<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
ELITRA PHARMACEUTICALS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 33-0779254
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
3510 DUNHILL STREET
SAN DIEGO, CALIFORNIA 92121
(858) 410-3030
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
HARRY F. HIXSON, JR., PH.D.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
3510 DUNHILL STREET
SAN DIEGO, CALIFORNIA 92121
(858) 410-3030
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
FREDERICK T. MUTO, ESQ. DANIELLE CARBONE, ESQ.
L. KAY CHANDLER, ESQ. SHEARMAN & STERLING
GLENN F. BAITY, ESQ. 1550 EL CAMINO REAL, SUITE 100
COOLEY GODWARD LLP MENLO PARK, CA 94025
4365 EXECUTIVE DRIVE, SUITE 1100 (650) 330-2200
SAN DIEGO, CA 92121
(858) 550-6000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
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 of 1933, 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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.001 par value per share............ $86,250,000 $22,770
</TABLE>
(1) Estimated for the purpose of calculating the amount of the registration fee
in accordance with Rule 457(o) under the Securities Act of 1933. Includes
$11,250,000 of shares that the underwriters have the option to purchase to
cover over-allotments, if any.
--------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 2000
PROSPECTUS
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SHARES
[LOGO]
COMMON STOCK
-----------------
This is an initial public offering of common stock by Elitra
Pharmaceuticals Inc. We are selling shares of common stock. The estimated
initial public offering price is between $ and $ per share.
We have applied for listing of our common stock on the Nasdaq National
Market under the symbol ELIT.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Elitra........................ $ $
</TABLE>
Elitra Pharmaceuticals Inc. has granted the underwriters an option for a
period of 30 days to purchase up to additional shares of common stock.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
CHASE H&Q U.S. BANCORP PIPER JAFFRAY
, 2000.
<PAGE>
[GRAPHIC]
INSIDE FRONT COVER
[The title "Elitra's Ultra-Rapid Gene to Lead Generation" appears centered at
the top of the page, which has been divided into five sections from top to
bottom each with its own graphic and caption.
ARTWORK 1: Double helix and other structures representing pathogens. Text 1:
Applies to all pathogens. We are evaluating over 35,000 genes in the major human
pathogenic bacteria and 20,000 genes in the two leading pathogenic fungi.
ARTWORK 2: Elements of double helix structure from Artwork 1 are separated into
pieces. Text 2: Ultra-Rapid Drug Target Identification. Our ultra high
throughput functional genomics technology identifies the five to ten percent of
those genes that are essential for the life of the pathogen. We can identify 100
such essential gene drug targets in a single month.
ARTWORK 3: Image of computer terminal. Text 3: Prioritize Optimal Drug Targets.
Our proprietary bioinformatics database allows us to prioritize the highest
quality antibiotic and antifungal drug targets.
ARTWORK 4: Image of information from Artwork 3 being placed into one of many
assays. Text 4: Rapid Gene-to-Screen. For any essential gene target in our
database, we can develop specific cell-based assays for high throughput drug
screening within two to three weeks. We then screen our prioritized drug targets
against large and diverse chemical libraries to identify novel drug targets.
ARTWORK 5: Image of multiple capsules. Text 5: New Classes of Novel Drugs. Small
molecule compounds are further developed to create whole new classes of
antibiotic and antifungal drugs.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 18
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 25
Management.................................................. 39
Related Party Transactions.................................. 49
Principal Stockholders...................................... 51
Description of Capital Stock................................ 53
Shares Eligible for Future Sale............................. 57
Underwriting................................................ 59
Legal Matters............................................... 61
Experts..................................................... 61
Where You Can Find Additional Information................... 61
Index to Financial Statements............................... F-1
</TABLE>
WE HAVE REGISTERED THE TRADEMARK "ELITRA" IN SWITZERLAND AND HAVE FILED A
TRADEMARK REGISTRATION FOR "ELITRA" IN THE UNITED STATES, CANADA, JAPAN AND THE
EUROPEAN COMMUNITY. ALL OTHER TRADEMARKS, SERVICE MARKS OR TRADE NAMES REFERRED
TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER
BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" ON PAGE 5 AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES TO THOSE FINANCIAL STATEMENTS ON PAGE F-1, BEFORE MAKING AN
INVESTMENT DECISION.
ELITRA PHARMACEUTICALS INC.
We are a leader in antimicrobial functional genomics. We use proprietary
technologies and molecular biology tools to identify the essential genes that
enable bacteria and fungi to grow and survive. We intend to discover, develop
and commercialize novel antibiotic and antifungal drugs that inhibit the
products of these essential genes. Our antimicrobial drugs will be designed to
treat common and life-threatening infections and to address the growing problem
of drug resistance in the $29 billion antimicrobial market. We have developed an
automated high throughput approach to discovering new antimicrobials, which we
refer to as ultra-rapid gene-to-lead generation. Using our ultra-rapid
technologies, we have identified over 800 essential drug targets in seven
species of clinically relevant bacteria in the past 18 months. By comparison,
all known antibiotics prescribed today inhibit fewer than 25 different essential
drug targets. We have established a proprietary bioinformatics database, which
allows us to rapidly prioritize and select optimal drug targets for our drug
discovery programs. In addition, we can prepare our drug targets for high
throughput screening to identify potential new drugs within two to three weeks,
while traditional methods generally require six to nine months. We believe that
the speed, specificity and sensitivity of our gene-to-lead approach, combined
with our bioinformatics database, will enable us to discover new classes of
antimicrobial drugs.
Over the last decade, major worldwide research efforts have focused on
determining the exact sequence of DNA from diverse organisms. However,
additional knowledge of a gene's role in an organism must be determined in order
to identify which genes would be suitable as targets for drug discovery and
development. Although there have been general advances in the areas of genomic
information, molecular biology tools and new screening technologies, these
advances have produced few new antimicrobial drugs. We believe that our approach
of developing new drugs working against novel targets will best address the
current crisis of drug resistant bacteria and fungi.
BENEFITS OF OUR ULTRA-RAPID GENE-TO-LEAD APPROACH
- ULTRA-RAPID GENE DISCOVERY
Conventional antimicrobial gene discovery techniques require the evaluation
of one gene at a time. Our functional genomics technology allows us to
simultaneously evaluate the essentiality of thousands of genes, comprising
the entire genome of an organism. Our automated process provides the
capacity to identify over 100 essential drug targets in a single month.
- OPTIMAL DRUG TARGETS
Using our proprietary bioinformatics database of essential drug targets, we
prioritize targets for our drug discovery programs. Targets are selected
where the resultant drug candidates are likely to have specific
characteristics, such as activity against a range of organisms or a specific
pathogen, inhibition of a particular biological activity and minimal human
toxicity.
- RAPID GENE TO SCREEN
Using traditional techniques it can take six to nine months to develop an
assay to begin screening for a compound that inhibits the drug target. In
addition, many targets are either too complex or have an unknown biochemical
function which makes assay development difficult or even impossible. In
contrast, because we use the same molecular biology tools used to discover
essential genes, we can convert our essential drug targets into assays for
high throughput screening within
1
<PAGE>
two to three weeks. Our assays are conducted directly in the pathogen of
interest and can be used to screen essential drug targets even when the
biochemical function of the protein is unknown.
- HIGHLY SENSITIVE ASSAYS
Our assay technology makes bacteria and fungi cells extremely sensitive to
compounds that inhibit a specific essential drug target. This approach
enables us to discover drug candidates that might not be detected using
traditional screening methodologies. The high degree of sensitivity and
specificity of our assays allows us to screen both new and historic
collections of chemical libraries to generate new drug candidates.
- HIGH THROUGHPUT SCREENING
We have established in-house high throughput screening capabilities that we
use to screen selected essential drug targets against our diverse chemical
library of approximately 170,000 compounds. Currently, we have the capacity
to screen approximately 25,000 compounds per day. We intend to increase our
chemical library to approximately 500,000 compounds and our screening
capacity to approximately 150,000 compounds per day.
OUR TECHNOLOGY
We use a proprietary shotgun antisense technology as a functional genomics
research tool to identify essential genes. Antisense molecules are short strands
of DNA or RNA that can be used to stop the production of specific proteins. By
stopping the production of a protein, we can determine if the associated gene is
essential to the growth and survival of an organism. We use the same molecular
biology tools for both identifying essential drug targets and screening for new
drug candidates.
We are developing our bioinformatics database to help select optimal
essential drug targets for our drug discovery programs. We are building that
database by adding our proprietary essential gene information to the source code
for the PathoSeq-TM- Database, that we have acquired by purchase or license from
Incyte Genomics, Inc. PathoSeq is an extensive database of public and
proprietary microbial sequence data, software and analysis tools. We believe
this comprehensive bioinformatics database represents a major advance in our
essential drug target selection and validation capabilities.
To date, we have applied our technologies to a variety of clinically
important bacteria and fungi. These include pathogens associated with both
common community and hospital-acquired infections, including those exhibiting a
high frequency of resistance to current antibiotics. Examples of these types of
pathogens include STAPHYLOCOCCUS AUREUS, PSEUDOMONAS AERUGINOSA and ASPERGILLUS
FUMIGATUS.
We plan to develop and commercialize antimicrobial drugs both on our own and
in collaboration with corporate partners. In May 2000, we entered into a
corporate collaboration with LG Chemical Ltd. to discover, develop and
commercialize antimicrobial products based on a specific number of our drug
targets. Under the collaboration, we retain exclusive marketing rights in North
America.
Our principal executive offices are located at 3510 Dunhill Street, San
Diego, CA 92121 and our telephone number is (858) 410-3030. We were incorporated
in California on July 18, 1997 and reincorporated in Delaware on June 1, 1998.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock we are offering................. shares
Common stock to be outstanding after the
offering................................... shares
Use of proceeds.............................. We intend to use the net proceeds of this
offering and a concurrent private placement
for research and development activities,
access to complementary technologies,
acquisition of compound and natural products
libraries, patent prosecution and other
capital investments, as well as working
capital and general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol....... ELIT
</TABLE>
------------------------
The number of shares of our common stock to be outstanding immediately after
this offering is based on the number of shares outstanding on August 15, 2000
and includes shares of our common stock to be sold to Incyte in a
concurrent private placement. This number excludes:
- 1,323,766 shares of our common stock issuable upon the exercise of stock
options outstanding under our stock option plan with a weighted average
exercise price of $0.08 per share;
- 93,656 shares of our common stock issuable upon the exercise of warrants
outstanding with a weighted average exercise price of $1.44 per share;
- 4,733,623 shares of our common stock available for future issuance under
our 1998 Equity Incentive Plan, as amended;
- 500,000 shares of our common stock available for future issuance under our
Non-Employee Directors' Stock Option Plan; and
- 500,000 shares of our common stock available for future issuance under our
Employee Stock Purchase Plan.
------------------------
UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED
TO REFLECT A -FOR- REVERSE STOCK SPLIT WHICH WILL BE EFFECTED PRIOR TO
THE CONSUMMATION OF THIS OFFERING AND ASSUMES:
- THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK INTO
35,181,246 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; AND
- NO EXERCISE BY THE UNDERWRITERS OF THE OVER-ALLOTMENT OPTION.
3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following summary financial data is derived from our financial
statements. You should read this information together with the financial
statements and the notes to those statements appearing elsewhere in this
prospectus and the information under "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." See
note 1 to our financial statements for an explanation of the determination of
the number of shares used in computing per share data.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1997 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------- -----------------------
1997 1998 1999 1999 2000
--------------- -------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $ -- $ -- $ -- $ -- $ 287
Total operating expenses..................... (40) (1,750) (6,052) (2,020) (5,990)
Loss from operations......................... (40) (1,750) (6,052) (2,020) (5,703)
Net loss..................................... (41) (1,749) (5,786) (2,042) (5,523)
Net loss attributable to common
stockholders............................... $ (41) $(1,749) $ (6,170) $ (2,042) $ (5,907)
======= ======= ========== ========== ==========
Basic and diluted net loss per share......... $ (0.11) $ (2.55) $ (4.52) $ (1.71) $ (2.93)
======= ======= ========== ========== ==========
Shares used in computing basic and diluted
net loss per share......................... 379,000 685,000 1,366,000 1,193,000 2,014,000
Pro forma basic and diluted net loss per
share...................................... $ (0.34) $ (0.21)
========== ==========
Shares used in computing pro forma basic and
diluted net loss per share................. 18,356,000 28,496,000
</TABLE>
The following table contains a summary of our consolidated balance sheet at
June 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock into 35,181,246 shares of common stock effective upon
the closing of this offering, including 6,722,327 shares of Series E
preferred stock issued in August 2000; and
- on a pro forma, as adjusted basis, to reflect the sale of
shares of common stock offered hereby at an assumed initial
public offering price per share of $ after deducting estimated
underwriting discounts, commissions and offering expenses, and the
concurrent sale and issuance of shares of common stock to Incyte at
the initial public offering price.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 11,269 $ 33,116 $
Working capital............................................. 9,285 31,133
Total assets................................................ 22,917 44,764
Long-term obligations, less current portion................. 2,548 2,548
Redeemable convertible preferred stock...................... 16,768 --
Accumulated deficit......................................... (13,867) (13,867)
Total stockholders' equity.................................. 342 38,958
</TABLE>
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERAITONS COULD BE HARMED. IN THAT EVENT, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES. WE EXPECT TO CONTINUE TO INCUR OPERATING
LOSSES, AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have generated operating losses since our inception in 1997 and as of
June 30, 2000 had an accumulated deficit of approximately $13.9 million. We
expect to continue to incur significant operating losses for the foreseeable
future as we incur increasing costs related to research and development,
expansion of our operations, initiation of preclinical testing and medicinal
chemistry capabilities. Our research and development expenditures and general
and administrative costs have exceeded our revenues to date and we expect to
spend significant additional amounts to fund research and development in order
to enhance our core technologies and undertake product development. As a result,
we expect that our operating expenses will increase significantly in the near
term and, consequently, we will need to generate significant revenues to achieve
profitability. To date, we have financed our operations primarily through the
private sale of equity securities and the proceeds of equipment financing
arrangements. We expect that payments from corporate collaborators, interest
income and government grants will be our main sources of revenues for the
foreseeable future. Revenues from commercial sales of products based upon any
drug target, drug lead or drug candidate that we may identify are not expected
for a number of years, if at all. Drug targets are typically the protein
products of genes that cause diseases, while drug leads are compounds that
exhibit early stage drug-like properties against drug targets and drug
candidates are drug leads that appear to have properties suitable for the
initiation of clinical trials. Any of these revenues will depend on our ability,
alone or with others, to research, develop, obtain regulatory clearance for,
manufacture and market products resulting from the application of our
technologies. The extent of our future losses may exceed our expectations and
jeopardize our ability to continue our operations.
MANY OF THE DRUG TARGET AND DRUG DISCOVERY METHODS WE EMPLOY ARE NEW AND
UNPROVEN AND MAY NOT LEAD TO THE DEVELOPMENT OF COMMERCIALLY VIABLE DRUGS.
There is limited scientific understanding relating to the role of genes in
most diseases. Our technologies for the discovery of genes that are essential to
the growth and survival of bacteria and fungi, called essential genes, are still
in the early stages of development. We are not certain of the commercial value
of any of the new or future drug targets identified using our technologies or
that our drug targets and drug discovery technologies will enable us or our
corporate collaborators to discover novel antimicrobial drugs. To date, no one
has developed or commercialized any products based on our technologies.
Significant research and development, financial resources and personnel will be
required to capitalize on our technology, develop commercially viable products
and obtain regulatory approval for these products.
IF WE ARE UNABLE TO ENTER INTO ADDITIONAL CORPORATE COLLABORATIONS, WE MAY NEVER
DEVELOP OR COMMERCIALIZE PRODUCTS OR ACHIEVE PROFITABILITY.
Our ability to continue to fund our research and development programs,
maintain adequate capital reserves and, ultimately, achieve profitability will
largely depend upon our ability to enter into additional corporate
collaborations. Because pharmaceutical and biotechnology companies engaged in
drug discovery and development activities historically have identified drug
targets and conducted drug discovery through their own internal research and
development departments, we must convince these companies that our
5
<PAGE>
technologies and research discoveries justify entering into collaborative
agreements with us at an early stage. Even if a potential corporate collaborator
believes that our technologies and research discoveries justify entering into an
agreement with us, its budgeting cycle, resources or other priorities may not
permit a timely collaboration. We also must compete with other companies for the
limited number of opportunities to enter into collaborative arrangements. If we
are unable to enter into corporate collaborative agreements, we will require
substantially greater capital to undertake the research, preclinical and
clinical development, manufacturing and marketing of our products.
WE MAY HAVE DIFFICULTY NEGOTIATING CORPORATE COLLABORATIVE AGREEMENTS ON
ACCEPTABLE TERMS, WHICH WOULD HINDER OUR ABILITY TO DEVELOP PRODUCTS AND BECOME
PROFITABLE.
We may not be able to negotiate additional corporate collaborative
agreements on acceptable terms, if at all. In particular, potential corporate
collaborators may be unwilling to enter into an agreement that allows us to
retain significant commercial rights in North America. In these cases, we may
lose potential corporate collaboration opportunities or may enter into a
corporate collaboration in which we do not retain desired rights. In addition,
corporate collaborative agreements may not be successful. If any corporate
collaborator breaches or terminates its agreement with us or otherwise fails to
conduct its collaborative activities successfully and in a timely manner, the
preclinical or clinical development or commercialization of the affected drug
candidates or research programs could be delayed or terminated. We will not be
able to control the amount or timing of resources these corporate collaborators
devote to our programs or potential products. Corporate collaborators may pursue
or develop alternative technologies either on their own or in collaboration with
others, including our competitors, as a means for identifying drug targets or
drug candidates.
THE DRUG DISCOVERY AND DEVELOPMENT PROCESS IS HIGHLY SPECULATIVE, AND WE OR OUR
CORPORATE COLLABORATORS MAY NEVER SUCCESSFULLY COMMERCIALIZE A DRUG.
The discovery and development of new drugs is highly uncertain and subject
to a number of significant risks which could prevent us or our corporate
collaborators from ever creating a commercial drug. Even if we are successful in
identifying drug leads using our technologies, we and our corporate
collaborators may not be able to discover or develop commercially viable
products. Drug leads and drug candidates that appear to be promising at early
stages of development may not advance to and through clinical trials and reach
the market for a number of reasons, including the possibility that the drug
leads and drug candidates will:
- fail to materialize based upon our inability to successfully initiate or
complete our discovery and development programs;
- be found ineffective or cause harmful side effects during preclinical
testing or clinical trials;
- fail to receive necessary regulatory clearance on a timely basis, or at
all;
- be difficult or expensive to manufacture on a commercial scale; or
- fail to generate market demand or be commercially successful.
In addition, success in preclinical testing and early stage clinical trials
does not ensure that later clinical trials will be successful. A number of
companies have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials.
COMPETITORS HAVE GREATER CAPITAL RESOURCES THAN US AND MAY DISCOVER, DEVELOP AND
MARKET PRODUCTS MORE QUICKLY THAN US OR PRODUCTS THAT ARE MORE EFFECTIVE THAN
OURS.
The competition among pharmaceutical and biotechnology companies to identify
drug candidates for development is intense and is expected to increase. We face
competition in these areas from
6
<PAGE>
pharmaceutical and biotechnology companies, academic and research institutions
and government or other publicly funded agencies, both within and outside the
United States. Many of the organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in target discovery and drug development and in
obtaining regulatory clearance and greater manufacturing and marketing
capabilities than we do. Our commercial opportunity will be reduced or
eliminated if our competitors identify genes useful as drug targets or if our
competitors discover, develop and market products more quickly than we do, or
that are more effective, have fewer side effects, are easier to administer or
are less expensive than drug candidates discovered using our technologies. Even
if we or our corporate collaborators are successful in developing effective
drugs, our products may not compete effectively with these products or other
successful products.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US
ON FAVORABLE TERMS, IF AT ALL.
We will need substantial funds to continue to research, develop and test our
potential products. If adequate funds are not available, or are available only
on unfavorable terms, we may be required to delay, reduce the scope of or
eliminate one or more of our programs. Our future capital requirements will
depend on, and could increase substantially as a result of, many factors,
including the following:
- progress in, and the costs of, our research and development programs;
- the scope, prioritization and number of programs;
- the progress of preclinical testing and clinical trials;
- our ability to enter into, and the terms of, corporate collaborations;
- the costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent and other intellectual property claims;
- competing technological and market developments;
- the costs of securing manufacturing arrangements for clinical or
commercial production;
- the cost of developing sales and marketing capabilities; and
- financial market conditions for debt and equity offerings.
We intend to raise additional funds through financings, corporate
collaborative relationships or other joint venture relationships and may seek to
finance some of our programs through other financing mechanisms. Because of our
long-term capital requirements, we may seek to raise money through equity
whenever we deem market conditions to be favorable, even if we do not need
additional capital at that time. We do not know whether any additional funding
will be available when needed or that this funding will be available on
favorable terms. If we raise additional funds by issuing equity or convertible
debt securities, you may experience substantial dilution. Debt financing, if
available, may involve restrictive covenants.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES
MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
COMPETE IN THE MARKET.
Our success will depend in part on our ability to obtain patents and
maintain adequate protection of the intellectual property related to our
technologies and products. The patent positions of biotechnology companies,
including our patent position, are generally uncertain and involve complex legal
and factual questions. A substantial amount of uncertainty exists over the
patentability of gene-related inventions in the United States and in other
countries. We will be able to protect our intellectual property rights from
unauthorized use by third parties only to the extent that our technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. The laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the United States, and many
7
<PAGE>
companies have encountered significant problems in protecting and defending
their rights in foreign jurisdictions. We have applied and will apply for
patents covering our technologies and products as and when we deem appropriate.
However, these applications may be challenged or may fail to result in issued
patents. Any patents we obtain may not be sufficiently broad to prevent others
from using our technologies or from developing competing products based on our
technology or proprietary gene products. Furthermore, others may independently
develop similar or alternative technologies or design around our patents. In
addition, our patents may be challenged, invalidated or fail to provide us with
any significant competitive advantages.
We rely on trade secret protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information and
trade secrets, but these measures may not provide adequate protection. While we
seek to protect our proprietary information by entering into confidentiality
agreements with employees, collaborators and consultants, we cannot assure you
that our proprietary information will not be disclosed, or that we can
meaningfully protect our trade secrets. In addition, our competitors may
independently develop or may have already developed substantially equivalent
proprietary information or may otherwise gain access to our trade secrets.
THE COST OF OBTAINING PATENT PROTECTION FOR OUR ESSENTIAL GENE TARGETS IS
EXPECTED TO BE SUBSTANTIAL.
In the United States, only ten DNA sequences or one protein sequence is
typically examined in a single application, and sometimes examination is
restricted to one, not ten, DNA sequences. Patent applications containing more
sequences, although adequate to initiate the patenting process, must ultimately
be divided into separate applications, each of which requires its own filing fee
and has attendant patent prosecution expenses. We currently have nine patent
applications pending in the United States, which include claims to over
700 essential gene targets. In foreign countries, it is typical for only one DNA
sequence or one protein sequence to be examined in any one application. If we do
not have sufficient financial resources or choose not to devote financial
resources required for separate applications, we will not be able to secure
patent protection for all of the essential gene targets we expect to discover.
LITIGATION OR THIRD PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND COULD HINDER OUR ABILITY TO
DEVELOP AND COMMERCIALIZE PRODUCTS.
