<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 2000
REGISTRATION NO. 333-34340
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
CEPHEID
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3826 77-0441625
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1190 BORREGAS AVENUE
SUNNYVALE, CALIFORNIA 94089-1302
(408) 541-4191
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------------
THOMAS GUTSHALL
CHIEF EXECUTIVE OFFICER
CEPHEID
1190 BORREGAS AVENUE
SUNNYVALE, CALIFORNIA 94089-1302
(408) 541-4191
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------------------
Copies to:
<TABLE>
<S> <C>
August J. Moretti Frederick W. Kanner
Heller Ehrman White & McAuliffe LLP Robert M. Smith
2500 Sand Hill Road, Suite 100 Dewey Ballantine LLP
Menlo Park, California 94025-7063 1301 Avenue of the Americas
Telephone: (650) 234-4229 New York, New York 10019-6092
Facsimile: (650) 234-4299 Telephone: (212) 259-8000
Facsimile: (212) 259-6333
</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, as amended (the "Securities Act"), check the following box. [ ]
If the 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 number of the earlier effective
registration statement for the same offering. [ ]
If the 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 the 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 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.
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<PAGE> 2
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 an offer to buy these securities in any state where the offer
or sale is not permitted.
PRELIMINARY PROSPECTUS Subject to completion June 21, 2000
--------------------------------------------------------------------------------
5,000,000 Shares
CEPHEID LOGO
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock.
We have been approved to have our common stock listed on the Nasdaq National
Market under the symbol "CPHD."
BEFORE BUYING ANY SHARES, YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER
SHARE TOTAL
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<S> <C> <C>
Public offering price $6.00 $30,000,000
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Underwriting discounts and commissions $0.42 $ 2,100,000
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Proceeds, before expenses, to Cepheid $5.58 $27,900,000
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</TABLE>
The underwriters may also purchase up to 750,000 shares of common stock from us
at the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. The underwriters may exercise
this option only to cover over-allotments, if any. If the underwriters exercise
the option in full, the total underwriting discounts and commissions will be
$2,415,000, and the total proceeds, before expenses, to Cepheid will be
$32,085,000.
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about June 26, 2000.
UBS WARBURG LLC
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
INVEMED ASSOCIATES
<PAGE> 3
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Through and including July 15, 2000 (the 25th day after commencement of this
offering), federal securities law may require all dealers selling shares of our
common stock, whether or not participating in this offering, to deliver a
prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary.................... 3
The offering.......................... 6
Summary consolidated financial data... 7
Risk factors.......................... 8
Forward-looking information........... 16
Use of proceeds....................... 17
Dividend policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected consolidated financial
data................................ 20
Management's discussion and analysis
of financial condition and results
of operations....................... 22
Business.............................. 28
Management............................ 47
Related party transactions............ 54
Principal shareholders................ 56
Description of capital stock.......... 59
Shares eligible for future sale....... 62
Underwriting.......................... 64
Legal matters......................... 67
Experts............................... 67
Where you can find more information... 68
Index to consolidated financial
statements.......................... F-1
</TABLE>
Cepheid(TM), Smart Cycler(R), I-CORE(TM) and GeneXpert(TM) are trademarks of
Cepheid. Other service marks, trademarks and trade names referred to in this
prospectus are the property of their respective owners.
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<PAGE> 4
Inside cover p.1
Illustration: This illustration, on the right side of the page, depicts
Cepheid's integrated sample preparation, amplification and
detection technology. The illustration shows the elements
of a disposable sample preparation cartridge linking with
the elements of an I-CORE module to perform amplification
and detection. The illustration is accompanied by text,
referencing on the appropriate section of the illustration.
Headline: Automating Gene-Based Testing
Caption: Integrated, Automated, Miniaturized Microfluidic Platforms
for Analyzing Complex Biological Samples, Including Sample
Preparation, Amplification and Detection.
Sub-header: Sample Preparation
In development
Caption: Our microfluidic cartridges, easily held in the palm of your
hand, replace several skilled technicians in a laboratory,
performing all processing steps in a matter of minutes.
Captions:
A raw specimen containing the DNA of interest is added to
the disposable cartridge.
Fluid Chambers: Flow-through fluid control measures and mixes the specimen
and reagents.
Lysing Module: Cells and organisms are rapidly lysed to release their DNA.
Microfluidic
Chip: Micromachined chips capture, purify, and concentrate DNA
molecules.
Reaction tube: Purified DNA molecules are mixed with amplification and
detection chemicals...and delivered into our patented
reaction tube, optimized for amplification and detection.
Sub-header: Amplification and Detection
Commercially available
Caption: Our I-CORE (Integrated Cooling/Heating Optics Reaction)
module is a miniaturized, temperature-controlled
fluorimeter for performing and continuously monitoring
biochemical reactions.
Captions:
Heater: Rapid, precise temperature control speeds time to result.
Optic blocks: Powerful optical analysis, detecting, monitoring and
qualifying up to four different DNA targets simultaneously.
<PAGE> 5
Base of illustration: I-CORE: Every I-CORE module in a larger system
can be operated independently, providing a level of
flexibility not possible with any other bioanalysis
system.
Fold-Out p. 2-3
Title: Cepheid's Integrated Technology Platforms and Products
Fold-Out p. 2
Inside Front Cover
The series of five images in the center of the page shows actual elements of
the Smart Cycler family of products. The first image shows a computer rendering
of a reaction tube. The second image is a photograph of an actual I-CORE module
with a reaction tube held above the module. The third and fourth photographs
show the Smart Cycler System, one that shows the internal 16 I-CORE modules
contained in the system, and another with a reaction tube held above a fully
functional Smart Cycler system. The fifth photograph represents a portable
Notebook Smart Cycler system.
Headline: The Smart Cycler(R) family
Caption: The Smart Cycler(R) family of systems enables rapid
amplification and real time detection of DNA targets in
both a laboratory and portable, field environment.
Sub-header: I-CORE(TM) tube and module;
Commercially available
Text: The patented I-CORE consumable reaction tube enables
efficient reaction and fast detection.
Artwork: Computer image of reaction tube.
Text: The I-Core module -- a single-site DNA assay reaction and
detection system. The building block for Cepheid's broad
range of DNA testing systems -- lab-based and portable.
Artwork: Picture of hand holding reaction tube above I-CORE module.
Sub-header: The 16-site Smart Cycler
Commercially available
Text: Cepheid's first product, the Smart Cycler System, which
contains 16 I-CORE modules.
Artwork: Picture of hand holding I-CORE module above Smart Cycler
system.
Artwork: Picture of hand holding reaction tube above Smart Cycler
system.
<PAGE> 6
Sub-header: Notebook Smart Cycler
In development
Text: This portable DNA testing system contains two I-CORE modules
integrated with a notebook computer.
Artwork: Picture of hand placing tube into a notebook Smart Cycler.
Fold-Out p.3
The series of four images in the center of the page shows elements of the
GeneXpert family of products. The first image shows a photograph of an
industrial designed sample preparation cartridge. The second and third images
represent scanning electron micrographs of a microfluidic chip, one at 3 mm in
size, and a magnified view at 50 um. The fourth image is a computer rendering
of a GeneXpert prototype that is designed to accommodate four sample preparation
cartridges.
Headline: The GeneXpert(TM) family
Caption: The GeneXpert(TM) family of systems will fully integrate
cartridge-based sample preparation with rapid amplification
and detection -- one step rapid DNA detection and analysis.
Sub-header: Sample preparation cartridge
In development
Text: All the steps necessary to perform a complex DNA analysis --
out of the lab and into your hand. A consumable cartridge,
designed for use with I-CORE based systems for complete,
seamless automation.
Artwork: Photograph of hand holding sample preparation cartridge.
Sub-header: Microfluidic chip
In development
Text: Micromachined silicon chips operate in a "flow-through"
mode, enabling capture and concentration of DNA in a sample
preparation cartridge.
Artwork: Scanning electron micrographs showing silicon chip at 3 mm
view.
Artwork: Scanning electron micrographs showing silicon chip at 50 um
view.
Sub-header: GeneXpert(TM) prototype
In development
Text: Industrial design for the GeneXpert system based on a
prototype. From raw specimen to result, automatically, in
less than 1 hour.
<PAGE> 7
Prospectus summary
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock that we discuss under "Risk factors." Our principal
executive offices are located at 1190 Borregas Avenue, Sunnyvale, California
94089. Our telephone number is (408) 541-4191. Our web site is
http://www.cepheid.com. We do not intend the information found on our website to
be a part of this prospectus.
OUR BUSINESS
We develop, manufacture and market microfluidic systems that integrate, automate
and accelerate biological testing. Our systems are miniaturized instruments that
analyze complex biological samples in a disposable cartridge by combining
molecular biology with microfluidic technology that processes small quantities
of liquid, typically using components fabricated with computer chip technology.
These systems rapidly perform all of the steps required to analyze complex
biological samples. We are initially focused on the detection and analysis of
nucleic acids, such as DNA, in samples such as blood, urine, cell cultures, food
and industrial water. The three key processing steps in nucleic acid testing
are:
+ SAMPLE PREPARATION -- procedures that must be performed to isolate the target
cells and to separate and purify their nucleic acids;
+ AMPLIFICATION -- a chemical process to make large quantities of DNA; and
+ DETECTION -- the method of determining the presence or absence of the target
DNA, typically through the use of fluorescent dyes.
Our systems can perform a broad range of functions that include automated
purification of DNA, screening for disease-causing agents, rapid detection of
food and water contaminants and genetic profiling. Our systems are designed for
a wide variety of laboratory and field settings, enabling users to perform tests
where and when they are needed.
We commenced commercial sales of our first product, the Smart Cycler, during May
2000. We have not, to date, recorded significant revenues from product sales.
The Smart Cycler is a fast, versatile DNA amplification and detection system
initially directed to the life sciences research market. Our GeneXpert system,
currently in development, is designed to integrate automated sample preparation
with our Smart Cycler amplification and detection technology in a disposable
cartridge format. Based upon our own comparisons and those of our collaborators,
we believe this fully integrated system will allow us to perform analysis of
biological samples faster and more efficiently than products currently
available. We are collaborating with strategic partners to co-develop assays, or
biological tests, and to provide marketing and sales support across a broad
range of markets.
OUR MARKET OPPORTUNITY
The life sciences research, clinical diagnostics, industrial testing and
pharmacogenomics markets use assays extensively to detect and quantify nucleic
acids or proteins in biological samples. With the recent advances in the field
of gene sciences, or genomics, and the resulting availability of vast DNA
sequence libraries that catalogue the structure of various sequences of DNA,
there has been a marked shift towards biological tests that detect the presence
of DNA sequences unique to a gene in a sample. Such gene-based testing offers a
level of sensitivity and specificity unmatched by other technologies and is the
fastest growing segment in these markets. We believe that DNA assays will only
achieve their full
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3
<PAGE> 8
market potential upon the development of advanced instruments and integrated
processes that address the following issues:
+ LONG TIME TO RESULT -- Currently, sample preparation, amplification and
detection can require several hours or even days, especially when cell
culturing is needed;
+ EXPENSIVE, LARGE AND INFLEXIBLE EQUIPMENT -- Most currently available
equipment is expensive, large and inflexible and is typically configured to
accommodate only one assay protocol at a time;
+ SKILLED TECHNICIANS, LABORATORY REQUIRED -- The majority of currently
available equipment and methods require skilled scientists and technicians
and a laboratory setting;
+ SAMPLE VOLUME CONSTRAINTS -- Existing microfluidic technologies accept and
process only very small sample volumes and therefore cannot assure that the
target molecule, if present in the sample, will be captured; and
+ LACK OF INTEGRATION -- Currently available amplification and detection
systems do not integrate automated sample preparation.
THE CEPHEID SOLUTION
We have developed integrated microfluidic instruments designed to incorporate
our automated sample preparation, amplification and detection technologies. Our
systems will allow practitioners in the life sciences research, clinical
diagnostics, industrial testing and pharmacogenomics markets to make use of the
vast new libraries of nucleic acid sequences now being generated by genomics
researchers. We believe our technologies provide the following advantages:
+ RAPID RESULTS -- Our proprietary I-CORE technology, incorporated into our
Smart Cycler and GeneXpert systems, generally achieves the heating and
cooling, or thermal cycling, required for DNA amplification and detection in
under 25 minutes. Our GeneXpert system has accomplished sample preparation in
as little as five minutes;
+ INEXPENSIVE, MODULAR, FLEXIBLE -- Our systems are flexible platforms that are
designed to run several different types of assays simultaneously. Our systems
are modular, enabling us to build products to meet the varying needs of our
target markets;
+ EASY TO OPERATE, PORTABLE -- The automation designed into our products will
permit operation by less skilled personnel and enable testing at the point of
use, outside of a laboratory setting;
+ WIDE RANGE OF SAMPLE VOLUMES -- In applications where the concentration of
the target molecule or organism is low, larger sample volumes must be tested
to find the target. Our GeneXpert system is designed to handle, in a
disposable cartridge, higher sample volumes than any other product currently
available; and
+ INTEGRATION OF KEY STEPS -- Our GeneXpert system is designed to integrate
sample preparation, amplification and detection into one system.
THE CEPHEID STRATEGY
Our objective is to become the leading provider of microfluidic systems that
integrate, automate and accelerate biological testing. Key elements of our
strategy include:
+ APPLY CORE TECHNOLOGIES BROADLY -- We intend to integrate our proprietary
I-CORE and automated sample preparation technologies to provide rapid
biological analysis platforms with applicability across a number of markets.
Our unique capabilities for rapid sample preparation through the use of
microfluidics will streamline this otherwise labor-intensive process;
+ INTRODUCE PRODUCTS IN STAGES -- We intend to establish an initial market
position in the life sciences research market by providing a fast, flexible
thermal cycler, our Smart Cycler. Our next product, the GeneXpert system,
will integrate and automate sample preparation with amplification and
detection;
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4
<PAGE> 9
+ FOCUS INITIALLY ON NUCLEIC ACID ANALYSIS -- We are initially focusing on the
development and application of our platform technologies to the field of
rapid nucleic acid analysis. We will adapt our sample preparation and
amplification technologies to increase the number of samples that can be
processed, referred to as throughput, as well as lower costs and provide
greater sensitivity;
+ COLLABORATE WITH PARTNERS -- We intend to market our systems to each of our
targeted market segments principally through partners to provide marketing,
sales, service and distribution. We have entered into a distribution
agreement with Fisher Scientific for the life sciences research market and in
May 2000 commenced sales of the Smart Cycler system in this market. Upon
receipt of necessary regulatory and other approvals, we intend to enter into
the clinical diagnostics market, initially through collaborative arrangements
with Innogenetics and Infectio Diagnostic. Our research also indicated that
significant opportunities exist in the industrial testing and
pharmacogenomics markets, and we have commenced discussions with potential
collaborative partners to penetrate these markets. We will utilize our
partners to develop chemistries for assays; and
+ GENERATE RECURRING REVENUE FROM DISPOSABLE PRODUCTS -- We expect to generate
recurring revenue from the manufacture and sale of our single use reaction
tubes and integrated sample preparation cartridges.
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5
<PAGE> 10
The offering
The following information assumes that the underwriters do not exercise the
over-allotment option granted to them to purchase additional shares in the
offering.
Common stock we are offering........ 5,000,000 shares
Common stock to be outstanding after
the offering........................ 25,515,430 shares
Proposed Nasdaq National Market
symbol.............................. CPHD
Use of proceeds..................... To fund our research and development
activities, expand manufacturing and
customer service for existing products,
continue development and manufacturing
of additional products, for other
working capital and general corporate
purposes, for capital expenditures and
to support possible acquisitions and
strategic investments. See "Use of
proceeds."
Unless we indicate otherwise, when analyzing the information in this prospectus,
you should assume that all outstanding shares of our preferred stock convert
into 13,326,636 shares of our common stock upon the closing of this offering.
The number of shares of common stock to be outstanding after the offering in the
table above is based on the number of shares outstanding as of March 31, 2000,
excluding:
+ 540,276 shares issuable upon the exercise of options at a weighted average
exercise price of $2.39 per share;
+ 320,397 shares issuable upon the exercise of warrants at a weighted average
exercise price of $2.49 per share;
+ 892,930 additional shares available for future grant under our 1997 Stock
Option Plan;
+ 200,000 additional shares available for future grant under our 2000
Non-Employee Directors' Stock Option Plan; and
+ 200,000 additional shares available for future purchase under our 2000
Employee Stock Purchase Plan.
In addition, we have agreed to issue an additional 750,000 shares if the
underwriters exercise their over-allotment option in full, which we describe in
"Underwriting." If the underwriters exercise this option in full, 26,265,430
shares of our common stock will be outstanding after this offering.
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6
<PAGE> 11
Summary consolidated financial data
The as adjusted consolidated balance sheet reflects the receipt of the net
proceeds from the sale of 5,000,000 shares of our common stock in this offering,
after deducting the underwriting discounts and commissions and estimated
offering expenses. The pro forma net loss per share and shares used in computing
pro forma net loss per share are calculated as if all of our convertible
preferred stock was converted into shares of our common stock on the date of
their issuance. The statement of operations for the year ended December 31, 1997
included approximately $95,000 of expenses incurred from our inception (March 4,
1996) through December 31, 1996 related to fund raising activities. Although we
were formed in March 1996, we did not receive our initial financing until March
1997.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(MARCH 4, (MARCH 4,
1996) THROUGH YEAR ENDED 1996) THROUGH THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999 1999 1999 2000
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................... $ 1,445 $ 3,577 $ 3,595 $ 8,617 $ 615 $ 916
Operating costs and expenses:
Cost of product sales........... -- -- 97 97 -- 131
Research and development........ 2,220 5,990 10,262 18,472 2,282 3,467
Selling, general and
administrative................ 583 1,178 1,297 3,058 289 730
------- ------- ------- -------- -------- --------
Total costs and operating
expenses................. 2,803 7,168 11,656 21,627 2,571 4,328
Loss from operations.............. (1,358) (3,591) (8,061) (13,010) (1,956) (3,412)
Interest income................... 88 325 250 663 104 202
Interest and other expense........ (4) (45) (108) (157) (19) (43)
------- ------- ------- -------- -------- --------
Net loss.......................... (1,274) (3,311) (7,919) (12,504) (1,871) (3,253)
Deemed dividend to preferred
shareholders.................... -- -- -- -- -- 19,114
------- ------- ------- -------- -------- --------
Net loss allocable to common
shareholders.................... $(1,274) $(3,311) $(7,919) $(12,504) $ (1,871) $(22,367)
------- ------- ------- -------- -------- --------
------- ------- ------- -------- -------- --------
Basic and diluted net loss per
common share.................... $ (7.61) $ (1.37) $ (1.90) $ (0.55) $ (4.42)
------- ------- ------- -------- --------
------- ------- ------- -------- --------
Shares used in computing basic and
diluted net loss per common
share........................... 167 2,414 4,164 3,415 5,065
Pro forma basic and diluted net
loss per common share........... $ (0.71) $ (1.22)
------- --------
------- --------
Shares used in computing pro forma
basic and diluted net loss per
common share.................... 11,111 18,391
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
ACTUAL AS ADJUSTED
CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS)
------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents................................... $ 18,420 $ 45,020
Working capital............................................. 17,264 43,864
Total assets................................................ 22,087 48,687
Long-term portion of debt and capital lease obligations..... 1,071 1,071
Deficit accumulated during the development stage............ (15,757) (15,757)
Total shareholders' equity.................................. 18,546 45,146
</TABLE>
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7
<PAGE> 12
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Risk factors
You should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could be harmed. In such an event, the
trading price of our common stock could decline, and you may lose all or part of
your investment.
RISKS RELATED TO OUR BUSINESS
WE ARE HEAVILY DEPENDENT ON THE EFFORTS OF FISHER SCIENTIFIC FOR THE MARKETING
AND SALE OF OUR FIRST PRODUCT. IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE,
WE WILL NOT ACHIEVE PROFITABILITY.
Our technologies are still in the early stages of development. We commenced
commercial sale of our first product, the Smart Cycler system, for the life
sciences research market in the first half of 2000. Fisher Scientific is the
co-exclusive distributor of our Smart Cycler system for the life sciences
research market. We will be substantially dependent on Fisher Scientific for the
marketing and sales of the Smart Cycler system and we will have little ability
to influence its efforts. If our Smart Cycler system is not successful, this
could have a negative impact on our ability to sell future systems. If our
systems do not gain market acceptance, we will be unable to generate significant
sales, which will prevent us from achieving profitability. Market acceptance
will depend on many factors, including:
+ our ability and the ability of our collaborators to convince our potential
customers of the advantages and economic value of our systems over
well-established technologies and products;
+ our ability and the ability of our collaborators to sell our systems; and
+ the success of our competitors' efforts to market and sell their products.
Our systems have been in operation for a limited period of time. As a result we
have not fully established their accuracy, reliability or ease of operation in
commercial use. If our Smart Cycler systems are not accepted in the marketplace,
this could have a negative effect on our ability to sell subsequent systems.
WE EXPECT TO INCUR FUTURE OPERATING LOSSES AND MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
We have experienced significant operating losses each year since our inception
and expect to incur substantial additional operating losses at least through
2002, primarily as a result of expected increases in expenses for manufacturing
capabilities, research and product development costs and selling, general and
administrative costs. We may never achieve profitability. For example, we
experienced net losses of approximately $1.3 million in the period from
inception (March 4, 1996) to December 31, 1997, $3.3 million in 1998, $7.9
million in 1999 and $3.3 million for the three months ended March 31, 2000. As
of March 31, 2000, we had an accumulated deficit of approximately $15.8 million.
Our losses have resulted principally from costs incurred in research and
development and from selling, general and administrative costs associated with
our operations.
WE DEPEND ON COLLABORATIONS WITH OTHER COMPANIES TO COMMERCIALIZE OUR PRODUCTS.
IF OUR COLLABORATORS ARE UNSUCCESSFUL OR IF WE ARE NOT ABLE TO FIND PROSPECTIVE
COLLABORATORS, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS.
We have entered into non-exclusive collaborations with Innogenetics and Infectio
Diagnostics whereby our partners will provide funding to support the development
and engineering efforts required to adapt
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8
<PAGE> 13
RISK FACTORS
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our systems to meet their specific market needs. Through these collaborations,
we also intend to rely upon our partners to provide the marketing, sales,
service and distribution functions. We only intend to develop a limited internal
capability for these functions. These contracts expire after a fixed period of
time. If they are not renewed or if we do not enter into new collaboration
agreements, our revenues will be reduced and our products may not be
commercialized. Our collaborators have the responsibility, where required, to
apply for the regulatory approval of any products to the US Food and Drug
Administration, or FDA, and corresponding regulatory agencies in other
countries. In addition, our collaborators may require a license for the
chemistries used in our products. Although we believe our collaborators have an
economic motivation to succeed in performing their contractual responsibilities,
we have limited or no control over the resources that any collaborator may
devote to our products. Any of our present or future collaborators may not
perform their obligations as expected. These collaborators may breach or
terminate their agreements with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner. Further, our
collaborators may not devote sufficient resources to the marketing, sale,
service or distribution of these products. If any of these events occur, we may
not be able to commercialize our products.
WE WILL REQUIRE A LICENSE FOR THERMAL CYCLING IN THE FIELD OF CLINICAL
DIAGNOSTICS AND OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO OBTAIN SUCH
LICENSE.
We have licensed patents from PE Biosystems for thermal cycling limited to the
fields of life sciences research, industrial testing, aspects of identity
testing and forensics. This license will terminate upon expiration of the last
to expire of the licensed patents. However, we will require an additional
license from PE Biosystems for thermal cycling in the clinical diagnostics
field. Although there are non-thermal cycling applications for our products in
the clinical diagnostics field, we believe that the thermal cycling applications
in this field are very important to our business and growth prospects. We may
not be able to obtain this additional license on reasonable terms, or at all. PE
Biosystems competes with us in the sale of thermal cycling equipment. If we are
unable to obtain this additional license, we may be unable to sell our products
for thermal cycling in the field of clinical diagnostics. This would reduce the
market for our products and reduce our future revenues.
MANY COMPETITORS AND POTENTIAL COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES
THAT MAKE OUR PRODUCTS OBSOLETE.
We expect to encounter intense competition from a number of companies that offer
products in our targeted application areas. We anticipate that these competitors
will include:
+ companies developing and marketing life sciences research products;
+ health care companies that manufacture laboratory-based tests and analyzers;
+ diagnostic and pharmaceutical companies; and
+ companies developing drug discovery technologies.
If we succeed in developing products in these areas, we will face competition
from both established and development-stage companies that continually enter
these markets.
In many instances, our competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organization than we have. Moreover, these
competitors may offer broader product lines and tactical discounts, and have
greater name recognition.
In addition, several companies are currently making or developing products that
may or will compete with our products. Our competitors may succeed in
developing, obtaining FDA approval for or
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RISK FACTORS
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marketing technologies or products that are more effective or commercially
attractive than our potential products or that render our technologies and
potential products obsolete. As these companies develop their technologies, they
may develop proprietary positions that may prevent us from successfully
commercializing our products.
Also, we may not have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in the future.
WE EXPECT THAT OUR OPERATING RESULTS WILL FLUCTUATE SIGNIFICANTLY AND ANY
FAILURE TO MEET FINANCIAL EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR
INVESTORS AND RESULT IN A DECLINE IN OUR STOCK PRICE.
We expect that our quarterly operating results will fluctuate in the future as a
result of many factors, some of which are outside of our control. We expect our
gross profit to fluctuate depending upon the timing of introduction and
acceptance of our products. In addition, our operating results may be effected
by the inability of some of our customers to consummate anticipated purchases of
our products, whether due to changes in internal priorities or, in the case of
governmental customers, problems with the appropriations process. It is possible
that in some future quarter or quarters our operating results will be below the
expectations of securities analysts or investors. In this event, the market
price of our common stock may fall abruptly and significantly. Because our
revenue and operating results are difficult to predict, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance.
If revenue declines in a quarter, whether due to a delay in recognizing expected
revenue or otherwise, our earnings will decline because many of our expenses are
relatively fixed. In particular, research and development and selling, general
and administrative expenses are not significantly affected by variations in
revenue.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY REQUIRE COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD ALSO CAUSE US
TO PAY SUBSTANTIAL DAMAGES AND LIMIT OUR ABILITY TO SELL SOME OR ALL OF OUR
PRODUCTS.
Our market success depends in part on us neither infringing valid, enforceable
patents or proprietary rights of third parties, nor breaching any licenses that
may relate to our technologies and products. We are aware of third-party patents
that may relate to our technology. It is possible that we may unintentionally
infringe upon these patents or proprietary rights of third parties.
