficult to use
as a first-line drug discovery tool despite their utility in determining gene
function.
OUR SOLUTION
We have developed a fully integrated target validation system that provides
gene function information based on mouse knockouts at early stages of drug
target discovery. Our solution moves directly from gene identification to
determination of gene function in a mammalian organism on a commercially viable
scale.
We use the following approach to drug target discovery and validation.
[GRAPH SHOWING STEPS INVOLVED IN DELTAGEN'S APPROACH]
We utilize proprietary molecular biology systems to more efficiently
knockout genes in mice on a large scale and conduct a detailed analysis of the
resulting physiological, pathological and behavioral effects in these mice. As a
result, we assess the function of the gene in a mammal that is closely related
genetically and physiologically to humans.
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We believe our technology platform and approach offer significant advantages
over the standard and genetic approaches, including:
- INCREASING THE SCALE AND SPEED OF GENERATING MAMMALIAN GENE FUNCTION
INFORMATION AND THE DELIVERY OF VALIDATED GENE TARGETS. Based on our
current knockout rates, we expect to be able to target, analyze and
deliver detailed IN VIVO gene function information on approximately 250
different genes per year. This is a significant improvement over
traditional approaches which produced an estimated worldwide total of over
700 reported mouse knockouts between 1991 and 1997. Our proprietary
high-throughput gene knockout and analysis system can be scaled-up to
greater capacity if we determine additional production is required.
- REDUCING THE COST OF DETERMINING GENE FUNCTION AND PROVIDING VALIDATED
GENE TARGETS. By providing a fully integrated target validation system as
opposed to a multi-tier process, we believe we can reduce the number of
steps and costs associated with the target validation process and the
number of parties to whom royalties must be paid. Through our database
product, we intend to provide our subscribers with information on gene
function and the target potential of genes earlier in the drug discovery
process than under the standard or genetic approaches. We believe that
early access to IN VIVO data allows selection of appropriate drug targets,
increases efficiency and reduces costs by allowing our subscribers to
focus on genes with high potential for successful drug development. This
information may allow our subscribers to eliminate non-viable targets from
potential development earlier in the discovery process.
- PRE-SELECTING COMMERCIALLY RELEVANT MAMMALIAN GENE TARGETS. We have
focused our target validation efforts on gene families that we believe
have the greatest potential for drug development. Worldwide genome
sequencing efforts have identified many new members of the gene families
currently targeted by the pharmaceutical and biotechnology industry,
including approximately 1,000 members that we have initially selected that
may have relevance to disease and are potential targets of drug discovery
efforts.
- ALLOWING OUR CUSTOMERS TO STORE, ACCESS, MANIPULATE AND ANALYZE GENE
FUNCTION INFORMATION THAT WE GENERATE. We have developed a proprietary
information technology infrastructure for the delivery, maintenance and
use of the data we produce. Each year, we expect to generate approximately
one million individual measurements of physiological, biochemical and
behavioral observations, or data points, relating to gene function in
mammalian systems. We organize and will deliver our data in a manner that
we believe will provide simple and rapid accessibility. Additionally, our
data is compatible with standard computing tools used by the
pharmaceutical and biotechnology industries.
- PROVIDING ACCESS TO KNOCKOUT MICE. The preclinical testing, or animal
testing, of drugs has often been impeded by the lack of animal models that
can represent the human disease condition. We believe our fully integrated
target validation system can produce and deliver relevant knockout mouse
models to the pharmaceutical and biotechnology industries. These knockout
mouse models can be used for further research and development relating to
gene function and disease analysis.
- PROVIDING OUR INTELLECTUAL PROPERTY PORTFOLIO ON THE FUNCTIONAL ROLE OF
GENES. We are pursuing intellectual property protection for our gene
function discoveries and plan to grant our customers the right to use our
intellectual property. Although we have filed a number of patent
applications, we do not currently hold any issued patents.
In addition to our gene function database, we have a program called Delta-GT
to discover novel, commercially relevant secreted proteins. Secreted proteins
are proteins that play an important role in the formation, regulation, growth
and maintenance of multi-cellular organisms. Examples of well-known secreted
proteins discovered by other companies include insulin, human growth hormone and
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erythropoeitin, or EPO. Using proprietary technologies, we have developed a
program that identifies and defines the mammalian IN VIVO function of secreted
proteins. Specifically, we have proven genetic technologies that allow us to
more rapidly identify and knockout secreted proteins in mice. We believe that
our Delta-GT program provides a foundation for developing and commercializing
proprietary therapeutic protein products.
OUR STRATEGY
Our goal is to be the leading provider of data on the function, role and
disease relevance of mammalian genes to the pharmaceutical and biotechnology
industries. We believe our data will improve the speed, efficiency and
effectiveness of drug discovery. Additionally, we intend to use our proprietary
genetic technologies to discover novel therapeutic secreted proteins. As we are
a development stage company with a limited operating history and an unproven
business strategy, we cannot assure you that we will succeed in achieving our
goal. The key elements of our strategy include:
- BECOMING THE MOST COMPREHENSIVE SOURCE OF INFORMATION ON MAMMALIAN GENE
FUNCTION AND TARGET VALIDATION. We intend to expand our current
proprietary technologies and develop new programs and systems to increase
the scale, scope and depth of our database content. We believe that we can
continue to discover, refine and deliver information that is relevant to
the drug discovery process.
- FOCUSING ON THE COMMERCIAL NEEDS OF OUR CUSTOMERS. We plan to deliver
valuable information to our customers and allow them to concentrate on the
drug discovery process downstream of target validation. By focusing our
research process on target validation and obtaining functional
information, we believe we provide our customers meaningful time and cost
savings in their drug discovery efforts. We plan to deliver information to
our customers over their proprietary intranets or eventually over the
Internet to facilitate real-time access and searching of our database
product.
- CONTINUING TO PURSUE INTELLECTUAL PROPERTY RIGHTS. We are employing an
intellectual property strategy to secure patent, trademark and copyright
protection for what we believe to be our commercially relevant inventions,
products, and methods. We intend to offer our customers access to our
intellectual property portfolio. Although we have filed a number of patent
applications, we do not hold any issued patents. We believe that if we are
able to secure patent rights around gene function and functional utility
associated with the development and commercialization of genes as drug
targets, we may be able to generate licensing and other revenues
associated with such rights.
- PURSUING EARLY-STAGE DEVELOPMENT OF TARGETS FOUND THROUGH OUR GENE TRAP
PROGRAM. We plan to continue the development of our gene trap program in
order to provide a pipeline of secreted proteins to serve as potential
drug discovery candidates. We intend to pursue early stage, in-house
development of selected opportunities that arise from this program, and we
may attempt to capitalize on these discoveries through collaborative
arrangements with pharmaceutical and biotechnology companies.
- ACQUIRING TECHNOLOGIES TO MEET THE CONTINUING TARGET VALIDATION NEEDS OF
CUSTOMERS. We intend to acquire and license additional products and
programs, if we determine that these products or programs complement our
existing target validation technologies or augment our existing
information technology platforms.
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OUR PRODUCTS AND PROGRAMS
We have developed and plan to continue to develop technologies, products and
programs that determine the function and disease relevance of genes in mammalian
organisms. We have developed and are expanding the following products and
programs:
DELTABASE
OVERVIEW
DeltaBase is our database which provides information, based on knockout
mouse studies, on gene function and validated gene targets for drug discovery.
We created DeltaBase to be marketed to the pharmaceutical and biotechnology
industries to help define the role that genes play in biological processes and
disease. We believe that DeltaBase can become a valuable resource for mammalian
gene function information and validated targets.
At our current rate of production, we expect to provide gene function and
target validation information, through DeltaBase, on approximately 250 different
genes per year. We select genes for DeltaBase based upon what we believe to be
their potential to become useful drug targets. We generate information on these
genes by comprehensively analyzing knockout mice generated through our
proprietary, gene knockout methods. Each knockout mouse undergoes a
standardized, detailed and extensive analysis in order to determine the function
and role that a particular gene plays in the mouse and that gene's suitability
as a drug target. We currently intend that DeltaBase will deliver a total of
approximately one million individual, IN VIVO function, data points per year. We
believe that the body of gene function information delivered under DeltaBase
will provide an advantage to the drug discovery efforts of pharmaceutical and
biotechnology companies by reducing the time required for target validation.
In addition to accessing target validation data, DeltaBase subscribers will
have access to the knockout mice used to generate this data. Access to these
animals will allow DeltaBase subscribers to more rapidly pursue specific areas
of interest. We believe this will be attractive to smaller pharmaceutical
companies who lack the necessary infrastructure for wide-scale target validation
programs.
DELTABASE TECHNOLOGIES
We designed DeltaBase to provide our potential subscribers with the ability
to compare resulting phenotypic and gene function data across hundreds of
different mammalian genes from different gene families selected for their
potential commercial relevance to drug discovery. In order to generate, analyze,
store, manipulate and deliver such large volumes of data and information, we
have developed proprietary, high-volume, assembly-line methods to:
- SELECT MAMMALIAN GENES AND GENE FAMILIES TO IDENTIFY VALIDATED DRUG
TARGETS. In selecting the gene families for DeltaBase, we targeted those
that have demonstrated their value as drug development targets, have led
to the commercialization of successfully marketed drugs and present
potential additional drug development targets. The current gene families
represented in DeltaBase include the G-protein coupled receptors, ion
channels and proteases. As part of the gene target selection process, we
utilize information technology, statistical analysis and biological
information systems to extract and analyze publicly available data on the
human genome to search for additional genes and gene families with
potential commercial relevance to drug discovery efforts. This application
of statistical and mathematical models to genetics is known as
bioinformatics. To date, our bioinformatics program has focused on an
initial pipeline of approximately 1,000 potential targets for development
under DeltaBase that we believe may be of interest to prospective
pharmaceutical and biotechnology subscribers.
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- RAPIDLY GENERATE LARGE NUMBERS OF KNOCKOUT MICE. We utilize proprietary
molecular biology systems to more efficiently knockout genes in mice on a
large scale. We are able to move directly from a small amount of gene
sequence information straight to the production of knockout mice and the
determination of gene function and validated targets. Our processes have
been scaled-up to produce and analyze approximately 250 gene knockouts per
year for our Deltabase program, which we believe is a significant
improvement over historical, relatively limited industry production. This
system can be readily scaled up to greater capacity if we determine
additional production is required.
- EXTENSIVELY ANALYZE THE KNOCKOUT MICE GENERATED. We have developed and
employ large-scale assembly-line analysis programs that provide detailed
physiological, pathological and behavioral data. This analysis is
performed on all tissues and organ systems within the mouse. Moreover,
this analysis of the entire organism may provide information on possible
side effects and toxicology profiles associated with each gene and its
function. We are also in the process of developing further analytical
programs in areas such as the central nervous system, cardiovascular
system, infectious disease, inflammation and the immune system. We believe
that the DeltaBase knockout mice can serve as efficient vehicles for the
generation of additional complementary information and data on gene
function.
- ACCURATELY AND EFFICIENTLY CAPTURE, STORE, MANIPULATE AND DELIVER
APPROXIMATELY ONE MILLION INDIVIDUAL DATA POINTS PER YEAR GENERATED FROM
THE ANALYSES OF KNOCKOUT MICE. DeltaBase subscribers will have the ability
to access, utilize and perform multifaceted analysis on the gene function
data and information contained in DeltaBase. In addition, our proprietary
information technology allows our customers to perform searches of the
gene function analyses contained in DeltaBase, obtain detailed scientific
and pathology summaries of gene function findings and submit inquiries and
questions to DeltaBase through a medical/scientific vocabulary search
engine containing approximately 1.5 million terms. To meet the needs of
DeltaBase subscribers, the data and information is readily exportable and
can be manipulated by information technology tools and other databases
widely employed in the pharmaceutical and biotechnology industries.
MARKETING AND CUSTOMER AGREEMENTS
On June 27, 2000, we entered into a DeltaBase agreement with Glaxo Wellcome
which is our first DeltaBase subscription agreement. Under the DeltaBase
agreement, Glaxo Wellcome has the right to access DeltaBase information on gene
function and validated gene targets based upon knockout mouse studies. The
DeltaBase agreement also grants Glaxo Wellcome non-exclusive, worldwide licenses
to knockout mice, materials and intellectual property rights under DeltaBase. We
will receive an aggregate of $5,000,000 in subscription licensing fees during
each year of the three-year term. In addition, we may receive additional fees
for access to our intellectual property. We do not expect the additional
licensing fees payable under this agreement to be material. We could also
receive from Glaxo payments ranging between $100,000 to up to $6.3 million, per
Glaxo product developed using our intellectual property, based upon the
achievement of designated milestones. We cannot assure you that we will receive
any milestone payments since payments are entirely dependent upon the research,
development and commercialization of products by Glaxo. Glaxo Wellcome may,
however, terminate our agreement for any reason within the first three months
after the one-year anniversary of the effective date upon payment of a specified
termination fee.
DELTASELECT
OVERVIEW
DeltaSelect is our custom gene knockout program which uses our proprietary
technology employed in our database program. Our DeltaSelect program is
different, however, because our customers select
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and identify to us the particular genes that they wish to have knocked out in
mice. We provide customers with access to our gene knockout technologies and the
resulting knockout mice, data and information generated under each DeltaSelect
program. To date, we have limited our DeltaSelect marketing efforts to those
particular pharmaceutical and biotechnology companies that we believe have the
potential to subscribe to our gene function database or to enter into larger
scale programs.
We have produced customized knockout mice at the direction of our customers
for a limited number of pharmaceutical companies. Currently, we are undertaking
DeltaSelect knockout programs under agreements with Glaxo Wellcome, Merck,
Pfizer, Roche and Schering-Plough. While our written agreement with Tularik has
expired, we continue to provide knockout mice to Tularik.
DELTASELECT TECHNOLOGY
We are currently developing technologies that can be used to create
conditional knockout mice. Conditional knockout mice are mice in which the gene
of interest is removed under unique conditions in a specific tissue or cell type
at selected and controlled times. We are currently developing conditional
knockout systems for our DeltaSelect program using CRE/LOX and FLP/FRT
recombinase technologies.
MARKETING AND CUSTOMER AGREEMENTS
Currently, we have DeltaSelect agreements with the following pharmaceutical
companies: Merck & Co., Inc., Schering-Plough Research Institute, Pfizer, Inc.
and Roche Biosciences, Inc. Under these agreements, we create knockout mice and
perform phenotypic analysis of these mice when requested by our customers. A
customer compensates us based on milestones reached in the creation and analysis
of each knockout mouse it requests. Under these agreements, we receive upfront
or initial payments. Each DeltaSelect agreement provides that we retain full
ownership of all technology that relates to the process of generating knockout
mice, while our customer retains all rights to the data and phenotypic
characteristics of the knockout mice created. All of our DeltaSelect agreements
have a term that expires upon the earlier of the completion of all milestones
for all knockouts or two years. The DeltaSelect agreements can only be
terminated for a material breach of the agreement. However, Roche and Glaxo
Wellcome can terminate their agreements at any time, without cause, upon 30 days
notice. Our DeltaSelect agreements with Roche and Pfizer expire in November and
December 2000, respectively.
DELTA-GT
OVERVIEW
Delta-GT is a secreted protein, gene trap program currently under
development that simultaneously identifies and determines the function of
mammalian secreted proteins. We believe this technology represents a tool for
the identification and development of a potential pipeline of new drugs.
Secreted proteins represent proteins that are synthesized for export from the
cell or to the surface membrane of the cell where they play a role in the
communication between cells. These communication roles are essential for the
formation, regulation, growth and maintenance of multi-cellular organisms.
Currently, secreted proteins constitute the majority of successful targets for
drug discovery. Examples of well-known secreted proteins discovered by other
companies include insulin, human growth hormone and erythropoeitin, or EPO.
Current pharmaceutical and biotechnology industry methods to identify novel
secreted proteins center on bioinformatics, which is the application of
statistical and mathematical models to genetics, and gene capturing
technologies. These methods are able to identify novel genes representing
secreted proteins but do not have the ability to determine the function of the
identified genes and proteins in mammalian systems. We believe that our Delta-GT
system will have the advantage of being able to both discover and identify novel
genes and to simultaneously inactivate or delete these genes in mouse
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embryonic stem cells, or ES cells. Our technology allows us to produce knockout
mice lacking the gene of interest that can be processed in the large-scale
analysis programs that we employ in our DeltaBase program. We believe the
Delta-GT system will offer an opportunity to discover and develop new
therapeutic proteins that have the potential to become drugs.
DELTA-GT TECHNOLOGY
We are an exclusive worldwide licensee of a secreted protein gene trap from
the University of Edinburgh that identifies genes that code for secreted
proteins and simultaneously enables the production of knockout mice to determine
the IN VIVO function of these genes. This secreted protein gene trap technology
will work in all cell types. However, when the system is employed in mouse ES
cells, the resultant ES cells containing the gene deletion can be used to more
rapidly generate knockout mice.
We believe that the benefits of our Delta-GT technology are its ability to:
- identify rarely turned on, or expressed, genes;
- move directly to IN VIVO analysis in the mouse eliminating the need for
cell-based experiments that require protein or antibody production to
define function;
- directly define the role of cell surface receptors and function in all
cell types; and
- identify key secreted proteins in a variety of physiological conditions.
In a mammalian genome, genes are compiled from several regions of DNA termed
exons that are separated from each other by non-coding DNA termed introns. When
a gene is expressed, the exon segments are brought together to produce proteins.
Gene traps function by introducing DNA into the genome of the cell and using the
cell's own protein producing machinery to make a hybrid protein. Part of the
protein is made from the genome DNA and part is made from the gene trap DNA that
is introduced into the cell. This hybrid DNA causes disruption of the normal
sequence that produces the functional gene code and results in loss of normal
protein production, which effectively knocks out the gene.
We employ a gene trap system that is incorporated into the DNA of cells and
is designed to specifically hit and identify genes that produce secreted
proteins. Secreted proteins have a distinguishing feature, similar to a zip
code, that instructs the cell to export the newly synthesized protein from the
cell or to the cell membrane. This feature is referred to as a signal sequence.
Delta-GT uses a system that relies upon the presence of the signal sequence to
direct the expression of a detection gene contained within the gene trap DNA.
When this detection gene is activated, cells will stain blue. This allows the
employment of a simple visual inspection to identify cells in which a secreted
protein has been hit by the trap. If the gene trap hits a protein that is not
secreted, the detection gene is not activated and no staining of the cell
occurs. When we introduce our gene trap into mouse ES cells, we are able to
produce knockout mice in which the function of a gene has been disrupted.
Our license agreement with the University of Edinburgh provides us with an
exclusive worldwide, royalty-bearing license to use the secreted gene trap
technology and commercialize products using this technology. Our license
agreement expires on the earlier of the tenth anniversary of the first
commercial sale of products using the technology or the life of the patent. We
can terminate the license if the University of Edinburgh materially breaches the
agreement, which breach is not remedied within 90 days, or upon 30 days notice.
The license can be terminated by the University of Edinburgh if:
- an order is made or a resolution is passed for our dissolution or winding
up;
- we default in a royalty payment, which is not remedied within 90 days; or
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- we materially breach the agreement, which is not remedied within 180 days
from notice.
We are unable to determine the amount of royalty payments that may be made to
the University of Edinburgh under the agreement as the payments are dependent
upon future sales, if any, of drug candidates commercialized under our Delta-GT
program. We believe that the minimum royalties payable under the agreement are
not material.
DELTAXPRESS
We plan to offer a new database product for gene expression analysis. If we
are successful in developing and making this product commercially available, we
anticipate we would offer customers subscription agreements for the
non-exclusive use of this database.
We have entered into an agreement with Affymetrix, Inc. for the supply of
products for gene expression analysis. Our agreement with Affymetrix is only the
first of many steps necessary to create this potential additional product.
These products allow for determination of the level of activity of
particular genes in a particular tissue, or gene expression. The activity of a
gene or a set of genes can differ based upon the physiological state within an
organism. For example, the presence or absence of certain genes from a set of
genes that interact with each other can cause the activity level of the other
genes in that set to increase or decrease. This gives clues as to the functional
roles and interactions of these genes.
Analysis of gene knockout mice in our gene function database provides
detailed functional information on the role of individual genes. However, this
information can be expanded to encompass the potential functional role of many
additional genes by using expression analysis of tissues from the knockout mice.
In knockout mice, the deletion of a gene creates a situation wherein the animal
attempts to compensate for the loss of the particular gene and therefore
activates or suppresses the expression of functionally related genes. We believe
that these systematic gene expression analysis studies of our knockout mice may
provide a method for assembling functional maps for large segments of the
genome. Therefore, we believe that DeltaXpress may add significant value to the
genomic content of our databases.
Our agreement with Affymetrix provides for an introductory period with an
initial payment of $500,000 and the purchase by us of two Affymetrix Gene Chip
Instrumentation Systems. The agreement also provides for royalty payments above
a specified threshold amount of sales of DeltaXpress, if any, in exchange for a
discount on the price of Affymetrics DNA probe arrays and a non-exclusive,
worldwide license to commercialize the resulting data. The Company believes that
any royalty payments will be immaterial during the initial term of the
agreement. At our election at the end of the initial terms of the agreement, we
can pay substantially higher annual fees, of an aggregate of $4 million per
year, for a greater discount and a reduced royalty rate for additional periods
up to a maximum of seven years.
