<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1998
REGISTRATION NO. 333-43529
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
LJL BIOSYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3826 77-0360183
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
404 TASMAN DRIVE
SUNNYVALE, CA 94089
(408) 541-8787
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
--------------------------
LEV J. LEYTES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
404 TASMAN DRIVE
SUNNYVALE, CA 94089
(408) 541-8787
(Name, Address Including Zip Code, and Telephone Number Including Area Code, of
Agent for Service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK B. WEEKS PATRICK A. POHLEN
VENTURE LAW GROUP COOLEY GODWARD LLP
A Professional Corporation 5 Palo Alto Square
2800 Sand Hill Road Palo Alto, CA 94306
Menlo Park, CA 94025
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 8, 1998
2,500,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE 2,500,000 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY
LJL BIOSYSTEMS, INC. ("LJL" OR THE "COMPANY"). PRIOR TO THIS OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE FOR THE COMMON STOCK WILL BE
BETWEEN $11.00 AND $13.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE
FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
APPLICATION HAS BEEN MADE TO HAVE THE COMMON STOCK APPROVED FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "LJLB."
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF COMMON
STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
PER SHARE.................................................... $ $ $
TOTAL (3).................................................... $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $700,000.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO AN ADDITIONAL 375,000 SHARES OF COMMON STOCK SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL,
THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL
TOTAL $ AND THE PROCEEDS TO COMPANY WILL TOTAL $ . SEE
"UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES LLC ON OR ABOUT ,
1998.
-------------------
NATIONSBANC MONTGOMERY SECURITIES LLC
HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
, 1998
<PAGE>
<TABLE>
<S> <C>
[LJL BIOSYSTEMS LOGO] PROPRIETARY TECHNOLOGIES AND PRODUCTS TO ACCELERATE AND
ENHANCE THE DRUG DISCOVERY PROCESS
[Drawing of drug discovery process with Recent advances in molecular biology and genomics as well
compounds and targets going into funnel and as combinatorial chemistry have resulted in the generation
coming out of funnel into drug leads] of large numbers of targets and compounds, shifting the
rate-limiting step in the drug discovery process to
screening.
FIRST HTS PRODUCTS UNDER DEVELOPMENT [photograph of the LJL Analyst]
ANALYST -- a four-mode analyzer specifically
designed to address the needs of the high
throughput screening ("HTS") setting.
POTENTIAL BENEFITS
-higher throughput
-improved analytical performance and
flexibility
-lower compound and reagent costs
HIGH VALUE-ADDED REAGENTS AND ASSAY KITS
POTENTIAL BENEFITS
-ease of implementation and use in HTS
-improved performance LJL ANALYST
Commercial launch is expected in the first half of 1998.
[Drawing of drug discovery process with LJL believes that its technology platform addresses many
compounds and targets going into funnel and of the limitations associated with current HTS systems,
coming out of funnel into drug leads] allowing its customers to accelerate the identification
and optimization of lead compounds for development into
new medicines.
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN ACTIVITIES THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER- ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. THESE TRANSACTIONS MAY BE EFFECTED ON
NASDAQ OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Analyst-TM-, CRITERION-TM-, FLARe-TM-, LJL-TM-, SmartOptics-TM-, The High
Throughput Company-TM- and the logo of the Company are trademarks of the
Company. This Prospectus also includes trade names and trademarks of companies
other than LJL, whose mention herein is with due recognition of and without
intent to misappropriate their marks.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN
THIS PROSPECTUS ASSUMES: (I) A 1-FOR-2 REVERSE STOCK SPLIT OF THE COMMON STOCK
AND PREFERRED STOCK TO BE EFFECTED PRIOR TO THIS OFFERING, (II) THE CONVERSION
OF ALL THE OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF COMMON STOCK TO
BE EFFECTED UPON THE CLOSING OF THIS OFFERING AND (III) NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION. EXCEPT FOR THE HISTORICAL INFORMATION
CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
LJL is developing and marketing proprietary technologies and products to
accelerate and enhance the drug discovery process. LJL's proprietary integrated
technology platform is comprised of instrumentation and fluorescence-based and
other assay technologies designed to provide flexible solutions to the current
and evolving high throughput screening ("HTS") requirements of drug discovery
laboratories. The drug discovery process involves several stages including
target identification, compound synthesis, assay development, screening and lead
optimization. Target identification and compound synthesis historically have
been the rate-limiting steps in the drug discovery process. Recent advancements
in genomics and molecular biology as well as combinatorial chemistry have
resulted in the generation of large numbers of targets and compounds. This
growth in the number of targets and compounds has shifted the rate-limiting
steps in the drug discovery process to assay development, screening and lead
optimization. To address these bottlenecks, LJL is developing instrumentation
and assays to provide integrated HTS solutions. LJL believes that its technology
platform addresses the major limitations associated with current HTS systems and
will allow its customers to accelerate the identification and optimization of
lead compounds for development into new medicines.
The Company's first HTS product, ANALYST, is a four-mode analyzer designed
specifically for use in the HTS setting. The Company believes that ANALYST will
provide several important advantages over currently available multi-mode
analyzers, including increased throughput, improved analytical performance and
flexibility, lower reagents costs and the ability to be quickly integrated into
the existing HTS laboratory and to evolve with changing HTS needs. ANALYST is
currently undergoing beta testing at two major pharmaceutical companies and two
biotechnology companies. The Company expects to commence shipments of ANALYST in
the first half of 1998.
LJL's integrated technology platform also includes proprietary
fluorescence-based and other assay technologies. Currently, LJL is developing a
line of high value-added, application-specific reagents and assay kits optimized
for use in HTS and specifically for use with ANALYST. The Company intends to
develop its reagent and assay kits in a single-step format. The Company believes
that a single-step format is better suited for the HTS environment because of
its speed, automation capability and lower cost. Additionally, LJL has licensed
a platform of novel fluorescence-based assay technologies known as Fluorescence
Lifetime Assay Repertoire ("FLARe") which it believes will address a number of
the current limitations associated with fluorescence-based HTS assays. The
Company believes that its proprietary FLARe technology, which includes methods
of assay detection using long-lifetime fluorescent reagents and phase/
modulation, will address the signal-to-noise problems normally associated with
intensity-based fluorescence assays. LJL's first reagents and assay kits are
expected to be introduced in 1998.
LJL is an established developer and manufacturer of automated instruments.
The Company believes these instruments are in use in more than 500 clinical
diagnostics and research laboratories worldwide. LJL intends to leverage its
proven product development and manufacturing track record to be the first to
market with effective solutions to the problems facing HTS users. The Company
believes that by
3
<PAGE>
establishing an installed base of instruments it will be able to generate
recurring revenue from the sale of reagents and assay kits. Additionally, the
Company believes that the market for its screening products can be extended into
other stages of the drug discovery process, such as assay development and lead
optimization. To further strengthen its market position, the Company plans to
develop and acquire additional screening technologies and to provide early
technology access to strategic customers.
The Company's office is located at 404 Tasman Drive, Sunnyvale, CA 94089 and
its telephone number is (408) 541-8787.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,500,000 shares
Common Stock to be outstanding after the
offering................................... 10,705,253 shares(1)(2)
Use of proceeds.............................. For commercialization of ANALYST, research
and development of future products,
acquisition of technologies and businesses
and working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... LJLB
</TABLE>
- ------------------------
(1) Based on 8,205,253 shares outstanding as of December 31, 1997. Excludes as
of December 31, 1997 (i) 441,000 shares issuable upon exercise of options
outstanding under the 1994 Equity Incentive Plan with a weighted average
exercise price of $0.20 per share, (ii) 389,000 shares issuable upon
exercise of options outstanding under the 1997 Stock Plan with a weighted
average exercise price of $1.28 per share, and (iii) 37,203 shares issuable
upon the net exercise of outstanding warrants. See "Management--Stock
Plans," "Description of Capital Stock--Warrants," and Notes 4 and 6 of Notes
to Financial Statements.
(2) On December 16, 1997, the Board of Directors of the Company approved: (i)
subject to stockholder approval, an increase of 1,250,000 shares of Common
Stock reserved pursuant to the 1997 Stock Plan, (ii) option grants to
purchase an aggregate of 105,250 shares of Common Stock to employees and
directors, (iii) restricted stock grants in an aggregate amount of 45,000
shares to directors, (iv) the reservation of 300,000 shares for future
issuance under the 1998 Employee Stock Purchase Plan and (v) the reservation
of 150,000 shares for future issuance under the 1998 Directors' Plan. See
"Management--Stock Plans" and "--Director Compensation."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
--------- ---------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Product sales......................... $ 1,256 $ 1,536 $ 3,551 $ 2,236 $ 5,622 $ 3,180 $ 4,233
Development agreements................ 4,282 2,932 2,659 2,915 3,663 3,538 642
--------- ---------- --------- ---------- ---------- ---------- -----------
Total revenues...................... 5,538 4,468 6,210 5,151 9,285 6,718 4,875
--------- ---------- --------- ---------- ---------- ---------- -----------
Costs and operating expenses:
Product sales......................... 1,042 971 1,581 1,174 2,755 1,595 2,035
Research and development.............. 2,380 1,524 1,810 1,740 2,384 1,816 2,426
Selling, general and administrative... 2,066 1,576 2,822 1,963 4,062 3,110 1,541
--------- ---------- --------- ---------- ---------- ---------- -----------
Total costs and operating
expenses.......................... 5,488 4,071 6,213 4,877 9,201 6,521 6,002
--------- ---------- --------- ---------- ---------- ---------- -----------
Income (loss) from operations........... 50 397 (3) 274 84 197 (1,127)
Interest and other income, net.......... 33 12 54 82 176 147 146
--------- ---------- --------- ---------- ---------- ---------- -----------
Income (loss) before provision for
income taxes.......................... 83 409 51 356 260 344 (981)
Provision for income taxes.............. 27 7 7 4 2 2 12
--------- ---------- --------- ---------- ---------- ---------- -----------
Net income (loss)....................... $ 56 $ 402 $ 44 $ 352 $ 258 $ 342 $ (993)
--------- ---------- --------- ---------- ---------- ---------- -----------
--------- ---------- --------- ---------- ---------- ---------- -----------
PRO FORMA DATA(2):
Pro forma net income (loss)............. $ 50 $ 245 $ 31 $ 214 $ 156 $ 206 $ (781)
--------- ---------- --------- ---------- ---------- ---------- -----------
--------- ---------- --------- ---------- ---------- ---------- -----------
Pro forma net income (loss) per share... $ 0.02 $ (0.09)
---------- -----------
---------- -----------
Shares used in computation of pro forma
net income (loss) per share........... 8,631 8,631
---------- -----------
---------- -----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
--------- ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 7,122 $ 7,122 $ 34,322
Working capital........................................................ 6,095 6,095 33,295
Total assets........................................................... 7,850 7,850 35,050
Long-term debt......................................................... 50 50 50
Mandatorily redeemable convertible preferred stock..................... 8,989 -- --
Accumulated deficit.................................................... (1,869) (1,869) (1,869)
Total stockholders' equity (deficit)................................... (2,571) 6,418 33,618
</TABLE>
- ------------------------
(1) The statement of operations data for the years ended December 31, 1992 and
1993 reflect the combined results of two commonly-controlled companies which
were merged into, and survived by, LJL BioSystems, Inc. on January 1, 1994.
(2) See Note 1 of Notes to Financial Statements for a description of pro forma
statement of operations data.
(3) Pro forma for the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the closing of the offering.
(4) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $12.00 per share
(after deduction of the estimated underwriting discount and offering
expenses) and the receipt and application of the net proceeds thereof, and
reflects the anticipated net exercise of outstanding warrants. See "Use of
Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE
FOLLOWING FACTORS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE
SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISK AND UNCERTAINTY. ACTUAL RESULTS AND THE TIMING OF
CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW AND
OTHER FACTORS DISCUSSED ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS."
NEW BUSINESS STRATEGY; NEW AND UNDEFINED MARKET FOR HIGH THROUGHPUT SCREENING
PRODUCTS
In the second half of 1996, the Company implemented a new strategic business
model to develop products for the HTS market. In connection with this change in
strategy, the Company shifted its focus from developing and manufacturing
clinical diagnostic and research products on an original equipment manufacturing
("OEM") basis to developing, manufacturing and marketing products for the HTS
market. As a result, the Company's historical operating and financial
performance is not indicative of future financial and business results. The
Company incurred operating losses for the nine months ended September 30, 1997
as a result of its change in business strategy and expects that operating losses
will increase substantially in the fourth quarter of 1997 and in future periods
due to a significant decline in revenues and a substantial increase in
expenditures to develop and commercialize the Company's HTS products. The
Company anticipates that it will continue to incur losses for at least the next
several years. To date, the Company has not commercially launched a product for
the HTS market. Accordingly, the Company is subject to the risks inherent in the
operation of a new business, such as the failure to develop an effective sales,
marketing and distribution channel, failure to achieve market acceptance and
demand for its HTS products, failure to implement commercial scale-up of
developed HTS products, if any, and failure to attract and retain key personnel.
Furthermore, the HTS market is new and undefined, and the use of HTS by
pharmaceutical and biotechnology companies is limited. Demand for the Company's
HTS products will depend upon the extent to which pharmaceutical and
biotechnology companies adopt HTS as a drug discovery tool. If HTS does not
become a widely used method in drug discovery, demand for the Company's products
will not develop as the Company currently expects or at all. The lack of demand
for the Company's HTS products would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Pharmaceutical Research and Development"
and "Business--Competition."
EARLY STAGE OF INSTRUMENTATION DEVELOPMENT
The Company's success will depend on its ability to develop and
commercialize its HTS instruments. The Company's first HTS instrument, ANALYST,
has recently entered beta testing and has not yet been implemented in a fully
operational HTS system. The Company has not previously developed or
commercialized products for the HTS market. Much of the instrumentation and
software expected to be incorporated into the Company's HTS products has not
previously been used in HTS applications. The successful implementation and
operation of the Company's HTS products will be a complex process requiring the
integration of advanced robotics, microfluidics, automated storage and retrieval
systems, fluorescence detector technologies and software and information
systems. Even if ANALYST appears to be promising at an early stage of
development or at commercial launch, it may not achieve market acceptance. In
addition, ANALYST may be difficult or uneconomical to produce, fail to achieve
expected performance levels, have a price level that is unacceptable in the
industry or be precluded from commercialization by the proprietary rights of
others. There can be no assurance that the Company will be able to successfully
develop, manufacture and market ANALYST or any other HTS products on a timely
basis, achieve anticipated performance levels or throughputs, gain industry
acceptance of the Company's products or develop a profitable business. The
failure to achieve any of these objectives would have a
6
<PAGE>
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Products Under Development--Analyst."
RISKS ASSOCIATED WITH THE DEVELOPMENT AND COMMERCIALIZATION OF REAGENTS AND
ASSAY KITS
The Company expects that a substantial portion of its revenues will be
derived from the sale of reagents and assay kits. The Company has no experience
in the development, manufacture or marketing of reagents or assay kits. The
Company intends to license assay technologies from third parties and to develop
reagents and assay kits internally. There can be no assurance that the Company
will succeed in licensing any additional assay technologies on acceptable terms,
if at all, or that it will successfully commercialize any reagents that it
licenses. In addition, the Company is internally developing reagents and assay
kits, but has no previous experience in this area. There can be no assurance
that the Company will successfully develop reagents or assay kits internally or
that, if developed, such reagents and assay kits will achieve market acceptance.
The Company currently intends to outsource the manufacture of reagents and
assays kits. There can be no assurance that the Company will be able to enter
into agreements with third parties for the manufacture of reagents and assay
kits on terms commercially favorable to the Company or at all. In addition, the
Company intends to sell reagents and assay kits to purchasers of HTS
instruments, including ANALYST. There can be no assurance that sales of ANALYST
will be sufficient to support this strategy. A failure to achieve commercial
acceptance of its reagents and assay kits would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Products Under Development--Reagents and Assays," "--Products Under
Development--FLARe Technology" and "--Patents and Proprietary Rights."
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The pharmaceutical and biotechnology instrumentation and reagents market is
characterized by rapid technological change and frequent new product
introductions. The Company's future success will depend on its ability to
enhance its current and planned HTS products and to develop and introduce, on a
timely basis, new products that address the evolving needs of its customers
including its higher-density, ultra high throughput analyzer and microplates and
its fluorescence-based reagents and assay kits. The Company does not anticipate
that prototypes for these ultra high throughput products will be available for
several years, if at all. Production of an ultra high throughput analyzer and
associated microplates, fluorescence-based reagents and assay kits will present
significant development and manufacturing challenges. The Company may experience
difficulties that could delay or prevent the successful development,
introduction and marketing of its new products or its product enhancements. Any
failure to develop and introduce products in a timely manner in response to
changing market demands or customer requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Products Under Development."
LACK OF SALES AND MARKETING EXPERIENCE
The Company has no experience in direct marketing, sales or distribution.
The Company's future profitability will depend on its ability to develop a
direct sales force to sell its HTS products to pharmaceutical and biotechnology
companies. The Company's products are technical in nature and the Company
therefore believes it is necessary to develop a direct sales force consisting of
people with scientific backgrounds and expertise. Competition for such employees
is intense. There can be no assurance that the Company will be able to attract
and retain qualified salespeople or that the Company will be able to build an
efficient and effective sales and marketing organization. Failure to attract or
retain qualified salespeople or to build such a sales and marketing organization
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company intends to market its HTS products in certain international
markets through distributors. The Company does not currently have distributors
in any international markets, and there can be no assurance that the Company
will be able to engage qualified distributors. Such distributors, if engaged,
may fail to satisfy financial or contractual obligations to the Company, fail to
adequately market the Company's
7
<PAGE>
products, cease operations with little or no notice to the Company or offer,
design, manufacture or promote competing product lines. The failure to develop
and maintain effective distribution channels could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Sales and Marketing."
COMPETITION
The market for HTS products is highly competitive. The Company expects that
competition will increase significantly as more biotechnology and pharmaceutical
companies adopt high throughput screening instruments as a drug discovery tool
and as new companies enter the market with advanced technologies. The Company
will compete in many areas, including high throughput screening instruments,
assay development and reagent sales. The Company competes with companies which
directly market HTS products. In addition, pharmaceutical and biotechnology
companies, academic institutions, governmental agencies and other research
organizations are conducting research and developing products in various areas
which compete with the Company's technology platform, either on their own or in
collaboration with others. Many of these competitors have greater financial,
operational and sales and marketing resources, and more experience in research
and development, than the Company. Further, certain companies offer screening
services on a contract or collaborative basis, and these services could
eliminate the need for a potential customer to purchase the Company's products.
The Company's technological approaches may be rendered obsolete or uneconomical
by advances in existing technological approaches or the development of different
approaches by one or more of the Company's current or future competitors. See
"Business-- Competition."
CONCENTRATION OF HTS MARKET
The market for HTS products is highly concentrated, with approximately 50
large pharmaceutical companies operating a substantial portion of the Company's
targeted drug discovery laboratories. Accordingly, the Company expects a
relatively small number of customers will account for a substantial portion of
its revenues. The Company will face risks associated with a highly concentrated
customer base when and if it begins to sell its HTS products, including the
failure to establish or maintain relationships within a limited customer pool,
or substantial financial difficulties or decreased capital spending by its
customers, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, the Company
faces the risk that customers will negotiate price discounts or other
unfavorable terms, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LENGTHY SALES CYCLE
The sale of HTS products typically involves a significant technical
evaluation and commitment of capital by customers. Accordingly, the sales cycle
associated with the Company's HTS products is expected to be lengthy and subject
to a number of significant risks, including customers' budgetary constraints and
internal acceptance reviews, that are beyond the Company's control. Due to this
lengthy and unpredictable sales cycle, the Company's operating results could
fluctuate significantly from quarter to quarter. See "--Future Fluctuations in
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MANUFACTURING RISK
The Company has never manufactured HTS products in commercial quantities.
The Company may encounter difficulties in scaling up production of its HTS
products relating to, among other things, quality control and assurance,
component supply and availability of qualified personnel. There can be no
assurance that, even if successfully developed and introduced to market, any of
the Company's products can be manufactured in sufficient quantities while
meeting quality control standards or at acceptable cost. Difficulties
encountered by the Company in manufacturing scale-up could have a material
adverse effect
8
<PAGE>
on its business, financial condition and results of operations. See
"--Dependence upon Key Personnel; Need to Hire Additional Qualified Personnel"
and "--Risks Associated with Reagents and Assay Development and
Commercialization." See also "Business--Manufacturing."
MANAGEMENT OF GROWTH
The Company's success will depend on the expansion of its operations and the
effective management of growth, which will place a significant strain on the
Company's management, operational and financial resources. To manage such
growth, the Company must expand its facilities, augment its operational,
financial and management systems and hire and train additional qualified
personnel. The Company's failure to manage growth effectively would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Dependence upon Key Personnel; Need to Hire
Additional Qualified Personnel."
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including Lev
J. Leytes, the Company's Chairman of the Board of Directors, President and Chief
Executive Officer. In addition, the Company's success will depend on its ability
to attract and retain other highly skilled personnel. Currently, the Company is
seeking to hire certain senior executives, including a Chief Financial Officer.
Competition for qualified personnel is intense, and the process of hiring such
qualified personnel is often lengthy. There can be no assurance that the Company
can recruit such personnel on a timely basis, if at all. The Company's
management and other employees may voluntarily terminate their employment with
the Company at any time. The loss of the services of key personnel, or the
inability to attract and retain additional qualified personnel, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Employees" and "Management."
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
Certain components used in the Company's HTS instruments are currently
purchased from a single or a limited number of outside sources. The reliance on
a sole or limited number of suppliers could result in time delays associated
with redesigning a product due to a failure to obtain a single source component,
an inability to obtain an adequate supply of required components and reduced
control over pricing, quality and timely delivery. The Company does not maintain
long-term agreements with any of its suppliers, and therefore the supply of a
particular component could be terminated at any time without penalty to the
supplier. Any interruption in supply of single source components could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company intends to rely on contract manufacturers,
some of which may be single-source vendors, for the development, manufacture and
supply of certain of its reagents and assay kits. There can be no assurance the
Company will be able to enter into such manufacturing contracts on commercially
reasonable terms, if at all, or that the Company's current or future contract
manufacturers will meet the Company's requirements for quality, quantity or
timeliness. If the supply of any such instrumentation components, reagents or
assay kits is interrupted, components, reagents and assay kits from alternative
suppliers and contract manufacturers may not be available in sufficient volumes
within required timeframes, if at all, to meet the Company's production needs.
See "Business--Manufacturing."
ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY
As of September 30, 1997, the Company had an accumulated deficit of
approximately $1.9 million. To date, the Company has not yet generated any
revenue from its HTS products, and the Company's expansion of its operations and
continued development of its HTS products will require a substantial increase in
marketing and sales and research and development expenditures for at least the
next several years. As a result, the Company expects to incur substantial
operating losses for the next several years. The Company's profitability will
depend on its ability to successfully develop and commercialize its HTS
9
<PAGE>
products. Accordingly, the extent of future losses and the time required to
achieve profitability, if achieved at all, is highly uncertain. Moreover, if
profitability is achieved, the level of such profitability cannot be predicted
and may vary significantly from quarter to quarter. See "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company may be required to raise substantial additional capital over a
period of several years in order to develop and commercialize its products. The
Company's future capital requirements will depend on numerous factors, including
the costs associated with developing and commercializing its products,
developing a direct marketing and sales force, maintaining existing, or entering
into future, licensing and distribution agreements, protecting intellectual
property rights, entering the reagents and assay kits business, expanding
facilities and consummating possible future acquisitions of technologies,
products or businesses. The Company may consume available resources more rapidly
than currently anticipated, resulting in the need for additional funding. The
Company may be required to raise additional capital through a variety of
sources, including the public equity market, private equity financings,
collaborative arrangements, and public or private debt. There can be no
assurance that additional capital will be available on favorable terms, if at
all. If adequate funds are not available, the Company may be required to
significantly reduce or refocus its operations or to obtain funds through
arrangements that may require the Company to relinquish rights to certain of its
products, technologies or potential markets, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
To the extent that additional capital is raised through the sale of equity, the
issuance of such securities would result in ownership dilution to the Company's
existing stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK OF INTERNATIONAL SALES AND OPERATIONS
The Company expects that international sales will account for a significant
portion of the Company's total revenues. International sales and operations are
subject to a number of risks, including the imposition of government controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability or conflicts, trade restrictions, changes in
tariffs and taxes, difficulties in staffing and managing international
operations, problems in establishing or managing distributor relationships and
general economic conditions. In addition, as the Company expands its
international operations, it may be required to invoice its sales in local
currencies. Consequently, fluctuations in the value of foreign currencies
relative to the U.S. dollar may adversely affect the Company's business,
financial condition and results of operations. See "Business--Sales and
Marketing" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OF TECHNOLOGIES AND BUSINESSES
The Company may acquire certain technologies, products or businesses to
broaden the scope of its existing and planned product lines and technologies.