Our commercial success depends in part on our ability to avoid infringing
the patent and proprietary rights of third parties, and not breaching any
licenses that we have entered into with third parties. A number of
pharmaceutical companies, biotechnology companies, independent researchers,
universities and research institutions may have filed patent applications or may
have been granted patents that cover technologies similar to the technologies
owned by or licensed to us. For instance, a number of patents may have issued
and may issue in the future on genes and gene fragments, screening techniques,
methods, products and technologies that we have developed or intend to develop.
If patents covering technologies required by our operations are issued to
others, we may have to obtain licenses from third parties, which may not be
available on commercially reasonable terms, or at all.
Third parties may claim that we are employing their proprietary technology
without authorization. In addition, third parties may obtain patents that relate
to our technologies and claim that our use of those technologies infringes these
patents. Regardless of their merit, these claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any of these claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses on commercially reasonable
terms, or at all. Defense of any lawsuit or failure to obtain any of these
licenses could adversely affect our ability to develop and commercialize
products.
8
<PAGE>
BECAUSE WE MUST OBTAIN REGULATORY CLEARANCE TO TEST AND MARKET OUR POTENTIAL
PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT
WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS.
The Food and Drug Administration, or FDA, must approve any drug or biologic
product before it can be marketed in the United States. Any products resulting
from our research and development efforts must also be approved by the
regulatory agencies of foreign governments before the product can be tested in
humans or sold in these countries. Before a new drug application or biologics
license application can be filed with the FDA, the product candidate must
undergo extensive preclinical testing and clinical trials, which can take many
years and will require substantial expenditures. Data obtained from preclinical
and clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. In addition, changes in regulatory
policy for product approval during the period of product development and
regulatory agency review could delay approval or cause the application to be
rejected. Any failure to obtain regulatory approval would delay or prevent us
from commercializing products.
Our efforts to date have been primarily limited to identifying drug targets
and initial high throughput screening. Significant research and development
efforts will be necessary before any products identified using our drug targets
can be commercialized. If regulatory approval is granted for any of our
products, this approval may impose limitations on the uses for which a product
may be marketed. Further, once regulatory approval is obtained, a marketed
product and its manufacturer are subject to continual review. Discovery of
previously unknown problems may result in restrictions and sanctions with
respect to the product, manufacturer and relevant manufacturing facility,
including withdrawal of the product from the market.
WE HAVE NO EXPERIENCE IN DEVELOPING, MANUFACTURING AND MARKETING DRUGS BASED ON
OUR TARGETS AND MAY BE UNABLE TO COMMERCIALIZE PROPRIETARY PRODUCTS.
We have no experience in using the drug targets that we identify to develop
drugs. In order for us to commercialize products, we will need to significantly
enhance our capabilities with respect to product development and establish
manufacturing and marketing capabilities, either directly or through outsourcing
or collaborative arrangements. We may not be able to establish these
capabilities or enter into any outsourcing or licensing agreements on
commercially reasonable terms, or at all. Furthermore, there are risks
associated with outsourcing or licensing. These types of arrangements will
render us dependent on third parties who may have interests and priorities
different than our own and who are likely to have obligations to other parties.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR OUR ABILITY TO EXPAND OUR OPERATIONS.
We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives and the continuation of any corporate
collaborations. In addition, recruiting and retaining qualified scientific
personnel to perform research and development work will be critical to our
success. There is currently a shortage of skilled executives and employees with
technical expertise, and this shortage is likely to continue. As a result,
competition for skilled personnel is intense, turnover rates are high and
competition for experienced scientists from numerous companies, academic and
other research institutions may limit our ability to attract and retain
qualified personnel. In particular, although we have employment agreements with
Dr. Hixson and Dr. Foulkes, those agreements cannot guarantee that either of
them will continue their employment with us.
9
<PAGE>
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH WHICH MAY PREVENT US FROM
MEETING OUR OBJECTIVES.
We will need to expand and effectively manage our operations and facilities
in order to facilitate potential corporate collaborations and pursue future
internal research, development and commercialization efforts. We expect to
significantly increase our rate of growth to meet our strategic objectives. If
our growth accelerates, it will place a strain on us. In addition, we will be
required to expand our management capabilities, enhance our operating and
financial systems and expand our facilities to manage our growth effectively. If
we continue to grow, it is possible that the number and skills of management and
scientific personnel, systems and facilities currently in place may not be
adequate.
OUR BUSINESS INVOLVES THE USE OF HAZARDOUS MATERIALS. WE COULD INCUR SUBSTANTIAL
COSTS IN THE EVENT THESE MATERIALS ARE NOT STORED, HANDLED OR DISPOSED OF
CORRECTLY.
Our research and development processes involve the controlled use of
hazardous materials, including biological materials, pathogens, chemicals and
various radioactive compounds. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of hazardous materials and waste products. The risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
an accident, we could be held liable for any damages that result and this
liability could exceed our resources and result in lengthy interruption of
business operations. Subsequent to an accident, we could also likely incur
significant additional costs to comply with environmental laws and regulations.
Changes in current or future environmental laws and regulations may require us
to incur significant compliance costs.
LIABILITY FOR DAMAGES RESULTING FROM INJURY CAUSED BY OUR PRODUCTS OR
TECHNOLOGIES COULD EXCEED OUR TOTAL ASSETS.
We may be held liable if any product we or our corporate collaborators
develop, or any product which is made with the use of any of our technologies,
causes injury or is found otherwise unsuitable during product testing,
manufacturing, marketing or sale. We currently have no product liability
insurance. When we attempt to obtain product liability insurance, this insurance
may be expensive or may not fully cover our potential liabilities. Inability to
obtain sufficient insurance coverage at an acceptable cost or otherwise to
protect against potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our collaborators. If we are
sued for damages resulting from any injury caused by our products, our liability
could exceed our total assets.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
Our quarterly operating results have fluctuated in the past and are likely
to fluctuate in the future. A number of factors, many of which we cannot
control, could subject our operating results and stock price to volatility,
including:
- acceptance of our technologies and platforms;
- announcements by our competitors;
- the introduction of new technologies or products by our competitors;
- our ability to enter into corporate collaborative relationships;
- the termination or non-renewal of corporate collaborations;
- recognition of payments from potential corporate collaborators;
- announcements by governments relating to policy changes in the
biotechnology industry; or
- general and industry-specific economic conditions that may affect our or
our corporate collaborators' research and development expenditures.
10
<PAGE>
A large portion of our expenses, including expenses for facilities,
equipment and personnel, are relatively fixed in the short term. In addition, we
expect operating expenses to increase during 2000. Accordingly, if our capital
resources do not grow as anticipated, we may not be able to correspondingly
reduce our operating expenses. Failure to achieve anticipated levels of capital
resources could therefore significantly harm our operating results for a
particular fiscal period. Due to the possibility of fluctuations in our revenues
and expenses, we believe that quarter-to-quarter comparisons of our operating
results are not a good indication of our future performance.
IF PHYSICIANS AND PATIENTS DO NOT ACCEPT OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SIGNIFICANT REVENUE, IF ANY.
Our drug candidates may not gain market acceptance among physicians,
patients, and the medical community. If any of our drug candidates fails to
achieve market acceptance, we may be unable to successfully market and sell the
product, which would limit our ability to generate revenue. The degree of market
acceptance of any drug candidate depends on a number of factors, including:
- demonstration of clinical efficacy and safety;
- price;
- convenience and ease of administration;
- potential advantage over alternative treatment methods; and
- marketing and distribution support.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE WILL LIKELY BE VOLATILE BECAUSE OF THE MARKET PRICE OF LIFE
SCIENCE COMPANIES HAS BEEN HIGHLY VOLATILE.
The stock market, from time to time, has experienced significant price and
volume fluctuations that are unrelated to the operating performance of
companies. The market prices of technology companies' stock, particularly life
science companies' stock, have been highly volatile. Our stock may be affected
by this type of market volatility, as well as by our own performance. The
following factors, among other factors, may have a significant effect on the
market price of our common stock:
- announcements of technological innovations or new products by us or our
competitors;
- announcements by securities analysts;
- developments in patent or other proprietary rights;
- fluctuations in our operating results;
- litigation initiated by or against us;
- announcements of results of clinical trials;
- regulatory approval or failure to obtain regulatory approval for any
product we develop;
- developments in our relationships with corporate collaborators;
- developments in domestic and international governmental policy or
regulation; and
- economic and other external factors.
11
<PAGE>
OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING. WE MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH
WHICH YOU DO NOT AGREE AND IN WAYS THAT MAY NOT YIELD A FAVORABLE RETURN.
Our management will retain broad discretion over the use of proceeds from
this offering. You may not deem those uses desirable and our use of the proceeds
may not yield a significant positive return or any return at all. While we
currently intend to use most of the proceeds from this offering for research and
development, acquisition of technologies, working capital and other general
corporate purposes, we have not yet determined the amount of net proceeds to be
used specifically for any of those purposes. Because of the number and
variability of factors that determine our use of the net proceeds from this
offering, we cannot assure you that our uses of the proceeds from this offering
will not vary substantially from our currently planned uses. As a result,
investors in this offering will be relying on the judgment of our management to
use the net proceeds of this offering in a productive manner.
THE CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT OTHER STOCKHOLDERS FROM INFLUENCING
SIGNIFICANT CORPORATE DECISIONS AND DEPRESS OUR STOCK PRICE.
After this offering, our executive officers, directors and stockholders
owning at least 5% of our stock will control approximately % of our
outstanding capital stock. If these officers, directors and principal
stockholders act together, they will be able to significantly influence and
possibly control matters requiring approval by our stockholders, including
approvals of amendments to our certificate of incorporation, mergers, a sale of
all or substantially all of our assets, going private transactions and other
fundamental corporate transactions. They may also be able to control the
election of our board of directors members.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE.
Prior to this offering, there has been no public market for shares of our
common stock. An active, liquid trading market may not develop following
completion of this offering, or if developed, may not be maintained. We will
determine the initial public offering price for the shares through negotiations
between us and representatives of the underwriters. This price may not be
indicative of prices that will prevail later in the trading market. The market
price of our common stock may decline below the initial public offering price,
and you may not be able to resell your shares at or above the initial public
offering price.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO YOU.
Our certificate of incorporation, our bylaws and Delaware law could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to you. These provisions could discourage potential takeover attempts
and could adversely affect the market price of our common stock. Because of
these provisions, you might not be able to receive a premium on your investment.
These provisions:
- authorize our board of directors, without stockholder approval, to issue
up to 5,000,000 shares of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and prevent a takeover attempt;
- limit who has the authority to call a special meeting of our stockholders;
- prohibit stockholder action by written consent, requiring stockholder
actions to be taken at stockholder meetings;
- establish advance notice requirements for nominations for election to the
board of directors and for proposals to be acted upon at stockholder
meetings; and
- establish staggered terms for the members of the board of directors.
12
<PAGE>
Any of the provisions described above could delay or make more difficult
transactions involving a change in control of us or our management.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in the
public market after the closing of this offering, or the perception that these
sales could occur. These sales could make it more difficult for us to sell
equity securities in the future at a time and price that we deem appropriate.
After this offering, we will have outstanding shares of common stock.
All the shares sold in this offering, plus any additional shares sold
upon exercise of the underwriters' over-allotment option, will be freely
tradable. The remaining shares of common stock will be eligible for
sale in the public market as follows:
- shares will be eligible for sale upon the expiration of lock-up
agreements beginning 180 days after the date of this prospectus;
- shares will be eligible for sale upon the exercise of vested options
180 days after the date of this prospectus.
After this offering we also intend to register up to approximately
shares of our common stock for sale upon exercise of outstanding
stock options issued under compensatory benefit plans or reserved for future
issuance under our stock option plans. In addition, the market price of our
common stock could decline if we sell additional equity securities in connection
with financings or corporate collaborative arrangements.
YOUR INVESTMENT WILL BE IMMEDIATELY DILUTED.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, if you
purchase shares of our common stock in this offering, you will incur immediate
and substantial dilution in pro forma net tangible book value of $ per
share. You may incur additional dilution if the holders of outstanding options
or warrants exercise those options or warrants.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks" and "estimates," and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed, implied or forecasted in the forward-looking statements. In
addition, the forward-looking events discussed in this prospectus might not
occur. These risks and uncertainties include, among others, those described in
"Risk Factors" beginning on page 5 and elsewhere in this prospectus. You are
cautioned not to place undue reliance on these forward-looking statements, which
reflect our management's view only as of the date of this prospectus. Except as
required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
14
<PAGE>
USE OF PROCEEDS
Our proceeds from the sale of the shares of common stock we are
offering are estimated to be $ million, after deducting the underwriting
discount and our estimated offering expenses. If the underwriters exercise in
full their option to purchase an additional shares of common stock, we
estimate that the total net proceeds will be approximately $ million. In
addition, we will receive $ million from the sale of shares of our common stock
to Incyte in a concurrent private placement.
We expect to use the net proceeds from this offering and the concurrent
private placement primarily for:
- research and development activities;
- access to complementary technologies;
- acquisition of compound and natural product libraries;
- patent prosecution; and
- other capital investments, as well as working capital and general
corporate purposes.
The amounts and timing of these expenditures will vary depending on a number
of factors, including progress in our research and development activities and
the timing and scope of agreements we may enter into with potential corporate
collaborators. Pending the uses described above, we will invest the net proceeds
of this offering in short- and intermediate-term, interest-bearing,
investment-grade securities.
The net proceeds of this offering and the concurrent private placement,
together with our existing capital resources and interest income, should be
sufficient to fund our anticipated operating expenses and capital requirements
for at least 18 months. We cannot be sure these funds will be sufficient. We
will continue to expend substantial resources for the expansion of drug
discovery and development, including costs associated with preclinical testing
and clinical trials. We will be required to expend substantial funds in the
course of completing required additional development, preclinical testing and
clinical trials of and regulatory clearance for product candidates, if any. Our
future liquidity and capital requirements will depend on many factors,
including:
- progress in, and the costs of, our research and development programs;
- our ability to enter into, and the terms of, corporate collaborations;
- the costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent and other intellectual property claims;
- the scope, prioritization and number of programs;
- the progress of preclinical testing and clinical trials;
- competing technological and market developments;
- the costs of securing manufacturing arrangements for clinical or
commercial production;
- the cost of developing sales and marketing capabilities; and
- financial market conditions for debt and equity offerings.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain all of our future earnings, if any, to finance the
expansion of our business and we do not anticipate paying any cash dividends on
our capital stock in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis derived from the unaudited financial statements;
- on a pro forma basis after giving effect to reflect:
- a -for- reverse stock split which will be effected prior to
consummation of this offering;
- the sale of 6,722,327 shares of Series E preferred stock in
August 2000 for $3.25 per share;
- the conversion of all of our 35,181,246 outstanding shares of preferred
stock, including the Series E preferred stock, into 35,181,246 shares
of common stock upon the closing of this offering; and
- On a pro forma as adjusted basis to reflect the sale of shares of
common stock offered hereby at an assumed initial public offering price of
$ per share and our receipt of the net proceeds after deducting
underwriting discounts and commissions and estimated offering expenses and
the sale of shares of common stock at $ per share to Incyte in a
private placement to close concurrently with this offering.
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Long-term obligations, less current portion............ $ 2,548,429 $ 2,548,429 $ 2,548,429
Redeemable convertible preferred stock, $0.001 par
value; 21,651,063 shares authorized and
21,333,334 shares issued and outstanding, actual; no
shares authorized, issued and outstanding, pro forma
and pro forma as adjusted............................ 16,768,000 --
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
7,125,585 shares authorized, issued and
outstanding, actual; 5,000,000 shares authorized
and no shares issued and outstanding, pro forma and
pro forma as adjusted.............................. 7,126 --
Common stock, $0.001 par value; 60,000,000 shares
authorized and 4,578,825 shares issued and
outstanding, actual; 60,000,000 shares authorized
and 39,760,071 shares issued and outstanding, pro
forma; 70,000,000 shares authorized and
shares issued and outstanding, pro forma as
adjusted........................................... 4,579 39,760
Additional paid-in capital........................... 17,203,128 55,790,636
Notes receivable from stockholders................... (66,501) (66,501)
Deferred compensation................................ (2,939,672) (2,939,672)
Accumulated other comprehensive loss................. 364 364
Accumulated deficit.................................. (13,867,064) (13,867,064)
----------- ----------- -----------
Total stockholders' equity............................. 341,960 38,957,523
----------- ----------- -----------
Total capitalization................................... $19,658,389 $41,505,952 $
=========== =========== ===========
</TABLE>
16
<PAGE>
The number of shares of common stock to be outstanding after this offering
assumes no exercise of the underwriters' over-allotment option. The information
in this table excludes the following at August 15, 2000:
- 1,323,766 shares of our common stock issuable upon the exercise of stock
options outstanding under our stock option plan with a weighted average
exercise price of $0.08 per share;
- 93,656 shares of our common stock issuable upon the exercise of warrants
outstanding with a weighted average exercise price of $1.44 per share;
- 4,733,623 shares of our common stock available for future issuance under
our 1998 Equity Incentive Plan, as amended;
- 500,000 shares of our common stock available for future issuance under our
Non-Employee Directors' Stock Option Plan; and
- 500,000 shares of our common stock available for future issuance under our
Employee Stock Purchase Plan.
17
<PAGE>
DILUTION
Our historical net tangible book value (deficit) as of June 30, 2000 was
$(6.9) million, or $(1.51) per share, based on the number of common shares
outstanding as of June 30, 2000. Historical net tangible book value per share
has been determined by dividing net tangible book value (total tangible assets
less total liabilities) by the number of shares of common stock outstanding at
June 30, 2000.
Our pro forma net tangible book value as of June 30, 2000 was approximately
$31.7 million, or $0.80 per share, based on the pro forma number of common
shares outstanding as of June 30, 2000, calculated after giving effect to the
automatic conversion of 28,458,919 shares of our preferred stock outstanding as
of June 30, 2000 into 28,458,919 shares of our common stock, and conversion of
6,722,327 shares of Series E preferred stock issued in August 2000 into
6,722,327 shares of common stock.
After giving effect to the sale of shares of common stock in this
offering and the concurrent private placement at the assumed initial public
offering price of $ per share and after deducting underwriting discounts and
commissions and estimated offering expenses and the sale of shares of
common stock in a private placement to close concurrently with this public
offering, our pro forma net tangible book value as of June 30, 2000 would have
been $ million, or $ per share. This represents an increase in pro forma net
tangible book value per share of $ to existing stockholders and dilution in
pro forma net tangible book value per share of $ to new investors who
purchase shares in this offering. Dilution is determined by subtracting pro
forma net tangible book value per share after the offering from the assumed
initial public offering price of $ per share. The following table
illustrates this dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............. $
Historical net tangible book value (deficit) per share as of
June 30, 2000............................................. $ (1.51)
Increase per share attributable to the sale of Series E
preferred stock in August 2000 and the conversion of
preferred stock into common stock......................... 2.31
-------
Pro forma net tangible book value per share as of June 30,
2000...................................................... 0.80
Increase per share attributable to new investors and shares
to be sold to Incyte in concurrent private placement......
-------
Pro forma net tangible book value per share after the
offering..................................................
-------
Dilution per share to new investors and to Incyte........... $
=======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us in this offering and in
the concurrent private placement based on an assumed public offering price of
$ per share:
<TABLE>
<CAPTION>
SHARES TOTAL CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... % $ % $
New investors...............
------- ------- ------- ------- -------
Total................. 100% $ 100% $
======= ======= ======= ======= =======
</TABLE>
These tables assume no exercise of stock options and warrants outstanding at
June 30, 2000 and include 2,413,859 shares subject to repurchase by us at a
weighted-average price of $0.05 per share.
At June 30, 2000, there were 1,514,562 shares of common stock issuable upon
exercise of outstanding stock options at a weighted average exercise price of
$0.08 per share and 67,606 shares of preferred stock
18
<PAGE>
issuable upon exercise of outstanding warrants at a weighted average exercise
price of $0.74 per share. Subsequent to June 30, 2000, we issued a warrant to
purchase 26,050 shares of common stock at an exercise price of $3.25 per share
and warrants to purchase an aggregate of 2,065,184 shares of Series E preferred
stock at an exercise price of $3.25 per share. The warrants to purchase
2,065,184 shares of Series E preferred stock will not be exercisable if we
complete this offering or if we are acquired by another entity prior to
February 18, 2002. To the extent that any of these options or warrants are
exercised, there will be further dilution to new investors.
19
<PAGE>
SELECTED FINANCIAL DATA
Our selected statement of operations data for the period July 18, 1997
(inception) through December 31, 1997 and the years ended December 31, 1998 and
1999 and our balance sheet data as of December 31, 1998 and 1999 have been
derived from our financial statements, which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this prospectus. Our
balance sheet data as of December 31, 1997 have been derived from our financial
statements which have been audited by Ernst & Young LLP and are not included in
this prospectus. We have also included our statement of operations data for the
six months ended June 30, 1999 and 2000 and our balance sheet data as of
June 30, 2000 from our unaudited financial statements included in this
prospectus. We prepared the unaudited information on the same basis as the
audited financial statements and have included all adjustments, consisting of
normal recurring adjustments, that we consider necessary for a fair presentation
of our financial position at such date and our operating results for those
periods. You should read the data set forth below together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes included elsewhere in this
prospectus.
Please see note 1 of notes to our financial statements for an explanation of
the determination of the number of shares used in computing per share data.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1997 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) DECEMBER 31, JUNE 30,
TO DECEMBER 31, ----------------------- ----------------------
1997 1998 1999 1999 2000
--------------- ---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Collaboration revenue....................... $ -- $ -- $ -- $ -- $ 287
Operating expenses:
Research and development.................. 29 1,156 4,380 1,424 3,874
General administrative.................... 11 594 1,672 596 2,116
---------- ---------- ---------- --------- ----------
Total operating expenses.................. 40 1,750 6,052 2,020 5,990
---------- ---------- ---------- --------- ----------
Loss from operations........................ (40) (1,750) (6,052) (2,020) (5,703)
Interest income (expense), net.............. (1) 1 266 (22) 180
---------- ---------- ---------- --------- ----------
Net loss.................................... (41) (1,749) (5,786) (2,042) (5,523)
Imputed dividend on Redeemable Series B
preferred stock........................... -- -- (384) -- (384)
---------- ---------- ---------- --------- ----------
Net loss attributable to common
stockholders.............................. $ (41) $ (1,749) $ (6,170) $ (2,042) $ (5,907)
========== ========== ========== ========= ==========
Basic and diluted net loss per share........ $ (0.11) $ (2.55) $ (4.52) $ (1.71) $ (2.93)
Shares used in computing basic and diluted
net loss per share........................ 379,000 685,000 1,366,000 1,193,000 2,014,000
Pro forma net loss per share................ $ (0.34) $ (0.21)
Shares used in computing pro forma basic and
diluted net loss per share................ 18,356,000 28,496,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
------------------------------ ---------
1997 1998 1999 2000
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 48 $ 1,306 $11,890 $11,269
Working capital............................................. (71) 726 10,160 9,285
Total assets................................................ 81 2,594 14,801 22,917
Long-term obligations, less current portion................. -- 827 1,275 2,548
Redeemable convertible preferred stock...................... -- -- 16,384 16,768
Accumulated deficit......................................... (41) (1,790) (7,960) (13,867)
Total stockholders' equity (deficit)........................ (41) 1,159 (4,756) 342
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND
OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE DISCUSSION AND ANALYSIS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
BY THESE FORWARD-LOOKING STATEMENTS DUE TO FACTORS INCLUDING, BUT NOT LIMITED
TO, THOSE FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We were founded and began operations in July 1997. We are applying our
proprietary technologies to rapidly identify genes essential to the growth of
bacterial and fungal organisms. The proteins made by these essential genes
represent potential drug targets, and it is our intention to use these drug
targets to develop antibiotic and antifungal drugs that treat a wide variety of
microbial diseases. Within the last 18 months, we have identified more than 800
essential genes in multiple organisms. To date, we have devoted substantially
all of our resources to research efforts. We have recently begun generating
collaborative revenues, which combined with revenues from government grants,
will represent our near term revenue sources. Other longer term revenue sources
may include product sales and product royalties.