COMMERCIALIZATION
We market our products globally through our own internal sales, marketing
and business development organization. Our commercialization strategy is to:
- initially target large pharmaceutical and biotechnology companies for
database subscriptions;
- develop and offer line extensions and other products under our database
program;
- expand and offer our services to smaller pharmaceutical and biotechnology
companies who lack the necessary infrastructure for wide-scale target
validation programs;
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- use DeltaSelect for future technology development and to introduce our
customers to our database program; and
- discover, identify and develop secreted proteins for therapeutic use
either by exclusive license or through co-development strategies under the
gene trap program.
Our marketing department is responsible for developing marketing strategy
and pricing policies as well as producing promotional materials. Our marketing
department also works directly with our customers' technology and licensing
officers and facilitates communication between us and our customers' scientists.
We also provide customer support services, including training and education, and
we elicit customer feedback which we consider when developing and improving our
products.
CUSTOMERS
On June 27, 2000, we entered into our first DeltaBase Collaboration
Agreement with Glaxo Wellcome, which gives Glaxo Wellcome the right to access
DeltaBase information on gene function and validated gene targets.
Under our DeltaSelect program, we have entered into arrangements with major
pharmaceutical companies where we produce customized standard, or unconditional,
knockout mice.
We currently perform services under our DeltaSelect program for
Schering-Plough, Merck, Pfizer, Roche Biosciences, Glaxo Wellcome and Tularik.
These customers, except for Glaxo Wellcome which became a DeltaSelect customer
in June 2000, accounted for all of our revenues for the year ended December 31,
1999. Pfizer, Roche and Merck accounted for 64%, 20% and 14%, respectively, of
our revenues in 1999. We do not have a written agreement with Tularik, and our
agreements with Roche and Pfizer expire in November and December 2000,
respectively.
Currently, we are not seeking to commercialize any drug candidates through
our Delta-GT program. As we are in the early stages of development of our Delta
Xpress program, we do not have any customers for this program.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, we had a total of 100 employees dedicated to
research and development activities. We have spent substantial funds over the
past three years to develop our database and other programs and expect to
continue to do so in the future. We spent approximately $879,000 in 1997,
$3.4 million in 1998 and $12.1 million in 1999 on research and development.
INTELLECTUAL PROPERTY
Our policy is to pursue patent protection around our commercially relevant
products, techniques and methods. Although we do not currently hold any issued
patents, we intend to file applications covering all the knockout mice we
produce. We also intend to pursue patent, copyright and trademark protection
with respect to any information technologies, systems or other products which we
believe would benefit from these protections. We cannot assure you, however,
that any of our patent applications will result in the issuance of any patents,
that our patent applications will have priority over others' applications, or
that, if issued, any of our patents will offer protection against our
competitors. Additionally, we cannot assure you that any patent issued by us
will not be challenged, invalidated or circumvented in the future or that the
rights created thereunder will provide a competitive advantage. Litigation may
be necessary to enforce any patents issued to us, to protect trade secrets or
know-how owned by us or to determine the enforceability, scope, and validity of
the proprietary rights of others.
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Others may have filed and in the future are likely to file patent
applications that are similar or identical to ours. To determine the priority of
inventions, we may have to participate in interference proceedings declared by
the U.S. Patent and Trademark Office that could result in substantial cost to
us. We cannot assure you that any patent application of another will not have
priority over patent applications filed by us. Our commercial success depends in
part on our neither infringing patents or proprietary rights of third parties
nor breaching any licenses that may relate to our technologies and products.
We have obtained licenses for certain technologies. However, we cannot
assure you that we will be able to obtain licenses for technology patented by
others on commercially reasonable terms, if at all, that we will be able to
develop alternative approaches if unable to obtain licenses or that our current
and future licenses will be adequate for the operation of our business. Our
failure to obtain necessary licenses or to identify and implement alternative
approaches could have a material adverse effect on our business, financial
condition and results of operations.
We also rely upon trade secrets, technical know-how and continuing invention
to develop and maintain our competitive position. We cannot assure you that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets or
disclose such technology, or that we can meaningfully protect our trade secrets,
or that we will be capable of protecting our rights to our trade secrets.
On May 24, 2000, Lexicon Genetics Incorporated, one of our competitors,
filed a lawsuit against us in the United States District Court for the District
of Delaware. The lawsuit complaint alleges that we have used methods that
infringe claims of United States Patent No. 5,789,215 under which Lexicon claims
to be an exclusive licensee and seeks to enjoin us from further use of such
methods. On June 13, 2000, we responded to Lexicon's complaint by filing an
answer and seeking a declaratory judgment in our favor. We intend to defend the
action vigorously. We may receive other future notices or lawsuits from third
parties alleging patent infringement.
COMPETITION
We face significant competition in the area of genomics-based research from
for-profit companies such as Celera Genomics, Curagen, Inc., DNX (a subsidiary
of Phoenix International Life Sciences, Inc.), GeneLogic, Inc., Human Genome
Sciences, Inc., Incyte Pharmaceuticals, Inc., Lexicon Genetics Incorporated and
Millennium Pharmaceuticals, Inc., among others, many of which have substantially
greater financial, scientific and human resources than we do. In addition, the
Human Genome Project and a large number of universities and other not-for-profit
institutions, many of which are funded by the U.S. and foreign governments, are
also conducting research to discover genes and their function.
We face, and will continue to face, significant competition in our efforts
to validate drug targets and to attract research dollars. Many other companies
have or are developing capabilities in the use of living organisms to define
gene function. These competitors include such companies as Lexicon Genetics
Incorporated, Exelixis, Inc., and Devgen N.V. Additionally, many genomics
companies may expand their capabilities to determine gene function. We also
believe that some pharmaceutical and biotechnology companies are discussing the
possibility of working together to discover the functions of genes and share
gene function-related data among themselves. The formation of this type of
consortium could reduce the customer base for our gene function-related
business. Further, as we expand our range of products and services, such as our
gene trap program, we will compete with additional companies, some of which may
be our customers at that time or potential customers.
Companies focused specifically on other organisms, such as fruit flies,
worms and yeast, use methods of identifying potential drug targets which are
different than ours. In addition, pharmaceutical, biotechnology and other
genomics companies, as well as a number of universities and other
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not-for-profit institutions, are seeking to develop competing technologies. Many
of these competitors have substantially greater financial, scientific and human
resources than we do. Many of these competitors also have substantially greater
experience than we do in their respective fields. As a result, our competitors
may succeed in developing products and technologies earlier than we do or in
developing products and technologies that are more effective than ours.
We believe that the principal competitive factors in selling our products
and services are the quality and reliability of the gene function information,
the volume of the gene function information, the features and ease of use of
database products and the cost and pricing of competing products. We believe
that we compete favorably with respect to these factors; however, our market is
rapidly changing and we expect to face further competition from new market
entrants and consolidation of our existing competitors.
GOVERNMENT REGULATION
The federal Animal Welfare Act governs the humane handling, care, treatment
and transportation of some animals used in U.S. research activities. Mice,
including the mice in our knockout programs, are currently not subject to
regulation under the Animal Welfare Act. Additionally the United States
Department of Agriculture, USDA, which enforces the Animal Welfare Act, is
presently considering changing the regulations issued under the Animal Welfare
Act to include mice within its coverage. The Animal Welfare Act imposes a wide
variety of specific regulations on producers and users of animal subjects, most
notably personnel, facilities and statistical standards, cage size, feeding,
watering and shipping conditions and environmental enrichment methods. If the
USDA decides to include mice in its regulations, we could be required to alter
our production operation for these models, including adding production capacity,
new equipment and additional employees. It is possible that the USDA's actions
will negatively affect our operations. In addition, although we do not
anticipate the addition of mice to the Animal Welfare Act to require significant
expenditures, it is possible that the Animal Welfare Act, when amended, may be
more stringent than we expect and require significant expenditures. Any future
amendments to the Animal Welfare Act or other laws or regulations may also
require significant expenditures by us.
Furthermore, some states have their own regulations, including general
anti-cruelty legislation, which establish certain standards in handling animals.
To the extent that we provide products and services overseas, we also have to
comply with foreign laws, such as the European Convention for the Protection of
Animals During International Transport and other anti-cruelty laws. The Council
of Europe is presently considering proposals to more stringently regulate animal
research.
We currently have no plans to pursue the clinical development of our
validated targets, and, therefore, do not anticipate having the regulatory
constraints typical of many biotechnology and pharmaceutical companies. In the
future, we may decide to pursue pre-clinical development in order to exploit our
validated targets. To the extent any of the validated targets are appropriate
for clinical development, we will pursue corporate partners to undertake such
activities.
Our customers that pursue clinical development of drugs based on our
research will be subject to extensive regulation, especially under the Federal
Food, Drug and Cosmetic Act. This law governs the pre-clinical and clinical
development, manufacturing, distribution, including export, and labeling of
drugs. We are also subject to a variety of other federal and state laws and
regulations in the U.S. and in other countries pertaining to our facilities, the
shipment, exportation and importation of various articles and health and safety
matters. For example, the Department of Transportation and various international
guidelines and regulations govern the transport of different types of materials.
The Bureau of Export Administration of the Department of Commerce exercises
export controls over technology such as our gene database. The Department of
Health and Human Services and USDA both regulate various types of articles that
present the possibility of spreading communicable and other
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diseases, including the regulation of vectors, such as animals and articles that
present risks of other harm to plants, human beings and other animals. The
Environmental Protection Agency has responsibility for facility emissions and
other environmental matters, including the regulation of new chemical
substances, which could include gene sequences.
Since we are in the business of developing animals containing changes in
their genetic make-up, we may become subject to a variety of laws, guidelines,
regulations and treaties specifically directed at genetically modified
organisms, or GMOs. The area of environmental releases of GMOs is rapidly
evolving and is currently subject to intense regulatory scrutiny, particularly
internationally. Current laws, guidelines and other requirements typically
include confinement requirements for preventing the spread of GMOs into the
environment. Examples of these guidelines in the U.S. include the National
Institutes of Health "Guidelines for Research Involving Recombinant DNA
Molecules" and the USDA "Guidelines for Research Involving the Planned
Introduction into the Environment of Genetically Modified Organisms". Although
these guidelines typically apply only to federally-funded activities, if we were
to become subject to similar laws in the future, we could incur compliance
costs.
The Biosafety Protocol, or the BSP, is also of particular importance to our
international operations. The BSP, a treaty recently adopted in Montreal, Canada
in late 1999, is expected to be ratified in many countries internationally in
approximately two years. Many industrialized and non-industrialized countries
will be signatories to the BSP. Although the U.S. is not subject to the BSP, if
ratified, the BSP is expected to cover shipments from the U.S. to countries
abroad that have signed the BSP. The BSP is also expected to cover the
importation of living modified organisms, a category that could include our
animals. If our animals are not contained as described in the BSP, our animals
could be subject to the potentially extensive import requirements of countries
that are signatories to the BSP.
EMPLOYEES
As of March 31, 2000, we had a total of 138 full-time employees. Of these,
18 hold Ph.D.s and 12 hold other advanced degrees. None of our employees is
represented by a labor union. We consider our relations with our employees to be
good.
FACILITIES
Our corporate headquarters, principal executive offices and research
facilities are located in Menlo Park, California and in San Carlos, California,
where we occupy a total of approximately 50,000 square feet under leases that
expire in July 14, 2004 and February 29, 2009, respectively. Our facilities
include an advanced mouse animal facility. We believe that our existing
facilities are adequate for current needs and that suitable additional space or
alternative space, if necessary, will be available in the future on commercially
reasonable terms.
LEGAL PROCEEDINGS
On May 24, 2000, Lexicon Genetics Incorporated, one of our competitors,
filed a lawsuit against us in the United States District Court for the District
of Delaware. The complaint in the lawsuit alleges that our methods of making
knockout mice infringe United States Patent No. 5,789,215 under which Lexicon
claims to be an exclusive licensee. The complaint seeks a judgment that we have
infringed this patent, a permanent injunction against further infringement of
the patent and an award of damages in an unspecified amount that, under certain
circumstances, may be tripled. We believe that the patent in question is invalid
and, even if the patent is found to be valid, that the methods we employ do not
infringe it. On June 13, 2000, we responded to Lexicon's complaint by filing an
answer and seeking a declaratory judgment in our favor. Our response seeks a
judgment declaring the patent invalid and that we have not infringed and are not
infringing the patent. We intend to defend the action vigorously.
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The litigation against us is in the early stages and its outcome cannot be
predicted. If Lexicon prevails and obtains an injunction, we would be required
to obtain a license in order to continue to use the methods covered by the
patent. We may not be able to obtain this license on favorable terms or at all.
If we are unable to obtain a license, we would be required to redesign our
processes to use alternative methods of making knockout mice and expect we would
experience a significant disruption in our ability to generate revenue during
this redesign period and as we develop a gene function database using these new
methods. This redesign and development would involve significant time and costs,
and the alternative methods available to us may not be as effective as our
current methods. We estimate the average time from the date we begin to create a
knockout mouse until the date the data from that knockout mouse is added to the
gene function database to be 12 months. The addition of new data points to our
gene function database could be significantly delayed. We may fail to attract
customers for a gene function database that uses the alternative methods, and
the marketing of our existing database and DeltaSelect program may be
significantly affected. If Lexicon prevails, we could also incur significant
financial liabilities which could materially affect our business and operating
results.
In addition, on July 13, 2000, we received a letter from Lexicon stating
that they believe we may be involved in activities that conflict with four
patents licensed to Lexicon. Lexicon's letter states that these patents cover
certain methods for producing gene targeted cells and transgenic, or knockout,
mice. We believe our methods do not infringe these patents. If Lexicon asserts
its rights under these patents as the basis for a lawsuit against us and Lexicon
prevails in any such lawsuit, we would be prevented from using our methods
unless we obtained a license. We may be unable to obtain a license on favorable
terms or at all, or we may choose not to seek a license. We believe we could use
alternative methods, with which we have experience and which we believe are as
effective as our current methods. Developing a gene function database using
these alternative methods would involve significant time and costs. An adverse
determination of any lawsuit with Lexicon involving these patents could also
significantly affect the marketing of our existing gene function database and
DeltaSelect program. We expect that, during the period prior to development of a
comparable gene function database using these alternative methods, we would
experience a significant disruption in our ability to generate revenue. If
Lexicon prevails in any lawsuit involving these patents, we could also incur
significant financial liabilities which could materially affect our business and
operating results.
We may be involved in additional litigation, investigations or proceedings
in the future. Any litigation, investigation or proceeding, with or without
merit, could be costly and time-consuming and could divert our management's
attention and resources which in turn could harm our business and financial
results.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows information about our executive officers and
directors as of March 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
-------------------------------------- -------- ------------------------------------------------
<S> <C> <C>
William Matthews, Ph.D................ 46 Chief Executive Officer, President and Director
Mark W. Moore, Ph.D................... 41 Chief Scientific Officer and Treasurer
Augustine G. Yee...................... 34 Vice President of Corporate Development, General
Counsel and Secretary
Lars Barfod........................... 40 Vice President of Commercial Development
John E. Burke......................... 39 Vice President of Intellectual Property
Terry Coley, Ph.D..................... 36 Vice President of Information Technology
Robert Klein, Ph.D.................... 35 Vice President of Technology Development
Brian E. Crowley...................... 33 Director of Finance
Vicente Anido, Jr., Ph.D.............. 47 Director
Philippe O. Chambon, M.D., Ph.D....... 42 Director
Thomas A. Penn........................ 54 Director
F. Noel Perry......................... 47 Director
Nicholas J. Simon..................... 46 Chairman of the Board
</TABLE>
Drs. Anido and Chambon and Messrs. Penn and Perry are members of our
compensation committee. Drs. Anido and Chambon and Mr. Penn are members of our
audit committee.
WILLIAM MATTHEWS, PH.D., a co-founder of our company, has served as our
President since February 1997 and as our Chief Executive Officer since December
1998. Dr. Matthews has served as a director of Deltagen since February 1997.
Prior to founding our company, Dr. Matthews worked at Genentech, Inc., from June
1992 to January 1997 where he established and ran a program in stem cell
biology. Dr. Matthews received his Ph.D. in cell biology from Southwestern
Medical School in Dallas, followed by post-doctoral fellowships at Harvard
Medical School and Princeton University.
MARK W. MOORE, PH.D., a co-founder of our company, has served as our Chief
Scientific Officer and Treasurer since February 1997. Prior to founding our
company, Dr. Moore worked from August 1991 to January 1997 at Genentech, Inc.
where he established and directed Genentech's gene knockout program in mice.
Dr. Moore was a Leukemia Society of America post-doctoral fellow in molecular
and cellular immunology in the laboratory of Dr. Michael Bevan at Scripps
Clinic. Following his post-doctoral work, Dr. Moore served on the faculty of the
Norris Cancer Center at the University of Southern California. Dr. Moore
received his A.B. in biochemistry from Princeton University and his Ph.D. in
biology from Brandeis University.
AUGUSTINE G. YEE has served as our Vice President of Corporate Development,
General Counsel and Secretary since April 1999. Prior to joining us, Mr. Yee was
a patent and intellectual property litigation attorney with the law firm of
Lyon & Lyon LLP from October 1993 to July 1995, and a corporate securities and
technologies attorney with Pillsbury Madison & Sutro LLP from August 1995 to
April 1999, where he represented companies in the biotechnology and information
technology fields. Mr. Yee was formerly a law clerk to the Honorable Edward
Rafeedie, United States District Court, Central District of California, and is
admitted to practice before the United States Patent and Trademark Office.
Mr. Yee received his B.S. in molecular biology from the University of California
at San Diego and his J.D. from Pepperdine University School of Law.
LARS BARFOD has served as our Vice President of Commercial Development since
October 1999. From March 1999 to September 1999, Mr. Barford served as Vice
President, Sales & Marketing at
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Ciphergen Biosystems, Inc. From April 1997 to January 1999, Mr. Barfod served as
Vice President of Marketing at Genentech. Mr. Barfod was also a member of
Genentech's Product Development and Commercial Operations committees. Prior to
joining Genentech, Mr. Barfod spent 11 years at Novo Nordisk
Pharmaceuticals, Inc., most recently as Vice President of Sales, Marketing and
Business Development. Mr. Barfod received his Masters degree in marketing from
the Royal University of Copenhagen, Denmark.
JOHN E. BURKE has served as our Vice President of Intellectual Property
since December 1999. Prior to joining us, Mr. Burke was Of Counsel with the law
firm of Pillsbury Madison & Sutro LLP from 1996 to 1999. Prior to that time, he
was a patent and intellectual property attorney with the law firm of Schwegman,
Lundberg, Woessner & Kluth from 1995 to 1996, and served as Corporate Patent
Counsel for Cortech, Inc., from 1993 to 1995. Mr. Burke was also a patent
attorney with the law firm of Morgan & Finnegan from 1990 to 1992. Mr. Burke is
admitted to practice before the U.S. Court of Appeals for the Federal Circuit,
the U.S. Supreme Court, and the U.S. Patent and Trademark Office and is a member
of the California and New York state bars. Mr. Burke received his B.S. in
chemical/biochemical engineering from Rutgers College of Engineering and his
J.D. from Rutgers School of Law.
TERRY COLEY, PH.D. has served as our Vice President of Information
Technology since September 1999. Prior to joining us, Dr. Coley was co-founder
and CEO of Virtual Chemistry, Inc., from January 1996 to August 1999. At Virtual
Chemistry, Dr. Coley established software teams to engineer custom software for
biotechnology and pharmaceutical companies. Prior to that time, Dr. Coley worked
as a molecular modeling software development project leader at Molecular
Simulations Inc. Dr. Coley received his B.S. in chemistry and computer science
from the University of Illinois and his Ph.D. in computational chemistry from
the California Institute of Technology.
ROBERT KLEIN, PH.D., has served as Vice President of Technology Development
since June 2000. Prior to that time, Dr. Klein held positions as Director of
Molecular Biology from June 1998 through June 2000 and Senior Scientist from May
1997 through June 1998 at Deltagen. Prior to joining Deltagen, Dr. Klein worked
at Genentech, Inc. from August 1993 through May 1997 where he was involved in
Genentech's functional genomics program. Dr. Klein also served as a project team
leader for Genentech's lead protein therapeutic for treatment of Parkinson's
disease. Dr. Klein received his A. B. in biochemistry from the University of
California at Berkeley and his Ph.D. in biology from the Massachusetts Institute
of Technology.
BRIAN E. CROWLEY has served as our Director of Finance since August 1999.
Prior to joining us, Mr. Crowley was the Director of Finance for the
Dataconferencing product division at Polycom, Inc. from January 1997 to February
1998 and the General Accounting Manager from November 1994 to January 1997.
Prior to that time, Mr. Crowley served as controller at The LAN Guys Inc. and
Conductus, Inc., and as an associate at PricewaterhouseCoopers LLP. Mr. Crowley
received his B.S. from St. Mary's College of California and his M.B.A. from the
University of Notre Dame. He is a licensed Certified Public Accountant in
California.