Such acquisitions would expose the Company to the risks associated with the
assimilation of new technologies, operations, sites and personnel, the diversion
of resources from the Company's existing business and technologies, the
inability to generate revenues to offset associated acquisition costs, the
maintenance of uniform standards, controls, and procedures and the impairment of
relationships with employees and customers as a result of any integration of new
management personnel. Acquisitions may also result in the issuance of dilutive
equity securities, the incurrence or assumption of debt or additional expenses
associated with amortization of acquired intangible assets or potential
businesses. The Company's failure to successfully address such risks could have
a material adverse effect on the Company's business, financial condition and
results of operations.
INTELLECTUAL PROPERTY RISKS
The Company's success will depend in part on its ability to obtain patents,
maintain trade secret protection and operate without infringing the proprietary
rights of others. The Company has two U.S.
10
<PAGE>
patents. The Company has filed four U.S. patent applications and four
provisional patent applications, all of which are currently pending. To
supplement its proprietary technology, the Company has licensed ten patents from
FluorRx, Inc. ("FluorRx") pursuant to a June 1997 agreement. Under this license,
the Company obtained certain worldwide rights relating to FluorRx's FLARe
technology. Certain of these rights have been licensed on an exclusive basis.
Certain other rights have been licensed on a non-exclusive basis, and therefore
could be or are licensed to third parties. In accordance with such agreement,
the Company pays one-time fees as well as royalties based on sales of its
products that incorporate this technology. The license may be terminated in the
event of a material breach by the Company. Furthermore, FluorRx may elect to
convert the exclusive rights into non-exclusive rights in the event the Company
fails to make certain minimum royalty payments. If the license were terminated
by FluorRx due to a material breach of the license by the Company, the Company
would lose the right to incorporate FLARe technology into its HTS products. In
such event, the Company would be required to exclude FLARe technology from the
Company's existing and future products and either license or develop internally
alternative technologies. There can be no assurance that the Company would be
able to license alternative technologies on commercially reasonable terms, or at
all, or that the Company would be capable of developing internally such
technologies. Furthermore, there can be no assurance that other companies may
not independently develop technology with functionality similar or superior to
the FLARe technology that does not or is claimed not to infringe the FLARe
patents, or that otherwise circumvents the technology licensed to the Company.
The Company is aware of third party patents that contain issued claims that
may cover certain aspects of the Company's reagent technologies. There can be no
assurance that the Company would not be required to license any such patents to
produce certain reagents, assay kits and related products or that such licenses
would be available on commercially reasonable terms, if at all. Any action
against the Company claiming damages and seeking to enjoin commercial activities
relating to the affected technologies could subject the Company to potential
liability for damages. The Company could incur substantial costs in defending
patent infringement claims, obtaining patent licenses, engaging in interference
and opposition proceedings or other challenges to its patent rights or
intellectual property rights made by third parties, or in bringing such
proceedings or enforcing any patent rights against third parties. The Company's
inability to obtain necessary licenses or its involvement in proceedings
concerning patent rights could have a material adverse effect on the business,
financial condition and results of operations of the Company.
The patent positions of bioanalytical product companies, including the
Company, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Consequently, there can be no assurance
that the patent applications of the Company or its licensor will result in
patents being issued or that any issued patents will provide protection against
competitive technologies or will be held valid if challenged or circumvented.
Others may independently develop products similar to those of the Company or
design around or otherwise circumvent patents issued to the Company. In the
event that any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the patent
owners of each of such patents or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be on terms acceptable to the Company or that the
Company would be successful in any attempt to redesign its products or processes
to avoid infringement. If the Company does not obtain necessary licenses, it
could be subject to litigation and encounter delays in product introductions
while it attempts to design around such patents. Alternatively, the development,
manufacture or sale of such products could be prevented. Litigation would result
in significant cost to the Company as well as diversion of management time.
Adverse determinations in any such proceedings could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also relies on trade secret and copyright law, and employee and
third-party nondisclosure agreements to protect its intellectual property rights
in its products and technology. There can be no assurance that these agreements
and measures will provide meaningful protection of the Company's trade
11
<PAGE>
secrets, copyrights, know-how, or other proprietary information in the event of
any unauthorized use, misappropriation or disclosure or that others will not
independently develop substantially equivalent proprietary technologies.
Litigation to protect the Company's trade secrets or copyrights would result in
significant cost to the Company as well as diversion of management time. Adverse
determinations in any such proceedings or unauthorized disclosure of the
Company's trade secrets could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States. There can be no
assurance that the Company will be able to protect its intellectual property in
these markets. See "Business--Intellectual Property," and "--Products Under
Development--FLARe Technology."
GOVERNMENT REGULATION
The Company's clinical diagnostics products, including Luminometer, Q2000
and Horizon, are subject to FDA regulation as medical devices, as well as
similar foreign regulation. The process of obtaining and maintaining required
regulatory clearances and approvals and otherwise remaining in regulatory
compliance in the United States and certain other countries is lengthy,
expensive and uncertain. Although the Company has phased out production of
Luminometer and Q2000, the Company will continue to manufacture Horizon on an
OEM basis. Horizon is used in research and clinical laboratories to perform IN
VITRO diagnostic ("IVD") tests, which are exempt from investigational device
exemption ("IDE") requirements, including the need to obtain the FDA's prior
approval, provided that, among other things, the testing is noninvasive, the
product is not used as a diagnostic procedure without confirmation by another
medically established test or procedure, and distribution controls are
established to assure that IVDs distributed for research are used only for those
purposes. To the Company's knowledge, its OEM customers have met these
conditions. There can be no assurance that the FDA would agree that the OEM
customers' distribution of the Company's clinical diagnostic products meet and
have met the requirements for IDE exemption. Failure by the Company, its OEM
customers or the recipients of the Company's clinical diagnostic products to
comply with the IDE exemption requirements could result in enforcement action by
the FDA, which could adversely affect the Company's or its OEM customers'
ability to gain marketing clearance or approval of these products or could
result in the recall of previously distributed products.
Applicable law requires that LJL comply with the FDA's current GMP
regulations for the manufacture of its clinical diagnostics products. The FDA
monitors compliance with its GMP regulations by subjecting medical product
manufacturers to periodic FDA inspections of their manufacturing facilities. The
FDA has recently revised the GMP regulations. The new Quality System Regulation
imposes design controls and makes other significant changes in the requirements
applicable to manufacturers. LJL is also subject to other regulatory
requirements, and may need to submit reports to the FDA including adverse event
reporting. Failure to comply with GMP regulations or other applicable legal
requirements can lead to, among other things, warning letters, seizure of
violative products, suspension of manufacturing, government injunctions and
potential civil or criminal liability on the part of the Company and the
responsible officers and employees. In addition, the government may halt or
restrict continued sale of such instruments. Any such actions could have a
material, adverse effect on the business, financial condition and results of
operations of the Company.
In order to export its clinical diagnostics instruments, the Company
maintains International Organization for Standardization ("ISO") 9001
certification and applies the CE mark to certain products that are exported,
which subjects LJL's operations to periodic surveillance audits. There can be no
assurance that the Company's operations will be found to comply with GMP
regulations, ISO standards or other applicable legal requirements or that the
Company will not be required to incur substantial costs to maintain its
compliance with existing or future manufacturing regulations, standards or other
requirements. Any such noncompliance or increased cost of compliance could have
a material adverse effect on the Company's business, results of operations and
financial condition.
LJL also is subject to numerous federal, state and local laws relating to
safe working conditions, manufacturing practices, environmental protection,
storage, use and disposal of hazardous or potentially
12
<PAGE>
hazardous substances. Any material failure to comply with such laws could
require the Company to incur significant costs and would have a material,
adverse effect upon the Company's ability to do business. Changes in existing
requirements or adoption of new requirements or policies relating to government
regulations could materially and adversely affect the ability of LJL to comply
with such requirements.
HAZARDOUS MATERIALS
The Company's research and development and manufacturing operations involve
the use of hazardous materials, biological samples, chemicals and various
radioactive compounds. In the future, the Company plans to manufacture certain
reagents, some of which likely will contain hazardous materials including
carcinogens. The Company is subject to federal, state and local laws and
regulations governing the storage, use, and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from the
use of these materials cannot be completely eliminated. In the event of an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company, which would have a
material adverse effect on the Company. The Company may incur substantial costs
to comply with environmental regulations if the Company develops its own
commercial reagents manufacturing facility.
FUTURE FLUCTUATIONS IN OPERATING RESULTS
The Company's future operating results are likely to fluctuate substantially
from period to period. The degree of fluctuation will depend on a number of
factors, including the timing and level of sales, the mix of products sold
through direct sales channels and third party distributors, and any change in
the product mix among the Company's planned product lines. Such fluctuations
could have a material adverse effect on its business, financial condition and
results of operations. Because a significant portion of the Company's business
is expected to be derived from orders placed by a limited number of large
customers, variations in the timing of such orders could cause significant
fluctuations in the Company's operating results. Other factors that may result
in fluctuations in operating results include industry acceptance of HTS as a
drug discovery tool, market acceptance of the Company's products, the timing of
new product announcements and the introduction of new products and new
technologies by the Company or its competitors, delays in research and
development of new products, increased research and development expenses,
increased marketing and sales expenses associated with the implementation of the
Company's direct marketing of its products, availability and cost of component
parts from its suppliers, competitive pricing pressures, and developments with
respect to regulatory matters. In connection with future introductions of new
products, the Company may be required to establish or increase reserves or
record charges for inventory obsolescence in connection with unsold inventory,
if any, of older generations of products.
The Company's expenditures for research and development, selling and
marketing, and general and administrative functions are based in part on future
revenue projections. The Company may be unable to adjust spending in a timely
manner in response to any unanticipated declines in revenues, which may have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company may be required to reduce prices in response
to competitive pressures or other factors or increase spending to pursue new
market opportunities. Any decline in average selling prices of a product which
is not offset by a reduction in product costs or by sales of other products with
higher gross margins would decrease the Company's overall gross profit and
adversely affect the Company's business, financial condition and results of
operations. In addition, the Company's operating results may vary from the
expectations of public market analysts and investors, and, as a result, the
price of the Common Stock would be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PRODUCT LIABILITY EXPOSURE; AVAILABILITY OF INSURANCE
The manufacture and sale of products involves an inherent risk of product
liability claims and associated adverse publicity. A successful product
liability claim brought against the Company in excess of its insurance coverage
could have a material adverse effect on the Company's business, financial
condition
13
<PAGE>
and results of operations. The Company currently only has limited product
liability insurance. There can be no assurance that the Company will be able to
maintain product liability insurance on acceptable terms, if at all, or that
such insurance will provide adequate coverage against potential liabilities.
Furthermore, an inability to obtain sufficient insurance coverage on reasonable
terms or to otherwise protect against potential product liability claims could
prevent or inhibit the commercialization and development of the Company's
products.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon completion of this offering, the Company's principal stockholders,
executive officers and directors together will beneficially own approximately
74.4% of the outstanding shares of Common Stock (71.9% if the Underwriters'
over-allotment option is exercised in full). As a result, these stockholders
will be able to control matters requiring approval by the stockholders of the
Company, including approvals of amendments to the Company's Certificate of
Incorporation, certain mergers, a sale of all or substantially all of the assets
of the Company, going private transactions and other fundamental transactions.
In addition, the Company's Certificate of Incorporation, as it is proposed to be
amended and restated concurrently with the closing of this offering (the
"Restated Certificate"), does not provide for cumulative voting with respect to
the election of directors. Consequently, the present directors and executive
officers of the Company, together with the Company's principal stockholders,
will be able to control the election of the members of the Board of Directors of
the Company. Such a concentration of ownership may have the effect of delaying
or preventing a change in control of the Company, including transactions in
which stockholders might otherwise receive a premium for their shares over
current market prices. See "Principal Stockholders."
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE; ANTI-TAKEOVER PROVISIONS
The Restated Certificate authorizes the Board of Directors of the Company,
without stockholder approval, to issue additional shares of Common Stock and to
fix the rights preferences and privileges of and issue up to 2,000,000 shares of
Preferred Stock with voting, conversion, dividends and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of preferred stock, rights to purchase
preferred stock or additional shares of Common Stock may have the effect of
delaying or preventing a change in control of the Company. In addition, the
possible issuance of preferred stock or additional shares of Common Stock could
discourage a proxy contest, make more difficult the acquisition of a substantial
block of the Company's Common Stock or limit the price that investors might be
willing to pay for shares of the Company's Common Stock. Further, the Restated
Certificate provides that any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing.
Special meetings of the stockholders of the Company may be called only by the
Chairman of the Board of Directors, the President of the Company, by the Board
of Directors pursuant to resolution adopted by a majority of the total number of
authorized directors, or by the holders of 10% of the outstanding voting stock
of the Company. These and other provisions contained in the Restated Certificate
and the Company's Bylaws, as well as certain provisions of Delaware law, could
delay or make more difficult certain types of transactions involving an actual
or potential change in control of the Company or its management (including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices) and may limit the ability of
stockholders to remove current management of the Company or approve transactions
that stockholders may deem to be in their best interests and, therefore, could
adversely effect the price of the Company's Common Stock. See "Description of
Capital Stock."
BROAD DISCRETION IN APPLICATION OF NET PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $27,200,000 ($31,385,000 if the
Underwriters' overallotment option is exercised in full) after deducting the
underwriting discount and estimated offering expenses. The Company
14
<PAGE>
intends to use the net proceeds from this offering principally for
commercialization of its HTS products, research and development of future
products, acquisition of technologies and businesses and working capital and
general corporate purposes. The Company's management and Board of Directors will
have broad discretion with respect to the application of such proceeds, and the
amounts actually expended by the Company for working capital purposes may vary
significantly depending on a number of factors, including future revenue growth,
if any, and the amount of cash, if any, generated by the Company's operations.
See "Use of Proceeds."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after this offering. The initial public offering
price, which will be determined by negotiations between the Company and the
Underwriters, will not necessarily be indicative of the market price at which
the Common Stock of the Company will trade after this offering. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. In addition, in recent years the stock market in
general, and the shares of biotechnology companies in particular, have
experienced extreme price fluctuations. These broad market and industry
fluctuations may have a material adverse effect on the market price of the
Common Stock. In the future, the Company's operating results may vary from the
expectations of public market analysts and investors, and, as a result, the
price of the Common Stock would be materially and adversely affected.
Announcements of technological innovations or new commercial products by the
Company or its competitors, disputes or other developments concerning
proprietary rights, including patents and litigation matters, publicity
regarding new products or technologies under development by the Company, its
licensors or its competitors, general market conditions, quarterly fluctuations
in the Company's revenues and financial results, as well as the other factors
described in these "Risk Factors" and elsewhere in this Prospectus, may have a
significant impact on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE;
REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act of
1933, as amended (the "Securities Act"), and lock-up agreements pursuant to
which all directors and executive officers and stockholders of the Company have
agreed not to sell or otherwise dispose of any of their shares without the prior
written consent of NationsBanc Montgomery Securities LLC. However, NationsBanc
Montgomery Securities LLC may at any time without notice, release all or any
portion of the securities subject to lock-up agreements. The Company has agreed
with NationsBanc Montgomery Securities LLC not to release any stockholder from
such lock-up agreement between the stockholder and the Company without the
consent of NationsBanc Montgomery Securities LLC. As a result of such
restrictions and based upon the number of shares outstanding on December 31,
1997, on the date of this Prospectus approximately no shares, other than the
2,500,000 shares offered hereby, will be eligible for sale pursuant to Rule 144
promulgated under the Securities Act. An additional 8,160,253 shares and 401,712
shares issuable upon exercise of outstanding vested options will be eligible for
sale 180 days after the date of this Prospectus upon expiration of the lock-up
agreements and in compliance with certain limitations set forth in the
Securities Act. After this offering, the holders of approximately 8,122,003
shares of Common Stock will be entitled to certain demand and piggyback
registration rights with respect to registration of such shares under the
Securities Act. If such holders, by exercising their demand or piggyback
registration rights, cause a large number of securities to be registered and
sold in the public market such sales could have an adverse effect on the market
price for the Company's Common Stock. If the Company were to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. See "Shares Eligible
For Future Sale" and "Description of Capital Stock-- Registration Rights."
15
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
investment from the initial public offering price. Additional dilution will
occur upon exercise of outstanding options. See "Dilution" and "Shares Eligible
for Future Sale." Prior to June 1997, the Company operated as an S corporation
for federal and state income tax purposes and distributed its taxable income to
its stockholders in the form of dividends. Since June 1997, the Company has
operated as a C corporation, and does not anticipate paying dividends in the
future. See "Dividend Policy."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import, constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others: the early state
of development of the Company's high throughput screening products; uncertainty
in the emerging high throughput screening market and uncertainty of commercial
acceptance of the Company's high throughput screening products; intense
competition; dependence on proprietary technology; dependence on in-licensed
technology; existing government regulation and changes in, or the failure to
comply with, government regulations; the Company's need for additional
financing; dependence on key personnel; limited manufacturing experience; and
other factors referenced in this Prospectus. Certain of these factors are
discussed in more detail elsewhere in this Prospectus, including, without
limitation, under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
being offered by the Company hereby at an assumed public offering price of
$12.00 per share are estimated to be $27,200,000 ($31,385,000 if the
Underwriters' overallotment option is exercised in full). The Company intends to
use the net proceeds of the offering to accelerate the commercialization of
ANALYST, including investments in manufacturing, sales and marketing
infrastructure, and to fund research and development of future products, to
acquire complementary technologies and businesses, and for working capital and
general corporate purposes. Although the Company intends to use a portion of net
proceeds to fund the acquisition of complementary technologies and businesses,
the Company has no present understandings, commitments or arrangements with
respect to any such acquisitions. Pending application of the net proceeds of the
offering as described above, the Company intends to invest such proceeds in
short-term, investment-grade, interest-bearing financial instruments.
DIVIDEND POLICY
Prior to June 1997, the Company operated as an S corporation for federal and
state income tax purposes and distributed its taxable income to its stockholders
in the form of dividends. Since June 1997, the Company has operated as a C
corporation and does not anticipate paying cash dividends in the foreseeable
future. The Company currently intends to retain all available funds and any
future earnings for use in the operation of its business.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis, (ii) pro forma to reflect the
conversion of all outstanding shares of Preferred Stock into Common Stock and
transfer of the S corporation accumulated deficit into additional paid-in
capital upon closing of the offering and (iii) as adjusted to give effect to the
sale by the Company of 2,500,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $12.00 per share and the application of
the net proceeds therefrom and 37,203 shares of Common Stock to be issued upon
the net exercise of outstanding warrants. See "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt............................................................. $ 50 $ 50 $ 50
----------- ----------- -----------
Mandatorily redeemable convertible preferred stock; $0.001 par value;
7,400,000 shares authorized; 3,621,503 shares issued and outstanding
actual; no shares issued and outstanding pro forma or as adjusted........ 8,989 -- --
----------- ----------- -----------
Stockholders' equity (deficit)(1)(2):
Common stock, $0.001 par value 19,000,000 shares authorized; 4,500,500
shares issued and outstanding actual; 8,122,003 shares issued and
outstanding pro forma; 10,659,206 shares issued and outstanding as
adjusted............................................................... 5 8 11
Additional paid-in capital............................................... -- 8,334 35,531
Deferred compensation.................................................... (55) (55) (55)
S corporation accumulated deficit........................................ (652) -- --
Accumulated deficit...................................................... (1,869) (1,869) (1,869)
----------- ----------- -----------
Total stockholders' equity (deficit)................................... (2,571) 6,418 33,618
----------- ----------- -----------
Total capitalization............................................... $ 6,468 $ 6,468 $ 33,668
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Excludes as of September 30, 1997, 1,300,000 shares of Common Stock reserved
for issuance under the Company's stock option plans, of which 731,000 shares
were issuable upon exercise of outstanding options at a weighted average
exercise price of $0.47 per share. See "Management--Stock Plans," "Certain
Relationships and Related Transactions," and "Underwriting" and Notes 1, 4
and 6 of Notes to Financial Statements.
(2) On December 16, 1997, the Board of Directors of the Company approved: (i) an
increase of 1,250,000 shares of Common Stock reserved pursuant to the 1997
Stock Plan, (ii) option grants to purchase an aggregate of 105,250 shares of
Common Stock to employees and directors, (iii) restricted stock grants in an
aggregate amount of 45,000 shares to directors, (iv) the reservation of
300,000 shares for future issuance under the 1998 Employee Stock Purchase
Plan and (v) the reservation of 150,000 shares for future issuance under the
1998 Directors' Plan. See "Management--Stock Plans" and "--Director
Compensation."
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 (assuming the conversion of all outstanding shares of Preferred Stock into
Common Stock and 37,203 shares of Common Stock to be issued upon the net
exercise of outstanding warrants) was approximately $6,418,000, or $0.79 per
share of Common Stock. Pro forma net tangible book value per share is determined
by dividing the net tangible book value (tangible assets less total liabilities)
of the Company by the number of shares of Common Stock outstanding, including
shares of Common Stock to be issued from the conversion of the Preferred Stock
immediately prior to the consummation of the offering and 37,203 shares of
Common Stock to be issued upon the net exercise of outstanding warrants. Without
taking into account any other changes in the net tangible book value after
September 30, 1997, other than to give effect to the receipt by the Company of
the estimated net proceeds from the sale of 2,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 per share, the pro forma net tangible book value of the Company as of
September 30, 1997 would have been $33,618,000, or $3.15 per share. This
represents an immediate increase in the pro forma net tangible book value of
$2.36 per share to existing stockholders and an immediate dilution of $8.85 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................ $ 12.00
Pro forma net tangible book value before the offering...... $ 0.79
Increase attributable to new investors(1).................. 2.36
---------
Pro forma net tangible book value after offering............. 3.15
---------
Dilution to new investors.................................... $ 8.85
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between existing stockholders and purchasers of shares in
the offering (at an assumed initial public offering price of $12.00 per share
and before deducting underwriting discounts and estimated offering expenses
payable by the Company) with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 8,159,206 76.5% $ 9,455,000 24.0% $ 1.16
New investors..................... 2,500,000 23.5% 30,000,000 76.0% 12.00
------------ ----- ------------- -----
Total......................... 10,659,206 100.0% $ 39,455,000 100.0% 3.70
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) The foregoing tables assume no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options under the 1994 Equity
Incentive Plan and the 1997 Stock Plan. As of September 30, 1997, options to
purchase 731,000 shares were outstanding under the Company's 1994 Equity
Incentive Plan and 1997 Stock Plan with a weighted average exercise price of
$0.47 per share and 569,000 shares were available for issuance under the
1994 Equity Incentive Plan and the 1997 Stock Plan. On December 16, 1997,
the Board of Directors of the Company approved: (i) subject to stockholder
approval, an increase of 1,250,000 shares of Common Stock reserved pursuant
to the 1997 Stock Plan, (ii) option grants to purchase an aggregate of
105,250 shares of Common Stock to employees and directors, (iii) restricted
stock grants in an aggregate amount of 45,000 shares to directors, (iv) the
reservation of 300,000 shares for future issuance under the 1998 Employee
Stock Purchase Plan and (v) the reservation of 150,000 shares for future
issuance under the 1998 Directors' Plan. To the extent that options are
exercised and shares of Common Stock are issued, there will be further
dilution to new investors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Management--Stock Plans" and "Description of Capital Stock."