We have incurred substantial operating losses since our inception. As of
June 30, 2000, our accumulated deficit was $13.9 million, and total
stockholders' equity was $17.1 million, after considering the conversion of
redeemable preferred stock into common stock. We expect to incur additional
operating losses over the next several years as we continue to fund internal
research and development, develop our technologies and products and
commercialize drugs based on those technologies.
Our research and development expenses consist primarily of salaries and
related personnel expenses. As of June 30, 2000, all research and development
costs have been expensed as incurred. We believe that continued investment in
research and development is critical to attaining our strategic objectives and
we expect these expenses to continue and to increase. General and administrative
expenses consist primarily of salaries and related personnel expenses for
executive, finance and administrative personnel, professional fees, and other
general corporate expenses. As we add personnel and incur additional costs
related to the growth of our business, general and administrative expenses will
also increase.
In connection with the grant of stock options and sale of restricted common
stock to employees, founders, consultants and directors, we recorded deferred
compensation of approximately $2.6 million in the first six months of 2000, in
addition to $1.6 million recorded in fiscal year 1999. We recorded this amount
as a component of stockholders' equity and will amortize the amount as a charge
to operations over the vesting period of the stock and options. We recorded
amortization of this deferred compensation of approximately $1.0 million for the
six months ended June 30, 2000, compared to approximately $76,000 for the six
months ended June 30, 1999 and $281,000 for the year ended December 31, 1999.
For options granted to employees, founders and directors, deferred
compensation is calculated as the difference between the exercise price of the
option or purchase price of the stock and the deemed fair value of our common
stock on the date of grant. For options granted to consultants, deferred
compensation is calculated as the fair value of the options granted or stock
sold in accordance with Statement of Financial Accounting Standards No. 123 and
Emerging Issues Task Force No. 96-18.
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RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUE. We recognized revenue of $287,000 in the six months ended
June 30, 2000, which is our first revenue recognized to date. This revenue
resulted from our collaboration with LG Chemical, which was signed in May 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$2.5 million, or 172%, to $3.9 million for the six months ended June 30, 2000,
from $1.4 million for the six months ended June 30, 1999. The increase was
primarily due to increased staffing and other personnel costs to support the
development of our technologies, and includes $637,000 in amortization of
deferred compensation charges. We expect that our research and development
expenses will increase substantially to fund research programs with partners and
collaborators, as well as our internal research and product development
initiatives.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.5 million, or 255%, to $2.1 million for the six months ended June 30, 2000
from $596,000 for the six months ended June 30, 1999. This increase was
primarily attributable to an increase in staffing necessary to manage and
support our growth, and includes $318,000 in amortization of deferred
compensation charges. We expect that our general and administrative expenses
will increase as we expand our personnel, add infrastructure and incur
additional costs to support our growth and requirements as a public company.
INTEREST AND OTHER INCOME, NET. Interest and other income, net of expenses,
primarily consists of interest income and interest expense. Interest income,
which represents income earned on our cash and cash equivalents and investments,
was $299,000 for the six months ended June 30, 2000 as compared to $38,000 for
the six months ended June 30, 1999. This increase in interest income was due to
higher cash and investment balances. Interest expense was $120,000 for the six
months ended June 30, 2000, and $60,000 for the six months ended June 30, 1999
due to our additional capital lease obligations.
IMPUTED DIVIDEND ON REDEEMABLE SERIES B PREFERRED STOCK. We recorded an
imputed dividend of $384,000 on our Redeemable Series B preferred stock in the
six months ended June 30, 2000. There were no imputed dividends in the six
months ended June 30, 1999, however we accrued $384,000 between July and
December 1999. These dividends relate to a provision in the stock purchase
agreement that permits the holders of our Redeemable Series B preferred stock to
require us to redeem their stock in 2004 at the original purchase price, plus
accrued interest for the two years preceding the redemption date. We are
accruing this interest obligation ratably over the four year period prior to the
redemption date, and will reclassify this accrual to additional paid-in capital
upon the conversion of the Redeemable Series B preferred stock into common
stock, upon the closing of this initial public offering.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$3.2 million, or 279%, to $4.4 million for the year ended December 31, 1999,
from $1.2 million for the year ended December 31, 1998. The increase was
primarily due to increased staffing and other personnel costs to support the
development of our technologies, and includes $188,000 in amortization of
deferred compensation charges.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.1 million, or 182%, to $1.7 million for the year ended December 31, 1999 from
$594,000 for the year ended December 31, 1998. This increase was primarily
attributable to an increase in staffing necessary to manage and support our
growth, and includes $93,000 in amortization of deferred compensation charges.
INTEREST AND OTHER INCOME, NET. Interest and other income, net of expenses,
primarily consists of interest income and interest expense. Interest income,
which represents income earned on our cash and cash equivalents and investments,
was $408,000 for the year ended December 31, 1999, and $35,000 for the year
ended December 31, 1998. The increase in interest income was due to higher cash
and
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investment balances. Interest expense was $142,000 for the year ended
December 31, 1999, and $35,000 for the year ended December 31, 1998. The
increase in income expense was due to debt facilities entered into during 1999.
IMPUTED DIVIDEND ON REDEEMABLE SERIES B PREFERRED STOCK. We recorded an
imputed dividend of $384,000 on our Redeemable Series B preferred stock in 1999.
There were no imputed dividends in 1998. This dividend relates to a provision in
the stock purchase agreement that permits the holders of our Redeemable
Series B preferred stock to require us to redeem stock in 2004 at the original
purchase price, plus accrued interest for the two years preceding the redemption
date.
INCOME TAXES
We incurred net operating losses for the years ended December 31, 1999 and
1998, and accordingly, we did not pay any federal or state income taxes. As of
December 31, 1999, we had net operating loss carryforwards for federal tax
purposes of approximately $7.0 million, which begin to expire in 2012.
As of December 31, 1999, we had net operating loss carryforwards for state
tax purposes of approximately $7.0 million, which begin to expire in 2005. We
also had a federal research and development tax credit carryforward of
approximately $382,000 that will begin to expire in 2011 and state research and
development tax credit carryforward of approximately $210,000 that will begin to
expire in 2011.
Our utilization of the net operating losses and credits may be subject to
substantial annual limitations pursuant to Section 382 and 383 of the Internal
Revenue Code, and similar state provisions, as a result of changes in our
ownership structure. These annual limitations may result in the expiration of
net operating losses and credits prior to utilization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through sales of
preferred stock to financial investors and strategic partners for total cash
proceeds of $45.8 million, including the sale of $21.8 million of Series E
preferred stock in August 2000. As of June 30, 2000, we had cash, cash
equivalents and investments of approximately $11.3 million. As of June 30, 2000,
on a pro forma basis, taking into effect the collection in July 2000 of
$1.2 million in accounts receivable and the August 2000 sale of Series E
preferred stock, we had $34.3 million in cash, cash equivalents and short-term
investments. We currently invest our funds in U.S. investment-grade corporate
debt securities with maturities not exceeding 14 months.
Our operating activities used cash of $4.5 million for the six months ended
June 30, 2000 and used cash of $1.9 million for the six months ended June 30,
1999 and used cash of $4.7 million for the year ended December 31, 1999 and used
cash of $1.5 million for the year ended December 31, 1998. Our use of cash for
these periods primarily resulted from our losses from operations and the changes
in our working capital accounts.
Our investing activities used cash of $1.8 million for the six months ended
June 30, 2000 and used cash of $182,000 for the six months ended June 30, 1999
and used cash of $4.4 million in the year ended December 31, 1999 and used cash
of $723,000 in the year ended December 31, 1998. Our investing activities
consist primarily of purchases of investment securities, fixed assets and
technology rights.
Our financing activities provided cash of $4.7 million for the six months
ended June 30, 2000 and provided cash of $16.0 million for the six months ended
June 30, 1999 and provided $15.7 million for the year ended December 31, 1999
and provided cash of $3.4 million for the year ended December 31, 1998. Our
financing activities have been primarily due to sales of preferred stock,
issuance of convertible bridge notes to private investors and obligations under
credit facilities and capital lease arrangements. We completed our Series B
financing in June 1999, resulting in significant financing activity for the six
months
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ended June 30, 1999. We have also made payments on notes payable, as well as on
our capital lease obligations.
In June 2000, we signed an agreement with Incyte. Under the terms of the
agreement, we will make 11 quarterly payments of $150,000 beginning in
January 2001 with a final payment of $265,000 in October 2003. We are also
obligated to purchase $2.7 million in services over a three-year period, with
minimum purchase obligations of $500,000 in the first year, $1.35 million over
the first two years, with total purchase commitments of $2.7 million over a
three-year period.
We expect that the proceeds from this offering and the concurrent private
placement, combined with our current cash, cash equivalents and investments will
be sufficient to fund our anticipated operating needs for at least the next
18 months. However, our future capital requirements and the adequacy of our
available funds will depend on many factors, including scientific progress in
our research and development programs, the magnitude of those programs,
competing technological and market developments and our ability to successfully
commercialize our first products and establish strategic relationships.
Therefore, we may require additional funding within this time frame and this
additional funding, if needed, may not be available on terms that are acceptable
to us, or at all. Further, any additional equity financing may be dilutive to
our then existing stockholders and may adversely affect their rights.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
will be effective January 1, 2001. This statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. We
believe the adoption of SFAS No. 133 will not have an effect on our financial
statements because we do not engage in derivative or hedging activities.
In March 2000, the Financial Accounting Standards Board issued Financial
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation--an interpretation of APB Opinion No. 25". FIN 44 clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees", the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 became effective on July 1, 2000, but some of
the conclusions in FIN 44 cover specific events that occur after either
December 15, 1998 or January 12, 2000. Management believes that FIN 44 will not
have a material effect on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our capital lease obligations, the interest rates under which are closely tied
to market rates, and our investments in interest rate sensitive financial
instruments. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety
and preservation of our invested principal funds by limiting default risk,
market risk and reinvestment risk. We mitigate default risk by investing in
investment grade securities. A hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would not materially
affect the fair value of our interest sensitive financial instruments at
December 31, 1998 and 1999 and June 30, 2000. Declines in interest rates over
time will, however, reduce our interest income while increases in interest rates
over time will increase our interest expense.
24
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BUSINESS
INTRODUCTION
We are a leader in antimicrobial functional genomics. We use proprietary
technologies and molecular biology tools to identify the genes that are
essential for bacteria and fungi to grow and survive, called essential genes. We
intend to discover, develop and commercialize novel antibiotic and antifungal
drugs that inhibit the products of these essential genes. We refer to the
products of these essential genes as essential drug targets. We use proprietary
ultra-rapid technologies to identify essential drug targets in major pathogenic
bacteria and fungi. We believe that our core technologies allow us to identify
essential drug targets more rapidly than existing technologies. Over the last
18 months, we have identified over 800 essential drug targets in seven microbial
organisms and have filed patents on over 700 of them. In contrast, we believe
that the antibiotics most commonly prescribed today inhibit fewer than 25
different essential drug targets. In addition, we can prepare our drug targets
for high throughput screening to identify new drug candidates within two to
three weeks, while traditional methods generally require six to nine months
before screening may begin. The drugs that we intend to develop will target
infectious diseases caused by bacterial or fungal pathogens. Pathogens are
organisms that can establish themselves in various tissues and organs and cause
a number of serious and, in some cases, lethal infections.
We are developing a bioinformatics database to help prioritize our drug
targets for our drug discovery programs. We have acquired the source code and
microbial sequence data unique to PathoSeq from Incyte. PathoSeq is an extensive
database of public and proprietary microbial sequence data, software and
analysis tools. We will integrate our proprietary essential gene information
into PathoSeq for use in our internal and partnered drug discovery programs. We
believe this comprehensive bioinformatics database represents a major advance in
our antimicrobial drug target selection and validation capabilities. Our
database uniquely allows us to select optimal broad or narrow spectrum drug
targets. We have acquired a large and diverse in-house chemical library and are
actively conducting high throughput screening against a select group of
essential drug targets. We plan to develop and market antimicrobial drugs both
on our own and in collaboration with corporate partners. In May 2000, we entered
into a corporate collaboration with LG Chemical Ltd. to discover, develop and
commercialize antimicrobial drugs based on a specific number of our drug
targets. Under this collaboration, we retain exclusive marketing rights in North
America.
INDUSTRY OVERVIEW
Over the last decade, major worldwide research efforts in both private and
public organizations have focused on determining the exact DNA sequence of genes
from diverse organisms. Estimates of the number of genes in the human genome,
representing the total composition of DNA, range from approximately 45,000 to
140,000. In comparison, ten of the most clinically important human pathogenic
bacteria together include approximately 35,000 genes, and two of the most
clinically important human pathogenic fungi together include approximately
20,000 genes. Initial genomic sequencing efforts have produced significant
amounts of information that may have a profound effect on drug discovery and
development. Although there is a large amount of sequence information for
humans, bacteria and fungi, gene sequence data alone may not provide sufficient
information about the role of the gene in the organism. Knowledge of gene
function is necessary to allow researchers to use sequence information to
determine which genes are involved in disease and to discover novel therapeutic
products that target those genes. The practice of determining the function of
genes is commonly called functional genomics. To date, most commercial research
efforts using functional genomics have focused on human rather than microbial
genomes.
THE ROLE OF ESSENTIAL GENES--FUNCTIONAL GENOMICS IN ANTIMICROBIAL DRUG
DISCOVERY. Essential genes in pathogens produce proteins that are required for
a pathogen's growth and survival. Using our functional genomics technology to
identify essential genes, we estimate there are approximately 400 essential
genes in
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individual bacteria and approximately 900 essential genes in individual fungal
organisms, comprising five to ten percent of their total genomes. We believe
that all known antibiotics prescribed today inhibit fewer than 25 different
essential drug targets. Thus, there are hundreds of essential drug targets that
remain to be used to discover and develop new classes of antibiotics.
ANTIMICROBIALS MARKET. Antimicrobials target infectious diseases caused by
organisms such as bacteria and fungi. Worldwide sales of antimicrobials totaled
over $29 billion in 1999. The majority of infections are acquired in the general
community, resulting in approximately 145 million courses of antibiotics
prescribed annually in the United States alone. In addition, the Centers for
Disease Control and Prevention estimates that an additional two million
hospital-acquired infections occur annually in the United States, resulting in
approximately 90,000 deaths.
For over 50 years, bacterial and fungal infections have been fought with
antimicrobials. These antimicrobials include antibiotics, such as penicillin,
cephalosporin and tetracycline, and antifungal drugs, such as azoles and
polyenes. A significant challenge in fighting bacterial and fungal infections is
that microorganisms devise ways to elude the action of, and become resistant to,
antimicrobial drugs. Antimicrobial drug resistance is now estimated to represent
a cost of approximately $4 billion annually in the United States. The overuse
and misuse of antibiotics as a preventative measure prior to the confirmation of
the cause of an infection is one factor in the development of resistance.
Additionally, patients frequently do not complete a full course of antibiotics
as prescribed and therefore do not completely eliminate the infection, which can
result in the survival of the most drug resistant organisms. The use of
broad-spectrum antibiotics to combat multiple organisms also encourages the
development of resistance to a specific drug, because resistance developed in
one bacterial species may be genetically transferred to different bacterial
species. In the last few years, bacteria have been isolated that have become
clinically resistant to all known antibiotics. Similarly, although there are
existing drugs to treat fungal infections, they can have significant side
effects and a limited spectrum of activity. In addition, fungal pathogens have
begun to exhibit resistance to currently available drugs.
ANTIBIOTIC DRUG DISCOVERY. Historically, most antibiotics were discovered
by exposing live bacteria to large random collections of chemicals to determine
which chemicals killed them. This whole-cell screening technique led to many of
the antibiotics still in use today, such as penicillin, erythromycin and
tetracycline. However, this approach gives no information as to how these
antibiotics actually work and does not distinguish between antibiotics that kill
bacteria and non-specific toxic compounds that can also have adverse effects in
humans.
In order to discover new antibiotics, researchers developed new tests,
called assays, that enabled a better understanding of how a drug works.
Consequently by the mid-1980s, biochemical assays, in which the protein that is
the target for drug interaction is first purified and studied in isolation
outside of the cell, became a primary method of screening drugs. Many companies
were successful in generating compounds that inhibited the function of bacterial
proteins isolated outside of the cell. However, these compounds frequently
failed to be effective when tested with live, intact bacteria, resulting in
wasted development time and resources.
By the mid-1990s, advances in both molecular biology and automation allowed
a new generation of assays to be developed that use a variety of techniques to
modify living cells. These functional assays allow researchers to more directly
assess a compound's ability to inhibit a protein of interest in the protein's
native environment. Although functional assays provide some advantages in the
screening process, the widespread use of this type of assay can be limited by:
- required knowledge of the function of the protein to develop an assay;
- long assay development timelines, which can take six to nine months; and
- insufficient sensitivity to detect potential drugs.
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Historically, pharmaceutical companies have countered resistance by subtly
altering the chemical structure of established antimicrobials. However, after
successive modifications to each class of antimicrobials, it has become
increasingly difficult to create new drugs that maintain their effectiveness for
an extended period. Although there have been general advances in the areas of
genomic information, molecular biology tools and new screening technologies,
these advances have produced few new antimicrobial drugs. Only one class of new
antibiotic drugs has been introduced in over 20 years. We believe that our
approach of developing new drugs working against novel targets will best address
the current crisis of drug resistant bacteria and fungi.
OUR SOLUTION
We have developed an automated high throughput approach to discover new
antimicrobial drugs, which we refer to as ultra-rapid gene-to-lead generation.
We have developed a functional genomics technology that allows us to identify
new essential genes rapidly. Our functional genomics technology uses a method we
term shotgun antisense. This method enables us not only to identify essential
genes, but also to develop drug-screening assays in parallel using the same
molecular biology tools. Using this approach, we can move new targets we
discover into screening within two to three weeks, substantially reducing the
six to nine months that are typically required for assay development and
validation using traditional techniques. Our functional genomics technology is
conducted directly in pathogenic organisms of interest, rather than in surrogate
biological systems. This enables us to establish proof of the importance of an
essential drug target prior to the initiation of a major drug discovery and
development program. We believe our molecular biology tools are broadly
applicable to multiple pathogens, and we have successfully identified essential
genes in the first seven pathogens we have tested. We believe our ultra-rapid
gene-to-lead generation approach offers the following benefits:
ULTRA-RAPID GENE DISCOVERY. Our functional genomics technology allows us to
simultaneously evaluate the essentiality of all genes in an organism rather than
testing one gene at a time. Once we have established the appropriate molecular
biology tools for an organism of interest, we have the capacity to identify over
100 essential drug targets in a single month. To date, we have identified over
800 essential genes in seven microbial organisms.
PRIORITIZE OPTIMAL DRUG TARGETS. We are applying our technology broadly,
analyzing many microbial pathogens that are the major causes of infections in
humans. We are developing a bioinformatics database of essential drug targets
for the major fungal and bacterial pathogens. Using our current database, we can
rapidly prioritize essential drug targets, where the corresponding drug
candidates can be expected to exhibit either broad or narrow spectrum activity,
with minimal human toxicity. We have acquired the source code and microbial
sequence data unique to PathoSeq from Incyte. We are using PathoSeq as the basis
to build our proprietary database comprised of essential genes of multiple
pathogens. We have accessed public and proprietary sequence information from
PathoSeq on 60 microbial genomes, and are regularly adding new essential genes
we identify to this database. By combining Incyte's framework with our essential
gene information, we believe we will have one of the most comprehensive
antimicrobial drug discovery databases.
RAPID GENE TO SCREEN. The same molecular biology tools that we use to
identify essential genes allow us to rapidly develop drug screens, typically
within two to three weeks. In contrast, traditional methods require more
time-consuming steps such as the need to clone the gene, express and purify the
protein and design a different type of assay for each new gene. Traditional
methods typically take six to nine months for each new gene. Furthermore, many
targets may be too complex or have unknown biochemical function which makes
assay development difficult or even impossible. Over 30% of the genes in any
given bacteria encode proteins that have no known biochemical function. Our
technology allows us to develop drug screens for our essential drug targets
regardless of whether the biochemical function of the protein is known.
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HIGHLY SENSITIVE ASSAYS. Using our functional assays we are able to
determine a compound's mechanism and specificity, and its ability to enter the
pathogen's cell and inhibit the protein in the cell. We have developed an assay
technology that makes pathogenic cells extremely sensitive to compounds that
inhibit a specific essential drug target. This approach enables us to discover
potential drugs that might not be detected using less sensitive methodologies.
We have validated our functional genomics technology by demonstrating up to a
1000 fold increase in the sensitivity of our assays by using existing
antibiotics against known drug targets. This high degree of sensitivity and
specificity in our cell-based assay creates the potential to screen both new and
historic collections of chemical libraries to generate new drug candidates.
HIGH THROUGHPUT SCREENING. We have established in-house high throughput
screening capabilities that we use to screen selected essential drug targets
against our diverse chemical library of approximately 170,000 compounds. We
intend to increase the size of our chemical library to approximately 500,000
compounds. Our current high throughput screening system can screen approximately
25,000 compounds per day and we intend to increase this capacity to
approximately 150,000 compounds per day. The same screening systems can also be
used to screen natural products against our essential drug targets.
BUSINESS STRATEGY
Our objective is to discover, develop and commercialize new classes of
antimicrobial drugs that target novel essential genes. The key elements of our
strategy are to:
MAXIMIZE DRUG CANDIDATES. We intend to screen numerous essential drug
targets against large numbers of diverse compounds to maximize the probability
of discovering multiple novel antimicrobial drug candidates. We intend to
achieve this by continuing to identify and prioritize essential drug targets,
increasing the size and diversity of our compound libraries, accessing natural
product libraries, adding new high throughput screening capabilities and
entering into strategic alliances.
BUILD OUR PROPRIETARY INFORMATICS DATABASE. We are building an extensive
bioinformatics database of microbial gene sequence, essential gene
identification and other related genomic information that allows us to
prioritize our essential drug targets for our drug discovery programs. We have
recently acquired the source code and microbial sequence data unique to
PathoSeq, and have licensed related source code and software from Incyte to
supplement our proprietary essential gene information. We plan to continue to
access basic gene sequence information from external sources, both public and
private, including sequence information on approximately 60 microbial genomes
contained in the PathoSeq Database. In addition, we are building a database that
captures data regarding the chemical structures of compounds that interact with
the targets we have identified, referred to as a cheminformatics database. We
plan to continue to expand our database technologies and biological information
to enhance our antimicrobial drug discovery capabilities.
BUILD A STRONG PATENT ESTATE. We plan to pursue the identification of a
large number of additional essential drug targets in the most common bacterial
and fungal pathogens. We intend to file patent applications on all of the
essential genes we identify and, to date, we have filed patent applications that
include claims to over 700 essential genes. We plan to pursue the prosecution of
U.S. and foreign patent applications for those essential genes that we consider
the most valuable broad and narrow spectrum drug targets, including those that
enter into our drug discovery programs. In addition, we have filed patent
applications on our basic method and chemical screening technologies and will
seek patent protection for new technologies we develop.