VICENTE ANIDO, JR., PH.D. has served as a member of our board of directors
since July 1998. Dr. Anido has been CEO and President of CombiChem, Inc., a
combinatorial company, from March 1996 until its acquisition by E.I. du Pont de
Nemours and Company, in October 1999. Prior to joining CombiChem, Dr. Anido was
the President of the Americas region at Allergan, Inc., where he was responsible
for Allergan's commercial operations in North and South America from June 1993
to March 1996. Prior to Allergan, Dr. Anido spent 18 years at Marion
Laboratories. Dr. Anido has also held the position of President and General
Manager of Nordic Laboratories and Marion Merrell Dow. Dr. Anido is currently a
director of Galileo Laboratories, Inc., FeRx, Inc., Adaptive Info.com and
Dochendo, Inc. Dr. Anido received his B.S. in pharmacy and his M.S. in
pharmaceutical sciences from
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West Virginia University and his Ph.D. in pharmacy administration from the
University of Missouri, Kansas City.
PHILIPPE O. CHAMBON, M.D., PH.D. has served as a member of our board of
directors since July 1998. Since January 1997, Dr. Chambon has been a Vice
President of The Sprout Group, the venture capital affiliate of Donaldson,
Lufkin & Jenrette. Dr. Chambon joined The Sprout Group in May 1995. From May
1993 to April 1995, Dr. Chambon served as Manager in the Healthcare Practice of
the Boston Consulting Group, a management consulting firm. He was formerly an
executive with Sandoz Pharmaceuticals, a subsidiary of Novartis. Dr. Chambon is
currently a director of Variagenics, Inc., PharSight Corporation, Skila Inc.,
and Spotfire, Inc., as well as several other private companies. Dr. Chambon
received his M.D. and Ph.D. degrees from the University of Paris and his M.B.A.
from Columbia University.
THOMAS A. PENN has served as a member of our board of directors since
January 2000. Since June 1998, Mr. Penn has been with Boston Millennia Partners,
a Boston-based venture capital firm, where he is a partner. From March 1994
until March 1998, Mr. Penn served as President and CEO of Tektagen, Inc.
Mr. Penn is a director of various private companies. Mr. Penn received B.S.
degrees from the Massachusetts Institute of Technology in metallurgy and
materials science and in industrial management, an M.B.A. from Stanford
University, and a J.D. from the University of Pennsylvania School of Law.
F. NOEL PERRY has served as a member of our board of directors since
February 1997. Mr. Perry has been a managing director of Baccharis
Capital, Inc., a venture capital firm founded in 1991. Mr. Perry is a director
of several private companies. Mr. Perry received his B.A. from the University of
Rhode Island and holds an M.B.A. from George Washington University. Mr. Perry is
a Chartered Financial Analyst.
NICHOLAS J. SIMON served as a member of our board of directors since June
1998 and Chairman of the Board since April 2000. Since April 2000, Mr. Simon has
been CEO of IO Pharmaceuticals. Mr. Simon also served as Vice President of
Business and Corporate Development of Genentech, Inc., from December 1995 to
March 2000, in which capacity he was responsible for product acquisitions,
strategic alliances, technology venture activities and corporate strategic
planning. Mr. Simon joined Genentech in 1989 as the Director of Business
Development and has over 20 years of experience in the biotechnology and
biomedical industries. Mr. Simon is currently a director of Intermune, Inc.,
Predict, Inc., Genitope, Inc. and IO Pharmaceuticals. He received his B.S. in
microbiology from the University of Maryland and holds an M.B.A. from Loyola
College.
BOARD OF DIRECTORS, COMMITTEES AND OTHER INFORMATION
We currently have authorized seven directors and there is currently one
vacancy. All directors are elected to hold office until their successors have
been elected. There are no family relationships among any of our directors or
executive officers.
We intend to amend our certificate of incorporation prior to completion of
this offering to provide for a board of directors consisting of seven members,
who will be divided into three classes serving staggered three-year terms:
- The term of our Class I directors will expire at our 2001 annual meeting;
- The term of our Class II directors will expire at our 2002 annual meeting;
and
- The term of our Class III directors will expire at our 2003 annual
meeting.
Our Class I directors will be Messrs. Perry and Simon. Our Class II
directors will be Messr. Penn and Dr. Chambon. Our Class III directors will be
Messr. Anido and Dr. Matthews. A director elected to fill the board vacancy will
be a member of Class III. Because we have a classified board, only two of
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our six board members will be elected at each annual stockholders' meeting, or
three in the case of elections for our Class III directors, with the other
directors continuing for the remainder of their class terms.
Our board of directors has a compensation committee and an audit committee.
Our compensation committee is responsible for, among other things, determining
salaries, incentives and other forms of compensation for our directors, officers
and other employees and administering various incentive compensation and benefit
plans. Drs. Anido and Chambon and Messrs. Penn and Perry are the current members
of the compensation committee.
Our audit committee reviews our annual audit and meets with our independent
auditors to review our internal controls and financial management practices.
Drs. Anido and Chambon and Mr. Penn are the current members of the audit
committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1999, we did not have a compensation committee and our board of directors
established executive compensation levels for fiscal year 1999. William
Matthews, Ph.D., who is our President and Chief Executive Officer and was a
member of our board of directors in 1999, will participate in all discussions
and decisions regarding salaries and incentive compensation for all employees
and consultants of our company, except that he will be excluded from decisions
regarding his own salary and incentive compensation. Established in April 2000,
our compensation committee is composed of four non-management directors. All
decisions relating to the compensation of our executive officers will be made by
the compensation committee.
DIRECTOR COMPENSATION
Except as we otherwise describe below, we have not paid any cash
compensation to members of our board of directors for their services as
directors.
We reimburse the directors for reasonable expenses in connection with
attendance at board and committee meetings. Directors are also eligible to
receive stock options under our 2000 Stock Incentive Plan. Non-employee
directors will receive annual stock option grants to purchase 5,000 shares of
common stock. A new director will receive a stock option grant to purchase
20,000 shares of common stock. As of the date of this prospectus, we have
granted a total 85,000 options to non-employee directors.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned, including salary,
bonuses, stock options and other compensation during the fiscal year ended
December 31, 1999 by William Matthews, Ph.D., our President and Chief Executive
Officer, and three of our other four executive officers, each of whose total
annual compensation exceeded $100,000 in 1999. We may refer to these officers as
our named executive officers in other parts of this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND POSITION(S) SALARY BONUS OPTIONS/SARS COMPENSATION
------------------------------------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
William Matthews, Ph.D.................... $205,833 $ 52,250 -- --
Chief Executive Officer and President
Mark W. Moore, Ph.D....................... 205,833 42,000 -- --
Chief Scientific Officer and Treasurer
Augustine G. Yee.......................... 124,631 13,125 228,571 $78,444(1)
Vice President of Corporate Development,
General Counsel and Secretary
Terry Coley, Ph.D......................... 58,333 -- 171,429 70,000(1)
Vice President of
Information Technology
Robert Klein, Ph.D........................ 119,375 -- 5,714 --
</TABLE>
------------------------
(1) Represents amount provided for relocation expenses.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes the stock options granted to each named
executive officer during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED(1) FISCAL YEAR 99 PRICE(2) DATE(3) 5% 10%
---------------------------------- ---------- -------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William Matthews, Ph.D............ -- -- -- -- -- --
Mark W. Moore, Ph.D............... -- -- -- -- -- --
Augustine G. Yee.................. 228,571 16.8% $0.31 05/13/09 $5,141,596 $8,229,103
Terry Coley, Ph.D................. 171,429 12.6 0.31 09/16/09 3,856,214 6,171,854
Robert Klein, Ph.D................ 5,714 -- 0.31 09/16/09 128,534 205,718
</TABLE>
------------------------
(1) These incentive stock options are exercisable in full immediately, but the
shares received upon exercise are subject to repurchase by us. Our right of
repurchase lapses as to 25% of the shares covered by the respective options
on the first anniversary of the date of grant, and lapses ratably on a
monthly basis thereafter, with the repurchase right terminating in full on
the fourth anniversary of the date of grant. Under the terms of our 1998
Stock Incentive Plan our board of directors retains the discretion, subject
to specified limitations within the stock plan, to modify, extend or renew
outstanding options and to reprice outstanding options. Options may be
repriced by canceling outstanding options and reissuing new options with an
exercise price equal to the fair market value on the date of reissue, which
may be lower than the original exercise price of such canceled options.
(2) We grant options at an exercise price equal to the fair market value of the
underlying common stock on the date of grant, as determined in good faith by
our board of directors, and the options vest over four years from the date
of grant. In determining the fair market value of our common stock, our
board of directors considers valuations of comparable companies, prices at
which we have issued preferred stock, valuation reports and analyses
prepared by third parties, the relative rights and preferences of our
preferred stock as compared to our common stock, and the lack of liquidity
of our securities. Once we become a publicly-held company, the fair market
value of our stock will equal trading market prices.
(3) The options have a term of ten years, subject to earlier termination in
certain events related to termination of employment.
(4) The dollar amounts under these columns represent the potential realizable
value of each grant over the term of the options based on assumed rates of
stock appreciation of 5% and 10%, compounded annually. The 5% and 10%
assumed rates of appreciation are suggested by the rules of the Securities
and Exchange Commission and do not represent our estimate or projection of
the future common stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our stock.
The potential realizable values above assume that the initial public
offering price of $14.00 per share was the fair market value of the common
stock on the date of grant and that the price of the applicable stock
increases from the date of grant until the end of the ten year option term
at the annual rates specified. There is no assurance provided to any holder
of our securities that the actual stock price appreciation over the ten year
option term will be the assumed 5% and 10% levels or at any other defined
level.
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<PAGE>
AGGREGATED CORRESPONDING OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUES AT DECEMBER 31, 1999
The following table provides information concerning the number and value of
unexercised options held by the named executive officers at December 31, 1999.
None of the named executive officers exercised any options during the fiscal
year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William Matthews, Ph.D........................ 274,286 -- $3,754,975 $ --
Mark W. Moore, Ph.D........................... 274,286 -- 3,754,975 --
Augustine G. Yee.............................. 228,571 -- 3,129,137 --
Terry Coley, Ph.D............................. 171,429 -- 2,346,863 --
Robert Klein, Ph.D............................ -- -- -- --
</TABLE>
------------------------
(1) The value of unexercised in-the-money options held at December 31, 1999
represents the total gain which an option holder would realize if he or she
exercised all of the in-the-money options held at December 31, 1999, and is
determined by multiplying the number of shares of common stock underlying
the options by the difference between an assumed initial public offering
price of $14.00 per share and the per share option exercise price. An option
is in-the-money if the fair market value of the underlying shares exceeds
the exercise of the option.
EMPLOYMENT AGREEMENTS
Dr. Matthews is party to an employment agreement dated April 7, 2000. The
agreement will expire on April 7, 2003 but will automatically renew for
additional one-year terms after that date unless either we or Dr. Matthews give
notice to not renew the agreement at least ninety days prior to the expiration
of the then existing term. The agreement provides for an initial annual salary
of $235,000 and accelerated vesting of all of Dr. Matthews' options in the event
of a change in control of our company. In addition, Dr. Matthews is entitled to
an annual bonus to be determined by the board of directors. In the event that
Dr. Matthews is terminated without cause, he will be entitled to receive
severance equal to nine months of his base salary.
Dr. Moore is party to an employment agreement dated April 8, 2000. The
agreement will expire on April 8, 2003 but will automatically renew for
additional one-year terms after that date unless either we or Dr. Moore give
notice to not renew the agreement at least ninety days prior to the expiration
of the then existing term. The agreement provides for an initial annual salary
of $225,000 and accelerated vesting of all of Dr. Moore's options in the event
of a change in control of our company. In addition, Dr. Moore is entitled to an
annual bonus to be determined by the board of directors. In the event that
Dr. Moore is terminated without cause, he will be entitled to receive severance
equal to six months of his base salary.
Mr. Yee is party to an employment agreement dated April 7, 2000. The
agreement will expire on April 7, 2003 but will automatically renew for
additional one-year terms after that date unless either we or Mr. Yee give
notice to not renew the agreement at least ninety days prior to the expiration
of the then existing term. The agreement provides for an initial annual salary
of $175,000 and accelerated vesting of a portion of Mr. Yee's options in the
event of a change in control of our company, unless more than 50% of his options
have already vested. In addition, Mr. Yee is entitled to an annual bonus to be
determined by the board of directors. In the event that Mr. Yee is terminated
without cause, he will be entitled to receive severance equal to six months of
his base salary.
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<PAGE>
Dr. Coley is party to an employment agreement dated April 7, 2000. The
agreement will expire on April 7, 2003 but will automatically renew for
additional one-year terms after that date unless either we or Dr. Coley give
notice to not renew the agreement at least ninety days prior to the expiration
of the then existing term. The agreement provides for an initial annual salary
of $175,000 and accelerated vesting of a portion of Dr. Coley's options in the
event of a change in control of our company, unless more than 50% of his options
have already vested. In addition, Dr. Coley is entitled to an annual bonus to be
determined by the board of directors. In the event that Dr. Coley is terminated
without cause, he will be entitled to receive severance equal to six months of
his base salary.
BENEFIT PLANS
1998 STOCK INCENTIVE PLAN
In April 1998, our board of directors adopted our 1998 Stock Incentive Plan,
or 1998 Stock Plan. The 1998 Stock Plan has been amended at various times to
increase the number of shares available under the 1998 Stock Plan. A total of
3,150,606 shares of common stock may be issued under the 1998 Stock Plan
pursuant to the direct award or sale of shares or the exercise of options
granted under the 1998 Stock Plan. If any option granted under the 1998 Stock
Plan expires or terminates for any reason without having been exercised in full,
then the unpurchased shares subject to that option will once again be available
for additional option grants.
Under the 1998 Stock Plan, all our employees, including officers and
directors or any subsidiary and any independent contractor or advisor who
performs services for us or a subsidiary are eligible to purchase shares of
common stock and to receive awards of shares or grants of nonstatutory options.
Employees are also eligible to receive grants of incentive stock options, or
ISOs, intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended. The 1998 Stock Plan is administered by the compensation
committee of our board of directors, which selects the persons to whom shares
will be sold or awarded or options will be granted, determines the number of
shares to be made subject to each sale, award or grant, and prescribes other
terms and conditions, including the type of consideration to be paid to us upon
sale or exercise and vesting schedules in connection with each sale, award or
grant.
The exercise price under the nonstatutory options generally must be at least
85% of the fair market value of the common stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value of
the common stock on the date of grant and, in the case of ISOs granted to
holders of more than 10% of the voting power of our company, not less than 110%
of such fair market value. The term of an option cannot exceed 10 years, and the
term of an ISO granted to a holder of more than 10% of the voting power of our
company cannot exceed five years. Options generally expire not later than
30 days following a termination of employment or six months following the
optionee's death or permanent disability.
As of March 31, 2000 we had outstanding options to purchase an aggregate of
1,266,230 shares of common stock at a weighted exercise price of $0.67 per
share. A total of 13,931 shares of common stock were available for future
issuance under the 1998 Stock Plan as of such date. Subsequently, options to
purchase 222,256 shares of common stock were granted on May 26, 2000 at a
weighted average exercise price of $7.88 per share and options to purchase
621,313 shares of common stock were granted to three of our officers on July 7,
2000 at a weighted average exercise price of $12.60 per share.
2000 STOCK INCENTIVE PLAN
The 2000 Stock Incentive Plan was adopted by our board of directors in April
2000 and will be submitted for approval by our stockholders prior to the
completion of this offering. The 2000 Stock Incentive Plan will be administered
by our compensation committee. The 2000 Stock Incentive Plan
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<PAGE>
provides for the direct award or sale of shares of common stock and for the
grant of options to purchase shares of common stock. The 2000 Stock Incentive
Plan provides for the grant of incentive stock options as defined in
Section 422 of the Internal Revenue Code and the grant of nonstatutory stock
options, restricted shares, stock appreciation rights, or SARs, and stock units,
or units to employees, non-employee directors and consultants.
5,485,714 shares of common stock have been authorized for issuance under the
2000 Stock Incentive Plan. The number of shares reserved for issuance under the
2000 Stock Incentive Plan will be increased on January 1 of each year from 2001
through 2010 by the lowest of:
- 4,571,429 shares of our common stock;
- 5% of our fully diluted outstanding common stock on the day of the
increase; or
- a lesser number of shares determined by our board of directors.
However, in no event may a participant receive SARs or option grants for more
than 857,143 shares in the aggregate per fiscal year, except that in the fiscal
year an individual's services first commence, the individual may receive SARs or
option grants for up to 1,714,286 shares in the aggregate.
The 2000 Stock Incentive Plan will have the following features:
- qualified employees will be eligible for the grant of incentive stock
options to purchase shares of common stock;
- qualified non-employee directors will be eligible to receive automatic
option grants, to be made at the consummation of our initial public
offering and at periodic intervals, to purchase shares of common stock at
an exercise price equal to 100% of the fair market value of those shares
on the date of grant;
- the compensation committee will determine the exercise price of options or
the purchase price of stock purchase rights, but in no event will the
option price for incentive stock options be less than 100% of the fair
market value of the stock on the date of grant; and
- the exercise price or purchase price may, at the discretion of the
compensation committee, be paid in, among other things, cash, cash
equivalents, full-recourse promissory notes, past services or future
services.
The 2000 Stock Incentive Plan includes change in control provisions that may
result in the accelerated vesting of outstanding option grants and SARs. The
committee may grant options or SARs in which all or some of the shares shall
become vested in the event of a change in control of the company. Change in
control is defined under the 2000 Stock Incentive Plan as:
- a change in the composition of the board of directors, as a result of
which fewer than one-half of our incumbent directors are directors who
either:
-- had been directors of our company 24 months prior to the change, or
-- were elected, or nominated for election, to the board with the
affirmative votes of at least a majority of our directors who had
been directors 24 months prior to the change and who were still in
office at the time of the election or nomination; or
- an acquisition or aggregation of securities by a person, as defined in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended, as a result of which the person becomes the beneficial owner of
fifty percent or more of the voting power of our then outstanding
securities.
The board of directors will be able to amend or modify the 2000 Stock
Incentive Plan at any time, subject to any required stockholder approval. The
2000 Stock Incentive Plan will terminate no later than ten years from the date
of adoption.
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<PAGE>
2000 EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted our 2000 Employee Stock Purchase Plan in
April 2000, to be effective upon completion of this offering. We will be
submitting it for approval by our stockholders prior to the completion of this
offering. A total of 1,142,857 shares of common stock have been reserved for
issuance under our employee stock purchase plan. The number of shares reserved
for issuance under the 2000 Employee Stock Purchase Plan will be increased on
the first day of each of our fiscal years, commencing 2001, by the lesser of:
- 5% of our fully diluted outstanding common stock on the day of the
increase; or
- a lesser number of shares determined by our board of directors.
Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, is administered by the board of
directors or by a committee appointed by the board. Employees, including our
officers and employee directors but excluding 5% or greater stockholders, are
eligible to participate if they are customarily employed for more than 20 hours
per week and for at least five months in any calendar year. Our 2000 Employee
Stock Purchase Plan permits eligible employees to purchase common stock,
generally through payroll deductions, which may not exceed 15% of an employee's
compensation.
The 2000 Employee Stock Purchase Plan will be implemented during a series of
overlapping offering periods of 24 months' duration, with new offering periods,
other than the first offering period, commencing on January 1 and July 1 of each
year. Our 2000 Employee Stock Purchase Plan establishes two accumulation periods
per year, neither of which will exceed six months. Amounts deducted from payroll
will accumulate, without interest. On the purchase dates set by the board of
directors for each accumulation period, accumulated payroll deductions will be
used to purchase common stock. The initial offering period will be for a 12
month duration and is expected to commence on the date of this offering and end
on June 30, 2001. The initial accumulation period will begin on the date of this
offering and end on December 31, 2000. During the initial accumulation period,
employees may pay for the stock in a lump sum at the end of the accumulation
period.
The purchase price will be equal to 85% of the fair market value per share
of common stock on either the last day of the accumulation period or on the last
trading day before the commencement of the applicable offering period, whichever
is less. Employees may withdraw their accumulated payroll deductions at any
time. Participation in our 2000 Employee Stock Purchase Plan ends automatically
on termination of employment with us. Immediately prior to the effective time of
a corporate reorganization, the participation period then in progress will
terminate and stock will be purchased with the accumulated payroll deductions
unless the 2000 Employee Stock Purchase Plan is assumed by the surviving
corporation or its parent corporation pursuant to the plan of merger or
consolidation.
401(k) PLAN
Effective January 1, 1999 we established a tax-qualified employee savings
and retirement plan for which our employees will generally be eligible. Under
the 401(k) Plan, employees may elect to reduce their current compensation and
have the amount of the reduction contributed to the 401(k) Plan. To date, we
have made no matching contributions. The 401(k) Plan is intended to qualify
under Section 401 of the Internal Revenue Code, so that contributions to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by us,
if any, will be deductible by us when made.
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<PAGE>
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We believe that we have executed all of the transactions set forth below on
terms no less favorable to us than terms we could have obtained from
unaffiliated third parties. It is our intention to ensure that all future
transactions, including loans, between us and our officers, directors and
principal stockholders and their affiliates, are approved by a majority of the
board of directors, including a majority of the independent and disinterested
members of the board of directors, and are on terms no less favorable to us than
those that we could obtain from unaffiliated third parties.
In connection with our founding in January 1997, we sold 1,523,840 shares of
common stock to each of William Matthews, Ph.D., our President and Chief
Executive Officer, and Mark W. Moore, Ph.D., our Chief Scientific Officer and
Treasurer, at a price of $0.01 per share. In addition, Dr. Matthews and
Dr. Moore both were also granted options in 1998 to purchase 274,286 shares of
common stock, all of which were exercisable as of March 31, 2000. In addition,
they were granted options in March 2000 to purchase an aggregate number of
514,286 shares of common stock. These options were fully exercised as of
March 31, 2000. In July, Drs. Matthews and Moore were granted options to
purchase an aggregate number of 564,171 shares of common stock. These shares
have not been exercised.