19
<PAGE>
SELECTED FINANCIAL DATA
The selected balance sheet data as of December 31, 1995 and 1996 and the
selected statement of operations data for the years ended December 31, 1994,
1995 and 1996 have been derived from the financial statements of the Company
audited by Price Waterhouse LLP, independent accountants, which are included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1992 and 1993, and the balance sheet data at December 31,
1992, 1993 and 1994 have been derived from audited financial statements not
included in this Prospectus. The selected balance sheet data as of September 30,
1997 and the selected statement of operations data for the nine months ended
September 30, 1996 and 1997 have been derived from unaudited financial
statements of the Company included in this Prospectus. The unaudited financial
statements have been prepared by the Company on a basis consistent with the
audited financial statements appearing elsewhere in this Prospectus and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of such data. The results
of operations for the nine months ended September 30, 1997 are not necessarily
indicative of results to be expected for any future period. The data set forth
below should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
related Notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Product sales........................... $ 1,256 $ 1,536 $ 3,551 $ 2,236 $ 5,622 $ 3,180 $ 4,233
Development agreements.................. 4,282 2,932 2,659 2,915 3,663 3,538 642
--------- --------- --------- --------- --------- --------- ---------
Total revenues........................ 5,538 4,468 6,210 5,151 9,285 6,718 4,875
--------- --------- --------- --------- --------- --------- ---------
Costs and operating expenses:
Product sales........................... 1,042 971 1,581 1,174 2,755 1,595 2,035
Research and development................ 2,380 1,524 1,810 1,740 2,384 1,816 2,426
Selling, general and administrative..... 2,066 1,576 2,822 1,963 4,062 3,110 1,541
--------- --------- --------- --------- --------- --------- ---------
Total costs and operating expenses.... 5,488 4,071 6,213 4,877 9,201 6,521 6,002
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations............. 50 397 (3) 274 84 197 (1,127)
Interest and other income, net............ 33 12 54 82 176 147 146
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes................................... 83 409 51 356 260 344 (981)
Provision for income taxes................ 27 7 7 4 2 2 12
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)......................... $ 56 $ 402 $ 44 $ 352 $ 258 $ 342 $ (993)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA DATA(2):
Income (loss) before provision (benefit)
for income taxes...................... $ 83 $ 409 $ 51 $ 356 $ 260 $ 344 $ (981)
Pro forma provision (benefit) for income
taxes................................. 33 164 20 142 104 138 (200)
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income (loss)............. $ 50 $ 245 $ 31 $ 214 $ 156 $ 206 $ (781)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income (loss) per
share(3).............................. $ 0.02 $ (0.09)
--------- ---------
--------- ---------
Shares used in computation of pro forma
net income (loss) per share(3)........ 8,631 8,631
--------- ---------
--------- ---------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents....................... $ 1,595 $ 510 $ 3 $ 1,773 $ 1,166 $ 7,122
Working capital (deficit)....................... 738 175 (27) (4) (295) 6,095
Total assets.................................... 2,152 1,367 1,358 2,483 2,458 7,850
Long-term debt.................................. 44 22 22 32 43 50
Mandatorily redeemable convertible preferred
stock......................................... -- -- -- -- -- 8,989
S corporation accumulated deficit............... -- -- -- -- -- (652)
Retained earnings (accumulated deficit)......... 877 211 9 46 (226) (1,869)
Total stockholders' equity (deficit)............ 916 250 48 85 (187) (2,571)
</TABLE>
- ------------------------
(1) The statement of operations data for the years ended December 31, 1992 and
1993, and the balance sheet data at December 31, 1992 and 1993, reflect the
combined results and financial position of two commonly-controlled companies
which were merged into, and survived by, LJL BioSystems, Inc. on January 1,
1994.
(2) Prior to June 1997, the Company operated under the S corporation provisions
of the Internal Revenue Code and comparable provisions of certain state
income tax laws. The pro forma statement of operations data reflect
provisions (benefit) for income taxes as if the Company had been subject to
federal and state income taxation as a C corporation during each of the
periods presented. See Note 1 of Notes to Financial Statements.
(3) See Note 1 of Notes to Financial Statements for a description of the
computation of pro forma net income (loss) per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT ARE
BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE
BY, AND INFORMATION CURRENTLY AVAILABLE TO, THE COMPANY'S MANAGEMENT. THE
COMPANY'S FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY SUCH FORWARD-LOOKING STATEMENTS. SEE
"RISK FACTORS" FOR A DISCUSSION OF FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH MATERIAL DIFFERENCES. THE FOLLOWING PRESENTATION OF MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO AND OTHER
FINANCIAL INFORMATION INCLUDED THEREIN.
OVERVIEW
From inception in 1988 through 1991, the Company derived its revenues from
the development of clinical diagnostics and research instruments for customers.
Beginning in 1992, the Company began manufacturing and shipping these clinical
diagnostics and research instruments to customers either for their internal use
or for resale on an OEM basis. In the second half of 1996, the Company
implemented a new strategic business model to develop products for the HTS
market. In connection with this change in strategy, the Company shifted its
focus from developing and manufacturing clinical diagnostic and research
products on an OEM basis to developing, manufacturing and marketing its own HTS
products.
As part of its shift in focus, the Company has discontinued its OEM
development activities entirely and has phased out production of all but one of
its OEM products. These OEM products included Luminometer (a microplate reader),
Q2000 (a clinical analyzer) and a microplate heater, all of which were sold to
Chiron Corporation ("Chiron"), and Horizon (a clinical specimen processor) sold
to Ventana Medical Systems, Inc. ("Ventana"). Product sales to Chiron and
Ventana, as well as revenues from development agreements with CombiChem, Inc.
("CombiChem"), accounted for approximately 90% of total revenues for each of the
years ended December 31, 1994, 1995 and 1996 and for the nine months ended
September 30, 1997. Although the Company intends to continue to manufacture the
Horizon through 1998 under its agreement with Ventana, sales of this remaining
OEM product are expected to substantially decline in the fourth quarter of 1997
and in future periods. In addition, revenues from development agreements
declined significantly during the nine months ended September 30, 1997, and the
Company does not expect to derive revenues from OEM development activities in
the fourth quarter of 1997 or in future periods.
Due to the anticipated substantial decline in revenues and the high costs
associated with the development and commercial launch of ANALYST, the
development of a sales and marketing function, the development and
commercialization of assays and reagents and the development of additional
generations of HTS products, the Company expects that operating losses will
increase substantially in the fourth quarter of 1997 and in future periods. The
Company expects to continue to incur operating losses for at least the next
several years. The Company's ability to achieve profitability will depend in
part on its ability to successfully develop, manufacture, market and achieve
industry acceptance of ANALYST, and to successfully develop, manufacture and
market reagents and assays. In 1996, the Company shifted its business strategy
to the HTS market, and accordingly LJL is subject to the risks inherent in both
the operation of a new business model and the entry into a new and uncertain
industry. The Company's high-density analyzer is in the early feasibility and
conceptual design stage and will present significant development and
manufacturing challenges and, if developed and manufactured, may not achieve
industry acceptance. Although LJL expects that a substantial portion of its
future revenues will be derived from reagents and assay sales, the Company has
no experience in the development, manufacture or marketing of reagents and
assays. The Company's FLARe technology will require a significant investment in
research and development, and the Company faces the risks associated with new
and uncertain technology in developing, manufacturing and commercializing any
FLARe products. Accordingly, the extent of future losses and the time required
to achieve profitability, if any, is highly uncertain. The Company's failure to
successfully and timely design, develop, manufacture and commercialize its HTS
products would have a material adverse
22
<PAGE>
effect on the Company's business, financial condition and results of operations.
In addition, the Company's operating results are likely to fluctuate
substantially from period to period, and a change in the product mix among the
Company's different planned product lines from the Company's current
expectations, among other factors, could result in the failure to meet analysts'
expectations regarding revenues or earnings.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUES. Total revenues decreased by $1.8 million, from $6.7 million for
the nine months ended September 30, 1996 to $4.9 million for the nine months
ended September 30, 1997. Revenues recognized under development agreements
decreased from $3.5 million during the nine months ended September 30, 1996 to
$642,000 for the nine months ended September 30, 1997. This decrease was due to
the Company's decision in 1996 to focus its future efforts on internal
development of a proprietary HTS product platform, the completion of its
existing OEM development agreements, and its decision not to pursue additional
development agreements. Revenues from product sales increased by $1.0 million,
from $3.2 million during the nine months ended September 30, 1996 to $4.2
million for the nine months ended September 30, 1997, due to increased unit
sales of Luminometer and Horizon products. Although the Company intends to
continue to manufacture Horizon through 1998 under its agreement with Ventana,
sales of this remaining OEM product are expected to substantially decline in
future periods. The Company expects that total revenues for the year ended
December 31, 1997 will be significantly less than total revenues for the year
ended December 31, 1996 due to the Company's increasing focus on the HTS market.
In addition, the Company expects this decline in revenues to continue due to the
completion of OEM development projects and the phasing out of OEM products.
COST OF PRODUCT SALES. Cost of product sales increased from $1.6 million
for the nine months ended September 30, 1996 to $2.0 million for the nine months
ended September 30, 1997. This increase was primarily due to increased unit
sales of Luminometer and Horizon products. Gross profit, as a percentage of
product sales, increased from 50% during the nine months ended September 30,
1996 to 52% for the nine months ended September 30, 1997, primarily as a result
of improved absorption of manufacturing overhead resulting from increased
production volume. The Company expects per unit cost of sales will increase and
gross profit will substantially decrease as unit sales continue to decrease,
resulting in decreased absorption of manufacturing overhead. In addition, cost
of product sales of ANALYST is expected to be high for at least the next year as
a result of low absorption of manufacturing overhead resulting from low
production volume.
RESEARCH AND DEVELOPMENT. Research and development expense increased from
$1.8 million for the nine months ended September 30, 1996 to $2.4 million for
the nine months ended September 30, 1997. This increase was primarily due to
costs associated with the development of the Company's HTS product platform,
partially offset by a significantly lower level of research and development
expenses incurred in connection with development agreements for OEM customers.
Costs incurred in connection with such development agreements were $1.5 million
and $165,000 for the nine months ended September 30, 1996 and 1997,
respectively. The Company expects research and development expenditures to
increase significantly in future periods to support the development of its HTS
products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs decreased from $3.1 million for the nine months ended September 30, 1996
to $1.5 million for the nine months ended September 30, 1997. This decrease was
primarily due to a decrease in the amount of S corporation distributions to the
Company's stockholders as compensation due to the Company's change in tax status
to a C corporation, which was partially offset by an increase in marketing and
sales expense associated with the addition of sales and marketing personnel and
HTS product marketing expenses. The Company expects selling, general and
administrative expenses to increase substantially in future periods due to the
increased marketing and selling resources necessary to promote the Company's HTS
products, as well as additional administrative costs associated with being a
public company.
23
<PAGE>
INTEREST AND OTHER INCOME, NET. Net interest and other income for the nine
months ended September 30, 1996 and 1997 was $147,000 and $146,000,
respectively, and primarily consisted of income earned on invested cash
balances.
YEARS ENDED DECEMBER 31, 1995 AND 1996
REVENUES. Total revenues increased by $4.1 million, from $5.2 million for
the year ended December 31, 1995 to $9.3 million for the year ended December 31,
1996. Of this increase, $3.4 million was attributable to higher product sales,
which increased from $2.2 million during 1995 to $5.6 million for 1996, due to
higher unit sales of Luminometer and, to a lesser extent, from commencement of
shipments of Q2000 and Horizon. Revenues from development agreements increased
from $2.9 million for the year ended December 31, 1995 to $3.7 million for the
year ended December 31, 1996. This increase was primarily attributable to a new
OEM development agreement and the sale of certain manufacturing rights to
Chiron.
COST OF PRODUCT SALES. The Company's cost of product sales increased from
$1.2 million for the year ended December 31, 1995 to $2.8 million for the year
ended December 31, 1996. This increase was primarily attributable to higher unit
sales of Luminometer, Q2000 and Horizon products. Gross profit percentage
increased from 47% in 1995 to 51% in 1996 primarily as a result of improved
absorption of manufacturing overhead resulting from increased production volume.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$1.7 million for the year ended December 31, 1995 to $2.4 million for the year
ended December 31, 1996. This increase was due primarily to costs associated
with the Company's HTS research and development program which commenced in the
second half of 1996. Research and development expenses also increased due to
costs associated with the Company's development agreements. Costs incurred in
connection with development agreements were $1.5 million and $1.7 million for
the years ended December 31, 1995 and 1996, respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs increased from $2.0 million for the year ended December 31, 1995 to $4.1
million for the year ended December 31, 1996. This increase was primarily due to
an increase in the amount of S corporation distributions to the Company's
stockholders as compensation and additional administrative expenses incurred in
connection with the Company's new strategic business model.
INTEREST AND OTHER INCOME, NET. Net interest and other income increased
from $82,000 for the year ended December 31, 1995 to $176,000 for the year ended
December 31, 1996. This increase was primarily due to a higher level of interest
earned on invested cash balances.
YEARS ENDED DECEMBER 31, 1994 AND 1995
REVENUES. Total revenues decreased by $1.0 million, from $6.2 million for
the year ended December 31, 1994 to $5.2 million for the year ended December 31,
1995. This decrease related primarily to a reduction in product sales, which
decreased from $3.6 million in 1994 to $2.2 million in 1995 due to a decrease in
unit sales of the Luminometer. Revenues from development agreements remained
relatively constant at $2.7 million for the year ended December 31, 1994 and
$2.9 million for the year ended December 31, 1995.
COST OF PRODUCT SALES. Cost of product sales decreased from $1.6 million
for the year ended December 31, 1994 to $1.2 million for the year ended December
31, 1995. This decrease was due primarily to the reduction in costs associated
with lower unit sales of Luminometer. Gross profit percentage decreased from 55%
in 1994 to 47% in 1995, primarily as a result of decreased absorption of
manufacturing overhead due to reduced unit sales.
RESEARCH AND DEVELOPMENT. Research and development expenses remained
relatively constant at $1.8 million for the year ended December 31, 1994
compared to $1.7 million for the year ended
24
<PAGE>
December 31, 1995. Costs incurred in connection with development agreements were
$1.6 million and $1.5 million for the years ended December 31, 1994 and 1995,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased from $2.8 million for the year ended December 31, 1994 to
$2.0 million for the year ended December 31, 1995. This decrease was primarily
due to a reduction in S corporation distributions to the Company's stockholders
as compensation.
INTEREST AND OTHER INCOME, NET. Net interest and other income increased
from $54,000 for the year ended December 31, 1994 to $82,000 for the year ended
December 31, 1995. This increase was primarily due to an increase in the amount
of late charges collected on past due payments received from the Company's
customers, partially offset by a lower level of interest earned on invested cash
balances.
INCOME TAXES
Prior to June 1997, the Company had been taxed as an S corporation for
federal and state income tax purposes. Under the Internal Revenue Code
provisions regarding S corporations, the Company had not been subject to federal
income taxes but had been subject to state income taxes at a reduced rate. As an
S corporation, the Company's stockholders paid taxes on their share of the
Company's taxable income in their individual tax returns. In June 1997, in
connection with the Preferred Stock financing, the Company became subject to the
C corporation provisions of the Internal Revenue Code pursuant to which the
Company's earnings are taxed for federal and state income tax purposes at the
corporate level. Through June 1997, the Company's profits were distributed to
the Company's stockholders through a combination of compensation, which was
treated as expense in the Statement of Operations, and dividends. Future
distributions are not expected. At September 30, 1997, the Company had a net
operating loss ("NOL") carryforward of $1.4 million for federal income tax
purposes, which expires in 2012. A full valuation allowance has been provided
for the NOL and all other deferred tax assets as management does not consider
their realization more likely than not.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 1997, the Company funded its operations
primarily through cash flows generated from operations, bank loans for equipment
purchases and loans from stockholders. In June 1997, the Company completed a
private placement of Preferred Stock, generating approximately $8.7 million in
cash, net of expenses.
Net cash used in operations totaled $1.4 million during the nine months
ended September 30, 1997 compared to net cash provided by operating activities
of $2.9 million during the comparable 1996 period. The decrease in net cash
provided by operations is primarily due to the Company's net loss during the
nine months ended September 30, 1997 compared to net income earned during the
comparable 1996 period and the Company's reduced emphasis on development
arrangements and OEM manufacturing, which resulted in certain changes in working
capital, including lower customer deposits, partially offset by reduced
inventory balances.
Net cash used in operations during the year ended December 31, 1996 of
$10,000 compares to cash provided by operations of $2.2 million and $304,000 in
1995 and 1994, respectively. Cash provided by operating activities has
historically fluctuated based on the timing of receipt of customer deposits,
working capital changes resulting from varying levels of OEM manufacturing
activities and fluctuations in the Company's net income. The decrease in net
cash provided by operations in 1996 was due primarily to an increase in
inventories and other assets, partially offset by increases in accounts payable
and accrued expenses.
Cash flows used in investing activities for the purchase of property and
equipment prior to 1997 were not significant. The increase in equipment
purchases during the nine months ended September 30, 1997 relates primarily to
the additional equipment needed for the development and manufacture of the
Company's new HTS products.
25
<PAGE>
Net cash used in financing activities for the years ended December 31, 1996,
1995 and 1994 totaled $504,000, $290,000 and $768,000, respectively, and
consisted primarily of the repayment of a note payable in 1994 and distributions
to the Company's stockholders as an S corporation. Net cash provided by
financing activities for the nine months ended September 30, 1997 totaled $7.6
million and consisted of the net proceeds from the sale of shares of Preferred
Stock, partially offset by dividends paid to stockholders during 1997.
At September 30, 1997, the Company had cash and cash equivalents of $7.1
million and an accumulated deficit of $1.9 million. The Company had three bank
loans, with cumulative outstanding balances of $98,000, bearing interest rates
of approximately 10.5%. Such loans are payable in annual installments of
approximately $30,000. The Company had no material capital commitments as of
September 30, 1997. In connection with the manufacture of ANALYST, during the
fourth quarter of 1997 the Company entered into approximately $400,000 of
non-cancelable purchase orders for material components. The Company may be
required to raise substantial additional capital over a period of several years
in order to develop and commercialize its products. The Company's future capital
requirements will depend on numerous factors, including the costs associated
with developing and commercializing its products, developing a direct marketing
and sales force, maintaining existing, or entering into future licensing and
distribution agreements, protecting intellectual property rights, entering the
reagents and assay kits business, expanding facilities and consummating possible
future acquisitions of technologies, products or businesses. The Company
believes the net proceeds of this offering, combined with cash from operations,
will be sufficient to fund operations for at least the next 18 months. The
Company may consume available resources more rapidly than currently anticipated,
resulting in the need for additional funding. The Company may be required to
raise additional capital through a variety of sources, including the public
equity market, private equity financings, collaborative arrangements, and public
or private debt. There can be no assurance that additional capital will be
available on favorable terms, if at all. If adequate funds are not available,
the Company may be required to significantly reduce or refocus its operations or
to obtain funds through arrangements that may require the Company to relinquish
rights to certain of its products, technologies or potential markets, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. To the extent that additional capital is
raised through the sale of equity, the issuance of such securities would result
in ownership dilution to the Company's existing stockholders.
26
<PAGE>
BUSINESS
LJL is developing and marketing proprietary technologies and products to
accelerate and enhance the drug discovery process. LJL's proprietary integrated
technology platform is comprised of instrumentation and fluorescence-based and
other assay technologies designed to provide a flexible solution to the current
and evolving HTS requirements of drug discovery laboratories. The drug discovery
process involves several stages including target identification, compound
synthesis, assay development, screening and lead optimization. Target
identification and compound synthesis historically have been the rate-limiting
steps in the drug discovery process. Recent advancements in genomics and
molecular biology as well as combinatorial chemistry have resulted in the
generation of large numbers of targets and compounds. This growth in the number
of targets and compounds has shifted the rate-limiting steps of the drug
discovery process to assay development, screening and lead optimization. To
address these bottlenecks, LJL is developing instrumentation and assays to
provide integrated HTS solutions. LJL believes that its technology platform
addresses the major limitations associated with current HTS systems and will
allow its customers to accelerate the identification and optimization of lead
compounds for development into new medicines.
The Company's first HTS product, ANALYST, is a four-mode analyzer designed
specifically for use in the HTS setting. The Company believes that ANALYST will
provide several important advantages over currently available multi-mode
analyzers, including increased throughput, improved analytical performance and
flexibility, lower reagents costs and the ability to be quickly integrated into
the existing HTS laboratory and to evolve with changing HTS needs. ANALYST is
currently undergoing beta testing at two major pharmaceutical companies and two
biotechnology companies. The Company expects to commence shipments of ANALYST in
the first half of 1998.
PHARMACEUTICAL RESEARCH AND DEVELOPMENT
THE DRUG DISCOVERY PROCESS
The drug discovery process involves the synthesis and testing, or screening,
of compounds against a target. A compound is a molecule that might mediate a
disease by its effect on a target. Targets are biological molecules, such as
enzymes, receptors, other proteins and nucleic acids, that are believed to play
a role in the onset or progression of a disease. The stages of the drug
discovery process include target identification, compound synthesis, assay
development, screening, secondary screening of hits, and lead compound
screening, or optimization.
[CHART]
27
<PAGE>
Targets are identified based on their anticipated role in the progression or
prevention of a disease. Until recently, scientists using conventional methods
had identified only a few hundred targets, many of which have not been
comprehensively screened. Recent developments in molecular biology and genomics
have led to a dramatic increase in the number of targets available for drug
discovery.
After a target is chosen, the researcher selects a library of compounds to
screen against this target. Compounds have historically been obtained from
natural sources or synthesized one at a time. Compound libraries were compiled
over decades by pharmaceutical companies using conventional synthesis
techniques. Recent technology advancements in combinatorial chemistry and other
chemical synthesis techniques, as well as licensing arrangements, have enabled
industrial and academic groups to greatly increase the supply and diversity of
compounds available for screening against targets. As a result, many researchers
are gaining access to libraries of hundreds of thousands of compounds in months
rather than years.
Following target and compound library selection, the compounds must be
screened to determine their effect on the target, if any. A compound that has an
effect on the target is defined as a hit. A greater number of compounds screened
against a given target results in a higher statistical probability that a hit
will be identified. Prior to screening targets against a compound, a biological
test or assay must be developed. An assay is a combination of reagents which
measures the effect of a compound on the activity of a target. Assay development
involves screening the assays to optimize performance against the selected
target. Assays are broadly classified as either biochemical or cellular.
Biochemical assays are usually performed with purified molecular targets and
generally have certain advantages, such as speed, convenience, simplicity and
specificity. Cellular assays are performed with living cells, which may
sacrifice speed and simplicity, but may deliver more biologically relevant
information. Scientists use both cellular and biochemical assays in their drug
discovery efforts. Both types of assays use a variety of detection modalities,
including absorbence, radioisotopic, luminescence, and a variety of fluorometric
technologies, such as fluorescence intensity, fluorescence polarization and
time-resolved fluorescence.
Once a compound is identified as a hit, a number of secondary screens are
performed to evaluate its potency and specificity for the intended target. This
cycle of repeated screening continues until a small number of lead compounds is
selected. These lead compounds are optimized by further screening. Optimized
lead compounds with the greatest therapeutic potential may be selected for
clinical evaluation. Due to the recent dramatic increase in the number of
available compounds and targets, a bottleneck has resulted at the screening
stage of the drug discovery process. Historically, screening has been a manual,
time-consuming process. Screening significantly larger numbers of compounds
against an increasing number of targets requires a system that can operate with
a high degree of automation and analytical flexibility.
CURRENT SCREENING SYSTEMS
Current screening systems operate with varying degrees of automation. Full
automation--from sample dispensing to data collection--enables round-the-clock
operation, thereby increasing the screening rate. Fully-automated HTS systems
consist of assay analyzers, liquid handling systems, robotics, a computerized
system for data management, reagents and assay kits and microplates. In the HTS
process, a robot moves a microplate among preparatory stations and then delivers
the microplate to the analyzer, which detects and measures possible bioactivity
of a compound against a target.
Most screening systems utilize off-the-shelf, general purpose assay
analyzers which were originally designed for low throughput use. The Company
believes most screening systems in use today have the following limitations:
LACK OF ANALYTICAL FLEXIBILITY. Most analyzers do not provide analytical
flexibility because they operate in only one type of assay detection mode.