ESTABLISH STRATEGIC PARTNERSHIPS. We intend to continue to establish
strategic partnerships with leading pharmaceutical and biotechnology companies
to further develop our essential drug targets and to globally commercialize
drugs that we develop. Initially, we will seek multiple partnerships that
provide us with research funding, milestone payments and royalties on future
product sales. These relationships will
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allow us to develop our essential drug target programs and also offset our
operational expenses. We intend to prioritize partnerships that will allow us to
retain significant marketing rights to drugs we develop, with the goal of
retaining exclusive rights in North America. In the longer term, we intend to
enter strategic partnerships to commercialize drugs identified in our internal
programs in territories outside of North America.
BUILD OUR DRUG DEVELOPMENT CAPABILITIES. We have established an experienced
management team to oversee the development of medicinal chemistry, pharmacology,
preclinical and early clinical drug development. We initially plan to outsource
both medicinal chemistry and preclinical activities, and to then build these
capabilities internally. We also intend to expand our throughput from
approximately 25,000 to 150,000 compound screenings per day by establishing a
miniaturized ultra-high throughput drug screening system.
ACCESS COMPLEMENTARY TECHNOLOGIES. We plan to identify and license or
acquire complementary technologies in areas such as bioinformatics database
analysis tools, protein analysis systems, medicinal chemistry capabilities and
additional diverse chemical and natural product libraries.
OUR TECHNOLOGY
SHOTGUN ANTISENSE TECHNOLOGY. We use proprietary shotgun antisense
technology solely as a functional genomics research tool to identify essential
genes. In contrast to conventional antisense molecules that are applied to the
outside of cells, we use advanced molecular biology tools and employ a cell's
own ability to generate antisense molecules inside the cell.
Antisense molecules are short strands of DNA or RNA that can be used to stop
the production of specific proteins. All cells produce proteins from genes by
transferring the information content in the gene through a chemical
intermediate, termed messenger ribonucleic acid or mRNA. The production of a
protein from mRNA is called translation. Certain antisense sequences that are
complementary to a particular region of an mRNA can bind to that region to stop
the production of a specific protein. Our shotgun antisense technology generates
antisense molecules inside the cell to prevent genes from producing proteins. If
an antisense molecule blocks the production of an essential protein in a
pathogen, the cells cannot grow.
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[LOGO]
[SHOTGUN ANTISENSE TECHNOLOGY GRAPHIC]
[The title "Proprietary Process for Identifying Essential Genes" appears
centered above a series of seven images and text that are linked by arrows from
left to right in two rows.
[First Row]
ARTWORK 1: Representation of an organism's cell with DNA inside
Text 1: Cell of bacteria or fungal pathogen
ARTWORK 2: Image of intact DNA without the cell
Text 2: Isolate DNA
ARTWORK 3: DNA shown in pieces
Text 3: Fragment DNA
ARTWORK 4: Image of tube with a DNA fragment and a block shape within it
Text 4: Arrow points to block with text "Promoter." Another arrow points to the
fragment within the tube with the text "Fragment." Text below image reads,
"Introduce random DNA fragments into vectors with a controllable promoter to
produce antisense fragments"
[Second Row]
ARTWORK 5: Repeat of Artwork 1 with tube from Artwork 4 inserted inside cell
Text 5: Re-introduce vector back into pathogenic cell
ARTWORK 6: Two diverging arrows
Text 6: Grow cells with antisense ON and OFF using controllable promoter
ARTWORK 7: Two boards labeled "ON" and "OFF." "ON" board has black and white
ovals while "OFF" board only has black ovals.
Text 7: To the right of the "ON" board there is a white oval with the text "No
Growth (Antisense blocks production of the protein from an essential gene)" To
the right of the "OFF" board there is a dark oval with text "Cell Growth (With
no antisense cells grow normally)"]
The first step in using our shotgun antisense technology is to isolate the
genome of a particular bacterial or fungal pathogen of interest. We then
fragment the isolated genome, using both physical and enzymatic methods, to
produce millions of overlapping but random DNA fragments. The random fragments
are each introduced into separate delivery vehicles for DNA, called vectors,
with a promoter that, when activated, allows us to closely control the
expression of these fragments inside cells. These vectors, each containing a
single random fragment of DNA under the control of a promoter, are then
introduced back into the pathogen of interest. We do this in a parallel process
that allows millions of random fragments each contained in individual vectors to
be re-introduced into a unique cell of the targeted pathogen, termed clones.
We then grow each clone in duplicate plates, one with the promoter turned
off and one with the promoter turned on and compare the growth of these cells.
With the promoter turned on, RNA fragments will be expressed. If the expressed
RNA fragment is produced from a fragment of an essential gene, the antisense may
block production of the corresponding protein and the cell will not grow. We
then isolate, sequence and analyze those DNA fragments that inhibit cell growth
to confirm that they are antisense molecules and to identify the corresponding
gene. Our shotgun antisense approach enables thousands of genes, comprising a
pathogen's entire genome, to be simultaneously evaluated for essentiality. We
have industrialized and automated our entire shotgun antisense approach to
accelerate the speed of essential gene discovery and have established the
capacity to analyze over 1.5 million bacterial clones in a single month.
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OUR ULTRA-RAPID GENE-TO-LEAD TECHNOLOGIES. Our technology not only allows
us to rapidly identify essential genes, but also enables us to move those
targets quickly into high throughput drug screening for the discovery of
potential antimicrobial drug candidates. Our process involves the following six
steps:
- STEP ONE: SELECT PATHOGENS. We select pathogens of significant medical
interest. These include pathogens that are associated with the more common
community and hospital-acquired infections, including those exhibiting a
high frequency of resistance to current antibiotics.
- STEP TWO: DESIGN MOLECULAR BIOLOGY TOOLS. In order to apply our shotgun
antisense technology to different microbial pathogens, we establish
molecular biology tools for each selected pathogen that permit the
carefully controlled expression of antisense fragments. For each organism,
we may apply a combination of established and proprietary molecular
biology tools.
- STEP THREE: IDENTIFY ESSENTIAL GENES. We apply our shotgun antisense
technology to identify essential genes. To date, we have demonstrated that
our shotgun antisense technology is effective in the first seven pathogens
to which it has been applied and have identified over 800 essential drug
targets using this method.
- STEP FOUR: PRIORITIZE TARGETS USING OUR PROPRIETARY DATABASE. We use our
proprietary database to compare the DNA sequence of each of our essential
genes to DNA sequences of genes in other organisms. We prioritize the
essential genes for drug discovery based on, among other factors, whether
the gene is essential in multiple pathogens, shows a high similarity of
sequence among pathogens and does not appear to show significant sequence
similarity to genes in higher organisms, including the available human
genome. This approach should decrease the probability that an antibiotic,
which inhibits the proteins we target, will also be toxic to humans.
- STEP FIVE: DEVELOP ASSAYS FOR SCREENING CHEMICAL LIBRARIES. The tools we
use to discover essential genes are the same tools we use to screen our
compound libraries. Our drug screening process uses the same controllable
promoters that we use to identify essential genes. These promoters allow
us to carefully adjust the level of expression of the antisense so that
only a small portion of the protein produced by the essential gene is
still produced. The cells can grow but become highly sensitive to any
further inhibition of that target. Because the target protein is present
at reduced levels when its antisense is expressed, the amount of a
potential drug required to inhibit cell growth is much less than in normal
cells which express higher levels of the target protein. Determining the
exact conditions for this assay generally requires an additional two to
three weeks after we select an essential gene for drug screening.
- STEP SIX: SCREEN CHEMICAL LIBRARIES AND IDENTIFY HITS. We use our high
throughput drug screening system to screen our libraries and have a
current capacity of approximately 25,000 compounds per day. When we add a
compound that inhibits the protein in the assay, the cell will no longer
grow. Compounds that inhibit the protein are called hits. We then further
evaluate hit compounds to identify lead compounds for drug development. We
have identified hits from our initial screens that are undergoing
exploratory medicinal chemistry.
OUR PROGRAMS
We have applied our technologies to a variety of clinically important
microorganisms. These include pathogens associated with both common community
and hospital-acquired infections, including those exhibiting a high frequency of
resistance to current antibiotics. The table below indicates the status of our
programs for the human pathogens we have chosen to pursue.
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[GRAPHIC]
BACTERIA. Bacterial species, both harmless and pathogenic, can be
differentiated by physical characteristics, such as their shape and the
structure of their cell wall. The latter is analyzed using a technique known as
the Gram stain. Gram-positive bacteria have a thick outer cell wall and stain
blue. In contrast, Gram-negative bacteria fail to stain. Many species of
bacteria have been implicated in life-threatening infections. With the
introduction of penicillin and other antibiotics that work against Gram-positive
bacteria, Gram-negative bacteria became the leading cause of hospital-acquired
infections. However, over the past two decades, Gram-positive bacteria have once
again emerged as the leading cause of bloodstream infections in the hospital
setting, presently accounting for almost 65% of those infections.
- GRAM-POSITIVE BACTERIA. The increase in resistance to antibiotics among
Gram-positive bacteria presents a serious challenge to physicians. For
example, the incidence of methicillin resistant STAPHYLOCOCCUS AUREUS, or
MRSA, increased from 2% in 1975 to approximately 50% by 1999. Today, most
MRSA strains are resistant to all commercially available drugs except
vancomycin and linezolid. However, strains of MRSA with increased
resistance to vancomycin have been reported in Japan, Europe and the United
States and have caused a number of fatalities. In addition, in a study
conducted in the United States, 28% of the ENTEROCOCCI samples isolated
from patients have shown resistance to vancomycin. In a study conducted in
the United Kingdom, 53% of samples causing bacterial infections in the
heart have shown resistance to aminoglycosides. In addition, according to
several studies 10-40% of the STREPTOCOCCI samples isolated from patients
have shown resistance to penicillin.
We have selected four Gram-positive pathogens of significant clinical
importance and applied our proprietary technologies to identify essential
genes. One of our development programs targeting one of these pathogens has
advanced to the stage of assay development and initial high-throughput drug
screening, a second program for another organism is undergoing the
ultra-rapid identification of essential genes, and molecular biology tools
are being developed in our other programs for the remaining two organisms.
To date, we have identified approximately 400 essential genes in these
bacteria using our technology.
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- GRAM-NEGATIVE BACTERIA. The introduction of effective antibiotics for
treatment of Gram-positive bacteria allowed Gram-negative bacteria such as
PSEUDOMONAS AERUGINOSA and ENTEROBACTERACEAE to dominate hospital-acquired
infections in the 1970s. The introduction of two new classes of drugs,
carbapenems and fluroquinolones, provided a brief reprieve. However,
resistant strains are becoming increasingly more common. In a 1997 study of
hospital-acquired infections caused by Gram-negative bacteria in the United
States, approximately 14% of PSEUDOMONAS AERUGINOSA were resistant to
imipenem, a carbapenem. In a study of Gram-negative bacteria isolated from
patients in European hospitals, 11% of ENTEROBACTER species were resistant
to ciprofloxacin, a fluroquinolone.
Due to the continuing spread of resistance, many epidemiologists believe
that there will be a resurgence of infections due to drug-resistant
Gram-negative bacteria. We have selected eight Gram-negative pathogens that
are causative agents of serious infections in both the community and
hospital settings. Our development program targeting one of these pathogens
has advanced through screening and hits have been identified against an
essential drug target. We are conducting initial exploratory chemistry on
these hits. We are identifying essential genes in four species, and
developing molecular biology tools in our programs for the remaining three.
To date, we have identified approximately 400 essential genes in these
bacteria using our technology.
FUNGI. Diseases such as AIDS or medical treatments that depress the immune
system, such as cancer chemotherapy or organ transplantation, have been
associated with an increased death rate due to fungal infections. For almost
30 years, amphotericin B was the only drug approved for treating serious fungal
infections despite significant kidney toxicity associated with the drug. Azoles
were introduced in the 1980s for treating the most common fungal pathogen,
CANDIDA ALBICANS, which is responsible for approximately 50% of fungal
infections. These agents interfere with the fungal cell's ability to produce a
cell membrane and are less toxic to humans. However, widespread use of azoles
encouraged development of resistance. Currently marketed azoles are also largely
ineffective against the more severe forms of fungal diseases, such as infections
caused by ASPERGILLUS.
We are currently developing proprietary molecular biology tools for two of
the more common fungal pathogens. In our program for one pathogen, we have
successfully demonstrated the utility of these tools and are in the process of
identifying essential genes. We are developing molecular biology tools in our
program for the second fungal pathogen.
SCREENING FOR NEW ANTIMICROBIALS. In order to maximize our drug discovery
programs, we are developing a diverse library of compounds to test against the
essential drug targets we identify. To date, we have acquired approximately
170,000 discreet chemical compounds that are ready for screening. Using our
cheminformatics database, we are able to tailor the selection of our compound
libraries to include chemical properties specific to antimicrobial compounds.
Our library includes compounds from commercial sources and those developed
through combinatorial chemistry. In the near term, we plan to grow our compound
library to approximately 500,000 compounds. In addition to chemical compounds,
we plan to use our technologies to screen natural products against our essential
drug targets to maximize our number of drug candidates.
STRATEGIC PARTNERS
We intend to continue to establish strategic partnerships with leading
pharmaceutical and biotechnology companies to further develop our essential drug
targets and to globally commercialize drugs that we develop. Initially, we will
seek multiple partnerships that provide us with research funding, milestone
payments and royalties on future product sales. These relationships will allow
us to develop our essential drug target programs and also offset our operational
expenses. We intend to prioritize partnerships that will allow us to retain
significant marketing rights to drugs we develop, with the goal of retaining
exclusive rights in North America. In the longer term, we intend to enter
strategic partnerships to commercialize drugs identified in our internal
programs in territories outside of North America.
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LG CHEMICAL LTD. In May 2000, we established a five-year collaboration with
LG Chemical Ltd., a chemical manufacturing company with annual sales of
approximately $4 billion in 1995, to discover, develop and commercialize
products for the treatment or prevention of human bacterial or fungal
infections. We will select optimal drug targets and screen compound libraries
against a subset of those drug targets selected by LG Chemical during the
research term. LG Chemical will provide the financial support for the initial
phases of drug discovery and development at both companies. Once a clinical
candidate is generated, LG Chemical will share with us responsibility for and
expenses of developing compounds resulting from the collaboration. We will
retain exclusive marketing rights in North America and both parties will jointly
share marketing rights in Western Europe. LG Chemical retains exclusive
marketing rights in all territories outside of North America and Western Europe.
Upon entering into the collaboration, LG Chemical purchased $5 million of our
preferred stock and committed to annual research funding during the research
term. LG Chemical will also make payments to us upon achievement of development
milestones. Both parties have limited rights to terminate the research at the
end of the third year of the collaboration.
INCYTE GENOMICS, INC. In June 2000, we acquired the source code and
microbial sequence data unique to the PathoSeq Database and licensed related
source code, software, patent rights and the trademark for PathoSeq from Incyte.
Under the terms of our agreement, we have the right to modify the licensed
software for our internal purposes, and to add our proprietary antimicrobial
genomics information to the data included in PathoSeq. Incyte remains
responsible for obligations under its existing customer contracts and will
provide database updates to its customers and to us. We also obtained the right
from Incyte to market and sell the PathoSeq Database. For a period of two years,
Incyte retained the right of first refusal to be the exclusive distributor of
the PathoSeq Database in the event we elect to offer it over the Internet.
In exchange for the exclusive software, source code and database licenses,
Incyte received $5.0 million of our preferred stock. We agreed to make
additional quarterly payments beginning in 2001 and to purchase future services
from Incyte, and they agreed to make future equity investments in us. Pursuant
to our agreement, in August 2000, Incyte purchased $2.0 million of our Series E
preferred stock. Our agreement also requires, in the event that we undertake an
initial public offering of our common stock, that Incyte, at our option,
purchase, in a private placement that will close concurrently with that initial
public offering, the lesser of:
- $5.0 million of our common stock at the initial public offering; or
- an amount equal to 15% of the total number of shares sold in the initial
public offering.
GOVERNMENT REGULATION
The manufacturing and marketing of our potential products and our ongoing
research and development activities are subject to extensive regulation by
numerous governmental authorities in the United States and other countries.
Before marketing in the United States, any drug developed by us or any of our
collaborators must undergo rigorous preclinical testing and clinical trials and
an extensive regulatory clearance process implemented by the FDA under the
federal Food, Drug, and Cosmetic Act. The FDA regulates, among other things, the
development, testing, manufacture, safety, efficacy, record keeping, labeling,
storage, clearance, advertising, promotion, sale and distribution of
biopharmaceutical products. The regulatory review and clearance process, which
includes preclinical testing and clinical trials of each product candidate, is
lengthy, expensive and uncertain. We may rely on corporate collaborators with
regard to all or part of the regulatory review process for some of our products.
Clinical testing must meet the FDA's requirements for institutional review
board oversight, patients' informed consent and good clinical practices.
Clinical testing must be conducted under FDA oversight. Before receiving FDA
clearance to market a product, we must demonstrate that the product is
adequately safe and effective on the patient population that will be treated. If
regulatory clearance of a product is
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granted, this clearance will be limited to those disease states and conditions
for which the product is useful, as demonstrated through clinical trials.
The length of time necessary to complete clinical trials varies
significantly and may be difficult to predict. In addition, information obtained
from preclinical testing and clinical trials is susceptible to varying
interpretations which could delay, limit or prevent us from obtaining regulatory
clearance of any potential drug. Further, delays or rejection may be encountered
based upon changes in FDA policy for drug clearance during the period of product
development and FDA regulatory review of each submitted new drug application, or
NDA, or product license application, or PLA. Similar delays or rejection also
may be encountered in foreign countries. We cannot assure you that regulatory
clearance will be obtained for any potential products developed by us or our
collaborators. Moreover, regulatory clearance may entail limitations on the
indicated uses of a drug. Further, even if regulatory clearance is obtained, a
marketed drug and its manufacturer are subject to continuing review, and
discovery of previously unknown problems with a drug or manufacturer can result
in the withdrawal of a drug from the market or a significant decrease in market
demand.
Any drug may produce some toxicities or undesirable side effects in animals
and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. Unacceptable toxicities or side effects may
occur at any dose level at any time in the course of studies in animals designed
to identify unacceptable effects of a drug candidate, known as toxicological
studies, or clinical trials of our potential products. The appearance of any
unacceptable toxicity or side effect could cause us or regulatory authorities to
interrupt, limit, delay or abort the development of any of our product
candidates and could ultimately prevent their clearance by the FDA or foreign
regulatory authorities for any or all targeted indications.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. If the regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, a marketing authorization will
be granted. This foreign regulatory approval process involves all of the risks
associated with FDA clearance discussed above.
Violations by us of regulatory requirements at any stage of drug
development, including preclinical testing and clinical trials, the regulatory
review process or post-clearance, may result in various adverse consequences
including the following:
- a delay by the FDA or other applicable regulatory authority in completing
regulatory review of a potential product;
- the FDA's or other authority's refusal to grant marketing clearance for a
potential product;
- required withdrawal of a drug from the market; and
- the imposition of criminal penalties against us.
We have not conducted any clinical trials or submitted any investigational
NDAs for any potential product of ours. We cannot assure you that we or our
corporate collaborators will be able to obtain FDA or other applicable
regulatory authority clearance for any potential products. If we do not obtain
the required regulatory authorizations or the scope of authorization we request,
it will delay or preclude us or our collaborators from marketing products and
limit the commercial use of the potential products.
INTELLECTUAL PROPERTY
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Accordingly, patents and other proprietary rights are an essential element of
our business. As of August 7, 2000, we had nine patent applications pending in
the United States,
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including two applications licensed exclusively from San Diego State University.
These applications include claims to over 700 essential gene targets, identified
by our technologies, as well as claims to certain gene discovery and drug
screening and discovery technologies. As of August 7, 2000, we had also filed
three corresponding foreign patent applications. We are seeking patent
protection for essential genes as well as their gene products, the use of those
genes or gene products in certain assays for discovering new antimicrobials,
antimicrobial compounds that inhibit the functions of those gene products,
methods for discovering essential genes, and related tools, techniques, DNA, and
genetically engineered organisms. Our commercial success will depend, in part,
on our ability to obtain and enforce this patent protection. We also intend to
seek patent protection or rely upon trade secret rights to protect our screening
and antimicrobial discovery technology, and to protect novel antimicrobials that
may result from our future research. We have entered into a nonexclusive license
agreement with Hoffmann-La Roche that gives us the right to use DNA vector
technology in our research.
In addition to patent protection, we rely on a combination of copyright and
trade secret laws, confidentiality and proprietary information agreements and
other contractual provisions to protect our proprietary rights, but these legal
means afford only limited protection. Despite any measures taken to protect our
intellectual property, unauthorized parties may attempt to replicate or reverse
engineer our trade secrets and know-how or to otherwise obtain and use
information that we regard as proprietary. In addition, the laws of some foreign
countries may not protect our proprietary rights as fully as do the laws of the
United States. Thus, the measures we are taking to protect our proprietary
rights in the United States and abroad may not be adequate. Finally, our
competitors may independently develop similar technologies.
A substantial amount of uncertainty exists over the patentability of
gene-related inventions in the United States and in other countries. In
December 1999, the United States Patent and Trademark Office issued new interim
guidelines for ascertaining whether patent applications meet the utility and
written description requirements of United States patent law. These two
requirements have particular importance in gene-related inventions, including
inventions relating to essential gene targets. We have disclosed in certain of
our patent applications an actual use of some essential gene sequence
information in affecting the growth or survival of a microbial pathogen, which
we believe addresses these patent law requirements. However, even with this
data, it is unclear how the United States Patent and Trademark Office will apply
these guidelines to our applications, whether the guidelines will be further
revised in the future, whether other examination policies will adversely affect
our applications, and whether the courts will agree with the standards used by
the United States Patent and Trademark Office in examining our applications.
Similar uncertainties exist in foreign countries. Thus, we cannot assure you
that we will be able to obtain adequate patent protection of our technology.
The cost of obtaining patent protection for our essential gene targets is
expected to be substantial. In the United States, only ten DNA sequences or one
protein sequence is typically examined in a single application, and sometimes
examination is restricted to one, not ten, DNA sequences. Patent applications
containing more sequences, although adequate to initiate the patenting process,
must ultimately be divided into separate applications, each of which requires
its own filing fee and has attendant patent prosecution expenses. In foreign
countries, it is typical for only one DNA sequence or one protein sequence to be
examined in any one application. If we do not have sufficient financial
resources, we will not be able to file and prosecute individual patent
applications covering all of the essential gene targets we expect to discover.
The drug discovery and genomics industries are characterized by the
existence of a large number of pending and issued patents and frequent
litigation based on allegations of patent infringement. Our technology is based
on various techniques and technologies that may be the subject of existing or
future patents owned by third parties. As the number of entrants into our area
of technology increases, and as patent filings by third parties mature into
issued patents, the possibility of an infringement claim against us grows. For
example, we may be inadvertently infringing a patent of which we are unaware. In
addition,
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because patent applications can take many years to issue, there may be patent
applications now pending of which we are unaware, which will cause us to be
infringing when issued in the future. To address any patent infringement claims,
we may have to enter into royalty or licensing agreements on disadvantageous
commercial terms, or to discontinue using particular essential gene targets or
discovery technologies. Even though we may file patent applications on a large
number of essential gene targets, third party patent rights are likely to
restrict the number of gene targets that we can ultimately exploit. A successful
claim of patent infringement against us, and our failure to license the
infringed or similar technology, may harm our business. In addition, any
infringement claims, with or without merit, would be time-consuming and
expensive to litigate or settle and could divert management attention from
administering our core business. We are pursuing a large number of essential
gene targets and related gene discovery and drug discovery technology. Because
third parties are also pursuing essential gene targets and related gene
discovery and drug discovery technology, there is likely to be overlap between
our patents and applications and the patents and applications of third parties,
resulting in patent interferences in the United States Patent and Trademark
Office and interferences, oppositions, cancellations, or related proceedings in
other countries. These proceedings could be time consuming and might result in
substantial expense and diversion of management attention, and our ownership of
and our right to use the affected intellectual property could remain unclear
until resolution of those proceedings.