In response, third parties may assert infringement or other intellectual
property claims against us. We may consequently be subjected to substantial
damages for past infringement if it is ultimately determined that our products
infringe a third party's proprietary rights. Further, we may be prohibited from
selling our products before we obtain a license, which, if available at all, may
require us to pay substantial royalties. Even if these claims are without merit,
defending a lawsuit takes significant time, may be expensive and may divert
management attention from other business concerns. Any public announcements
related to litigation or interference proceedings initiated or threatened
against us could cause our stock price to decline.
WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS, WHICH WOULD
BE EXPENSIVE AND, IF WE LOSE, MAY CAUSE US TO LOSE SOME, IF NOT ALL, OF OUR
INTELLECTUAL PROPERTY RIGHTS, AND THEREBY IMPAIR OUR ABILITY TO COMPETE IN THE
MARKET.
We rely on patents to protect a large part of our intellectual property and our
competitive position. In order to protect or enforce our patent rights, we may
initiate patent litigation against third parties, such as infringement suits or
interference proceedings. These lawsuits could be expensive, take
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RISK FACTORS
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significant time and divert management's attention from other business concerns.
They would put our patents at risk of being invalidated or interpreted narrowly
and our patent applications at risk of not issuing. We may also provoke these
third parties to assert claims against us. Patent law relating to the scope of
claims in the technology fields in which we operate is still evolving and,
consequently, patent positions in our industry are generally uncertain. We
cannot assure you that we will prevail in any of these suits or that the damages
or other remedies awarded, if any, will be commercially valuable. During the
course of these suits, there may be public announcements of the results of
hearings, motions and other interim proceedings or developments in the
litigation. If securities analysts or investors perceive any of these results to
be negative, it could cause our stock to decline.
THE RIGHTS WE RELY UPON TO PROTECT THE INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE THE
TECHNOLOGY AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
Our competitive success will be affected in part by our continued ability to
obtain and maintain patent protection on our inventions, technologies and
discoveries, including intellectual property that we license. Our pending patent
applications may lack priority over others' applications or may not result in
the issuance of patents. Even if issued, our patents may not be sufficiently
broad to provide protection against competitors with similar technologies and
may be challenged, invalidated or circumvented.
In addition to patents, we rely on a combination of trade secrets, copyright and
trademark laws, nondisclosure agreements, licenses and other contractual
provisions and technical measures to maintain and develop our competitive
position via our intellectual property rights. Nevertheless, these measures may
not be adequate to safeguard the technology underlying our products. If
inadequately protected, third parties could use our technology, and our ability
to compete in the market would be reduced. In addition, employees, consultants
and others who participate in the development of our products may breach their
agreements with us regarding our intellectual property. We may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside of the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology. Our competitors may also develop similar products
without infringing on any of our intellectual property rights or design around
our proprietary technologies.
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING, UNCERTAIN AND MAY
PREVENT US FROM OBTAINING REQUIRED APPROVALS FOR THE COMMERCIALIZATION OF SOME
OF OUR PRODUCTS.
Some of our products, depending upon their intended use, will be subject to
approval or clearance by the FDA or foreign governmental entities prior to their
marketing for commercial use. Products used for clinical diagnostic purposes
will require such approval. To date, we have not sought approval from the FDA or
any foreign governmental body for the commercial sale of any of our products.
The process of obtaining necessary FDA or foreign clearance or approvals can be
lengthy, expensive and uncertain. We expect our collaborators generally to
direct the regulatory approval process for many of our products. There are no
assurances that they will timely and diligently pursue such process, or that
they or we can obtain any required clearance or approval. Any such failure, or
any material delay in obtaining the clearance or approval, could harm our
business, financial condition and results of operations.
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In addition, our failure or the failure of our collaborators to comply with
regulatory requirements applicable to our products could result in significant
sanctions, including:
+ injunctions;
+ recall or seizure of products;
+ withdrawal of marketing clearances or approvals; and
+ fines, civil penalties and criminal prosecutions.
RESTRICTIONS ON REIMBURSEMENT FROM THIRD PARTY PAYORS OF THE COST TO PATIENTS OF
OUR PRODUCTS MAY LIMIT OUR ABILITY TO SELL PRODUCTS IN SOME MARKETS.
Our ability to sell our products in the clinical diagnostics market will depend
in part on the extent to which reimbursement for our products and related
treatments will be available from:
+ government health administration authorities;
+ private health coverage insurers;
+ managed care organizations; and
+ other organizations.
If appropriate reimbursement cannot be obtained, it could prevent us from
successfully commercializing some of our potential products.
There are efforts by governmental and third-party payors to contain or reduce
the costs of health care through various means. Additionally, third-party payors
are increasingly challenging the price of medical products and services. If
purchasers or users of our products are not able to obtain adequate
reimbursement for the cost of using our products, they may forego or reduce
their use. Significant uncertainty exists as to the reimbursement status of
newly approved health care products and whether adequate third-party coverage
will be available.
WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO
COMPETE.
We are highly dependent on the principal members of our management and
scientific staff. The loss of services of any of these persons could seriously
harm our product development and commercialization efforts. In addition, we will
require additional skilled personnel in areas such as manufacturing, quality
control, project management, microbiology, software engineering, mechanical
engineering and electrical engineering. Our business is located in Silicon
Valley, California, where demand for personnel with these skills is extremely
high and is likely to remain high. As a result, competition for and retention of
personnel, particularly for employees with technical expertise, is intense and
the turnover rate is high. If we are unable to hire, train and retain a
sufficient number of qualified employees, our ability to conduct and expand our
business could be seriously reduced. The inability to retain and hire qualified
personnel could also hinder the planned expansion of our business.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR SYSTEMS AND MAY ENCOUNTER
MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.
We intend initially to manufacture our own systems. We currently have limited
manufacturing capacity for our systems. If we fail to manufacture and deliver
products in a timely manner, our relationships with our customers could be
seriously harmed, and revenue would decline. We have only recently begun to
manufacture our Smart Cycler systems and are continuing to develop our quality
control procedures. We cannot assure you that manufacturing or quality control
problems will not arise as we
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RISK FACTORS
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attempt to scale-up our production of Smart Cycler systems or that we can
scale-up manufacture and quality control in a timely manner or at commercially
reasonable costs. If we are unable to manufacture Smart Cycler systems or our
disposable reaction tubes consistently on a timely basis because of these or
other factors, our product sales will decline. Our Smart Cycler systems largely
require manual assembly. We are currently manufacturing Smart Cycler systems and
disposable reaction tubes in-house, in limited volumes. If demand for our
products increases significantly, we will either need to expand our in-house
manufacturing capabilities or outsource to other manufacturers.
Our manufacturing facilities are subject to periodic regulatory inspections by
the FDA and other federal and state regulatory agencies. These facilities are
subject to Quality System Regulations, or QSR, requirements of the FDA. If we
fail to maintain facilities in accordance with QSR regulations, other
international quality standards or other regulatory requirements, then the
manufacturing process could be suspended or terminated, which would impair our
business.
WE RELY ON SINGLE SOURCE SUPPLIERS FOR SOME OF OUR PRODUCT COMPONENTS THAT COULD
IMPAIR OUR MANUFACTURING ABILITY.
We depend on long term delivery contracts with four separate single source
suppliers that supply several components used in the manufacture of our Smart
Cycler. If we need alternative sources for key component parts for any reason,
such component parts may not be immediately available. If alternative suppliers
are not immediately available, we will have to identify and qualify alternative
suppliers, and production of such components may be delayed. We may not be able
to find an adequate alternative supplier in a reasonable time period, or on
commercially acceptable terms, if at all. Our inability to obtain a key source
supplier for the manufacture of our potential products may force us to curtail
or cease operations.
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD REDUCE OUR
ABILITY TO COMPETE AND RESULT IN LOWER REVENUE.
We anticipate that our existing capital resources and the net proceeds from this
offering will enable us to maintain currently planned operations through at
least the year 2001. However, we premise this expectation on our current
operating plan, which may change as a result of many factors, including market
acceptance of our Smart Cycler system and future opportunities with
collaborators. Consequently, we may need additional funding sooner than
anticipated. Our inability to raise capital would seriously harm our business
and product development efforts.
In addition, we may choose to raise additional capital due to market conditions
or strategic considerations even if we believe we have sufficient funds for our
current or future operating plans. To the extent that additional capital is
raised through the sale of equity or convertible debt securities, the issuance
of these securities could result in dilution to our shareholders.
We currently have no credit facility or committed sources of capital. To the
extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the development
and commercialization of our technologies. These funds may not be available on
favorable terms, or at all. If adequate funds are not available on attractive
terms, we may be required to curtail operations significantly or to obtain funds
by entering into financing, supply or collaboration agreements on unattractive
terms.
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RISK FACTORS
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IF A NATURAL DISASTER STRIKES OUR MANUFACTURING FACILITIES WE MAY BE UNABLE TO
MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND WE WOULD
EXPERIENCE LOST REVENUE.
Our manufacturing facilities are located in Sunnyvale, California. The
facilities and some pieces of manufacturing equipment are difficult to replace
and could require substantial replacement lead-time. Our manufacturing
facilities may be affected by natural disasters such as earthquakes and floods.
Earthquakes are of particular significance since the manufacturing facilities
are located in an earthquake-prone area. In the event our existing manufacturing
facilities or equipment is affected by man-made or natural disasters, we may be
unable to manufacture products for sale, meet customer demands or sales
projections. If our manufacturing operations were curtailed or ceased, it would
seriously harm our business.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER
HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND
COSTLY.
Our research and development processes involve the controlled storage, use and
disposal of hazardous materials, including biological hazardous materials. We
are subject to federal, state and local regulations governing the use,
manufacture, storage, handling and disposal of materials and waste products.
Although we believe that our safety procedures for handling and disposing of
these hazardous materials comply with the standards prescribed by law and
regulation, the risk of accidental contamination or injury from hazardous
materials cannot be eliminated completely. In the event of an accident, we could
be held liable for any damages that result, and any liability could exceed the
limits or fall outside the coverage of our insurance. We may not be able to
maintain insurance on acceptable terms, or at all. We could be required to incur
significant costs to comply with current or future environmental laws and
regulations.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE.
We face an inherent business risk of exposure to product liability claims if our
technologies or systems are alleged to have caused harm. We may not be able to
obtain insurance for such potential liability on acceptable terms with adequate
coverage or may be excluded from coverage under the terms of the policy. We may
not be able to maintain insurance on acceptable terms, or at all.
RISKS RELATED TO THIS OFFERING
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the book value
per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $4.23 in net tangible book
value per share of common stock. In addition, the number of shares available for
issuance under our stock option and employee stock purchase plans will
automatically increase without shareholder approval. You will incur additional
dilution upon the exercise of outstanding stock options and warrants. See
"Dilution" for a more detailed discussion of the dilution you will incur in this
offering.
OUR STOCK PRICE COULD BE VOLATILE, AND YOUR INVESTMENT COULD SUFFER A DECLINE IN
VALUE.
The trading price of our common stock is likely to be volatile and could be
subject to wide price fluctuations in response to various factors, many of which
are beyond our control, including:
+ announcements or introduction of technological innovations by us or our
competitors;
+ changes in financial estimates by securities analysts;
+ conditions or trends in the biotechnology and pharmaceutical industries;
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+ announcements by us of significant acquisitions, financings or strategic
partnerships; and
+ sales of our common stock.
In addition, the stock market in general, and the Nasdaq National Market and the
biotechnology industry market in particular, have experienced significant price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of those companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance. In the past, securities class action litigation has
often been instituted following periods of volatility in the market price of a
company's securities. A securities class action suit against us could result in
substantial costs, potential liabilities and the diversion of our management's
attention and resources.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
Following this offering our directors, entities affiliated with our directors
and our executive officers will beneficially own, in the aggregate approximately
23.5% of our outstanding common stock. These shareholders as a group will be
able to influence our management and affairs and, if acting together, will be
able to significantly influence most matters requiring the approval by our
shareholders, including the election of directors, any merger, consolidation or
sale of all or substantially all of our assets and any other significant
corporate transaction. This concentration of ownership may also delay or prevent
a change of control of our company at a premium price if these shareholders
oppose it. See "Principal shareholders" for details on our stock ownership.
OUR ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS AND
THUS LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY FOR OUR COMMON STOCK IN
THE FUTURE.
The provisions of our articles of incorporation that eliminate cumulative
voting, create a staggered board of directors and authorize our board of
directors to issue preferred stock with rights superior to our common stock
could discourage a third party from acquiring, or make it more difficult for a
third party to acquire, control of us without approval of our board of
directors. Such provisions could also limit the price that investors might be
willing to pay for shares of our common stock in the future.
THERE IS A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public market
following this offering could cause the market price of our common stock to
decline. If there are more shares of our common stock offered for sale than
buyers are willing to purchase, then the market price of our common stock may
decline to a market price at which buyers are willing to purchase the offered
shares of common stock and sellers remain willing to sell the shares.
There will be 25,515,430 shares of common stock outstanding immediately after
this offering, or 26,265,430 shares if the representatives of the underwriters
exercise their over-allotment option in full. All of the shares sold in the
offering will be freely tradable without restriction or further registration
under the Securities Act, except for any shares purchased by our "affiliates" as
defined in Rule 144 of the Securities Act.
All of our existing shareholders have executed lock-up agreements. Those lock-up
agreements restrict all of our existing shareholders from selling, pledging or
otherwise disposing of their shares for a period of 180 days after the date of
this prospectus without the prior written consent of UBS Warburg LLC. However,
UBS Warburg LLC may, in its sole discretion, release all or any portion of the
common stock from the restrictions of the lock-up agreements.
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Forward-looking information
Some of the statements under "Prospectus summary," "Risk factors," "Management's
discussion and analysis of financial condition and results of operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by any forward-looking statements. Some of these factors are listed
under "Risk factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "intends," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of those statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform them to actual results.
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Use of proceeds
We estimate that the net proceeds from the sale of the shares of common stock we
are offering will be approximately $26.6 million, after deducting the
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be approximately $30.8 million.
We currently intend to use the net proceeds to fund our research and development
activities, expand manufacturing and customer service for existing products and
continue development and manufacturing of additional products, for other working
capital and general corporate purposes and for capital expenditures. Although we
have no current plans, agreements or commitments with respect to any
acquisition, we may, if the opportunity arises, use an unspecified portion of
the net proceeds to acquire or invest in products, technologies or companies.
Our management may spend the proceeds from this offering in ways which the
shareholders may not deem desirable.
The timing and amount of our actual expenditures will be based on many factors,
including cash flows from operations and the growth of our business.
Until we use the net proceeds of this offering for the above purposes, we intend
to invest the funds in short-term, investment grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.
Dividend policy
We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends in the foreseeable future. Any future determination relating to
our dividend policy will be made at the discretion of our board of directors and
will depend on a number of factors, including future earnings, capital
requirements, financial conditions and future prospects and other factors the
board of directors may deem relevant.
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Capitalization
The following table sets forth our capitalization as of March 31, 2000:
+ on an actual basis;
+ on a pro forma basis as of such date to reflect the automatic conversion
prior to the closing of this offering of all outstanding shares of preferred
stock into 13,326,636 shares of common stock and the filing of amended and
restated articles of incorporation to increase the number of common shares
authorized; and
+ on a pro forma as adjusted basis to reflect the sale of the common stock
offered by this prospectus, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, and to reflect the
use of the offering proceeds.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(In thousands, except share data)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equipment financing, less current portion................ $ 1,071 $ 1,071 $ 1,071
-------- -------- --------
Shareholders' equity:
Preferred stock, no par value, no shares authorized,
issued or outstanding, actual and pro forma; 5,000,000
authorized, no shares issued and outstanding, pro forma
as adjusted............................................ -- -- --
Convertible preferred stock, no par value, 14,000,000
shares authorized, actual; no shares authorized, pro
forma and pro forma as adjusted; 13,326,636 shares
issued and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as adjusted....... 32,680 -- --
Common stock, no par value, 30,000,000 shares authorized,
actual and pro forma; 100,000,000 pro forma as
adjusted; 7,188,794 shares issued and outstanding,
actual; 20,515,430 shares issued and outstanding, pro
forma; 25,515,430 shares issued and outstanding, pro
forma as adjusted...................................... 698 33,378 59,978
Additional paid-in capital............................... 6,318 6,318 6,318
Note receivable from shareholder......................... (69) (69) (69)
Deferred stock-based compensation........................ (5,324) (5,324) (5,324)
Deficit accumulated during the development stage......... (15,757) (15,757) (15,757)
-------- -------- --------
Total shareholders' equity..................... 18,546 18,546 45,146
-------- -------- --------
Total capitalization........................... $ 19,617 $ 19,617 $ 46,217
======== ======== ========
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of March 31, 2000 and excludes:
+ 540,276 shares issuable upon the exercise of options at a weighted average
exercise price of $2.39 per share;
+ 320,397 shares issuable upon the exercise of warrants at a weighted average
exercise price of $2.49 per share;
+ 892,930 additional shares available for future grant under our 1997 Stock
Option Plan;
+ 200,000 additional shares available for future grant under our 2000
Non-Employee Directors' Stock Option Plan; and
+ 200,000 additional shares available for future purchase under our 2000
Employee Stock Purchase Plan.
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Dilution
Our historical net tangible book value as of March 31, 2000 was approximately
$18.5 million, or $2.58 per common share, based on the number of common shares
outstanding as of March 31, 2000. Historical net tangible book value per share
is equal to the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding as of March 31,
2000.
Our pro forma net tangible book value as of March 31, 2000 was approximately
$18.5 million, or $0.90 per share, based on the pro forma number of shares
outstanding as of March 31, 2000 of 20,515,430, calculated after giving effect
to the automatic conversion of 13,326,636 shares of our preferred stock
outstanding as of March 31, 2000 into 13,326,636 shares of our common stock.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards, after giving effect to the sale of
5,000,000 shares in this offering. This represents an immediate increase in pro
forma net tangible book value of $0.87 per share to existing shareholders and in
immediate dilution in pro forma net tangible book value of $4.23 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $6.00
Historical net tangible book value per share as of March
31, 2000............................................... $ 2.58
Decrease attributable to conversion of preferred stock.... (1.68)
------
Pro forma net tangible book value per share as of March
31, 2000............................................... 0.90
Increase attributable to the offering..................... 0.87
------
Net tangible book value per share after the offering........ 1.77
-----
Dilution per share to new investors......................... $4.23
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000, after
giving effect to this offering, the total number of shares of common stock
purchased from us and the total consideration and the average price per share
paid by existing shareholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Existing shareholders.......... 20,515,430 80% $33,500,923 53% $1.63
New investors.................. 5,000,000 20 30,000,000 47 $6.00
---------- ---- ----------- ----
Total..................... 25,515,430 100% $63,500,923 100% $2.49
========== ==== =========== ====
</TABLE>
The number of shares of common stock outstanding in the table above is based on
the number of shares outstanding as of March 31, 2000 and excludes:
+ 540,276 shares issuable upon the exercise of options at a weighted average
exercise price of $2.39 per share;
+ 320,397 shares issuable upon the exercise of warrants at a weighted average
exercise price of $2.49 per share;
+ 892,930 additional shares available for future grant under our 1997 Stock
Option Plan;
+ 200,000 additional shares available for future grant under our 2000
Non-Employee Directors' Stock Option Plan; and
+ 200,000 additional shares available for future purchase under our 2000
Employee Stock Purchase Plan.
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<PAGE> 24
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Selected consolidated financial data
The following tables contain selected consolidated financial data as of and for
each of the three fiscal periods ended December 31, 1997, 1998 and 1999 and have
been derived from our consolidated financial statements, which have been audited
by Ernst & Young LLP, independent auditors. The consolidated statement of
operations data for the three month periods ended March 31, 1999 and 2000 and
the consolidated balance sheet data as of March 31, 2000 are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus and include all adjustments consisting only of normal, recurring
adjustments, which we consider necessary for a fair presentation of the data.
The selected consolidated financial data should be read in conjunction with our
consolidated financial statements and the notes to those consolidated financial
statements and Management's discussion and analysis of financial condition and
results of operations included elsewhere in this prospectus. Historical results
are not necessarily indicative of the results to be expected in the future.
The pro forma net loss per share and shares used in computing pro forma net loss
per share are calculated as if all of our convertible preferred stock was
converted into shares of common stock on the date of their issuance. The
statement of operations for the year ended December 31, 1997 included
approximately $95,000 of expenses incurred from our inception (March 4, 1996)
through December 31, 1996 related to fund raising activities. Although we were
formed in March 1996, we did not receive our initial financing until March 1997.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION PERIOD FROM
(MARCH 4, 1996) (MARCH 4, 1996) INCEPTION
THROUGH YEAR ENDED THROUGH THREE MONTHS (MARCH 4, 1996)
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31, THROUGH
CONSOLIDATED STATEMENT 1997 1998 1999 1999 1999 2000 MARCH 31, 2000
OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.............. $ 1,445 $ 3,577 $ 3,595 $ 8,617 $ 615 $ 916 $9,533
Operating costs and
expenses:
Cost of product sales...... -- -- 97 97 -- 131 228
Research and development... 2,220 5,990 10,262 18,472 2,282 3,467 21,939
Selling, general and
administrative........... 583 1,178 1,297 3,058 289 730 3,788
----- ----- ----- ------- ----- ----- -----
Total costs and operating
expenses................... 2,803 7,168 11,656 21,627 2,571 4,328 25,955
----- ----- ----- ------- ----- ----- -----
Loss from operations........ (1,358) (3,591) (8,061) (13,010) (1,956) (3,412) (16,422)
Interest income............. 88 325 250 663 104 202 865
Interest expense............ (4) (45) (108) (157) (19) (43) (200)
----- ----- ----- ------- ----- ----- -----
Net loss.................... (1,274) (3,311) (7,919) (12,504) (1,871) (3,253) (15,757)
Deemed dividend to preferred
shareholders............... -- -- -- -- -- (19,114) (19,114)
----- ----- ----- ------- ----- ----- -----
Net loss allocable to common
shareholders............... $(1,274) $(3,311) $(7,919) $(12,504) $(1,871) $(22,367) $(34,871)
----- ----- ----- ------- ----- ----- -------
----- ----- ----- ------- ----- ----- -------
Basic and diluted net loss
per common share........... $ (7.61) $ (1.37) $ (1.90) $ (0.55) $ (4.42)
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Shares used in computing
basic and diluted net loss
per common share........... 167 2,414 4,164 3,415 5,065
Pro forma basic and diluted
net loss per common
share...................... $ (0.71) $ (1.22)
----- -----
----- -----
Shares used in computing pro
forma basic and diluted net
loss per common share...... 11,111 18,391
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
1997 1998 1999 2000
(In thousands)
CONSOLIDATED BALANCE SHEET DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash, cash equivalents and short term investments........ $ 1,120 $ 8,676 $ 1,493 $ 18,420
Restricted cash.......................................... 300 300 -- --
Working capital.......................................... 1,188 8,347 732 17,264
Total assets............................................. 2,453 11,042 4,886 22,087
Long-term debt, net of current portion................... 88 531 1,205 1,071
Deficit accumulated during development stage............. (1,274) (4,586) (12,504) (15,757)
Total shareholders' equity............................... 1,909 9,175 1,557 18,546
</TABLE>
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Management's discussion and analysis of financial condition
and results of operations
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and the
notes to those consolidated financial statements included elsewhere in this
prospectus. This discussion may contain forward-looking statements that involve
risks and uncertainties. As a result of many factors, such as those set forth
under "Risk factors," and elsewhere in this prospectus, our actual results may
differ materially from those anticipated in these forward-looking statements.
OVERVIEW
From inception in March 1996 through March 2000, our operating activities were
primarily devoted to research and development of our core technologies,
development of our first-generation products such as the Smart Cycler system and
the GeneXpert system, recruiting personnel, business development, raising
capital and acquiring assets. In the last half of 1999, we recognized revenue
from our first product sales when we sold prototype versions of our Smart Cycler
system for DNA amplification and detection to two customers. In May 2000, Fisher
Scientific, our distributor to the life sciences research market, commenced
commercial sales of our Smart Cycler system.
Since inception, we have incurred significant losses and, as of March 31, 2000,
we had an accumulated deficit of $15.8 million. We anticipate incurring
additional losses, which may increase, through at least 2002 as we increase our
commercialization activity. Our losses have resulted from research and
development, manufacturing scale-up and selling, general and administrative
costs associated with our operations. We expect to incur increasing research and
development and manufacturing scale-up costs. We expect that our selling,
general and administrative expenses will increase as we commercialize our
products and incur the obligations of a public reporting company. In 2000 we
expect to incur additional costs resulting from facilities expansion. As a
result, we will need to generate significantly higher revenue to achieve
profitability.
Our revenue has been derived from grants and government-sponsored research, and
research and development contracts with commercial partners. Although we
introduced our Smart Cycler system in May 2000 and are developing new products
and plan to introduce future products, we cannot assure you that we will be
successful in these efforts.
We anticipate that our quarterly results of operations will fluctuate due to
several factors, including market evaluation and acceptance of current or new
products, the success and timing of signing new customer or collaboration
agreements, the timing of commercial availability of new applications for our
products and the timing and extent of our research and development efforts.
Deferred stock-based compensation represents the difference between the fair
value of our common stock and the exercise price of options on the date of
grant. The fair value of our common stock for purposes of this calculation was
determined based on our review of the primary business factors underlying the
value of our common stock on the date such option grants were made, viewed in
light of this offering and the expected initial public offering price per share.
During the year ended December 31, 1999, we recorded deferred stock-based
compensation totaling $736,000. Additional deferred stock-based compensation
totaling $5.4 million was recorded for options granted during the quarter ended
March 31, 2000. These amounts are included as a reduction to shareholders'
equity and are being amortized over the respective vesting periods of the
individual stock options, which vesting is generally four years. We recorded
amortization of deferred compensation of $184,000 for the year
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
ended December 31, 1999 and $615,000 for the three months ended March 31, 2000.
We expect to record amortization expense for deferred compensation with respect
to options granted as of March 31, 2000 as follows: $2.6 million during the
remainder of 2000, $1.7 million during 2001, $768,000 during 2002, $245,000
during 2003 and $3,000 during 2004. The amount of deferred compensation expense
to be recorded in future periods may decrease if unvested options for which
deferred compensation has been recorded are subsequently canceled.
We determined compensation for options granted to non-employees in accordance
with Statement of Financial Accounting Standards No. 123 and the Emerging Issues
Task Force Consensus No. 96-18 as the fair value of the equity instruments
issued. We record compensation for options granted to non-employees as the
related services are rendered, and the value of the compensation may be
periodically remeasured and the expense adjusted accordingly as the underlying
options vest. We recorded an aggregate of $30,000 as a research and development
expense in the year ended December 31, 1999 and $165,000 for the three months
ended March 31, 2000 for non-employee stock-based compensation. The aggregate
value of $1.6 million, based on the deemed fair value of our common stock at
March 31, 2000, will be recorded as a research and development expense over the
period of the related services, which is generally three months to two years.