In order to perform assays using different detection modes, researchers
generally must switch single-mode analyzers and reconfigure the HTS line.
Alternatively, researchers may set up the HTS line with multiple single-mode
analyzers which often results in critical space constraints.
28
<PAGE>
INADEQUATE SENSITIVITY. As researchers continue to use smaller assay
volumes to reduce reagents costs and increase throughput, many analyzers are
inadequate because they are not sensitive enough to read results based on
these smaller volumes. Inadequate sensitivity may result in missed hits,
limited research capabilities, increased costs of compounds, assays and
reagents and lower throughput.
POOR HTS SYSTEM INTEGRATION. Most analyzers have not been designed
specifically for an HTS environment. They are difficult and expensive to
integrate into an HTS line. Even after the analyzer is integrated into the
HTS line, there are often many problems, including increased probability of
system failures, loss of data, time delays and loss of costly compounds and
reagents.
INABILITY TO OPERATE IN DENSER FORMAT. Most analyzers detect assays solely
in the standard 96-well microplate format. However, drug discovery companies
are beginning to move to a denser, 384-well format to reduce costs of
reagents, assays and compounds while increasing throughput. Most existing
analyzers cannot accommodate the need for this denser format.
LIMITATIONS OF CURRENT ASSAYS. Many assays in use today are performed in a
complex, multi-step process and are expensive, time-consuming and difficult
to implement in an HTS setting. In addition, certain assays use
radioisotopes, which result in problematic waste-disposal issues.
Fluorescence-based assays constitute a growing assay format in HTS due to
the relative lack of waste-disposal problems, as well as their sensitivity,
versatility and adaptability to HTS. However, the use of fluorescence-based
assays in HTS has been limited due to the relative insensitivity of
available analyzers. Certain assays are also unsuitable for HTS because of
the low sensitivity of both the assay and analyzer.
The HTS laboratory today must balance the needs for sensitivity and
analytical flexibility. The increasing use of HTS and need for higher throughput
further exposes the limitations of current screening systems. These limitations
result in higher costs, lower throughput and lower productivity.
THE LJL SOLUTION
LJL is developing products specifically designed for both the current and
evolving HTS market. Since 1988, LJL has designed, developed and manufactured
high performance clinical diagnostics analyzers and other automated instruments.
To develop these products, the Company has assembled an integrated team of
scientists and engineers with expertise in fluorescence chemistry, biophysics,
biochemistry, chemical and mechanical engineering, electronics and software.
The Company's first HTS product, ANALYST, is a four-mode analyzer designed
to address many of the current limitations of available multi-mode analyzers.
The Company believes ANALYST will be the only multi-mode analyzer that enables
higher throughput, improved analytical performance and flexibility, lower
compound, assay and reagents costs, allows quick integration into the existing
HTS laboratory and meets evolving HTS needs. ANALYST is currently undergoing
beta testing at two major pharmaceutical companies and two biotechnology
companies. The Company expects to commence shipments of ANALYST in the first
half of 1998.
The Company is also developing high value-added, application-specific
reagents and assay kits, which are being optimized for use in HTS and
specifically for use with ANALYST. The Company believes that customers will
prefer to purchase reagents and instruments from one source for convenience,
ongoing support and accountability.
In addition to ANALYST, the Company is currently developing an analyzer
capable of reading 1,536-well microplates. The Company believes this higher
density format will greatly improve the user's throughput and productivity and
decrease costs. This high-density analyzer will be an evolution of the ANALYST
technology platform. The Company also plans to develop additional assays which
will be optimized to perform in the higher density format and intends to scale
down certain of its first generation assays and reagents for use in this same
format.
29
<PAGE>
LJL STRATEGY
LJL's objective is to become a leader in the development and
commercialization of advanced technologies and products that accelerate the pace
and improve the productivity of the drug discovery process. To implement this
strategy, the Company intends to:
PROVIDE FIRST-TO-MARKET HTS SOLUTIONS. LJL's technology platform is
comprised of two principal proprietary components: instrumentation and assay
technologies. LJL intends to leverage this technology platform and its
proven expertise in rapid product development and manufacturing of automated
instrumentation systems to be the first to market with effective HTS
solutions.
PURSUE AN EVOLUTIONARY APPROACH TO PRODUCT DEVELOPMENT. The Company
anticipates that the HTS needs of the pharmaceutical industry will continue
to change rapidly over the next three to five years and are difficult to
predict at this time. LJL intends to offer products with features and
capabilities that provide solutions to the current and evolving HTS needs of
drug discovery laboratories. For example, the Company's first HTS analyzer
can perform four major types of optically-detected assays in both the
industry standard 96-well microplate and 384-well microplate formats.
Additionally, the Company is designing a high-density analyzer to read
1,536-well microplates.
EXTEND INSTRUMENTATION AND ASSAY PRODUCTS INTO OTHER STAGES OF THE DRUG
DISCOVERY PROCESS. LJL believes that its screening products are well-suited
for primary and secondary screening and other closely-related stages of the
drug discovery process such as assay development and lead optimization,
which require repetitive screening. The Company believes that users will
benefit from using the same, high performance screening products.
GENERATE RECURRING REVENUE THROUGH THE SALE OF REAGENTS, ASSAY KITS AND
CONSUMABLES. LJL believes that establishing an installed base of HTS
analyzers will enable the Company to generate recurring revenue from the
sale of reagents, assay kits and consumables. These products will be high
value-added, application-specific tools that are optimized for use in HTS
and specifically with the Company's analyzers. The Company believes that
customers will prefer to purchase reagents and instruments from one source
for convenience, ongoing support and accountability.
DEVELOP AND ACQUIRE NOVEL SCREENING TECHNOLOGIES. LJL recently licensed
FLARe, a platform of patented bioassay technologies, which it believes will
address a number of the current limitations associated with
fluorescence-based HTS assays. LJL is also developing internally certain
reagent technologies and intends to license or acquire additional screening
technologies to establish and maintain a market advantage for its products.
PROVIDE EARLY ACCESS TO STRATEGIC CUSTOMERS. LJL intends to provide
strategic customers with early access to certain of its technologies which
will provide insight into next generation product requirements and
technology needs. The Company believes this insight will allow the Company
to provide products that more closely meet the needs of its customers.
PRODUCTS UNDER DEVELOPMENT
The Company's first HTS products under development are ANALYST and
consumables, including high value-added, application-specific reagents and assay
kits. ANALYST is currently undergoing beta testing at two major pharmaceutical
companies and two biotechnology companies. The Company expects to commence
shipments of ANALYST in the first half of 1998, and the first accompanying
reagents and assay kits are expected to be introduced in 1998.
ANALYST
ANALYST is a four-mode analyzer designed specifically for use in the HTS
setting. ANALYST can read luminescence assays and the three major types of
fluorescence-based assays, fluorescence intensity, fluorescence polarization
("FP") and time resolved fluorescence assays. ANALYST allows users to perform
both cellular and biochemical assays in all four detection formats. To operate
ANALYST, the user specifies the detection mode and other parameters through
either a local host computer running LJL's graphical
30
<PAGE>
interface software or an external system controller. A 96-well or 384-well
microplate is placed in the microplate gripper by a user or robot and is
automatically aligned with the optical detection component, SmartOptics.
Depending on the type of assay detection mode selected by the user,
SmartOptics' system of optical switches, lenses and fiber optic cables focuses
the excitation light source (either a high intensity, constant light in the case
of fluorescence intensity and FP assays or a flashing light in the case of
time-resolved fluorescence assays) into either the middle or bottom of the fluid
in the microwell. This focusing flexibility enables the user to optimize assay
performance for a variety of assays regardless of the location of the optimal
focal area. For example, the optimal focal area for the excitation source in FP
assays is in the middle of the well, whereas the optimal focal area for cellular
assays is the bottom of the well. In addition, this focusing precision allows
these assays to be read at lower reagent concentrations. The Company believes
that certain assays that have previously not been able to be performed because
of existing analyzers' relative insensitivity will now be able to be used with
ANALYST. In addition, because of this increased sensitivity, certain assays can
be read faster, which increases throughput for this assay class. The light
emitted from the well is fed into a photo-multiplier tube where the intensity of
the light is quantitatively measured. The light emitted in a luminescence assay
is generated by a chemical reaction within the well and not in response to an
excitation light source as is the case for fluorescence-based assays. To
optimize performance in each of these detection modes, ANALYST has two
photo-multiplier tubes, one for luminescence assays and one for
fluorescence-based assays, and automatically directs the emitted light to the
proper unit depending on the assay selected. The light strikes the photocathode
within the photo-multiplier tube, generating the signal that is recorded by the
computer. This data can then be directed to the user's data management system
for further analysis.
Several additional features of ANALYST make it particularly suitable for
integration into the current HTS setting and allow it to operate with minimal
human intervention. ANALYST has a comprehensive self-diagnostic system that
monitors the intensity of the excitation light source and helps prevent the loss
of data and compounds. ANALYST has two serial ports, one to communicate between
ANALYST and the robot controller and the other to upload information to the data
management system. The separation of these two functions may reduce the
incidence of data corruption. An additional communications port allows the user
to employ third party software to either alert the user or shut down the system
in the case of a system failure. The control panel can be attached to either
side of the instrument, providing integration flexibility. ANALYST also accepts
microplates in their short dimension, which accommodates light-duty robot arms
and eliminates the need for a plate turntable. Finally, ANALYST is compatible
with most currently-available microplates, reagents and liquid handling systems.
The Company believes ANALYST will be the only multi-mode analyzer that
enables higher throughput, improved analytical performance and flexibility,
lower compound, assay and reagents costs, allows quick integration into the
existing HTS laboratory and meets evolving HTS needs. Analytical flexibility is
substantially improved based on the four-mode detection capability. The Company
believes that the ability to program precise instrument parameters enables
assays to be performed on ANALYST with improved sensitivity. Throughput is
expected to be increased because the programmable four-mode detection capability
saves the time normally lost in manual reconfiguration when switching between
assay modes in other multi-mode systems. In addition, the ability to run screens
in both the 96- and 384-well format with no loss of sensitivity will enable the
user to increase productivity.
There can be no assurance that the Company will successfully manufacture or
market ANALYST or that ANALYST will achieve market acceptance. The failure to
successfully commercialize ANALYST would have a material, adverse effect on the
Company's business, financial condition or results of operations.
REAGENTS AND ASSAYS
In 1998, the Company intends to offer high value-added, application-specific
reagents and assay kits that are optimized for use in HTS and specifically for
use with ANALYST. The Company intends to initially develop reagents and assay
kits in a single-step format. LJL believes that a single-step assay format is
better suited to the HTS environment because it is faster, less expensive and
easier to automate than multi-
31
<PAGE>
step assays. The Company believes that its reagents and assay kits will provide
two major benefits to its customers. First, overall assay performance is
expected to be improved because these consumables are being optimized for use
with ANALYST. Second, the Company believes that customers will prefer to
purchase reagents and instruments from one source for convenience, ongoing
support and accountability.
The use of fluorescence-based assays in HTS is increasing due to their
sensitivity, versatility, adaptability, safety and lack of waste-disposal
problems associated with radioisotopic assays. Among fluorescence-based assays,
FP assays are especially well-suited for HTS because they can be used in a
single-step format and are relatively insensitive to concentration and volume
variations. However, the use of FP assays in HTS has previously been limited
because of the relative insensitivity of available analyzers.
The Company believes the increased sensitivity and precision of ANALYST in
the FP format will improve the performance of FP assays. LJL is currently
developing a new, long-lifetime FP reagent based on its proprietary FLARe assay
technology. Currently available FP reagents have short lifetimes and cannot be
used in screening certain targets. The Company believes that its long-lifetime
FP reagent will expand the class of available targets for certain major
diseases, including cardiovascular and immunodeficiency diseases, that can be
screened in a single-step, FP format.
The Company intends to enter into collaborative relationships for the
development of additional reagents, although, to date, no agreements have been
reached. There can be no assurance that LJL will successfully develop its own
reagents and assay kits, that any LJL reagents and assay kits, if developed,
will achieve market acceptance or result in significant Company revenues, or
that the Company will enter into any agreements for rights to additional
reagents or assay technology, the failure of any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
HIGH-DENSITY, ULTRA HIGH THROUGHPUT SCREENING PLATFORM
The Company is developing products designed to operate in a high-density,
ultra high throughput screening system. These products include a 1,536-well
format analyzer, reagents, assay kits and proprietary 1,536-well microplates.
The high-density analyzer will be an evolution of the ANALYST technology
platform, and is being designed to read 1,536 wells arrayed in the same space as
a 96-well microplate. The Company believes this high-density format will
increase throughput significantly over that of currently available systems. In
addition, the high-density analyzer is being designed to perform screens using
significantly reduced assay volumes, thus reducing the costs of reagents, assays
and compounds. LJL is developing 1,536-well microplates to operate with its
high-density analyzer. The Company believes that HTS system performance will be
optimized with the use of these proprietary plates in conjunction with LJL's
high-density analyzer due to the lower error tolerance between system components
in this miniaturized format. In addition, the Company's high-density HTS
analyzer is being designed to operate with third party 1,536-well microplates,
reagents and liquid handling systems. The Company also plans to bring to market
additional reagents and assay kits and intends to miniaturize certain of its
first generation reagents and assays for use in the high-density format.
FLARE TECHNOLOGY
The Company has licensed FLARe, a platform of patented, fluorescence-based
bioassay technologies for use in commercial pharmaceutical and biopharmaceutical
research and development. Fluorescence-based assay technologies are well-suited
to HTS because they are sensitive, versatile, easy to automate and safer than
radioisotopic assays. However, use of fluorescence-based HTS assays has been
limited due to the high level of background noise in the fluorescence signal
within the assay, which obscures the assay-specific signal and results in loss
of sensitivity and reduced accuracy. LJL believes its FLARe technology may
significantly improve the sensitivity, precision and speed of these assays.
The FLARe platform uses an extension of fluorescence lifetime detection,
called phase/modulation. Phase/modulation is a method of measuring the time
required for a molecule to absorb and then emit light ("fluorescence lifetime").
Fluorescence lifetime assays performed using phase/modulation detection have a
higher signal-to-noise ratio than traditional fluorescence assays based on
measurement of intensity. Small
32
<PAGE>
changes in phase/modulation can be accurately measured, resulting in an assay
format that is both accurate and sensitive, including high-density, low volume
HTS formats. In addition, fluctuations in assay volume do not affect the quality
of the assay signal, which is also important in a high-density format, where
precision of fluid handling is extremely difficult.
Many targets, compounds and microplates have transient fluorescent
properties that obscure the assay-specific signal generated by currently
available short lifetime fluorescent reagents. However, using LJL's
phase/modulation assay detection technology, the transient background signal, or
noise, of the well environment can be electronically subtracted from the
assay-specific signal of the long-lifetime fluorescent reagent, resulting in a
high signal-to-noise ratio.
Because cellular and sub-cellular events such as ligand-receptor binding,
ion flux, and protein-protein interaction all produce changes in the physical
micro-environment, the Company believes FLARe technology can be used in a
single-step assay format against most major classes of human drug targets,
including receptors, ion channels, cell regulatory pathways, gene regulatory
elements and enzymes.
The following chart summarizes several of the key assay modalities of FLARe,
with examples of classes of targets and therapeutic areas to which the Company
believes they may be applicable:
<TABLE>
<CAPTION>
ASSAY TECHNOLOGY POTENTIAL TARGET CLASSES POTENTIAL THERAPEUTIC AREA
- -------------------------------- -------------------------------- --------------------------------
<S> <C> <C>
Long-Lifetime Fluorescence Protein-Protein Interactions Cancer, neurological disorders,
Polarization - cell surface receptors cardiovascular diseases,
(biochemical and cell-based - intracellular signaling inflammatory disorders,
assays) - cell-cycle control gene endocrine diseases
regulation
Phase Resolved Fluorescence Ion Channels Cancer, neurological disorders,
Lifetime Intracellular Ion Flux cardiovascular diseases,
(biochemical and cell-based Cell Surface Receptors inflammatory disorders,
assays) endocrine diseases, and
gastrointestinal diseases
Kinase Reporters Protein Kinases Cancer, autoimmune diseases
(biochemical assays)
Protease Reporters Proteases Cardiovascular disease, AIDS,
(biochemical assays) neurodegenerative diseases
</TABLE>
CLINICAL DIAGNOSTIC PRODUCTS
Since 1988, the Company has successfully designed and manufactured several
products for clinical diagnosis, including Luminometer, Q2000, and Horizon, all
of which were or are marketed and sold through third parties. The Company's
products are used primarily in clinical and research laboratories, which require
highly automated systems to perform large numbers of assays reliably 24 hours a
day with minimal human intervention. The Company has employed a proprietary,
modular, object-oriented design approach in which previously developed and
proven modules are adapted to new systems. LJL believes this design and
manufacturing approach has enabled the Company to rapidly develop and
manufacture new products, and the Company intends to continue to employ this
design and manufacturing method in the development of its HTS instruments.
Luminometer is a highly sensitive blood analyzer used to detect and monitor
the presence of HIV and hepatitis viruses, which the Company developed for
Chiron's DNA-based diagnostics needs. Since 1992, the Company has manufactured
and shipped more than 700 Luminometers to laboratories worldwide. The Company
also developed for Chiron Q2000, which is a second generation, highly automated
analyzer used for HIV and hepatitis detection and monitoring. The Company sold
the manufacturing rights to Q2000 to Chiron, and has phased out production of
both Q2000 and Luminometer.
33
<PAGE>
In 1996, the Company completed development of Horizon, a clinical specimen
processor used in cancer diagnostics for Ventana. More than 150 units of Horizon
have been manufactured and shipped worldwide. Although the Company intends to
continue to manufacture Horizon under its agreement with Ventana in 1998,
revenues from OEM product sales are expected to substantially decline in future
periods.
SALES AND MARKETING
The Company intends to market its HTS products worldwide through a direct
sales force in North America and distributors outside North America. LJL
believes that approximately 50 large pharmaceutical companies, each of which
operates numerous laboratories, control a substantial portion of the total
number of pharmaceutical research and development laboratories. As a result, the
Company believes a relatively small direct sales force can effectively penetrate
this market. In addition, the Company intends to market its HTS products to a
significantly larger number of biotechnology and smaller pharmaceutical
companies. The Company currently has a direct sales team of four professionals
and plans to hire additional sales personnel. Because the Company's products are
technically-sophisticated and customers are Ph.D.-level researchers, the sales
force consists of scientifically-qualified personnel to address the technical
sophistication of the Company's products and customers. Sales support is
provided by an in-house applications team. The Company is in the process of
identifying European and Pacific Rim distributors that are currently selling
products into the pharmaceutical R&D market.
The Company is marketing ANALYST and intends to market associated reagents
and assay kits under the trademark name of CRITERION. The Company's high-density
HTS products are expected to include an analyzer, reagents, assay kits and
proprietary 1,536-well microplates. The Company intends to sell reagents
primarily to laboratories that perform relatively large numbers of assays, and
intends to sell assay kits, which will include a combination of reagents and
detailed instructions on protocol and use, to laboratories where convenience and
ease of use are expected to be more important than volume purchase of reagents.
The Company will face the risks associated with a highly concentrated
customer base when and if it begins to sell its HTS products. Thus, any
unfavorable development regarding a customer, including but not limited to such
customer negotiating price discounts or unfavorable terms to LJL on its
products, or encountering substantial financial difficulties or decreasing its
capital spending, could have a material adverse effect on the Company's
business, financial condition and results of operations.
MANUFACTURING
The Company has employed a proprietary, modular, object-oriented design
methodology to develop and manufacture a number of successful analytical systems
for clinical diagnosis. LJL's clinical diagnostics and research products are
manufactured at the Company's facilities in Sunnyvale, California. LJL is an
FDA-registered medical device manufacturer operating under GMP regulations and
is certified under ISO 9001. Certain of LJL's clinical diagnostics products have
the CE mark for European distribution. LJL has built its clinical diagnostics
products with an average mean-time-between-failure rate of over 25,000 hours,
demonstrating reliability that the Company believes is significantly higher than
that of similar clinical diagnostics products. LJL has established a track
record of on-time shipment to its customers. The Company has long-standing
relationships with many local suppliers, who both manufacture custom components
and supply off-the-shelf components.
The Company intends to use essentially the same manufacturing process for
ANALYST as it has for its OEM clinical diagnostics products. This manufacturing
process consists of purchasing custom and other components from third parties
and performing sub-assembly, final assembly, and quality assurance functions
in-house. ANALYST will be manufactured in LJL's existing manufacturing facility.
The Company believes that its manufacturing infrastructure for ANALYST is
sufficient for at least the next few years.
The Company's initial strategy with regard to manufacturing reagents is to
outsource the manufacture of assay kits to LJL's specifications. The Company may
begin manufacturing reagents internally if it is determined to be
cost-effective. In addition, the Company intends to expand its relationships
with vendors
34
<PAGE>
of plastic disposables and to have them manufacture its 1,536-well HTS
microplates according to LJL specifications.
The Company's success will depend in part on the expansion of its operations
and the effective management of these expanded operations. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving quality control and assurance, component supply and shortages
of qualified personnel. Difficulties encountered by the Company in manufacturing
scale-up could have a material adverse effect on its business, financial
condition and results of operations.
COMPETITION
The market for HTS instrumentation is expected to become highly competitive.
The Company anticipates that competition will increase significantly as more
biotechnology and pharmaceutical companies adopt HTS instruments as a drug
discovery tool and as new companies enter the market with advanced technologies.
The Company will compete in many areas, including high throughput screening
instruments, assay development and reagent sales. The Company competes with
companies which directly market high throughput products. In addition,
pharmaceutical and biotechnology companies, academic institutions, governmental
agencies and other research organizations are conducting research and developing
products in various areas which compete with the Company's technology platform,
either on their own or in collaboration with others. The Company's potential
customers may assemble high throughput screening systems by purchasing
components from competitors. Further, certain companies offer screening services
on a contract or collaborative basis, and these services could eliminate the
need for a potential customer to purchase the Company's products. The Company's
technological approaches may be rendered obsolete or uneconomical by advances in
existing technological approaches or the development of different approaches by
one or more of the Company's current or future competitors. Many of these
competitors have greater financial and personnel resources, and more experience
in research and development, than the Company.
INTELLECTUAL PROPERTY RISKS
The Company's success will depend in part on its ability to obtain patents,
maintain trade secret protection and operate without infringing the proprietary
rights of others. The Company has two U.S. patents. The Company has filed four
U.S. patent applications and four provisional patent applications, all of which
are currently pending. To supplement its proprietary technology, the Company has
licensed ten patents from FluorRx pursuant to a June 1997 agreement. Under this
license, the Company obtained certain worldwide rights relating to FluorRx's
FLARe technology. Certain of these rights have been licensed on an exclusive
basis. Certain other rights have been licensed on a non-exclusive basis, and
therefore could be or are licensed to third parties. In accordance with such
agreement, the Company pays one-time fees as well as royalties based on sales of
its products that incorporate this technology. The license may be terminated in
the event of a material breach by the Company. Furthermore, FluorRx may elect to
convert the exclusive rights into non-exclusive rights in the event the Company
fails to make certain minimum royalty payments. If the license were terminated
by FluorRx due to a material breach of the license by the Company, the Company
would lose the right to incorporate FLARe technology into its HTS products. In
such event, the Company would be required to exclude FLARe technology from the
Company's existing and future products and either license or develop internally
alternative technologies. There can be no assurance that the Company would be
able to license alternative technologies on commercially reasonable terms, or at
all, or that the Company would be capable of developing internally such
technologies. Furthermore, there can be no assurance that other companies may
not independently develop technology with functionality similar or superior to
the FLARe technology that does not or is claimed not to infringe the FLARe
patents, or that otherwise circumvents the technology licensed to the Company.
The Company is aware of third party patents that contain issued claims that
may cover certain aspects of the Company's reagent technologies. There can be no
assurance that the Company would not be required to license any such patents to
produce certain reagents, assay kits and related products or that
35
<PAGE>
such licenses would be available on commercially reasonable terms, if at all.