COMPETITION
The competition among pharmaceutical and biotechnology companies to identify
drug targets and antimicrobial drug candidates for development is intense and is
expected to increase. We face competition in these areas from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government or other publicly funded agencies, both within and outside the United
States. We compete with a number of companies that are active in the field of
functional genomics in the identification of drug targets for use in drug
discovery. We will also compete with companies in the discovery, development and
commercialization of antimicrobial drugs. Many of the organizations competing
with us have substantially greater capital resources, larger research and
development staffs and facilities, greater experience in target discovery and
drug development and in obtaining regulatory clearance and greater manufacturing
and marketing capabilities than we do. Our commercial opportunity will be
reduced or eliminated if our competitors identify genes useful as drug targets
before we do or if our competitors discover, develop and market products more
quickly or that are more effective, have fewer side effects, are easier to
administer or are less expensive than product candidates discovered using our
technologies. Even if we or our collaborators are successful in developing
effective drugs, our products may not compete effectively with these products or
other successful products.
EMPLOYEES
As of August 15, 2000, we employed 48 persons, of whom 18 hold Ph.D. or M.D.
degrees, and six hold advanced degrees. Approximately 35 employees are engaged
in research and development, and 13 in business development, information
systems, finance and other administrative functions. None of our employees is
covered by a collective bargaining agreement and we believe that our relations
with our employees are good.
FACILITIES
We lease approximately 22,000 square feet of office and laboratory
facilities in San Diego, California. The leases on our facilities expire on
September 30, 2003. Our current facilities meet our space requirements for
research and development and administration and we believe that anticipated
future growth can be accommodated by leasing additional space.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
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SCIENTIFIC ADVISORY BOARD
The following individuals are members of our Scientific Advisory Board:
<TABLE>
<CAPTION>
NAME CURRENT POSITION
---- ----------------
<S> <C>
Joshua Fierer, M.D.............................. Head of the Division of Infectious Diseases in the
Department of Medicine at the University of
California, San Diego and the VA Medical Center in
La Jolla, California; Director of the Microbiology
Laboratory at the VA Medical Center
Eric M. Gordon, Ph.D............................ Senior Vice President of Research at Sunesis
Pharmaceuticals, Inc.; Former President, Founder
and Chief Scientific Officer of Versicor, Inc.,
Vice President of Research and Director of
Chemistry at Affymax Research Institute and
Director of Medical Chemistry at the Squibb
Institute for Medical Research and Bristol Myers
Squibb Pharmaceutical Institute
Heinz W. Gschwend, Ph.D......................... Independent consultant and Scientific Advisory
Board member for several biopharmaceutical
technology companies; Director of SIDDCO and
Metabasis Pharmaceuticals; Former Executive Vice
President of Research and Preclinical Development
of Arris (now AxyS) Pharmaceuticals and head of
CIBA-GEIGY's (now Novartis) Central Research
Laboratories
G. Wesley Hatfield, Ph.D........................ Professor of Microbiology and Molecular Genetics in
the College of Medicine and Chemical and Biomedical
Engineering in the School of Engineering at the
University of California, Irvine; Fellow of the
American Academy of Microbiology
Moselio Schaechter, Ph.D........................ Distinguished Professor, Emeritus, at Tufts
University School of Medicine; Former President of
the American Society of Microbiology and Chair of
the American Association of Microbiology Immunology
Robert W. Simons, Ph.D.......................... Associate Professor of Genetics, Department of
Microbiology and Molecular Genetics, and Vice
Chairman for Academic Affairs at the University of
California, Los Angeles; Member of Molecular
Biology Institute and Jonsson Comprehensive Cancer
Center at the University of California, Los
Angeles.
Douglas W. Smith, Ph.D. ........................ Professor of Biology at the University of
California, San Diego
Inder Verma, Ph.D............................... Professor in the Laboratory of Genetics at the Salk
Institute and American Cancer Society Professor of
Molecular Biology; Member of National Academy of
Sciences and a Fellow of the American Academy of
Microbiology
Judith W. Zyskind, Ph.D. ....................... Professor of Biology at San Diego State University
and one of our Directors. See
"Management--Executive Officers and Directors."
</TABLE>
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our current executive
officers and directors as of August 18, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harry F. Hixson, Jr., Ph.D................ 61 Chief Executive Officer, President and
Chairman of the Board
J. Gordon Foulkes, Ph.D................... 46 Executive Vice President, Research &
Development and Director
Alana B. McNulty.......................... 37 Vice President and Chief Financial Officer
Edgardo Baracchini, Jr., Ph.D............. 40 Vice President, Business Development
Charles Hsu, Ph.D.(1)..................... 42 Director
Wende S. Hutton(1)........................ 40 Director
Arnold L. Oronsky, Ph.D.(2)............... 59 Director
Arthur M. Pappas(2)....................... 53 Director
Lowell E. Sears(1)........................ 49 Director
Andrew E. Senyei, M.D.(2)................. 50 Director
Judith W. Zyskind, Ph.D................... 61 Director
</TABLE>
------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
HARRY F. HIXSON, JR., PH.D., has served as our Chief Executive Officer and
Chairman of our board of directors since February 1998. He was appointed as our
President in June 1998. Dr. Hixson served as President and Chief Executive
Officer of GeneSys Therapeutics, Inc., a biotechnology company, from 1991 until
its merger with Somatix Therapy Corporation, a biotechnology company, in 1992.
From 1985 to 1991, Dr. Hixson held various senior management positions at
Amgen Inc., a biotechnology company, including President and Chief Operating
Officer. Dr. Hixson currently serves as a director of Signal
Pharmaceuticals, Inc., a biopharmaceutical company. Dr. Hixson holds a Ph.D. in
Physical Biochemistry from Purdue University, an M.B.A. from The University of
Chicago and a B.S. degree in chemical engineering from Purdue University.
J. GORDON FOULKES, PH.D., has served as our Executive Vice President of
Research & Development and a member of our board of directors since
January 1999. Prior to joining us, Dr. Foulkes served as Chief Technical Officer
of Aurora Biosciences Corporation, a biotechnology company, from 1996 to 1998,
and Chief Scientific Officer of Oncogene Science, Inc., a biotechnology company,
from 1987 to 1996. From 1981 until 1987, Dr. Foulkes held academic positions at
the Massachusetts Institute of Technology and The Medical Research Council in
the United Kingdom. Dr. Foulkes holds a Ph.D. from the University of Dundee in
Scotland and a First Class B.S. degree in Biochemistry from the University of
Wales.
ALANA B. MCNULTY has served as our Vice President of Finance and Chief
Financial Officer since September 1998. Prior to joining us, Ms. McNulty served
as General Manager of the cartilage joint venture between Advanced Tissue
Sciences, Inc., a biotechnology company, and Smith & Nephew from 1996 to 1998.
From 1991 to 1996, Ms. McNulty held various management positions in corporate
development, including Executive Director, at Advanced Tissue Sciences, Inc.
From 1986 to 1988, Ms. McNulty served as an associate at Bear Stearns
Companies, Inc. and Sutro & Co., specializing in biotechnology investments.
Ms. McNulty holds an M.B.A. from the University of California, Los Angeles and a
B.A. degree in Biology from the University of California, Santa Barbara.
EDGARDO BARACCHINI, JR., PH.D., has served as our Vice President, Business
Development since August 1999. Prior to joining us, Dr. Baracchini served as
Director of Business Development at Agouron Pharmaceuticals, Inc., a
biotechnology company, from 1997 to 1999. He also served as Director of Business
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<PAGE>
Development and Strategic Planning at Alanex Corporation, a biotechnology
company, from 1996 to 1997, prior to its acquisition by Agouron Pharmaceuticals,
and as Assistant Director of Business Development at Isis
Pharmaceuticals, Inc., a biotechnology company, from 1992 to 1996.
Dr. Baracchini holds a Ph.D. in molecular and cell biology from the University
of Texas at Dallas, an M.B.A. from the University of California, Irvine and a
B.S. degree in microbiology from the University of Notre Dame.
CHARLES HSU, PH.D., has served as a member of our board of directors since
June 1999. Since February 1996, Dr. Hsu has been a general partner of The Walden
Group, a venture capital firm, where he is primarily responsible for Walden's
investment activities in the health care and life science industries. Dr. Hsu
formerly served as a partner at Advent International, an equity investment firm,
from 1990 to 1996, where he led or managed investments in over twenty-five life
science companies. Dr. Hsu holds a Ph.D. in Genetics and an M.B.A. from Stanford
University and a B.A. degree in Biochemistry from Harvard University.
WENDE S. HUTTON has served as a member of our board of directors since
June 1998. Ms. Hutton has been a general partner of Mayfield Fund, a venture
capital fund focusing on early stage healthcare and technology companies, since
1994. Ms. Hutton formerly served as general manager of Transgenic Laboratory
Products at GenPharm International, a biotechnology company, from 1991 to 1993
and held positions in marketing and business development at Nellcor
Incorporated, a medical device company from 1986 to 1990. Ms. Hutton holds an
M.B.A. from Harvard Business School and a B.A. in Human Biology from Stanford
University.
ARNOLD L. ORONSKY, PH.D., has served as a member of our board of directors
since June 1999. Since 1994, Dr. Oronsky has been a General Partner of InterWest
Partners, a private venture capital firm. Dr. Oronsky formerly served as
President of Coulter Pharmaceuticals, Inc., a biotechnology company, in 1996,
and is currently a board member. He is also a director of Corixa Corporation, a
biotechnology company and Signal Pharmaceuticals, Inc., a biopharmaceutical
company. Formerly, Dr. Oronsky was Vice President of Discovery Research Center
at the Lederle Laboratories, division of American Cyanamid Company. He has been
a lecturer at Johns Hopkins Medical School since 1988. Dr. Oronsky holds a Ph.D.
from Columbia University College of Physicians and Surgeons and a B.S. from New
York University.
ARTHUR M. PAPPAS has served as a member of our board of directors since
March 2000. Mr. Pappas is Chairman and Chief Executive Officer of A.M. Pappas &
Associates, LLC, an international consulting, investment and venture company
that focuses on life science companies, products and related technologies. Prior
to founding A.M. Pappas & Associates in 1994, he was a director on the main
board of Glaxo Holdings plc with executive responsibilities for operations in
Asia Pacific, Latin America and Canada. He has held various senior executive
positions with Abbott Laboratories International Ltd., Merrell Dow
Pharmaceuticals, and the Dow Chemical Company, in the United States and
internationally. Mr. Pappas is a director of Quintiles Transnational Corp.,
AtheroGenics, Inc., Valentis Inc., Embrex Inc., KeraVision, Inc. and several
privately held companies. Mr. Pappas received a B.S. in biology from Ohio State
University and an M.B.A. in finance from Xavier University.
LOWELL E. SEARS has served as a member of our board of directors since
March 2000. Since 1994, he has served as Chairman and Chief Executive Officer of
Sears Capital Management, Inc., a life science venture capital and portfolio
management company. From 1988 to 1994, Mr. Sears served as Chief Financial
Officer, Senior Vice President responsible for the Asia-Pacific region,
Treasurer and Director of Planning, for Amgen Inc., a biotechnology company. He
currently serves as a director of Neose Technologies, Inc., Techne Corporation
and Dendreon Corporation. Mr. Sears holds an M.B.A. from Stanford University and
a B.A. in economics from Claremont McKenna College.
ANDREW E. SENYEI, M.D., has served as a member of our board of directors
since June 1998. Since 1988, Dr. Senyei has served as a General Partner of
Enterprise Partners, an equity investment firm, and has a focus and expertise in
medical technologies. Dr. Senyei has over 20 years of experience building
emerging health care technologies and service companies. Dr. Senyei currently
serves on the board of directors of Ligand Pharmaceuticals Incorporated, Corixa
Corporation and Discovery Partners
40
<PAGE>
International. Dr. Senyei holds an M.D. degree from Northwestern University and
a B.A. from Occidental College.
JUDITH W. ZYSKIND, PH.D., is the founder of our company and has served as a
member of our board of directors since our inception in July 1997. Dr. Zyskind
formerly served as our Chief Scientific Officer from June 1998 to August 1999.
Dr. Zyskind is a professor of Biology at San Diego State University and a Fellow
of the American Academy of Microbiology. Dr. Zyskind has published numerous
articles and books in the general area of molecular biology of microorganisms.
Dr. Zyskind holds a Ph.D. from Iowa State University, a M.S. from Iowa State
University and a B.S. from the University of Dayton.
BOARD COMPOSITION
Our board of directors is divided into three classes, serving staggered
terms of three years, and any vacancies that occur during the year may be filled
by our board of directors for the remainder of the full term. Dr. Hsu,
Ms. Hutton and Dr. Zyskind serve as Class I directors, whose term will expire at
the first annual meeting of stockholders following the closing of this offering.
Drs. Foulkes, Oronsky and Senyei serve as Class II directors, whose term will
expire at the second annual meeting of stockholders following the closing of
this offering. Dr. Hixson, Mssrs. Pappas and Sears serve as Class III directors,
whose term will expire at the third annual meeting of stockholders following the
closing of this offering. Officers serve at the discretion of the board of
directors. There are no family relationships among any of our directors or
executive officers.
BOARD COMMITTEES
Our board of directors has established an audit committee and a compensation
committee.
AUDIT COMMITTEE
The audit committee consists of Dr. Hsu, Ms. Hutton and Mr. Sears. The audit
committee is composed of three independent directors who make recommendations to
the board of directors regarding the selection of independent auditors, reviews
the results and scope of the audit and other services provided by our
independent auditors and reviews and evaluates our audit and control functions.
COMPENSATION COMMITTEE
The compensation committee consists of Dr. Oronsky, Mr. Pappas and
Dr. Senyei . The compensation committee makes recommendations regarding our 1998
Equity Incentive Plan, as amended, Non-Employee Directors' Stock Option Plan and
Employee Stock Purchase Plan, and makes decisions concerning salaries and
incentive compensation for our employees and consultants.
DIRECTOR COMPENSATION
Our directors currently do not receive any cash compensation for services on
the board of directors or any committee thereof, but directors may be reimbursed
for expenses in connection with attendance at board and committee meetings. All
directors are eligible to participate in our 1998 Equity Incentive Plan.
Non-employee directors receive an initial grant and automatic grants of options
under our Non- Employee Directors' Stock Option Plan as described below.
Pursuant to a consultant agreement entered into in September 1999 and
renewed in July 2000, we pay Dr. Zyskind $60,000 a year for consulting services
provided by her to us. See "Management--Employment Agreements."
In March 2000, we granted an option to purchase 80,000 shares of common
stock to Arthur Pappas and an option to purchase 100,000 shares of our common
stock to Lowell Sears. See "Principal Stockholders."
In August 2000, The Sears Living Trust, of which Mr. Sears is the trustee,
purchased 38,461 shares of our Series E preferred stock at an aggregate purchase
price of $124,998.25.
41
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or Compensation Committee. See
"Related Party Transactions" for a description of transactions between us and
entities affiliated with members of our Compensation Committee.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by Delaware law, except with respect to certain
proceedings initiated by those persons. We are also empowered under our bylaws
to enter into indemnification contracts with our directors and officers and to
purchase insurance on behalf of any person we are required or permitted to
indemnify. Under this provision, we have entered into indemnification agreements
with each of our directors and executive officers.
In addition, our amended and restated certificate of incorporation provides
that no director will be personally liable to us or our stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives an improper personal
benefit.
The amended and restated certificate of incorporation also provides that if
the Delaware General Corporation Law is amended after the approval by our
stockholders of the amended and restated certificate of incorporation to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of our directors shall be eliminated
or limited to the fullest extent permitted by the Delaware General Corporation
Law, as so amended. The provision does not affect a director's responsibilities
under any other law, including the federal securities laws or state or federal
environmental laws.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned during the
year end December 31, 1999 by our chief executive officer and each of the four
other most highly compensated executive officers whose total salary and bonus
exceeded $100,000 for services rendered to us in all capacities during 1999.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
--------------------------------
ANNUAL COMPENSATION SECURITIES
----------------------- RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARD OPTIONS(#)
--------------------------- --------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
Harry F. Hixson, Jr., Ph.D.,
Chief Executive Officer, President and
Chairman..................................... 240,000 68,040 -- --
J. Gordon Foulkes, Ph.D.,
Executive Vice President, Research &
Development and Director..................... 225,000 60,000 $17,500(1) 250,000
Alana B. McNulty
Vice President and Chief Financial Officer... 138,805(2) 34,875 -- 152,000
Judith W. Zyskind, Ph.D.,
Former Chief Scientific Officer.............. 80,000(3) -- -- --
Edgardo Baracchini, Jr.,
Ph.D., Vice President, Business
Development.................................. 62,500(4) 12,656 -- 300,000
</TABLE>
------------------------
(1) Includes 250,000 shares of common stock sold at a purchase price of $0.07
per share. 62,500 of the shares vested on January 4, 2000 and the remainder
of shares will vest thereafter in 36 monthly installments.
(2) Ms. McNulty's salary is based upon 10 months of service in the 1999 fiscal
year. If Ms. McNulty had performed services for the entire 1999 fiscal
year, she would have received $155,000 as her annual salary.
(3) Dr. Zyskind's employment as Chief Scientific Officer ended on August 31,
1999.
(4) Dr. Baracchini's employment as Vice President, Business Development
commenced on August 2, 1999. If Dr. Baracchini had been employed for the
entire 1999 fiscal year, he would have received $150,000 as his annual
salary.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1999
The following table sets forth information concerning the individual grants
of stock or options to our chief executive officer and each of our four other
most highly paid executive officers during the fiscal year ended December 31,
1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
----------------------- REALIZABLE VALUE
PERCENT OF AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN PRICE EXPIRATION -------------------
NAME GRANTED(#) 1999(%)(1) ($/SH) DATE 5%($) 10%($)
---- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Harry F. Hixson, Jr., Ph.D............ -- -- -- -- -- --
J. Gordon Foulkes, Ph.D............... 250,000(2) 21.0 0.07 8/09 28,506 45,390
Alana B. McNulty...................... 152,000(3) 12.8 0.07 8/09 17,331 27,597
Edgardo Baracchini, Jr., Ph.D......... 300,000(4) 25.2 0.07 8/09 34,207 54,469
Judith W. Zyskind, Ph.D............... -- -- -- -- -- --
</TABLE>
------------------------
(1) Based on an aggregate of 1,188,500 options granted to our employees,
consultants and directors under our 1998 Equity Incentive Plan during the
fiscal year ended December 31, 1999.
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<PAGE>
(2) On January 4, 2000, 24,500 of these shares vested. Beginning on
January 31, 2000, at the end of each month for 43 months, 5,209 shares
vested or will vest, and after 12 days of the 44th month, the remaining
1,513 shares will vest.
(3) On September 1, 1999, 1,900 of these shares vested. Beginning on
September 30, 1999, at the end of each month for 47 months, 3,167 shares
vested or will vest, and after 12 days of the 48th month, the remaining
1,251 shares will vest.
(4) On August 2, 2000, 75,000 of these shares will vest. Beginning on
August 31, 2000, at the end of each month for 36 months, 6,250 shares will
vest.
The options listed in the table above represent options granted under our
1998 Equity Incentive Plan, as amended. The exercise price per share of each
option was equal to the fair market value of the common stock of the date of
grant as determined by the board of directors. The board of directors has the
right to accelerate the vesting of these options. The term of the options is
10 years.
The potential realizable value is calculated based on the term of the option
and is calculated by assuming that the fair market value of common stock on the
date of the grant as determined by the board appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the option
is exercised and the common stock received therefor is sold on the last day of
the term of the option for the appreciated price. The 5% and 10% rates of
appreciation are derived from the rules of the Securities and Exchange
Commission. The actual value realized may be greater than or less than the
potential realizable values set forth in the table.
AGGREGATED 1999 OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides summary information concerning options
exercised during 1999 and held as of December 31, 1999 for our chief executive
officer and each of our four other most highly paid executive officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
ACQUIRED ON REALIZED --------------------------------- ---------------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE(#) UNEXERCISABLE(#)
---- ----------- -------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Harry F. Hixson, Jr.,
Ph.D..................... -- -- -- -- -- --
J. Gordon Foulkes, Ph.D.... 250,000 0 -- -- -- --
Alana B. McNulty........... 152,000 0 -- -- -- --
Edgardo Baracchini, Jr.,
Ph.D..................... 300,000 0 -- -- -- --
Judith W. Zyskind, Ph.D.... -- -- -- -- -- --
</TABLE>
--------------------------
(1) Based on the fair market value per share of common stock at the date of
exercise (as determined in good faith by the board of directors for the
date of exercise), less the exercise price.
Each of the officers listed above elected to exercise all options that we
have granted to them in fiscal year 1999 to purchase shares of restricted common
stock, subject to our right of repurchase under a vesting schedule. Based upon
the exercise of the options granted in fiscal year 1999, at the end of fiscal
year 1999, Dr. Foulkes held 250,000 shares remaining subject to our right of
repurchase under a vesting schedule, Ms. McNulty held 137,432 shares remaining
subject to our right of repurchase under a vesting schedule and Dr. Baracchini
held 300,000 shares remaining subject to our right of repurchase under a vesting
schedule.
44
<PAGE>
EMPLOYEE BENEFIT PLANS
1998 EQUITY INCENTIVE PLAN
We adopted our 1998 Equity Incentive Plan in July 1998 and amended the plan
in June and November of 1999 and March and August of 2000. We have reserved an
aggregate of 8,000,000 shares of common stock for issuance upon the exercise of
stock awards granted to employees, directors and consultants under the 1998
Equity Incentive Plan, as amended. Each year upon the annual meeting of
stockholders starting in 2001, the total number of shares reserved for issuance
under the plan will increase by an amount equal to the lesser of:
- 2% of our outstanding common stock on the last day of the preceding
calendar year;
- 4,000,000 shares; or
- an amount set by our board.
The 1998 Equity Incentive Plan will terminate on June 30, 2008, unless earlier
terminated by the board.
The 1998 Equity Incentive Plan permits the granting of options intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, to employees, including officers and
employee directors, and options that do not so qualify to employees, directors
and consultants, including non-employee directors. In addition, the 1998 Equity
Incentive Plan permits the granting of stock appreciation rights, or SARs, with
or independently of options, as well as stock bonuses and rights to purchase
restricted stock. No person is eligible to be granted options and SARs covering
more than 2,000,000 shares of common stock in any calendar year.
The 1998 Equity Incentive Plan is administered by the board or a committee
appointed by the board. Subject to the limitations set forth in the 1998 Equity
Incentive Plan, the board has the authority to select the persons to whom grants
are to be made, to designate the number of shares to be covered by each stock
award, to determine whether an option is to be an incentive stock option or a
nonstatutory stock option, to establish vesting schedules, to specify the option
exercise price and the type of consideration to be paid upon exercise and,
subject to some restrictions, to specify other terms of stock awards.
The maximum term of options granted under the 1998 Equity Incentive Plan is
10 years. The aggregate fair market value, determined at the time of grant, of
the shares of common stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year may not
exceed $100,000, or the options or portion thereof which exceed this limit,
according to the order in which they are granted, will be treated as
nonstatutory stock options. Options granted under the 1998 Equity Incentive Plan
generally are non-transferable and expire three months after the termination of
an optionee's service to us. In general, if an optionee is permanently disabled
or dies during his or her service to us, the person's options may be exercised
up to 12 months following a disability and 18 months following death.