This expense will be based on the fair value of the stock option using the
Black-Scholes option valuation model and may be periodically remeasured and the
expense adjusted accordingly as the underlying options vest.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Revenues increased to $916,000 in the three months ended March 31, 2000 from
$615,000 in the three months ended March 31, 1999. The components of this
increase were a $391,000 increase in grant and government-sponsored research
revenue, a $151,000 increase in product sales, and a decrease of $241,000 in
research and development revenue from commercial partners.
COST OF PRODUCT SALES
In the three months ended March 31, 2000, we sold initial versions of our Smart
Cycler to five collaborators with cost of sales of $131,000. Cost of product
sales includes direct material costs, labor and manufacturing overhead, royalty
costs from licensed technologies and reserves for excess inventory. There were
no product sales in the three months ended March 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $3.5 million in the three months
ended March 31, 2000 from $2.3 million in the three months ended March 31, 1999.
This $1.2 million increase included $409,000 of non-cash charges related to the
amortization of deferred stock-based compensation and $165,000 of non-cash
non-employee stock-based compensation. The remaining increase of $611,000 was
attributed to a $415,000 increase in salaries and related personnel costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $730,000 in the three
months ended March 31, 2000 from $289,000 in the three months ended March 31,
1999. This $441,000 increase included $206,000 of non-cash charges related to
the amortization of deferred stock-based compensation. The remaining $235,000
increase was due to an $87,000 increase in salaries and related personnel costs
incurred in connection with the hiring of technical and administrative staff in
the customer support function in anticipation of the launch of our Smart Cycler
systems in May 2000, and a $74,000 increase in recruiting fees and temporary
employees.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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INTEREST INCOME (EXPENSE), NET
Net interest income increased to $159,000 in the three months ended March 31,
2000 from $85,000 in the three months ended March 31, 1999. This increase was
due to increases in cash and cash equivalents as a result of our equity
financing in the three months ended March 31, 2000.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues were $3.6 million in 1999 and $3.6 million in 1998. In 1999, research
and development revenue from commercial partners increased by $480,000 and
revenue from product sales increased by $160,000, offset by a $621,000 decrease
in grant and government-sponsored research revenue.
COST OF PRODUCT SALES
In 1999 we sold initial versions of our Smart Cycler systems to two
collaborators. We recorded cost of sales of $97,000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $10.3 million in 1999 from $6.0
million in 1998. These expenses include salaries and related costs of research
and development personnel as well as the costs of consultants, parts and
supplies associated with research and development projects. The increase was
attributable to an increase of $2.7 million in salaries and related personnel
costs from the addition of employees as well as additional supplies and
consulting costs required to develop, assemble, build and test prototypes of
Smart Cycler systems and a $1.6 million increase in research and development
expenses on other projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $1.3 million in 1999
from $1.2 million in 1998. These expenses consisted of an increase of $140,000
in salaries and related costs.
INTEREST INCOME (EXPENSE), NET
Net interest income consists of income from our cash and investments offset by
interest expense related to our equipment financing. Net interest income
decreased to $142,000 in 1999 from $280,000 in 1998. This decrease resulted from
a declining cash and investment balance and increased debt obligations.
INCOME TAXES
As of December 31, 1999, we had federal net operating loss carryforwards of
approximately $11.9 million. We also had federal research and development tax
credit carryforwards of approximately $300,000. The net operating loss and
credit carryforwards will expire at various dates beginning on 2006 through
2019, if not utilized. Utilization of the 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. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
As of December 31, 1998 and 1999, we had deferred tax assets of approximately
$2.1 million and $5.1 million, respectively. The net deferred tax asset has been
fully offset by a valuation allowance. The net valuation allowance increased by
$3.0 million during the year ended December 31, 1999. Deferred tax assets relate
to net operating loss carryforwards, research credit carryforwards and
capitalized research and development costs.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Revenues increased to $3.6 million in 1998 from $1.4 million in 1997. Of this
increase, $1.5 million was due to increased grant and government-sponsored
research revenue, and $662,000 was due to increased research and development
revenue from commercial partners, primarily pursuant to the Development and
Supply Agreement with Innogenetics, which we entered into in November 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased to $6.0 million in 1998 from
$2.2 million in 1997. Of this increase, $1.6 million was related to compensation
for additional scientific personnel and related costs, and $1.4 million was
related to increased supplies and consulting costs due to increased activities
in government, commercial and internal projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $1.2 million in 1998
from $583,000 in 1997. The increase was due to a $425,000 increase related to
the hiring of additional personnel to support our growing business activities
and a $170,000 increase in other expenses.
INTEREST INCOME (EXPENSE), NET
Net interest income increased to $280,000 in 1998 from $84,000 in 1997. This
increase was due to increases in cash and investment balances as a result of our
equity financing in April 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception through private sales of
preferred stock, contract payments to us under government and commercial
research and development agreements and equipment financing arrangements.
Through March 31, 2000, we received net proceeds of $33.2 million from issuances
of common and preferred stock and $8.8 million from commercial research and
development agreements and government grants and contracts. In addition, through
March 31, 2000 we had financed equipment purchases and leasehold improvements
totaling approximately $2.1 million. As of March 31, 2000, we had $1.6 million
in equipment financing obligations. These obligations are secured by the
equipment financed, bear interest at a weighted-average fixed rate of 12.48% and
are due in monthly installments through June 2003. Under the terms of the
equipment financing agreement a balloon payment is due at the end of each loan
term. This equipment financing facility has expired.
As of March 31, 2000, we had $18.4 million in cash and cash equivalents, as
compared to $1.5 million as of December 31, 1999. We used $7.1 million for
operations in the year ended December 31, 1999 and $2.2 million for the three
months ended March 31, 2000. In 1999, this consisted of the net loss for the
period of $7.9 million offset in part by non-cash charges of $214,000 related to
stock-based compensation of $498,000, amortization and depreciation expense and
working capital changes of $104,000. For the three months ended March 31, 2000,
this amount consisted of $3.3 million in net loss for the period, offset in part
by $780,000 related to stock-based compensation, amortization and depreciation
of $172,000 and working capital changes of $142,000. In 1999, cash provided by
investing activities was $421,000, which consisted of $1.6 million of proceeds
from the maturities of marketable securities, $300,000 related to the expiration
of a standby letter of credit, offset by $1.5 million of capital expenditures.
We used $254,000 in investing activities for the three months ended March 31,
2000, which consisted of capital expenditures. We received $1.1 million from
financing activities for the year ended December 31, 1999 and $19.3 million for
the three months ended March 31, 2000. In 1999, this amount was attributed to
proceeds from equipment financing of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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$1.3 million, offset by repayment of our equipment financing arrangement of
$270,000. In the three months ended March 31, 2000, the amount was related to
our receipt of $19.5 million from the issuance of preferred and common stock,
offset by repayment of our equipment financing arrangement of $118,000.
We expect to have negative cash flow from operations through at least 2002. We
expect to incur increasing research and development expenses, as well as
expenses for additional personnel for production and commercialization efforts.
Our future capital requirements depend on a number of factors, including market
acceptance of our products, the resources we devote to developing and supporting
our products, continued progress of our research and development of potential
products, the need to acquire licenses to new technology and the availability of
other financing. We believe that our current cash balances, together with the
net proceeds of this offering and revenue to be derived from product sales and
research and development collaborations will be sufficient to fund our
operations at least through the year 2001. To the extent our capital resources
are insufficient to meet future capital requirements, we will need to raise
additional capital or incur indebtedness to fund our operations. There can be no
assurance that additional debt or equity financing will be available on
acceptable terms, if at all. If adequate funds are not available, we may be
required to delay, reduce the scope of or eliminate our research and development
programs, reduce our commercialization efforts or obtain funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to technologies or products that we might otherwise seek to
develop or commercialize.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and for Hedging Activities, or SFAS 133, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 1999 and is not anticipated to have an impact on our
results of operations or financial condition when adopted, as we hold no
derivative financial instruments and do not currently engage in hedging
activities.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, or SOP 98-1. SOP 98-1 requires that
entities capitalize costs related to internal use software once certain criteria
have been met. We adopted the provisions of SOP 98-1 on January 1, 1999. Through
December 31, 1999, we have capitalized approximately $350,000 relating to the
purchase and installation of enterprise resource planning, accounting, cadcam
and documentation systems for internal use. The assets are depreciated using the
straight-line method over a useful life of five years.
In December 1999, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB
101. SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition. The adoption of SAB 101 had no
impact on our historical revenue recognition policy.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at the
then prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of investment-grade securities, including commercial
paper, money market funds and government and non-government debt securities. At
December 31, 1999 and March 31, 2000 we held no investments in marketable
securities.
We have operated primarily in the United States and all sales to date have been
made in US dollars. Accordingly, we have not had any exposure to foreign
currency rate fluctuations.
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods presented.
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Business
OVERVIEW
Cepheid develops, manufactures and markets microfluidic systems that integrate,
automate and accelerate biological testing. Our systems are miniaturized
instruments that analyze complex biological samples in a disposable cartridge by
combining molecular biology with microfluidic technology that processes small
quantities of liquid, typically using components fabricated with computer chip
technology. These systems rapidly perform all of the steps required to analyze
complex biological samples. We are initially focused on the detection and
analysis of nucleic acids, such as DNA, in samples such as blood, urine, cell
cultures, food and industrial water. The three key processing steps in nucleic
acid testing are:
+ SAMPLE PREPARATION -- procedures that must be performed to isolate the target
cells and to separate and purify their nucleic acids;
+ AMPLIFICATION -- a chemical process to make large quantities of DNA; and
+ DETECTION -- the method of determining the presence or absence of the target
DNA, typically through the use of fluorescent dyes.
We believe our technology has applications in many markets, including life
sciences research, clinical diagnostics, industrial testing and
pharmacogenomics. Our systems can perform a broad range of functions that
includes automated purification of DNA, screening for disease-causing agents,
rapid detection of food and water contaminants and genetic profiling. Our
systems are designed for a wide variety of laboratory and field settings,
enabling users to perform tests where and when they are needed.
We commenced commercial sales of our first product, the Smart Cycler, during May
2000. The Smart Cycler is a fast, versatile DNA amplification and detection
system initially directed to the life sciences research market. During the
second half of 2000, we intend to release the Smart Cycler XC, a portable
version of this instrument. Our GeneXpert system, currently in development, is
designed to integrate automated sample preparation with our Smart Cycler
amplification and detection technology in a disposable cartridge format. Based
upon our own comparisons and those of our collaborators, we believe our
integrated systems allow us to perform analysis of biological samples faster and
more efficiently than any other products currently available. We are
collaborating with strategic partners to co-develop assays, or biological tests,
and to provide marketing and sales support across a broad range of markets.
INDUSTRY BACKGROUND
OVERVIEW
Nucleic acids are molecules found inside cells. Nucleic acids, such as DNA and
RNA, contain the unique blueprint, or genes, of each living creature. Advances
in molecular biology have led to the development of techniques for reading the
genome and for detecting the presence of a known DNA sequence. The most widely
used method for DNA analysis is first to amplify the target DNA and subsequently
to detect the DNA with the use of fluorescent dyes. The most common
amplification technique is polymerase chain reaction, or PCR.
The biochemicals used to test for the presence of DNA from a specific organism
are DNA probes. Probes have been developed for identifying strep, HIV,
gonorrhea, syphilis, chlamydia, anthrax, E.coli and salmonella. In fact, probes
can be designed for any unique DNA sequence and have been
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BUSINESS
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developed for many significant infectious disease organisms and many DNA
mutations associated with human cancer and with inherited human characteristics.
The life sciences research, clinical diagnostics, industrial testing and
pharmacogenomics industries use assays extensively to detect and quantify
nucleic acids and proteins in biological samples. With the recent advances in
the field of genomics and the availability of vast DNA sequence libraries, there
has been a marked shift towards biological tests that detect the presence of DNA
sequences unique to a gene. Such gene-based testing offers a level of
sensitivity and specificity unmatched by other technologies and, according to
industry analyst reports including a January 2000 report by UBS Warburg LLC, is
the fastest growing segment in these markets. The growth of gene-based testing
has been limited by technical complexity, labor intensity, cost and lack of
automation.
AMPLIFICATION AND DETECTION
For samples with low concentrations of target organisms, cell culturing is
routinely used to naturally grow enough copies of the organism for detection and
identification. However, cell culturing is a very slow amplification process,
which may require several days to generate a million or more copies.
The discovery of PCR and other amplification techniques dramatically improved
the turnaround and time sensitivity of DNA probe assays. PCR acts on a target
molecule to generate a million or more copies of the target nucleic acid
sequence through repeated cycles of heating and cooling. Originally, this
thermal cycling was accomplished by manually moving the sample between hot and
cold water baths. Detection is typically accomplished by tagging the DNA with
fluorescent dyes and manually placing the amplified sample on a gel to read it.
Later, thermal cyclers were developed to automate the heating and cooling
functions, and fluorimeters were developed to read the fluorescent signal.
SAMPLE PREPARATION
Before a laboratory can perform PCR and other nucleic acid tests, a sequence of
labor intensive, complex and time consuming sample preparation procedures must
be performed to isolate the target cells and to separate and purify their
nucleic acids. These sample preparation procedures include cell separation and
washing, cell lysing, and DNA or RNA purification. Each of the procedures
involves many reagent handling and mixing steps and the use of assorted
laboratory equipment such as balances, centrifuges, vortexers, pipettors,
microplates, bead columns and plate readers. Kits containing reagents and
consumables for DNA and RNA purification simplify these procedures, but they
remain manually intensive and are subject to operator error and specimen
cross-contamination. According to a market analysis report on the life sciences
industry published by Strategic Directions International, a Los Angeles based
independent research organization, the sample preparation market for nucleic
acids was estimated to be over $722 million in 1999 and is expected to grow at a
rate of 9.5% per year.
Most samples require lysis, which is the rupturing of a cell membrane to release
the DNA contained inside. Rapid, efficient, versatile lysis of cells and
organisms to extract DNA, RNA or proteins is not an easy process. Today, this
step can be one of the most time consuming and complex steps in bio-analysis.
For example, red blood cells are extremely easy to lyse, but they do not contain
any nucleic acids and are rarely of interest to genetic researchers. On the
other hand, white blood cells do contain nucleic acids, including the complete
human genome. White blood cells are more difficult to lyse and must be separated
from the red blood cells, which contain PCR-inhibiting chemicals. Organisms such
as spores, tuberculosis cells, chlamydia and other bacteria are even more
difficult to lyse, and researchers today typically use harsh, PCR-inhibiting
chemicals, at elevated temperatures for long periods of time in order to
accomplish this task.
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LIMITATIONS
Despite the shift to DNA-based testing in our target markets, current
technologies have inherent limitations including one or more of the following:
LONG TIME TO RESULT
Current sample preparation, amplification and detection processes are slow.
Sample preparation typically requires up to eight hours to complete.
Amplification and detection can require an additional two hours or more to
complete. The overall time required is often days, especially when cell
culturing is needed.
EXPENSIVE, LARGE AND INFLEXIBLE EQUIPMENT
Most currently available equipment is expensive, large and inflexible and is
typically configured to accommodate only one assay protocol. As a result, in
order to operate this equipment cost-effectively, it must be run in a batches,
rather than individual tests.
SKILLED TECHNICIANS, LABORATORY REQUIRED
The majority of currently available equipment and methods require skilled
scientists and technicians and a laboratory setting. In many cases, separate
rooms are required for sample preparation and amplification to prevent
contamination from one sample to another.
SAMPLE VOLUME CONSTRAINTS
The challenge of DNA testing is to ensure that the target molecule, if present
in the sample, is captured. If the target molecule is present and is not
captured, the test will provide a false negative. Existing microfluidic
technologies accept and process only very small sample volumes and therefore
require significant sample preparation efforts. For example, one nanoliter of
human blood, approximately one fifty-thousandth of a drop, may be sufficient to
detect human DNA. However, more than a milliliter of blood, which is a million
times larger than a nanoliter, may be necessary to establish the presence or
absence of pathogens such as bacteria and viruses.
LACK OF INTEGRATION
Currently available amplification and detection systems do not integrate sample
preparation and are configured in ways that complicate the future integration of
sample preparation.
In summary, DNA testing is currently a complicated, time consuming process that
requires expensive, specialized equipment and highly trained staff. We believe
that DNA assays will only achieve their full market potential upon the
development of advanced instruments and integrated processes that are both rapid
and automated.
THE CEPHEID SOLUTION
We have developed integrated microfluidic instruments designed to incorporate
our automated sample preparation, amplification and detection technologies and
handle a variety of different biological samples. We believe our systems
represent significant advances in the tools needed in the life sciences
research, clinical diagnostics, industrial testing and pharmacogenomics markets.
Our systems will allow practitioners in these markets to make use of the vast
new libraries of nucleic acid sequences now being generated by genomics
researchers. Currently, there are at least 27 Cepheid systems in use by
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Cepheid and 17 of our collaborators, including US military facilities, the
Centers for Disease Control and the FBI. These systems have been in use only for
a limited period of time, though some have been in use for well over a year. As
a result, to date we have received only limited customer response to our
products; however, based on the limited responses we have received, we believe
our initial products have been well received.
Our platform technologies address each of the limitations set forth above in the
following manner:
RAPID RESULTS
Our proprietary I-CORE technology, incorporated into our Smart Cycler and
GeneXpert systems, generally achieves the heating and cooling, or thermal
cycling, required for amplification and detection in under 25 minutes through:
+ fast heating and cooling rates; and
+ immediate access to individual test results without having to wait for the
completion of a batch.
Our GeneXpert system will further reduce the time to result by incorporating our
automated sample preparation technology. We have accomplished sample preparation
in our GeneXpert prototype in as little as 5 minutes and a final result in less
than 30 minutes. We achieved these results in our internal testing, and the
results have been published in peer reviewed articles.
INEXPENSIVE, MODULAR, FLEXIBLE
Our systems are flexible platforms that are designed to run many different types
of assays simultaneously. In addition, as many as four different target
molecules can be simultaneously detected in the same reaction tube. This
flexibility enables our systems to perform assays more cost-effectively than
other currently available systems. Our systems are modular, enabling us to build
products to meet the varying needs of our target markets.
EASY TO OPERATE, PORTABLE
Our systems are easy to use and less labor intensive than other systems
currently available. The Smart Cycler integrates amplification and detection,
which eliminates the risk of cross-contamination inherent when using two
instruments. The GeneXpert will provide an even greater level of integration and
automation by combining sample preparation with amplification and detection.
This level of integration will permit operation by less skilled personnel and
enable testing at the point of use, outside of a laboratory setting.
WIDE RANGE OF SAMPLE VOLUMES
Our GeneXpert system incorporates our automated sample preparation technology
into disposable cartridges. These cartridges are designed to handle a wide range
of sample volumes, concentrating and purifying the target DNA in a sample and
removing extraneous materials, thereby increasing the sensitivity of the
resulting assay. Our sample preparation technology gathers target molecules from
large sample volumes that can then be analyzed in our I-CORE module or using
microfluidic technologies such as microarrays, which are designed to work with
smaller volumes. Microarrays are miniaturized glass plates that can detect
specific DNA molecules. Microarrays typically accept only very small sample
volumes and require high concentrations of DNA.
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INTEGRATION OF KEY STEPS
All of our component systems have been designed for integration. The GeneXpert
system is designed to integrate sample preparation, amplification and detection
into one system.
MARKETS
Laboratory experimentation in life sciences research, clinical diagnostics,
industrial testing and pharmacogenomics still relies on primitive tools such as
test tubes, beakers and other equipment that require extensive manual
manipulation. These methods are expensive and often imprecise and present
significant productivity challenges. We believe that there is a significant need
for simpler, faster and more accurate laboratory tests in all of these markets.
LIFE SCIENCES RESEARCH
The life sciences industry employs more than 100,000 molecular biology
researchers worldwide focusing on basic biomedical, pharmaceutical,
environmental, agricultural and clinical diagnostics research. In recent years
significant research efforts have focused on identifying genes and determining
their function. This field, which is known as genomics, has accelerated the
understanding of the molecular mechanisms of genetics, diseases and disease
treatment. DNA and RNA sample preparation, target amplification, and detection
technologies are increasingly important and widely used procedures in the life
sciences research field.
CLINICAL DIAGNOSTICS
Numerous breakthroughs in molecular biology and genomics have provided new
insights into the nature of human diseases and new therapies for treating them.
As a result, DNA-based testing is being rapidly adopted in the field of clinical
diagnostics to detect, identify and characterize pathogens, to determine
antibiotic resistance and to identify genetic abnormalities, such as cancer.
DNA-based testing includes a variety of assay techniques, such as thermal
cycling covered by patents held by PE Biosystems, as well as constant
temperature, or isothermal, techniques.
PATHOGEN DETECTION
Detection and identification of pathogens in a variety of clinical specimens
rely on culture and biochemical identification techniques that have evolved over
the past 200 years. Specimens, such as blood, urine, feces or swab extracts, are
applied to growth media capable of selectively supporting the growth of
microorganisms. The material is incubated for one or more days to allow the
microorganisms to grow. Additional tests are then performed to identify the
microorganism or to determine if antimicrobial drug resistance is present. These
techniques are typically manually intensive. Even in cases where some degree of
automation has been introduced, results may still not available for several
days.
Patients infected with pathogens, such as bacteria, viruses and fungi, may die
if untreated before laboratory results are available. Moreover, in recent years
resistance to antibiotic and antiviral therapies has become an important health
issue. In order to appropriately treat a patient, clinicians need to detect
pathogens with specificity and rapidly determine if a candidate drug is
effective against the pathogen in that patient. We believe our products will
address a wide range of applications where rapid testing will dramatically
impact the clinical management of acute infectious diseases.
BLOOD PRODUCT QUALITY
Nucleic acid amplification techniques have been developed to detect bacteria and
major blood viruses, such as HIV, HCV, HBV and HTLV, in donor blood. Current
tests typically require one or more days
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to complete. Rapid pathogen testing will reduce the time spent waiting for test
results and enable immediate blood pooling and component separation.
PRE-TRANSFUSION BLOOD TESTING
All donated blood is currently tested for viruses, but blood and blood products
can become contaminated with bacteria after donation. The American Red Cross has
recommended that platelets and other blood components be tested for bacteria
immediately prior to transfusion to minimize the risk of patient infection from
contaminated blood. Currently, this testing typically requires one or more days
to complete. We believe that our technology will enable rapid bacterial testing
and potentially extend the shelf life of blood products.
CANCER
Diagnosis and prognosis of cancer currently depends on the pathological
examination of tissue sections using special stains or specific antibody-based
reagents to detect evidence of abnormal cell morphology or proliferation.
Biopsies for staging cancer operations are obtained surgically, typically in the
hospital or in specialized in-patient oncology clinics. The information obtained
during these procedures and subsequent molecular analyses that determine the
treatment may not be available in a timely manner. We believe integrated
analysis systems that can rapidly and automatically process cells or tissues and
detect cancerous genetic abnormalities will be required to meet the needs of the
growing oncology field.
INDUSTRIAL TESTING
The detection and identification of bacterial and viral pathogens as well as
general contaminants in food raw materials, industrial product materials,
processing or assembly lines and water continue to depend on conventional
culturing techniques. These techniques typically require two to three days and
thus do not alert industrial producers to quality control problems until well
after the fact. Currently no industrial producer can detect and control the
sudden introduction of a pathogen or contaminant in a time-critical manner.
FOOD AND BIOPROCESSING
We believe rapid, on-site testing will provide considerable economic value to
food producers by ensuring high product quality, greater yields, elimination of
product recalls and reduced treatment costs. To achieve these benefits, we
believe integrated, easy-to-use biological analysis systems are required.
WATER SUPPLIES
Water supply quality management is a critical need in a wide range of
industries, including food, pulp and paper, cosmetics, personal hygiene
products, metals and plastics, petrochemical and power generation. With greater
pressure to recycle water, minimize the use of antibacterials and maintain
quality discharges, manufacturers are seeking technologies to rapidly identify
contamination problems at the source. For example, cryptosporidium parvum is a
water-borne pathogen infective at a dose of a single organism. It is responsible
for frequent widespread outbreaks of intestinal disease that can be life
threatening for individuals with compromised immune systems. To detect the
presence of organisms such as cryptosporidium, there is a need for rapid
biological testing systems that can concentrate the organisms from several
gallons of water. We believe that on-site, rapid testing systems, such as the
ones we are developing, will play an important role in further enabling the
detection of these types of pathogens.
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FORENSIC AND IDENTITY TESTING
The use of DNA "fingerprinting" techniques for identifying individuals is
increasing. These techniques typically utilize PCR and sample preparation from
whole blood or cells. In addition to human applications, there are important
plant and animal identity applications, such as detection of
genetically-modified organisms, or GMOs, and the verification of plant and
animal strains. We believe integrated, easy-to-use instruments for both the
laboratory and field will be needed to satisfy the growing demand for this type
of testing.
PHARMACOGENOMICS
According to a January 2000 report published by UBS Warburg, major
pharmaceutical companies spent more than $35 billion worldwide in 1998 on drug
discovery and development. This same report indicates that sales of
instrumentation and supplies for genomic- and proteomic-related research reached
$2.8 billion in 1998.
DRUG DISCOVERY AND DEVELOPMENT
Pharmaceutical and genomic companies are continually seeking more efficient,
high-throughput technologies to accelerate drug discovery and development. New
molecular tools, including microarrays and microfluidic devices are being
introduced that allow the probing of a very large number of DNA targets.
However, nearly all of these tools require sample preparation and nucleic acid
amplification prior to their use. We believe these new molecular tools will be
more widely adopted when there is a viable and cost-effective integration of
sample preparation with amplification and detection. Our systems are designed to
automate, integrate and accelerate these procedures.
PREDICTIVE MEDICINE
A natural outgrowth of the genomic research undertaken to support drug discovery
is the identification of genetic markers, such as single nucleotide
polymorphisms, or SNPs. These markers correlate directly to an individual's
response to a specific drug or its side effects. We believe pharmaceutical
companies will be integrating pharmacogenomic profiling into their drug
development and clinical studies protocols. We believe that, as a result,
regulatory approval for these new drugs will require use of companion genetic
tests to ensure the presence or absence of specific markers. This will improve
patient management by allowing physicians to prescribe the right drugs for the
right patients.
We have obtained a license from PE Biosystems to make and sell thermal cycling
systems for use with PCR in the fields of life sciences research, industrial
testing and drug discovery and development. An additional license will be
required to use these systems for PCR thermal cycling in the fields of clinical
diagnostics and predictive medicine.