Common stock held by certain employees and non-employees is subject to stock
purchase agreements whereby we have the option to repurchase unvested shares
upon termination of employment at the initial issuance price. Our right to
repurchase these shares generally lapses at the rate of 25% per year from the
date of the agreement.
From February 1997 through January 2000, we sold shares of our preferred
stock in private financings as follows: 3,428,571 shares of Series A preferred
stock at a price of $0.875 per share in February and May 1997; 7,510,206 shares
of Series B preferred stock at a price of $1.53 per share in February and July
1998; and 7,198,709 shares of Series C preferred stock at a price of $3.13 per
share in January 2000. Of the 7,510,206 outstanding shares of Series B preferred
stock, Tularik, Inc. purchased 489,797 shares in February 1998 at a purchase
price of $1.53 per share in connection with an agreement, whereby we would
produce knockout mice for Tularik, Inc.
Each share of preferred stock will convert automatically into one share of
common stock upon the closing of this offering. The purchasers of the preferred
stock include the following holders of more than 5% of our securities and their
affiliated entities:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
---------------------------------
INVESTOR SERIES A SERIES B SERIES C
------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Stipa Investments, L.P.(1).................................. 3,428,571 1,795,919 957,701
Entities associated with the Sprout Group(2)................ -- 4,781,586 1,460,854
Entities associated with Boston Millennia Partners(3)....... -- -- 2,553,870
</TABLE>
------------------------
(1) F. Noel Perry, a member of our board of directors, is a Managing Director of
Baccharis Capital, which is the general partner of Stipa Investments, L.P.
(2) Includes shares held by DLJ Capital Corp., Sprout Venture Capital, L.P.,
Sprout CEO Fund, L.P. and Sprout Capital VIII, L.P. Philippe Chambon, a
member of our board of directors, is affiliated with each of these entities.
(3) Includes shares held by Boston Millennia Partners II Limited Partnership,
Boston Millennia Partners II-A Limited Partnership, Boston Millennia
Partners GmbH & Co. KG and Boston Millennia Associates II Partnership.
Thomas A. Penn, a member of our board of directors, is a partner of Boston
Millennia Partners, the sponsor of each of these funds.
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<PAGE>
In 1998, we issued three of our directors options to acquire 371,429 shares
of common stock at an exercise price of $0.31 per share.
We currently expect that $4 million of our common stock to be sold in this
offering will be sold to entities affiliated with Boston Millennia Partners.
Thomas A. Penn, a member of our board of directors, is a partner of Boston
Millennia Partners.
In March 2000, we loaned $536,700 to William Matthews, Ph.D., and $268,350
to Mark W. Moore, Ph.D., in connection with their exercise of employee stock
options. Each loan was made pursuant to a four-year, full recourse promissory
note bearing interest at the rate of 6.8% per annum (the applicable federal
rate), and was secured by a pledge of the shares purchased.
In March 2000, in connection with a consulting arrangement, we agreed to
issue upon commencement of the arrangement to Institute Genetique Biologie
Moleculaire et Cellulaire, IGBMC, a three-year warrant to purchase 457,143
shares of our Series C preferred stock at a price of $3.13 per share. This
warrant will vest in its entirety on the four month anniversary of the
commencement date of activities under the agreement. IGBMC, a scientific
foundation, is under the direction of Professor Pierre Chambon, who is the
father of a director of Deltagen, Philippe Chambon, M.D., Ph.D. In March 2000 we
also granted to Professor Chambon an option to purchase 28,571 shares of common
stock at a price of $1.57 per share.
The purchasers of the above shares of preferred stock and warrants to
purchase preferred stock are entitled to registration rights. See "Description
of Capital Stock--Registration Rights."
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our amended and restated certificate of incorporation and bylaws provide
that we will indemnify each of our directors and officers to the fullest extent
permitted by Delaware General Corporation Law. Further, we have entered into
indemnification agreements with each of our directors and officers. For further
information, see "Description of Capital Stock--Limitation of Liability and
Indemnification Matters."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth information about the beneficial ownership of
our common stock on March 31, 2000, and as adjusted to reflect the sale of the
shares of common stock in this offering, by:
- each named executive officer;
- each of our directors;
- each person known to us to be the beneficial owner of more than 5% of our
common stock; and
- all of our executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner listed on
the tables is c/o Deltagen, Inc., 1003 Hamilton Avenue, Menlo Park, California
94025.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by the footnotes below,
we believe, based on the information furnished to us, that the persons and
entities named in the tables below have sole voting and investment power with
respect to all shares of common stock that they beneficially own, subject to
applicable community property laws. We have based our calculation of the
percentage of beneficial ownership on 21,804,437 shares of common stock
outstanding on March 31, 2000 and 28,804,437 shares of common stock outstanding
upon completion of this offering.
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding shares
of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of March 31, 2000. We did not deem
these shares outstanding, however, for the purpose of computing the percentage
ownership of any other person. Asterisks represent beneficial ownership of less
than one percent.
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<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF COMMON STOCK
SHARES OF BENEFICIALLY OWNED
COMMON STOCK -------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
----------------------------------------------------------- -------------- -------- --------
<S> <C> <C> <C>
Vicente Anido, Jr., Ph.D. ................................. 40,000 * *
1621 Bayside Drive
Corona Del Mar, CA 92625
Philippe O. Chambon, M.D., Ph.D.(2) ....................... 6,820,659 31.3% 23.7%
c/o The Sprout Group
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Thomas A. Penn(3)(5) ...................................... 2,553,870 11.7 9.9
c/o Boston Millennia Partners
20 Valley Stream Parkway, Suite 265
Malvern, PA 19355
F. Noel Perry(4) .......................................... 6,182,191 28.4 21.5
c/o Baccharis Capital Inc.
2420 Sand Hill Road
Suite 100
Menlo Park, CA 94025
Nicholas J. Simon ......................................... 89,065 * *
531 Parrott Drive
San Mateo, CA 94402
William Matthews, Ph.D.(6) ................................ 1,755,177 8.0 6.1
Mark W. Moore, Ph.D.(7) ................................... 1,395,691 6.4 4.7
Augustine G. Yee(8) ....................................... 285,714 1.3 1.0
Terry Coley, Ph.D. ........................................ 171,429 * *
Robert Klein, Ph.D.(9) .................................... 171,426 * *
All directors and executive officers as a group
(9 persons)(10) ......................................... 19,465,222 89.3 67.6
</TABLE>
------------------------
* Less than 1% of the outstanding shares of common stock.
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<PAGE>
(1) Includes, where indicated, shares issuable upon the exercise of options
exercisable within 60 days of March 31, 2000. These options, granted under
the 1998 Stock Incentive Plan, were immediately exercisable for shares
subject to repurchase upon termination of employment. The right to
repurchase terminates, and the shares vest, as to 25% of the shares after
one year of employment and monthly thereafter over the remaining three
years.
(2) Includes 5,778,738 shares held by Sprout Capital VIII, L.P., 26,264 shares
held by The Sprout CEO Fund, L.P., 90,714 shares held by DLJ Capital Corp.,
578,218 shares held by DLJ ESC II, L.P. and 346,725 shares held by Sprout
Venture Capital L.P., a division of DLJ Capital Corp., which is the
Managing General Partner of Sprout Capital VIII, L.P., the General Partner
of the Sprout CEO Fund and the General Partner of Sprout Venture Capital
L.P. DLJ Capital Corp. has sole voting and investment control over the
shares held by Sprout Capital VIII, L.P., The Sprout CEO Fund, L.P. and
Sprout Venture Capital L.P. Philippe Chambon, M.D., Ph.D. is a vice
president of the Sprout Group and is a member of our board of directors. He
is also General Partner of DLJ Associates VIII, L.P., the General Partner
of Sprout Capital VIII, L.P. Dr. Chambon disclaims beneficial ownership of
the shares held by these entities except to the extent of his pecuniary
interest in these shares. Excludes a three-year warrant to purchase 457,143
shares of Series C preferred stock at a price of $3.13 per share that will
be granted in connection with a consulting agreement with Institute
Genetique Biologie Moleculaire et Cellulaire, a scientific foundation, that
is under the direction of Professor Pierre Chambon, who is the father of
Philippe Chambon, M.D., Ph.D.
(3) Includes 2,254,715 shares held by Boston Millennia Partners II Limited
Partnership, 91,777 shares held by Boston Millennia Partners II-A Limited
Partnership, 178,936 shares held by Boston Millennia Partners GmbH & Co. KG
and 28,442 shares held by Boston Millennia Associates II Partnership.
Thomas A. Penn is a partner of Boston Millennia Partners, the sponsor of
these investment funds and is a member of our board of directors. Mr. Penn
disclaims beneficial ownership of the shares held by these entities except
to the extent of his pecuniary interest in these shares.
(4) Includes 6,182,191 shares held by Stipa Investments, L.P. F. Noel Perry, a
member of our board of directors, is a managing director of Baccharis
Capital, Inc., which is the general partner of Stipa Investments, L.P.
Mr. Perry disclaims beneficial ownership of the shares held by such entity
except to the extent of his pecuniary interest in these shares.
(5) Assumes the purchase of 285,714 shares of common stock included in this
offering as a participant in the directed share program.
(6) Includes 650,400 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 2000 and 342,857 shares subject to repurchase as
of June 30, 2000.
(7) Includes 462,342 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 2000 and 171,429 shares subject to repurchase as
of June 30, 2000.
(8) Includes 57,143 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 2000, 133,334 shares subject to repurchase as of
June 30, 2000.
(9) Includes 34,285 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 2000, 34,285 shares subject to repurchase as of
June 30, 2000.
(10) Includes 1,204,170 shares issuable upon the exercise of options
exercisable within 60 days of June 30, 2000, and 965,325 shares are
subject to repurchase as of June 30, 2000.
62
<PAGE>
5% STOCKHOLDERS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
NUMBER OF BENEFICIALLY OWNED
SHARES OF -------------------
COMMON STOCK BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
----------------------------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with The Sprout Group(1) .............. 6,820,659 31.3% 23.7%
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Stipa Investments, L.P.(2) ................................ 6,182,191 28.4 21.5
2420 Sand Hill Road
Suite 100
Menlo Park, CA 94025
Entities affiliated with Boston Millennia 2,553,870 11.7 9.9
Partners(3)(4) ..........................................
Rowes Wharf
Boston, MA 02110
William Matthews, Ph.D..................................... 1,755,177 8.0 6.1
Mark W. Moore, Ph.D........................................ 1,395,691 6.4 4.7
</TABLE>
------------------------
(1) Includes 5,778,738 shares held by Sprout Capital VIII, L.P., 26,264 shares
held by The Sprout CEO Fund, L.P., 90,714 shares held by DLJ Capital Corp.,
578,218 shares held by DLJ ESC II, L.P. and 346,725 shares held by Sprout
Venture Capital L.P., a division of DLJ Capital Corp., which is the Managing
General Partner of Sprout Capital VIII, L.P., the General Partner of the
Sprout CEO Fund and the General Partner of Sprout Venture Capital L.P. DLJ
Capital Corp. has sole voting and investment control over the shares held by
Sprout Capital VIII, L.P., The Sprout CEO Fund, L.P. and Sprout Venture
Capital L.P. Philippe Chambon, M.D., Ph.D. is a vice president of the Sprout
Group and is a member of our board of directors. He is also General Partner
of DLJ Associates VIII, L.P., the General Partner of Sprout Capital VIII,
L.P. Dr. Chambon disclaims beneficial ownership of the shares held by these
entities except to the extent of his pecuniary interest in these shares.
Excludes a three-year warrant to purchase 457,143 shares of Series C
preferred stock at a price of $3.13 per share that will be granted in
connection with a consulting agreement with Institute Genetique Biologie
Moleculaire et Cellulaire, a scientific foundation, that is under the
direction of Professor Pierre Chambon, who is the father of Philippe
Chambon, M.D., Ph.D.
(2) F. Noel Perry, a member of our board of directors, is a managing director of
Baccharis Capital, Inc., which is the general partner of Stipa Investments,
L.P. Mr. Perry is the sole natural person exercising voting and/or
investment power with respect to the shares held by Stipa Investments, L.P.,
but disclaims beneficial ownership of the shares held by such entity except
to the extent of his pecuniary interest in these shares.
(3) Includes 2,254,715 shares held by Boston Millennia Partners II Limited
Partnership, 91,777 shares held by Boston Millennia Partners II-A Limited
Partnership, 178,936 shares held by Boston Millennia Partners GmbH &
Co. KG, and 28,442 shares held by Boston Millennia Associates II
Partnership. The following natural persons exercise voting and/or investment
power with respect to the shares held by these entities: A. Dana Callow,
Jr.; Robert S. Sherman; and Martin J. Hernon. Thomas A. Penn is a partner of
Boston Millennia Partners, which is the sponsor of each of these investment
funds and is a member of our board of directors. Mr. Penn disclaims
beneficial ownership of the shares held by these entities except to the
extent of his pecuniary interest in these shares.
(4) Assumes the purchase of 285,714 shares of common stock included in this
offering as a participant in the directed share program.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our amended
and restated certificate of incorporation and our amended and restated by-laws
is a summary. Statements contained elsewhere in this prospectus relating to
these provisions are not necessarily complete, and we refer you to the amended
and restated certificate of incorporation and the amended and restated by-laws
that will be in effect upon the completion of this offering. We have filed
copies of these documents with the Securities and Exchange Commission as
exhibits to our registration statement, of which this prospectus is a part. The
amended and restated certificate of incorporation and the amended and restated
by-laws described below will become effective at the time of completion of this
offering.
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 amendment of our certificate of incorporation, will consist of
80,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value.
COMMON STOCK
As of March 31, 2000 there were 21,804,437 shares of common stock
outstanding and held by approximately 126 stockholders of record, assuming the
automatic conversion of each outstanding share of preferred stock upon the
closing of this offering. After this offering, there will be 28,804,437 shares
of our common stock outstanding, or 29,854,437 shares if the underwriters
exercise their over-allotment option in full.
Common stock held by certain employees and non-employees is subject to stock
purchase agreements whereby we have the option to repurchase unvested shares
upon termination of employment at the initial issuance price. Our right to
repurchase these shares generally lapses at the rate of 25% per year from the
date of the agreement.
The holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of common stock entitled to vote in any
election of directors can elect all of the directors standing for election, if
they so choose. Subject to preferences that may be applicable to any then
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors out
of funds legally available therefor. See "Dividend Policy." Upon our
liquidation, dissolution or winding up, the holders of common stock will be
entitled to share ratably in the net assets legally available for distribution
to stockholders after the payment of all of our debts and other liabilities of
our company, subject to the prior rights of any preferred stock then
outstanding. Holders of common stock have no preemptive or conversion rights or
other subscription rights and there are no redemption or sinking funds
provisions applicable to the common stock. All outstanding shares of common
stock are, and the common stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into common stock. See Note 8 of notes to our financial
statements for a description of the currently outstanding preferred stock.
Following the conversion, our certificate of incorporation will be restated to
delete all references to the prior series of preferred stock, and 5,000,000
shares of undesignated preferred stock will be authorized. The board of
directors has the authority, without further action by the stockholders, to
issue from time to time the preferred stock in one or more series and to fix the
number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and the qualifications or
restrictions thereof. The preferences, powers, rights and
64
<PAGE>
restrictions of different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions, and purchase funds and
other matters. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of common stock or
affect adversely the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control of us.
WARRANTS
As of March 31, 2000, we had two outstanding warrants entitling their
holders to purchase an aggregate of 43,101 shares of Series B preferred stock at
an exercise price of $1.53 per share. In addition, as of July 31, 2000, we had
an outstanding warrant entitling the holder to purchase 457,143 shares of
Series C preferred stock at an exercise price of $3.13 per share. The Series B
and C warrants contain provisions which adjust the exercise price and the
aggregate number of shares that may be issued upon the exercise of the warrant
if a stock dividend, stock split, reorganization, reclassification or
consolidation occurs. Upon completion of the initial public offering and
conversion of all of our preferred stock into common stock, these warrants will
be exercisable for common stock.
REGISTRATION RIGHTS
After this offering, the holders of 18,180,586 shares of common stock issued
upon conversion of the Series A preferred stock, Series B preferred stock and
Series C preferred stock and upon exercise of warrants are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
If we propose to register any of our securities under the Securities Act for our
own account, holders of common stock issuable upon conversion of the Series A,
Series B and Series C preferred stock and holders of the Silicon Valley Bank
warrant are entitled to notice of such registration and are entitled to include
their shares in that registration subject to various conditions. The
underwriters of any such offering have the right to limit the number of shares
included in such registration.
In addition, commencing 180 days after the effective date of the
registration statement of which this prospectus is a part, holders of at least
40% of the common stock issuable upon conversion of the Series C preferred stock
may require us to prepare and file a registration statement under the Securities
Act at our expense covering at least 40% of the common stock issuable upon
conversion of the Series C preferred stock, provided that the shares to be
included in such registration have an anticipated aggregate net proceeds to us
of at least $5,000,000. The holders of common stock issued upon conversion of
the Series A preferred stock and Series B preferred stock are entitled to
participate in any such registration. In addition, commencing 180 days after the
effective date of this registration statement of which this prospectus is a
part, holders of at least 30% of the common stock issuable upon conversion of
the Series A and Series B preferred stock may require us to prepare and file a
registration statement, under the Securities Act at our expense covering at
least 30% of the common stock issuable upon conversion of the Series A and
Series B preferred stock, provided that the shares entitled to be included in
such registration have an anticipated aggregated net proceeds to us of at least
$5,000,000. Under these demand registration rights, we are required to use our
reasonable best efforts to cause the shares requested to be included in the
registration statement, subject to customary conditions and limitations. We are
not obligated to effect more than two of these stockholder-initiated
registrations.
Once we become eligible to file a registration statement on Form S-3, the
holders of common stock issuable upon conversion of the Series A, Series B and
Series C preferred stock and holders of the Silicon Valley Bank warrant may
require us to register, all or a portion of their securities on a registration
statement on Form S-3 and may participate in a Form S-3 registration by us,
subject to
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<PAGE>
certain conditions and limitations. Registration rights terminate no later than
five years after this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS AND DELAWARE LAW
Our amended and restated certificate of incorporation and by-laws, effective
upon completion of this offering, contain provisions that could discourage,
delay or prevent a tender offer or takeover attempt at a price which many
stockholders may find attractive. The existence of these provisions, which are
intended to enhance the likelihood of continuity and stability in the
composition of, and policies formulated by, our board, could limit the price
that investors might otherwise pay in the future for shares of our common stock.
BLANK CHECK PREFERRED STOCK. As noted above, our board of directors,
without stockholder approval, will have the authority under our amended and
restated certificate of incorporation to authorize the issuance of preferred
stock, commonly referred to as "blank check" preferred stock with rights senior
to those of common stock. As a result, preferred stock could be issued quickly
and easily, could impair the rights of holders of common stock and could be
issued with terms calculated to delay or prevent a change of control or make
removal of management more difficult.
CLASSIFIED BOARD OF DIRECTORS. Our amended and restated certificate of
incorporation provides for a board of directors divided into three classes of
directors serving staggered three-year terms. The classification of directors
has the effect of making it more difficult for stockholders to change the
composition of the board of directors in a relatively short period of time. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the board of directors.
STOCKHOLDER ACTION. Our amended and restated certificate of incorporation
provides that stockholders may only act at meetings of stockholders and not by
written consent in lieu of a stockholders' meeting.
STOCKHOLDER MEETINGS. Our amended and restated certificate of incorporation
and by-laws provide that stockholders may not call a special meeting of the
stockholders. Rather, special meetings of stockholders may only be called by the
chief executive officer or secretary only at the request of the chairman of the
board, the chief executive officer or the president of our company or by a
resolution adopted by a majority of our board of directors. Our amended and
restated by-laws also provide that stockholders may only conduct business at
special meetings of stockholders that was specified in the notice of the
meeting. These provisions may discourage another person or entity from making a
tender offer, even if it acquired a majority of our outstanding voting stock,
because the person or entity could only take action at a duly called
stockholders' meeting relating to the business specified in the notice of
meeting and not by written consent.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our amended and restated by-laws provide that a stockholder seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice of this intention in writing. To be timely, a stockholder
must deliver or mail the notice and we must receive the notice at our principal
executive offices not less than 50 days nor more than 75 days prior to the
scheduled date of the annual meeting of stockholders. The amended and restated
by-laws also include a similar requirement for making nominations at special
meetings and specify requirements as to the time, form and content of the
stockholder's notice. These provisions could delay stockholder actions that are
favored by the holders of a majority of our outstanding stock until the next
stockholders' meeting.
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<PAGE>
SUPER-MAJORITY VOTING. Delaware law generally provides that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation, unless a corporation's
certificate of incorporation requires a greater percentage. We have provisions
in our certificate of incorporation which require a vote of at least 66 2/3% of
the stockholders entitled to vote in the election of directors to amend in any
respect or repeal the anti-takeover provisions of our certificate of
incorporation and a vote of at least 66 2/3% of the voting power of the
stockholders or board of directors to adopt, amend or repeal the by-laws of our
company.