The exercise price of options granted under the 1998 Equity Incentive Plan
is determined by the board of directors in accordance with the guidelines set
forth in the 1998 Equity Incentive Plan. The exercise price of an incentive
stock option cannot be less than 100% of the fair market value of the common
stock on the date of the grant. The exercise price of a nonstatutory stock
option cannot be less than 85% of the fair market value of the common stock on
the date of grant. Options granted under the 1998 Equity Incentive Plan vest at
the rate specified in the option agreement. The exercise price of incentive
stock options granted to any person who at the time of grant owns stock
representing more than 10% of the total combined voting power of all classes of
our capital stock must be at least 110% of the fair market value of the stock on
the date of grant and the term of the incentive stock options cannot exceed five
years.
Any stock bonuses or restricted stock purchase awards granted under the 1998
Equity Incentive Plan will be in the form and will contain the terms and
conditions as the board deems appropriate. The purchase price under any
restricted stock purchase agreement will not be less than 85% of the fair market
45
<PAGE>
value of the common stock on the date of grant. Stock bonuses and restricted
stock purchase agreements awarded under the 1998 Equity Incentive Plan are
generally non-transferable.
Under the 1998 Equity Incentive Plan, shares subject to stock awards that
have expired or otherwise terminated without having been exercised in full again
become available for grant, but shares subject to exercised stock appreciation
rights will not again become available for grant. The board of directors has the
authority to reprice outstanding options and SARs and to offer optionees and
holders of SARs the opportunity to replace outstanding options and SARs with new
options or SARs for the same or a different number of shares.
Upon a change in control of our company, all outstanding stock awards under
the 1998 Equity Incentive Plan must either be assumed or substituted by the
surviving entity. In the event the surviving entity does not assume or
substitute stock awards, the exercise of the stock awards will be accelerated
prior to the change of control and outstanding stock awards will be terminated
to the extent not exercised prior to the change in control. Additionally,
pursuant to our 1998 Equity Incentive Plan, if an optionee is terminated without
cause within one month prior or thirteen months after the change of control,
then the exercise of stock awards will be accelerated in full.
As of August 15, 2000, we had issued 1,942,611 shares of common stock upon
the sale of restricted stock or exercise of options granted under the 1998
Equity Incentive Plan, and had granted additional options to purchase an
aggregate of 1,323,766 shares of common stock. As of August 15, 2000, 4,733,623
shares of common stock remained available for future grants under the 1998
Equity Incentive Plan.
EMPLOYEE STOCK PURCHASE PLAN
In August 2000, we adopted our Employee Stock Purchase Plan covering an
aggregate of 500,000 shares of common stock. Each year upon the annual meeting
of stockholders starting in 2001, the total number of shares reserved for
issuance under the Purchase Plan will increase by an amount equal to the lesser
of:
- 1% of the total number of shares of common stock outstanding on the last
day of the preceding year calendar year:
- 1,000,000; or
- an amount set by our board.
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
board may authorize participation by eligible employees, including officers, in
periodic offerings following the commencement of the Purchase Plan. The initial
offering under the Purchase Plan will commence on the effective date of this
offering and terminate one year from the effective date.
Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by us or our
subsidiary designated by the board for at least 20 hours per week and are
customarily employed by us or our subsidiary designated by the board for at
least five months per calendar year. Employees who participate in an offering
may have up to 15% of their earnings withheld under the Purchase Plan. The
amount withheld is then used to purchase shares of the common stock on specified
dates determined by the board. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
Common Stock at the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment with us.
In the event of a merger, reorganization, consolidation or liquidation
involving our company, the board has discretion to provide that each right to
purchase common stock will be assumed or an equivalent right substituted by the
successor corporation, or the board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to the merger or
46
<PAGE>
other transaction. The board has the authority to amend or terminate the
Purchase Plan, provided, however, that no action by the board may adversely
affect any outstanding rights to purchase common stock.
401(K) PLAN
In January 1998, our board of directors adopted the Elitra 401(k) plan
covering our employees who are at least twenty-one years of age. Eligible
employees may make pre-tax contributions to the 401(k) plan of up to 15% of
their eligible earnings, subject to a statutorily determined annual limit. Each
participant is fully vested in his or her deferred salary contributions.
Participant contributions are held and invested by the 401(k) plan's trustee. In
addition, eligible employees may make roll-over contributions to the 401(k) plan
from a tax-qualified retirement plan. The 401(k) plan allows us to make
discretionary matching contributions to a participant's account.
The 401(k) plan is intended to qualify under Section 401 of the Internal
Revenue Code so that contributions by us or plan participants to the
401(k) plan and income earned on the 401(k) plan contributions, are not taxable
to employees until withdrawn from the plan, and so that our contributions, if
any, will be deductible by us when made.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In August 2000, we adopted our Non-Employee Directors' Stock Option Plan to
provide for the automatic grant of options to purchase shares of common stock to
our non-employee directors. The Directors' Plan is administered by the board,
unless the board delegates administration to a committee of at least two
disinterested directors.
The maximum number of shares of common stock that may be issued upon
exercise of options granted under the Directors' Plan is 500,000. Each year upon
the annual meeting of stockholders starting in 2001, the total number of shares
reserved for issuance under the Directors' Plan will increase by an amount equal
to the lesser of:
- 1/2% of the total number of shares of common stock outstanding on the
last day of the preceding calendar year; or
- an amount set by our board.
Under the terms of the Directors' Plan:
- each person who, after the effective date of this offering, for the
first time becomes a non-employee director automatically will be
granted, upon the date of his or her initial appointment or election to
be a non-employee director, a one-time option to purchase
40,000 shares of common stock subject to a three year vesting period;
and
- on the date of each annual meeting of stockholders after the effective
date of this offering, other than any annual meeting held in 2000, each
person who is elected at an annual meeting to serve as a non-employee
director, and who was also a non-employee director prior to the annual
meeting, automatically will be granted an option to purchase
15,000 shares of common stock subject to a twelve-month vesting period.
No option granted under the Directors' Plan may be exercised after the
expiration date, ten years from the date it was granted. The exercise price of
options under the Directors' Plan will equal 100% of the fair market value of
the common stock on the date of grant. Options granted under the Directors' Plan
are generally non-transferable. Unless otherwise terminated by the board of
directors, the Directors' Plan automatically terminates on the tenth anniversary
of the date of this offering. As of the date hereof, no options to purchase
shares of common stock have been granted under the Directors' Plan. Options
granted under the Directors' Plan vest in full upon a change in control of our
company, unless assumed or replaced with similar options by the entity gaining
control of our company.
47
<PAGE>
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Harry F. Hixson, Jr., Ph.D.,
dated April 3, 1998, as amended on June 18, 1998, providing for an annual
salary, subject to adjustments, plus bonuses subject to performance milestones
to be determined by our board of directors and the acquisition by Dr. Hixson of
1,340,000 shares of common stock at $0.001 per share that are subject to a
vesting schedule. Upon our termination of the agreement without cause,
Dr. Hixson will continue to receive his base salary for six months from the date
of termination, including bonus and any unvested options or shares subject to
our repurchase right will be accelerated as if he remained an employee for an
additional six months. If Dr. Hixson is terminated within eighteen months of a
change in control, Dr. Hixson will receive six months of his base salary and the
acceleration of any unvested options or shares subject to our repurchase right.
The employment agreement indicates that Dr. Hixson's employment is terminable at
will by either party.
We entered into an employment agreement with J. Gordon Foulkes, Ph.D., dated
December 30, 1998, providing for an annual salary, subject to adjustments, plus
bonuses subject to certain performance milestones to be determined by our board
of directors and the acquisition by Dr. Foulkes of 250,000 shares of common
stock at $0.07 per share that are subject to our repurchase right based upon a
vesting schedule. Upon our termination of the agreement without cause,
Dr. Foulkes will receive his base salary for six months from the date of
termination, including bonus. In either case, any unvested options or shares
subject to our repurchase right will be accelerated as if Dr. Foulkes remained
an employee for an additional six months. If Dr. Foulkes is terminated without
cause following a change in control, he will receive six months of his base
salary and the acceleration of any unvested options or shares subject to our
repurchase right. The employment agreement indicates that Dr. Foulkes employment
is terminable at will by either party.
We entered into an employment agreement with Alana B. McNulty, dated
July 12, 1999, providing for an annual salary, subject to adjustments, plus
bonuses subject to performance milestones to be determined by our board of
directors, and the acquisition by Ms. McNulty of 148,000 shares of common stock
at $0.07 per share under our equity incentive plan. Upon our termination of the
agreement without cause, Ms. McNulty will continue to receive her salary for six
months from the date of termination, including bonus and any unvested options or
shares subject to our repurchase right will accelerate as if she remained an
employee for six additional months. If Ms. McNulty is terminated within eighteen
months of a change in control, Ms. McNulty will receive six months of her base
salary and the acceleration of any unvested options or shares subject to our
repurchase right. The employment agreement indicates that Ms. McNulty's
employment is terminable at will by either party.
We entered into an employment agreement with Edgardo Baracchini, Jr., Ph.D.,
dated June 18, 1999, providing for an annual salary, subject to adjustments,
plus bonuses subject to performance milestones to be determined by our board of
directors and the acquisition by Dr. Baracchini of 300,000 shares of our common
stock at $0.07 per share under our equity incentive plan. Upon our termination
of the agreement without cause, Dr. Baracchini will continue to receive his
salary for six months from the date of termination, including bonus and any
unvested options or shares subject to our repurchase right will accelerate as if
he remained an employee for six additional months. If Dr. Baracchini is
terminated within eighteen months of a change in control, Dr. Baracchini will
receive six months of his base salary and the acceleration of any unvested
options or shares subject to our repurchase right. The employment agreement
indicates that Dr. Baracchini's employment is terminable at will by either
party.
We entered into a consulting agreement with Judith W. Zyskind, Ph.D., dated
September 1, 1999, providing for the payment of services and the continuation of
vesting of options to purchase our common stock that we previously granted to
Dr. Zyskind. The agreement has been extended until September 1, 2001 unless
terminated by either party with thirty days' written notice.
48
<PAGE>
RELATED PARTY TRANSACTIONS
The following is a description of transactions since our inception, to which
we have been a party, in which the amount involved in the transaction exceeds
$60,000 and in which any director, executive officer or holder of more than five
percent of our capital stock had or will have a direct or indirect material
interest, other than compensation arrangements that are otherwise required to be
described under "Management."
We have issued since our inception through August 18, 2000, in private
placement and corporate alliance transactions, shares of preferred stock as
follows: an aggregate of 4,545,456 shares of Series A preferred stock at $0.66
per share in October 1998; an aggregate of 21,333,334 shares of Series B
preferred stock at $0.75 per share in June and September 1999; an aggregate of
1,041,667 shares of Series C preferred stock at $4.80 per share in May 2000; an
aggregate of 1,538,462 shares of Series D preferred stock at $3.25 per share in
June 2000; and an aggregate of 6,722,327 shares of Series E preferred stock at
$3.25 per share in August 2000. The investors in the Series E preferred stock
also received warrants to purchase 1,680,568 shares of Series E preferred stock
at an exercise price of $3.25 per share. In connection with the Series E
preferred stock financing, we issued warrants to purchase 384,616 shares of
Series E preferred stock at an exercise price of $3.25 per share to the holder
of the Series D preferred stock. All warrants issued in conjunction with the
Series E preferred stock financing are only exercisable to the extent that prior
to February 18, 2002, we do not complete an initial public offering of shares of
our common stock or we are not acquired by another entity.
Each share of preferred stock is convertible, without payment of additional
consideration, into one share of common stock, and all outstanding shares of
preferred stock shall be convertible into shares of common stock upon the
closing of this offering.
The following executive officers, directors and holders of more than five
percent of our voting securities purchased securities in the amounts indicated
since our inception, July 18, 1997.
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
COMMON -------------------------------------------------------
PURCHASER (1) STOCK SERIES A SERIES B SERIES C SERIES D SERIES E
------------- ----------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Harry F. Hixson, Jr., Ph.D...... 1,340,000 -- 666,666 -- -- 400,000
J. Gordon Foulkes, Ph.D......... 500,000 -- -- -- -- --
Alana B. McNulty................ 300,000 -- -- -- -- --
Edgardo Baracchini, Jr.,
Ph.D.......................... 300,000 -- -- -- -- --
Judith W. Zyskind, Ph.D......... 1,040,000 -- -- -- -- --
Lowell E. Sears, as trustee for
The Sears Living Trust........ -- -- -- -- -- 38,461
ENTITIES AFFILIATED WITH
DIRECTORS
Mayfield Fund(2)................ -- 2,250,001 4,000,000 -- -- 467,691
Enterprise Partners(3).......... -- 2,250,001 4,000,000 -- -- 307,692
The Walden Group(4)............. -- -- 5,666,667 -- -- 307,692
Interwest Group(5).............. -- -- 5,000,000 -- -- 307,690
GeneChem Technologies Venture
Fund, L.P.(6)................. -- -- 1,333,336 -- -- 307,692
TechAMP International L.P.(7)... -- -- -- -- -- 307,692
5% OR GREATER STOCKHOLDERS
Incyte Genomics, Inc.(8)........ -- -- -- -- 1,538,462 --
Price per share................. $.001-$0.07 $0.66 $0.75 $4.80 $3.25 $3.25
Date of purchase................ 7/97-12/99 10/98 6/99-9/99 5/00 6/00 8/00
</TABLE>
------------------------
(1) See "Principal Stockholders" for more information related to beneficial
ownership of our shares.
49
<PAGE>
(2) Wende S. Hutton is a General Partner of Mayfield Fund. 112,500 shares of
Series A preferred stock, 200,000 shares of Series B preferred stock and
15,385 shares of Series E preferred stock are held by Mayfield Associate
Fund III. 2,137,501 shares of Series A preferred stock, 3,800,000 shares of
Series B preferred stock and 292,307 shares of Series E preferred stock are
held by Mayfield VIII.
(3) Andrew W. Senyei, M.D., is a General Partner of Enterprise Partners.
180,000 shares of Series A preferred stock, 320,000 shares of Series B
preferred stock and 24,615 shares of Series E preferred stock are held by
Enterprise Partners IV, Associates L.P. and 2,070,001 shares of Series A
preferred stock, 3,680,000 shares of Series B preferred stock and
283,077 shares of Series E preferred stock are held by Enterprise Partners
IV, L.P.
(4) Charles Hsu, Ph.D., is a General Partner of The Walden Group. 281,147
shares are held by International Ventures Capital Investment Corp., 70,743
shares are held by Pacven Walden Ventures IV Associates Fund, L.P.,
3,795,017 shares are held by Pacven Walden Ventures IV, 1,405,733 shares are
held by Walden--SBIC, L.P. and 421,719 shares are held by WIG--Gloval
Ventures PTE, Ltd.
(5) Arnold L. Oronsky, Ph.D., is a General Partner of Healthcare of Interwest
Partners. 161,354 shares are held by Interwest Investors VI, L.P. and
5,146,336 shares are held by Interwest Partners VI, L.P.
(6) Arthur M. Pappas is Chief Executive Officer of A.M. Pappas & Associates,
LLC, which has an investment in GeneChem Technologies Venture Fund. In
addition, A.M. Pappas & Associates is a special advisor to GeneChem
Management, Inc., which is a manager of GeneChem Technologies Venture Fund.
(7) Arthur M. Pappas is Chief Executive Officer of A.M. Pappas & Associates,
LLC, the general partner of Tech Amp International L.P., a life sciences
venture capital fund.
(8) Concurrent with this offering, Incyte will purchase, in a private
placement, the lesser of $5,000,000 of our common stock at the initial
public offering price or an amount equal to 15% of the number of the total
shares sold in our initial public offering.
We have granted options to purchase shares of our common stock to some of
our directors and executive officers. In March 2000, we granted an option to
purchase 200,000 shares to Harry F. Hixson, Sr., an option to purchase
150,000 shares to J. Gordon Foulkes, an option to purchase 75,000 shares to
Alana B. McNulty and an option to purchase 75,000 shares to Edgardo Baracchini,
Jr. The options will vest over 48 equal monthly installments commencing four
years from the grant date, subject to acceleration upon a firmly underwritten
public offering of our common stock and the closing of two transactions with one
or more corporate partners or collaborators, subject to certain minimum
threshold conditions. In connection with the early exercise of stock options
granted to some of our executive officers, the following officers executed
promissory notes in the amounts listed below:
<TABLE>
<CAPTION>
PROMISSOR AMOUNT
--------- --------
<S> <C>
Edgardo Baracchini, Jr., Ph.D.............................. $21,000
J. Gordon Foulkes, Ph.D.................................... $17,500
Alana B. McNulty........................................... $21,000
</TABLE>
We retain the right to repurchase the unvested shares if the officers'
employment with us ends.
We have entered into a Consulting Agreement with Judith W. Zyskind, Ph.D., a
member of our board of directors. Pursuant to the Consulting Agreement, we will
pay Dr. Zyskind $60,000 a year for consulting services rendered to us.
We have also entered into an indemnification agreement with each of our
directors and executive officers.
In June 2000, we agreed with Incyte to acquire and enhance the PathoSeq
Database. Under our agreement, we issued 1,538,462 shares of Series D preferred
stock, and agreed to make payments and purchase services from Incyte in the
future. See "Business--Strategic Partners."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of August 18, 2000 by:
- each person who is known by us to own beneficially more than 5% of our
common stock;
- each of our current directors, our chief executive officer and our other
four most highly compensated executive officers during 1999; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the stockholders named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The applicable percentage of
ownership for each stockholder is based on 39,963,867 shares of common stock
outstanding as of August 18, 2000, in each case together with applicable options
and warrants beneficially owned are deemed outstanding for the purpose of
computing the percentage of ownership of the person holding those options and
warrants, but are not deemed outstanding for computing the percentage ownership
of any other person.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
SHARES -------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Wende S. Hutton (1) ........................................ 6,717,692 16.8%
Mayfield Fund 2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025
Andrew W. Senyei, M.D. (2) ................................. 6,557,693 16.4%
Enterprise Partners
7979 Ivanhoe Avenue, Suite 550
La Jolla, CA 92037
Charles Hsu, Ph.D. (3) ..................................... 5,974,359 14.9%
The Walden Group
750 Battery Street, 7th Floor
San Francisco, CA 94111
Arnold L. Oronsky, Ph.D. (4) ............................... 5,307,690 13.3%
Interwest Partners
3000 Sand Hill Road Building 3, Suite 255
Menlo Park, CA 94025
Harry F. Hixson, Jr., Ph.D. (5) ............................ 2,346,666 5.9%
3510 Dunhill Street
San Diego, CA 92121
Incyte Genomics, Inc.(6) ................................... 2,153,846 5.4%
3160 Porter Drive
Palo Alto, CA 94304
Judith W. Zyskind, Ph.D. (7) ............................... 880,000 2.2%
J. Gordon Foulkes, Ph.D. (8)................................ 500,000 1.3%
Alana B. McNulty (9)........................................ 300,000 *
Edgardo Baracchini, Ph.D. (10).............................. 300,000 *
Lowell E. Sears (11) ....................................... 53,044 *
Arthur M. Pappas (12) ...................................... 11,666 *
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
SHARES -------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
All directors and executive officers as a group 28,948,810 72.4%
(11 persons) (13).........................................
</TABLE>
------------------------
* Represents beneficial ownership of less than one percent.
(1) Includes 6,229,808 shares held by Mayfield VIII, L.P., 327,885 shares held
by Mayfield Associates Fund III, L.P., 144,615 shares held by Patho Trust
and 15,384 shares held by Ms. Hutton, as trustee of the Hutton Living Trust.
Ms. Hutton disclaims beneficial ownership of these shares except to the
extent of her pecuniary interest in these funds and the shares held by her
as trustee of the Hutton Living Trust.
(2) Includes 6,033,078 shares held by Enterprise Partners IV, L.P. and 524,615
shares held by Enterprise Partners IV Associates, L.P. Dr. Senyei disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in these funds.
(3) Includes 3,795,017 shares held by Pacven Walden Ventures IV, L.P.,
1,405,733 shares held by Walden--SBIC, L.P., 421,719 shares held by
WIG--Global Ventures PTE, Ltd., 281,147 shares held by International
Ventures Capital Investment Corp. and 70,743 shares held by Pacven Walden
Ventures IV Associates Fund, L.P. Dr. Hsu disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in these funds.
(4) Includes 5,146,336 shares held by Interwest Partners VI, L.P. and 161,354
shares held by Interwest Investors VI, L.P. Dr. Oronsky disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in these funds.
(5) Includes 2,286,666 shares held by Harry F. Hixson, Jr., as trustee of the
H. Hixson Separate Property Trust, 20,000 shares held by the Harry F.
Hixson III Trust, the beneficiary which is Dr. Hixson's son, 20,000 shares
held by the Claire-Marie Therese Hixson Trust, of which the beneficiary is
Dr. Hixson's daughter and 20,000 shares held by Teresa Hixson, Dr. Hixson's
wife. Dr. Hixson disclaims beneficial ownership of the shares held in the
Harry F. Hixson III Trust, Claire-Marie Therese Hixson Trust and Teresa
Hixson. Includes 609,488 shares subject to our right of repurchase within 60
days of August 18, 2000.
(6) The percentage of shares beneficially owned after the offering includes
shares of our common stock purchased in a private placement concurrent
with our initial public offering.
(7) Includes 163,333 shares subject to our right of repurchase within 60 days
of August 18, 2000.
(8) Includes 319,247 shares subject to our right of repurchase within 60 days
of August 18, 2000.
(9) All shares are held by Alana B. McNulty, as trustee of the McNulty Family
Trust. Includes 179,850 shares subject to our right of repurchase within 60
days of August 18, 2000.
(10) Includes 212,500 shares subject to our right of repurchase within 60 days
of August 18, 2000.
(11) Includes 14,583 shares subject to options exercisable within 60 days of
August 18, 2000 and 38,461 shares held by Mr. Sears, as trustee of The
Sears Living Trust.
(12) Includes 11,666 shares subject to options exercisable within 60 days of
August 18, 2000. Excludes 1,641,028 shares held by GeneChem Technologies
Venture Fund, L.P. and 307,692 shares held by TechAMP International L.P. For
a description of the relationship between the parties, see "Related Party
Transactions."
(13) Includes 26,249 shares subject to options exercisable within 60 days of
August 18, 2000.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our amended and restated certificate of incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
70,000,000 shares of common stock, par value $0.001 per share, and 5,000,000
shares of preferred stock, par value $0.001 per share, the rights and
preferences of which may be established from time to time by our board of
directors. As of August 18, 2000, 4,782,621 shares of common stock were issued
and outstanding and 35,181,246 shares of preferred stock convertible into
35,181,246 shares of common stock upon the completion of this offering were
issued and outstanding. As of August 18, 2000, we had 51 common stockholders of
record.
Immediately after the closing of this offering, we will have
shares of common stock outstanding, assuming no exercise of options to acquire
1,323,766 additional shares of common stock or warrants to purchase
93,656 additional shares of common stock or preferred stock convertible into
93,656 shares of common stock that are outstanding as of the date of this
prospectus.
The description below gives effect to the filing of the amended and restated
certificate of incorporation and the adoption of our amended and restated
bylaws. The following summary is qualified in its entirety by reference to our
amended and restated certificate of incorporation and our amended and restated
bylaws, copies of which are filed as exhibits to the registration statement of
which this prospectus is a part.
COMMON STOCK
Each holder of common stock is entitled to one vote per share on all matters
to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably any dividends as may be declared by the board of
directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. The
issuance of preferred stock could adversely affect the voting power of holders
of common stock and reduce the likelihood that holders of common stock will
receive dividend payments and payments upon liquidation. The issuance of
preferred stock could have the effect of decreasing the market price of the
common stock. Holders of common stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, to issue from time to time up to an aggregate of 5,000,000 shares of
preferred stock, in one or more series, each of such series to have such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences as shall be determined by the
board of directors. The rights for the holders of common stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future. Issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, 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 us. We have no present
plans to issue any shares of preferred stock.