THE CEPHEID STRATEGY
Our objective is to become the leading provider of microfluidic systems that
integrate, automate and accelerate biological testing. We intend to develop our
platform technologies for the emerging life sciences research, clinical
diagnostics, industrial testing and pharmacogenomics markets. We are applying
our technologies to all key processing steps in biological testing: sample
preparation, amplification and detection. Key elements of our strategy include:
APPLY CORE TECHNOLOGIES BROADLY
We intend to integrate our proprietary I-CORE and automated sample preparation
technologies to provide rapid biological analysis platforms with applicability
across a number of markets. Our unique capabilities for rapid sample preparation
through the use of microfluidics will streamline this otherwise labor-intensive
process. We are developing our Smart Cycler and GeneXpert systems to improve
speed
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and flexibility in some markets and to address other markets that historically
have been served by traditional microbiological culturing techniques,
immunoassays or empirical analysis. Our target markets include life sciences
research, clinical diagnostics, industrial testing and pharmacogenomics.
INTRODUCE PRODUCTS IN STAGES
We intend to establish an initial market position in the life sciences research
market through the introduction of our Smart Cycler. We have entered into a
distribution agreement with Fisher Scientific under which Fisher has agreed to
market our Smart Cycler. We intend to introduce our GeneXpert system next. This
system will integrate automated sample preparation with amplification and
detection technology. We will also provide our I-CORE modules on an original
equipment manufacturer, or OEM, basis to manufacturers of clinical diagnostic
equipment for use with their sample preparation and assay components.
FOCUS INITIALLY ON NUCLEIC ACID ANALYSIS
We are initially focusing on the development and application of our platform
technologies to the field of rapid nucleic acid analysis. We intend to adapt our
platforms to provide purified nucleic acids to traditional analysis systems as
well as emerging high-density testing technologies. We will adapt our sample
preparation and amplification technologies to improve throughput, lower costs
and provide greater sensitivity, thus providing applications in drug development
and the emerging field of predictive medicine.
COLLABORATE WITH PARTNERS
We intend to market our systems to each of our targeted market segments
principally through partners to provide marketing, sales, service and
distribution. We have entered into a number of non-exclusive collaborations
whereby our partners have agreed to provide funding to support the development
and engineering efforts required to adapt our systems to meet their specific
market needs. In certain markets, we will retain the rights to market directly
to end customers. We will utilize our partners to develop chemistries for
assays.
GENERATE RECURRING REVENUE FROM DISPOSABLE PRODUCTS
We expect to generate recurring revenue from the manufacture and sale of our
single use reaction tubes and integrated sample preparation cartridges. We
intend to manufacture these disposable products in our own facilities using
advanced assembly processes based on robotics and continuous flow processing to
minimize labor costs and ensure product quality.
THE CEPHEID TECHNOLOGY
AUTOMATED SAMPLE PREPARATION
Automated sample preparation remains the last major hurdle in creating fully
integrated nucleic acid analysis systems. Most automated sample preparation
instruments available today utilize robotics, with machines merely duplicating
the steps technicians would perform in laboratories. These systems have been
beneficial to high throughput, single assay applications, but require large
capital investments and skilled personnel in a laboratory.
We believe our proprietary automated sample preparation technology will be the
first to integrate the basic chemistry and physics required to prepare a raw
sample for analysis. We have developed
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microfluidic technologies that perform these steps in a disposable cartridge.
The key steps in sample preparation together with our corresponding technologies
are as follows:
ADDING REAGENTS
We manufacture disposable sample preparation cartridges that can contain
reagents needed for the amplification process as well as probes for specific
nucleic acid targets. Our low-cost, plastic molded cartridges also incorporate a
proven fluid delivery system.
MEASURING SAMPLE VOLUME AND MIXING
We use pressure differences to flow liquids through our cartridges and use
proprietary mechanical valving mechanisms to produce precise fluid flow control.
Our flow-through technology allows the sample to be processed on a continuous
basis and is critical to our ability to accommodate the larger sample sizes
required for high sensitivity pathogen detection. Our cartridges mix fluids
through a versatile, proprietary, plastic valve assembly that can accommodate a
variety of sample preparation protocols.
SEPARATING SPECIFIC CELLS OR TARGETS
Our cartridges incorporate filters and filter assemblies that can perform
functions ranging from basic sample clean-up to specific cell or target capture.
LYSING CELLS
We have developed a very rapid proprietary lysis technology capable of releasing
DNA from the cells of organisms that are difficult to lyse, such as spores. This
technology does not require harsh chemicals, and therefore eliminates the
difficult and time-consuming purification steps that are required by
conventional technologies. This technology is incorporated in our GeneXpert
system and will allow lysis procedures, that now may take hours, to be performed
in seconds. We have developed and delivered a number of self-contained
prototypes to select strategic collaborators.
CAPTURING AND CONCENTRATING DNA
We have developed a miniature silicon chip specifically designed for effective
molecular capture and concentration. These chips, approximately 4mm by 4mm,
contain thousands of identical, tall pillars (typically 5 to 10 microns in
diameter, 200 microns tall, spaced 5 to 10 microns apart). Traditional
solid-phase materials widely used in current sample preparation techniques for
DNA capture, such as glass fibers, bind and hold molecules with varying
efficiencies. In contrast, the uniform forest of identical pillars on our
extraction and concentration chip results in extremely uniform binding, allowing
rapid and efficient release of the captured DNA.
Because our chips are operated in a flow-through mode, they can capture and
concentrate DNA or other chemicals from large liquid sample volumes. We have
increased the concentration of target DNA by a factor as large as 10 in samples
as large as one milliliter. All material in the sample other than the target DNA
is moved to a waste chamber in the cartridge.
PREPARING FOR ANALYSIS
We integrate the sample preparation cartridge with our proprietary reaction
tube, the same tube designed for our I-CORE and Smart Cycler for amplification
and detection. After capturing and concentrating the DNA from the sample, our
cartridge automatically mixes the DNA with amplification reagents and moves the
DNA to the reaction tube for amplification and detection.
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AMPLIFICATION AND DETECTION
In 1996, we licensed a technology from Lawrence Livermore National Laboratories
that allows us to integrate amplification and detection. Our commercial version
of the technology is called the Integrated, Cooling/Heating Optics Reaction
module, or I-CORE module, a single chamber module measuring approximately 1 inch
by 4 inches by 5 inches. An I-CORE is a complete, independent,
temperature-controlled fluorimeter for performing and continuously monitoring
chemical reactions such as PCR, and is a key element of both our Smart Cycler
and GeneXpert systems. The temperature of the sample can be controlled rapidly
and accurately, allowing faster reactions and more accurate results. The I-CORE
technology also allows the analysis of samples to be performed with much lower
power than traditional methods. This permits our systems to become truly
portable, giving our customers the capability to obtain bioanalytical results
when and where they are needed. The modular nature of the I-CORE allows us to
develop a variety of flexible instrument platforms, designed to meet the needs
of many of our customers.
INDEPENDENT CONTROL
One of the key distinguishing features of our I-CORE technology is that in a
system composed of multiple I-COREs, each I-CORE can be operated and controlled
independently. We believe that this is not possible with any other system
currently on the market. In contrast to traditional thermal cycling systems, in
which all the samples are subjected to the same time/temperature/optical
protocol, each sample in an I-CORE-based instrument can be subjected to a
different protocol. This allows the operator to perform many different assays or
experiments at the same time on the same instrument.
POWERFUL OPTICAL ANALYSIS
Each I-CORE module includes a powerful, four-channel optical analysis system
capable of complex chemical assays. This allows the detection and quantification
of multiple fluorescent dyes and multiple target molecules in the same reaction
tube. Continuous optical monitoring during amplification also allows the user to
stop the reaction as soon as a target is detected, thereby shortening the time
to result. For example, in a single reaction tube, the I-CORE module could
simultaneously detect and quantify staphylococcus aureus, detect the presence or
absence of the methicillin-resistance gene and measure the response of a
separate internal control. The internal control allows us to verify the
performance of the system.
PATENTED REACTION TUBE
Our disposable patented reaction tube is used in conjunction with the I-CORE
module and has been optimized to provide rapid temperature cycling and long
optical path lengths for optimum optical sensitivity. In addition, the tube is
designed to eliminate entrapped air, which can interfere with the optical
signal. This feature minimizes optical noise, makes assays more uniform and
reproducible and minimizes the need for optical normalization.
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PRODUCTS
We are developing two families of products, the Smart Cycler and GeneXpert
families, that incorporate our core technologies. The following table sets forth
our amplification and detection products:
<TABLE>
<CAPTION>
NAME DESCRIPTION STATUS
---- ----------- ------
<S> <C> <C>
I-CORE Module Complete thermal cycling microinstrument for In Production
DNA amplification and detection
Smart Cycler Laboratory-based DNA analysis instrument In Production
containing 16 I-CORE modules
Smart Cycler XC Portable, battery-operated DNA analysis In Development
instrument containing 16 I-CORE modules for use
in the field
Notebook Smart Cycler Portable, battery-operated DNA analysis In Development
instrument containing two I-CORE modules
integrated with a notebook computer
Smart Cycler Reaction Disposable I-CORE reaction tubes optimized for In Production
Tubes (25 micronL and research and diagnostic applications
100 micronL)
</TABLE>
The following table sets forth our family of products that integrate sample
preparation, amplification and detection:
<TABLE>
<CAPTION>
NAME DESCRIPTION STATUS
---- ----------- ------
<S> <C> <C>
GeneXpert Automated system for sample preparation, In Development
amplification and detection from raw biological
samples
Briefcase GeneXpert Portable, battery-operated version of the In Development
GeneXpert
GXPT-1 Disposable cartridge for spores and bacteria in In Development
aqueous-based solutions
GXPT-2 Disposable cartridge for genomic DNA in blood In Development
GXPT-3 Disposable cartridge for viral pathogens in Future Development
clinical swabs
GXPT-4 Disposable cartridge for bacterial DNA in blood Future Development
GXPT-5 Disposable cartridge for viral pathogens in Future Development
blood
</TABLE>
I-CORE MODULE
Our I-CORE module is a low-cost, self-contained instrument for performing and
continuously monitoring chemical reactions such as PCR. Each module can
optically measure up to four separate reactions. The I-CORE module rapidly and
accurately controls the heating and cooling of the sample, which allows for fast
reactions and accurate results. I-CORE modules can be configured into a variety
of DNA analysis instruments or can be sold to manufacturers of large clinical
and research instruments for incorporation into their instrument platforms. The
I-CORE module is a key component in both our
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Smart Cycler and GeneXpert families of products. We expect to incorporate our
I-CORE technology into future systems.
Our I-CORE technology, when used in thermal cycling applications such as PCR, is
subject to the patents owned by PE Biosystems. We have obtained the required
license for PE Biosystems for thermal cycling limited to the fields of life
sciences research, industrial testing, aspects of identity testing and
forensics. We are also pursuing a license from PE Biosystems for the field of
clinical diagnostics. Our I-CORE technology also can be used in non-thermal
cycling and non PCR applications, such as iso-thermal, or constant temperature,
DNA amplification. We do not need a license from PE Biosystems for use in such
applications.
SMART CYCLER FAMILY
Our Smart Cycler system contains 16 I-CORE modules arranged into a rapid,
flexible, multi-purpose instrument capable of performing DNA amplification and
detection by means of a number of available fluorescent chemical techniques. In
1998, we received an R&D 100 award from R&D Magazine for the design of the Smart
Cycler. To date, we have placed 27 Smart Cyclers with 17 different collaborators
for technology evaluation. We anticipate the commercial launch of the Smart
Cycler in the first half of 2000, and we have a co-exclusive agreement with
Fisher Scientific to distribute the Smart Cycler.
Our Smart Cycler XC (eXtreme Conditions) is a portable, battery-operated version
of the Smart Cycler targeted toward military, law enforcement and industrial
testing markets. The development of the Smart Cycler XC was funded by the US
Army under a development contract. To date, we have placed two systems in the
field for technology evaluation.
Our Notebook Smart Cycler is a battery-operated prototype thermal cycler in
which two I-CORE modules have been integrated with a notebook computer to
further increase portability for the point-of-use market.
REACTION TUBES
One of our patented reaction tubes is required for each assay run using our
I-CORE or Smart Cycler family of products. We offer two types of patented
reaction tubes for use with these systems. Both are designed to be disposed of
after a single use and represent opportunities for recurring revenue from an
installed base of instruments. We manufacture and sell a 25 microliter tube,
typically preferred in the life sciences research market, and a 100 microliter
tube, which is typical for applications that might require larger liquid
reaction volumes.
GENEXPERT SYSTEM
Our GeneXpert family of products combines sample preparation with the
amplification and detection functions performed by our I-CORE module into an
integrated, automated DNA analysis instrument. These products are designed to
purify, concentrate, detect and identify targeted DNA sequences, from sample to
result, in less than 30 minutes. Current techniques for accomplishing this same
complex series of procedures require extensive manual labor by skilled
technicians and can take anywhere from six hours to three days.
Our GeneXpert technology platform is designed to accept cartridges with several
different internal configurations, each designed to perform a different class of
assay. Each cartridge will be labeled with bar codes that instruct the
instrument how to direct the fluids through the cartridge and activate the
various mixing, lysing, amplification, detection and other functions as
required. Furthermore, the GeneXpert system is compact, uses low power and is
suitable for applications requiring portability.
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DISPOSABLE ASSAY CARTRIDGES
We have two disposable assay cartridges under development:
SPORES AND BACTERIA IN AQUEOUS-BASED SOLUTIONS
Our GXPT-1 cartridge will be a general-purpose device optimized for rapidly
extracting, concentrating and detecting spores and bacteria from aqueous-based
samples. We have successfully demonstrated the usefulness of this cartridge for
applications such as detecting infectious organisms in urine, bacteria from
swabs and spores in environmental samples. For example, in 1999 we designed,
built and tested a prototype instrument and cartridge system for the deletion of
chlamydia and gonorrhea in urine specimens. Based upon our own internal testing,
we believe the sensitivity of this system was comparable to available FDA
approved systems and could lead to a faster test for chlamydia and gonorrhea. In
addition, we have designed, built and tested a prototype cartridge that
concentrates, lyses and detects spores. We anticipate this cartridge will also
be used to detect bacteria in food, spores in industrial products and to replace
bacterial cultures. We are optimizing this cartridge to improve speed and
sensitivity when targets are present in low concentration in a large volume.
GENOMIC DNA IN BLOOD
Our GXPT-2 cartridge will be optimized for extracting and concentrating genomic
DNA from blood or cell cultures. This cartridge will have broad applications in
HLA (human leukocyte antigen) analysis, genetic analysis and SNP detection and
analysis. This cartridge will extract white blood cells from whole blood,
automatically lyse these cells, extract and concentrate the genomic DNA, then
selectively amplify and detect several genomic regions containing the SNPs of
interest. The practical realization of SNP information in routine medical
testing will require simple, cost-effective disposables such as this cartridge.
In addition to our own development efforts, we are working with collaborators to
co-develop the methodologies and chemistries to be used in specific assays
incorporated in these cartridges. Our cartridge design supports a strategy in
which a continuous introduction of new assays and new disposable cartridges can
be launched over a period of time, expanding the panel of tests that can be
implemented on an installed base of GeneXpert instruments. We are engaged in the
early stage development of these additional disposable cartridges:
VIRAL PATHOGENS IN SWABS
We intend to design our GXPT-3 cartridge to accept nasal swab extracts or other
respiratory secretions, capture the viral pathogens, lyse the viruses and
perform real-time PCR. We believe there will be widespread adoption of rapid
respiratory virus testing, such as for flu and childhood viral pathogens, as new
antiviral treatments become available.
BACTERIAL DNA IN BLOOD
We intend to design our GXPT-4 cartridge to accept up to 10 milliliters of whole
blood and extract and concentrate bacterial DNA. This will enable detection of
the presence of bacteria. Bacterial contamination in blood causes over 20,000
deaths per year in the United States. Relatively large volumes of blood are
necessary to achieve the required diagnostic sensitivity. In addition, this
cartridge in the GeneXpert system will be able to rapidly and simultaneously
detect antibiotic resistance.
VIRAL PATHOGENS (DNA AND RNA) IN BLOOD
We intend to design our GXPT-5 cartridge to accept up to 10 milliliters of whole
blood, separate and concentrate viruses and their nucleic acids. This will
enable the rapid screening of donor blood for transfusions and blood from organ
donors. We believe that this cartridge will also be utilized for monitoring
therapeutic response to antiviral drugs.
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RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on refining and enhancing of
our existing systems, significantly improving our basic technology and
developing key future technologies and systems. As with our core technologies
and products, we are concentrating our efforts in the areas of sample
preparation, amplification and detection.
SAMPLE PREPARATION
+ New miniature components for improved performance of nucleic acid
purification;
+ Large and small-scale microfluidic systems for automated fluid handling;
+ New processing methodologies and chemistries, including viral capture; and
+ Parallel, high-density sample handling and processing systems.
AMPLIFICATION
+ Enhanced performance of reaction components and systems; and
+ Alternative amplification chemistries.
DETECTION
+ Distinguishing a larger number of fluorescent probes;
+ Alternative detection technologies, including solid-state optical detection
systems with applicability beyond current homogeneous methodologies;
+ Alternative nucleic acid and other biomolecule detection techniques; and
+ Further miniaturization of optical detection systems.
SALES AND MARKETING
Our commercialization strategy is to sell our products principally through
distribution partners across a wide range of markets, including life sciences
research, clinical diagnostics, industrial testing and pharmacogenomics. We may
market our products directly to key customers in the pharmaceutical industry and
the US government. Before we can market our products for thermal cycling in the
clinical diagnostics field, we will require an additional license from PE
Biosystems. We are unaware of any other limitations on our ability to enter our
target markets.
Our distribution partners are continually looking for innovative new products.
We plan to partner with them to gain access to their marketing resources and
their proprietary reagents and assays. We will retain the rights to manufacture
the key components and disposable products for our systems. We currently have
eight employees engaged in marketing, sales and service activities and are
planning to hire additional personnel before the end of the year.
COLLABORATIONS
We have entered into collaborations with commercial entities and have received
grants and research contracts from US government agencies. We have entered into
the following significant commercial collaborations:
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FISHER SCIENTIFIC
We intend to launch our first product, the Smart Cycler system, in the first
half of 2000 into the US life sciences research market through the Life Sciences
group of Fisher Scientific, Inc. Fisher has distribution rights to the US life
sciences research market and the option to extend those rights into Canada and
certain European countries. Fisher will sell under the Cepheid label and trade
dress. We will establish the end user list price for the system, accessories and
disposable reaction tubes. This three year arrangement may be extended by mutual
agreement.
Our agreement with Fisher is subject to Fisher's ongoing fulfillment of minimum
purchase requirements. We also retain the ability to market, directly or through
a collaborator, a private-label version of the system to the life sciences
research market.
INNOGENETICS
We have entered into a Development and Supply Agreement with Innogenetics, a
Belgian biotechnology company. The focus of this collaboration is the
development of products integrating our proprietary technologies for sample
preparation, rapid amplification and detection and Innogenetics' proprietary
methods for genetic testing and viral genotyping. Any resulting products will be
sold on a worldwide basis by Innogenetics, through their direct sales
organizations in the US and Europe and through distributor organizations.
INFECTIO DIAGNOSTIC
We have formed Aridia Corp., a joint venture we own equally with Infectio
Diagnostic (I.D.I.), Inc., a Canadian diagnostic company. Aridia is developing a
line of proprietary molecular diagnostic tests for the rapid, time critical
identification of bacterial and fungal infections, such as group B strep,
antibiotic resistant bacteria, meningitis and sepsis. The first products from
this venture, a line of assays adapted to our Smart Cycler system, will be
directed primarily to hospital laboratories. Products incorporating our sample
preparation cartridge technology will follow and will enable diagnostic
procedures to be performed closer to the patient. These products will require
FDA approval or clearance, or other applicable regulatory approval or clearance,
which has not been obtained or sought.
US GOVERNMENT
Fast DNA testing, available when and where it is needed, is of great interest to
the US government, primarily for biological warfare defense, but also for
medical diagnostics, food testing, forensics and other applications. We have
received grants and research contracts from the following US government agencies
that have funded much of our fundamental technology development:
+ Defense Advanced Research Projects Agency;
+ United States Army Medical Research Institute of Infectious Diseases;
+ Soldier Biological Chemical Command; and
+ Lawrence Livermore National Laboratory.
In addition, the following US government agencies are evaluating prototypes of
our products:
+ Center for Disease Control;
+ Federal Bureau of Investigation; and
+ Armed Forces Institute of Pathology.
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MANUFACTURING
Our manufacturing processes were designed to comply with ISO 9001 quality
control procedures but, we have not yet applied for ISO certification. Our
facilities and manufacturing processes are designed to comply with FDA's Quality
Systems Requirements to enable us to market our systems in the future into the
clinical diagnostics and industrial testing markets. We perform final assembly,
calibration and test of our instruments. We produce our patented disposable
reaction tubes on a custom, automated assembly line. This line can be expanded
to deliver up to 20 million tubes per year with a single shift. Our new
manufacturing facility provides increased capacity for assembly, test and
inventory of our products.
COMPETITION
Several companies provide instruments for DNA amplification or detection. PE
Biosystems and Hoffmann La Roche sell systems integrating amplification and
detection to the commercial market. Organon Teknika, Promega and Qiagen are
competitors in the area of sample preparation, selling both sample preparation
kits and robotic systems.
We expect to encounter intense competition from a number of companies that offer
various products for sample preparation, amplification and detection. We
anticipate that our competitors will come primarily from the following two
sectors:
+ companies providing conventional products based on established technologies;
and
+ companies developing their own microfluidics technologies.
In order to compete against vendors of conventional products, we will need to
demonstrate the advantages of our products over alternative well-established
technologies and products. We will also need to demonstrate the potential
economic value of our products relative to these conventional technologies and
products.
We will also need to compete effectively with companies developing their own
microfluidics technologies and products, such as ACLARA Biosciences, Caliper,
Nanogen and Orchid Biosciences. Other companies we are aware of that are
involved in microfluidic research include Affymetrix, Motorola, 3M and PE
Biosystems. Microfluidic technologies have undergone and are expected to
continue to undergo rapid and significant change. Our future success will depend
on our ability to establish and maintain a competitive position in these and
future technologies. Rapid technological development may result in our products
or technologies becoming obsolete. Products we offer could be made obsolete
either by less expensive or more effective products based on similar or other
technologies.
In many instances, our competitors have or will have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than we do. Moreover,
competitors may have greater name recognition than we do, and may offer
discounts as a competitive tactic. We cannot assure you that our competitors
will not succeed in developing or marketing technologies or products that are
more effective or commercially attractive than our products, or that would
render our technologies and products obsolete. Also, we may not have the
financial resources, technical expertise or marketing, distribution or support
capabilities to compete successfully in the future. Our success will depend in
large part on our ability to maintain a competitive position with our
technologies.
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GOVERNMENT REGULATION
For our initial commercial market, the biomedical research market, we do not
anticipate the need for FDA or other regulatory approval. We have not applied
for FDA or other regulatory approvals with respect to any of our products under
development. We anticipate, however, the manufacturing, labeling, distribution
and marketing of some or all of the diagnostic products under development or
diagnostic products we may develop and commercialize in the future will be
subject to regulation in the United States and in other countries. In addition
to clinical diagnostics markets, we also may pursue forensic, agricultural,
environmental, laboratory and industrial applications for our products which may
be subject to different government regulation. Aspects of our manufacturing and
marketing activities may also be subject to federal, state and local regulation
by various governmental authorities.
In the United States, the FDA regulates, as medical devices, most diagnostic
tests and in vitro reagents that are marketed as finished test kits and
equipment. Pursuant to the Federal Food, Drug and Cosmetic Act, and the
regulations promulgated thereunder, the FDA regulates the preclinical and
clinical testing, design, manufacture, labeling, distribution and promotion of
medical devices. We will not be able to commence marketing or commercial sales
in the United States of new medical devices under development that fall within
the FDA's jurisdiction until we receive clearance or approval from the FDA,
which can be a lengthy, expensive, and uncertain process. Noncompliance with
applicable requirements can result in, among other things, administrative or
judicially imposed sanctions such as injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals, or criminal prosecution.
INTELLECTUAL PROPERTY
PATENTS AND PATENTS PENDING
We hold an exclusive license to key technologies from the Lawrence Livermore
National Laboratory, or LLNL, in the fields of nucleic acid analysis and ligand
binding assays with integrated optical detection. These technologies have
resulted in one issued US patent and include one pending US patent application
and two pending international counterpart patent application. The LLNL
technologies are the basis of our I-CORE module and encompass the key I-CORE
features.
We also have an issued US patent on our disposable reaction tube. We have an
additional 12 pending US patent applications and six pending international
counterpart applications relating to our technologies. Our pending patent
applications relate to our I-CORE module, reaction tubes, lysing technology,
nucleic acid concentration chip and microfluidic devices, and methods and
systems as applied to sample processing and automated DNA analysis.
OUTSIDE TECHNOLOGIES REQUIRED
We have obtained a thermal cycling license from PE Biosystems for sale of the
I-CORE module in the life sciences research, industrial testing and drug
discovery and development markets. In addition, we are in discussions with PE
Biosystems regarding a license to their US patent covering thermal cycling
systems for other fields.
In the area of human diagnostics for PCR-based applications, we rely on partners
who have negotiated or are negotiating the appropriate licenses from Hoffmann La
Roche for application to this field. There are also numerous non-PCR
amplification methods that can be adapted to our systems and we are pursuing
collaborations with developers of these methods.
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EMPLOYEES
As of March 31, 2000, we had 76 full-time employees of whom seven hold PhD
degrees and seven hold other advanced degrees. Approximately 37 employees are
engaged in research and product development, 24 of whom are in engineering and
13 in biotechnology. None of our employees are represented by a labor union. We
place a high value on our human capital and consider our employee relations to
be good.
FACILITIES
We occupy approximately 33,000 square feet of leased and sub-leased office and
laboratory space in Sunnyvale, California as the base for our manufacturing,
product support and research and development efforts. All our space is leased
through at least mid 2003 and is expected to meet our currently anticipated
facilities needs at least through 2001. If necessary, we believe we will be able
to obtain additional facilities space on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
SCIENTIFIC ADVISORY BOARD
We have assembled a group of scientific advisors with demonstrated expertise in
fields related to microbiology, microfluidics, instrumentation technologies and
systems. Our Scientific Advisory Board meets periodically with our scientific
and development personnel and management to discuss our present and long-term
research and development activities. Scientific Advisory Board members include:
+ R. Bruce Darling, PhD, Professor of Electrical Engineering, University of
Washington. Dr. Darling is an expert in the areas of microfabrication,
microfluidic systems, modeling and instrumentation.