Any action against the Company claiming damages and seeking to enjoin commercial
activities relating to the affected technologies could subject the Company to
potential liability for damages. The Company could incur substantial costs in
defending patent infringement claims, obtaining patent licenses, engaging in
interference and opposition proceedings or other challenges to its patent rights
or intellectual property rights made by third parties, or in bringing such
proceedings or enforcing any patent rights against third parties. The Company's
inability to obtain necessary licenses or its involvement in proceedings
concerning patent rights could have a material adverse effect on the business,
financial condition and results of operations of the Company.
The patent positions of bioanalytical product companies, including the
Company, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Consequently, there can be no assurance
that the patent applications of the Company or its licensor will result in
patents being issued or that any issued patents will provide protection against
competitive technologies or will be held valid if challenged or circumvented.
Others may independently develop products similar to those of the Company or
design around or otherwise circumvent patents issued to the Company. In the
event that any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the patent
owners of each of such patents or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be on terms acceptable to the Company or that the
Company would be successful in any attempt to redesign its products or processes
to avoid infringement. If the Company does not obtain necessary licenses, it
could be subject to litigation and encounter delays in product introductions
while it attempts to design around such patents. Alternatively, the development,
manufacture or sale of such products could be prevented. Litigation would result
in significant cost to the Company as well as diversion of management time.
Adverse determinations in any such proceedings could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also relies on trade secret and copyright law, and employee and
third-party nondisclosure agreements to protect its intellectual property rights
in its products and technology. There can be no assurance that these agreements
and measures will provide meaningful protection of the Company's trade secrets,
copyrights, know-how, or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure or that others will not
independently develop substantially equivalent proprietary technologies.
Litigation to protect the Company's trade secrets or copyrights would result in
significant cost to the Company as well as diversion of management time. Adverse
determinations in any such proceedings or unauthorized disclosure of the
Company's trade secrets could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States. There can be no
assurance that the Company will be able to protect its intellectual property in
these markets. See "Business--Intellectual Property," and "--Products Under
Development--FLARe Technology."
GOVERNMENT REGULATION
The Company's clinical diagnostics products, including Luminometer, Q2000
and Horizon, are subject to FDA regulation as medical devices, as well as
similar foreign regulation. The process of obtaining and maintaining required
regulatory clearances and approvals and otherwise remaining in regulatory
compliance in the United States and certain other countries is lengthy,
expensive and uncertain. Although the Company has phased out production of
Luminometer and Q2000, the Company will continue to manufacture Horizon on an
OEM basis. Horizon is used in research and clinical laboratories to perform IVD
tests, which are exempt from IDE requirements, including the need to obtain the
FDA's prior approval, provided that, among other things, the testing is
noninvasive, the product is not used as a diagnostic procedure without
confirmation by another medically established test or procedure, and
distribution controls are established to assure that IVDs distributed for
research are used only for those purposes. To the Company's knowledge, its OEM
customers have met these conditions. There can be no assurance that the
36
<PAGE>
FDA would agree that the OEM customers' distribution of the Company's clinical
diagnostic products meet and have met the requirements for IDE exemption.
Failure by the Company, its OEM customers or the recipients of the Company's
clinical diagnostic products to comply with the IDE exemption requirements could
result in enforcement action by the FDA, which could adversely affect the
Company's or its OEM customers' ability to gain marketing clearance or approval
of these products or could result in the recall of previously distributed
products.
Applicable law requires that LJL comply with the FDA's current GMP
regulations for the manufacture of its clinical diagnostics products. The FDA
monitors compliance with its GMP regulations by subjecting medical product
manufacturers to periodic FDA inspections of their manufacturing facilities. The
FDA has recently revised the GMP regulations. The new Quality System Regulation
imposes design controls and makes other significant changes in the requirements
applicable to manufacturers. LJL is also subject to other regulatory
requirements, and may need to submit reports to the FDA including adverse event
reporting. Failure to comply with GMP regulations or other applicable legal
requirements can lead to, among other things, warning letters, seizure of
violative products, suspension of manufacturing, government injunctions and
potential civil or criminal liability on the part of the Company and the
responsible officers and employees. In addition, the government may halt or
restrict continued sale of such instruments. Any such actions could have a
material, adverse effect on the business, financial condition and results of
operations of the Company.
In order to export its clinical diagnostics instruments, the Company
maintains ISO 9001 certification and applies the CE mark to certain products
that are exported, which subjects LJL's operations to periodic surveillance
audits. There can be no assurance that the Company's operations will be found to
comply with GMP regulations, ISO standards or other applicable legal
requirements or that the Company will not be required to incur substantial costs
to maintain its compliance with existing or future manufacturing regulations,
standards or other requirements. Any such noncompliance or increased cost of
compliance could have a material adverse effect on the Company's business,
results of operations and financial condition.
LJL also is subject to numerous federal, state and local laws relating to
safe working conditions, manufacturing practices, environmental protection,
storage, use and disposal of hazardous or potentially hazardous substances. Any
material failure to comply with such laws could require the Company to incur
significant costs and would have a material, adverse effect upon the Company's
ability to do business. Changes in existing requirements or adoption of new
requirements or policies relating to government regulations could materially and
adversely affect the ability of LJL to comply with such requirements.
EMPLOYEES
As of December 31, 1997, the Company had 49 employees, of which 11 are
employed in manufacturing, 25 in research and development, and 13 in marketing,
sales and administration. Nine employees hold Ph.D. degrees, and 14 additional
employees hold M.S. degrees. The Company's future success depends upon the
continued service of its key scientific, technical and senior management
personnel and its continuing ability to attract and retain highly qualified
technical and managerial personnel. None of the Company's employees is
represented by a labor union or covered by a collective bargaining agreement.
The Company considers its relations with its employees to be satisfactory.
FACILITIES
The Company's headquarters are located in Sunnyvale, California, and are
comprised of approximately 14,000 square feet of office, research and
development and manufacturing space. The Company's lease of these premises
expires January 31, 2000 and is renewable for an additional term of five years
under certain conditions. As the Company hires additional administrative and
marketing personnel, the Company plans either to lease additional space or to
move its headquarters within the next 24 months in order to support its
projected growth. The Company expects that additional space will be available on
commercially reasonable terms.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Lev J. Leytes........................................ 42 President, Chief Executive Officer and Chairman of
the Board of Directors
Galina Leytes........................................ 43 Executive Vice President and Director
Anthony H. Bautista.................................. 42 Vice President of Manufacturing Operations
Robert T. Beggs...................................... 49 Vice President of Finance and Administration
William G. Burton, Ph.D.............................. 57 Vice President, Chief Technology Officer
Douglas N. Modlin, Ph.D.............................. 45 Vice President of Instrumentation Systems Research
and Development
DIRECTORS
George W. Dunbar, Jr.(1)............................. 51 Director
Michael F. Bigham(2)................................. 40 Director
John G. Freund, M.D.(2).............................. 44 Director
Daniel S. Janney(1).................................. 32 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
LEV J. LEYTES is a co-founder of the Company and has been its President,
Chief Executive Officer and Chairman of the Board of Directors since inception.
Prior to founding LJL, Mr. Leytes worked in various technical and management
positions at Beckman Instruments, Inc., a life sciences company, and Molecular
Devices Corporation, a bioanalytical instrumentation company. Mr. Leytes holds
an M.S. in engineering from the Moscow Engineering Institute. Mr. Leytes is the
spouse of Galina Leytes.
GALINA LEYTES is a co-founder of the Company and has been Vice President and
a director since inception, and was promoted to Executive Vice President in
January 1996. Ms. Leytes previously served as the Company's Chief Financial
Officer and Secretary from inception to December 1997. Prior to founding LJL,
Ms. Leytes managed the information systems group at Stanford University, was a
consultant in management information systems, and was a senior programmer at
Charles Schwab & Co., Inc. She holds an M.S. in engineering from the Kiev
Engineering Institute. Ms. Leytes is the spouse of Lev J. Leytes.
ANTHONY H. BAUTISTA joined the Company in November 1991 as Manufacturing
Operations Manager, and was promoted to Director of Manufacturing Operations in
December 1993 and Vice President of Manufacturing Operations in May 1996. Prior
to joining LJL, Mr. Bautista held various management positions in the
manufacturing divisions of Molecular Devices Corporation, a bioanalytical
instrumentation company, and Hewlett-Packard Company, a computer and electronics
company. Mr. Bautista holds an A.A. in electronic technology from the College of
San Mateo and a B.S. in electrical engineering from San Jose State University.
ROBERT T. BEGGS joined the Company in November 1992 as Controller, and was
promoted to Director of Finance and Administration in December 1994 and Vice
President of Finance and Administration in May 1996. Prior to joining LJL, Mr.
Beggs was the Controller of Sequoia-Turner Corporation, a medical instruments
company, acquired in 1991 by Abbott Laboratories, a pharmaceutical and
diagnostics company. Mr. Beggs held several financial management positions at
G.D. Searle & Co., a pharmaceutical company and a wholly-owned subsidiary of
Monsanto Company, and Siemens AG, a diversified electronics
38
<PAGE>
company. Mr. Beggs holds a B.S. in business administration from Nichols College
and an M.B.A. from the University of Massachusetts, Amherst.
WILLIAM G. BURTON, PH.D. joined the Company in March 1996 as Director of
Technology and Business Development, and was promoted to Vice President of
Technology and Business Development in January 1997 and Chief Technology Officer
in August 1997. Dr. Burton was Program Manager, Strategic Market Development for
the BioScience Products Division of Hewlett-Packard Company from September 1994
until March 1996. From January 1993 to September 1994, Dr. Burton was a business
consultant to various biotechnology and pharmaceutical companies. From June 1989
to January 1993, he was a Managing Director of TS/BioDevices, Inc., a
biotechnology systems development company and was responsible for operations and
business development. Previously, Dr. Burton held senior management positions in
biotechnology and health care-related research, product development, marketing
and strategic planning and analysis. He holds a B.S. in biology from California
State University, Long Beach, and an M.S. and Ph.D. in biochemistry from the
University of California at Los Angeles.
DOUGLAS N. MODLIN, PH.D. joined the Company in December 1996 as Senior
Director of Research and Development, and was promoted to Vice President of
Instrumentation Systems Research and Development in October 1997. Prior to
joining the Company, Dr. Modlin was the Manager of Advanced Test Systems
Development at Micro Module Systems, Inc., an electronic integration company,
from November 1995 to December 1996, and was the Associate Technical Director of
Research at Molecular Devices Corporation, a bioanalytical instrumentation
company, from August 1993 to October 1995. From November 1991 to August 1993, he
was the Program Manager of Diagnostic Instrumentation for Affymax NV, a drug
discovery company. Dr. Modlin holds a B.S. in electrical engineering from the
California Polytechnic State University, San Luis Obispo, and an M.S. and Ph.D.
in electrical engineering from Stanford University.
GEORGE W. DUNBAR, JR. has been a director of the Company since February
1995. Mr. Dunbar has been the President, Chief Executive Officer and a director
of Metra Biosystems, Inc., a medical device company specializing in products for
the detection and management of metabolic bone and joint diseases, since July
1991. He is also a member of the Board of Directors of DepoTech Corporation, a
drug delivery company, and Sonus Pharmaceuticals, Inc., a medical diagnostic
ultrasound company. Mr. Dunbar holds a B.S. in electrical engineering and an
M.B.A. from Auburn University.
MICHAEL F. BIGHAM has been a director of the Company since June 1997. Mr.
Bigham has been the President, Chief Executive Officer and a director of Coulter
Pharmaceutical, Inc., a drug development company ("Coulter"), since July 1996.
Prior to joining Coulter, Mr. Bigham served as Executive Vice President of
Operations from April 1994 to June 1996, Chief Financial Officer from April 1989
to June 1996, and Vice President of Corporate Development from July 1988 to
March 1992 at Gilead Sciences, Inc., a biotechnology company. Previously, Mr.
Bigham was Co-head of Healthcare Investment Banking for Hambrecht & Quist LLC,
an investment banking firm. Mr. Bigham is also a member of the Board of
Directors of Datron Systems, Inc., an electronics company, and several
privately-held companies. Mr. Bigham received a B.S. degree in commerce with
distinction from the University of Virginia and an M.B.A. from the Stanford
University Graduate School of Business.
JOHN G. FREUND, M.D. has been a director of the Company since June 1997. Dr.
Freund has been Managing Director of the General Partner of Skyline Venture
Partners, L.P., a venture capital firm, since October 1997. He served as
Managing Director in the Alternative Assets Group of Chancellor Capital
Management, Inc. (now Chancellor LGT Asset Management, Inc.), from August 1995
to September 1997. In 1995, Dr. Freund co-founded Intuitive Surgical Devices,
Inc., a privately-held medical device company. From July 1988 through December
1994, Dr. Freund was employed at Acuson Corporation, a medical equipment
company, where he was Vice President-Corporate Development and later Executive
Vice President. Previously, he was a partner in Morgan Stanley Venture Partners,
a venture capital firm, and also co-founded the healthcare group in the
corporate finance department of Morgan Stanley & Co., Inc. Dr. Freund holds a
B.A. from Harvard College, an M.D. from Harvard Medical School and an M.B.A.
39
<PAGE>
from Harvard Business School, where he was a Baker Scholar and won what is now
called the John L. Loeb Fellowship for excellence in finance.
DANIEL S. JANNEY has been a director of the Company since June 1997. Mr.
Janney is a partner of Alta Partners, a venture capital company, which he joined
in April 1996. Prior to joining Alta Partners, Mr. Janney served as a Vice
President in the health care investment banking group of Montgomery Securities
(now NationsBanc Montgomery Securities LLC) from January 1994 to April 1996 and
as an Associate at Montgomery Securities from March 1993 to December 1993. From
June 1990 to February 1993, Mr. Janney was an Associate at Bankers Trust Company
in the leveraged buyout/private equity group. Mr. Janney holds a B.A. from
Georgetown University and an M.B.A. from the Anderson School at the University
of California, Los Angeles.
BOARD COMPOSITION
The Company currently has authorized seven directors. In accordance with the
terms of the Company's Restated Certificate, effective upon the closing of this
offering, the terms of office of the directors will be divided into two classes:
Class I, whose term will expire at the annual meeting of stockholders to be held
in 1999 or special meeting held in lieu thereof and Class II, whose term will
expire at the annual meeting of stockholders to be held in 2000 or special
meeting held in lieu thereof. The Class I directors are Galina Leytes, George W.
Dunbar, Jr. and Daniel S. Janney, and the Class II directors are Lev J. Leytes,
Michael F. Bigham and John G. Freund, M.D. and a vacancy to be filled by the
Board of Directors. At each annual meeting of stockholders after the initial
classification or special meeting in lieu thereof, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the second annual meeting following election or special
meeting held in lieu thereof. In addition, the Company's Restated Certificate
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the two
classes so that, as nearly as possible, each class will consist of one-half of
the directors. This classification of the Board of Directors may have the effect
of delaying or preventing changes in control or management of the Company.
Although directors of the Company may be removed for cause by the affirmative
vote of the holders of a majority of the Common Stock, the Company's Restated
Certificate provides that holders of two-thirds of the Common Stock must vote to
approve the removal of a director without cause.
BOARD COMMITTEES
In December 1997, the Board established the Audit Committee and Compensation
Committee. The Board's Audit Committee currently consists of Messrs. Dunbar and
Janney. The Audit Committee reviews the Company's annual audit and meets with
the Company's independent accountants to review the Company's internal
accounting procedures and financial management practices. The Compensation
Committee currently consists of Mr. Bigham and Dr. Freund. The Compensation
Committee recommends compensation and benefits for the Company's President and
Chief Executive Officer and the Company's other executive officers to the Board
of Directors, reviews general policy relating to compensation and benefits of
employees of the Company, and administers the Company's Stock Plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board of Directors
was, at any time since the formation of the Company, an officer or employee of
the Company. No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving on the Board of Directors or Compensation Committee.
DIRECTOR COMPENSATION
The Company does not currently provide cash compensation to directors for
services in such capacity, but directors may be reimbursed for certain expenses
in connection with attendance at Board of Directors
40
<PAGE>
and Committee meetings. Directors are eligible to participate in the Company's
Stock Plans and, beginning in 1998, employee directors will also be eligible to
participate in the Company's 1998 Employee Stock Purchase Plan and non-employee
directors will also be eligible to participate in the 1998 Directors' Stock
Option Plan. In December 1995, Mr. Bigham was granted an option to purchase
10,000 shares of Common Stock at an exercise price of $0.10 per share subject to
a four year vesting schedule, in March 1997 he was granted an option to purchase
10,000 shares of Common Stock at an exercise price of $1.00 per share subject to
a four year vesting schedule, and in December 1997 he purchased 5,000 shares of
restricted Common Stock subject to a four year vesting schedule. In February
1995, Mr. Dunbar was granted an option to purchase 20,000 shares of Common Stock
at an exercise price of $0.10 per share subject to a four year vesting schedule
and in December 1997 he was granted an option to purchase 10,000 shares of
Common Stock at an exercise price of $2.00 per share subject to a four year
vesting schedule. In December 1997, Mr. Janney and Dr. Freund each purchased
20,000 shares of restricted Common Stock subject to four year vesting schedules.
See "Stock Plans."
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded by the Company
during the fiscal year ended December 31, 1997 to its President, Chief Executive
Officer and Chairman of the Board of Directors and the Company's other four most
highly compensated executive officers, each of whose aggregate compensation
during the Company's last fiscal year exceeded $100,000 (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL
COMPENSATION(1) SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- ---------------------------------------------------------------------------- ---------- --------- -------------
<S> <C> <C> <C>
Lev J. Leytes(2) ........................................................... $ 250,000 $ 75,000 12,304
President, Chief Executive Officer and
Chairman of the Board of Directors
Galina Leytes(2) ........................................................... $ 140,000 $ 0 4,823
Executive Vice President and Director
Anthony H. Bautista ........................................................ $ 105,934 $ 50,263 23,760
Vice President of
Manufacturing Operations
Robert T. Beggs ............................................................ $ 108,963 $ 44,411 26,439
Vice President of
Finance and Administration
William G. Burton, Ph.D. ................................................... $ 137,437 $ 36,721 26,891
Vice President,
Chief Technology Officer
</TABLE>
- ------------------------
(1) In accordance with the Securities and Exchange Commission (the "SEC") rules,
other annual compensation in the form of perquisites and other personal
benefits has been omitted where the aggregate amount of such perquisites and
other personal benefits constitutes less than the lesser of $50,000 or 10%
of the total annual salary and bonus for the Named Executive Officer for the
fiscal year.
(2) Prior to June 1997, the Company had been taxed as an S corporation for
federal and state income tax purposes. Under the Internal Revenue Code
regulations regarding S corporations, the Company had not been subject to
federal income taxes but had been subject to state income taxes at a reduced
rate. As an S corporation, the Company's stockholders paid taxes on their
share of the Company's taxable
41
<PAGE>
income on their individual tax returns. In June 1997, in connection with the
Company's preferred stock financing, the Company became subject to the
provisions of subchapter C of the Internal Revenue Code pursuant to which
the Company's earnings are taxed for federal and state income tax purposes
at the corporate level. Amounts exclude S corporation dividends in the
aggregate amount of $1,075,000 distributed to Lev J. Leytes and Galina
Leytes for the period from January 1 through June 5, 1997 during which the
Company operated as a subchapter S corporation for federal and state income
tax purposes. See "Dividend Policy."
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENTAGE OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OR OPTION TERM(5)
OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#) YEAR(%)(3) ($/SH)(4) DATE 5%($) 10%($)
- --------------------------------- ----------- ------------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lev J. Leytes.................... 12,304(1) 2.6% $ 2.20 12/16/07 $ 213,434 $ 355,892
Galina Leytes.................... 4,823(1) 1.0 2.20 12/16/07 83,663 139,505
Anthony H. Bautista.............. 10,000(2) 2.1 1.00 8/27/07 185,467 301,249
7,500(2) 1.6 2.00 12/16/07 131,601 218,437
6,260(1) 1.3 2.00 12/16/07 109,843 182,322
Robert T. Beggs.................. 15,000(2) 3.1 1.00 8/27/07 278,201 451,874
5,000(2) 1.0 1.00 3/14/07 92,734 150,625
6,439(1) 1.3 2.00 12/16/07 112,983 187,535
William G. Burton, Ph.D.......... 20,000(2) 4.2 1.00 6/17/07 370,935 602,498
6,891(1) 1.4 2.00 12/16/07 120,915 200,700
</TABLE>
- ------------------------
(1) All of such options granted vest in full on the vesting commencement date.
Such options expire 10 years from the date of grant, or earlier upon
termination of employment. See "Stock Plans - 1997 Stock Plan."
(2) Twenty percent (20%) of such options granted vest one year from the vesting
commencement date, and 1/20th of the total shares vest on each quarterly
anniversary of the vesting commencement date thereafter. Such options expire
10 years from the date of grant, or earlier upon termination of employment.
See "Stock Plans--1994 Equity Incentive Plan" and "Stock Plans--1997 Stock
Plan".
(3) Based on an aggregate of 480,000 options granted to employees, consultants
and directors during the fiscal year ended December 31, 1997.
(4) The exercise price per share of each option except the options granted to
Lev J. Leytes and Galina Leytes was equal to the estimated fair value of the
Common Stock on the date of grant as determined by the Board of Directors.
The exercise price per share of the options granted to Lev J. Leytes and
Galina Leytes was equal to 110% of the estimated fair value of the Common
Stock on the date of grant as determined by the Board of Directors.
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the SEC. There can be no assurance that the
actual stock price appreciation over the ten-year option term will be at the
assumed 5% and 10% levels or at any other defined level. Unless the market
price of the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the Named Executive Officers. The
potential realizable value is calculated by assuming that the initial public
offering price of $12.00 per share appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day at the appreciated price.
42
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND YEAR-END OPTION HOLDINGS AND
VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on exercise of stock options during the
fiscal year ended December 31, 1997 and the number and value of securities
underlying unexercised options held by each of the Named Executive Officers as
of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997
ACQUIRED ON VALUE ------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- --------------------------------- ----------- ------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Lev J. Leytes.................... -- -- 12,304/0 $120,579/0
Galina Leytes.................... -- -- 4,823/0 47,265/0
Anthony H. Bautista.............. 25,000 $297,500 6,260/32,500 62,600/363,500
Robert T. Beggs.................. 10,000 119,000 17,939/38,500 201,240/440,150
William G. Burton, Ph.D.......... -- -- 14,891/52,000 164,110/600,800
</TABLE>
- ------------------------
(1) Value realized and value of unexercised in-the-money options are based on a
value of $12.00 per share of the Company's Common Stock, the assumed
offering price. Amounts reflected are based on the assumed value minus the
exercise price multiplied by the number of shares acquired on exercise and
do not indicate that the optionee sold such stock.
EMPLOYMENT AGREEMENTS
In December 1995, the Company entered into an agreement with Mr. Leytes
providing that, in the case of involuntary termination other than for cause,
salary and benefits will continue to be paid for a period of one year from the
date of termination, all stock options and restricted stock then held by Mr.
Leytes will immediately vest, and a bonus equal to the greater of the actual
bonus owing to Mr. Leytes in the year of termination or 100% of the base salary
Mr. Leytes received for the preceding twelve calendar months will be paid.
STOCK PLANS
1994 EQUITY INCENTIVE PLAN. The Company's 1994 Equity Incentive Plan (the
"1994 Plan") was adopted by the Board of Directors and approved by the
stockholders in January 1994. A total of 479,250 shares of Common Stock have
been reserved for issuance under the 1994 Plan. As of December 31, 1997, 38,250
options to purchase any shares of Common Stock had been exercised, options to
purchase a total of 441,000 shares at a weighted average exercise price of $0.20
per share were outstanding and no shares remained available for future option
grants under the 1994 Plan.