WARRANTS
As of August 18, 2000, there were warrants outstanding to purchase 17,606
shares of Series B preferred stock at an exercise price of $0.71 per share,
50,000 shares of Series B preferred stock at an
53
<PAGE>
exercise price of $0.75 per share and 26,050 shares of common stock at $3.25 per
share, all of which will convert into warrants to purchase a total of
93,656 shares of common stock at the existing warrant exercise prices, upon the
closing of this offering. In August 2000, we issued 2,065,184 warrants to
purchase shares of our Series E preferred stock at an exercise price of $3.25
per share. These warrants will expire upon the effectiveness of this
registration statement or a firmly written public offering of our common stock
or if we are acquired by another entity prior to February 18, 2002.
CONCURRENT PRIVATE PLACEMENT
In June 2000, we entered into an agreement with Incyte. Our agreement
requires, in the event that we undertake an initial public offering of our
common stock, that Incyte, at our option, purchase, in a private placement that
will close concurrently with that initial public offering, the lesser of:
- $5.0 million of our common stock at the initial public offering; or
- an amount equal to 15% of the total number of shares sold in the initial
public offering.
We intend to exercise this option in connection with this offering, and Incyte
will purchase shares of our common stock in a concurrent private placement.
Incyte has agreed not to sell, transfer, encumber or otherwise dispose of any of
the shares it acquires in the private placement for 180 days following this
offering.
REGISTRATION RIGHTS
After this offering, the holders of 35,181,246 shares of common stock will
be entitled to rights with respect to the registration of those shares under the
Securities Act, under a Third Amended and Restated Investor Rights Agreement
dated August 18, 2000. Under the terms of the investors' rights agreement, if we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, these holders are entitled to notice of the registration
and are entitled, subject to limitations, to include shares therein. Commencing
with the date that is 90 days after this offering, the holders may also require
us to file a registration statement under the Securities Act with respect to
their shares, and we are required to use our best efforts to effect to such
registration. Furthermore, the holders may require us to register their shares
on a registration statement on Form S-3 when that form becomes available to us.
These registration rights terminate on the third anniversary of the effective
date of this offering.
Generally, we are required to bear all registration and selling expenses
incurred in connection with any of the registrations described above. The
registration rights are also subject to conditions and limitations, among them
the right of the underwriters of a public offering to limit the number of shares
included in the registration statement filed in connection therewith.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
DELAWARE ANTI-TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to specified exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder--defined as any
person or entity that is the beneficial owner of at least 15% of a corporation's
voting stock--for a period of three years following the time that the
stockholder became an interested stockholder, unless:
- prior to that time, the corporation's board of directors approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the corporation's voting stock outstanding at the time the
transaction commenced, excluding, for purposes of determining the number
of shares outstanding, those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine
54
<PAGE>
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or
- at or subsequent to that time, the business combination is approved by the
corporation's board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, lease, exchange, mortgage, transfer, pledge or other disposition
involving the interested stockholder and 10% or more of the assets of the
corporation;
- subject to specified exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class of series of
the corporation beneficially owned by the interested stockholder; and
- the receipt by the interested stockholder of the benefit of any loans,
advance, guarantees, pledges or other financial benefits provided by or
through the corporation.
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public 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. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years, did own, 15% or more of the
corporation's outstanding voting stock. This provision could delay, discourage
or prohibit transactions not approved in advance by the board of directors,
including takeover attempts that might result in a premium over the market price
of the common stock.
CERTIFICATE OF INCORPORATION AND BYLAWS
Our amended and restated certificate of incorporation provides that the
board of directors will be divided into three classes of directors, with each
class serving a staggered three-year term. The classification system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of us and may maintain the composition of
the board of directors, as the classification of the board of directors
generally increases the difficulty of replacing a majority of directors. Our
amended and restated certificate of incorporation provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, our amended and restated bylaws provide that
special meetings of the stockholders may be called only by the Chairman of the
Board of Directors, by the chief executive officer or by the board of directors
upon a resolution adopted by a majority of the total number of authorized
directors. Our amended and restated certificate of incorporation also specifies
that the authorized number of directors may be changed only by resolution of the
board of directors and does not include a provision for cumulative voting for
directors. Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one or
more directors. Furthermore, our amended and restated certificate of
incorporation authorizes our board of directors to establish one or more series
of undesignated preferred stock, the terms of which can be determined by the
board of directors at the time of issuance. These and other provisions contained
in our amended and restated certificate of incorporation and amended and
restated bylaws could delay or discourage transactions involving an actual or
potential change in control of Elitra or our management, including transactions
in which stockholders might otherwise receive a
55
<PAGE>
premium for their shares over then current prices. They may also limit the
ability of stockholders to remove our current management or approve transactions
that stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices. Furthermore, since only a
limited number of shares will be available for sale shortly after the offering
because of contractual and legal restrictions on resale described below, sales
of substantial amounts of common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
SALES OF REGISTERED SECURITIES
Upon completion of this offering, we will have shares of common stock
outstanding, assuming no exercise of currently outstanding options or warrants.
Of these shares, the shares sold in this offering, plus any
additional shares sold upon exercise of the underwriters' over-allotment option,
will be freely transferable without restriction under the Securities Act, unless
they are held by our "affiliates" as that term is used under the Securities Act
and the rules and regulations promulgated thereunder. The remaining 39,963,867
shares of common stock held by existing stockholders are restricted shares.
Substantially all of these restricted shares are or will be subject to lock-up
agreements providing that the stockholder will not offer, sell or otherwise
dispose of any shares of common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Chase Securities. Chase
Securities may, in its sole discretion, and at any time without notice, release
all or any portion of the restricted shares subject to lock-up agreements.
Additionally, restricted shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under
Rules 144 or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of lock-up agreements and the provisions of
Rules 144 and 701, additional shares will be available for sale in the public
market as follows:
- no restricted shares will be eligible for immediate sale on the effective
date of this offering;
- 39,963,867 restricted shares, plus approximately shares of
common stock issuable upon exercise of vested stock options, will be
eligible for sale upon expiration of the lock-up agreements 180 days after
the date of this prospectus; and
- the remainder of the restricted shares will be eligible for sale from time
to time thereafter upon expiration of their respective one-year holding
periods and could be sold earlier if the holders exercise any available
registration rights.
The holders of 35,207,296 shares of common stock have the right in specified
circumstances to require us to register their shares under the Securities Act
for resale to the public beginning 90 days from the effective date of this
offering. If those holders, by exercising their demand registration rights,
cause a large number of shares to be registered and sold in the public market,
those sales could have an adverse effect on the market price for the common
stock. If we were required to include in a registration that we initiated shares
held by those holders upon the exercise of their piggyback registration rights,
those sales may have an adverse effect on our ability to raise needed capital.
In addition, we expect to file a registration statement on Form S-8 registering
shares of common stock subject to outstanding stock options or reserved for
issuance under our stock option plans. We expect to file this registration
statement as soon as practicable after the effective date of this offering.
Shares registered under this registration statement will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market, unless the shares are subject to vesting restrictions with us or the
lock-up agreements described above.
57
<PAGE>
RULE 144
In general, under Rule 144 as in effect on the date of this prospectus,
beginning 90 days after the effective date of this offering, an affiliate of us,
or a person (or persons whose shares are aggregated) who has beneficially owned
restricted shares (as defined under Rule 144) for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
greater of one percent of the then outstanding shares of common stock or the
average weekly trading volume of the common stock on The Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Commission. Sales under Rule 144 are subject to
requirements relating to the manner of sale, notice, and the availability of
current public information about us. A person (or persons whose shares are
aggregated) who was not an affiliate of us at any time during the 90 days
immediately preceding the sale and who has beneficially owned restricted shares
for at least two years is entitled to sell their shares under Rule 144(k)
without regard to the limitations described above.
RULE 701
An employee, officer, director or consultant to us who purchased or was
awarded shares or options to purchase shares under a written compensatory plan
or contract is entitled to rely on the resale provisions of Rule 701 under the
Securities Act, which permits affiliates and non-affiliates to sell their
Rule 701 shares without having to comply with the Rule 144 holding period
restrictions, in each case commencing 90 days after the effective date of this
offering. In addition, non-affiliates may sell Rule 701 shares without complying
with the public information, volume and notice provisions of Rule 144.
LOCK-UP AGREEMENTS
We, all of our executive officers and directors and substantially all of our
security holders have agreed or will agree not to offer, sell or otherwise
dispose of any shares of common stock, options or warrants to acquire shares of
common stock or securities exchangeable for or convertible into shares of common
stock for a period of 180 days after the date of this prospectus, without the
prior written consent of Chase Securities, subject to limited exceptions.
We intend to file a registration statement under the Securities Act of 1933
covering the shares of common stock subject to outstanding options or reserved
for issuance under our 1998 Equity Incentive Plan, our Employee Stock Purchase
Plan and our Non-Employee Directors' Stock Option Plan. This registration
statement is expected to be filed within 90 days of effectiveness of the
registration statement covering the shares of common stock in this offering and
will automatically become effective upon filing. Accordingly, shares registered
under that registration statement will, subject to Rule 144 volume limitations
applicable to affiliates and the expiration of a 180-day lock-up period, be
available for sale in the open market, except to the extent that those shares
are subject to our vesting restrictions or the contractual restrictions
described above.
58
<PAGE>
UNDERWRITING
Chase Securities Inc. and U.S. Bancorp Piper Jaffray Inc. are the
representatives of the underwriters. Subject to the terms and conditions of the
underwriting agreement, the underwriters named below, through their
representatives, have severally agreed to purchase from us the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
OF
NAME SHARES
---- ---------
<S> <C>
Chase Securities Inc........................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total....................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us, our counsel and the independent auditors. The
underwriters are committed to purchase all of the shares of common stock offered
by us in this prospectus if they purchase any shares.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share................................... $ $
Total....................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1.3 million.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may re-allow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The representatives have advised us
that the underwriters do not intend to confirm discretionary sales in excess of
5% of the shares of common stock offered in this prospectus.
We have granted to the underwriters a 30-day option to purchase up to
additional shares of common stock at the initial public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of total number of shares the underwriter purchased in the above
table. We will be obligated, pursuant to this option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of common stock offered by us.
59
<PAGE>
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make with respect to these liabilities.
Substantially all of our securityholders and all of our executive officers
and directors have agreed or will agree prior to completion of this offering,
that they will not, without the prior written consent of Chase Securities Inc.,
offer, sell or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock owned by them for a period of 180 days
following the date of this prospectus. We have agreed that we will not, without
the prior written consent of Chase Securities Inc., offer, sell or otherwise
dispose of any shares of common stock, options or warrants to acquire shares of
common stock or securities exchangeable for or convertible into shares of common
stock for a period of 180 days following the date of this prospectus, except
that we may issue shares upon the exercise of options and warrants granted prior
to the date hereof and in connection with our employee stock purchase plan that
we adopted in August 2000. We also may grant additional options or other awards
under our 1998 equity incentive plan and non-employee directors' stock option
plan. Without the prior written consent of Chase Securities Inc., any additional
options granted shall not be exercisable during this 180-day period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common stock at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the shares of common stock. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when common stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the shares of common stock will be
determined by negotiations among us and the representatives. Among the factors
considered in determining the initial public offering price will be prevailing
market and economic conditions, our revenue and earnings, market valuations of
other companies engaged in activities similar to our business operations, our
management and other factors deemed relevant.
In addition, at our request, the underwriters have reserved up to
shares of common stock for sale at the initial public offering price to
our directors, business associates and related persons. The number of shares
available for sale to the general public will be reduced if such persons
purchase the reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.
In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our shares of common stock
on the Nasdaq National Market in accordance with Rule 103 of Regulation M under
the Securities Exchange Act of 1934, as amended. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent
60
<PAGE>
bids are lowered below the passive market maker's bid, however, the passive
market maker must then lower its bid when certain purchase limits are exceeded.
LEGAL MATTERS
Cooley Godward LLP, San Diego, California, will pass upon the validity of
the common stock offered by this prospectus for us. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Shearman & Sterling, Menlo Park, California. Cooley Godward LLP holds 5,000
shares of our common stock and GC&H Investments, an investment fund of the
attorneys of Cooley Godward LLP, holds 30,003 shares of our Series A preferred
stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999, and for the period from July 17, 1997
(inception) through December 31, 1997 and each of the two years in the period
ended December 31, 1999, as set forth in their report, which is included in this
Prospectus and in the registration statement. Our financial statements are
included in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement 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 or the exhibits and
schedules which are part of the registration statement. For further information
with respect to Elitra and the common stock offered by this prospectus, we refer
you to the registration statement and the exhibits and schedules filed as part
of the registration statement. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
website at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the SEC. These periodic reports, proxy
statements and other information will be available for inspection and copying at
the SEC's public reference rooms and the website of the SEC referred to above.
61
<PAGE>
ELITRA PHARMACEUTICALS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Elitra Pharmaceuticals Inc.
We have audited the accompanying balance sheets of Elitra
Pharmaceuticals Inc. as of December 31, 1998 and 1999, and the statements of
operations, stockholders' equity (deficit) and cash flows for the period from
July 18, 1997 (inception) to December 31, 1997 and the years ended December 31,
1998 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Elitra Pharmaceuticals Inc.
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for the period from July 18, 1997 (inception) to December 31, 1997 and the
years ended December 31, 1998 and 1999, in conformity with accounting principles
generally accepted in United States.
ERNST & YOUNG LLP
San Diego, California
March 17, 2000
F-2
<PAGE>
ELITRA PHARMACEUTICALS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
----------- ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 1,305,921 $ 7,883,660 $ 6,247,007
Short-term investments.......................... -- 4,006,171 5,021,814
Accounts receivable............................. -- -- 1,150,000
Prepaid expenses and other current assets....... 28,958 167,839 124,729
----------- ------------ ------------
Total current assets.............................. 1,334,879 12,057,670 12,543,550
Acquired technology rights........................ -- -- 7,275,000
Property and equipment, net....................... 1,206,582 2,617,496 2,820,610
Other assets...................................... 52,937 125,335 277,448
----------- ------------ ------------
Total assets...................................... $ 2,594,398 $ 14,800,501 $ 22,916,608
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities........ $ 303,419 $ 1,048,163 $ 1,248,719
Obligation relating to acquired technology
rights, current............................... -- -- 300,000
Deferred revenue................................ -- -- 862,500
Notes payable, current.......................... 177,773 250,000 250,000
Capital lease obligations, current.............. 127,558 599,102 597,000
----------- ------------ ------------
Total current liabilities......................... 608,750 1,897,265 3,258,219
Notes payable, net of current portion............. 462,211 291,667 166,667
Capital lease obligations, net of current
portion......................................... 364,930 983,168 756,762
Obligation relating to acquired technology rights,
net of current portion.......................... -- -- 1,625,000
Redeemable convertible preferred stock, $.001 par
value, 21,651,063 shares authorized and
21,333,334 shares issued and outstanding at
December 31, 1999 and June 30, 2000; no shares
authorized issued and outstanding pro forma..... -- 16,384,000 16,768,000 $ --
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value,
4,545,456, 4,545,456 and 7,125,585 shares
authorized, issued and outstanding at
December 31, 1998 and 1999 and June 30, 2000,
respectively; 5,000,000 shares authorized, no
shares issued and outstanding pro forma....... 4,545 4,545 7,126 --
Common stock, $.001 par value, 45,000,000 shares
authorized, 3,088,010, 3,791,699 and
4,578,825 shares issued and outstanding at
December 31, 1998 and 1999 and June 30, 2000,
respectively; 60,000,000 shares authorized,
33,037,744 shares issued and outstanding pro
forma......................................... 3,088 3,792 4,579 33,038
Additional paid-in capital...................... 2,958,240 4,529,960 17,203,128 33,949,795
Notes receivable from stockholders.............. (17,360) (49,000) (66,501) (66,501)
Deferred compensation........................... -- (1,274,580) (2,939,672) (2,939,672)
Accumulated other comprehensive income (loss)... -- (9,931) 364 364
Accumulated deficit............................. (1,790,006) (7,960,385) (13,867,064) (13,867,064)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit).............. 1,158,507 (4,755,599) 341,960 $ 17,109,960
----------- ------------ ------------ ============
Total liabilities and stockholders' equity
(deficit)....................................... $ 2,594,398 $ 14,800,501 $ 22,916,608
=========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
ELITRA PHARMACEUTICALS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1997 YEARS ENDED
(INCEPTION) TO DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ------------------------- -------------------------
1997 1998 1999 1999 2000
-------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Collaboration revenue........ $ -- $ -- $ -- $ -- $ 287,501
Expenses:
Research and development..... 29,265 1,155,929 4,379,695 1,423,913 3,874,386
General and administrative... 10,624 593,793 1,672,541 595,906 2,115,639
------------ ----------- ----------- ----------- -----------
Total operating expenses....... 39,889 1,749,722 6,052,236 2,019,819 5,990,025
------------ ----------- ----------- ----------- -----------
Loss from operations........... (39,889) (1,749,722) (6,052,236) (2,019,819) (5,702,524)
Interest expense............... (942) (34,783) (142,245) (59,992) (119,640)
Interest income................ 176 35,154 408,102 37,610 299,485
------------ ----------- ----------- ----------- -----------
Net loss....................... (40,655) (1,749,351) (5,786,379) (2,042,201) (5,522,679)
Imputed dividend on Redeemable
Series B preferred stock..... -- -- (384,000) -- (384,000)
------------ ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders................. $ (40,655) $(1,749,351) $(6,170,379) $(2,042,201) $(5,906,679)
============ =========== =========== =========== ===========
Historical net loss per share,
basic and diluted............ $ (0.11) $ (2.55) $ (4.52) $ (1.71) $ (2.93)
Weighted average shares
outstanding, basic and
diluted...................... 379,000 685,000 1,366,000 1,193,000 2,014,000
Pro forma net loss per share,
basic and diluted............ $ (0.34) $ (0.21)
Pro forma weighted average
shares outstanding, basic and
diluted...................... 18,356,000 28,496,000
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
ELITRA PHARMACEUTICALS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- -------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
--------- -------- --------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization at July 18,
1997................................ -- $ -- 1,333,000 $1,333 $ -- $ (1,333) $ --
Net loss and comprehensive loss..... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- -------- -----------
BALANCE AT DECEMBER 31, 1997.......... -- -- 1,333,000 1,333 -- (1,333) --
Collection on note receivable from
stockholder....................... -- -- -- -- -- 1,333 --
Issuance of founders' shares of
common stock at $.001 per share
for cash.......................... -- -- 1,407,000 1,407 -- -- --
Issuance of common stock at $.001
per share in exchange for a
technology license................ -- -- 100,010 100 -- -- --
Issuance of Series A Preferred Stock
for cash and conversion of notes
payable, net of issuance costs of
$54,326........................... 4,545,456 4,545 -- -- 2,941,128 -- --
Issuance of common stock for
promissory notes.................. -- -- 248,000 248 17,112 (17,360) --
Net loss and comprehensive loss..... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- -------- -----------
BALANCE AT DECEMBER 31, 1998.......... 4,545,456 4,545 3,088,010 3,088 2,958,240 (17,360) --
Issuance costs related to issuance
of redeemable preferred stock..... -- -- -- -- (60,893) -- --
Issuance of restricted common stock
for cash.......................... -- -- 250,000 250 17,250 -- --
Exercise of stock options for
cash.............................. -- -- 1,689 2 117 -- --
Issuance of common stock for
stockholder notes................. -- -- 452,000 452 31,188 (31,640) --
Deferred stock compensation related
to stock options and restricted
stock............................. -- -- -- -- 1,557,321 -- (1,557,321)
Amortization of deferred stock
compensation...................... -- -- -- -- -- -- 280,907
Issuance of warrants to lessor...... -- -- -- -- 28,571 -- --
Forfeiture of stock options......... -- -- -- -- (1,834) -- 1,834
Imputed dividend on Redeemable
Preferred Stock sold in June
1999.............................. -- -- -- -- -- -- --
Unrealized losses on short-term
investments....................... -- -- -- -- -- -- --
Net loss............................ -- -- -- -- -- -- --
Comprehensive loss.................. -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- -------- -----------
BALANCE AT DECEMBER 31, 1999.......... 4,545,456 4,545 3,791,699 3,792 4,529,960 (49,000) (1,274,580)
Issuance of common stock for cash
and notes receivable
(unaudited)....................... -- -- 787,126 787 54,312 (17,501) --
Issuance of Series C Preferred Stock
for cash (unaudited).............. 1,041,667 1,042 -- -- 5,000,295 -- --
Issuance of Series D Preferred Stock
for technology rights
(unaudited)....................... 1,538,462 1,539 -- -- 4,998,461 -- --
Deferred compensation related to
stock options and restricted stock
(unaudited)....................... -- -- -- -- 2,620,100 -- (2,620,100)
Amortization of deferred
compensation (unaudited).......... -- -- -- -- -- -- 955,008
Imputed dividend on Redeemable
Preferred Stock sold in June 1999
(unaudited)....................... -- -- -- -- -- -- --
Unrealized gains on short-term
investments (unaudited)........... -- -- -- -- -- -- --
Net loss (unaudited)................ -- -- -- -- -- -- --
Comprehensive loss (unaudited)...... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- -------- -----------
Balance at June 30, 2000
(unaudited)......................... 7,125,585 $7,126 4,578,825 $4,579 $17,203,128 $(66,501) $(2,939,672)
========= ====== ========= ====== =========== ======== ===========
SEE ACCOMPANYING NOTES.
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED EQUITY
INCOME (LOSS) DEFICIT (DEFICIT)
------------- ------------ -------------
<S> <C> <C> <C>
Initial capitalization at July 18,
1997................................ $ -- $ -- $ --
Net loss and comprehensive loss..... -- (40,655) (40,655)
------- ------------ -----------
BALANCE AT DECEMBER 31, 1997.......... -- (40,655) (40,655)
Collection on note receivable from
stockholder....................... -- -- 1,333
Issuance of founders' shares of
common stock at $.001 per share
for cash.......................... -- -- 1,407
Issuance of common stock at $.001
per share in exchange for a
technology license................ -- -- 100
Issuance of Series A Preferred Stock
for cash and conversion of notes
payable, net of issuance costs of
$54,326........................... -- -- 2,945,673
Issuance of common stock for
promissory notes.................. -- -- --
Net loss and comprehensive loss..... -- (1,749,351) (1,749,351)
------- ------------ -----------
BALANCE AT DECEMBER 31, 1998.......... -- (1,790,006) 1,158,507
Issuance costs related to issuance
of redeemable preferred stock..... -- -- (60,893)
Issuance of restricted common stock
for cash.......................... -- -- 17,500
Exercise of stock options for
cash.............................. -- -- 119
Issuance of common stock for
stockholder notes................. -- -- --
Deferred stock compensation related
to stock options and restricted
stock............................. -- -- --
Amortization of deferred stock
compensation...................... -- -- 280,907
Issuance of warrants to lessor...... -- -- 28,571
Forfeiture of stock options......... -- -- --
Imputed dividend on Redeemable
Preferred Stock sold in June
1999.............................. -- (384,000) (384,000)
Unrealized losses on short-term
investments....................... (9,931) -- (9,931)
Net loss............................ -- (5,786,379) (5,786,379)
-----------
Comprehensive loss.................. -- -- (5,796,310)
------- ------------ -----------
BALANCE AT DECEMBER 31, 1999.......... (9,931) (7,960,385) (4,755,599)
Issuance of common stock for cash
and notes receivable
(unaudited)....................... -- -- 37,598
Issuance of Series C Preferred Stock
for cash (unaudited).............. -- -- 5,001,337
Issuance of Series D Preferred Stock
for technology rights
(unaudited)....................... -- -- 5,000,000
Deferred compensation related to
stock options and restricted stock
(unaudited)....................... -- -- --
Amortization of deferred
compensation (unaudited).......... -- -- 955,008
Imputed dividend on Redeemable
Preferred Stock sold in June 1999
(unaudited)....................... -- (384,000) (384,000)
Unrealized gains on short-term
investments (unaudited)........... 10,295 -- 10,295
Net loss (unaudited)................ -- (5,522,679) (5,522,679)
-----------
Comprehensive loss (unaudited)...... -- -- (5,512,384)
------- ------------ -----------
Balance at June 30, 2000
(unaudited)......................... $ 364 $(13,867,064) $ 341,960
======= ============ ===========
SEE ACCOMPANYING NOTES.