+ Stanley Falkow, PhD, Professor Microbiology and Immunology, Geographic
Medicine and Infectious Diseases, Stanford University School of Medicine. Dr.
Falkow focuses his research efforts on microbial pathogenicity and
investigates the natural history of infectious diseases at molecular and
genetic levels.
+ Gregory Kovacs, MD, PhD, Associate Professor of Electrical Engineering and,
by courtesy, of Medicine, Stanford University. Dr. Kovacs develops
micromachined sensors and fluidic devices for biomedical applications,
clinical and research instrumentation and specialized devices for detection
of environmental pathogens and toxins. Dr. Kovacs serves as the chair of our
Scientific Advisory Board.
+ Dorian Liepmann, PhD, Associate Professor, Bioengineering and Mechanical
Engineering, University of California, Berkeley. Dr. Liepmann's research
areas include experimental fluid mechanics, biofluid mechanics, microfluidic
systems, bio-MEMS, mixing, free surface flows and hydroacoustics.
+ David A. Relman, MD, Assistant Professor Medicine, Stanford University. Dr.
Relman's research focuses on molecular mechanisms of pathogenesis and
advanced molecular methods for microbial pathogen discovery.
+ Ann Warford, PhD, Director of Laboratory Operations, SRA Life Sciences. Dr.
Warford is an expert in the practical application of advanced clinical
diagnostics in hospital settings.
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+ Richard Zare, PhD, Marguerite Blake Wilbur Professor in Natural Science at
Stanford University, Department of Chemistry, Stanford University. Dr. Zare
investigates chemical reactions at the molecular level, including molecular
collision processes and dedicates a good deal of his time to advancing
chemical analysis technologies through such techniques as laser-induced
fluorescence and high performance capillary electrophoresis.
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Management
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is the name, age, position and a brief account of the business
experience of each of our executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
Thomas L. Gutshall........................... 62 Chairman of the Board, Chief Executive
Officer and Director
Kurt Petersen, PhD .......................... 52 President, Chief Operating Officer and
Director
M. Allen Northrup, PhD ...................... 45 Vice-President, Research and Chief Technical
Officer
Catherine A. Smith........................... 44 Vice-President, Finance and Chief Financial
Officer
Gerald S. Casilli(1)......................... 60 Director
Cristina H. Kepner(1)........................ 53 Director
Ernest Mario, PhD(1) ........................ 61 Director
Dean O. Morton(2)............................ 68 Director
Hollings C. Renton(2)........................ 53 Director
</TABLE>
---------------
(1) Member of the audit committee
(2) Member of the compensation committee
Thomas L. Gutshall Mr. Gutshall is a co-founder and has served us as Chairman
of the Board and Chief Executive Officer since August 1996. From January 1995 to
August 1996, he was President and Chief Operating Officer of CV Therapeutics.
From 1989 to 1994, he was Executive Vice President at Syntex Corporation and a
member of the Pharmaceutical Executive Committee. His responsibilities while at
Syntex included managing Syva Company, Syntex Agribusiness, Pharmaceutical and
Chemical Operations and Services, Syntex Pharmaceutical Intl. Ltd. and
Environmental Health and Safety. He is also a member of the board of directors
of Catalytica Pharmaceuticals and CV Therapeutics.
Kurt Petersen, PhD Dr. Petersen is a co-founder and has served us as President
and Chief Operating Officer since August 1996. From January 1996 through July
1996, Dr. Petersen worked as a private consultant. From 1985 to 1995, he served
as Vice President, Technology for NovaSensor. While at NovaSensor he was
responsible for commercializing many innovative micromachined devices and
fundamental fabrication processes. He holds 19 patents and has authored over 80
papers and presentations.
M. Allen Northrup, PhD Dr. Northrup is a co-founder and has served us as Vice
President, Research and Chief Technology Officer since May 1997. From 1991 to
1997, he served as the Principal Engineer at the Microtechnology Center of
Lawrence Livermore National Laboratory, where he demonstrated the first
micromachined and optically interrogated PCR system. He holds 17 patents, has
authored 50 publications and serves on several national and international
committees in the areas of biotechnology and microinstrumentation.
Catherine A. Smith Ms. Smith is our Vice President, Finance and Chief Financial
Officer and joined us as Vice President in January 1998. From 1992 to 1997, she
was a consultant to numerous private and public biotechnology, pharmaceutical,
diagnostic and device companies, providing interim or part-time financial
management. She began her career at the international public accounting firm
Deloitte + Touche, where she served as an audit manager from 1979 to 1984. She
also served as the Controller for Thoratec Laboratories Corporation from 1984 to
1989.
Gerald A. Casilli Mr. Casilli joined us as a director in April 1997. Mr.
Casilli has served as Chairman of the Board of IKOS Systems, Inc. since 1989 and
as Chief Executive Officer from 1989 to 1995. From 1986 to 1989, he was a
general partner at Trinity Ventures, Ltd., a venture capital firm. Mr. Casilli
was a general partner of Genesis Capital, a venture capital firm from 1982 to
1990. In
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1973, Mr. Casilli founded Millennium Systems, a manufacturer of microprocessor
development systems, and served as its President and Chief Executive Officer
until 1982. Mr. Casilli currently serves as a director of Evans & Sutherland.
Cristina H. Kepner Ms. Kepner joined us as a director in May 1998. She is
Executive Vice President and director of Invemed Associates LLC, an investment
bank. She has been with Invemed since 1978, where she also serves as Corporate
Finance Director. She is currently on the boards of ViroLogic, Inc. and Quipp,
Inc.
Ernest Mario, PhD Dr. Mario joined us as a director in March 2000. He has been
the Chairman of the Board since 1997 and Chief Executive Officer of ALZA
Corporation since 1993. From 1993 to 1997, he was Co-Chairman of the Board of
ALZA. Prior to joining ALZA, he served as Chief Executive of Glaxo Holdings plc,
a pharmaceutical corporation, from 1989 to 1993, and as Deputy Chairman from
1992 to 1993. From 1988 to 1989, he served as Chairman of the Board and Chief
Executive Officer of Glaxo, Inc., a subsidiary of Glaxo Holdings, and from 1986
to 1988 as President and Chief Operating Officer of Glaxo, Inc. He currently
serves on the boards of Catalytica, Inc., COR Therapeutics, Inc., Orchid
Biosciences, Inc., Pharmaceutical Product Development, Inc. and SonoSite, Inc.
Dean O. Morton Mr. Morton joined us as a director in July 1997. He was Executive
Vice President, Chief Operating Officer and a director of Hewlett-Packard
Company. He is currently a member of the board of directors of ALZA Corporation,
BEA Systems, Inc., Centigram Communications Corporation, The Clorox Company and
KLA-Tencor Corporation. He is a trustee of the State Street Research group of
mutual funds and a director of the Metropolitan Series Fund, Inc. and State
Street Research Portfolios, Inc. He serves on the Board of Monterey Bay Aquarium
Research Institute and the Board of Kaiser Foundation Health Plan and Hospitals.
He is a trustee of the David and Lucille Packard Foundation and Chairman of The
Center for Excellence in Non Profits.
Hollings C. Renton Mr. Renton joined us as a director in March 2000. Since 1993,
he has served as the President and Chief Executive Officer and a director of
Onyx Pharmaceuticals, Inc. From 1991 to 1993, he served as President and Chief
Operating Officer of Chiron Corporation following their acquisition of Cetus
Corporation. Prior to the acquisition, he served as President of Cetus from 1990
to 1993 and as Chief Operating Officer of Cetus from 1987 to 1990.
BOARD COMPOSITION
We will have nine authorized directors upon the closing of this offering. In
accordance with the terms of our amended and restated articles of incorporation,
the terms of office of the board of directors will be divided into three
classes:
+ Class I directors, whose term will expire at the annual meeting of
shareholders to be held in 2001;
+ Class II directors, whose term will expire at the annual meeting of
shareholders to be held in 2002; and
+ Class III directors, whose term will expire at the annual meeting of
shareholders to be held in 2003.
The Class I directors will be Mr. Morton and Dr. Petersen, the Class II
directors will be Mr. Casilli and Ms. Kepner and the Class III directors will be
Dr. Mario, Mr. Gutshall and Mr. Renton. There will be two vacancies on the board
of directors. At each annual meeting of shareholders after the initial
classification, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election. The authorized number of directors may be
increased only by resolution of the board of directors and a majority vote of
our shareholders. Any additional directorships resulting from an increase in the
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number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. This
classification of our board of directors may have the effect of delaying or
preventing changes in control or management of our company.
BOARD COMMITTEES
The audit committee of our board of directors was established in September 1998
and reviews, acts on and reports to the board of directors on various auditing
and accounting matters, including the recommendation of our independent
auditors, the scope of our annual audits, fees to be paid to our independent
auditors, the performance of our independent auditors and our accounting
practices. The members of our audit committee are Mr. Casilli, Ms. Kepner and
Dr. Mario, each of whom is an independent director.
The compensation committee of the board of directors was established in
September 1998 and reviews and approves the salaries and stock options
recommended by our Human Resources Department for our employees, consultants,
directors and other individuals compensated by us. Mr. Morton and Mr. Renton,
each of whom is an independent director, are currently the members of the
compensation committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee has ever been at any time an officer or
employee of ours, and none of our executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more
officers serving as a member of our board of directors or compensation
committee.
DIRECTOR COMPENSATION
We reimburse our non-employee directors for expenses incurred in connection with
attending board and committee meetings but do not compensate them for their
services as board or committee members. We have in the past granted non-employee
directors options to purchase our common stock pursuant to the terms of our
stock plans, and our board continues to have the discretion to grant options to
new non-employee directors. In 1999, none of our non-employee directors were
granted any options. In March 2000, upon joining our board, Dr. Mario and Mr.
Renton each received an option to purchase 48,000 shares of our common stock.
Beginning in April 2000, our non-employee directors will each receive
nondiscretionary, automatic grants of options to purchase 15,000 shares of our
common stock upon joining the board of directors and nondiscretionary, automatic
grants of options to purchase 5,000 shares of our common stock each year
pursuant to the 2000 Non-Employee Directors' Stock Option Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our amended and restated articles of incorporation limit the liability of
directors to the maximum extent permitted by California law. California law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
+ breach of their duty of loyalty to the corporation or its shareholders;
+ acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law;
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+ unlawful payments of dividends or unlawful stock repurchases or redemptions;
or
+ any transaction from which the director derived an improper personal benefit.
Such limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors, officers, employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our bylaws covers at least negligence and gross negligence
on the part of indemnified parties. Our bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the bylaws permit such indemnification.
We intend to enter into agreements to indemnify our directors, in addition to
the indemnification provided for in our bylaws. These agreements, among other
things, will indemnify our directors for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such director in
any action or proceeding, including any action by or in our right, arising out
of such person's services as one of our directors, to any of our subsidiaries or
to any other company or enterprise to which the director provides services at
our request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors.
There is no pending litigation or proceeding involving any of our directors or
officers in which indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table shows all compensation received during 1999 by our Chief
Executive Officer and our other most highly compensated executive officers, who
received salary and bonus compensation of more than $100,000 during 1999,
collectively referred to as the Named Executive Officers. There was no other
compensation to the Named Executive Officers in 1999.
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION SALARY BONUS
<S> <C> <C>
--------------------------------------------------------------------------------
Thomas L. Gutshall.......................................... $170,000 --
Chairman of the Board and Chief Executive Officer
Kurt Petersen, PhD.......................................... $170,000 --
President and Chief Operating Officer
M. Allen Northrup, PhD...................................... $160,000 $64,625
Vice President, Research and Chief Technical Officer
Catherine A. Smith.......................................... $140,000 --
Vice President, Finance and Chief Financial Officer
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to any of the Named Executive Officers during the fiscal
year ended December 31, 1999.
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AGGREGATED OPTION EXERCISES IN THE YEAR DECEMBER 31, 1999 AND YEAR-END OPTION
VALUES
As of December 31, 1999, none of the Named Executive Officers held any options.
None of the Named Executive Officers exercised any options during the fiscal
year ended December 31, 1999.
EMPLOYEE BENEFIT PLANS
1997 STOCK OPTION PLAN
Our board of directors adopted our 1997 Stock Option Plan on January 31, 1997.
This plan provides for the grant of incentive stock options to our employees and
nonstatutory stock options to our employees, directors and consultants. As of
March 31, 2000, 2,800,000 shares of common stock were reserved for issuance
under this plan. Of these shares, 1,366,794 shares had been issued upon exercise
of stock options, 540,276 shares were subject to outstanding options and 892,930
shares were available for future grant.
Our board of directors administers this plan and determines the terms of options
granted, including the exercise price, the number of shares subject to
individual option awards and the vesting period of options. The exercise price
of nonstatutory options must generally be at least 85% of the fair market value
of our common stock on the date of grant. The exercise price of incentive stock
options cannot be lower than 100% of the fair market value of our common stock
on the date of grant and, in the case of incentive stock options granted to
holders of more than 10% of our voting power, not less than 110% of the fair
market value. The term of an incentive stock option cannot exceed 10 years, and
the term of an incentive stock option granted to a holder of more than 10% of
our voting power cannot exceed five years.
Our board of directors may not, materially amend, modify or terminate this plan
without the consent of a majority of our shareholders. This plan will terminate
in 2007 unless terminated earlier by our board of directors and our
shareholders.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 2000 Employee Stock Purchase Plan in April
2000. This plan provides our employees with an opportunity to purchase our
common stock through accumulated payroll deductions.
A total of 200,000 shares of common stock has been reserved for issuance under
this plan. In addition, this plan provides for annual increases in the number of
shares available for issuance under the plan on the first day of each year,
beginning January 1, 2001, equal to the lesser of:
+ 200,000 shares;
+ 0.75% of the outstanding shares of our capital stock on that date; or
+ such lesser amount as may be determined by our board of directors.
Our board of directors, or a committee appointed by the board, administers this
plan. Our board or its committee has full and exclusive authority to interpret
the terms of this plan and determine eligibility.
Employees are eligible to participate in this plan if they are employed by us or
any participating subsidiary for at least 20 hours per week for at least 22
weeks in any calendar year. However, an employee may not be granted an option to
purchase stock under the purchase plan if such employee immediately after grant
owns stock possessing five percent or more of the total combined voting power or
value of all classes of our capital stock or of any subsidiary.
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This plan, which is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended, allows participants to obtain favorable tax
treatment of purchases and sales of shares obtained under the plan. The plan
provides for offering periods of up to 24 months, as determined by the plan
administrator. The offering periods will generally start on January 1 of each
year, except that the first offering period will commence on the first trading
day before the effective date of this offering, will end on the last trading day
on or before December 31, 2000, and will have two purchase periods ending on the
last trading days of December 2000 and June 2001.
This plan permits participants to purchase our common stock through payroll
deductions of up to 15% of the participant's compensation, up to a maximum of
$25,000 per year. Compensation is defined as the participant's base straight
time gross earnings and commissions, but excludes payments for overtime, shift
premium payments, incentive compensation, incentive payments, bonuses and other
compensation.
Amounts deducted and accumulated for the participant's account are used to
purchase shares of our common stock on the last trading day of each purchase
period at a price of 85% of the lower of the fair market values of the common
stock at the beginning of the offering period and the end of the purchase
period. Participants may reduce their withholding percentage to zero at any time
during an offering period and may increase their withholding percentage or
decrease it on the first day of each purchase period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
A participant may not transfer rights granted under this plan other than by
will, the laws of descent and distribution or as otherwise provided under the
plan.
This plan provides that if we merge with or into another corporation or effect a
sale of substantially all of our assets, a successor entity may assume or
substitute for each outstanding purchase right. If the successor entity refuses
to assume or substitute the outstanding purchase rights, the offering period
then in progress will be shortened, and a new exercise date will be set.
This plan will terminate in 2020. Our board of directors has the authority,
however, to amend or terminate this plan at any time and may apply any action to
affect their outstanding rights to purchase stock under this plan.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Our board adopted the 2000 Non-Employee Directors' Stock Option Plan in March
2000. This plan provides for the automatic grant to our non-employee directors
of options to purchase shares of our common stock.
SHARE RESERVE
We have reserved a total of 200,000 shares of our common stock for issuance
under this plan. If an optionholder does not purchase the shares subject to his
or her option before the option expires or otherwise terminates, the shares that
are not purchased will again become available for issuance under this plan.
ADMINISTRATION
The board administers this plan. The board has the authority to construe,
interpret and amend this plan, but this plan specifies the essential terms of
the options, including:
+ the option recipients;
+ the grant dates;
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+ the number of shares subject to the option;
+ the exercisability and vesting of the option;
+ the exercise price; and
+ the type of consideration.
ELIGIBILITY
Options will automatically be granted under this plan to our non-employee
directors as follows:
+ Each non-employee director who is elected to the board following the adoption
of this plan will be granted an option for 15,000 shares on the date of
election to the board; and
+ On the date of the next board meeting following each year's annual meeting of
shareholders, each non-employee director who is continuing as a non-employee
director and has been a director for longer than six months will be granted
an additional option for 5,000 shares.
As long as the non-employee director continues to serve with us or with an
affiliate of ours (whether in the capacity of a director, consultant, or an
employee) each option granted under this plan to such person will vest
commencing one month after the date of its grant, at the rate of one
thirty-sixth of the total number of shares each month for the initial 15,000
share grants and one-twelfth of the total number of shares each month for the
annual 5,000 share grants until fully vested and will remain exercisable
throughout its term.
OPTION TERMS
Options have an exercise price equal to 100% of the fair market value of our
common stock on the grant date. The option term is ten years but it generally
will terminate three months after the optionholder's service terminates. If
termination is due to the optionholder's disability or death, however, the
post-termination exercise period is extended to 12 months.
The optionholder may not transfer the option. The optionholder may designate a
beneficiary to exercise the option following the optionholder's death.
Otherwise, the option exercise rights will pass by the optionholder's will or by
the laws of descent and distribution.
PLAN TERMINATION
This plan terminates in March 2010.
401(k) PLAN
In July 1997, our board of directors adopted a Retirement Savings and Investment
Plan covering our full-time employees located in the United States. This plan is
intended to qualify under Section 401(k) of the Internal Revenue Code of 1986,
as amended, so that contributions to this plan by employees, and the investment
earnings thereon, are not taxable to our employees until withdrawn. Pursuant to
this plan, employees may elect to reduce their current compensation by up to the
lesser of 20% of their annual compensation or the statutory prescribed annual
limit, $10,000 in 1999 and $10,500 in 2000, and to have the amount of such
reduction contributed to their plan. We do not currently make matching
contributions on behalf of plan participants.
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<PAGE> 58
--------------------------------------------------------------------------------
Related party transactions
SALES OF SECURITIES
+ In February 1997, we sold to various investors a total of 2,530,000 shares of
Series A preferred stock at a purchase price of $1.25 per share.
+ In April 1998, we sold to various investors a total of 3,666,658 shares of
Series B preferred stock at a purchase price of $2.25 per share.
+ In November 1998, we sold to Innogenetics, a collaborator, a total of 750,000
shares of Series C preferred stock at a purchase price of $3.00 per share.
+ In January through March 2000, we sold to various investors a total of
6,379,978 shares of Series C preferred stock at a purchase price of $3.00 per
share.
The following is a description of transactions since inception to which we have
been a party, in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of our capital stock had
or will have a direct or indirect material interest, other than compensation
arrangements which are described under "Management."
The following persons or entities purchased securities in the amounts set forth,
on an as-converted to common stock basis, in the chart below. We sold shares of
our Series A preferred stock between January 1997 and March 1997. We sold shares
of our Series B preferred stock between March 1998 and April 1998. We sold
shares of our Series C preferred stock between November 1998 and March 2000.
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
--------------------------------------------------------------------------------------------------------------------
PURCHASER(1) COMMON STOCK SERIES A SERIES B SERIES C WARRANTS
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------
DIRECTORS AND PRINCIPAL SHAREHOLDERS
Gerald S. Casilli........................... 80,000 140,000 23,000 65,306 --
Cristina H. Kepner(4)....................... -- -- 25,000 34,000 6,232
Invemed Associates LLC(4)................... -- -- 1,555,000 -- 233,248
Dean O. Morton.............................. 48,000 40,000 25,000 25,000 --
Wheatley Partners II, LP(5)................. -- 480,000 620,545 1,000,000 --
EXECUTIVE OFFICERS
Thomas L. Gutshall.......................... 1,000,000(2) 6,000 2,000 6,000 --
Kurt Petersen, PhD.......................... 1,200,000(2) -- -- -- --
M. Allen Northrup, PhD...................... 1,200,000(2)(3) -- -- -- --
Catherine A. Smith.......................... 259,000(2) -- -- -- --
OTHER TRANSACTION INFORMATION
Price per share............................. $0.005 to $1.50 $1.25 $2.25 $3.00 $2.58
</TABLE>
(1) See "Principal shareholders" for more detail on shares held by these
purchasers.
(2) These shares were purchased pursuant to a stock purchase agreement that
provided for a right of repurchase held by us.
(3) During 1997, we loaned $138,000 to Dr. Northrup for the purchase of common
stock from the exercise of the employee's stock options. Dr. Northrup paid
4% of the total exercise price, and we loaned Dr. Northrup the remaining 96%
of the purchase price. The loan bears interest at 7%.
(4) In connection with the sale of Series B preferred stock in April 1998,
Invemed Associates acted as our agent and received a warrant to purchase
233,248 shares of our common stock at $2.58 per share, which was transferred
to Invemed Fund L.P., and Cristina H. Kepner received a warrant to purchase
6,232 shares of our common stock at $2.58 per share.
(5) Barry Fingerhut, Irwin Lieber and Barry Rubenstein, three general partners
of Wheatley Partners II, LP, each own shares of Cepheid individually. See
"Principal Shareholders" for more detail on shares held by Messrs.
Fingerhut, Lieber and Rubenstein.
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54
<PAGE> 59
RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
We have entered into, or prior to this offering will enter into, indemnification
agreements with our directors and executive officers for the indemnification of
and advancement of expenses to these persons to the fullest extent permitted by
law. We also intend to enter into these agreements with our future directors and
executive officers.
Holders of our preferred stock are entitled to registration rights with respect
to the shares of our common stock that they will hold following this offering.
We believe that all transactions between us and our officers, directors,
principal shareholders and other affiliates have been and will be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
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55
<PAGE> 60
--------------------------------------------------------------------------------
Principal shareholders
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 2000 (assuming
conversion of all outstanding shares of preferred stock into common stock upon
the closing of this offering and as adjusted to reflect the sale of the shares
offered by this prospectus) by:
+ each person or group of affiliated persons who is known by us to beneficially
own more than 5% of our common stock;
+ each of our directors;
+ each Named Executive Officer listed in the "Summary compensation" table
above; and
+ all of our executive officers and directors as a group.
Percentage of ownership is based on 20,515,430 shares outstanding as of March
31, 2000 assuming conversion of our preferred stock, and 25,515,430 shares
outstanding after this offering, assuming no exercise of the underwriters'
over-allotment options. All shares of the common stock subject to options
currently exercisable or exercisable within 60 days after March 31, 2000 are
deemed to be outstanding for the purpose of computing the percentage of
ownership of the person holding such options, but are not deemed to be
outstanding for computing the percentage of ownership of any other person.
Unless otherwise indicated below, each shareholder named in the table has sole
or shared voting and investment power with respect to all shares beneficially
owned, subject to applicable community property laws. Unless otherwise indicated
in the table, the address of each individual listed in the table is c/o Cepheid,
1190 Borregas Avenue, Sunnyvale, CA 94089.
<TABLE>
<CAPTION>
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER TOTAL NUMBER OFFERING OFFERING
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Gerald S. Casilli(1)......................... 295,896 1.4% 1.2%
Cristina H. Kepner(2)........................ 65,232 * *
Ernest Mario, PhD(3)......................... 48,000 * *
Dean O. Morton(4)............................ 148,000 * *
Hollings Renton(5)........................... 48,000 * *
Thomas L. Gutshall(6)........................ 1,058,000 5.1% 4.1%
Kurt Petersen, PhD(7)........................ 1,119,000 5.5% 4.4%
M. Allen Northrup, PhD(8).................... 1,200,000 5.8% 4.7%
Catherine A. Smith(9)........................ 259,000 1.3% 1.0%
All executive officers and directors as a
group (9 persons).......................... 4,241,128 20.7% 16.6%
FIVE PERCENT SHAREHOLDERS
Invemed Associates LLC(10)................... 1,788,248 8.6% 7.0%
Wheatley Partners II, LP(11)................. 2,100,545 10.2% 8.2%
Barry Fingerhut(12).......................... 2,273,083 11.1% 8.9%
Irwin Lieber(13)............................. 2,273,083 11.1% 8.9%
Barry Rubenstein(14)......................... 2,273,083 11.1% 8.9%
</TABLE>
* Less than one percent.
(1) Includes an immediately exercisable option to acquire 10,000 shares of
common stock. As of March 31, 2000, we have the right to repurchase 9,167
of the shares issuable upon exercise of
--------------------------------------------------------------------------------
56
<PAGE> 61
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
this option and 20,000 shares of common stock owned by Mr. Casilli if he
ceases to be one of our directors. Mr. Casilli's business address is c/o
IKOS, 19050 Pruneridge Avenue, Cupertino, CA 95014.
(2) Includes a warrant to purchase 6,232 shares of common stock. Does not
include common stock and warrants owned by Invemed Fund, L.P., a fund for
which Invemed Associates LLC is the sole general partner. See Note 10. Ms.
Kepner is an officer and director of Invemed Associates LLC and disclaims
beneficial ownership of the common stock and warrants owned by Invemed
Fund, L.P. Ms. Kepner's business address is c/o Invemed Associates LLC, 375
Park Avenue, New York, NY 10152.
(3) Consists of an immediately exercisable option to purchase 48,000 shares. As
of March 31, 2000, we have the right to repurchase 47,000 of the shares
issuable upon exercise of this option if Dr. Mario ceases to be one of our
directors. Dr. Mario's business address is c/o ALZA Corporation, 1900
Charleston Road, Mountain View, CA 94043.
(4) Includes an immediately exercisable option to acquire 10,000 shares of
common stock. As of March 31, 2000, we have the right to repurchase 9,167
of the shares issuable upon exercise of this option and 15,000 shares of
common stock owned by Mr. Morton if he ceases to be one of our directors.
Mr. Morton's business address is c/o Hewlett-Packard Corporation, 3200
Hillview Avenue, Palo Alto, CA 94304.