DELAWARE ANTI-TAKEOVER STATUTE. Section 203 of the Delaware corporation law
prohibits persons deemed "interested stockholders" from engaging in a "business
combination" with a Delaware corporation for three years following the date
these persons become interested stockholders. Interested stockholders generally
include:
- persons who are the beneficial owners of 15% or more of our outstanding
voting stock; and
- persons who are our affiliates or associates and who hold 15% or more of
our outstanding voting stock at any time within three years before the
date on which such person's status as an interested stockholder is
determined.
Subject to certain exceptions, a "business combination" includes, among
other things:
- mergers and consolidations;
- the sale, lease, exchange, mortgage, pledge, transfer or other disposition
of assets having an aggregate market value equal to 10% or more of either
the aggregate market value of all assets of the corporation determined on
a consolidated basis or the aggregate market value of all our outstanding
stock;
- transactions that result in our issuance or transfer of any of our stock
to the interested stockholder, except pursuant to certain exercises,
exchanges, conversions, distributions or offers to purchase with respect
to securities outstanding prior to the time that the interested
stockholder became such and that, generally, do not increase the
interested stockholder's proportionate share of any class or series of our
stock;
- any transaction involving us that has the effect of increasing the
proportionate share of our stock of any class or series, or securities
convertible into the stock of any class or series, that is owned directly
or indirectly by the interested stockholder; or
- any receipt by the interested stockholder of the benefit (except
proportionately as a stockholder) of any loans, advances, guarantees,
pledges or other financial benefits which we provided.
Section 203 does not apply to a business combination if:
- before a person becomes an interested stockholder, our board approves the
transaction in which the interested stockholder became an interested
stockholder or approves the business combination;
- upon consummation of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested stockholder
owns at least 85% of our voting stock outstanding at the time the
transaction commences (other than certain excluded shares); or
- following a transaction in which the person became an interested
stockholder, the business combination is approved by our board and
authorized at a regular or special meeting of stockholders (and not by
written consent) by the affirmative vote of the holders of at least
two-thirds of our outstanding voting stock not owned by the interested
stockholder.
These provisions of Delaware law and our amended and restated certificate of
incorporation and bylaws could have the effect of discouraging others from
attempting hostile takeovers and, as a
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consequence, they may also inhibit temporary fluctuations in the market price of
our common stock that often result from actual or rumored hostile takeover
attempts. Such provisions may also have the effect of preventing changes in our
management. It is possible that these provisions could make it more difficult to
accomplish transactions which stockholders may otherwise deem to be in their
best interests.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our amended and restated certificate of
incorporation that limit the liability of our directors for monetary damages for
breach of their fiduciary duty as directors, except for liability that cannot be
eliminated under the Delaware General Corporation Law, or Delaware Law. The
Delaware Law provides that directors of a company will not be personally liable
for monetary damages for breach of their fiduciary duty as directors, except for
liability
- for any breach of their duty of loyalty to us or our stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided Section 174 of the Delaware Law; or
- for any transaction from which the director derived an improper personal
benefit.
Any amendment or repeal of these provisions requires the approval of the
holders of shares representing at least 66 2/3% of our shares entitled to vote
in the election of directors, voting as one class.
Our amended and restated certificate of incorporation and amended and
restated bylaws also provide that we shall indemnify our directors and officers
to the fullest extent permitted by the Delaware Law. We have entered into
separate indemnification agreements with our directors and executive officers
that could require us, among other things, to indemnify them against liabilities
that may arise by reason of their status or service as directors and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. We believes that the limitation of liability
provision in our amended and restated certificate of incorporation and the
indemnification agreements will facilitate our ability to continue to attract
and retain qualified individuals to serve as directors and officers of our
company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServe 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,
and no predictions can be made regarding the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering due to certain
contractual and legal restrictions on resale. Nevertheless, sales of our common
stock in the public market after the restrictions lapse, or the perception that
such sales may occur, could adversely affect the prevailing market price.
SALE OF RESTRICTED SHARES AND LOCK-UP AGREEMENTS
Upon completion of this offering, we will have an aggregate of 28,804,437
outstanding shares of common stock, or 29,854,437 shares if the underwriters
exercise the over-allotment option in full. As of March 31, 2000, we had:
- 2,084,571 outstanding restricted shares to employees, consultants and
directors;
- outstanding stock options to employees, consultants and directors for the
purchase of an aggregate of 1,266,230 shares of common stock; and
- outstanding warrants to purchase 43,101 shares of Series B preferred stock
which will automatically convert into warrants to purchase an equal number
of shares of common stock upon the completion of this offering.
In addition, as of July 31, 2000, we had outstanding a warrant to purchase
457,143 shares of Series C preferred stock which will automatically convert into
a warrant to purchase an equal number of shares of common stock upon completion
of this offering.
The 7,000,000 shares of common stock being sold being sold in this offering
will be freely tradable (other than by an "affiliate" of our company as such
term is defined in the Securities Act) without restriction or registration under
the Securities Act. All remaining shares were issued and sold by us in private
transactions and are eligible for public sale if registered under the Securities
Act or sold in accordance with Rule 144 or Rule 701 thereunder.
Our directors, executive officers and certain stockholders, who collectively
hold an aggregate of 21,804,437 shares of common stock, have agreed, pursuant to
lock-up agreements, that they will not sell any common stock owned by them
without the prior written consent of the representatives of the underwriters for
a period of 180 days from the date of this prospectus.
Following the expiration of the lockup period, approximately 20,207,172
shares of common stock, including shares issuable upon the exercise of certain
options, will be available for sale in the public market subject to compliance
with Rule 144 or Rule 701, including approximately 489,797 shares eligible for
the sale under Rule 144(k). See "Underwriting."
RULE 144
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person deemed to be our affiliate, or a person
holding restricted shares who beneficially owns shares that were not acquired
from us or our affiliate within the previous one year, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the then outstanding shares of common stock, approximately 288,044
shares immediately after this offering, assuming no exercise of the
underwriters' over-allotment option, or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the SEC.
Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about us.
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RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the ninety days preceding a sale, and who has beneficially owned the
shares to be sold for at least two years, is entitled to sell those shares
without regard to the volume, manner-of-sale or other limitations contained in
Rule 144.
RULE 701
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the SEC has indicated
that Rule 701 will apply to stock options granted by us before this offering,
along with the shares acquired upon exercise of such options. Securities issued
in reliance on Rule 701 are deemed to be restricted shares and, beginning
90 days after the date of this prospectus (unless subject to the contractual
restrictions described above), may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with the two-year minimum holding period
requirements.
STOCK OPTIONS
We intend to file registration statements under the Securities Act covering
approximately shares of common stock reserved for issuance under the 1998
Stock Plan, 2000 Stock Plan and 2000 Employee Stock Purchase Plan. This
registration statement is expected to be filed soon after the date of this
prospectus and will automatically become effective upon filing. Accordingly,
shares registered under such registration statement will be available for sale
in the open market, unless such shares are subject to vesting restrictions with
us or the contractual restrictions described above.
REGISTRATION RIGHTS
In addition, after this offering, the holders of preferred shares and
warrants convertible into an aggregate of 18,180,586 shares of common stock will
be entitled to certain rights to cause us to register the sale of such shares
under the Securities Act. Registration of these shares under the Securities Act
would result in these shares, other than shares purchased by our affiliates,
becoming freely tradable without restriction under the Securities Act. See
"Description of Capital Stock--Registration Rights."
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U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
tax consequences of the ownership and disposition of our common stock by a
non-U.S. holder. As used in this prospectus, the term "non-U.S. holder" is a
person other than:
- a citizen or individual resident of the U.S. for U.S. federal income tax
purposes;
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the U.S.;
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust, in general, if it is subject to the primary supervision of a
court within the U.S. and the control of one or more U.S. persons.
This discussion does not consider:
- U.S. state, local, and estate or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, without limitation, if the
non-U.S. holder is a partnership, that the U.S. tax consequences of
holding and disposing of our common stock may be affected by certain
determinations made at the partner level;
- the tax consequences for the shareholders or beneficiaries of a non-U.S.
holder;
- any special tax rules that may apply to certain non-U.S. holders,
including, without limitation, banks, insurance companies, dealers in
securities and traders in securities who elect to apply a mark-to-market
method of accounting; or
- special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge," or "conversion
transaction," or any similar or hybrid financial instrument
The following is based on our interpretation of the provisions of the U.S.
Internal Revenue Code of 1986, as amended, applicable U.S. Treasury regulations,
and administrative and judicial interpretations, all as of the date of this
prospectus, and all of which may change, retroactively or prospectively. The
following summary is for general information only and in no way should be
construed as legal or professional tax consulting advice. ACCORDINGLY, EACH
NON-U.S. HOLDER SHOULD CONSULT A TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE,
LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND
DISPOSING OF SHARES OF OUR COMMON STOCK.
DIVIDENDS
In the event that dividends are paid on the shares of common stock,
dividends paid to a non-U.S. holder of common stock generally will be subject to
withholding of U.S. federal income tax at a 30% rate, or such lower rate as may
be provided by an applicable income tax treaty. Non-U.S. holders should consult
their tax advisors regarding their entitlement to benefits under a relevant
income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the U.S. or, if an income tax treaty applies,
attributable to a permanent establishment, or in the case of an individual, a
"fixed base", in the U.S., as provided in that treaty ("U.S. trade or business
income"), are generally subject to U.S. federal income tax on a net income basis
at regular graduated rates, but are not generally subject to the 30% withholding
tax if the non-U.S. holder files the appropriate U.S. Internal Revenue Service
form with the payor. Any U.S. trade or business income received by a
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non-U.S. holder that is a corporation may also, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or such lower rate
as specified by an applicable income tax treaty.
Dividends paid prior to January 1, 2001 to an address in a foreign country
are presumed, absent actual knowledge to the contrary, to be paid to a resident
of that country for purposes of the withholding discussed above and for purposes
of determining the applicability of a tax treaty rate. For dividends paid after
December 31, 2000:
- a non-U.S. holder of common stock who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy applicable
certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number; and
- look-through rules will apply for tiered partnerships.
A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit of
any excess amounts withheld by filing an appropriate claim for refund with the
IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally should not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder;
- the non-U.S. holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the U.S. for more than 182 days in the taxable year of
the disposition and meets certain other requirements;
- the non-U.S. holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to certain U.S. expatriates; or
- we are or have been a "U.S. real property holding corporation" for federal
income tax purposes at any time during the shorter of the five-year period
ending on the date of disposition or the period that the non-U.S. holder
held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe
that we should not have been and should not currently be, and we do not
anticipate that we will become, a "U.S. real property holding corporation" for
U.S. federal income tax purposes. The tax relating to stock in a "U.S. real
property holding corporation" will not apply to a non-U.S. holder whose
holdings, direct and indirect, at all times during the applicable period,
constituted 5% or less of the common stock, provided that the common stock was
regularly traded on an established securities market, as defined in the
implementing U.S. Treasury Regulations.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under specified circumstances, U.S. Treasury Regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, non-U.S. holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends paid prior to January 1, 2001 to an address
outside the U.S. For dividends paid after December 31, 2000, however, a non-U.S.
holder of common
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stock that fails to certify its non-U.S. holder status in accordance with
applicable U.S. Treasury Regulations may be subject to backup withholding at a
rate of 31% on payments of dividends.
The payment of the proceeds of the disposition of common stock by a holder
to or through the U.S. office of a broker generally will be subject to
information reporting and backup withholding at a rate of 31% unless the holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds of the
disposition by a non-U.S. holder of common stock to or through a non-U.S. office
of a broker will not be subject to backup withholding or information reporting
unless the broker is a "U.S. related person." In the case of the payment of
proceeds from the disposition of common stock by or through a non-U.S. office of
a broker that is a "U.S. related person," information reporting, but currently
not backup withholding, on the payment applies unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files that the
holder is a non-U.S. holder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income for certain periods is
derived from the conduct of a U.S. trade or business; or
- effective after December 31, 2000, a foreign partnership if, at any time
during its taxable year;
-- at least 50% of the capital or profits interest in the partnership is
owned by U.S. persons; or
-- the partnership is engaged in a U.S. trade or business.
Effective after December 31, 2000, backup withholding generally will not
apply to the payment of disposition proceeds by or through a non-U.S. office of
a broker that is a U.S. person or a "U.S. related person" unless the broker has
actual knowledge that the holder is a U.S. person. Non-U.S. holders should
consult their own tax advisors regarding the application of the information
reporting and backup withholding rules to them, including changes to these
rules that will become effective after December 31, 2000.
Any amount withheld under the backup withholding rules from a payment to a
non-U.S. holder will be credited against the holder's U.S. federal income tax
liability, if any, and may entitle the non-U.S. holder to a refund provided that
the required information is furnished to the IRS.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, each
underwriter named below has severally agreed to purchase, and we have agreed to
sell to each underwriter, the number of shares set forth opposite the name of
that underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------ ---------
<S> <C>
Salomon Smith Barney Inc....................................
FleetBoston Robertson Stephens Inc..........................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total..................................................... 7,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the
over-allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., FleetBoston Robertson
Stephens Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to dealers at the public offering price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per share on sales to other dealers. If all
of the shares are not sold at the initial offering price, the representatives
may change the public offering price and the other selling terms. The
representatives have advised us that the underwriters do not intend to confirm
any sales to any accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,050,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
option is exercised, each underwriter must, subject to specified conditions,
purchase a number of additional shares approximately proportionate to that
underwriter's initial purchase commitment.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 700,000 of the common shares, or 10%, of the common
stock to be sold in this offering to our directors, officers and employees, as
well as to clients, vendors and other parties associated with us. The number of
shares available for sale to the general public will be reduced to the extent
that any reserve shares are purchased. Any reserved shares not purchased will be
offered by the underwriters on the same terms as the other shares offered by
this prospectus. We have agreed to indemnify the underwriters against some
liabilities and expenses, including liabilities under the Securities Act of
1933, in connection with sales of the directed shares.
We, our officers and directors and holders of substantially all of our
existing outstanding shares have agreed that, for a period of 180 days from the
date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., dispose of or hedge any shares of our common stock or
any securities convertible into or exchangeable for common stock. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our shares was
determined by negotiations among us and the representatives. Among the factors
considered in determining the initial public offering price were our
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record of operations, our current financial condition, our future prospects, our
markets, the economic conditions in and future prospects for the industry in
which we compete, our management, and currently prevailing general conditions in
the equity securities markets, including current market valuations of publicly
traded companies considered comparable to us. There can be no assurance,
however, that the prices at which our shares will sell in the public market
after this offering will not be lower than the price at which they are sold by
the underwriters or that an active trading market in our common stock will
develop and continue after this offering.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "DGEN."
The following table shows the underwriting discounts and commissions 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 underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY DELTAGEN
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................ $ $
Total................................................ $ $
</TABLE>
Salomon Smith Barney Inc., on behalf of the underwriters, may purchase and
sell shares of our common stock in the open market. These transactions may
include short sales, syndicate covering transactions and stabilizing
transactions. Short sales involve syndicate sales of common stock in excess of
the number of shares to be purchased by the underwriters in the offering, which
creates a syndicate short position. Covered short sales are sales of shares made
in an amount up to the number of shares represented by the underwriters'
over-allotment option. Transactions to close out the covered syndicate short
involve either purchases of the common stock in the open market after the
distribution has been completed or the exercise of the over-allotment option.
The underwriters may also make "naked" short sales of shares in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares of common stock 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 shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Stabilizing
transactions consist of the bids for or purchases of shares in the open market
while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from an underwriter when Salomon
Smith Barney Inc., in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that underwriter.
Any of these activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
these transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.
We estimate that the total expenses, excluding underwriting discounts and
commissions, payable by us in connection with this offering will be
approximately $1.2 million.
The representatives or their respective affiliates may, in the future,
perform various investment banking and advisory services for us from time to
time, for which they will receive customary fees. The representatives may, from
time to time, engage in transactions with and perform services for us in the
ordinary course of business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
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LEGAL MATTERS
Various legal matters with respect to the validity of the common stock
offered by this prospectus and certain intellectual property matters will be
passed upon for us by Pillsbury Madison & Sutro LLP, San Francisco, California.
Selected legal matters relating to our intellectual property will be passed upon
by John E. Burke, our own Vice President of Intellectual Property. Partners of
Pillsbury Madison & Sutro LLP own an aggregate of 28,571 shares of our common
stock. Mr. Burke, our Vice President of Intellectual Property, owns 171,429
shares of our common stock. Various legal matters relating to the offering will
be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for the period
from January 28, 1997 (date of inception) to December 31, 1997 and for the years
ended December 31, 1998 and 1999, and for the period from January 28, 1997 (date
of inception) to December 31, 1999, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in the
registration statement, or the exhibits which are part of the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the shares of our common stock to be sold in this offering, please refer to the
registration statement and the exhibits which are part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete. Each statement in
this prospectus regarding the contents of the referenced contract or other
document is qualified in all respects by our reference to the copy filed with
the registration statement.
For further information about us and our common stock, we refer you to our
registration statement and its attached exhibits, copies of which may be
inspected without charge at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these
documents by writing to the Securities and Exchange Commission and paying a
duplicating fee. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information about the public reference rooms. The
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and Web site
of the Commission referred to above.
We intend to furnish our stockholders with annual reports containing audited
financial statements and an opinion thereon expressed by independent certified
public accountants. We also intend to furnish other reports as we may determine
or as required by law.