The purposes of the 1994 Plan are to provide a means by which employees of
and consultants to the Company may be given an opportunity to benefit from
increases in value of the stock of the Company, to retain the services of
persons who are currently employees or directors of or consultants to the
Company, to secure and retain the services of new employees, directors and
consultants, and to provide incentives for such persons to exert maximum efforts
for the success of the Company. The 1994 Plan provides for the granting to
employees, including officers and employee directors, of incentive stock options
within the meaning of Section 422 of the Code and for the granting to employees
and consultants of nonstatutory stock options. The 1994 Plan also provides for
the granting to employees and consultants of stock bonuses, rights to purchase
restricted stock, and stock appreciation rights (collectively with the incentive
stock options and nonstatutory stock options, the "Stock Awards"). To the extent
an optionee would have the right in any calendar year to exercise for the first
time one or more incentive stock options for shares having an aggregate fair
market value (under all plans of the Company and determined for each share as of
the date the option to purchase the shares was granted) in excess of $100,000,
any such excess options shall be treated as nonstatutory stock options. If not
terminated earlier, the 1994 Plan will terminate in January 2004.
43
<PAGE>
The 1994 Plan may be administered by the Board of Directors or a committee
consisting of at least two disinterested directors (the "1994 Administrator").
The 1994 Administrator has the power to determine which of the persons eligible
under the 1994 Plan shall be granted Stock Awards; when and how Stock Awards
shall be granted; whether a Stock Award will be an incentive stock option, a
nonstatutory stock option, a stock bonus, a right to purchase restricted stock,
a stock appreciation right, or a combination of the foregoing; the provisions of
each Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive stock pursuant to a Stock
Award; and the number of shares with respect to which Stock Awards shall be
granted to each such person. Options granted under the 1994 Plan are not
generally transferable by the optionee. Options granted under the 1994 Plan may
be exercised within thirty days after termination of employment or consulting
status, provided however that options may be exercised within 18 months after an
optionee's termination by death or 12 months after an optionee's termination due
to optionee's disability, and in any event no later than the expiration of the
option's 10 year term. The exercise price of incentive stock options must be at
least equal to the fair market value of the Common Stock on the date of grant,
and the exercise price of nonstatutory stock options must be at least equal to
50% of the fair market value of the Common Stock on the date of grant. Under the
Company's standard form of option agreement, the options vest over five years,
with 20% vesting on each annual anniversary of the vesting commencement date.
The 1994 Administrator has the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest, notwithstanding the provisions in the Stock Award. In the
event of a dissolution, sale of substantially all of the Company's assets,
merger, reverse merger, or consolidation of the Company with or into another
corporation, the Board may have the surviving corporation assume the Stock
Awards granted under the 1994 Plan, or substitute similar Stock Awards, continue
the Stock Award in full force and effect or accelerate vesting thereof.
1997 STOCK PLAN. The Company's 1997 Stock Plan (the "1997 Plan") was
adopted by the Board of Directors in March 1997 and approved by the stockholders
in May 1997. An increase of 1,250,000 shares in the number of shares reserved
for issuance under the 1997 Plan, to a total of 2,070,750 shares of Common Stock
issuable thereunder, was authorized by the Board of Directors in December 1997
and will be submitted for approval by the stockholders prior to completion of
this offering. As of December 31, 1997, a total of 820,750 shares of Common
Stock were reserved for issuance under the 1997 Plan, 45,000 shares of Common
Stock had been issued pursuant to stock purchase rights, no options to purchase
any shares of Common Stock had been exercised, options to purchase a total of
389,000 shares at a weighted average exercise price of $1.28 per share were
outstanding and 386,750 shares remained available for future option grants under
the 1997 Plan.
The purposes of the 1997 Plan are to attract and retain the best available
personnel to the Company, to provide additional incentives to the Company's
employees and consultants and to promote the success of the Company's business.
The 1997 Plan provides for the granting to employees, including officers and
employee directors, of incentive stock options within the meaning of Section 422
of the Code and for the granting to employees and consultants, including
nonemployee directors, of nonstatutory stock options. Stock purchase rights may
also be granted under the 1997 Plan. To the extent an optionee would have the
right in any calendar year to exercise for the first time one or more incentive
stock options for shares having an aggregate fair market value (under all plans
of the Company and determined for each share as of the date the option to
purchase the shares was granted) in excess of $100,000, any such excess options
shall be treated as nonstatutory stock options. If not terminated earlier, the
1997 Plan will terminate in March 2007.
The 1997 Plan may be administered by the Board of Directors or a committee
appointed by the Board which shall be constituted in such a manner as to comply
with applicable law (the "1997 Administrator"). The 1997 Administrator has the
power to select the consultants and employees to whom options and stock purchase
rights may be granted, to determine the terms of the options granted including
the exercise price, the number of shares subject to the option and the
exercisability thereof, and the form of consideration payable upon exercise.
Options granted under the 1997 Plan are not generally transferable by the
optionee. The maximum number of shares which may be subject to options granted
to any employee for any fiscal
44
<PAGE>
year of the Company shall be 2,000,000. Such limitation shall not take effect
until the earliest date required under Section 162(m) of the Code. Options
granted under the 1997 Plan must be exercised within 3 months or such other
period of time not less than thirty days as determined by the 1997 Administrator
after termination of employment or consulting status, provided however that
options must be exercised within 6 months after an optionee's termination by
death and within 12 months after an optionee's termination by disability, and in
any event no later than the expiration of the option's 10 year term. The
exercise price of incentive stock options must be at least equal to the fair
market value of the Common Stock on the date of grant, and the exercise price of
nonstatutory stock options shall be determined by the 1997 Administrator on the
date of grant; provided, however, that the exercise price of any stock option
granted to the Company's Chief Executive Officer and the four other most highly
compensated officers of the Company must equal at least 110% in the case of an
incentive stock option or 100% in the case of a nonstatutory stock option of the
fair market value of the Common Stock on the date of grant. Under the Company's
standard form of option agreement, the options vest over five years, with 20%
vesting on the 12 month anniversary of the vesting commencement date and with
1/20th vesting quarterly thereafter. In the event of a dissolution or
liquidation, to the extent it has not been previously exercised, the option or
stock purchase right will terminate immediately prior to the consummation of
such proposed action. In the event of a proposed sale of all or substantially
all of the Company's assets, merger of the Company with or into another
corporation, each outstanding option or stock purchase right shall be assumed or
an equivalent option or right substituted by the successor corporation, unless
the successor corporation does not agree to assume the option or stock purchase
right or to substitute an equivalent option or right, in which case such option
or stock purchase right shall terminate upon consummation of such proposed
action.
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
December 1997 and will be submitted to the stockholders for approval prior to
the completion of this offering. A total of 300,000 shares of Common Stock has
been reserved for issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by an offering period commencing on the effective date
of this offering and ending on January 31, 2000. Each subsequent offering period
will have a duration of twenty-four months. Each offering period after the first
offering period will commence on February 1 and August 1 of each year. Each
offering period will consist of four consecutive purchase periods of six months
duration, with the last day of each period being designated a purchase date. The
first purchase date will occur on July 31, 1998, with subsequent purchase dates
to occur every six months thereafter. The Purchase Plan may be administered by
the Board of Directors or a committee thereof. Employees (including officers and
employee directors) of the Company, or of any majority-owned subsidiary
designated by the Board, are eligible to participate in the Purchase Plan if
they are employed by the Company or any such subsidiary for at least 20 hours
per week and more than five months per year. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 20% of an employee's compensation, at a price equal to the lower of 85%
of the fair market value of the Company's Common Stock at the beginning of the
offering period or the purchase date. If the fair market value of the Common
Stock on a purchase date is less than the fair market value at the beginning of
the offering period, a new twenty-four month offering period will automatically
begin on the first business day following the purchase date with a new fair
market value. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment with the Company. If not terminated earlier, the Purchase Plan
will have a term of 20 years.
The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of all or substantially all of the
Company's assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the Board of Directors shortens the offering period so that employees' rights to
purchase stock under the Purchase Plan are exercised prior to the merger or sale
of assets. The Board of Directors has the power to amend or terminate the
Purchase Plan as long as such action does not adversely affect any outstanding
rights to purchase stock thereunder.
45
<PAGE>
1998 DIRECTORS' STOCK OPTION PLAN. The 1998 Directors' Stock Option Plan
(the "Directors' Plan") was adopted by the Board of Directors in December 1997
and will be submitted for approval by the stockholders prior to completion of
this offering. A total of 150,000 shares of Common Stock has been reserved for
issuance under the Directors' Plan. The Directors' Plan provides for the
automatic grant of nonstatutory stock options to nonemployee directors of the
Company. The Directors' Plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the Board of Directors.
The Directors' Plan provides that each person who first becomes a
nonemployee director of the Company after the date of this offering shall be
granted a nonstatutory stock option to purchase 20,000 shares of Common Stock
(the "First Option") on the date on which the optionee first becomes a
nonemployee director of the Company. The First Option will not be granted to
individuals serving as nonemployee directors as of the date of this offering.
Thereafter, on the date of each annual meeting of the Company's stockholders,
each nonemployee director (including nonemployee directors who were not granted
a First Option prior to the date of such annual meeting) shall be granted an
option to purchase 5,000 shares of Common Stock (a "Subsequent Option") if, on
such date, he or she has served on the Company's Board of Directors for at least
six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any one grant and the
method of making a grant. No option granted under the Directors' Plan is
transferable by the optionee other than by will or the laws of descent or
distribution or pursuant to the terms of a qualified domestic relations order,
and each option is exercisable, during the lifetime of the optionee, only by
such optionee. The Directors' Plan provides that the First Option shall become
exercisable in installments as to 25% of the total number of shares subject to
the First Option on each of the first, second, third and fourth anniversaries of
the date of grant of the First Option; each Subsequent Option shall become
exercisable in full on the fourth anniversary of the date of grant of that
Subsequent Option. The exercise price of all stock options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option. Options granted under
the Directors' Plan have a term of ten years.
In the event of the dissolution or liquidation of the Company, a sale of all
or substantially all of the assets of the Company, the merger of the Company
with or into another corporation in which the Company is not the surviving
corporation or any other capital reorganization in which more than 50% of the
shares of the Company entitled to vote are exchanged, the Company shall give to
each nonemployee director either (i) a reasonable time within which to exercise
the option, including any part of the option that would not otherwise be
exercisable, prior to the effectiveness of any such transaction at the end of
which time the Option shall terminate, or (ii) the right to exercise the option,
including any part of the option that would not otherwise be exercisable (or
receive a substitute option with comparable terms) as to an equivalent number of
shares of stock of the corporation succeeding the Company or acquiring its
business by reason of any such transaction. The Board of Directors may amend or
terminate the Directors' Plan; provided, however, that no such action may
adversely affect any outstanding option. If not terminated earlier, the
Directors' Plan will have a term of ten years.
401(K) PLAN
Effective January 1, 1992, the Company adopted a tax deferred savings plan
called the LJL
BioSystems, Inc. 401(k) Profit Sharing Plan (the "401(k) Plan"), which covers
all employees who have been employed by the Company for at least one year. An
employee may contribute up to 15% of his or her compensation to the 401(k) Plan
on a pre-tax basis, not to exceed in any given year the maximum amount allowable
under IRS regulations. The Company will contribute the total amount of salary
elected to be deferred by each employee and may contribute a discretionary
matching contribution equal to a specified percentage of the participant's
compensation. The rates of pre-tax contributions may be reduced with respect to
highly compensated employees, as defined in the Internal Revenue Code, so that
the 401(k) Plan will comply with Section 401(k) of the Internal Revenue Code.
Pre-tax contributions are allocated to
46
<PAGE>
each employee's individual account, which is invested in selected investment
alternatives according to the directions of the employee. An employee's pre-tax
contributions vest over five years and are nonforfeitable at all times.
Withdrawals are permitted from an employee's account while the employee is still
employed by the Company in the event of a financial hardship or when the
employee reaches age 59 1/2. Employees may also borrow from the accounts. All
benefits are generally distributed to employees upon termination of employment.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company has included in its Restated Certificate a provision to eliminate
the personal liability of its directors for monetary damages for breach of their
fiduciary duties as directors to the fullest extent permitted by Delaware law.
In addition, the Company's Bylaws provide that the Company is required to
indemnify its officers and directors under certain circumstances to the fullest
extent permitted by Delaware law, and the Company is required to advance
expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. The Company has
entered into indemnification agreements with each of its officers and directors
containing provisions that are in some respects broader than the specific
indemnification provisions contained in the Delaware Law. The indemnification
agreements require the Company, among other things, to indemnify such officers
and directors against certain liabilities that may arise by reason of their
status or service as officers and directors and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. The Company intends to obtain directors' and officers' liability
insurance with respect to liabilities arising out of certain matters, including
matters under the Securities Act.
At present, the Company is not aware of any pending or threatened litigation
or proceeding involving a director, officer, employee or agent of the Company in
which indemnification would be required or permitted. The Company is not aware
of any threatened litigation or proceeding that might result in a claim for such
indemnification. The Company believes that its charter provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
47
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1997, shares of the Company's Preferred Stock, convertible into an
aggregate of 3,621,503 shares of Common Stock, were sold at an as-converted
price of $2.60 to investors that included, among others: entities affiliated
with Chancellor LGT Asset Management, Inc. (which consists of 878,462 shares
sold to Citiventure 96 Partnership, L.P., 431,923 shares sold to Chancellor LGT
Private Capital Offshore Partners II, L.P. and 228,077 shares sold to Chancellor
Private Capital Partners III, L.P.), entities affiliated with Alta Partners
(which consists of 953,223 shares sold to Alta California Partners, L.P. and
21,778 shares sold to Alta Embarcadero Partners, LLC), entities affiliated with
Hambrecht & Quist Capital Management, Inc. (which consists of 461,539 shares
sold to H&Q Healthcare Investors and 307,693 shares sold to H&Q Life Sciences
Investors) and 40,000 shares sold to a living trust and a charitable remainder
trust formed by Michael F. Bigham. In addition, the Company issued warrants to
purchase 65,653 shares of Preferred Stock to NationsBanc Montgomery Securities
LLC. The Company expects these warrants will be exercised immediately prior to
the completion of this offering.
In December 1995, the Company entered into an employment agreement with Mr.
Leytes providing that, in the case of involuntary termination other than for
cause, salary and benefits will continue to be paid for a period of one year
from the date of termination, all stock options and restricted stock then held
by Mr. Leytes will immediately vest, and a bonus equal to the greater of the
actual bonus owing to Mr. Leytes in the year of termination or 100% of the base
salary Mr. Leytes received for the preceding twelve calendar months will be
paid.
The Company has entered into indemnification agreements with each of its
officers and directors containing provisions which may require the Company,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. The Company also intends to
execute such agreements with its future directors and executive officers. See
"Management-- Limitation of Liability and Indemnification Matters."
The Company believes that all of the transactions set forth above were in
its best interests. As a matter of policy, the transactions were, and all future
transactions between the Company and its officers, directors, principal
stockholders and affiliates will be, approved by a majority of the Board of
Directors, including a majority of the independent and disinterested directors
on the Board of Directors, and will be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997 and as adjusted
to reflect the sale of the Common Stock offered by the Company pursuant to this
Prospectus and conversion of all outstanding shares of Preferred Stock into
shares of Common Stock by (i) each stockholder who is known by the Company to
own beneficially more than 5% of the Common Stock, (ii) each Named Executive
Officer of the Company, (iii) each director of the Company, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)(2)
SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Entities affiliated with Chancellor LGT Asset Management, Inc.(3)................. 1,538,462 18.7% 14.4%
1166 Avenue of the Americas
New York, NY 10036
Entities affiliated with Alta Partners(4)......................................... 975,001 11.9% 9.1%
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Entities affiliated with Hambrecht & Quist Capital Management, Inc.(5)............ 769,232 9.4% 7.2%
50 Rowes Wharf
Boston, MA 02110
Lev J. Leytes(6).................................................................. 4,552,804 55.4% 42.5%
Galina Leytes(7).................................................................. 4,545,323 55.4% 42.4%
Anthony H. Bautista(8)............................................................ 32,760 * *
Robert T. Beggs(9)................................................................ 29,439 * *
William G. Burton, Ph.D.(10)...................................................... 14,891 * *
George W. Dunbar, Jr.(11)......................................................... 10,000 * *
Metra Biosystems, Inc.
265 North Whisman Road
Mountain View, CA 94043
Michael F. Bigham(12)............................................................. 50,000 * *
750 Forest Avenue
Palo Alto, CA 94301
John G. Freund, M.D............................................................... 20,000 * *
Daniel S. Janney(13).............................................................. 995,001 12.1% 9.3%
Alta Partners
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
All directors and executive officers as a group (10 persons)(14).................. 5,729,449 69.0% 53.1%
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the Company's Common
Stock.
(1) Assumes no exercise of the Underwriters' over-allotment option and no
exercise of outstanding warrants. Except pursuant to applicable community
property laws or as indicated in the footnotes to this table, to the
Company's knowledge, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such stockholder.
(2) Applicable percentage of ownership for each stockholder is based on
8,205,253 shares of Common Stock outstanding as of December 31, 1997 and
assumes 10,705,253 shares of Common Stock
49
<PAGE>
outstanding after completion of this offering, together with applicable
options for such stockholders. Beneficial ownership is determined in
accordance with the rules of the SEC. The number of shares beneficially
owned by a person includes shares of Common Stock subject to options held
by that person that are currently exercisable or exercisable within 60 days
of December 31, 1997. Such shares issuable pursuant to such options are
deemed outstanding for computing the percentage ownership of the person
holding such options but are not deemed outstanding for the purposes of
computing the percentage ownership of each other person. Unless otherwise
indicated, the address of each of the individuals named above is: c/o LJL
BioSystems, Inc., 404 Tasman Drive, Sunnyvale, CA 94089.
(3) Consists of 878,462 shares held by Citiventure 96 Partnership, L.P.,
431,923 shares held by Chancellor LGT Private Capital Offshore Partners II,
L.P. and 228,077 shares held by Chancellor Private Capital Partners III,
L.P.
(4) Consists of 953,223 shares held by Alta California Partners, L.P. and
21,778 shares held by Alta Embarcadero Partners, LLC. Daniel S. Janney, a
director of the Company, is a general partner of the general partner of
Alta California Partners, L.P. and is a general partner of Alta Embarcadero
Partners, LLC, shares voting and dispositive power with respect to the
shares held by each such entity, and disclaims beneficial ownership of such
shares in which he has no pecuniary interest.
(5) Consists of 461,539 shares held by H&Q Healthcare Investors and 307,693
shares held by H&Q Life Sciences Investors.
(6) Consists of 3,880,500 shares jointly held by Lev J. Leytes and Galina
Leytes, 600,000 shares held by Yalta Investments, L.P., 30,000 shares held
by the Dina L. Leytes Irrevocable Trust and 30,000 shares held by the Mary
E. Leytes Irrevocable Trust and 12,304 shares issuable upon exercise of
options exercisable within 60 days of December 31, 1997. Mr. Leytes
disclaims beneficial ownership of the shares held in each trust except to
the extent of his pecuniary interest therein.
(7) Consists of 3,880,500 shares jointly held by Lev J. Leytes and Galina
Leytes, 600,000 shares held by Yalta Investments, L.P., 30,000 shares held
by the Dina L. Leytes Irrevocable Trust and 30,000 shares held by the Mary
E. Leytes Irrevocable Trust and 4,823 shares issuable upon exercise of
options exercisable within 60 days of December 31, 1997. Ms. Leytes
disclaims beneficial ownership of the shares held in each trust except to
the extent of her pecuniary interest therein.
(8) Includes 7,760 shares issuable upon exercise of options exercisable within
60 days of December 31, 1997.
(9) Includes 19,439 shares issuable upon exercise of options exercisable within
60 days of December 31, 1997.
(10) Consists of 14,891 shares issuable upon exercise of options exercisable
within 60 days of December 31, 1997.
(11) Consists of 10,000 shares issuable upon exercise of options exercisable
within 60 days of December 31, 1997.
(12) Includes 25,000 shares held by a charitable trust formed by Michael F.
Bigham, 7,500 shares held by a living trust formed by Mr. Bigham, 7,500
shares held by an irrevocable trust formed by Mr. Bigham, and 5,000 shares
issuable upon exercise of options exercisable within 60 days of December
31, 1997. Mr. Bigham disclaims beneficial ownership of the shares held in
each trust except to the extent of his pecuniary interest therein.
(13) Includes 953,223 shares held by Alta California Partners, L.P. and 21,778
shares held by Alta Embarcadero Partners, LLC. Daniel S. Janney, a
director of the Company, is a general partner of the general partner of
Alta California Partners, L.P. and is a general partner of Alta
Embarcadero Partners, LLC, shares voting and dispositive power with
respect to the shares held by each such entity, and disclaims beneficial
ownership of such shares in which he has no pecuniary interest.
(14) Includes 975,001 shares held by entities affiliated with certain directors
of the Company as described in Note 4 and 93,948 shares subject to options
exercisable within 60 days of December 31, 1997.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $0.001 par value, and
2,000,000 shares of undesignated Preferred Stock, $0.001 par value.
COMMON STOCK
As of December 31, 1997, there were 8,205,253 shares of Common Stock
outstanding (pro forma reflecting the conversion of all outstanding shares of
Preferred Stock into Common Stock upon the completion of this offering), held of
record by 27 stockholders, and options to purchase an aggregate of 830,000
shares of Common Stock were also outstanding. There will be 10,705,253 shares of
Common Stock outstanding (assuming no exercise of the Underwriters'
overallotment option, no exercise of outstanding warrants, and no exercise of
outstanding options under the Stock Plans after December 31, 1997) after giving
effect to the sale of the shares of Common Stock to the public offered hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and satisfaction of preferential rights
of any outstanding Preferred Stock. The Common Stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of Common
Stock are, and the shares of Common Stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
PREFERRED STOCK
In June 1997, the Company completed a private placement of 3,621,503 shares
of its Preferred Stock for $2.60 per share. Upon the closing of this offering,
each outstanding share of Preferred Stock will be converted into one share of
Common Stock and automatically retired. Thereafter, the Board of Directors is
authorized to issue up to 2,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. As of the closing of the offering, no shares of
Preferred Stock will be outstanding and the Company currently has no plans to
issue any shares of Preferred Stock.
WARRANTS
As of December 31, 1997, the Company had outstanding exercisable warrants to
purchase 65,653 shares of Preferred Stock at $5.20 per share. The warrants
expire upon the closing of this offering. Each warrant contains provisions for
the adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant under certain circumstances, including stock
dividends, stock splits, certain reorganizations and reclassifications. Each
warrant may be exercised, without the payment of cash, for the number of shares
of Common Stock purchasable by the difference between the aggregate exercise
price of the warrant and the value at the current market price per share of
Common Stock of the aggregate number of shares purchasable under the warrant.
The Company anticipates that the warrants will be exercised immediately prior to
the closing of this offering.
51
<PAGE>
REGISTRATION RIGHTS
Following this offering the holders of 8,122,003 shares of Common Stock (the
"Registrable Securities") or their transferees will be entitled to certain
rights with respect to the registration of such shares under the Securities Act.
These rights are provided under the terms of an agreement between the Company
and the holders of the Registrable Securities. Subject to certain limitations in
the agreement, the holders of at least 50% of the Registrable Securities may
require, on two occasions beginning after the earlier of June 6, 1999 or 12
months after the effective date of this offering, that the Company use its best
efforts to register the Registrable Securities for public resale. If the Company
registers any of its Common Stock either for its own account or for the account
of other security holders, the holders of Registrable Securities are entitled to
include their shares of Common Stock in such registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering. The holders of Registrable Securities may also require the Company
(not more than two times in any twelve-month period or three times in the
aggregate) to register all or a portion of their Registrable Securities on Form
S-3 when use of such form becomes available to the Company, provided, among
other limitations, that the proposed aggregate selling price (net of any
underwriters' discounts or commissions) is at least $1,000,000. All registration
expenses must be borne by the Company and certain selling expenses relating to
the Registrable Securities must be borne by the Company.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company's Restated Certificate and Amended and Restated Bylaws provide,
among other things, that after the closing of this offering, any action required
or permitted to be taken by the stockholders of the Company may be taken only at
a duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board, the President of the Company or by any person or persons
holding shares representing at least 10% of the outstanding capital stock. The
Restated Certificate also provides for a classified Board and specifies that the
authorized number of directors may be changed only by resolution of the Board of
Directors. See "Management--Board Composition." These provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of the Company. The Bylaws also establish procedures, including
advance notice procedures with regard to the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors.