(5) Consists of an immediately exercisable option to purchase 48,000 shares. As
of March 31, 2000, we have the right to repurchase 48,000 of the shares
issuable upon exercise of this option if Mr. Renton ceases to be one of our
directors. Mr. Renton's business address is c/o Onyx Pharmaceuticals, Inc.,
3031 Research Drive, Richmond, CA 94806.
(6) Includes an immediately exercisable option to purchase 50,000 shares. As of
March 31, 2000, we have the right to repurchase 45,834 of the shares
issuable upon exercise of this option and 62,500 shares of common stock
owned by Mr. Gutshall if he ceases to be an employee, director or
consultant for us.
(7) As of March 31, 2000, we have the right to repurchase 75,000 shares of
common stock owned by Dr. Petersen if he ceases to be an employee, director
or consultant for us.
(8) As of March 31, 2000, we have the right to repurchase 300,000 shares of
common stock owned by Dr. Northrup if he ceases to be an employee or
consultant for us.
(9) As of March 31, 2000, we have the right to repurchase 92,292 shares of
common stock owned by Ms. Smith if she ceases to be an employee or
consultant for us.
(10) Includes 1,555,000 shares of common stock owned by Invemed Fund, L.P., a
fund for which Invemed Associates LLC is the sole general partner and holds
a 0.5 percent partnership interest. Invemed Fund, L.P. also holds warrants
to purchase an additional 233,248 shares. The business address of Invemed
Fund, L.P. is c/o Invemed Associates LLC, 375 Park Avenue, New York, NY
10152.
(11) The business address of Wheatley Partners II, LP is 80 Cuttermill Road,
Suite 311, Great Neck, NY 11021.
(12) Includes 2,100,545 shares of common stock owned by Wheatley Partners II,
LP, a limited partnership in which Mr. Fingerhut is a general partner. Mr.
Fingerhut shares voting and dispositive power over the shares held by
Wheatley Partners II, LP and disclaims beneficial ownership of these shares
except to the extent of his equity interest therein. Mr. Fingerhut's
business address is c/o Wheatley Partners II, LP, 80 Cuttermill Road, Suite
311, Great Neck, NY 11021.
(13) Includes 2,100,545 shares of common stock owned by Wheatley Partners II,
LP, a limited partnership in which Mr. Lieber is a general partner. Mr.
Lieber shares voting and dispositive
--------------------------------------------------------------------------------
57
<PAGE> 62
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
power over the shares held by Wheatley Partners II, LP and disclaims
beneficial ownership of these shares except to the extent of his equity
interest therein. Mr. Lieber's business address is c/o Wheatley Partners
II, LP, 80 Cuttermill Road, Suite 311, Great Neck, NY 11021.
(14) Includes 2,100,545 shares of common stock owned by Wheatley Partners II,
LP, a limited partnership in which Mr. Rubenstein is a general partner. Mr.
Rubenstein shares voting and dispositive power over the shares held by
Wheatley Partners II, LP and disclaims beneficial ownership of these shares
except to the extent of his equity interest therein. Mr. Rubenstein's
business address is c/o Wheatley Partners II, LP, 80 Cuttermill Road, Suite
311, Great Neck, NY 11021.
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58
<PAGE> 63
--------------------------------------------------------------------------------
Description of capital stock
The following information describes our common stock and preferred stock, and
provisions of our amended and restated articles of incorporation and our bylaws,
all as will be in effect upon the closing of this offering. This description is
only a summary. You should also refer to the amended and restated articles and
bylaws which have been filed with the SEC as exhibits to our registration
statement, of which this prospectus forms a part. The descriptions of our common
stock and preferred stock reflect changes to our capital structure that will
occur upon the closing of this offering in accordance with the terms of the
amended and restated articles.
Upon completion of this offering, our authorized capital stock will consist of
100,000,000 shares of common stock, no par value, and 5,000,000 shares of
preferred stock, no par value.
COMMON STOCK
As of March 31, 2000, there were 7,188,794 shares of our common stock
outstanding and held of record by 96 shareholders. There will be 25,515,430
shares of our common stock outstanding upon the closing of this offering, which
gives effect to the issuance of 5,000,000 shares of common stock offered by us
under this prospectus and the conversion of preferred stock discussed below.
Each share of our common stock has identical rights and privileges in every
respect. The holders of our common stock are entitled to vote upon all matters
submitted to a vote of our shareholders and are entitled to one vote for each
share of common stock held. The holders of our common stock will not have
cumulative voting rights.
Subject to the prior rights and preferences, if any, applicable to shares of our
preferred stock or any series of preferred stock, the holders of our common
stock are entitled to receive such dividends, payable in cash, stock or
otherwise, as may be declared by our board of directors out of any funds legally
available for the payment of dividends.
If we voluntarily or involuntarily liquidate, dissolve or wind-up, the holders
of our common stock will be entitled to receive after distribution in full of
the preferential amounts, if any, to be distributed to the holders of our
preferred stock or any series of preferred stock, all of the remaining assets
available for distribution ratably in proportion to the number of shares of
common stock held by them. Holders of our common stock have no preferences or
any preemptive conversion or exchange rights and there will be no redemption or
sinking fund provisions applicable to our common stock.
PREFERRED STOCK
As of March 31, 2000, there were 13,326,636 shares of preferred stock
outstanding. Upon the closing of this offering, all outstanding shares of
preferred stock will be converted into 13,326,636 shares of our common stock and
will be held of record by 163 shareholders. These shares of preferred stock will
no longer be authorized, issued or outstanding.
Our board of directors is authorized to provide for the issuance of shares of
preferred stock in one or more series, and to fix for each series such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be provided in a
resolution or resolutions adopted by the board. The rights of the holders of our
common stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that we may issue in the future. Our board of
directors may authorize the issuance of shares of preferred stock with terms and
conditions that could discourage a takeover or other transaction that holders of
some or a
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59
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
majority of shares of our common stock might believe to be in their best
interests or in which holders of common stock might receive a premium for their
shares over the then market price.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement entered into between us and holders
of shares of common stock issuable upon conversion of our Series
A, Series B and Series C preferred stock, we are obligated, under limited
circumstances and subject to specified conditions and limitations, to use our
reasonable best efforts to register the registrable shares.
We must use our best efforts to register the registrable shares:
+ if we receive written notice from holders of 50% or more of the registrable
shares requesting that we effect a registration with respect to at least 20%
of the registrable shares then held by the holders requesting registration;
+ if we decide to register our own securities; or
+ if we receive written notice from any holder or holders of the registrable
shares requesting that we effect a registration on Form S-3 (a shortened form
of registration statement) with respect to the registrable shares and we are
then eligible to use Form S-3 (which at the earliest could occur twelve
calendar months after the closing of this offering).
However, in addition to certain other conditions and limitations, if requested
by the underwriters to decrease the number of shares registered, we can limit
the number of registrable shares included in the registration. The underwriters
have requested that no registrable shares be registered in this offering. In
addition, the holders of these registration rights have entered into lock-up
agreements and waived their registration rights for a period of 180 days
following this offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated articles of incorporation limit the personal liability
of our directors for monetary damages to the fullest extent permitted by the
California General Corporation Law. Under California law, a director's liability
to a company or its shareholders may not be limited:
+ for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
+ for acts or omissions that a director believes to be contrary to the best
interests of the company or its shareholders or that involve the absence of
good faith on the part of the director;
+ for any transaction from which a director derived an improper personal
benefit;
+ for acts or omissions that show a reckless disregard for the director's duty
to the company or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing the
director's duties, of a risk of serious injury to the company or its
shareholders;
+ for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the company or its
shareholders;
+ under Section 310 of the California General Corporation Law concerning
contracts or transactions between the company and a director; or
+ under Section 316 of the California General Corporation Law concerning
directors' liability for improper dividends, loans and guarantees.
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60
<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to our share holders for any violation by a
director of the director's fiduciary duty to us or our shareholders.
Our articles of incorporation also include an authorization for us to indemnify
our "agents," as defined in Section 317 of the California General Corporation
Law, through bylaw provisions, by agreement or otherwise, to the fullest extent
permitted by law. Pursuant to this provision, our amended and restated bylaws
provide for indemnification of our directors, officers and employees. In
addition, we may, at our discretion, provide indemnification to persons whom we
are not obligated to indemnify. The amended and restated bylaws also allow us to
enter into indemnity agreements with individual directors, officers, employees
and other agents. Indemnity agreements have been entered into with all directors
and certain executive officers and provide the maximum indemnification permitted
by law. We also intend to obtain directors' and officers' liability insurance.
These agreements, together with our amended and restated bylaws and amended and
restated articles of incorporation, may require us, among other things, to
indemnify our directors and executive officers, other than for liability
resulting from willful misconduct of a culpable nature, and to advance expenses
to them as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled to
indemnification. Section 317 of the California General Corporation Law, our
amended and restated bylaws and our indemnification agreements make provision
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain circumstances,
for liabilities, including reimbursement of expenses incurred, arising under the
Securities Act. We are not currently aware of any pending litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification will be required or permitted. Moreover, we are not
currently aware of any threatened litigation or proceeding that might result in
a claim for such indemnification. We believe that the foregoing indemnification
provisions and agreements are necessary to attract and retain qualified persons
and directors and executive officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Securities
Transfer and Trust.
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61
<PAGE> 66
--------------------------------------------------------------------------------
Shares eligible for future sale
Prior to this offering, there has been no public market for our common stock.
The market price of our common stock after this offering could decline as a
result of the sale of a large number of shares of our common stock in the
market, or the perception that such sales could occur. Such sales also could
make it more difficult for us to sell equity securities in the future at a time
and price that we deem appropriate. Based on the number of shares outstanding at
March 31, 2000, after this offering, we will have 25,515,430 outstanding shares
of common stock. Of these shares, the shares being offered hereby are freely
tradable. The remaining 20,515,430 shares are eligible for sale in the public
market at various times after 180 days from the date of this prospectus,
subject, in some cases, to volume limitations under Rule 144.
All of the holders of our common stock, together with the holders of options to
purchase 540,276 shares of common stock and the holders of warrants to purchase
320,397 shares of our stock, have entered into lock-up agreements under which
they have agreed with the underwriters not to offer, sell, contract to sell,
hedge or otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act of 1933 relating to, any of its
common stock or securities convertible into or exchangeable for shares of common
stock during the period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus, without the prior written
consent of UBS Warburg LLC.
In general, under Rule 144 of the Securities Act of 1933, a person or persons
whose shares are required to be aggregated, including an affiliate, whose shares
have been owned for at least one year is entitled to sell, within any
three-month period after the date of this prospectus, a number of shares that
does not exceed the greater of 1% of the then outstanding shares of common
stock -- approximately 255,154 shares immediately after this offering -- or the
average weekly trading volume in our common stock during the four calendar weeks
preceding the date on which notice of such sale is filed, subject to certain
restrictions. In addition, a person who is not deemed to have been an affiliate
of ours at any time during the 90 days preceding a sale and whose shares have
been beneficially owned by nonaffiliates for at least two years would be
entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from one
of our affiliates, such person's holding period for the purpose of effecting a
sale under Rule 144 commences on the date of transfer from the affiliate.
Following 90 days after the date of this prospectus, shares issued upon exercise
of options that we granted prior to the date of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act of 1933. Rule 701 permits resales of such shares in reliance upon
Rule 144 under the Securities Act of 1933 but without compliance with the
restrictions, including the holding-period requirement, imposed under Rule 144.
As of March 31, 2000, options to purchase a total of 540,276 shares of our
common stock were outstanding, all of which were currently exercisable. Of these
540,276 shares, 535,276 shares may be eligible for sale in the public market at
various times after 90 days from the date of this prospectus.
Approximately 180 days after the date of this prospectus, we intend to file a
registration statement to register for resale the 1,433,206 shares of common
stock reserved for issuance under our stock option plans and employee stock
purchase plan. We expect the registration statement to become effective
immediately upon filing. Shares issued upon the exercise of stock options
granted under our stock option plans will be eligible for resale in the public
market from time to time subject to vesting and, in the case of certain options,
the expiration of the lock-up agreements referred to above.
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62
<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
--------------------------------------------------------------------------------
Holders of our preferred stock, whose shares will be converted into 13,326,636
shares of our common stock upon the closing of this offering and holders of
warrants to purchase 320,397 shares of our common stock have the right, subject
to various conditions and limitations, to include their shares in registration
statements relating to our securities. By exercising their registration rights
and causing a large number of shares to be registered and sold in the public
market, these holders may cause the price of the common stock to fall. In
addition, any demand to include such shares in our registration statements could
have a material adverse effect on our ability to raise needed capital. See
"Management -- Benefit plans," "Principal shareholders," "Shares eligible for
future sale" and "Underwriting."
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63
<PAGE> 68
--------------------------------------------------------------------------------
Underwriting
Cepheid and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, Prudential Securities
Incorporated and Invemed Associates LLC are the representatives of the
underwriters.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
<S> <C>
--------------------------------------------------------------------------
UBS Warburg LLC.............................................
Prudential Securities Incorporated..........................
Invemed Associates LLC......................................
------------
Total.............................................
============
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional 750,000 shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional 750,000 shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
<S> <C> <C>
------------------------------------------------------------------------------------------
Per share................................................... $ $
Total................................................ $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1,300,000.
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
The underwriters have informed us that they do not expect discretionary sales to
exceed 5% of the shares of common stock to be offered.
Cepheid and all of its shareholders have agreed with the underwriters not to
offer, sell, contract to sell, hedge or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under the Securities
Act relating to, any of its common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, without the prior written consent of UBS Warburg LLC.
The underwriters have reserved for sale, at the initial public offering price,
up to 250,000 shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our management, other parties,
including our employees, may participate in the reserve shares program. The
number of shares available for sale to the general public in the offering will
be reduced
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64
<PAGE> 69
UNDERWRITING
--------------------------------------------------------------------------------
to the extent these persons purchase reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares in this offering.
As of March 31, 2000, Invemed Associates LLC, one of the underwriters, held
1,555,000 shares of Series B preferred stock through Invemed Fund, L.P., a fund
for which Invemed Associates is the general partner. These shares were purchased
in April 1998 at $2.25 per share. Certain affiliates of Invemed Associates hold
188,580 shares of Series B preferred stock, all of which were purchased in April
1998 at $2.25 per share, and 318,000 shares of Series C preferred stock, all of
which were purchased in January 2000 at $3.00 per share. An affiliate of UBS
Warburg LLC, one of the underwriters, holds an aggregate of 33,333 shares of
Series C preferred stock, all of which were purchased in January 2000 at $3.00
per share. Certain affiliates of Prudential Securities Incorporated, one of the
underwriters, hold 10,000 shares of Series B preferred stock, all of which were
purchased in April 1998 at $2.25 per share, and 43,333 shares of Series C
preferred stock, all of which were purchased in January or February 2000 at
$3.00 per share. The aforementioned affiliated shareholders have agreed, for a
period of 180 days following the date of this prospectus, that they will not
sell, transfer, assign, pledge, hypothecate or otherwise transfer these shares
without the prior written consent of UBS Warburg LLC. The National Association
of Securities Dealers, Inc. has deemed the shares of Series C preferred stock
held by these affiliated shareholders to be underwriting compensation. As such,
these affiliated shareholders have agreed that (i) not less than 276,267 shares
of such Series C preferred stock shall not be sold, transferred, assigned or
hypothecated for a period of five years from the effective date of this offering
and (ii) the balance of 394,666 held by such affiliated shareholders shall not
be sold, transferred, assigned or hypothecated for a period of one year from the
effective date of this offering, in each case except to officers or partners
(but not directors) of the underwriters who agree to be bound by the same
restrictions.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:
+ the information set forth in this prospectus and otherwise available to the
representatives;
+ the history and the prospects for the industry in which we compete;
+ the ability of our management;
+ our prospectus for future earnings, the present state of our development and
our current financial position;
+ the general condition of the securities markets at the time of this offering;
and
+ the recent market prices of, and the demand for, publicly traded common stock
of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of our common stock while the offering
is in progress.
The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or affect the
market price of our common stock. As a result, the price of our common stock may
be higher than the price that otherwise might
--------------------------------------------------------------------------------
65
<PAGE> 70
UNDERWRITING
--------------------------------------------------------------------------------
exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments that the underwriters may be required to make in respect thereof.
--------------------------------------------------------------------------------
66
<PAGE> 71
--------------------------------------------------------------------------------
Legal matters
The validity of the common stock offered hereby will be passed upon for us by
Heller Ehrman White & McAuliffe LLP, Palo Alto, California. Heller Ehrman White
& McAuliffe LLP owns 51,875 shares of our common and preferred stock, and HEWM
Investors, an entity affiliated with Heller Ehrman White & McAuliffe LLP, owns
39,444 shares of our common and preferred stock. Certain legal matters will be
passed upon for the underwriters by Dewey Ballantine LLP, New York, New York.
Experts
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements at December 31, 1998 and 1999, for the periods from inception (March
4, 1996) through December 31, 1997 and 1999, and for the years ended December
31, 1998 and 1999, as set forth in their report. We have included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
The statements in this prospectus as set forth under the captions "Risk
factors -- Our products could infringe on the intellectual property rights of
others, which may require costly litigation and, if we are not successful, could
also cause us to pay substantial damages and limit our liability to sell some or
all of our products" and "-- The rights we rely upon to protect the intellectual
property underlying our products may not be adequate, which could enable third
parties to use the technology and would reduce our ability to compete in the
market" and in "Business -- Intellectual Property" have been passed upon by
Heller Ehrman White & McAuliffe LLP, our patent counsel and experts on such
matters, and are included herein in reliance upon its review and approval.
--------------------------------------------------------------------------------
67
<PAGE> 72
--------------------------------------------------------------------------------
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act with respect to the
shares of common stock to be sold in this offering. This prospectus does not
contain all of the information set forth in the registration statement. For
further information with respect to us and the common stock to be sold in this
offering, reference is made to the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of ours, such
reference is qualified in all respects by such contract or document filed as
part of the registration statement. You should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
You may read and copy all or any portion of the registration statement or any
other information Cepheid files at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, DC 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's web site (http:\\www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors of
these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.
--------------------------------------------------------------------------------
68
<PAGE> 73
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------------------------------------------------------------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
--------------------------------------------------------------------------------
F- 1
<PAGE> 74
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cepheid
We have audited the accompanying consolidated balance sheets of Cepheid (a
development stage company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended December 31, 1998 and 1999 and the periods from inception (March
4, 1996) through December 31, 1997 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cepheid at
December 31, 1998 and 1999 and the consolidated results of its operations and
its cash flows for the years ended December 31, 1998 and 1999 and the periods
from inception (March 4, 1996) through December 31, 1997 and 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 20, 2000
--------------------------------------------------------------------------------
F- 2
<PAGE> 75
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY
MARCH 31,
DECEMBER 31, MARCH 31, 2000
1998 1999 2000 (NOTE 1)
-------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 7,079,031 $ 1,493,313 $ 18,420,495
Short term investments................. 1,596,529 -- --
Accounts receivable.................... 764,495 566,033 574,134
Inventory.............................. -- 285,433 505,019
Prepaid expenses and other current
assets............................... 172,110 434,998 163,638
----------- ------------ ------------
Total current assets..................... 9,612,165 2,779,777 19,663,286
Property and equipment, net.............. 1,100,164 2,077,844 2,160,512
Other assets............................. 330,010 28,299 263,250
----------- ------------ ------------
Total assets............................. $11,042,339 $ 4,885,920 $ 22,087,048
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 434,992 $ 574,029 $ 564,238
Accrued compensation................... 239,572 345,796 544,448
Accrued professional fees.............. -- 78,021 40,347
Accrued other liabilities.............. 367,515 412,210 636,803
Deferred revenue....................... 44,760 128,533 85,638
Current portion of equipment
financing............................ 174,536 496,742 512,414
Current portion of deferred rent....... 4,128 12,313 14,992
----------- ------------ ------------
Total current liabilities................ 1,265,503 2,047,644 2,398,880
Equipment financing, less current
portion................................ 530,836 1,205,066 1,070,933
Deferred rent, less current portion...... 71,320 76,357 71,716
Commitments
Shareholders' equity:
Convertible preferred stock, no par
value; designated in series;
14,000,000 shares authorized;
6,946,658, 6,946,658 and 13,326,636
shares issued and outstanding at
December 31, 1998 and 1999 and March
31, 2000, respectively (none pro
forma); aggregate liquidation value
of $13,662,481 and $32,802,415 at
December 31, 1999 and March 31, 2000,
respectively......................... 13,565,965 13,565,965 32,679,594 $ --
Common stock, no par value;
30,000,000 shares authorized,
6,764,930, 6,871,177 and 7,188,794
shares issued and outstanding at
December 31, 1998 and 1999 and March
31, 2000, respectively (20,515,430
shares pro forma).................... 297,943 350,690 698,443 33,378,037
Additional paid-in capital............. -- 766,005 6,317,630 6,317,630
Note receivable from shareholder....... (103,500) (69,000) (69,000) (69,000)
Deferred stock-based compensation...... -- (552,466) (5,323,655) (5,323,655)
Deficit accumulated during the
development stage.................... (4,585,728) (12,504,341) (15,757,493) (15,757,493)
----------- ------------ ------------ ------------
Total shareholders' equity............... 9,174,680 1,556,853 18,545,519 $ 18,545,519
----------- ------------ ------------ ============
Total liabilities and shareholders'
equity................................. $11,042,339 $ 4,885,920 $ 22,087,048
=========== ============ ============
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 3
<PAGE> 76
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(MARCH 4, 1996) (MARCH 4, 1996)
THROUGH THROUGH THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999 1999 1999 2000
--------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............ $ -- $ -- $ 159,451 $ 159,451 $ -- $ 151,388
Grant and government
sponsored research
revenue................ 1,400,081 2,869,540 2,248,935 6,518,556 263,746 654,905
Research and development
revenue................ 45,206 706,969 1,187,138 1,939,313 351,538 109,665
----------- ----------- ----------- ------------ ------------ ------------
Total revenues............. 1,445,287 3,576,509 3,595,524 8,617,320 615,284 915,958
Operating costs and
expenses:
Cost of product sales.... -- -- 97,088 97,088 -- 130,585
Research and development
(including charges for
stock-based
compensation of
$169,288 in 1999 and
$409,235 for the three
months ended March 31,
2000).................. 2,220,688 5,990,127 10,261,332 18,472,147 2,282,050 3,467,207
Selling, general and
administrative
(including charges for
stock-based
compensation of $14,251
in 1999 and $206,201
for the three months
ended March 31,
2000).................. 582,702 1,178,318 1,297,731 3,058,751 288,972 730,155
----------- ----------- ----------- ------------ ------------ ------------
Total costs and operating
expenses................. 2,803,390 7,168,445 11,656,151 21,627,986 2,571,022 4,327,947
----------- ----------- ----------- ------------ ------------ ------------
Loss from operations....... (1,358,103) (3,591,936) (8,060,627) (13,010,666) (1,955,738) (3,411,989)
Interest income............ 87,690 325,244 250,135 663,069 104,043 202,214
Interest expense........... (3,745) (44,878) (108,121) (156,744) (19,318) (43,377)
----------- ----------- ----------- ------------ ------------ ------------
Net loss................... (1,274,158) (3,311,570) (7,918,613) (12,504,341) (1,871,013) (3,253,152)
Deemed dividend to Series C
preferred shareholders
(Note 10)................ -- -- -- -- -- (19,113,629)
----------- ----------- ----------- ------------ ------------ ------------
Net loss allocable to
common shareholders...... $(1,274,158) $(3,311,570) $(7,918,613) $(12,504,341) $ (1,871,013) $(22,366,781)
=========== =========== =========== ============ ============ ============
Basic and diluted net loss
per common share......... $ (7.61) $ (1.37) $ (1.90) $ (0.55) $ (4.42)
=========== =========== =========== ============ ============
Shares used in computing
basic and diluted net
loss per common share.... 167,390 2,414,087 4,163,963 3,415,273 5,064,632
Pro forma basic and diluted
net loss per common
share,
$ (0.71) $ (1.22)
=========== ============
Shares used in computing
pro forma basic and
diluted net loss per
common share,
(unaudited).............. 11,110,621 18,391,268
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 4, 1996)
THROUGH
MARCH 31,
2000
---------------------------
(UNAUDITED)
<S> <C>
Revenues:
Product sales............ $ 310,839
Grant and government
sponsored research
revenue................ 7,173,461
Research and development
revenue................ 2,048,978
------------
Total revenues............. 9,533,278
Operating costs and
expenses:
Cost of product sales.... 227,673
Research and development
(including charges for
stock-based
compensation of
$169,288 in 1999 and
$409,235 for the three
months ended March 31,
2000).................. 21,939,354
Selling, general and
administrative
(including charges for
stock-based
compensation of $14,251
in 1999 and $206,201
for the three months
ended March 31,
2000).................. 3,788,906
------------
Total costs and operating
expenses................. 25,955,933
------------
Loss from operations....... (16,422,655)
Interest income............ 865,283
Interest expense........... (200,121)
------------
Net loss................... (15,757,493)
Deemed dividend to Series C
preferred shareholders
(Note 10)................ (19,113,629)
------------
Net loss allocable to
common shareholders...... $(34,871,122)
============
Basic and diluted net loss
per common share.........
Shares used in computing
basic and diluted net
loss per common share....
Pro forma basic and diluted
net loss per common
share,
Shares used in computing
pro forma basic and
diluted net loss per
common share,
(unaudited)..............