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DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Deficit......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Deltagen, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Deltagen, Inc. (a company in the
development stage) at December 31, 1998 and 1999, and the results of its
operations and its cash flows from January 28, 1997 (date of inception) to
December 31, 1997, the years ended December 31, 1998 and 1999 and for the
cumulative period from January 28, 1997 (date of inception) to December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 6, 2000
F-2
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
-------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 8,635 $ 848 $ 17,961
Accounts receivable, net......................... 357 585 107
Prepaid expenses................................. 62 205 194
------- -------- --------
Total current assets......................... 9,054 1,638 18,262
Property and equipment, net........................ 2,213 4,973 6,169
Other assets....................................... 13 163 644
------- -------- --------
Total assets................................. $11,280 $ 6,774 $ 25,075
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................. $ 631 $ 2,976 $ 2,636
Accrued liabilities.............................. 95 984 1,526
Current portion of capital lease obligations..... 28 30 30
Current portion of loans payable................. -- 503 567
Deferred revenue................................. 559 946 771
------- -------- --------
Total current liabilities.................... 1,313 5,439 5,530
Capital lease obligations, less current
portion........................................ 65 22 14
Loans payable, less current portion.............. -- 2,233 2,051
------- -------- --------
Total liabilities............................ 1,378 7,694 7,595
------- -------- --------
Commitments (Note 4)
Redeemable convertible preferred stock:
Authorized: 18,995,920 shares
Issued and outstanding: 10,938,777 shares at
December 31, 1998 and 1999, 18,137,486 shares at
March 31, 2000; and none pro forma
(Liquidation value: $14,500 at December 31, 1998
and 1999, $37,050 at March 31, 2000)............. 14,447 14,447 36,807 $ --
------- -------- -------- --------
Stockholders' deficit:
Common stock, $0.001 par value:
Authorized: 28,571,429 shares
Issued and outstanding: 1,811,268, 2,069,685
and 3,666,951 shares at December 31, 1998, 1999
and March 31, 2000, respectively; and
21,804,437 shares pro forma.................... 2 2 4 22
Additional paid-in capital......................... 73 10,695 22,530 59,319
Unearned stock-based compensation.................. (13) (7,610) (15,307) (15,307)
Notes receivable from stockholders................. -- -- (805) (805)
Deficit accumulated during the development stage... (4,607) (18,454) (25,749) (25,749)
------- -------- -------- --------
Total stockholders' deficit.................. (4,545) (15,367) (19,327) $ 17,480
------- -------- -------- ========
Total liabilities, redeemable convertible
preferred stock and stockholders'
deficit.................................... $11,280 $ 6,774 $ 25,075
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM CUMULATIVE PERIOD
JANUARY 28, JANUARY 28, FROM JANUARY 28,
1997 (DATE OF YEARS ENDED 1997 (DATE OF THREE MONTHS ENDED 1997 (DATE OF
INCEPTION) TO DECEMBER 31, INCEPTION) TO MARCH 31, INCEPTION) TO
DECEMBER 31, ------------------- DECEMBER 31, ------------------- MARCH 31,
1997 1998 1999 1999 1999 2000 2000
------------- -------- -------- ------------- -------- -------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Contract revenue....... $ -- $ 381 $ 1,240 $ 1,621 $ 221 $ 286 $ 1,907
------- ------- -------- -------- -------- -------- --------
Operating expenses:
Research and
development........ 879 3,360 12,144 16,383 2,236 5,627 22,010
General and
administrative..... 416 638 2,932 3,986 248 2,045 6,031
------- ------- -------- -------- -------- -------- --------
Total operating
expenses......... 1,295 3,998 15,076 20,369 2,484 7,672 28,041
------- ------- -------- -------- -------- -------- --------
Loss from operations... (1,295) (3,617) (13,836) (18,748) (2,263) (7,386) (26,134)
Interest income........ 40 268 251 559 98 180 739
Interest expense....... -- (3) (262) (265) (30) (89) (354)
------- ------- -------- -------- -------- -------- --------
Net loss............... $(1,255) $(3,352) $(13,847) $(18,454) $ (2,195) $ (7,295) $(25,749)
======= ======= ======== ======== ======== ======== ========
Deemed dividend related
to beneficial
conversion feature of
preferred stock...... -- -- -- -- -- (22,360) (22,360)
------- ------- -------- -------- -------- -------- --------
Net loss attributable
to common
stockholders......... $(1,255) $(3,352) $(13,847) $(18,454) $ (2,195) $(29,655) $(48,109)
======= ======= ======== ======== ======== ======== ========
Net loss per common
share, basic and
diluted.............. $ -- $ (8.00) $ (12.82) $ (2.44) $ (18.56)
======= ======= ======== ======== ========
Weighted average shares
used in computing net
loss per share, basic
and diluted.......... -- 419 1,080 898 1,598
======= ======= ======== ======== ========
Pro forma net loss per
share basic and
diluted
(unaudited).......... $ (1.15) $ (1.64)
======== ========
Weighted average shares
used in computing pro
forma net loss per
share, basic and
diluted
(unaudited).......... 12,018 18,136
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM JANUARY 28, 1997
(DATE OF INCEPTION) TO MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED NOTES RECEIVABLE TOTAL
-------------------- PAID-IN STOCK-BASED FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT DEFICIT
--------- -------- ---------- ------------ ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash at $0.01 per share in
January 1997 and at $0.05
per share in May, June and
December 1997............... 1,787,268 $2 $ 23 $ -- -- $ -- $ 25
Unearned stock-based
compensation................ -- -- 40 (40) -- -- --
Amortization of unearned
stock-based compensation.... -- -- -- 17 -- -- 17
Net loss...................... -- -- -- -- -- (1,255) (1,255)
--------- -- -------- -------- ----- -------- --------
Balances, December 31, 1997... 1,787,268 2 63 (23) -- (1,255) (1,213)
Issuance of common stock for
cash at $0.05 per share in
January 1998................ 24,000 -- 1 -- -- -- 1
Unearned stock-based
compensation................ -- -- 9 (9) -- -- --
Amortization of unearned
stock-based compensation.... -- -- -- 19 -- -- 19
Net loss...................... -- -- -- -- -- (3,352) (3,352)
--------- -- -------- -------- ----- -------- --------
Balances, December 31, 1998... 1,811,268 2 73 (13) -- (4,607) (4,545)
Stock option exercise at $0.31
per share................... 272,465 -- 84 -- -- -- 84
Issuance of warrants.......... -- -- 185 -- -- -- 185
Repurchase of unvested
restricted stock............ (14,048) -- (1) -- -- -- (1)
Unearned stock-based
compensation................ -- -- 10,354 (10,354) -- -- --
Amortization of unearned
stock-based compensation.... -- -- -- 2,757 -- -- 2,757
Net loss...................... -- -- -- -- -- (13,847) (13,847)
--------- -- -------- -------- ----- -------- --------
Balances, December 31, 1999... 2,069,685 2 10,695 (7,610) -- (18,454) (15,367)
Stock option exercise at $0.31
and $1.57 per share for cash
and notes receivable from
stockholders (unaudited).... 1,598,056 2 1,376 -- (805) -- 573
Repurchase of unvested common
stock at $1.57 per share
(unaudited)................. (790) -- -- -- -- -- --
Unearned stock-based
compensation (unaudited).... -- -- 10,459 (10,459) -- -- --
Amortization of unearned stock
compensation (unaudited).... -- -- -- 2,762 -- -- 2,762
Beneficial conversion feature
related to issuance of
Series C preferred stock
(unaudited)................. -- -- 22,360 -- -- -- 22,360
Deemed dividend related to
beneficial conversion
feature of preferred stock
(unaudited)................. -- -- (22,360) -- -- -- (22,360)
Net loss (unaudited).......... -- -- -- -- -- (7,295) (7,295)
--------- -- -------- -------- ----- -------- --------
Balance as at March 31, 2000
(unaudited)................. 3,666,951 $4 $ 22,530 $(15,307) $(805) $(25,749) $(19,327)
========= == ======== ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE PERIOD
JANUARY 28, FROM JANUARY 28,
1997 (DATE OF YEARS ENDED 1997 (DATE OF THREE MONTHS
INCEPTION) TO DECEMBER 31, INCEPTION) TO ENDED MARCH 31,
DECEMBER 31, ------------------- DECEMBER 31, -------------------
1997 1998 1999 1999 1999 2000
-------------- -------- -------- ------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(1,255) $(3,352) $(13,847) $(18,454) $ (2,195) $ (7,295)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization.................. 69 224 677 970 121 238
Amortization of equipment under
capital lease................. -- 12 28 40 7 7
Provisions for bad debt........ -- -- 104 104 -- --
Amortization of warrants issued
in connection with loans...... -- -- 37 37 2 12
Amortization of unearned
stock-based compensation
expense....................... 17 19 2,757 2,793 162 2,762
Changes in operating assets and
liabilities:
Accounts receivable.......... -- (357) (332) (689) 357 478
Prepaid expenses............. (34) (29) (143) (206) 4 11
Deposits..................... (13) -- (150) (163) -- (6)
Other assets................. -- -- (475)
Accounts payable............. 153 478 2,345 2,976 (218) (340)
Accrued liabilities.......... 39 56 889 984 335 542
Deferred revenue............. -- 559 387 946 (221) (175)
------- ------- -------- -------- -------- --------
Net cash used in operating
activities................. (1,024) (2,390) (7,248) (10,662) (1,646) (4,241)
------- ------- -------- -------- -------- --------
Cash flows from investing
activities:
Acquisition of property and
equipment...................... (578) (1,090) (2,318) (3,986) (81) (1,441)
Leasehold improvements........... (415) (341) (1,147) (1,903) (556) --
------- ------- -------- -------- -------- --------
Net cash used in investing
activities................. (993) (1,431) (3,465) (5,889) (637) (1,441)
------- ------- -------- -------- -------- --------
Cash flows from financing
activities:
Principal payments under capital
lease obligations.............. -- -- (41) (41) (21) (8)
Repayment of loans payable....... -- -- (416) (416) (89) (130)
Proceeds from the issuance of
debt........................... -- -- 3,300 3,300 1,800 --
Proceeds from the issuance of
common stock, net of issuance
costs.......................... 25 1 -- 26 -- --
Proceeds from the issuance of
preferred stock, net of
issuance costs................. 2,980 11,467 -- 14,447 -- 22,360
Proceeds from the issuance of
common stock under stock option
plan, net of issuance costs and
stock repurchased.............. -- -- 83 83 -- 573
------- ------- -------- -------- -------- --------
Net cash provided by
financing activities....... 3,005 11,468 2,926 17,399 1,690 22,795
------- ------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents................. 988 7,647 (7,787) 848 (593) 17,113
Cash and cash equivalents,
beginning of period.............. -- 988 8,635 -- 8,635 848
------- ------- -------- -------- -------- --------
Cash and cash equivalents, end of
period........................... $ 988 $ 8,635 $ 848 $ 848 $ 8,042 $ 17,961
======= ======= ======== ======== ======== ========
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest....................... $ -- $ (3) $ (225) $ (228) (28) (77)
Supplemental disclosure of non-cash
investing and financing
activities:
Additions to property and
equipment acquired under
capital lease obligations...... $ -- $ 93 $ -- $ 93 $ --
Unearned stock-based
compensation................... $ 40 $ 9 $ 10,354 $ 10,403 $ 910 $ 10,459
Issuance of notes receivable in
exchange for common stock...... $ -- $ -- $ -- $ -- $ -- $ 805
<CAPTION>
CUMULATIVE PERIOD
FROM JANUARY 28,
1997 (DATE OF
INCEPTION) TO
MARCH 31,
2000
-------------------
(UNAUDITED)
<S> <C>
Cash flows from operating
activities:
Net loss......................... $(25,749)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization.................. 1,208
Amortization of equipment under
capital lease................. 47
Provisions for bad debt........ 104
Amortization of warrants issued
in connection with loans...... 49
Amortization of unearned
stock-based compensation
expense....................... 5,555
Changes in operating assets and
liabilities:
Accounts receivable.......... (211)
Prepaid expenses............. (195)
Deposits..................... (169)
Other assets................. (475)
Accounts payable............. 2,636
Accrued liabilities.......... 1,526
Deferred revenue............. 771
--------
Net cash used in operating
activities................. (14,903)
--------
Cash flows from investing
activities:
Acquisition of property and
equipment...................... (5,427)
Leasehold improvements........... (1,903)
--------
Net cash used in investing
activities................. (7,330)
--------
Cash flows from financing
activities:
Principal payments under capital
lease obligations.............. (49)
Repayment of loans payable....... (546)
Proceeds from the issuance of
debt........................... 3,300
Proceeds from the issuance of
common stock, net of issuance
costs.......................... 26
Proceeds from the issuance of
preferred stock, net of
issuance costs................. 36,807
Proceeds from the issuance of
common stock under stock option
plan, net of issuance costs and
stock repurchased.............. 656
--------
Net cash provided by
financing activities....... 40,194
--------
Net increase (decrease) in cash and
cash equivalents................. 17,961
Cash and cash equivalents,
beginning of period.............. --
--------
Cash and cash equivalents, end of
period........................... $ 17,961
========
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest....................... $ (305)
Supplemental disclosure of non-cash
investing and financing
activities:
Additions to property and
equipment acquired under
capital lease obligations...... $ 93
Unearned stock-based
compensation................... $ 20,862
Issuance of notes receivable in
exchange for common stock...... $ 805
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Deltagen, Inc., (the "Company") was incorporated in Delaware on January 28,
1997. The Company's primary business is the determination of the therapeutic
potential of genes by using mammalian genetics to discover the IN VIVO function
of genes and the development and marketing of a database containing these
findings. Deltagen identifies novel gene targets through the use of advanced
bioinformatics. Genetically altered mice are then produced to exclude the
targeted gene and proprietary analysis is performed to determine the potential
function of the excluded gene.
Through December 31, 1999, the Company has been primarily engaged in
developing its initial product technology, recruiting personnel, and raising
capital. The Company has entered into research agreements with United States
based pharmaceutical companies. In the course of its development activities, the
Company has sustained substantial losses and expects such losses to continue
through at least 2003. The Company plans to fund its operations with proceeds
from the sale of capital stock and from debt financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM RESULTS
The accompanying balance sheet as of March 31, 2000, the statements of
operations and of cash flows for the three months ended March 31, 1999 and 2000
and for the period from January 28, 1997 (date of inception) to March 31, 2000,
and the statement of stockholders' equity for the three months ended March 31,
2000 are unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position and its results of operations and its cash flows for the three months
ended March 31, 1999, and 2000. The financial data and other information
disclosed in these notes to financial statements related to these periods are
unaudited. The results for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
UNAUDITED PRO FORMA INFORMATION
If the Company's initial public offering as described in Note 13 is
consummated, all of the redeemable convertible preferred stock outstanding will
automatically be converted into common stock. The pro forma redeemable
convertible preferred stock and stockholders' deficit at March 31, 2000 has been
adjusted for the assumed conversion of redeemable convertible preferred stock
based on the shares of redeemable convertible preferred stock outstanding at
March 31, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Investments with an original maturity of 90 days or less as of the date of
purchase are considered cash equivalents.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Cash and cash equivalents are invested in deposits with three financial
institutions. The Company has not experienced any losses on its deposits of cash
and cash equivalents. Management regularly reviews these financial institutions
for credit worthiness and, accordingly, minimal credit risk exists.
The Company's receivables relate to contracts, and there is no collateral
required for these receivables. In 1999, three customers individually accounted
for 64%, 20% and 14% of the Company's total revenue. At December 31, 1999, three
customers individually accounted for 57%, 36% and 7% of the net accounts
receivable balance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair value due to their relatively short
maturities. Based upon borrowing rates currently available to the Company for
leases with similar terms, the carrying value of capital lease obligations
approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful life of the asset; seven years for laboratory equipment,
three years for computer equipment and six years for furniture and fixtures.
Leasehold improvements are amortized over the lesser of their estimated useful
lives or the term of the lease. Maintenance and repairs are charged to
operations as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires
the Company to review for impairment of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. When such an event occurs, management determines whether there
has been an impairment by comparing the anticipated undiscounted future net cash
flows to the related asset's carrying value. If an asset is considered impaired,
the asset is written down to fair value, which is determined based either on
discounted cash flows or appraised values, depending on the nature of the asset.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and
F-8
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
REVENUE RECOGNITION
For most contracts revenue is recognized based on the terms of the contract.
The contracts specify milestones to be met and the payments associated with
meeting each milestone. Revenue is recognized on completion of each milestone.
For these contracts payment for the first milestone is received in advance of
completion. This payment is shown as deferred revenue and only recognized as
revenue once the first milestone has been completed. For all subsequent
milestones, payment is received upon completion of the milestone and revenue is
recognized at that time. None of the amounts recognized as revenue are
refundable.
The amount of revenue recognized on completion of each milestone is such
that the earned revenue, as a percentage of total anticipated revenue,
approximates the costs incurred in achieving the related milestone, as a
percentage of the total anticipated costs.
Where the contract does not specify milestones and payment is upon
completion of the contract, revenue is recognized based on
percentage-of-completion method of accounting.
The portion of payments received in advance of the completion of milestones
is reflected in deferred revenue. Where revenues are recognized on a percentage
of completion basis, but based on the terms of the contract the receivable
cannot yet be billed, these amounts are shown as unbilled receivables.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development costs, including development costs of the Company's
database product which do not meet the capitalization criteria of Statement of
Financial Accounting Standards No. 86 ("SFAS No. 86"), "Accounting for the Cost
of Computer Software to be Sold, Leased or Otherwise Marketed," are charged to
operations as incurred.
CERTAIN RISKS AND UNCERTAINTIES
The Company's services are concentrated in highly competitive markets which
are characterized by rapid technological advances, frequent changes in customer
requirements and evolving regulatory requirements and industry standards. Any
failure by the Company to anticipate or to respond adequately to technological
developments in its industry, changes in customer requirements or changes in
regulatory requirements or industry standards, or any significant delays in the
development or introduction of services, could have a material adverse effect on
the Company's business and operating results.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock
F-9
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
issued to Employees" and Financial Accounting Standards Board Interpretation
No. 28 ("FIN No. 28"), "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans" and complies with the disclosure
provisions of Statements of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation."
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price. SFAS No. 123 defines a "fair value" based method of accounting
for an employee stock option or similar equity investment. The pro forma
disclosures of the difference between compensation expense included in net loss
and the related cost measured by the fair value method are presented in Note 9.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44") "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of the Accounting Practice
Board Opinion No. 25 ("APB No. 25"). This interpretation clarifies the
definition of employee for purposes of applying APB No. 25, "Accounting for
Stock Issued to Employees," the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. Management is in process of evaluating
the impact of the implementation of FIN No 44. on the financial position of the
Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation,
and disclosure of revenue in financial statements filed with the SEC. SAB
No. 101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. The
Company has complied with the guidance in SAB No. 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of relationship that exists. SFAS
No. 133 will be effective for fiscal years beginning after June 15, 2000. The
Company does not believe that the implementation of SFAS No. 133 will have any
significant impact on its financial position or results of operations.
F-10
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Basic earnings per share is calculated based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share would
give effect to the dilutive effect of common stock equivalents consisting of
stock options and warrants. Potentially dilutive securities have been excluded
from the diluted earnings per share calculations as they have an antidilutive
effect due to the Company's net losses.
The computation of pro forma net loss per share includes shares issuable
upon the conversion of outstanding shares of convertible preferred stock (using
the as-if converted method) from the original date of issuance.
A reconciliation of shares used in the calculations is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28,
1997 (DATE OF YEARS ENDED THREE MONTHS ENDED
INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -------------------------
1997 1998 1999 1999 2000
------------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Net loss.............................. $(1,255) $(3,352) $(13,847) $(2,195) $ (7,295)
======= ======= ======== ======= ========
Deemed dividend related to beneficial
conversion feature of preferred
stock............................... -- -- -- -- (22,360)
------- ------- -------- ------- --------
Net loss attributable to common
stockholders........................ $(1,255) $(3,352) $(13,847) $(2,195) $(29,655)
======= ======= ======== ======= ========
Weighted-average shares of common
stock outstanding................... 1,512 1,810 1,849 1,811 2,446
Less: Weighted-average shares subject
to repurchase....................... (1,512) (1,391) (769) (913) (848)
------- ------- -------- ------- --------
Weighted-average shares used in basic
and diluted net loss per share...... -- 419 1,080 898 1,598
======= ======= ======== ======= ========
Pro forma basic and diluted:
Net loss attributable to common
stockholders........................ $(13,847) $(29,655)
======== ========
Weighted-average shares used in basic
and diluted net loss per
share................................. 1,080 1,598
Adjustment to reflect weighted-average
effect of assumed conversion of
preferred stock (unaudited)........... 10,938 16,538
-------- --------
Weighted-average shares used in pro
forma basic and diluted net loss per
share (unaudited)..................... 12,018 18,136
======== ========
</TABLE>
F-11
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following outstanding options and warrants (prior to the application of
the treasury stock method), and convertible preferred stock (on an as-converted
basis) were excluded from the computation of diluted net loss per share as they
had an antidilutive effect (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28,
1997 (DATE OF YEARS ENDED THREE MONTHS ENDED
INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -------------------------
1997 1998 1999 1999 2000
------------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average effect of common stock
equivalents:
Unvested common stock subject to
repurchase.............................. 1,512 1,391 769 913 848
Options outstanding....................... -- 160 1,205 866 1,753
Shares resulting from the conversion of the:
Series A convertible preferred stock...... 2,642 3,429 3,429 3,429 3,429
Series B convertible preferred stock...... -- 3,987 7,510 7,510 7,510
Series C convertible preferred stock...... -- -- -- -- 5,599
Warrants to purchase convertible stock.... -- -- 35 11 43
----- ----- ------ ------ ------
Total common stock equivalents excluded from
the computation of earnings per share as
their effect was antidilutive............. 4,154 8,967 12,948 12,729 19,182
===== ===== ====== ====== ======
</TABLE>
3. BALANCE SHEET COMPONENTS
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Trade and other receivables................................. $ 57 $689
Unbilled receivables........................................ 300 --
---- ----
357 689
Less: Allowance for doubtful accounts....................... -- (104)
---- ----
$357 $585
==== ====
</TABLE>
F-12
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
3. BALANCE SHEET COMPONENTS (CONTINUED)
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Laboratory equipment....................................... $1,491 $ 3,459
Computer and related equipment............................. 212 457
Furniture and fixtures..................................... 50 155
Leasehold improvements..................................... 756 1,903
------ -------
2,509 5,974
Less: Accumulated depreciation and amortization............ (296) (1,001)
------ -------
$2,213 $ 4,973
====== =======
</TABLE>
Depreciation and amortization expense was $69,000, $236,000 and $705,000 for
the period ended December 31, 1997 and for the years ended December 31, 1998 and
1999, respectively, and was $1.0 million for the period from January 28, 1997
(date of inception) to December 31, 1999.
Property and equipment includes $93,000 of computer and related equipment
under capital lease at December 31, 1998 and 1999. Accumulated depreciation of
assets under capital lease totaled $12,000 and $40,000 at December 31, 1998 and
1999.
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued liabilities......................................... $46 $862
Accrued payroll/vacation.................................... 49 122
--- ----
$95 $984
=== ====
</TABLE>
4. COMMITMENTS
OPERATING LEASES
The Company leases its facilities in San Carlos, California under an
operating lease which expires in February 2004, with an option to extend the
lease for five additional years. Under the terms of the lease, the Company is
responsible for maintenance costs, taxes and insurance.
The Company leases its facilities in Menlo Park, California under an
operating lease which expires in July 2004, with an option to extend the lease
for five additional years. Under the term of the lease, the Company is
responsible for 53% of the operating expenses, tax expenses, tenants share of
common area and tenants share of utilities. In conjunction with the lease
agreement, a standby letter of credit of $150,000 was issued in November 1999
with a financial institution, in favor of the landlord, as collateral for the
fulfillment of the contract obligations. The letter of credit is secured by a
cash deposit of the same amount and is automatically renewed on an annual basis,
unless notice of cancellation is provided by 30 days in advance.
F-13
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
4. COMMITMENTS (CONTINUED)
Rent expense for the period ended December 31, 1997, and for the years ended
December 31, 1998 and 1999 was $130,000, $162,000 and $496,000, respectively.
Rent expense was $788,000 for the cumulative period from January 28, 1997 (date
of inception) to December 31, 1999.
Future minimum lease payments as at December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 865
2001........................................................ 889
2002........................................................ 913
2003........................................................ 938
2004........................................................ 455
------
Total....................................................... $4,060
======
</TABLE>
5. RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSE AGREEMENTS
The Company has entered into several research and development
collaborations.
In July 1998, the Company entered into a research contract with Merck &
Co., Inc. to provide Knockout Mice Projects for a value of $850,000. A second
contract was entered in December 1999 to provide additional Knockout Mice
Projects for an estimated value of $1,000,000. Each project is divided into
milestones and payments are made based on achievement of these. Revenues
recognized relating to the first contract were $68,000 and $179,000 in 1998 and
1999, respectively. No revenues have been recognized relating to the second
contract. Payments for the first milestones of $255,000 and $300,000 were
received in advance for the first and second contracts respectively.