The Company is subject to the provisions of Section 203 of the Delaware Law,
an anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
In addition, these provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding voting stock of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation, 1745 Gardena Avenue, Glendale, California 91204, (818) 502-1404.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market may adversely affect the market price of the Common Stock offered
hereby. Furthermore, as described below, because only a limited number of shares
will be available for sale shortly after this offering because of certain
contractual and legal restrictions on resale, sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, based on the number of shares outstanding
as of December 31, 1997, the Company will have outstanding an aggregate of
10,705,253 shares of Common Stock assuming (i) the issuance by the Company of
2,500,000 shares of Common Stock offered hereby, (ii) no exercise of outstanding
warrants to purchase 65,653 shares of Preferred Stock, that expire upon the
effective date of this offering, (iii) no exercise of vested options to purchase
314,349 shares of Common Stock, and (iv) no exercise of the Underwriters'
overallotment option to purchase 375,000 shares of Common Stock. Of these
shares, 2,500,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, except for shares
held by "affiliates" of the Company as that term is defined in Rule 144 under
the Securities Act and the regulations promulgated thereunder (whose sales would
be subject to certain limitations and restrictions described below).
The remaining 8,205,253 shares of Common Stock held by officers, directors,
employees and other stockholders of the Company are "restricted securities"
within the meaning of Rule 144 under the Securities Act ("Restricted Shares").
These restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or 701
under the Securities Act, which are summarized below. Sales of these restricted
securities in the public market, or the availability of such shares for sale,
could adversely affect the market price of the Common Stock.
All of the stockholders of the Company have entered into agreements ("Lock
Up Agreements") generally providing that they will not offer, sell, contract to
sell or grant any option to purchase or otherwise dispose of the shares of
Common Stock of the Company or any securities exercisable for or convertible
into the Company's Common Stock owned by them for a period of 180 days after the
effective date of the registration statement filed pursuant to this offering
(the "Effective Date") without the prior written consent of NationsBanc
Montgomery Securities LLC. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144 or 701, shares subject to Lock-Up Agreements will not be salable until
such agreements expire or are waived by NationsBanc Montgomery Securities LLC.
Taking into account the Lock-Up Agreements, and assuming NationsBanc Montgomery
Securities LLC does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the following
times: beginning on the Effective Date, only the shares sold in the Offering
will be immediately available for sale in the public market; beginning 180 days
after the Effective Date, approximately 8,122,003 additional shares will be
eligible for sale pursuant to Rule 144, of which all but 258,808 shares are held
by affiliates of the Company and 38,250 additional shares will be eligible for
sale pursuant to Rule 701, of which all but 3,250 shares are held by affiliates
of the Company. Such shares eligible to be sold pursuant to Rules 144 and 701
are subject to certain restrictions as described below.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the Lock-Up Agreements (180 days after the Effective Date of the
offering), a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 107,053 shares immediately after the
offering); or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the date of sale. Sales under Rule 144 are
also subject to certain manner of sale provisions and notice requirements and to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any
53
<PAGE>
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Pursuant to the Lock-Up Agreements, all Company employees and consultants
holding Common Stock or stock options may not sell shares acquired upon exercise
until 180 days after the Effective Date. Beginning 180 days after the Effective
Date, any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. In addition, the Company intends to file registration
statements under the Securities Act as promptly as possible after the Effective
Date to register shares to be issued pursuant to the Company's 1994 Plan, 1997
Plan, Purchase Plan and Directors' Plan. As a result, any options exercised
under such plans after the effectiveness of such registration statements will
also be freely tradable in the public market, except that shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144. As of December 31, 1997,
there were outstanding options for the purchase of 830,000 shares, of which
options for 401,712 shares will be eligible for sale 180 days after the date of
this Prospectus upon expiration of the Lock-Up Agreements and in compliance with
certain limitations set forth in the Securities Act. See "Risk Factors--Shares
Eligible for Future Sale" and "Management--Stock Plans."
In addition, after this offering, the holders of approximately 8,122,003
shares will be entitled to certain rights with respect to registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock--Registration Rights."
54
<PAGE>
UNDERWRITING
The Underwriters named below, represented by NationsBanc Montgomery
Securities LLC, Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement (the "Underwriting Agreement") by and
between the Company and the Underwriters, to purchase from the Company the
aggregate number of shares of Common Stock indicated below opposite their
respective names at the offering price less the underwriting discount set forth
on the cover page of this Prospectus. The Underwriting Agreement provides that
the obligations of the Underwriters to pay for and accept delivery of the shares
of Common Stock are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
NationsBanc Montgomery Securities LLC............................................
Hambrecht & Quist LLC............................................................
Volpe Brown Whelan & Company, LLC................................................
----------
Total........................................................................ 2,500,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share, and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share
to certain other dealers. After the offering, the price and other selling terms
may be changed by the Representatives. The Common Stock is offered subject to
receipt and acceptance by the Underwriters, and to certain other conditions,
including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 375,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,500,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise such option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with the offering.
In June 1997, H&Q Healthcare Investors and H&Q Life Sciences Investors,
entities affiliated with Hambrecht & Quist LLC, purchased 769,232 shares of the
Company's Preferred Stock at a purchase price of $2.60 per share, for an
aggregate of $2,000,000. Such shares will convert into 769,232 shares of Common
Stock upon the closing of this offering. In June 1997, the Company granted
NationsBanc Montgomery Securities LLC warrants to purchase 65,653 shares of the
Company's Preferred Stock at an exercise price of $5.20 per share. See
"Description of Capital Stock."
The Representatives have advised the Company that the Underwriters do not
expect to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of the shares of Common Stock offered
hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
55
<PAGE>
For a period of 180 days after the effectiveness of the Registration
Statement, without the prior written consent of NationsBanc Montgomery
Securities LLC, the Company and holders of 8,205,253 shares of Common Stock
including the Company's directors and executive officers have agreed not to
offer, sell or contract to sell, sell or grant any option to purchase, make any
short sale, pledge or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or securities exchangeable or exercisable for or
convertible into shares of, or any other rights to purchase or acquire Common
Stock of the Company other than transfers to the holders' immediate family or
into trusts for the benefit of the holder or members of the holder's immediate
family.
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the offering price for the Common Stock will be
negotiated between the Company and the Representatives. Among the factors to be
considered in determining the offering price of the Common Stock will be
prevailing market and economic conditions, market valuations of other companies
engaged in activities similar to the Company, estimates of the business
potential and prospects of the Company, the present state of the Company's
business operations, the Company's management and other factors deemed relevant.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation ("Venture Law Group"),
Menlo Park, California. Certain legal matters in connection with this offering
will be passed upon for the Underwriters by Cooley Godward LLP ("Cooley
Godward"), Palo Alto, California. Certain legal matters with respect to
information contained in this Prospectus under the captions "Risk
Factors--Intellectual Property Risks" and "Business--Intellectual Property" will
be passed upon by Kolish, Hartwell, Dickinson, McCormick & Heuser, patent
counsel to the Company. As of the date of this Prospectus, certain directors of
Venture Law Group and an investment partnership affiliated with Venture Law
Group own (i) options under the 1997 Stock Plan to purchase an aggregate of
20,000 shares of the Company's Common Stock, and (ii) 9,500 shares of the
Company's Preferred Stock, which shares will convert into 9,500 shares of the
Company's Common Stock upon the completion of this offering. As of the date of
this Prospectus, GC&H Investments, an investment partnership affiliated with
Cooley Godward, owns 9,500 shares of the Company's Preferred Stock, which shares
will convert into 9,500 shares of the Company's Common Stock upon the completion
of this offering.
EXPERTS
The financial statements as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall include any amendments thereto) on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement, certain items of which are contained in
exhibits to the Registration Statement as permitted by the rules and regulations
of the SEC. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits thereto, and the financial statements and notes filed as a part
thereof. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement, including exhibits thereto and
the financial statements and notes filed as a part thereof, as well as such
reports and other information filed with the Commission, may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New York, NY
10048, and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon payment of certain fees prescribed by the Commission. Such
reports and other information may also be inspected without charge at a World
Wide Web site on the Internet maintained by the Commission (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC through the
Electronic Data Gathering, Analysis, and Retrieval System.
57
<PAGE>
LJL BIOSYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheet.............................................................................................. F-3
Statement of Operations and Retained Earnings (Accumulated Deficit)........................................ F-4
Statement of Cash Flows.................................................................................... F-5
Notes to Financial Statements.............................................................................. F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
LJL BioSystems, Inc.
The reverse stock split described in Note 6 to the financial statements has not
been consummated at January 7, 1998. When it has been consummated, we will be in
a position to furnish the following report:
"In our opinion, the accompanying balance sheet and the related statements
of operations and retained earnings (accumulated deficit) and of cash flows
present fairly, in all material respects, the financial position of LJL
BioSystems, Inc. at December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above."
PRICE WATERHOUSE LLP
San Jose, California
February 21, 1997, except as to Note 6
which is as of January , 1998
F-2
<PAGE>
LJL BIOSYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
SEPTEMBER
DECEMBER 31, SEPTEMBER 30,
-------------------- 30, 1997
1995 1996 1997 (NOTE 6)
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $1,773,000 $1,166,000 $7,122,000
Accounts receivable....................... 349,000 397,000 169,000
Inventories............................... 237,000 673,000 137,000
Other current assets...................... 3,000 71,000 49,000
--------- --------- -----------
Total current assets.................... 2,362,000 2,307,000 7,477,000
Property and equipment, net................. 121,000 151,000 373,000
--------- --------- -----------
$2,483,000 $2,458,000 $7,850,000
--------- --------- -----------
--------- --------- -----------
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................... $ 127,000 $ 233,000 $ 215,000
Accrued expenses.......................... 286,000 396,000 755,000
Customer deposits......................... 1,938,000 1,943,000 364,000
Current portion of long-term debt......... 15,000 30,000 48,000
--------- --------- -----------
Total current liabilities............... 2,366,000 2,602,000 1,382,000
--------- --------- -----------
Long-term debt, net of current portion...... 32,000 43,000 50,000
--------- --------- -----------
Commitments and contingencies (Note 5)
Mandatorily redeemable convertible preferred
stock; $0.001 par value; 7,400,000 shares
authorized; 3,621,503 issued and
outstanding at September 30, 1997;
$21,543,000 redemption value (no shares
outstanding pro forma).................... -- -- 8,989,000 $ --
--------- --------- ----------- -----------
Stockholders' equity (deficit):
Common stock; $0.001 par value; 12,000,000
shares authorized at December 31, 1995
and 1996; 19,000,000 shares authorized
at September 30, 1997; 4,500,500 shares
issued and outstanding at December 31,
1995 and 1996 and at September 30, 1997
(8,122,003 shares outstanding pro
forma).................................. 5,000 5,000 5,000 8,000
Additional paid-in capital................ 34,000 34,000 -- 8,334,000
Deferred compensation..................... -- -- (55,000) (55,000)
S corporation accumulated deficit (Note
1)...................................... -- -- (652,000) --
Retained earnings (accumulated deficit)... 46,000 (226,000) (1,869,000) (1,869,000)
--------- --------- ----------- -----------
Total stockholders' equity (deficit).... 85,000 (187,000) (2,571,000) $6,418,000
--------- --------- ----------- -----------
-----------
$2,483,000 $2,458,000 $7,850,000
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LJL BIOSYSTEMS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................... $3,551,000 $2,236,000 $5,622,000 $3,180,000 $4,233,000
Development agreements.......... 2,659,000 2,915,000 3,663,000 3,538,000 642,000
--------- --------- --------- --------- ----------
Total revenues................ 6,210,000 5,151,000 9,285,000 6,718,000 4,875,000
--------- --------- --------- --------- ----------
Costs and operating expenses:
Product sales................... 1,581,000 1,174,000 2,755,000 1,595,000 2,035,000
Research and development........ 1,810,000 1,740,000 2,384,000 1,816,000 2,426,000
Selling, general and
administrative................ 2,822,000 1,963,000 4,062,000 3,110,000 1,541,000
--------- --------- --------- --------- ----------
Total costs and operating
expenses.................... 6,213,000 4,877,000 9,201,000 6,521,000 6,002,000
--------- --------- --------- --------- ----------
Income (loss) from operations..... (3,000) 274,000 84,000 197,000 (1,127,000)
Interest and other income......... 59,000 87,000 181,000 150,000 153,000
Interest expense.................. (5,000) (5,000) (5,000) (3,000) (7,000)
--------- --------- --------- --------- ----------
Income (loss) before provision for
income taxes.................... 51,000 356,000 260,000 344,000 (981,000)
Provision for income taxes........ 7,000 4,000 2,000 2,000 12,000
--------- --------- --------- --------- ----------
Net income (loss)................. 44,000 352,000 258,000 342,000 (993,000)
Retained earnings (accumulated
deficit) at beginning of
period.......................... 211,000 9,000 46,000 46,000 (226,000)
S corporation dividends paid...... (246,000) (315,000) (530,000) (364,000) (1,075,000)
Transfer of S corporation
accumulated deficit (Note 1).... -- -- -- -- 742,000
Accretion of mandatorily
redeemable preferred stock
redemption value................ -- -- -- -- (317,000)
--------- --------- --------- --------- ----------
Retained earnings (accumulated
deficit) at end of period....... $ 9,000 $ 46,000 $(226,000) $ 24,000 $(1,869,000)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Pro forma data (unaudited) (Note
1):
Income (loss) before provision
(benefit) for income taxes.... $ 51,000 $ 356,000 $ 260,000 $ 344,000 $ (981,000)
Pro forma provision (benefit)
for income taxes.............. 20,000 142,000 104,000 138,000 (200,000)
--------- --------- --------- --------- ----------
Pro forma net income (loss)..... $ 31,000 $ 214,000 156,000 $ 206,000 (781,000)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Pro forma net income (loss) per
share......................... $ 0.02 $ (0.09)
--------- ----------
--------- ----------
Shares used in computation of
pro forma net income (loss)
per share..................... 8,631,000 8,631,000
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LJL BIOSYSTEMS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ $ 44,000 $ 352,000 $ 258,000 $ 342,000 $ (993,000)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and
amortization................. 65,000 57,000 63,000 42,000 87,000
Amortization of deferred
compensation................. -- -- -- -- 1,000
Changes in assets and
liabilities:
Accounts receivable.......... (809,000) 553,000 (48,000) (118,000) 228,000
Inventories.................. 396,000 30,000 (436,000) (600,000) 536,000
Other current assets......... (107,000) 108,000 (68,000) -- 22,000
Accounts payable............. 82,000 2,000 106,000 91,000 (18,000)
Accrued expenses............. 96,000 (84,000) 110,000 2,358,000 359,000
Customer deposits............ 537,000 1,145,000 5,000 778,000 (1,579,000)
--------- --------- --------- --------- ----------
Net cash provided by (used
in) operating
activities............... 304,000 2,163,000 (10,000) 2,893,000 (1,357,000)
--------- --------- --------- --------- ----------
Cash flows used in investing
activities for the purchase of
property and equipment........... (43,000) (103,000) (93,000) (45,000) (309,000)
--------- --------- --------- --------- ----------
Cash flows from financing
activities:
Repayment of note payable to
shareholder.................... (500,000) -- -- -- --
Repayment of long-term debt...... (22,000) (22,000) (19,000) -- (25,000)
Proceeds from long-term debt..... -- 47,000 45,000 34,000 50,000
Proceeds from issuance of
mandatorily redeemable
convertible preferred stock,
net............................ -- -- -- -- 8,672,000
Payment of S corporation
dividends...................... (246,000) (315,000) (530,000) (364,000) (1,075,000)
--------- --------- --------- --------- ----------
Net cash provided by (used
in) financing
activities............... (768,000) (290,000) (504,000) (330,000) 7,622,000
--------- --------- --------- --------- ----------
Net increase (decrease) in cash and
cash equivalents................. (507,000) 1,770,000 (607,000) 2,518,000 5,956,000
Cash and cash equivalents at
beginning of period.............. 510,000 3,000 1,773,000 1,773,000 1,166,000
--------- --------- --------- --------- ----------
Cash and cash equivalents at end of
period........................... $ 3,000 $1,773,000 $1,166,000 $4,291,000 $7,122,000
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for
interest....................... $ 14,000 $ 5,000 $ 6,000 $ 3,000 $ 6,000
Cash paid during the period for
income taxes................... $ 9,000 $ 5,000 $ 2,000 $ 2,000 $ 1,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY AND BASIS OF PRESENTATION
LJL BioSystems, Inc. (the "Company") was incorporated in Delaware on January
14, 1993 and is the surviving corporation of two commonly controlled companies
that were merged into the Company on January 1, 1994. The Company is developing
and intends to commercialize proprietary technologies, products and services to
provide a flexible solution to the current and evolving high throughput
screening requirements of drug discovery laboratories. The Company currently
operates in one business segment.
In the second half of 1996, the Company implemented a new strategic business
model aimed at developing instruments for the emerging high throughput screening
market of the accelerated drug discovery market. In connection with the change
in strategy, the Company shifted its focus from developing and manufacturing
original equipment manufacturing ("OEM") clinical diagnostics and research
products to developing, manufacturing and marketing its own products for high
throughput screening. As part of its shift in focus, the Company has
discontinued its OEM development activities and has phased out production of all
but one of its OEM instruments. However, the Company intends to continue to
manufacture products under its agreement with Ventana Medical Systems, Inc.
through 1998. As a result, revenues from development agreements declined
significantly during the nine months ended September 30, 1997, and revenues from
OEM product sales are expected to materially decline in future periods.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The financial information at September 30, 1997 and for the nine month
periods ended September 30, 1996 and 1997 is unaudited. In the opinion of
management, this information has been prepared on the same basis as the audited
financial statements and includes all adjustments, consisting solely of normal
recurring adjustments, necessary for the fair statement of results for the
interim periods. The results of operations and cash flows for the nine month
period ended September 30, 1997 are not necessarily indicative of the results
for the full year or any future period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from product sales are generally recognized upon shipment.
Development agreements are performed on a best efforts basis and revenues are
recognized based on work performed using the percentage of completion method,
completion measured using cost incurred to total estimated cost at completion.
Amounts received in advance of services rendered are recorded as customer
deposits. Research and development expenses under development agreements were
$1,602,000, $1,537,000 and $1,663,000 in 1994, 1995 and 1996, respectively.
F-6
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs are expensed as incurred and consist of costs
incurred for internally funded research and development activities and
development agreements. These amounts include direct costs and research-related
overhead expenses.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities from
date of purchase of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including
accounts receivable, accounts payable and accrued liabilities, approximate fair
value due to their short maturities. The carrying value of the Company's
long-term debt approximates fair value as its interest rates approximate market
rates for borrowings with similar terms and maturities.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of accounts receivable. At December 31, 1995, amounts due
from two customers represented 54% and 36% of gross accounts receivable. At
December 31, 1996, amounts due from three customers represented 72%, 15% and 10%
of gross accounts receivable. The Company performs ongoing credit evaluations of
its customers' financial condition and provides for expected losses; however,
such amounts have not been material. As a percentage of total revenues, product
sales and revenues recognized under development agreements from individual
customers in excess of 10% of total revenues were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Chiron Corporation......................................... 95% 47% 58%
CombiChem, Inc............................................. -- 31% 18%
Ventana Medical Systems, Inc............................... -- 11% 13%
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
CAPITALIZED SOFTWARE COSTS
Software development costs incurred subsequent to the establishment of
technological feasibility are capitalized in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed." Amortization of capitalized
software development costs is the greater of the amount computed using (a) the
ratio of current revenues to the total of current and anticipated future
revenues or (b) the straight-line method over the estimated economic life of the
product. No amounts have been capitalized to date.
F-7
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization
are computed using the straight-line method over estimated useful lives ranging
from three to five years. Maintenance and repairs are expensed as incurred.
LONG-LIVED ASSETS
The Company has adopted 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"), and identifies and records impairment losses on
long-lived assets when events and circumstances indicate that the assets might
be impaired. No such events have occurred with respect to the Company's
long-lived assets, which consist primarily of property and equipment and
leasehold improvements.
INCOME TAXES
Through June 5, 1997, the Company had elected to be taxed under the S
corporation provisions of the Internal Revenue Code. Under those provisions, the
Company was not subject to federal corporate income taxation. Rather, the
Company's shareholders included their respective portions of the Company's
taxable income in their individual income tax returns.
California generally conforms to the federal provisions recognizing S
corporations as pass-through entities. However, California imposes a 1.5% tax at
the legal entity level. The provision for income taxes for the years ended
December 31, 1994, 1995 and 1996 has been computed at this rate, adjusted for
potentially nondeductible items and nonrecoverable deferred tax assets. At
December 31, 1995 and 1996, and at June 6, 1997, the tax effects of the
differences between the financial reporting and income tax bases of assets and
liabilities were not material.
On June 6, 1997, in connection with the Preferred Stock financing, the
Company became subject to the C corporation provisions of the Internal Revenue
Code. Accordingly, its earnings since that time are taxed at federal and state
corporate income tax rates. Concurrently, the Company adopted an asset and
liability approach for accounting for income taxes which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events recognized in the Company's financial statements or
income tax returns. Deferred tax assets are recognized, net of any valuation
allowance, for deductible temporary differences, net operating losses and tax
credit carryforwards when their realization is considered more likely than not.
Deferred tax expense represents the change in the deferred tax asset and
liability balances.
Upon termination of S corporation status on June 6, 1997, the S corporation
accumulated deficit of $742,000 (as adjusted for the final S corporation
dividend of $625,000 paid on July 19, 1997) was transferred to additional
paid-in capital, to the extent available, with the remainder presented as a
separate component of stockholders' deficit at September 30, 1997.
STOCK-BASED COMPENSATION
The Company has adopted the pro forma disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
F-8
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
PRO FORMA PROVISION (BENEFIT) FOR INCOME TAXES, PRO FORMA NET INCOME (LOSS)
AND PRO FORMA NET INCOME (LOSS) PER SHARE
Unaudited pro forma provision (benefit) for income taxes presented in the
Statement of Operations and Retained Earnings (Accumulated Deficit) reflects
income taxes computed at rates that would have been in effect had the Company
been subject to federal and state income taxes at the corporate level during the
periods presented.
Historical net income (loss) per share has not been presented herein since
such amounts are not considered meaningful due to the prior periods' S
corporation status and the significant change in the Company's capital structure
that will occur in connection with the Company's proposed initial public
offering of Common Stock (the "Offering") (see Note 6).
Unaudited pro forma net income (loss) per share is computed using the
weighted average number of common and common equivalent shares outstanding.
Common equivalent shares are excluded from the computation if their effect is
antidilutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common and common equivalent shares (stock
options, warrants and mandatorily redeemable convertible preferred stock) issued
during the period commencing twelve months prior to the initial filing of the
Offering, and through the effective date of the Offering, at prices below the
assumed initial public offering price have been included in the calculation as
if they were outstanding for all periods presented (using the treasury stock
method for stock options and warrants and the if-converted method for
mandatorily redeemable convertible preferred stock).
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 is effective for the Company's fiscal year ending December 31, 1997.
Under SFAS 128, primary earnings per share is replaced by basic earnings per
share and fully diluted earnings per share is replaced by diluted earnings per
share. The Company does not believe the adoption of SFAS 128, which will require
retroactive restatement of all prior periods presented, will have a material
impact on its computation of net income (loss) per share.
F-9
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2--COMPOSITION OF BALANCE SHEET AMOUNTS:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
-------------------- 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable comprise:
Trade receivables....................... $ 375,000 $ 448,000
Less allowance for doubtful accounts.... (26,000) (51,000)
--------- ---------
$ 349,000 $ 397,000
--------- ---------
--------- ---------
Inventories comprise:
Raw materials........................... $ 54,000 $ 355,000 $ 108,000
Work-in-process......................... 52,000 313,000 25,000
Finished goods.......................... 131,000 5,000 4,000
--------- --------- -----------
$ 237,000 $ 673,000 $ 137,000
--------- --------- -----------
--------- --------- -----------
Property and equipment comprise:
Computer equipment...................... $ 465,000 $ 508,000
Furniture and equipment................. 63,000 110,000
Leasehold improvements.................. 25,000 25,000
--------- ---------
553,000 643,000
Less accumulated depreciation and
amortization............................ (432,000) (492,000)
--------- ---------
$ 121,000 $ 151,000
--------- ---------
--------- ---------
</TABLE>
NOTE 3--LONG-TERM DEBT:
In September 1995 and 1996, the Company entered into two equipment loan
agreements with a bank related to the purchase of equipment and software. At
December 31, 1996, the Company had outstanding borrowings on these loans of
$42,000 and $31,000, respectively. Both loans are secured by the related
equipment and software and by personal guarantees by the Company's shareholders
and are due and payable in monthly installments over three years and bear
interest at 10.95% and 10.20% per annum, respectively. The equipment loan
agreements require that the Company complies with certain covenants, including
certain restrictions regarding distributions to shareholders. Future principal
payments under the loan agreements are $30,000, $31,000 and $12,000 in 1997,
1998 and 1999, respectively.