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 4
<PAGE> 77
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (MARCH 4, 1996) THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
DEFICIT
NOTE ACCUMULATED
ADDITIONAL RECEIVABLE DEFERRED DURING THE TOTAL
PREFERRED COMMON PAID-IN FROM STOCK-BASED DEVELOPMENT SHAREHOLDERS'
STOCK STOCK CAPITAL SHAREHOLDER COMPENSATION STAGE EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------------
Issuance of 4,548,000 shares
of common stock at $0.005
per share for cash to
founders and directors
between December 1996 and
February 1997.............. $ -- $ 22,740 $ -- $ -- $ -- $ -- $ 22,740
Issuance of 1,328,000 shares
of common stock at
$0.05 - $0.12 per share for
cash and a promissory note
to founders and directors
in March, June and August
1997....................... -- 153,760 -- (138,000) -- -- 15,760
Issuance of 2,530,000 shares
of Series A convertible
preferred stock to
investors at $1.25 per
share for cash in March
1997, net of issuance costs
of $17,500................. 3,145,000 -- -- -- -- -- 3,145,000
Net loss and comprehensive
loss for period from
inception (March 4, 1996)
through December 31,
1997....................... -- -- -- -- -- (1,274,158) (1,274,158)
----------- -------- ---------- --------- ----------- ------------ -----------
Balance at December 31, 1997... 3,145,000 176,500 -- (138,000) -- (1,274,158) 1,909,342
Issuance of 888,930 shares of
common stock at
$0.05 - $0.30 per share for
cash under employee and
consultant option plans at
various dates in 1998...... -- 121,443 -- -- -- -- 121,443
Issuance of 3,666,658 shares
of Series B convertible
preferred stock to
investors at $2.25 per
share in April 1998 for
cash, net of issuance costs
of $58,650................. 8,191,330 -- -- -- -- -- 8,191,330
Issuance of 750,000 shares of
Series C convertible
preferred stock to a
research collaborator at
$3.00 per share in November
1998 for cash, net of
issuance costs of
$20,365.................... 2,229,635 -- -- -- -- -- 2,229,635
Payment on note receivable
from related party in
April, 1998................ -- -- -- 34,500 -- -- 34,500
Net loss and comprehensive
loss....................... -- -- -- -- -- (3,311,570) (3,311,570)
----------- -------- ---------- --------- ----------- ------------ -----------
Balance at December 31, 1998... 13,565,965 297,943 -- (103,500) -- (4,585,728) 9,174,680
Issuance of 106,247 shares of
common stock at
$0.12 - $0.50 per share for
cash under employee and
consultant plans and to
other investors at various
dates in 1999, net of
repurchases................ -- 52,747 -- -- -- -- 52,747
Payment on note receivable
from related party in July
1999....................... -- -- -- 34,500 -- -- 34,500
Deferred stock-based
compensation............... -- -- 736,005 -- (736,005) -- --
Amortization of deferred
stock-based compensation... -- -- -- -- 183,539 -- 183,539
Compensation relating to
options issued to
consultants to purchase
common stock for services
rendered, such option
valued using the
Black-Scholes Valuation
model...................... -- -- 30,000 -- -- -- 30,000
Net loss and comprehensive
loss....................... -- -- -- -- -- (7,918,613) (7,918,613)
----------- -------- ---------- --------- ----------- ------------ -----------
Balance at December 31, 1999... 13,565,965 350,690 766,005 (69,000) (552,466) (12,504,341) 1,556,853
Issuance of 317,617 shares of
common stock at
$0.12 - $1.50 per share for
cash under employee and
consultant option plans, in
January, February and March
2000 (unaudited)........... -- 347,753 -- -- -- -- 347,753
Issuance of 6,379,978 shares
of Series C convertible
preferred stock to
investors at $3.00 per
share in January 2000 for
cash, net of issuance costs
of $26,371 (unaudited)..... 19,113,629 -- -- -- -- -- 19,113,629
Deferred stock-based
compensation (unaudited)... -- -- 5,386,625 -- (5,386,625) -- --
Amortization of deferred
stock-based compensation
(unaudited)................ -- -- -- -- 615,436 -- 615,436
Compensation relating to
options issued to
consultants to purchase
common stock for services
rendered, such option
valued using the
Black-Scholes Valuation
model (unaudited).......... -- -- 165,000 -- -- -- 165,000
Net loss and comprehensive
loss (unaudited)........... -- -- -- -- -- (3,253,152) (3,253,152)
----------- -------- ---------- --------- ----------- ------------ -----------
Balance at March 31, 2000
(unaudited).................. $32,679,594 $698,443 $6,317,630 $ (69,000) $(5,323,655) $(15,757,493) $18,545,519
=========== ======== ========== ========= =========== ============ ===========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 5
<PAGE> 78
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(MARCH 4, 1996) (MARCH 4, 1996)
THROUGH THROUGH THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999 1999 1999 2000
-------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................... $(1,274,158) $(3,311,570) $(7,918,613) $(12,504,341) $(1,871,013) $(3,253,152)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization..... 28,106 220,905 498,228 747,239 101,265 171,643
Amortization of deferred stock-
based compensation.............. -- -- 183,539 183,539 -- 615,436
Issuance of options to purchase
common stock for services
rendered........................ -- -- 30,000 30,000 -- 165,000
Deferred rent..................... 9,496 65,952 13,222 88,670 (312) (1,962)
Changes in operating assets and
liabilities:
Accounts receivable............. (448,653) (315,842) 198,462 (566,033) 230,984 (8,101)
Inventory....................... -- -- (285,433) (285,433) -- (219,586)
Prepaid expenses and other
assets........................ (105,502) (96,618) (261,177) (463,297) (67,429) 36,409
Accounts payable and other
current liabilities........... 369,121 478,146 345,526 1,192,793 243,424 134,233
Accrued compensation............ 53,467 186,105 106,224 345,796 68,483 198,652
----------- ----------- ----------- ------------ ----------- -----------
Net cash used in operating
activities........................ (1,368,123) (2,772,922) (7,090,022) (11,231,067) (1,294,598) (2,161,428)
----------- ----------- ----------- ------------ ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures............... (507,169) (842,006) (1,475,908) (2,825,083) (502,436) (254,311)
Proceeds from maturities of
marketable securities............. 1,220,776 4,717,429 1,596,529 7,534,734 1,596,529 --
Purchase of marketable
securities........................ (2,040,323) (5,494,411) -- (7,534,734) -- --
Restricted cash.................... (300,000) -- 300,000 -- -- --
----------- ----------- ----------- ------------ ----------- -----------
Net cash (used in) provided by
investing activities.............. (1,626,716) (1,618,988) 420,621 (2,825,083) 1,094,093 (254,311)
----------- ----------- ----------- ------------ ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from the sales of
preferred shares.................. 3,162,500 10,499,990 -- 13,662,490 -- 19,113,629
Net proceeds from the sales of
common shares..................... 21,000 42,418 52,747 116,165 23,412 347,753
Repayment on note receivable from
shareholder....................... -- 34,500 34,500 69,000 -- --
Proceeds from loan arrangements.... 116,898 690,282 1,266,287 2,073,467 -- --
Principle payments under loan
arrangements...................... (4,990) (96,818) (269,851) (371,659) (39,341) (118,461)
----------- ----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities.............. 3,295,408 11,170,372 1,083,683 15,549,463 (15,929) 19,342,921
----------- ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash
and cash equivalents.............. 300,569 6,778,462 (5,585,718) 1,493,313 (216,434) 16,927,182
Cash and cash equivalents at
beginning of period............... -- 300,569 7,079,031 -- 7,079,031 1,493,313
----------- ----------- ----------- ------------ ----------- -----------
Cash and cash equivalents at end of
period............................ $ 300,569 $ 7,079,031 $ 1,493,313 $ 1,493,313 $ 6,862,597 $18,420,495
=========== =========== =========== ============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............ $ 3,747 $ 44,878 $ 108,121 $ 156,746 $ 19,318 $ 43,377
=========== =========== =========== ============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock under
promissary note................. $ 138,000 $ -- $ -- $ 138,000 $ -- $ --
=========== =========== =========== ============ =========== ===========
Conversion of accounts payable to
convertible preferred stock..... $ 30,000 $ -- $ -- $ 30,000 $ -- $ 30,000
=========== =========== =========== ============ =========== ===========
Deferred stock-based compensation
related to certain stock
options......................... $ -- $ -- $ 736,005 $ 736,005 $ -- $ 5,386,625
=========== =========== =========== ============ =========== ===========
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 4, 1996)
THROUGH
MARCH 31, 2000
-----------------------------------
(UNAUDITED)
<S> <C>
OPERATING ACTIVITIES:
Net loss........................... $(15,757,493)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization..... 918,882
Amortization of deferred stock-
based compensation.............. 798,975
Issuance of options to purchase
common stock for services
rendered........................ 195,000
Deferred rent..................... 86,708
Changes in operating assets and
liabilities:
Accounts receivable............. (574,134)
Inventory....................... (505,019)
Prepaid expenses and other
assets........................ (426,888)
Accounts payable and other
current liabilities........... 1,327,026
Accrued compensation............ 544,448
------------
Net cash used in operating
activities........................ (13,392,495)
------------
INVESTING ACTIVITIES:
Capital expenditures............... (3,079,394)
Proceeds from maturities of
marketable securities............. 7,534,734
Purchase of marketable
securities........................ (7,534,734)
Restricted cash.................... --
------------
Net cash (used in) provided by
investing activities.............. (3,079,394)
------------
FINANCING ACTIVITIES:
Net proceeds from the sales of
preferred shares.................. 32,776,119
Net proceeds from the sales of
common shares..................... 463,918
Repayment on note receivable from
shareholder....................... 69,000
Proceeds from loan arrangements.... 2,073,467
Principle payments under loan
arrangements...................... (490,120)
------------
Net cash provided by (used in)
financing activities.............. 34,892,384
------------
Net increase (decrease) in cash
and cash equivalents.............. 18,420,495
Cash and cash equivalents at
beginning of period............... --
------------
Cash and cash equivalents at end of
period............................ $ 18,420,495
============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............ $ 200,123
============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock under
promissary note................. $ 138,000
============
Conversion of accounts payable to
convertible preferred stock..... $ 60,000
============
Deferred stock-based compensation
related to certain stock
options......................... $ 6,122,630
============
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 6
<PAGE> 79
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Cepheid (the "Company") was incorporated in the State of California on March 4,
1996. The Company was organized to develop new technology platforms that exploit
the advantages of micromachining, microelectronics, and microfluidic
technologies to create automated, integrated, miniaturized instrument systems
for life sciences research, clinical diagnostics, industrial testing and
pharmacogenomics markets.
The Company's activities to date have consisted principally of raising capital,
arranging for facilities, acquiring equipment and licensing rights, recruiting
managerial and technical personnel, implementing document control and designing
and developing instrument systems. Accordingly, the Company is considered to be
in the development stage at March 31, 2000. The statement of operations for the
year ended December 31, 1997 included approximately $95,000 of expenses incurred
from our inception (March 4, 1996) to December 31, 1996 related to fundraising
activities. Although we were formed in March 1996, we did not receive our
initial financing until March 1997.
At December 31, 1999 and March 31, 2000, the Company had incurred an accumulated
deficit of approximately $12,500,000 and $15,757,000, respectively. The Company
has and expects to continue to finance its activities principally through
revenue sources, sales of its equity securities (see Note 10), and capital
equipment financing.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Cepheid include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from these estimates.
UNAUDITED PRO FORMA INFORMATION
In February 2000, the Board of Directors authorized the management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is consummated under the terms presently
anticipated, all of the preferred stock outstanding will automatically be
converted into common stock. Unaudited pro forma shareholders' equity at March
31, 2000, as adjusted for the assumed conversion of the preferred stock, is set
forth on the balance sheet.
INTERIM FINANCIAL DATA
The consolidated financial information at March 31, 2000 and for the three
months ended March 31, 1999 and 2000 is unaudited but has been prepared on the
same basis as the annual consolidated
--------------------------------------------------------------------------------
F- 7
<PAGE> 80
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial statements and, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the consolidated financial position at such
dates and the consolidated operating results and cash flows for such periods.
Results for the interim periods are not necessarily indicative of the results to
be expected for any subsequent period.
REVENUE RECOGNITION
Contract revenues related to best efforts, research and development agreements
and government grants are recognized as the related services are performed.
Under these agreements, the Company is required to perform specific research and
development activities and is reimbursed based on the costs associated with each
specific contract over the term of the agreement. Milestone related revenues are
recognized upon the achievement of the specified milestone. Deferred revenue is
recorded when funds are received in advance of services to be performed.
Product revenue is recognized upon delivery and the transfer of title to
customers, net of allowances for estimated returns, if any.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of costs incurred for
company-sponsored and collaborative research and development activities. These
costs include direct and research-related overhead expenses. Research and
development expenses under collaborative agreements and government grants
approximate the revenue recognized under such agreements. The Company expenses
research and development costs as such costs are incurred.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original maturities
of three months or less. At December 31, 1998, 1999 and March 31, 2000, the
Company had $6,929,634, $1,493,015 and $18,343,332, respectively, in a money
market fund which invests in various U.S. government securities including
Treasury bills, notes and bonds.
SHORT-TERM INVESTMENTS
The Company classifies its short-term investments as available-for-sale and
records its investments at fair market value in accordance with Statement of
Financial Accounting Standards No. 115. Available-for-sale securities are
carried at amounts that approximate fair market value based on quoted market
prices. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. Interest on securities classified as available-for-sale is also included
in interest income. The Company has experienced no realized gains or losses on
its short-term investments. At December 31, 1998, short-term investments
consisted of U.S. government securities with an average maturity of 90 days, and
a fair value of $1,596,529, which approximated amortized cost. There were no
short-term investments as of December 31, 1999 and March 31, 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method, and the cost is amortized over the estimated useful lives
of the assets, which range from three to five
--------------------------------------------------------------------------------
F- 8
<PAGE> 81
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years. Leasehold improvements are amortized using the straight-line method over
the estimated useful lives of the assets or the term of the lease, whichever is
shorter.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), the Company reviews long-lived assets,
including property and equipment, for impairment whenever events or changes in
business circumstances indicate that the carrying amounts of the assets may not
be fully recoverable. Under SFAS 121, an impairment loss would be recognized
when estimated undiscounted future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows. Through March 31,
2000, there have been no such losses.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company has elected to account
for stock options granted to employees and directors using the intrinsic value
method and; accordingly, does not recognize compensation expense for stock
options granted to employees with exercise prices equal to the fair value of the
underlying common shares. Options granted to non-employees have been accounted
for in accordance with SFAS 123 and Emerging Issues Task Force Consensus No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling, Goods or Services," and
may be periodically re-measured with the resulting value charged to expense over
the period of the related services being rendered.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual
cost) or market. At December 31, 1999 and March 31, 2000, inventories consisted
mainly of raw materials.
COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities to be included in other comprehensive income. For the years ended
December 31, 1998 and 1999 and the three months ended March 31, 1999 and 2000,
comprehensive loss equaled net loss as other comprehensive income (loss) was
zero.
SEGMENT REPORTING
Effective in January 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. The Company has
determined that it operates in only one segment and accordingly, the adoption of
SFAS 131 had no impact on the financial statements.
--------------------------------------------------------------------------------
F- 9
<PAGE> 82
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET LOSS PER SHARE
Basic net loss per share has been calculated based on the weighted-average
number of common shares outstanding during the period, less shares subject to
the Company's right of repurchase. Diluted net loss per share would give effect
to the dilutive effect of common stock equivalents consisting of convertible
preferred stock, stock options and warrants (calculated using the treasury stock
method). Potentially dilutive securities have been excluded from the computation
of diluted net loss per share as their inclusion would be antidilutive.
The computation of pro forma basic and diluted 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.
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (MARCH 4, THREE MONTHS
1996) THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, 1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------
Net loss allocable to common
shareholders............... $(1,274,158) $(3,311,570) $(7,918,613) $(1,871,013) $(22,366,781)
=========== =========== =========== =========== ============
Basic and diluted:
Weighted-average shares of
common stock
outstanding.............. 5,112,493 6,501,013 6,834,552 6,791,443 6,871,177
Less: weighted-average
shares subject to
repurchase............... (4,945,103) (4,086,926) (2,670,589) (3,376,170) (1,806,545)
----------- ----------- ----------- ----------- ------------
Shares used in computing
basic and diluted net
loss per share........... 167,390 2,414,087 4,163,963 3,415,273 5,064,632
=========== =========== =========== =========== ============
Basic and diluted net loss
per share.................. $ (7.61) $ (1.37) $ (1.90) $ (0.55) $ (4.42)
=========== =========== =========== =========== ============
Pro forma basic and diluted:
Shares used above.......... 4,163,963 5,064,632
Pro forma adjustment to
reflect weighted-average
effect of assumed
conversion of preferred
stock (unaudited)........ 6,946,658 13,326,636
----------- ------------
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)........ 11,110,621 18,391,268
=========== ============
Pro forma basic and diluted
net loss per share
(unaudited)................ $ (0.71) $ (1.22)
=========== ============
</TABLE>
--------------------------------------------------------------------------------
F- 10
<PAGE> 83
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During all periods presented, the Company had securities outstanding which could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per share, as their effect would have
been antidilutive. These outstanding securities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------
Convertible preferred stock...... 2,530,000 6,946,658 6,946,658 6,946,658 13,326,636
Outstanding options.............. 495,920 199,880 289,360 176,330 540,276
Warrants......................... 32,000 306,797 320,397 320,397 320,397
---------- ---------- ---------- ---------- -----------
Total................... 3,057,920 7,453,335 7,556,415 7,443,385 14,187,309
========== ========== ========== ========== ===========
Weighted average exercise price
of options..................... $ 0.11 $ 0.18 $ 0.39 $ 0.26 $ 2.39
========== ========== ========== ========== ===========
Weighted average exercise price
of warrants.................... $ 1.75 $ 2.49 $ 2.49 $ 2.49 $ 2.49
========== ========== ========== ========== ===========
</TABLE>
SIGNIFICANT CONCENTRATIONS
Financial instruments that potentially subject the company to concentrations of
credit risk primarily consist of cash equivalents and marketable securities.
The Company relies on several companies as the sole source of various materials
in its manufacturing process. Any extended interruption in the supply of these
materials could result in the failure to meet customer demand.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on the
Company's results of operations or financial condition when adopted as the
Company holds no derivative financial instruments and does not currently engage
in hedging activities.
In March 1998, the ACIPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 requires that the entities capitalize certain costs related to internal
use software once certain criteria have been met. The Company adopted the
provisions of SOP 98-1 on January 1, 1999. Through December 31, 1999, the
Company has capitalized approximately $350,000 relating to the purchase and
installation of enterprise resource planning, accounting, cadcam and
documentation systems for internal use. The assets are depreciated using the
straight line method over a useful life which is expected to be five years.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition. The adoption of SAB 101 had no impact on the
Company's historical revenue recognition policy.
--------------------------------------------------------------------------------
F- 11
<PAGE> 84
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LICENSE AGREEMENTS
LAWRENCE LIVERMORE NATIONAL LABORATORY
The Company has a worldwide exclusive license with Lawrence Livermore National
Laboratory ("LLNL") to use or sublicense certain patent rights and to make, have
made, import, and use certain licensed products relating to the patent rights
for the use of rapid thermal cycling technology with real time optical detection
for nucleic acid amplification.
In consideration for this technology, the Company paid LLNL an issue fee of
$150,000 in 1997, which is included in research and development expense in that
year. Upon commercialization of any product containing the licensed technology,
including the Smart Cycler system, the Company will pay royalties to LLNL based
on net sales.
PE BIOSYSTEMS
In April 2000, the Company entered into a non-exclusive license agreement with
PE Biosystems for the use of a thermal cycling technology in specific fields.
The license required the Company to pay a fee of approximately $120,000 upon the
execution of the agreement and to pay royalties on future product sales.
3. GRANT AND OTHER GOVERNMENT SPONSORED RESEARCH AGREEMENTS
THE EDGEWOOD RESEARCH, DEVELOPMENT AND ENGINEERING CENTER
In September 1996, The Company entered into a research and development contract
with the Edgewood Research, Development and Engineering Center ("ERDEC"), a
department of the U.S. government. The agreement provides for research and
development funding as well as certain milestone payments to the Company upon
the occurrence of specific events as defined in the agreement. The agreement and
its related service agreement terminated in February 2000.
Total revenue of $1,325,081 (95% of total grant and government-sponsored
research revenue), $1,112,925 (39% of total grant and government-sponsored
research revenue), $54,328 (2% of total grant and government-sponsored research
revenue) and $2,212 (1% of total grant and government-sponsored research
revenue) was recognized for the period from inception (March 4, 1996) through
December 31, 1997, for the years ended December 31, 1998 and 1999, and for the
three months ended March 31, 2000, respectively.
US DEPARTMENT OF THE ARMY
In November 1997, the Company entered into an agreement with the US Army to
conduct research and development services relating to the design and development
of a specified device. The agreement was modified in May 1998 and in August
1998. The agreement provides for research and development cost-plus-fixed-fee
funding and is performed on the "best-efforts" basis. The aggregate funding for
the agreement, including all modifications, totaled $1,349,545. The contract
termination date has been extended to January 2001 and includes additional
funding. Revenue recognized under this research agreement was $262,412 (9% of
total grant and government sponsored research revenue), $976,071 (43% of total
grant and government sponsored research revenue) and $111,062 (17% of total
grant
--------------------------------------------------------------------------------
F- 12
<PAGE> 85
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and government-sponsored research revenue) for the years ended December 31, 1998
and 1999, and for the three months ended March 31, 2000, respectively.
GRANT FROM THE DEFENSE ADVANCED RESEARCH PROJECTS AGENCY
In May 1998, the Company received a three-year grant of approximately $5,000,000
from the Defense Advanced Research Projects Agency ("DARPA") to perform research
and development on the design and development of a specific device. Over the
three year period, approximately $1,000,000 of this amount directly funds work
by the United States Military Institute for Infectious Disease ("USAMRIID"), a
subcontractor to the Company under the grant. The Company estimates that up to
an additional $750,000 funded to the Company will in turn fund other
subcontractors under the grant over the same period. The associated revenue and
expense related to these subcontractors will appear in the Company's statement
of operations. The three-year grant is subject to annual funding approval. For
the first and second years of the program, $1,057,254 and $1,643,013,
respectively have been awarded. Such amounts exclude funding for the USAMRIID
subcontract. Costs associated with the research and development activities under
this grant for the years ended December 1998 and 1999, and for the three months
ended March 31, 2000, approximate the revenue recognized of $882,213 (31% of
total grant and government sponsored research revenue), $968,348 (43% of total
grant and government sponsored research revenue) and $395,813 (60% of total
grant and government-sponsored research revenue), respectively.
4. RESEARCH AND DEVELOPMENT ARRANGEMENT
In November 1998, the Company entered into a joint research and development
collaboration and supply agreement with Innogenetics NV which provides funding
for best efforts research and development activities to the Company. The
contract does not have a specified term, however, termination may occur upon
mutual consent of the parties or by contract breach. Funding under this
arrangement approximates $1.4 million and revenue recognized under this research
arrangement was $476,125, $730,817 and $109,665 for the years ended December 31,
1998 and 1999, and for the three months ended March 31, 2000, respectively.
In November 1998, in conjunction with the agreement, Innogenetics purchased
750,000 shares of Series C preferred stock at $3.00 per share.
5. DISTRIBUTION AGREEMENT
In January 2000, the Company entered into a co-exclusive, multi-year agreement
with Fisher Scientific Company L.L.C. ("Fisher") to market the Cepheid Smart
Cycler(R) system in the United States. Under the terms of the agreement, the
Company granted to Fisher the co-exclusive right to distribute the Company's
thermal cyclers, accessories and reaction tubes in the United States and certain
foreign countries into the life science market. The term of the agreement
extends for three years from the date of the Company's initial product launch
and remains in force for successive six month periods unless either party gives
written notice of non-renewal. The Company may also terminate the co-exclusivity
of the distribution rights if Fisher fails to achieve certain sales targets.
--------------------------------------------------------------------------------
F- 13
<PAGE> 86
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. JOINT VENTURE AGREEMENT
In February 2000, the Company entered into a joint venture shareholder agreement
with Infectio Diagnostics (I.D.I.) Inc. ("Infectio"). The joint venture, Aridia
Corp., was created primarily to engage in the business of developing, producing
and exploiting a series of innovative human diagnostic systems and products for
rapid identification of pathogens responsible for human infectious diseases.
Both the Company and Infectio hold an equal portion in the joint venture. The
agreement provides that each party sell products to the joint venture at defined
transfer prices, and each party will share equally in the net profits. In
conjunction with this agreement, a Joint Technology and Collaboration Agreement
was also signed between Aridia Corp. and both Infectio and the Company. Due to
the early stage of this arrangement, no amounts were incurred by or recorded as
a result of the joint venture through March 31, 2000.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
<S> <C> <C>
--------------------------------------------------------------------------------------
Scientific equipment........................................ $ 613,033 $1,496,683
Office furniture, computers and equipment................... 638,541 1,025,233
Leasehold improvements...................................... 97,601 303,167
---------- ----------
1,349,175 2,825,083
Less accumulated depreciation and amortization.............. (249,011) (747,239)
---------- ----------
$1,100,164 $2,077,844
========== ==========
</TABLE>
8. EQUIPMENT FINANCING
In July 1997, the Company entered into an initial equipment financing agreement
with a financing company for up to $1,000,000. In March 1999, the equipment line
was increased to $2,530,000 which the Company could draw upon through December
31, 1999. As of December 31, 1998 and 1999, the Company had financed $807,180
and $2,073,467, respectively, in equipment purchases under this agreement. The
equipment loans are to be repaid over 42 months at interest rates ranging from
11.49% to 12.90% and are secured by the related equipment.
In November 1999, $306,000 of the financed amount was deposited with the
financing company in accordance with a negative covenant pledge agreement which
stipulated that such a payment is required if the Company failed to meet certain
on-hand cash requirements during the life of the agreement. The deposit was
refunded to the Company in March 2000 upon meeting those requirements. As of
December 31, 1999, this deposit was included in "prepaid expenses and other
current assets."
--------------------------------------------------------------------------------
F- 14
<PAGE> 87
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In conjunction with the original agreement, the Company issued the financing
company a warrant to purchase 32,000 shares of the Company's Series A Preferred
Stock at $1.75 per share (see Note 10). The warrant is exercisable immediately.
In conjunction with a March 1999 amendment to the agreement, the Company issued
the financing company a warrant to purchase 13,600 shares of the Company's
common stock at an exercise price of $2.35 per share. The warrant is exercisable
immediately. The value of all warrants issued to the financing company,
determined using a Black-Scholes valuation model, was immaterial for accounting
purposes; therefore, no value was recorded related to these warrants.
Future minimum principal payments under the equipment financing arrangement at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C>
------------------------------------------------------------------------
2000................................................... $ 681,947
2001................................................... 685,604
2002................................................... 539,513
2003................................................... 152,138
----------
Total minimum payments............................ 2,059,202
Amount representing interest........................... (357,394)
----------
Present value of future payments....................... 1,701,808
Current portion of equipment financing................. (496,742)
----------
Noncurrent portion of equipment financing.............. $1,205,066
==========
</TABLE>
9. FACILITY LEASE
The Company leases its facilities under an operating lease. This lease expires
July 31, 2003 with renewal option at the end of the initial term of the lease.
Lease payments under this operating lease are subject to future increases based
on the Consumer Price Index. In connection with the facility lease agreement the
Company obtained an irrevocable standby letter of credit in the amount of
$300,000 to secure its building lease, which is included in "other assets" at
December 31 1998. This requirement was terminated in March 1999.
Minimum annual rental commitments under the operating leases at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C>
------------------------------------------------------------------------
2000................................................... $ 424,598
2001................................................... 434,688
2002................................................... 444,672
2003................................................... 262,080
----------
Total minimum payments............................ $1,566,038
==========
</TABLE>
Rent expense for the period from inception (March 5, 1996) through December 31,
1997, and for the years ended December 31, 1998 and 1999 was $111,117, $401,952
and $423,493, respectively.