In October 1998, the Company entered into a research contract with Roche
Bioscience, a division of Syntex (USA) Inc., to provide Knockout Mice Projects.
The contract has an estimated value of $650,000. Payments to the Company will be
based on the achievement of specific milestones. The revenues recognized
relating to this contract were $105,000 and $249,000 in 1998 and 1999,
respectively. A payment of $78,000 was received in advance for the first
milestone.
In December 1998, the Company entered into a research contract with
Pfizer Inc., to provide Knockout Mice Projects. The total estimated value of the
contract is $970,000. The payments are based on the completion of each
milestone. The revenues recognized relating to this contract were $790,000 in
1999. A payment of $300,000 was received in advance for the first milestone..
The Company entered into a research contract with Tularik Inc. in February
1998, to perform phenotypic analysis on sets of knockout mice and to deliver to
Tularik breeding pairs of mice. The total contract has an estimated value of
$500,000, based upon the payment terms detailed in the contract. An initial
payment of $250,000 was received. The Company may derive additional revenues
from royalties paid by Tularik on a semi-annual basis. Royalties are equal to 1%
of the net sales of royalty bearing products until the tenth anniversary of the
first commercial sale of the royalty bearing product, on a country-by-country
basis. Additional royalty payments, based on a predetermined amount, will be
made by Tularik, upon initiation of a major phase of additional studies based on
Deltagen delivered
F-14
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
5. RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSE AGREEMENTS (CONTINUED)
projects. No royalties have been recognized or received as at December 31, 1999.
The revenues relating to this contract amount to $208,000 and $22,000 in 1998
and 1999, respectively.
In December 1999, the Company entered into a research contract with
Schering-Plough Research Institute to provide Knockout Mice Projects. The
estimated value of the contract is $1,000,000. Payments are based upon
completion of each milestone. No revenues relating to this contract were
recognized in 1999.
6. CAPITAL LEASE OBLIGATIONS
In June 1998, the Company entered into a three year capital lease agreement
for $93,000, bearing interest at 10.58% per year. The leased equipment includes
various items of computer hardware. Upon termination of the lease agreement, the
Company is required to purchase the equipment for a purchase price of $1.
As at December 31, 1999, future minimum lease payments under the
non-cancelable capital lease are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 35
2001........................................................ 23
----
Total minimum lease payments................................ 58
Less: Amount representing interest.......................... (6)
----
Present value of future minimum lease payments.............. 52
Less: Current portion....................................... (30)
----
Total capital lease obligations, net of current portion..... $ 22
====
</TABLE>
7. LOANS PAYABLE
In December 1998, the Company entered into a loan agreement with a financial
institution to obtain one or more loans totaling up to $1,800,000. A
corresponding amount of machinery, equipment and other property is pledged as
collateral for each loan.
In January 1999 and March 1999, the Company incurred loans of $872,000 and
$928,000, respectively, for a total financing of $1,800,000. These loans bear
respective interest rates of 10.87% and 11.11% and are required to be repaid in
48 monthly installments, beginning in January 1999 and April 1999, respectively.
In accordance with this loan agreement, the financial institution is
entitled to receive a warrant to purchase shares of the Company's Series B
preferred stock at a price of $1.53 per share. The number of shares eligible for
purchase is equal to the greater of 10,000 or the number obtained by multiplying
the amount borrowed by the Company by 2% and then dividing the total by $1.53.
Consequently, the Company issued a warrant to purchase 23,510 Series B preferred
shares at a price of $1.53. The warrant term is seven years and ends in January
2006. The value of the warrant was calculated using the Black-Scholes pricing
model and has been charged to additional paid-in capital and will be
F-15
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
7. LOANS PAYABLE (CONTINUED)
amortized to interest expense over the life of the loan. The assumptions used in
the Black-Scholes model are as follows: dividend yield of 0%, term of 7 years,
expected volatility of 75% and risk free interest rate of 4.96%.
As of December 31, 1999, the Company has recorded a loan discount related to
these warrants of $99,000, of which $21,000 has been amortized to interest
expenses for the year then ended.
In March 1999, the Company entered into a loan agreement with a financial
institution to obtain up to six loans totaling up to $1,500,000. A corresponding
amount of machinery, equipment and other property is pledged as collateral for
each loan.
In June 1999 and November 1999, the Company incurred loans of $919,000 and
$581,000, respectively, obtaining a total financing of $1,500,000. These loans
bear respective interest rates of 11.25% and 11.89% and are required to be
repaid in 48 monthly installments, beginning in July 1999 and November 1999,
respectively.
In conjunction with this loan agreement, the Company issued in March 1999 a
warrant to purchase 19,591 shares of Series B preferred stock at a price of
$1.53 per share. According to the contract, the number of shares has been
calculated by dividing $1,500,000 by the initial exercise price of $1.53
multiplied by 2%. The warrant has a seven year term and ends in March 2006. The
value of the warrant was calculated using the Black-Scholes pricing model and
has been charged to additional paid-in capital and will be amortized to interest
expense over the life of the loan. The assumptions used in the Black-Scholes
model are as follows: dividend yield of 0%, term of 7 years, volatility of 75%
and risk free interest rate of 5.23%.
As of December 31, 1999, the Company has recorded a loan discount related to
these warrants of $86,000, of which $16,000 has been amortized to interest
expense during the period.
The related loans payable balances as at December 31, 1999 are broken down
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
Notes payable in monthly installments at interest rates
ranging from 10.87% to 11.89% maturing from January to
October 2003.............................................. $2,884
Less: Current portion....................................... 503
Less: Discount due to warrants.............................. 148
------
$2,233
======
</TABLE>
F-16
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
7. LOANS PAYABLE (CONTINUED)
Maturities of long-term debt were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 503
2001........................................................ 825
2002........................................................ 1,000
2003........................................................ 556
------
$2,884
======
</TABLE>
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Under the Company's Certificate of Incorporation, as amended, the Company is
authorized to issue 18,995,920 shares of preferred stock, of which 3,428,571,
7,567,349 and 8,000,000 have been designated as Series A preferred stock,
Series B preferred stock and Series C preferred stock, respectively.
Convertible preferred stock as at December 31, 1998 and 1999 consists of the
following (in thousands):
<TABLE>
<CAPTION>
SHARES PROCEEDS
------------------------ LIQUIDATION NET OF
SERIES AUTHORIZED OUTSTANDING AMOUNT ISSUANCE COSTS
------ ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
A.............................. 3,429 3,429 $ 3,000 $ 2,980
B.............................. 7,567 7,510 11,500 11,467
------ ------ ------- -------
10,996 10,939 $14,500 $14,447
====== ====== ======= =======
</TABLE>
Convertible preferred stock as at March 31, 2000 consists of the following
(in thousands) (unaudited):
<TABLE>
<CAPTION>
SHARES PROCEEDS
------------------------ LIQUIDATION NET OF
SERIES AUTHORIZED OUTSTANDING AMOUNT ISSUANCE COSTS
------ ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
A.............................. 3,429 3,429 $ 3,000 $ 2,980
B.............................. 7,567 7,510 11,500 11,467
C.............................. 8,000 7,199 22,550 22,360
------ ------ ------- -------
Balances, March 31, 2000....... 18,996 18,138 $37,050 $36,807
====== ====== ======= =======
</TABLE>
The holders of convertible preferred stock have the rights and preferences
as follows:
REDEMPTION
The holders of Series A, Series B and Series C preferred stock are entitled
on or at any time after December 31, 2004 with the approval of at least 66 2/3%
of the Series A and Series B preferred stock holders or of at least a majority
of the Series C preferred stockholders to require the Company to redeem all or a
portion of their shares by paying in cash a sum equal to the original purchase
price per
F-17
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
share plus all accrued but unpaid dividends, in the case of the Series A and
Series B preferred stock, the greater of the original purchase price per share
plus all accrued but unpaid dividends and the fair market value of the Series C
preferred stock, as determined in good faith by the board of directors and
majority of the preferred stockholders. On the last day of the calendar quarter
during which a request for redemption is received, the Company shall redeem
8.33% of the designated shares of each such series of preferred stock requested
by such holders to be redeemed (the "designated shares") and shall redeem an
equal number of such designated shares on the last day of the subsequent eleven
calendar quarters.
The redemption rights of the Series C preferred stock shall be prior and in
preference to the redemption rights of the Series A and Series B preferred
stock.
DIVIDENDS
The holders of shares of Series A, Series B, and Series C preferred stock
are entitled to receive dividends at the rate of $0.07, $0.12 and $0.25 per
share per year, respectively. In the event dividends are paid on any share of
common stock, an additional dividend must be paid with respect to all
outstanding shares of preferred stock in an amount equal per share (on an
as-if-converted basis) to the amount paid or set aside for each share of common
stock whenever funds are legally available. Such dividends are payable when, as
and if declared by the board of directors. No dividends accrue unless declared
by the board of directors. As of March 31, 2000, no dividends had been declared.
In January 2000, the Company issued 7,198,709 of Series C redeemable
convertible preferred stock at $3.13 per share for proceeds of $22,360,000. The
issuance resulted in a beneficial conversion feature of $22,360,000, calculated
in accordance with Emerging Issues Task Force No. 98-5 ("EITF No. 98-5"),
"Accounting for Convertible Securities with Beneficial Conversion Features." The
beneficial conversion feature is reflected as a preferred dividend in the
Statement of Operations for the first quarter of 2000.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
the holders of shares of Series C preferred stock are entitled to receive, prior
and in preference to any distribution of any of the assets of this corporation
to the holders of Series A preferred stock, Series B preferred stock and common
stock, an aggregate amount equal to $3.13 per outstanding share of Series C
preferred stock plus all accrued but unpaid dividends on such shares. After the
thereabove described distribution, the holders of shares of Series A and
Series B preferred stock are entitled to receive, prior and in preference to any
distribution of any of the assets of the Company to the holders of common stock,
an amount per share equal to $0.875 and $1.53 for each outstanding share of
Series A and Series B preferred stock, respectively, plus any declared but
unpaid dividends on such shares.
In the event that upon liquidation or dissolution, the assets and funds of
the Company are insufficient to permit the payment of the full preferential
amounts to Series C preferred stockholders, first, and Series A and B preferred
stockholders, after, then the entire assets and funds of the Company legally
available for distribution are to be distributed ratably among the holders of
shares of Series C preferred stock first, and of Series A and B preferred stock,
after, in proportion to the full preferential amount each is otherwise entitled
to receive.
F-18
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
After the distributions described above have been paid in full, the
remaining assets of the Company available for distribution must be distributed
to the holders of shares of Series A, Series B and Series C preferred stock and
common stock pro rata based on the number of shares of common stock held by
each, assuming conversion of all such Series A, Series B and Series C preferred
stock.
CONVERSION
Each share of preferred stock, at the option of the holder, is convertible
into a number of fully paid and nonassessable shares of common stock as
determined by dividing the respective preferred stock issue price by the
conversion price in effect on the date the certificate for such share is
surrendered for conversion. The initial conversion price of shares of Series A,
Series B and Series C preferred stock is $0.875, $1.53 and $3.13, respectively,
and is subject to adjustment in accordance with antidilution provisions
contained in the Company's Certificate of Incorporation, as amended. Conversion
is automatic immediately upon the closing of a firm commitment underwritten
public offering in which the public offering price equals or exceeds $10.96 per
share (as adjusted to reflect subsequent stock dividends, stock splits,
combinations or recapitalization) and the aggregate proceeds raised equal or
exceed $25,000,000.
VOTING RIGHTS
The holder of each share of preferred stock is entitled to one vote for each
share of common stock into which shares of Series A, Series B and Series C
preferred stock could then be converted.
9. STOCKHOLDERS' DEFICIT
COMMON STOCK
At March 31, 2000, the Company has reserved sufficient shares of common
stock for issuance upon conversion of preferred stock. Common stockholders are
entitled to dividends as and when declared by the board of directors subject to
the prior rights of the preferred stockholders. The holder of each share of
common stock is entitled to one vote.
Common stock held by certain employees and non-employees is subject to stock
purchase agreements whereby the Company has the option to repurchase unvested
shares upon termination of employment at the initial issuance price. The
Company's right to repurchase these shares generally lapses at the rate of 25%
per year from the date of the agreement. At December 31, 1997, 1998 and 1999,
1,787,429, 970,286 and 709,714 of common stock remain subject to the Company's
right of repurchase, respectively. At March 31, 1999 and 2000, 857,143 and
2,084,571 of common stock remain subject to repurchase, respectively. The
Company's right to repurchase these shares generally lapses over four years from
the date of the agreement.
1998 STOCK INCENTIVE PLAN
In April 1998, the Company adopted the 1998 Stock Incentive Plan (the
"Plan"). The Plan provides for the granting of stock options and restricted
shares to employees and consultants of the Company. Options granted under the
Plan may be either incentive stock options or nonqualified stock options.
Incentive stock options ("ISO") may be granted only to Company employees
(including
F-19
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' DEFICIT (CONTINUED)
officers and directors who are also employees). Nonqualified stock options
("NSO") may be granted to Company employees and consultants. At March 31, 2000,
the Company has reserved 3,150,606 shares of common stock for issuance under the
Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the board of directors, provided, however, that (i) the
exercise price of an ISO and NSO may not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and
(ii) the exercise price of an ISO and NSO granted to a 10% shareholder may not
be less than 110% of the estimated fair value of the shares on the date of
grant, respectively. To date, options granted generally vest over four years.
Activity under the Plan is as follows (in thousands except per share
amount):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
OPTIONS ----------------------------------------
AVAILABLE NUMBER OF AGGREGATE WEIGHTED AVERAGE
FOR GRANT OPTIONS PRICE EXERCISE PRICE
--------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Options reserved at the plan inception........... 202 -- $ -- $ --
Additional shares reserved....................... 1,349 -- -- --
Options granted.................................. (806) 806 247 0.31
------ ------ ------- -----
Balances, December 31, 1998...................... 745 806 247 0.31
Additional shares reserved....................... 914 -- -- --
Options granted.................................. (1,364) 1,364 418 0.31
Options exercised................................ -- (272) (84) 0.31
Option cancelled................................. 110 (110) (34) 0.31
------ ------ ------- -----
Balances, December 31, 1999...................... 405 1,788 547 0.31
Additional shares reserved (unaudited)........... 686
Options granted (unaudited)...................... (1,085) 1,085 1,692 1.56
Options exercised (unaudited).................... -- (1,598) (1,378) 0.87
Options cancelled (unaudited).................... 9 (9) (7) 0.77
------ ------ ------- -----
Balances, March 31, 2000 (unaudited)............. 15 1,266 $ 854 $0.67
====== ====== ======= =====
</TABLE>
In 1998, there was a grant of 11,429 options to a scientific advisor at an
exercise price of $0.31. All these options were still outstanding at
December 31, 1999 and at March 31, 2000. Annual compensation expense for this
grant was $1,000 and $22,000, for 1998 and 1999, respectively. The quarterly
expense for this grant was $5,000 and $6,000 for the first quarter of 1999 and
2000, respectively. The options vest over four years. During the first quarter
of 2000, additional options were granted to scientific advisors to purchase an
aggregate 106,857 common shares at an exercise price of $1.57 for 101,143 shares
and $0.31 for 5,714 shares. An option to purchase 3,429 shares has been
cancelled as at March 31, 2000. The compensation expense for these additional
grants was $131,000 for the first quarter of 2000.
F-20
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' DEFICIT (CONTINUED)
RESTRICTED STOCK GRANTS
The Company granted restricted shares to certain employees. The value of
these grants has been determined based on the fair value at the grant date for
awards consistent with SFAS No. 123, and is included in the pro-forma
stock-based compensation.
In 1997 and 1998, restricted shares were granted to consultants and
scientific advisors. All of these shares were still outstanding as at
December 31, 1999 and as at March 31, 2000. The annual compensation expense for
these grants was $6,000, $8,000 and $84,000, respectively for the period ended
December 31, 1997 and the years ended December 31, 1998 and 1999. For three
months ended March 31, 1999 and March 31, 2000, the compensation expense was
$19,000 and $20,000, respectively. The Company's right to repurchase these
shares generally lapses over four years from the date of the agreement.
PRO FORMA STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost been determined based on the fair value at the grant date for
the awards consistent with the provisions of SFAS No. 123, the Company's net
loss would have been as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 28,
1997 (DATE OF YEARS ENDED THREE MONTHS ENDED
INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -------------------------
1997 1998 1999 1999 2000
------------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss as reported.... $(1,255) $(3,352) $(13,847) $(2,195) $(29,845)
Pro forma............... $(1,266) $(3,377) $(13,921) $(2,204) $(29,863)
Basic and diluted net
loss per common share:
As reported............. $ -- $ (8.00) $ (12.82) $ (2.44) $ (18.68)
Pro forma............... $ -- $ (8.05) $ (12.89) $ (2.45) $ (18.68)
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made each
year. The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions for grants. No
assumptions are given for 1997 since the Plan was not adopted until 1998.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------- -------------------
1998 1999 1999 2000
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Risk-free interest rate................... 4.94% 5.88% 5.12% 6.33%
Expected life............................. 5 years 5 years 5 years 5 years
Expected dividends........................ -- -- -- --
</TABLE>
F-21
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' DEFICIT (CONTINUED)
The expected life is based on assumption that stock options on average are
exercised one year after they are fully vested. The risk free interest rate was
calculated in accordance with the grant date and the life term of the options.
MINIMUM VALUE OF OPTION
Based on the above assumptions, the weighted average minimum values per
share of options granted under the Plan were $0.07 and $7.86 for the years ended
December 31, 1998 and December 31, 1999, respectively. The weighted average
minimum values were $4.87 and $10.05 for the three months ended March 31, 1999
and March 31, 2000.
The weighted average minimum values per share of restricted shares granted
were $0.03 for the year ended December 31, 1997 and $0.31 for the year ended
December 31, 1998. (None were granted in 1999.)
At December 31, 1998, 805,714 options were outstanding at an average
exercise price of $0.31 all of which were exercisable but none of which were
vested at that date.
The options outstanding, vested and exercisable by exercise price as at
December 31, 1999 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
------------------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.31 1,788 9.4 $0.31 247 $0.31
</TABLE>
The options outstanding and currently exercisable by exercise price as at
March 31, 2000 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
------------------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.31 896 9.0 $0.31 257 $0.31
$1.57 370 9.9 $1.57 -- $1.57
----- ---- ----- --- -----
1,266 9.26 $0.67 257 $0.31
===== ===
</TABLE>
DEFERRED STOCK COMPENSATION
During 1997, 1998, 1999 and 2000, the Company issued stock options and
restricted shares to certain employees with exercise prices below the deemed
fair value of the Company's common stock at the date of grant. In accordance
with the requirements of APB No. 25, the Company has recorded unearned stock
compensation for the difference between the exercise price of the stock options
and the deemed fair value of the Company's common stock at the date of grant.
This unearned stock compensation is amortized to expense over the period during
which the options subject to repurchase
F-22
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' DEFICIT (CONTINUED)
vest, generally four years, using the method set out in example 2 of FASB
Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each vested tranche
of options is accounted for as a separate option grant awarded for past
services. Accordingly, the compensation expense is recognized over the period
during which the services have been provided. The Company has recorded unearned
stock compensation for options and restricted shares granted to employees of
$26,000, $2,000 and $10,178,000 for the years ended December 31, 1997, 1998 and
1999 and $9,399,000 for the three months ended March 31, 2000; of which $11,000,
$10,000 and $2,651,000 have been amortized to expenses during fiscal years 1997,
1998 and 1999 and $2,605,000 amortized to expense in the three months ended
March 31, 2000.
Stock-based compensation expense related to stock options granted to
consultants is recognized as the stock options are earned. The fair value of the
stock options granted is calculated at each reporting date using the
Black-Scholes option pricing model. As a result, the stock-based compensation
expense will fluctuate as the fair market value of our common stock fluctuates.
The Company believes that the fair value of the stock options are more reliably
measurable than the fair value of the services received. In connection with the
grant of stock options to consultants, the Company recorded unearned stock
compensation of $14,000, $7,000 and $176,000 for the years ended December 31,
1997, 1998 and 1999 and $1,060,000 for the three months ended March 31, 2000, of
which $6,000, $9,000 and $157,000 have been amortized to expense in 1997, 1998
and 1999 and $157,000 amortized to expense in the three months ended March 31,
2000.
As of March 31, 2000, the Company expects to amortize stock-based
compensation expense of $7.3 million in the remainder of fiscal 2000,
$5.0 million in 2001, $2.3 million in 2002, $690,000 in 2003 and $11,000 in
2004.
10. EMPLOYEE BENEFIT PLAN
In 1999, the Company established a 401(k) Plan (the "Plan") to provide tax
deferred salary deductions for all eligible employees. Participants may make
voluntary contributions to the Plan of up to 20% of their compensation, limited
by certain Internal Revenue Service restrictions. The Company's matching
contribution is discretionary as determined by the board of directors. The
Company has not contributed to the plan since its inception.
11. RELATED PARTIES
In connection with the research and development contract with Tularik,
described in Note 5, Tularik purchased 489,797 shares of Series B preferred
stock at a price of $1.53 per share, in February 1998. There were no outstanding
receivables relating to this agreement as at December 31, 1998 and 1999.
Deferred revenues of $19,000 have been recognized as of December 31, 1999.