NOTE 4--EQUITY INCENTIVE PLANS:
On January 10, 1994, the Company adopted the 1994 Equity Incentive Plan (the
"1994 Plan") under which 499,500 shares of the Company's Common Stock were
reserved for issuance to employees, directors and consultants of the Company, as
approved by the Board of Directors. On March 14, 1997, the Company reduced the
number of shares reserved for issuance under the 1994 Plan to 479,250. The 1994
Plan, which expires in 2004, provides for the grant of incentive as well as
nonstatutory stock options, stock bonuses, stock appreciation rights and
restricted stock purchase rights.
In March 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan")
under which 820,750 shares of the Company's Common Stock (including 20,250
shares originally reserved under the 1994 Plan) have been reserved for issuance
to employees, directors and consultants of the Company, as approved by
F-10
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 4--EQUITY INCENTIVE PLANS: (CONTINUED)
the Board of Directors. The 1997 Plan, which expires in 2007, provides for the
grant of incentive as well as nonstatutory stock options and restricted stock
purchase rights.
Options granted under the plans are for terms not to exceed ten years. If
the option is granted to a shareholder who owns more than 10% of all outstanding
stock of the Company, the term may not exceed five years and the exercise price
of the stock option must be at least 110% of the estimated fair value of the
stock at the date of grant. Exercise prices of incentive stock options granted
to all other persons are generally equal to at least 100% of the estimated fair
value of the stock at the date of grant, as determined by the Board of
Directors. For nonstatutory stock options granted to all other persons, the
exercise price under the 1994 Plan and the 1997 Plan is generally equal to at
least 50% or 85%, respectively, of the estimated fair value of the stock at the
date of grant. Options under the plans generally vest over a five year period.
The term of restricted stock purchase rights granted under the 1997 Plan is
thirty days, after which unaccepted stock purchase rights expire. If the stock
purchase right is granted to a shareholder who owns stock representing more than
10% of the total combined voting power of all classes of stock of the Company,
the exercise price is generally at least equal to 100% of the estimated fair
value of the stock on the date of grant. The exercise price of stock purchase
rights granted to all other persons is generally equal to at least 85% of the
estimated fair value of the stock on the date of grant.
The following table summarizes activity under the plans:
<TABLE>
<CAPTION>
WEIGHTED
SHARES STOCK AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- -----------
<S> <C> <C> <C>
Authorized................................................ 499,500 --
Granted................................................... (255,500) 255,500 $ 0.10
Canceled.................................................. 12,500 (12,500) $ 0.10
---------- -----------
Balance at December 31, 1994.............................. 256,500 243,000 $ 0.10
Granted................................................... (209,000) 209,000 $ 0.10
Canceled.................................................. 105,750 (105,750) $ 0.10
---------- -----------
Balance at December 31, 1995.............................. 153,250 346,250 $ 0.10
Granted................................................... (102,000) 102,000 $ 0.10
Canceled.................................................. 60,000 (60,000) $ 0.10
---------- -----------
Balance at December 31, 1996.............................. 111,250 388,250 $ 0.10
Authorized (unaudited).................................... 800,500 --
Granted (unaudited)....................................... (342,750) 342,750 $ 0.89
---------- -----------
Balance at September 30, 1997 (unaudited)................. 569,000 731,000 $ 0.47
---------- -----------
---------- -----------
</TABLE>
F-11
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 4--EQUITY INCENTIVE PLANS: (CONTINUED)
The following table summarizes information about stock options outstanding
and vested under the plans at December 31, 1996 and September 30, 1997
(unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
-------------------------------------- --------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STOCK STOCK REMAINING STOCK STOCK REMAINING
EXERCISE PRICE PER OPTIONS OPTIONS CONTRACTUAL OPTIONS OPTIONS CONTRACTUAL
SHARE OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE LIFE
- --------------------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
$0.10................ 388,250 215,850 7.1 years 388,250 243,700 6.4 years
$0.60................ -- -- -- 91,000 2,500 9.3 years
$1.00................ -- -- -- 251,750 10,000 9.5 years
----------- ----------- ----------- -----------
388,250 215,850 731,000 256,200
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Deferred compensation is recorded when the exercise price of an option is
less than the deemed fair value of the underlying stock on the date of grant.
From inception through June 1997, all stock options were granted at exercise
prices which equaled the estimated fair value of the underlying stock on the
respective grant dates. In August 1997, the Company granted options to purchase
a total of 75,000 shares of Common Stock at an exercise price of $1.00 per
share. Deferred compensation of approximately $56,000 was recorded on these
options, based on the deemed fair value of the Common Stock on the date of grant
of $1.75 per share. In October 1997, the Company granted options to purchase
24,500 shares of Common Stock at an exercise price of $1.00 per share.
Additional deferred compensation of approximately $123,000 is expected to be
recorded based on a deemed fair value of the Common Stock of $6.00 per share on
the date of grant. Additionally, in October 1997 the Company granted to a
consultant options to purchase 7,500 shares of the Company's Common Stock at an
exercise price of $1.00 per share resulting in additional deferred compensation
of $40,000 is expected to be recorded based on the estimated fair value of the
options granted. In December 1997, the Company granted 45,000 shares of
restricted Common Stock at an exercise price of $2.00 per share and options to
purchase 30,250 shares of Common Stock at an exercise price of $2.00 per share.
Additional deferred compensation of approximately $553,000 related to these
grants is expected to be recorded based on a deemed fair value of the Common
Stock of $9.35 per share on the date of grant. Deferred compensation is
amortized over the vesting period of the options or restricted stock, generally
four to five years.
In December 1997, the Company also granted fully vested options to purchase
75,000 shares of Common Stock at an exercise price of $2.00 per share in lieu of
employee cash bonuses. Compensation expense of $552,000 related to these
options, based on a deemed fair value of the Common Stock on the date of grant
of $9.35 per share, is being recognized as earned throughout 1997. Accordingly,
$414,000 of such expense has been recognized during the nine months ended
September 30, 1997 and is included in accrued expenses.
At September 30, 1997, the Company had 4,987,154 shares of Common Stock
reserved for future issuance upon conversion of mandatorily redeemable
convertible preferred stock, exercise of stock options and exercise of
mandatorily redeemable convertible preferred stock purchase warrants.
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25. Had compensation cost
for the Company's option plans been determined based on the fair value of the
options at the dates of grant, as prescribed in SFAS 123, the Company's pro
forma net income for 1995 and 1996 would have included additional stock
compensation
F-12
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 4--EQUITY INCENTIVE PLANS: (CONTINUED)
expense of $1,000 and $2,000, respectively. The fair value of each option grant
has been estimated on the date of grant using the minimum value method with the
following assumptions used for grants during the applicable period: dividend
yield of 0.0% for 1995 and 1996; risk-free interest rates of 5.6% to 7.8% for
options granted during the year ended December 31, 1995 and 5.5% to 6.8% for
options granted during the year ended December 31, 1996; and a weighted average
expected option term of six years for 1995 and 1996.
For pro forma purposes, option grants made prior to January 1, 1995 are not
considered; further, additional option grants are expected to be made during
1997 and beyond. Accordingly, pro forma disclosures may differ materially from
the reported results of operations in the future.
NOTE 5--COMMITMENTS AND CONTINGENCIES:
In September 1996, the Company amended the operating lease agreement for its
facility to extend the lease term to January 2000 and provide the Company an
option to extend the lease term for an additional five years. The lease
agreement requires the Company to pay minimum rent as well as certain facility
operating expenses incurred by the lessor. Rent expense in 1994, 1995 and 1996
was $99,000, $128,000 and $149,000, respectively.
Future minimum payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 144,000
1998.............................................................................. 144,000
1999.............................................................................. 153,000
2000.............................................................................. 13,000
----------
$ 454,000
----------
----------
</TABLE>
In June 1997, the Company entered into a development, license and sales
agreement (the "Agreement") under which it obtained worldwide rights to certain
patented assay technologies. Future minimum royalties due through 2002 under the
Agreement aggregate approximately $950,000.
Under an employment agreement with an officer entered into in December 1995,
the Company is required in the event of involuntary termination to continue to
pay all salary, bonus and benefits for a period of up to one year.
In the normal course of business, the Company is subject to various claims
and assessments which, in the opinion of management, will not have a material
adverse effect on its results of operations or financial condition.
NOTE 6--SUBSEQUENT EVENTS:
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May and June 1997, the Company amended its Certificate of Incorporation
to authorize a total of 7,400,000 shares of Preferred Stock for future issuance.
F-13
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 6--SUBSEQUENT EVENTS: (CONTINUED)
In June 1997, the Company completed a private placement of 3,621,503 shares
of Series A Mandatorily Redeemable Convertible Preferred Stock (the "Series A")
for $2.60 per share, resulting in proceeds of $8,672,000, net of issuance costs
of $744,000.
The Series A stockholders may be entitled to annual dividends at a rate of
$0.312 per share (subject to adjustment for dilution or stock splits). Such
dividends are noncumulative and are payable when and if declared by the Board of
Directors provided, however, that such dividends shall be deemed to be accrued
and cumulatively payable upon the redemption of the Series A or a liquidation or
dissolution of the Company. Accordingly, such amounts are accreted to the
carrying value of the Series A with a corresponding charge to accumulated
deficit. The Series A shares carry a liquidation preference of $2.60 per share
(subject to adjustment for dilution and stock splits) plus cumulative but unpaid
dividends, and are convertible at any time at the option of the holder on a
one-for-one basis (subject to adjustment for antidilution) into shares of the
Company's Common Stock. The Series A shareholders have one vote for each share
of Common Stock into which such shares may be converted. The Series A shares
automatically convert into shares of the Company's Common Stock in the event of
an initial public offering of the Company's Common Stock resulting in gross cash
proceeds of at least $15.0 million. The Series A shares are redeemable on June
6, 2004, or any annual anniversary date thereafter, upon written notice by
holders of at least 75% of the Series A stock, in the amount of $2.60 per share
(subject to adjustment for antidilution) plus cumulative but unpaid dividends.
WARRANTS
In connection with the Series A private placement in June 1997, the Company
issued to the placement agent two warrants to purchase a total of 65,653 shares
of Series A preferred stock at an exercise price of $5.20 per share. The
warrants expire on the earlier of June 6, 2002, the closing of an initial public
offering of the Company's Common Stock pursuant to a registration statement
under the Securities Act of 1993 or a merger or sale of substantially all of the
Company's assets. The warrants are exercisable immediately.
INCREASE IN AUTHORIZED SHARES, INITIAL PUBLIC OFFERING AND REVERSE STOCK
SPLIT
In June 1997, the Board of Directors increased the authorized number of
shares of the Company's Common Stock to 19,000,000.
In December 1997, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell up to 2,875,000 shares of Common Stock
to the public. In connection with the Offering, the Board of Directors approved,
subject to stockholder approval, a one-for-two reverse stock split of the
Company's Common and Series A Stock. All share and per share amounts in the
accompanying financial statements have been retroactively adjusted to reflect
the reverse stock split. If the Offering is completed under the terms currently
contemplated, 3,621,503 shares of outstanding mandatorily redeemable convertible
preferred stock will convert into an equal number of shares of Common Stock.
Unaudited pro forma shareholders' equity at September 30, 1997, as adjusted
for the assumed conversion of the mandatorily redeemable convertible preferred
stock and the concurrent transfer of the remaining S corporation accumulated
deficit to additional paid-in capital, is set forth in the accompanying balance
sheet.
F-14
<PAGE>
LJL BIOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 6--SUBSEQUENT EVENTS: (CONTINUED)
CHANGES TO STOCK OPTION PLANS
On December 16, 1997, the Board of Directors adopted the 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan") and the 1998 Directors' Plan and
reserved 300,000 and 150,000 shares of Common Stock, respectively, for issuance
under these plans. The 1998 Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, permits eligible employees to purchase
Common Stock through payroll deductions at a purchase price equal to 85% of the
estimated fair value of the Company's Common Stock at the beginning or end of
the offering period, whichever is less. The 1998 Directors' Plan provides for
certain automatic grants of nonstatutory stock options to nonemployee directors
of the Company. Options granted under the 1998 Directors' Plan vest over four
years, have a term of ten years and are granted at exercise prices equal to the
estimated fair value of the Company's Common Stock on the date of grant.
Additionally, on December 16, 1997, the Board of Directors approved an amendment
to the 1997 Plan to increase the number of shares reserved for issuance by
1,250,000 shares. The 1998 Directors' Plan, the 1998 Purchase Plan and the
increase in shares available under the 1997 Plan will be submitted for
stockholder approval prior to completion of the Offering.
F-15
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES, OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
PROSPECTUS SUMMARY.............................. 3
RISK FACTORS.................................... 6
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS.................................... 16
USE OF PROCEEDS................................. 17
DIVIDEND POLICY................................. 17
CAPITALIZATION.................................. 18
DILUTION........................................ 19
SELECTED FINANCIAL DATA......................... 20
MANAGEMENT'S DISCUSS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........... 22
BUSINESS........................................ 27
MANAGEMENT...................................... 38
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.................................. 48
PRINCIPAL STOCKHOLDERS.......................... 49
DESCRIPTION OF CAPITAL STOCK.................... 51
SHARES ELIGIBLE FOR FUTURE SALE................. 53
UNDERWRITING.................................... 55
LEGAL MATTERS................................... 56
EXPERTS......................................... 56
ADDITIONAL INFORMATION.......................... 57
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS 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.
2,500,000 SHARES
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
HAMBRECHT & QUIST
VOLPE BROWN WHELAN &
COMPANY
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee.............................................................. $ 11,026
NASD filing fee................................................................... 4,238
Nasdaq National Market listing fee................................................ 44,055
Printing and engraving expenses................................................... 120,000
Legal fees and expenses........................................................... 250,000
Accounting fees and expenses...................................................... 150,000
Blue Sky qualification fees and expenses.......................................... 5,000
Transfer agent and registrar fees................................................. 15,000
Miscellaneous fees and expenses................................................... 100,681
----------
Total......................................................................... $ 700,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article XIV of the Company's Restated
Certificate (Exhibit 3.3 hereto) and Article VI of the Company's Restated Bylaws
(Exhibit 3.5 hereto) provide for indemnification of the Company's directors,
officers, employees and other agents to the maximum extent permitted by Delaware
Law. In addition, the Company has entered into Indemnification Agreements
(Exhibit 10.2 hereto) with its officers and directors. The Underwriting
Agreement (Exhibit 1.1) also provides for cross-indemnification among the
Company and the Underwriters with respect to certain matters, including matters
arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 31, 1994, the Company has sold and issued the following
unregistered securities:
1. In June 1997, the Company issued and sold, pursuant to Series A
Preferred Stock Purchase Agreements, an aggregate of 3,621,503 shares of its
Preferred Stock convertible into 3,621,503 shares of Common Stock at a
purchase price of $2.60 per share for an aggregate offering price of
$9,415,907.80. NationsBanc Montgomery Securities LLC served as a placement
agent in the transaction and received compensation in the form of (i) a 5%
placement fee and (ii) warrants to purchase an aggregate of 65,653 shares of
the Company's Preferred Stock convertible into 65,653 shares of Common Stock
with an exercise price of $5.20 per share.
2. From December 31, 1994 through December 31, 1997, the Company
granted options under the 1994 Equity Incentive Plan to purchase an
aggregate of 402,000 shares of Common Stock at exercise prices ranging from
$0.10 to $0.60 per share to 28 employees, directors and consultants.
3. From March 14, 1997 through December 31, 1997, the Company granted
(i) options under the 1997 Stock Plan to purchase an aggregate of 389,000
shares of Common Stock at exercise prices
II-1
<PAGE>
ranging from $1.00 to $2.20 per share to 55 employees, directors and
consultants and (ii) stock purchase rights under the 1997 Stock Plan to
purchase an aggregate of 45,000 shares of Common Stock at a purchase price
of $2.00 per share to 3 directors. Each stock purchase right has been
exercised in full.
4. In November 1997, one employee exercised a stock option for 2,250
shares of Common Stock at an exercise price of $0.10 per share. In December
1997, three employees exercised stock options for an aggregate of 36,000
shares of Common Stock, each at an exercise price of $0.10 per share.
The issuances of the securities in Item 1 above were deemed to be exempt
from registration under the Securities Act in reliance on Regulation D Rule 506
of the Securities Act. The issuances of the options and purchases of Common
Stock in Items 2, 3, and 4 above were deemed exempt from registration under the
Securities Act in reliance upon Rule 701 promulgated under the Securities Act.
The recipients of securities in each such transaction represented their
intentions 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 affixed to the share certificates, options and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the Company, as currently in effect.+
3.2 Form of Amended and Restated Certificate of Incorporation of the Company, to be filed and become
effective prior to the effective date of the offering.+
3.3 Form of Amended and Restated Certificate of Incorporation of the Company, to be filed and become
effective upon completion of the offering.+
3.4 Bylaws of the Company.+
3.5 Form of Amended and Restated Bylaws of the Company, to be effective upon completion of the offering.+
4.1 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.+
4.2 Specimen Stock Certificate.*
4.3 Amended and Restated Investors' Rights Agreement dated June 17, 1997 between the Company and the
individuals and entities listed in the signature pages thereto.+
5.1 Opinion of Venture Law Group regarding the legality of the Common Stock being registered.
10.1 Agreement dated June 5, 1997 between the Company and FluorRx, Inc.+**
10.2 Form of Indemnification Agreement between the Company and each of its officers and directors.+
10.3 Severance Agreement dated December 6, 1995 between the Company and Lev J. Leytes.+
10.4 Lease between Company and Yageo USA Inc., as amended.+
10.5 1994 Equity Incentive Plan and Forms of Agreements.+
10.6 1997 Stock Plan and Forms of Agreements.+
10.7 1998 Directors' Stock Option Plan and Forms of Agreements.+
10.8 1998 Employee Stock Purchase Plan and Subscription Agreement.+
11.1 Computation of pro forma net income (loss) per share.+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Independent Accountants.***
23.2 Consent of Venture Law Group (included in Exhibit 5.1).
23.3 Consent of Kolish, Hartwell, Dickinson, McCormick & Heuser.+
24.1 Power of Attorney (see page II-4).+
27.1 Financial Data Schedule.+
</TABLE>
- ------------------------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
Omitted portions will be filed separately with the Securities and Exchange
Commission.
*** Replaces previously filed Exhibit.
+ Previously filed.
(b) Financial Statement Schedules
The following financial statement schedule of the Company is filed as part
of this Registration Statement and should be read in conjunction with the
Financial Statements of the Company.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Schedules other than those listed above have been omitted for the reason
that they are not required or are not applicable, or the required information 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 for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The 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.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Sunnyvale, State of California on January 7, 1998.
<TABLE>
<S> <C> <C>
LJL BIOSYSTEMS, INC.
By: /s/ LEV J. LEYTES
-----------------------------------------
Lev J. Leytes
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- -------------------------- ------------------------------ -------------------
President, Chief Executive
/s/ LEV J. LEYTES Officer and Chairman of the
- -------------------------- Board of Directors January 7, 1998
Lev J. Leytes (Principal Executive
Officer)
/s/ GALINA LEYTES*
- -------------------------- Executive Vice President and January 7, 1998
Galina Leytes Director
Vice President of Finance and
/s/ ROBERT T. BEGGS* Administration (Principal
- -------------------------- Financial and Accounting January 7, 1998
Robert T. Beggs Officer)
/s/ GEORGE W. DUNBAR,
JR.*
- -------------------------- Director January 7, 1998
George W. Dunbar, Jr.
/s/ MICHAEL F. BIGHAM*
- -------------------------- Director January 7, 1998
Michael F. Bigham
/s/ JOHN G. FREUND,
M.D.*
- -------------------------- Director January 7, 1998
John G. Freund, M.D.
/s/ DANIEL S. JANNEY*
- -------------------------- Director January 7, 1998
Daniel S. Janney
*By: /s/ LEV J. LEYTES
-------------------------
Lev J. Leytes
Attorney-in-Fact
II-4
<PAGE>
LJL BIOSYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION OF BEGINNING END OF
ALLOWANCE AND RESERVES OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ------------------------------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts................................... $ 10 $ 3 $ -- $ 13
1995
Allowance for doubtful accounts................................... $ 13 $ 13 $ -- $ 26
1996
Allowance for doubtful accounts................................... $ 26 $ 25 $ -- $ 51
Nine months ended September 30, 1997
Allowance for doubtful accounts (unaudited)....................... $ 51 $ -- $ 3 $ 48
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*........................................................................
3.1 Amended and Restated Certificate of Incorporation of the Company, as currently in effect.+..............
3.2 Form of Amended and Restated Certificate of Incorporation of the Company, to be filed and become
effective prior to the effective date of the offering.+...............................................
3.3 Form of Amended and Restated Certificate of Incorporation of the Company, to be filed and become
effective upon completion of the offering.+...........................................................
3.4 Bylaws of the Company.+.................................................................................
3.5 Form of Amended and Restated Bylaws of the Company, to be effective upon completion of the offering.+...
4.1 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.+...............................................................
4.2 Specimen Stock Certificate.*............................................................................
4.3 Amended and Restated Investors' Rights Agreement dated June 17, 1997 between the Company and the
individuals and entities listed in the signature pages thereto.+......................................
5.1 Opinion of Venture Law Group regarding the legality of the Common Stock being registered................
10.1 Agreement dated June 5, 1997 between the Company and FluorRx, Inc.+**...................................
10.2 Form of Indemnification Agreement between the Company and each of its officers and directors.+..........
10.3 Severance Agreement dated December 6, 1995 between the Company and Lev J. Leytes.+......................
10.4 Lease between Company and Yageo USA Inc., as amended.+..................................................
10.5 1994 Equity Incentive Plan and Forms of Agreements.+....................................................
10.6 1997 Stock Plan and Forms of Agreements.+...............................................................
10.7 1998 Directors' Stock Option Plan and Forms of Agreements.+.............................................
10.8 1998 Employee Stock Purchase Plan and Subscription Agreement.+..........................................
11.1 Computation of pro forma net income (loss) per share.+..................................................
23.1 Consent of Independent Accountants.***..................................................................
23.2 Consent of Venture Law Group (included in Exhibit 5.1)..................................................
23.3 Consent of Kolish, Hartwell, Dickinson, McCormick & Heuser.+............................................
24.1 Power of Attorney (see page II-4).+.....................................................................
27.1 Financial Data Schedule.+...............................................................................
</TABLE>
- ------------------------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
Omitted portions will be filed separately with the Securities and Exchange
Commission.
*** Replaces previously filed Exhibit.
+ Previously filed.
<PAGE>
EXHIBIT 5.1
[Venture Law Group Letterhead]
January 7, 1998
LJL BioSystems, Inc.
404 Tasman Drive
Sunnyvale, CA 94089
REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on December 31, 1997 (the "Registration
Statement") in connection with the registration under the Securities Act of
1933, as amended, of a total of 2,875,000 shares of your Common Stock (the
"Shares"), to be sold by the Company. The Shares include an over-allotment
option to purchase 375,000 shares granted to the underwriters and are to be sold
to the underwriters as described in the Registration Statement for resale to the
public. As your counsel in connection with this transaction, we have examined
the proceedings taken and are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares when issued and sold in the manner
described in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and in any amendment thereto.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 21, 1997, except
as to Note 6 which is as of January , 1998, relating to the financial
statements of LJL BioSystems, Inc., which appears in such Prospectus. We also
consent to the application of such report to the Financial Statement Schedule
for the three years ended December 31, 1996 listed under Item 16(b) of this
Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data."
PRICE WATERHOUSE LLP
San Jose, California
January , 1998