--------------------------------------------------------------------------------
F- 15
<PAGE> 88
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 2000, the Company leased additional facilities adjacent to the existing
property primarily for manufacturing and customer service operations. The term
of the lease is two years commencing on May 1, 2000. Minimum annual rental
commitments under the operating lease is $209,050, $319,225 and $107,350 for the
years ended December 31, 2000, 2001 and 2002, respectively.
10. SHAREHOLDERS' EQUITY
COMMON STOCK
In January 2000, the Company's Board of Directors approved an amendment to the
Company's articles of incorporation which increased the number of authorized
shares of common stock to 30,000,000 shares.
FOUNDERS AND DIRECTORS' SHARES
From August 1996 to August 1997, the Company issued 5,876,000 shares of common
stock to founders and directors of the Company. Generally, these common shares
are subject to the Company's lapsing right of repurchase. This right lapses
ratably over a period of 48 months from the date of purchase. There are
1,568,040 and 960,000 shares subject to repurchase by the Company as of December
31, 1999 and March 31, 2000.
CONVERTIBLE PREFERRED STOCK
The following table describes information with respect to the series of
convertible preferred stock outstanding:
<TABLE>
<CAPTION>
SHARES ISSUED ISSUANCE PRICE PREFERENCE IN
AND OUTSTANDING PER SHARE LIQUIDATION
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Series A..................................... 2,530,000 $1.25 $ 3,162,500
Series B..................................... 3,666,658 2.25 8,249,981
Series C..................................... 750,000 3.00 2,250,000
---------- -----------
Balance, December 31, 1999................... 6,946,658 13,662,481
Series C..................................... 6,379,978 3.00 19,139,934
---------- -----------
Balance, March 31, 2000...................... 13,326,636 $32,802,415
========== ===========
</TABLE>
Series A, B and C convertible preferred shareholders are entitled to
noncumulative annual dividends, when and if declared by the board of directors,
of $.08, $.14 and $.18 per share, respectively, payable in preference to common
stock dividends. No dividends have been declared or paid by the Company to date.
Series A, B and C convertible preferred shares have a liquidation preference of
$1.25, $2.25 and $3.00 per share, respectively, plus all declared but unpaid
dividends. Upon liquidation, after payment of the full liquidation preference
has been made to the Series A, B and C shareholders, the remaining assets of the
Company, if any, shall be distributed ratably among the common shareholders. If
the assets available for distribution to the preferred shareholders are
insufficient to pay such shareholders the full preferential amount, then the
available assets shall be ratably distributed first to the shareholders of
Series B and C as a single class, with any remaining assets payable to Series A
preferred shareholders.
--------------------------------------------------------------------------------
F- 16
<PAGE> 89
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred stock is convertible at any time at the option of the shareholder. As
of March 2000, each share of Series A, B and C convertible stock is convertible
into one share of common stock plus any accumulated and unpaid dividends. The
conversion ratio is adjustable under certain circumstances including stock
splits or dividends. Each share of Series A, B and C convertible preferred stock
automatically converts into common stock at the conversion rate in the event of
an underwritten public offering of the Company's common stock at an offering
price of not less than $5.00 per share and with aggregate net proceeds to the
Company, after deduction of underwriting commissions and expenses, of at least
$10,000,000 or upon approval by the majority of the preferred shareholders of
each series. Each share of convertible preferred stock votes equally with shares
of common stock on an "if-converted" basis.
CHANGE IN AUTHORIZED SHARES
In January 2000, the Board of Directors increased the authorized number of
shares of Series C Preferred Stock to 7,130,000 shares. In March 2000, the Board
of Directors approved an amendment to the Company's articles of incorporation.
In that amendment, the Company is authorized to issue 100,000,000 shares of its
common and 5,000,000 shares of preferred stock. This amendment to the articles
of incorporation is subject to stockholder approval.
DEEMED DIVIDEND
In January through March 2000, the Company consummated the sale of 6,379,978
shares of Series C convertible preferred stock from which the Company received
proceeds of approximately $19.1 million or $3.00 per share. At the date of
issuance, the Company believed the per share price of $3.00 represented the fair
value of the preferred stock. Subsequent to the commencement of the Company's
initial public offering process, Cepheid re-evaluated the fair value of its
common stock as of January and March 2000. Accordingly, the increase in fair
value has resulted in a beneficial conversion feature of $19.1 million, that has
been recorded as a deemed dividend to preferred shareholders in 2000. The
Company recorded the deemed dividend at the date of issuance by offsetting
charges and credits to additional paid-in-capital, without any effect on total
shareholders' equity. This change was made against additional paid in capital as
the Company did not have retained earnings from which it could have deducted a
deemed dividend. The preferred stock dividend increases the net loss allocable
to common shareholders in the calculation of basic and diluted net loss per
common share for the three months ended March 31, 2000. The guidelines set forth
in the Emerging Issues Task Force Consensus No. 98-5 limit the amount of the
deemed dividend to the amount of the proceeds of the related financing.
WARRANTS
In connection with the equipment financing agreement entered into in October
1997 and amended in March 1999, the Company issued warrants to purchase 32,000
shares of Series A convertible preferred stock at an exercise price of $1.75 per
share and 13,600 shares of common stock at an exercise price of $2.35 per share.
The Series A warrant expires on the earliest of October 9, 2003, or the day
prior to the effectiveness of a registration statement covering an underwritten
offering of the Company's securities with aggregate proceeds of at least
$15,000,000, or a merger or sale of substantially all of the Company's assets.
The common stock warrant expires March 16, 2005. The warrants are exercisable
immediately. The value of the warrants was insignificant for accounting
purposes.
--------------------------------------------------------------------------------
F- 17
<PAGE> 90
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the Series B Preferred Stock offering in 1998, the Company
issued warrants to purchase 274,797 shares of common stock at an exercise price
of $2.58 per share to the private placement agent for the Series B Preferred
Stock financing. The warrants expire on April 30, 2003. The warrants are
exercisable immediately as of the issue date of April 22, 1998. Because these
warrants are considered equity issuance costs, no value was recorded since the
net impact on Shareholders' equity would have been zero.
A summary of warrants to purchase stock at December 31, 1999 and March 31, 2000
is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
DESCRIPTION STOCK WARRANTS PRICE EXPIRATION
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------
Lease financing arrangements.................. Series A Preferred 32,000 $1.75 2003
Issuance of Series B.......................... Common 274,797 $2.58 2003
Lease financing arrangements.................. Common 13,600 $2.35 2005
-------
320,397
=======
</TABLE>
Stock Option Plan
On April 16, 1997, the Board of Directors approved a stock option plan (the
"Plan") and initially reserved 2,000,000 shares for issuance thereunder. In
January 2000, the Board of Directors and the shareholders approved an amendment
to reserve an additional 800,000 shares for issuance under the Plan. As of
December 31, 1999 and March 31, 2000, 711,463 and 892,930 shares remain
available for future grant, respectively. Under the Plan, incentive stock
options may be granted to employees, and nonstatutory stock options may be
granted to employees, directors and consultants. Options are granted at an
exercise price of not less than the fair value per share of the common stock on
the date of grant and expire not later than ten years from the date of grant.
The options may be exercised immediately upon grant, however, the shares
issuable upon exercise of the options are subject to a lapsing right of
repurchase by the Company. Options under the Plan generally vest 25% one year
after the date of grant and then on a pro rata basis over the following 36
months. An aggregate 483,205 and 701,978 shares are subject to repurchase at an
aggregate repurchase price of $102,919 and $408,315 as of December 31, 1999 and
March 31, 2000, respectively. Such repurchase rights will lapse at a minimum
rate of 25% per annum and over a period of time not to exceed four years from
the date the option was granted.
Pro forma net loss and net loss per share information has been determined as if
the Company had accounted for its employee stock options granted under the fair
value method of SFAS 123. The fair value of these options was estimated at the
date of grant using the Black-Scholes option pricing model, with the following
weighted-average assumptions: risk-free interest rates of 6.5%, 5.75% and 6.0%
for grants in fiscal 1997, 1998 and 1999, respectively; a weighted-average
expected life of five years; and a dividend yield of zero. The weighted-average
fair value of options granted during 1997, 1998, and 1999 was $0.03, $0.05 and
$2.99, respectively.
--------------------------------------------------------------------------------
F- 18
<PAGE> 91
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The Company's pro forma
information is as follows (in thousands except for per share data):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 4, 1996)
THROUGH
DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1998 1999
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------------
Net loss attributable to common shareholders:
As reported......................................... $(1,274) $(3,312) $(7,919)
Pro forma........................................... $(1,276) $(3,317) $(7,939)
Basic and diluted net loss per share:
As reported......................................... $ (7.61) $ (1.37) $ (1.90)
Pro forma........................................... $ (7.62) $ (1.37) $ (1.91)
</TABLE>
The fair value option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of employee stock options.
--------------------------------------------------------------------------------
F- 19
<PAGE> 92
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
SHARES WEIGHTED
AVAILABLE AVERAGE
FOR FUTURE NUMBER EXERCISE
GRANT OF SHARES PRICE
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
Authorized............................................. 2,000,000 -- --
Granted................................................ (503,720) 503,720 $0.11
Forfeited.............................................. 7,800 (7,800) $0.05
--------- --------
Balance, December 31, 1997............................... 1,504,080 495,920 $0.11
Granted................................................ (615,690) 615,690 $0.19
Exercised.............................................. -- (888,930) $0.14
Forfeited.............................................. 22,800 (22,800) $0.09
--------- --------
Balance, December 31, 1998............................... 911,190 199,880 $0.18
Granted below fair value............................... (266,950) 266,950 $0.50
Exercised.............................................. -- (122,470) $0.45
Forfeited.............................................. 55,000 (55,000) $0.35
Repurchased............................................ 12,223 -- $0.35
--------- --------
Balance, December 31, 1999............................... 711,463 289,360 $0.39
Authorized (unaudited)................................. 1,000,000 -- --
Granted below fair value (unaudited)................... (632,450) 632,450 $2.41
Exercised (unaudited).................................. -- (381,534) $0.92
Repurchased (unaudited)................................ 13,917 -- $0.14
--------- --------
Balance, March 31, 2000 (unaudited)...................... 1,092,930 540,276 $2.39
========= ========
</TABLE>
The following table summarizes information about exercisable options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
WEIGHTED AVERAGE
NUMBER CONTRACTUAL LIFE
EXERCISE PRICE OF SHARES REMAINING (IN YEARS)
<S> <C> <C>
-------------------------------------------------------------------------------------------------
$0.05....................................................... 7,200 7.16
0.12....................................................... 45,380 6.89
0.22....................................................... 30,500 8.57
0.30....................................................... 5,800 8.73
0.35....................................................... 16,930 8.96
0.50....................................................... 183,550 6.83
-------- -----
289,360 7.20
-------- -----
-------- -----
</TABLE>
STOCK-BASED COMPENSATION
During the year ended December 31, 1999 and the three months ended March 31,
2000, in connection with stock option grants to employees, deferred stock
compensation was recorded totaling $736,005,
--------------------------------------------------------------------------------
F- 20
<PAGE> 93
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and $5,386,625, respectively, representing the difference between the deemed
fair value of the common stock for financial reporting purposes and the exercise
price of the underlying options. This amount is recorded as a reduction of
shareholders' equity and is being amortized over the vesting period of the
individual options, generally four years. The Company recorded amortization of
deferred stock compensation of $183,539 and $615,436 for the year ended December
31, 1999 and the three months ended March 31, 2000, respectively.
During the years ended December 31, 1998 and 1999 and during the three months
ended March 31, 2000, the Company granted 21,200, 4,800 and 9,600 nonqualified
common stock options to consultants at exercise prices that range from $0.12 to
$1.50 per share for services rendered, respectively. Such options are included
in the option tables disclosed above. The options generally vest over two years
and have expiration dates which range from the end of the term of the consulting
agreements to ten years after the grant date. Expense of $30,000 and $165,000
was recognized in 1999 and for the three months ended March 31, 2000,
respectively, related to these transactions. The related expense in 1998 was not
material. The fair value of these options was estimated using the Black-Scholes
model, with the following weighted-average assumptions: risk-free interest rate
of 5.75%, 6.0% and 6.0% for grants in fiscal 1998, 1999 and in the three months
ended March 31, 2000, respectively; a weighted-average expected life of five
years; a dividend yield of zero and expected volatility of the Company's common
stock of 0.7.
RESERVED SHARES
The Company has reserved shares of common stock for future issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
<S> <C> <C>
----------------------------------------------------------------------------------------
Stock Options:
Options outstanding....................................... 289,360 540,276
Reserved for future grants................................ 711,463 1,092,930
Convertible preferred stock:
Issued and outstanding.................................... 6,946,658 13,326,636
Warrants outstanding........................................ 320,397 320,397
--------- ----------
8,267,878 15,280,239
========= ==========
</TABLE>
NOTE RECEIVABLE FROM SHAREHOLDER
During 1997, the Company loaned $138,000 to an employee for the purchase of
common stock upon the exercise of the employee's stock options. The employee
paid 4% of the total exercise price, and the Company loaned the employee the
remaining 96% of the purchase price subject to a full-recourse note. The loan
bears interest at 7.0%. The principle sum of the note is due on April 16, 2001
along with all unpaid interest. At December 31, 1997, 1998 and 1999, the
balances of $138,000, $103,500 and $69,000, respectively, were outstanding on
the promissory note.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In March 2000, the Company adopted the 2000 Nonemployee Directors Stock Option
Plan ("the Directors Plan") and reserved a total of 200,000 shares of common
stock for issuance thereunder.
--------------------------------------------------------------------------------
F- 21
<PAGE> 94
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Each nonemployee director who becomes a director of the Company will be
automatically granted a nonstatutory stock option to purchase 15,000 shares of
common stock on the date on which such person first becomes a director. At the
first board meeting following each annual shareholders meeting, beginning with
the first board meeting after the first Annual Shareholders Meeting, each
nonemployee director then in office for over six months will automatically be
granted a nonstatutory option to purchase 5,000 shares of common stock. The
exercise price of options under the Directors Plan will be equal to the fair
market value of the common stock on the date of the grant. The term of these
options is 10 years. The Directors Plan will terminate in March 2010, unless
terminated earlier in accordance with the provisions of the Directors Plan.
11. INCOME TAXES
The Company has no provision for U.S. federal or state income taxes for any
period as it has incurred operating losses in all periods and for all
jurisdictions.
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $11,900,000. The Company also had federal
research and development tax credit carryforwards of approximately $300,000. The
net operating loss and credit carryforwards will expire at various dates
beginning in 2006 through 2019, if not utilized.
Utilization of the net operating losses and credit carryforwards may be subject
to a substantial annual limitation due to ownership change provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carry forwards........................... $1,800,000 $4,500,000
Research and other credit carry forwards.................... 200,000 500,000
Other -- Net................................................ 100,000 100,000
---------- ----------
Total deferred tax assets................................... 2,100,000 5,100,000
Valuation allowance for deferred tax assets................. (2,100,000) (5,100,000)
---------- ----------
Net deferred tax assets..................................... $ -- $ --
========== ==========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased by
approximately $600,000 and $1,500,000 during the periods ended December 31, 1997
and December 31, 1998, respectively.
12. BENEFIT PLAN
Effective January 1, 1998, the Company adopted a 401(k) plan that allows
eligible employees to contribute up to $10,000 of their qualified compensation
subject to IRS limits. The Company has the
--------------------------------------------------------------------------------
F- 22
<PAGE> 95
CEPHEID
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1999
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
discretion to make matching contributions each year. For the years ended
December 31, 1998 and 1999, the Company did not make any matching contributions.
13. SUBSEQUENT EVENTS (UNAUDITED)
In April 2000, the Board of Directors adopted the 2000 Employee Stock Purchase
Plan (the "Purchase Plan"). A total of 200,000 shares of the Company's common
stock have been reserved for issuance under the Purchase Plan. The Purchase Plan
permits eligible employees to purchase common stock at a discount up to a
maximum of 15% of compensation through payroll deductions during defined
offering periods. The price at which stock is purchased under the Purchase Plan
is equal to 85% of the fair market value of the common stock on the first or
last day of the offering period, whichever is lower. The initial offering period
will commence on the effective date of the initial public offering and will end
in June 2002. In addition, the Purchase Plan provides for annual increases in
the number of shares available for issuance under the Purchase Plan on the first
business day of each year, beginning January 1, 2001, equal to the lesser of
200,000 shares, 0.75% of the outstanding shares on the date of the annual
increase or such amount as may be determined by the Board.
--------------------------------------------------------------------------------
F- 23
<PAGE> 96
Cepheid's Smart Cycler System commercially available May 1, 2000 through Fisher
Scientific
<PAGE> 97
Description of artwork
Inside back cover, p. 6
Full page photograph of Smart Cycler System, including Smart Cycler instrument,
computer monitor, mini-centrifuge, tube racks, cooling block and reaction tubes.
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
<PAGE> 98
[CEPHEID LOGO]
<PAGE> 99
--------------------------------------------------------------------------------
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses to be paid by Cepheid, other than
the underwriting discounts and commissions payable by Cepheid in connection with
the sale of the common stock being registered. All amounts shown are estimates
except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
<S> <C>
------------------------------------------------------------------------
Registration fee............................................ $ 18,216
NASD filing fee............................................. 9,700
Nasdaq National Market listing fee.......................... 95,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 225,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 350,000
Director and officer liability insurance.................... 165,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 72,084
----------
Total............................................. $1,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 315 of the California General Corporation Law permits indemnification of
officers and directors and other corporate agents under certain circumstances
and subject to certain limitations. Our Articles of Incorporation and Bylaws
provide that we will indemnify our directors, officers, employees and agents to
the full extent permitted by California General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary under
California law. In addition, we intend to enter into indemnification agreements
with our directors and officers that require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature). The indemnification provisions in our Articles of
Incorporation and Bylaws and the indemnification of our officers and directors
under the indemnification agreements may be sufficiently broad to permit
indemnification of our officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act. In
addition, the underwriting agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the Company and
our officers and directors for certain liabilities arising under the Securities
Act, or otherwise. Reference is made to Item 17 of this Registration Statement
for additional information regarding indemnification of officers and directors.
We also intend to maintain director and officer liability insurance, if
available on reasonable terms, to insure our directors and officers against the
cost of defense, settlement or payment of a judgment under certain
circumstances. In addition, the underwriting agreement filed as Exhibit 1.1 to
this Registration Statement provides for indemnification by the underwriters of
the Company and our officers and directors for certain liabilities arising under
the Securities Act, or otherwise.
--------------------------------------------------------------------------------
II- 1
<PAGE> 100
PART II
--------------------------------------------------------------------------------
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our incorporation in August 1996, we have sold and issued the following
securities:
1. In March 1997, we sold 2,530,000 shares of Series A preferred stock to 30
investors for aggregate consideration of $3,162,500.
2. In April 1998, we sold 3,666,658 shares of Series B preferred stock to 38
investors for aggregate consideration of $8,249,980.
3. In November 1998, we sold 750,000 shares of Series C preferred stock to
Innogenetics, N.V. for an aggregate consideration of $2,250,000.
4. In January to March 2000, we sold 6,379,978 shares of Series C preferred
stock to 150 investors for aggregate consideration of $19,140,000.
5. From inception through March 31, 2000, we issued 7,188,794 shares of common
stock at prices ranging from $0.005 to $1.50, and we have options outstanding
to purchase an aggregate of 540,276 shares of common stock with exercise
prices ranging from $0.05 to $6.00 per share. From inception through March
31, 2000, options to purchase 1,366,794 shares of common stock were exercised
for aggregate consideration of approximately $524,000 net of repurchased
shares.
There were no underwriters employed in connection with any of the transactions
set forth in Item 15.
The issuances of securities described in Items 1 through 5 were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act and Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering. With respect to the issuance of stock
options described in Item 5, an exemption from registration was unnecessary in
that none of the transactions involved a "sale" of securities as this term is
used in Section 2(3) of the Securities Act. The sale and issuance of securities
and the exercise of options described in Item 5 are deemed to be exempt from
registration under the Securities Act by virtue of Rule 701 promulgated
thereunder in that they were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to a written contract relating to
compensation, as provided in Rule 701. The recipients of securities in each such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were fixed to the share certificates and other
instruments issued in such transactions. All recipients either received adequate
information about us or had access, through employment or other relationships,
to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
-------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Articles of Incorporation
*3.2 Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 and 3.2
*4.2 Specimen Common Stock Certificate
*5.1 Opinion of Heller Ehrman White & McAuliffe LLP
*10.1 Standard Industrial Lease, dated October 21, 1997, between
Cepheid and Marin County Employees Retirement Association.
</TABLE>
--------------------------------------------------------------------------------
II- 2
<PAGE> 101
PART II
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
*10.2 Consent of Landlord and Lease Agreement among Cepheid, AMB
Property, L.P. and SIMCO Electronics, dated March 28, 2000.
*10.3 1997 Stock Option Plan, as amended
*10.4 2000 Employee Stock Purchase Plan
*10.5 2000 Non-Employee Directors' Stock Option Plan
*10.6 Form of Indemnification Agreement between Cepheid and its
officers and directors.
*10.7 Promissory Note, dated June 4, 1997 between Cepheid and M.
Allen Northrup, Ph.D.
*10.8 Amended and Restated Investor Rights Agreement, dated
January 21, 2000 among Cepheid and certain shareholders of
Cepheid.
*10.9+ License Agreement, dated January 16, 1996, between Cepheid
and The Regents of the University of California, Lawrence
Livermore National Laboratory.
*10.10+ Letter Agreement, dated January 10, 2000, between Cepheid
and Fisher Scientific Company LLC.
*10.11+ Development and Supply Agreement, dated November 17, 1998,
between Cepheid and Innogenetics N.V.
*10.12 Joint Technology and Collaboration Agreement, dated February
4, 2000, among Cepheid, Aridia Corp. and Infectio Diagnostic
(I.D.I.) Inc.
*10.13 Shareholders Agreement, dated February 4, 2000, among
Cepheid, Aridia Corp. and Infectio Diagnostic (I.D.I.) Inc.
*10.14+ License and Supply Agreement, dated February 4, 2000,
between Cepheid and Aridia Corp.
*10.15+ License and Supply Agreement, dated February 4, 2000,
between Aridia Corp. and Infectio Diagnostic (I.D.I.) Inc.
*10.16+ Thermal Cycler Supplier Agreement, dated April 15, 2000,
between Cepheid and PE Biosystems, a division of PE
Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Heller Ehrman White & McAuliffe LLP. Reference is
made to Exhibit 5.1.
*24.1 Power of Attorney. Reference is made to the signature page.
*27.1 Financial Data Schedule.
</TABLE>
-------------------------
* Previously filed.
+ Certain portions of these exhibits have been omitted pursuant to a request
for confidential treatment filed with the SEC.
(b) FINANCIAL STATEMENT SCHEDULE.
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the
--------------------------------------------------------------------------------
II- 3
<PAGE> 102
PART II
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Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the Offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 5 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Sunnyvale,
California, on the 20th day of June 2000.
CEPHEID
By: /s/ THOMAS L. GUTSHALL
------------------------------------
Thomas L. Gutshall
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 5 TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS L. GUTSHALL Chairman of the Board, June 20, 2000
-------------------------------------------------------- Chief Executive Officer
Thomas L. Gutshall and Director
(Principal Executive Officer)
/s/ KURT PETERSEN, PH.D. President, Chief Operating June 20, 2000
-------------------------------------------------------- Officer and Director
Kurt Petersen, Ph.D.
/s/ CATHERINE A. SMITH Vice-President of Finance and June 20, 2000
-------------------------------------------------------- Chief Financial Officer
Catherine A. Smith (Principal Financial and
Accounting Officer)
* Director June 20, 2000
--------------------------------------------------------
Gerald S. Casilli
* Director June 20, 2000
--------------------------------------------------------
Cristina H. Kepner
* Director June 20, 2000
--------------------------------------------------------
Ernest Mario, Ph.D.
* Director June 20, 2000
--------------------------------------------------------
Dean O. Morton
* Director June 20, 2000
--------------------------------------------------------
Hollings C. Renton
*By: /s/ THOMAS L. GUTSHALL
---------------------------------------------------
Thomas L. Gutshall, Attorney-in-fact
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Articles of Incorporation
*3.2 Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 and 3.2
*4.2 Specimen Common Stock Certificate
*5.1 Opinion of Heller Ehrman White & McAuliffe LLP
*10.1 Standard Industrial Lease, dated October 21, 1997, between
Cepheid and Marin County Employees Retirement Association.
*10.2 Consent of Landlord and Lease Agreement among Cepheid, AMB
Property, L.P. and SIMCO Electronics, dated March 18, 2000.
*10.3 1997 Stock Option Plan, as amended
*10.4 2000 Employee Stock Purchase Plan
*10.5 2000 Non-Employee Director's Stock Option Plan
*10.6 Form of Indemnification Agreement between Cepheid and its
officers and directors.
*10.7 Promissory Note, dated June 4, 1997 between Cepheid and M.
Allen Northrup, Ph.D.
*10.8 Amended and Restated Investor Rights Agreement, dated
January 21, 2000 among Cepheid and certain shareholders of
Cepheid.
*10.9+ License Agreement, dated January 16, 1996, between Cepheid
and The Regents of the University of California, Lawrence
Livermore National Laboratory.
*10.10+ Letter Agreement, dated January 10, 2000, between Cepheid
and Fisher Scientific Company LLC.
*10.11+ Development and Supply Agreement, dated November 17, 1998,
between Cepheid and Innogenetics N.V.
*10.12 Joint Technology and Collaboration Agreement, dated February
4, 2000, among Cepheid, Aridia Corp. and Infectio Diagnostic
(I.D.I.) Inc.
*10.13 Shareholders Agreement, dated February 4, 2000, among
Cepheid, Aridia Corp. and Infectio Diagnostic (I.D.I.) Inc.
*10.14+ License and Supply Agreement, dated February 4, 2000,
between Cepheid and Aridia Corp.
*10.15+ License and Supply Agreement, dated February 4, 2000,
between Aridia Corp. and Infectio Diagnostic (I.D.I.) Inc.
*10.16+ Thermal Cycler Supplier Agreement, dated April 15, 2000,
between Cepheid and PE Biosystems, a division of PE
Corporation
23.1 Consent of Ernst & Young, LLP Independent Auditors.
23.2 Consent of Heller Ehrman White & McAuliffe LLP. Reference is
made to Exhibit 5.1.
*24.1 Power of Attorney. Reference is made to the signature page.
*27.1 Financial Data Schedule.
</TABLE>
-------------------------
* Previously filed.
+ Certain portions of these exhibits have been omitted pursuant to a request
for confidential treatment filed with the SEC.
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