F-23
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
12. INCOME TAXES
The components of the net deferred tax assets as of December 31, 1998 and
1999 are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,319 $ 6,386
Research and experimental credits....................... 277 1,022
Cumulative temporary differences........................ 16 1,189
Depreciation and amortization........................... 153 --
------- -------
1,765 8,597
------- -------
Deferred tax liabilities:
Depreciation and amortization........................... -- 219
------- -------
Net deferred tax assets................................. 1,765 8,378
Valuation allowance..................................... (1,765) (8,378)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
At December 31, 1999, the Company had federal and state operating loss
carryforwards of approximately $16,035,000 and $16,013,000, respectively, and
federal and state tax credits of approximately $539,000 and $694,000,
respectively. These carryforwards will expire between 2005-2019, if not
utilized.
The U.S. Federal income tax rules may restrict the utilization of the
operating loss and tax credit carryforwards in the case of an "ownership change"
of a corporation.
13. SUBSEQUENT EVENTS (UNAUDITED)
ISSUANCE OF REDEEMABLE CONVERTIBLE SERIES C PREFERRED STOCK
On January 21, 2000, the Company issued 7,198,709 shares of redeemable
convertible Series C preferred stock for $3.13 per share for total cash proceeds
of $22,550,000. The holders of Series C preferred stock are entitled to receive
dividends of $0.25 per share per annum when and if declared by the board of
directors and $3.13 per share upon liquidation. As a result of this issuance a
beneficial conversion feature charge has been included in the results of
operations for the three months ended March 31, 2000.
In conjunction with the issuance of the Series C preferred stock financing,
an option to purchase an aggregate of up to 15% of the shares to be sold in the
event of an initial public offering, at the offering price to the public, was
granted to investors of which two Deltagen directors are the general partners. A
subsequent amendment, executed by the requisite percentage of shareholders,
rescinded the Series C holders right to purchase up to 15% of the shares to be
sold in the initial public offering.
F-24
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
As a result of the issuance of the Series C preferred stock the Articles of
Incorporation were amended to increase the total number of authorized shares to
47,567,349, allocated as follows: common stock--28,571,429, Series A preferred
stock--3,428,571, Series B preferred stock--7,567,349 and Series C preferred
stock--8,000,000.
REGISTRATION
In March 2000, the Company's board of directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell its common stock to the public. Upon completion of
the Company's initial public offering, all of the outstanding preferred stock
will be converted into shares of common stock.
CONSULTING AND RESEARCH COLLABORATION CONTRACT
On March 15, 2000, the company negotiated the basic terms of a three year
consulting arrangement research collaboration agreement with Institute Genetique
Biologie Moleculaire et Cellulaire (IGBMC), a scientific institution. Deltagen
determines which projects are to be conducted by IGBMC in the area of functional
genomics and particularly knockout animals and disruption technologies. The
costs and expenses related to the projects will be shared by Deltagen and IGBMC.
In conjunction with this agreement, a three year warrant to purchase 457,143
shares of Series C preferred stock of Deltagen at a price of $3.13 per share was
granted to IGBMC as of July 25, 2000. The warrant will vest in its entirety on
the four month anniversary of the commencement date of the agreement. The Chief
Executive Officer of IGBMC is the father of one of the members of Deltagen's
board of directors. The agreement has not yet become effective. For the purpose
of valuing the warrants in accordance with EITF 96-18 "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" no measurement date has occurred
and so no value has yet been attributed to these warrants.
PROMISSORY NOTES TO OFFICERS
In March 2000, stock options to purchase an aggregate of 514,286 shares at
an exercise price of $1.57 per share were granted under the 1998 Stock Incentive
Plan to two officers of the Company. These options were valued at the deemed
fair market value in March 2000 of $12.93. The total compensation expense
associated with these option grants is $5.0 million, of which $466,000 has been
charged to operations in the first quarter of 2000. All of these options were
exercised in March 2000 for cash in the amount of the par value of the shares of
$500 and in exchange for two four-year full recourse promissory notes totalling
$805,000. These notes bear interest at 6.8%.
2000 STOCK OPTION PLAN
In April 2000, the board of directors adopted the 2000 Stock Incentive Plan
(the "2000 Plan"). The 2000 Plan provides for the granting of incentive stock
options ("ISO"), non-statutory stock options, restricted shares, stock units or
stock appreciation rights ("SARs"), to employees, non-employee directors and
consultants.
F-25
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
5,485,714 shares of common stock have been authorized for issuance under the
2000 Plan, that will terminate no later than 2010. On January 1 of each year the
number of shares reserved for issuance will be increased, but limited to a total
of authorized shares of 45,714,286.
Non-employee directors shall automatically be granted a nonstatutory option
to purchase 22,857 shares as a result of their appointment as directors on, or
after, the effectiveness of an initial public offering of the stock; such option
to vest monthly over a 3-year period. They will then receive a nonstatutory
option to purchase 5,714 shares on an annual basis; such option to vest over one
year. In other cases, the vesting conditions of restricted shares, stock option,
SARs or stock units granted will be specified in each individual agreement. The
stock options and SARs granted are subject to acceleration of vesting in the
event of a change in control of the Company. The purchase price for restricted
and the exercise price for stock options and SARs will be determined by the
Committee in charge of the 2000 Plan administration. The exercise price of an
option shall not be less than 100% of the fair market value of a share on the
date of grant. The term of an ISO shall not exceed 10 years.
2000 EMPLOYEE STOCK PURCHASE PLAN
In April 2000, the board of directors adopted the 2000 Employee Stock
Purchase Plan ("2000 ESPP"). 1,142,857 shares of common stock have been reserved
for issuance under the 2000 ESPP; subject to increase on the first day of each
fiscal year, commencing 2001. The 2000 ESPP contains overlapping
twenty-four-month offering periods and successive six-month accumulation
periods. The price of stock purchased under the ESPP shall be the lower of 85%
of the fair market value of such share on the last trading day in such
accumulation period or 85% of the fair market value of such share on the last
trading day before the commencement of the applicable offering period.
LEGAL MATTERS
On May 24, 2000, Lexicon Genetics Incorporated filed a lawsuit against the
Company in the United States District Court for the District of Delaware. The
complaint in the lawsuit alleges that the Company's methods of making knockout
mice infringe United States Patent No. 5,789,215 under which Lexicon claims to
be an exclusive licensee. The complaint seeks a judgment that the Company
infringed this patent, a permanent injunction against further infringement of
the patent and an award of damages in an unspecified amount that, under certain
circumstances, may be tripled. The Company believes that the patent in question
is invalid and, even if the patent is found to be valid, that the methods
employed do not infringe it. On June 13, 2000, the Company responded to
Lexicon's complaint by filing an answer and seeking a declaratory judgment in
its favor. The response seeks a judgment declaring the patent invalid and that
the Company has not infringed and are not infringing the patent. The Company
intends to defend the action vigorously.
The litigation is in the early stages and its outcome cannot be predicted.
If Lexicon prevails and obtains an injunction, the Company would be required to
obtain a license in order to continue to use the methods covered by the patent.
The Company may not be able to obtain this license on favorable terms or at all.
If unable to obtain a license, the Company would be required to redesign its
processes to use alternative methods of making knockout mice and would
experience a significant disruption in its ability to generate revenue during
this redesign period and as it develops a gene function database using these new
methods. This redesign and development would involve significant time and costs,
and
F-26
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the alternative methods available may not be as effective as current methods.
The estimated average time from the date of creation of a knockout mouse until
the date the data from that knockout mouse is added to the gene function
database is 12 months. The addition of new data points to the gene function
database could be significantly delayed. If Lexicon prevails, the Company could
also incur significant financial liabilities which could materially affect its
business and operating results.
In addition, on July 13, 2000, the Company received a letter from Lexicon
stating that it believes the Company may be involved in activities that conflict
with four patents licensed to Lexicon. Lexicon's letter states that these
patents cover certain methods for producing gene targeted cells and transgenic,
or knockout, mice. The Company believes its methods do not infringe these
patents. If Lexicon asserts its rights under these patents as the basis for a
lawsuit against the Company and Lexicon prevails in any such lawsuit, the
Company would be prevented from using its methods unless it obtained a license.
The Company may be unable to obtain a license on favorable terms or at all, or
it may choose not to seek a license. The Company believes it could use
alternative methods, with which it has experience and which it believes are as
effective as its current methods. Developing a gene function database using
these alternative methods would involve significant time and costs. An adverse
determination of any lawsuit with Lexicon involving these patents could also
significantly affect the marketing of its existing gene function database and
DeltaSelect program. The Company expects that, during the period prior to
development of a comparable gene function database using these alternative
methods, it would experience a significant disruption in its ability to generate
revenue. If Lexicon prevails in any lawsuit involving these patents, it could
also incur significant financial liabilities which could materially affect its
business and operating results.
At this time no estimate can be made of the outcome or any possible loss
which may be incurred.
STOCK SPLIT
In May 2000, the board of directors approved an 8-for-7 forward split of its
preferred and common stock. All common stock data and common stock option plan
information in this report has been restated to reflect the split. In addition
the conversion prices of the Company's Series A, Series B and Series C
convertible preferred stock have also been adjusted to reflect the effect of the
split.
OPTION GRANTS
On May 26, 2000, options to purchase 222,256 shares of common stock under
the 1998 Plan were granted at an exercise price of $7.88 per share. The total
unearned compensation related to these grants amounts to $875,000 of which
$201,000 have been amortized to expense in the second quarter of fiscal year
2000.
On July 7, 2000, options to purchase 621,313 shares of common stock under
the 1998 Plan were granted at an exercise price of $12.60 per share. The total
unearned compensation related to these grants amounts to $249,000, of which
$56,000 will be amortized to expense in the third quarter of fiscal year 2000.
F-27
<PAGE>
DELTAGEN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
CUSTOMER AGREEMENT
On June 27, 2000, the Company entered into its first DeltaBase subscription
agreement with Glaxo Wellcome. Under the DeltaBase agreement, Glaxo Wellcome has
the right to access DeltaBase information on gene function and validated gene
targets based upon knockout mouse studies. The DeltaBase agreement also grants
Glaxo Wellcome non-exclusive, worldwide licenses to knockout mice, materials and
intellectual property rights under DeltaBase. The Company will receive an
aggregate of $5,000,000 in subscription licensing fees during each year of the
three-year term. In addition, the Company may receive additional licensing fees
for access to its intellectual property and additional payments on milestones
achieved and on products developed by Glaxo Wellcome, if any, using DeltaBase
information, materials and related intellectual property. Glaxo Wellcome may,
however, terminate the agreement for any reason within the first three months
after the one year anniversary of the effective date upon payment of a specified
termination fee.
LOAN AGREEMENT
In June 2000, the Company entered into a loan agreement with a financial
institution to obtain one or more loans totaling up to $6,500,000. A
corresponding amount of machinery, equipment and other property is pledged as
collateral for each loan.
During June 2000, the Company incurred loans of $1,262,000 and $1,649,000
for a total financing of $2,911,000. These loans bear respective interest rates
of 12.75% and 12.49% and are required to be repaid in 36 and 48 monthly
installments, respectively, beginning in July 2000.
F-28
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
7,000,000 SHARES
DELTAGEN, INC.
COMMON STOCK
[DELTAGEN LOGO]
------
PROSPECTUS
, 2000
---------
SALOMON SMITH BARNEY
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
--------------------------------------------------
--------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses expected to be incurred
by the registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee and the National Association of Securities Dealers, Inc. filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 31,878
National Association of Securities Dealers, Inc. filing
fee....................................................... 12,575
NASDAQ listing fee.......................................... 90,000
Blue Sky fees and expenses.................................. 10,000
Accounting fees and expenses................................ 300,000
Legal fees and expenses..................................... 500,000
Printing and engraving expenses............................. 200,000
Registrar and Transfer Agent's fees......................... 25,000
Miscellaneous fees and expenses............................. 30,547
----------
Total................................................... $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper. The registrant's Restated Certificate of Incorporation
and the registrant's bylaws each provide for indemnification of the registrant's
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the
II-1
<PAGE>
Delaware General Corporation Law. The registrant has also entered into
agreements with its directors and officers that will require the registrant,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers to the fullest
extent not prohibited by law.
The underwriting agreement provides for indemnification by the underwriters
of the registrant, its directors and officers, and by the registrant of the
underwriters, for certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the "Act"), and affords certain rights of
contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order below is information regarding the number
of shares of common and preferred stock issued, as well as the number of options
and warrants granted, by the registrant since January 1, 1997. Further included
is the consideration, if any, received by the registrant for such shares,
options and warrants, and information relating to the section of the Act, or
rule of the SEC, under which exemption from registration was claimed. All awards
of options did not involve any sale under the Act and none of these securities
were registered under the Act.
(a) On various dates between January 1997 and March 2000, the registrant
issued 2,152,179 shares of its common stock to 100 employees and directors
directly and pursuant to the exercise of options granted under its 1998 Stock
Incentive Plan. The exercise prices per share ranged from $0.01 to $1.57, for an
aggregate consideration of $1,473,215. The registrant relied on the exemption
provided by Rule 701 under the Act.
(b) In January 1997, the registrant issued 1,523,840 shares of its common
stock to two accredited investors. The price per share was $0.01, for an
aggregate consideration of $13,333. The registrant relied on the exemption
provided by Section 4(2) of the Act.
(c) In February and May 1997, the registrant issued 3,428,571 shares of
Series A preferred stock to one accredited investor. The price per share was
$0.88, for an aggregate consideration of $3,000,000. The registrant relied on
the exemption provided by Rule 506 under Regulation D and Section 4(2) of the
Act.
(d) In February and July 1998, the registrant issued an aggregate of
7,510,206 shares of Series B preferred stock to a total of seven accredited
investors. The price per share was $1.53, for an aggregate consideration of
$11,500,000. The registrant relied on the exemption provided by Rule 506 under
Regulation D and Section 4(2) of the Act.
(e) In December 1998 and March 1999, the registrant issued two warrants to
purchase an aggregate of 43,101 Series B preferred shares at a price of $1.53
per share. The registrant relied on the exemption provided by Rule 506 under
Regulation D and Section 4(2) of the Act.
(f) In January 2000, the registrant issued 7,198,709 shares of Series C
preferred stock to a total of 30 accredited investors. The price per share was
$3.13, for an aggregate consideration of $22,549,955. The registrant relied on
the exemption provided by Rule 506 under Regulation D and Section 4(2) of the
Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
and warrants issued in such transactions. All recipients had adequate access,
through employment or other relationships, to information about the registrant.
No underwriters were engaged in connection with the foregoing sales of
securities. All of the foregoing securities are deemed restricted securities for
purposes of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
1.1** Form of Underwriting Agreement
3(i).1** Amended Restated Certificate of Incorporation in effect upon
the date of this filing
3(i).2** Certificate of Amendment of Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State
on July 12, 2000
3(i).3** Form of Restated Certificate of Incorporation to be
effective upon the consummation of this offering
3(ii).1** Bylaws of the Registrant in effect upon the date of this
filing
3(ii).2** Bylaws of the Registrant effective upon the consummation of
this offering
4.1** Specimen Common Stock Certificate
4.2** Investors' Rights Agreement dated May 27, 1999
4.3** Investors' Rights Agreement dated January 21, 2000
5.1** Opinion of Pillsbury Madison & Sutro LLP
10.1.1** 1998 Stock Incentive Plan
10.1.2** Form of Option Agreement under 1998 Stock Incentive Plan
10.2.1** 2000 Stock Incentive Plan
10.2.2** Form of Incentive Option Agreement under 2000 Stock
Incentive Plan
10.2.3** Form of Nonstatutory Stock Option Agreement under 2000 Stock
Incentive Plan
10.3** 2000 Employee Stock Purchase Plan
+10.4 Agreement with University of Edinburgh
10.5.1** Lease Agreement for 1031 Bing Street, San Carlos, California
10.5.2** Addendum to Lease Agreement
10.5.3** First Amendment to Lease Agreement
10.6** Lease Agreement for 1003 Hamilton Avenue, Menlo Park,
California
10.7** Form of Indemnification Agreement
10.8** Agreement with William Matthews, Ph.D.
10.9** Agreement with Mark W. Moore, Ph.D.
10.10** Agreement with Augustine G. Yee, Esq.
10.11** Agreement with Terry Coley, Ph.D.
10.12** Series B Preferred Stock Warrant issued to Silicon Valley
Bank
10.13** Series B Preferred Stock Warrant issued to LMSI
10.14** Agreement with IGBMC
10.15** Promissory Note between Deltagen and William Matthews, Ph.D.
10.16** Promissory Note between Deltagen and Mark W. Moore, Ph.D.
+10.17 Agreement with Roche Biosciences, Inc. dated October 2, 1998
+10.18 Agreement with Pfizer, Inc. dated December 22, 1998
+10.19** Agreement with Schering-Plough dated December 16, 1999
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
+10.20 Agreement with Merck dated December 21, 1999
+10.21 Agreement with Glaxo dated June 27, 2000
+10.22 Collaboration Agreement with Glaxo dated June 27, 2000
+10.23 Agreement with Affymetrix, Inc. dated July 12, 2000
10.24 Series C Preferred Stock Warrant issued to IGBMC
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2** Consent of Pillsbury Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration Statement)
24.1** Power of Attorney (see page II-5)
27.1** Financial Data Schedule
</TABLE>
------------------------
** Filed previously.
+ Confidential treatment has been requested with respect to a portion of this
agreement.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 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 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 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 Rule 424(b)(1) or (4) or
497(h) under the 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 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.
(3) It will provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park,
State of California, on the 2nd day of August, 2000.
<TABLE>
<S> <C> <C>
DELTAGEN, INC.
By /s/ AUGUSTINE G. YEE
----------------------------------------
Augustine G. Yee
VICE PRESIDENT OF CORPORATE DEVELOPMENT,
GENERAL COUNSEL AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <C> <S>
* President and Chief Executive
------------------------------------------- Officer (Principal Executive August 2, 2000
William Matthews, Ph.D. Officer) and Director
/s/ BRIAN E. CROWLEY Director of Finance (Principal
------------------------------------------- Financial and Accounting August 2, 2000
Brian E. Crowley Officer)
*
------------------------------------------- Director August 2, 2000
Vicente Anido, Jr., Ph.D.
*
------------------------------------------- Director August 2, 2000
Philippe Chambon, M.D., Ph.D.
*
------------------------------------------- Director August 2, 2000
Thomas A. Penn
*
------------------------------------------- Director August 2, 2000
F. Noel Perry
*
------------------------------------------- Director August 2, 2000
Nicholas J. Simon
/s/ AUGUSTINE G. YEE
-------------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
--------------------- -------
<C> <S>
1.1** Form of Underwriting Agreement
3(i).1** Amended Restated Certificate of Incorporation in effect upon
the date of this filing
3(i).2** Certificate of Amendment of Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State
on July 12, 2000
3(i).3** Form of Restated Certificate of Incorporation to be
effective upon the consummation of this offering
3(ii).1** Bylaws of the Registrant in effect upon the date of this
filing
3(ii).2** Bylaws of the Registrant effective upon the consummation of
this offering
4.1** Specimen Common Stock Certificate
4.2** Investors' Rights Agreement dated May 27, 1999
4.3** Investors' Rights Agreement dated January 21, 2000
5.1** Opinion of Pillsbury Madison & Sutro LLP
10.1.1** 1998 Stock Incentive Plan
10.1.2** Form of Option Agreement under 1998 Stock Incentive Plan
10.2.1** 2000 Stock Incentive Plan
10.2.2** Form of Incentive Option Agreement under 2000 Stock
Incentive Plan
10.2.3** Form of Nonstatutory Stock Option Agreement under 2000 Stock
Incentive Plan
10.3** 2000 Employee Stock Purchase Plan
+10.4 Agreement with University of Edinburgh
10.5.1** Lease Agreement for 1031 Bing Street, San Carlos, California
10.5.2** Addendum to Lease Agreement
10.5.3** First Amendment to Lease Agreement
10.6** Lease Agreement for 1003 Hamilton Avenue, Menlo Park,
California
10.7** Form of Indemnification Agreement
10.8** Agreement with William Matthews, Ph.D.
10.9** Agreement with Mark W. Moore, Ph.D.
10.10** Agreement with Augustine G. Yee, Esq.
10.11** Agreement with Terry Coley, Ph.D.
10.12** Series B Preferred Stock Warrant issued to Silicon Valley
Bank
10.13** Series B Preferred Stock Warrant issued to LMSI
10.14** Agreement with IGBMC
10.15** Promissory Note between Deltagen and William Matthews, Ph.D.
10.16** Promissory Note between Deltagen and Mark W. Moore, Ph.D.
+10.17 Agreement with Roche Biosciences, Inc. dated October 2, 1998
+10.18 Agreement with Pfizer, Inc. dated December 22, 1998
+10.19** Agreement with Schering-Plough dated December 16, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
--------------------- -------
<C> <S>
+10.20 Agreement with Merck dated December 21, 1999
+10.21 Agreement with Glaxo dated June 27, 2000
+10.22 Collaboration Agreement with Glaxo dated June 27, 2000
+10.23 Agreement with Affymetrix, Inc. dated July 12, 2000
10.24 Series C Preferred Stock Warrant issued to IGBMC
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2** Consent of Pillsbury Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration Statement)
24.1** Power of Attorney (see page II-5)
27.1** Financial Data Schedule
</TABLE>
------------------------
** Filed previously.
+ Confidential treatment has been requested with respect to a portion of this
agreement.