</TABLE>
F-5
<PAGE>
ELITRA PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED SIX MONTHS ENDED
JULY 18, 1997 DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------- -------------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $(40,655) $(1,749,351) $(5,786,379) $(2,042,201) $(5,522,679)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued in exchange for a
technology license......................... -- 100 -- -- --
Amortization of deferred interest expense.... -- -- 540 -- 6,445
Amortization of acquired technology rights... -- -- -- -- 25,000
Depreciation of property and equipment....... -- 67,371 302,895 112,500 283,522
Amortization of deferred compensation........ -- -- 280,907 75,714 955,008
Changes in operating assets and liabilities:
Prepaid expenses and other current
assets................................... (2,826) (26,132) (138,881) (19,778) 43,110
Accounts receivable........................ -- -- -- -- (1,150,000)
Deferred revenue........................... -- -- -- -- 862,500
Other assets............................... (18,939) (33,998) (72,398) (24,574) (152,113)
Accounts payable and accrued liabilities... 21,615 281,804 744,744 29,939 200,556
-------- ----------- ----------- ----------- -----------
Net cash used in operating activities.......... (40,805) (1,460,206) (4,668,572) (1,868,400) (4,448,651)
-------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of short-term investments............ -- -- (4,016,102) -- (1,015,643)
Purchases of property and equipment............ (11,624) (723,930) (410,326) (181,908) (455,636)
Purchase of technology rights.................. -- -- -- -- (375,000)
Collection on note receivable from
stockholder.................................. -- 1,333 -- -- --
-------- ----------- ----------- ----------- -----------
Net cash used in investing activities.......... (11,624) (722,597) (4,426,428) (181,908) (1,846,279)
-------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Issuance of common stock for cash.............. -- 1,407 17,619 17,501 37,598
Issuance of preferred stock for cash, net of
issuance costs............................... -- 2,570,935 15,039,107 16,000,000 5,001,337
Proceeds from convertible bridge notes and note
payable...................................... 100,000 1,048,055 1,010,016 -- --
Payments on notes payable...................... -- (133,333) (208,333) -- (125,000)
Payments on capital lease obligations.......... -- (45,911) (185,670) (66,679) (255,658)
-------- ----------- ----------- ----------- -----------
Net cash provided by financing activities...... 100,000 3,441,153 15,672,739 15,950,822 4,658,277
-------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 47,571 1,258,350 6,577,739 13,900,514 (1,636,653)
Cash and cash equivalents at beginning of
period....................................... -- 47,571 1,305,921 1,305,921 7,883,660
-------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period..... $ 47,571 $ 1,305,921 $ 7,883,660 $15,206,435 $ 6,247,007
======== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest......................... $ 942 $ 34,783 $ 141,705 $ 23,926 $ 50,898
======== =========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of property and equipment through
capital lease obligations.................... $ -- $ 538,399 $ 1,303,483 $ -- $ 31,000
======== =========== =========== =========== ===========
Issuance of preferred stock for technology
rights....................................... $ -- $ -- $ -- $ -- $ 5,000,000
======== =========== =========== =========== ===========
Conversion of notes payable to redeemable
preferred stock.............................. $ -- $ 374,738 $ 900,000 $ -- $ --
======== =========== =========== =========== ===========
Issuance of common stock for notes receivable
from stockholders............................ $ 1,333 $ 17,360 $ 31,640 $ -- $ 17,501
======== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION OF BUSINESS
Elitra Pharmaceuticals Inc. (the "Company") was incorporated in California
on July 18, 1997 under the name of Rajyabiotics Corporation. The Company
commenced operations in November 1997. On February 24, 1998, the Company was
reincorporated in Delaware and on October 20, 1998, the Company changed its name
to Elitra Pharmaceuticals, Inc.
The Company is a leader in antimicrobial functional genomics. Elitra uses
proprietary technologies and molecular biology tools to identify the genes that
are essential for bacteria and fungi to grow and survive, called essential
genes. The Company intends to develop and commercialize novel antibiotic and
antifungal drugs that inhibit the products of these essential genes.
The Company is developing a bioinformatics database to help prioritize our
drug targets for our drug discovery programs. Elitra believes this comprehensive
bioinformatics database represents a major advance in our antimicrobial drug
target selection and validation capabilities. The Company has acquired a large
and diverse in-house chemical library and are actively conducting high
throughput screening against a select group of essential drug targets, and plans
to develop and market antimicrobial drugs both internally and in collaboration
with corporate partners.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The financial information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited and includes all adjustments, consisting
only of normal recurring adjustments, that the Company's management considers
necessary for a fair presentation of the Company's operating results and cash
flows for such periods. Results for the six month period ended June 30, 2000 are
not necessarily indicative of results to be expected for the full fiscal year
2000 or any future period.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers instruments purchased with an original maturity of
three months or less, principally money market accounts and U.S. government and
corporate debt securities, to be cash equivalents.
All short-term investment securities are classified as available-for-sale,
and are carried at fair value. Unrealized gains and losses, if any, are reported
in a separate component of stockholders' equity. The cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
F-7
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and short-term investments are financial
instruments, which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and marketable debt securities of financial institutions and
corporations with strong credit ratings. The Company also has established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are reviewed periodically and may be modified to
take advantage of trends in yields and interest rates. Pursuant to Company
policy, the Company has historically held the investments to maturity. However,
the Company has the ability to sell these investments before maturity and has
therefore classified the investments as available for sale. The Company has not
experienced any significant losses on its investments.
FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts payable
and accrued liabilities, are carried at cost, which management believes
approximates fair value because of the short-term maturity of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful lives of the
assets (generally three to seven years) or the term of the applicable lease.
ACQUIRED TECHNOLOGY RIGHTS
In accordance with APB 17, ACCOUNTING FOR INTANGIBLE ASSETS, the acquired
technology rights (Note 10) are recorded at cost and will be amortized over the
estimated useful life of the technology of three years. For purposes of
evaluating impairment of the acquired technology rights, the Company compares
the carrying values and estimated future cash flows of the acquired rights.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, if indicators of impairment exist, the Company
assesses the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, the Company will value
the asset at fair value. While the Company's current and historical operating
and cash flow losses are indicators of impairment, the Company believes the
future cash flows to be received from the long-lived assets will exceed the
assets' carrying value, and accordingly the Company has not recognized any
impairment losses through June 30, 2000.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
F-8
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Strategic alliance revenues are earned and recognized on a percentage of
completion basis as research costs are incurred in accordance with the
provisions of each strategic alliance agreement. Fees paid to initiate research
projects are deferred and amortized over the project period in accordance with
SEC Staff Accounting Bulletin (SAB) No. 101. Milestone payments are recognized
as revenue upon the completion of the milestone. Revenue from grants is
recognized on a percentage of completion basis as related costs are incurred.
The Company recognizes revenue only on payments that are non-refundable, and
defers revenue recognition until performance obligations have been completed.
None of the strategic alliances or research grants require scientific
achievement as a performance obligation.
INCOME TAXES
Current income tax expense (benefit) is the amount of income taxes expected
to be payable (receivable) for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax basis of assets and liabilities, as well as the
expected future tax benefit to be derived from tax loss and credit
carryforwards. Deferred income tax expense is generally the net change during
the year in the deferred income tax asset or liability. Valuation allowances are
established when realizability of deferred tax assets is uncertain. The effect
of tax rate changes is reflected in tax expense (benefit) during the period in
which such changes are enacted.
STOCK-BASED COMPENSATION
As permitted by SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations ("APB 25")
in accounting for its employee stock options. Under APB 25, when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant, no compensation expense is recognized.
When the exercise price of employee or director stock options is less than
the deemed fair value of the underlying stock as estimated by the Company's
management for financial presentation purposes in accordance with APB 25 or on
the grant date, the Company records deferred compensation for the difference.
The deferred compensation is amortized to expense over the vesting period of the
options using an accelerated amortization methodology in accordance with FASB
Interpretation No. 28 ("FIN 28"). In 1999 and 2000, the Company recognized
deferred stock compensation related to certain stock option grants and sales of
restricted stock (see Note 7). Options or stock awards issued to non-employees
and consultants are recorded at their fair value using the Black-Scholes model
as determined in accordance with SFAS No. 123 and EITF 96-18 and recognized over
the related service period.
SOFTWARE COSTS
Purchased software is capitalized at cost and amortized over the estimated
useful life, generally three years. The Company has no significant internally
developed software.
F-9
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires that all components
of comprehensive income (loss), including net income (loss), be reported in the
financial statements in the period in which they are recognized. The Company has
disclosed its comprehensive loss as a component of its Statement of
Stockholders' Equity (Deficit).
NET LOSS PER SHARE
Basic and diluted net loss per common share presented in conformity with
SFAS No. 128, EARNINGS PER SHARE, and SAB 98, for all periods presented. Under
the provisions of SAB 98, common stock and convertible preferred stock that has
been issued or granted for nominal consideration prior to the anticipated
effective date of the initial public offering must be included in the
calculation of basic and diluted net loss per common share as if these shares
had been outstanding for all periods presented. To date, the Company has not
issued or granted shares for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the year ended December 31, 1999 and the six
months ended June 30, 2000, as described above, and also gives effect to the
assumed conversion of preferred stock which will automatically convert to common
stock immediately prior to the completion of the Company's initial public
offering (using the "as if converted" method) from the original date of
issuance.
F-10
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1997
(INCEPTION) YEARS ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------- -------------------------
1997 1998 1999 1999 2000
------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
stockholders.................. $(40,655) $(1,749,351) $(6,170,379) $(2,042,201) $(5,906,679)
Basic and diluted net loss per
share......................... $ (0.11) $ (2.55) $ (4.52) $ (1.71) $ (2.93)
======== =========== =========== =========== ===========
Weighted-average shares used in
computing historical net loss
per share, basic and
diluted....................... 379,000 685,000 1,366,000 1,193,000 2,014,000
Pro forma:
Net loss attributable to
common stockholders......... $(6,170,379) $(5,906,679)
=========== ===========
Pro forma net loss per share,
basic and diluted
(unaudited)................. $ (0.34) $ (0.21)
=========== ===========
Shares used above 1,366,000 2,014,000
Pro forma adjustment to reflect
weighted-average effect of
assumed conversion of
convertible preferred stock
(unaudited)................... 16,990,000 26,482,000
----------- -----------
Shares used in computing pro
forma net loss per share,
basic and diluted
(unaudited)................... 18,356,000 28,496,000
</TABLE>
The Company has excluded all convertible preferred stock, outstanding stock
options and warrants, and shares subject to repurchase from the calculation of
diluted loss per common share because all such securities are antidilutive for
all applicable periods presented. The total number of shares excluded from
calculations of diluted net loss per share, prior to application of the treasury
stock method for options and warrants, was 0, 4,785,000, 26,914,000, and
30,041,087 for the period from July 18, 1997 (inception) to December 31, 1997,
the years ended December 31, 1998 and 1999, and the six months ended June 30,
2000, respectively. Such securities, had they been diluted, would have been
included in the computation of diluted net loss per share.
F-11
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA STOCKHOLDERS' EQUITY
Unaudited pro forma stockholders' equity at June 30, 2000 includes the
conversion of all outstanding shares of preferred stock into common stock.
SEGMENT REPORTING
SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, requires the use of a management approach in identifying and
disclosing financial information about segments of an enterprise. Management has
determined that the Company operates in one business segment.
NEW ACCOUNTING PRONOUNCEMENTS
The Company expects to adopt SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, effective January 1, 2001. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of the SFAS No. 133
will have a significant effect on its results of operations or financial
position.
In March 2000, the Financial Accounting Standards Board issued Financial
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation--an interpretation of APB Opinion No. 25". FIN 44 clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees," the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 became effective on July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occur after either
December 15, 1998 or January 12, 2000. Management believes that FIN 44 will not
have a material effect on our financial position or results of operations.
2. BALANCE SHEET DETAILS
INVESTMENTS
The following is a summary of the Company's cash, cash equivalents and
short-term investments, all of which mature within one year of the balance sheet
date:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
------------------------------------------ ---------------------------------------
GROSS GROSS
UNREALIZED ESTIMATED UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE COST GAINS FAIR VALUE
----------- -------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash................... $ 3,146,211 $ -- $ 3,146,211 $ 6,121,043 $ -- $ 6,121,043
Corporate debt
securities........... 8,753,551 (9,931) 8,743,620 5,147,414 364 5,147,778
----------- ------- ----------- ----------- ---- -----------
$11,899,762 $(9,931) $11,889,831 $11,268,457 $364 $11,268,821
=========== ======= =========== =========== ==== ===========
</TABLE>
F-12
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
2. BALANCE SHEET DETAILS (CONTINUED)
There were no realized gains or losses on sales of available-for-sale
securities for the years ended December 31, 1998 and 1999 or the six months
ended June 30, 2000. The gross unrealized gains and losses are included in
comprehensive loss. The unrealized gains and losses had no cash effect and
therefore are not reflected in the statement of cash flows.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Laboratory equipment...................... $1,001,768 $2,122,125 $2,431,998
Office furniture, computers and
equipment............................... 272,185 756,289 927,409
Leasehold improvements.................... -- 109,348 114,991
---------- ---------- ----------
1,273,953 2,987,762 3,474,398
Less accumulated depreciation............. (67,371) (370,266) (653,788)
---------- ---------- ----------
$1,206,582 $2,617,496 $2,820,610
========== ========== ==========
</TABLE>
3. LEASE COMMITMENTS
The Company leases its facilities under noncancelable operating lease
agreements, which expire in September 2003. Rent expense was $1,898, $78,621 and
$312,262, for the period from July 18, 1997 (inception) to December 31, 1997 and
the years ended December 31, 1998 and 1999, respectively. Rent expense for the
six months ended June 30, 1999 and 2000 was $123,524 and $224,962, respectively.
Annual future minimum lease payments for operating and capital leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ---------
<S> <C> <C>
Years ending December 31,
2000.................................................. $ 385,458 $ 627,133
2001.................................................. 390,093 561,969
2002.................................................. 394,926 466,241
2003.................................................. 298,989 174,120
---------- ---------
Total minimum lease payments.......................... $1,469,466 1,829,463
==========
Less amounts representing interest.................... (247,193)
---------
Present value of capital lease obligations............ 1,582,270
Less current portion.................................. (599,102)
---------
Capital lease obligations, net of current portion..... $ 983,168
=========
</TABLE>
F-13
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
3. LEASE COMMITMENTS (CONTINUED)
Property and equipment acquired through capital lease financing have a net
book value of $536,700, $1,637,125 and $1,584,444 which is net of accumulated
depreciation of $24,000, $117,152, and $317,078 at December 31, 1998 and 1999
and June 30, 2000, respectively.
In conjunction with a 1999 capital lease agreement of $1.0 million, the
Company issued warrants to the lessor to purchase 67,606 shares of Series B
preferred stock at a range of $.71 to $.75 per share. The fair value of the
warrants was recorded as a discount on the related debt and is being amortized
as additional interest expense over the period of the debt. In July 2000, the
Company issued a warrant to purchase 26,050 shares of common stock at $3.25 per
share in conjunction with a new equipment lease facility.
In April 2000, the Company signed a new lease agreement for a research
facility that requires monthly payments of approximately $22,000 through
September, 2003.
4. NOTE PAYABLE
The Company has a $750,000 credit facility that has been used toward the
purchase of certain equipment. As of December 31, 1999 and June 30, 2000, the
Company has $541,667 and $416,667, respectively, outstanding under the facility.
Equal monthly principal installments plus interest at the prime rate plus .50%
(10.00% at June 30, 2000) commenced on March 4, 1999. Unpaid principal and any
unpaid accrued interest are due in March 2002. The credit facility is secured by
substantially all the fixed assets of the Company, and excludes the intellectual
property. The carrying value of the Company's obligation under the note payable
agreement approximates its fair value and the implicit interest rate
approximates the Company's borrowing rate.
The principal payments of the note payable are due as follows:
<TABLE>
<CAPTION>
<S> <C>
Years ending December 31,
2000........................................................ $250,000
2001........................................................ 250,000
2002........................................................ 41,667
--------
$541,667
========
</TABLE>
5. LICENSE AGREEMENT
In April 1998, the Company entered into an exclusive license agreement with
San Diego State University Foundation ("the Foundation") related to the
Company's core gene discovery technology. As consideration for the license, the
Company paid $25,000 in cash and issued 100,010 shares of common stock valued at
$100. The Company is required to make additional payments upon the achievement
of certain milestones, as well as royalties upon any commercial sales from
products related to the license agreement.
F-14
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
6. RELATED PARTY TRANSACTIONS
As of December 31, 1999 and June 30, 2000, the Company has received
promissory notes totaling $49,000 and $66,501, respectively, from stockholders
as payment for the purchase of shares of common stock. The full-recourse
promissory notes require monthly payments and bear interest at interest rates
ranging from 5.46% to 8% per annum and are secured by the related shares of
common stock. Unpaid principal and interest are due between October 2003 and
2008.
7. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CHARACTERISTICS AND TERMS APPLICABLE TO PREFERRED STOCK
The Company has Series A, B, C and D preferred stock (the "Preferred Stock")
outstanding at June 30, 2000. Each share of preferred stock is automatically
convertible into common stock upon the earlier of: a) the date specified by the
holders of at least sixty-six and two-thirds percent of the outstanding shares
of Series A and B preferred stock, voting together as a single class; b) the
closing of a firm underwritten public offering in which the equity of the
Company is valued at no less than $80 million in the aggregate; or
c) immediately prior to the closing of any acquisition. The Series A, B and D
preferred stock contain certain anti-dilution provisions. Each share of
outstanding preferred stock is entitled to one vote for each share of common
stock into which it would be converted. The Preferred Stock is convertible at
any time into common stock of the Company at a conversion ratio (one to one)
determined based on a formula provided in the Company's Restated Certificate of
Incorporation. The Company has reserved the full number of shares of common
stock issuable upon conversion of the Preferred Stock.
A summary of preferred stock issued and outstanding as of June 30, 2000 is
as follows:
<TABLE>
<CAPTION>
SHARES LIQUIDATION PREFERENCE
---------- ----------------------
<S> <C> <C>
Series A...................................... 4,545,456 $ 3,000,000
Series B...................................... 21,333,334 16,000,000
Series C...................................... 1,041,667 5,000,000
Series D...................................... 1,538,462 5,000,001
---------- -----------
28,458,919 $29,000,001
========== ===========
</TABLE>
REDEEMABLE SERIES B PREFERRED STOCK
During 1999, the Company issued 21,333,334 shares of Redeemable Series B
preferred stock at $.75 per share for aggregate proceeds of $16,000,000. The
holders of Series B preferred stock are entitled to receive non-cumulative
dividends of 8% of the original purchase price per share, when, as and if
declared by the Board of Directors, prior to and in preference to common
stockholders. The Series B preferred stock has a liquidation preference of $.75
per share, in addition to any declared but unpaid dividends. Within sixty days
prior to June 9, 2004, the holders of the Series B preferred stock may elect to
have the Company redeem the Series B preferred shares at an amount of $.75 per
share, plus any declared and unpaid dividends on such shares, plus an amount
equal to 8% of the issue price compounded annually beginning after the second
anniversary of the issuance date through the date of redemption. The Company has
recorded imputed dividends of $768,000 related to this requirement.
F-15
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
7. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
The holders of Series A, C and D preferred stock are entitled to receive
non-cumulative dividends of 8% of the original purchase price per share, when,
as and if declared by the Board of Directors, prior to and in preference to
common stockholders. In the event of a liquidation of the Company, Convertible
Series A, C and D preferred stockholders are entitled to a liquidation
preference of $.66, $4.80, and $3.25, per share, plus any declared but unpaid
dividends on such shares.
COMMON STOCK
The majority of the outstanding shares of common stock have been issued to
the Company's founders and employees. The Company has sold restricted common
stock during 1999 that vests over the service period of the employee, and is
subject to repurchase at the original purchase price upon certain events.
STOCK OPTIONS
In July 1998, the Company adopted the 1998 Stock Incentive Plan (the "1998
Plan") under which a total of 3,688,425 shares of common stock have been
reserved for future issuance. The 1998 Plan provides for the grant of incentive
stock options, nonstatutory stock options, or the issuance of restricted stock
to employees, directors and consultants. Options granted under the 1998 Plan
generally expire no later than ten years from the date of grant (five years for
a 10% stockholder). Options generally vest and become fully exercisable over a
period of four years. The exercise price of incentive stock options must be
equal to at least the fair value of the Company's common stock on the date of
grant, and the exercise price of non-statutory stock options may be no less than
85% of the fair value of the Company's common stock on the date of grant.
The following table summarizes stock option activity under the 1998 Plan and
related information through June 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1997................... -- $ --
Granted.......................................... 487,500 $.07
Exercised........................................ (248,000) $.07
---------
Outstanding at December 31, 1998................... 239,500 $.07
Granted.......................................... 1,188,500 $.07
Exercised........................................ (453,689) $.07
Cancelled........................................ (7,123) $.07
---------
Outstanding at December 31, 1999................... 967,188 $.07
Granted (unaudited).............................. 1,360,000 $.09
Exercised (unaudited)............................ (787,126) $.07
Cancelled (unaudited)............................ (25,500) $.07
---------
Outstanding at June 30, 2000 (unaudited)........... 1,514,562 $.08
=========
</TABLE>
F-16
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
7. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The weighted-average fair value of options granted during 1998, 1999 and
2000 was $.04 per share. At December 31, 1999 and June 30, 2000, 246,883 and
462,568 options to purchase common stock were vested and exercisable,
respectively, and 1,069,548 and 435,048 shares, respectively, remain available
for future grant under the 1998 Plan. The weighted-average remaining contractual
life of the options outstanding at June 30, 2000 is approximately 9.4 years.
Adjusted pro forma information regarding net loss is required by SFAS 123,
and has been determined as if the Company had accounted for its stock options
under the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the Black-Scholes value pricing model with
the following assumptions for 1998, 1999 and 2000: risk-free interest rate of
6.0%; dividend yield of 0%; estimated market volatility of 70%; and a
weighted-average expected life of the options of four years. For purposes of
adjusted pro forma disclosures, the estimated fair value of the options is
amortized to expense over the vesting period. The adjusted pro forma net loss
available to common stockholders for the years ended December 31, 1998 and 1999
and the six months ended June 30, 2000 was $(1,751,917), $(6,172,437) and
$(5,910,092), respectively and the pro forma net loss per share for these
periods was ($2.55), ($4.52), and ($2.93) per share, respectively. The pro forma
effect on net loss may not be representative of the pro forma effect on net loss
in future years because it reflects less than four years of vesting and changes
in the subjective input assumptions may effect the fair value of future option
grants.
DEFERRED COMPENSATION
The Company has recorded a total of $4,177,421 of deferred compensation for
options granted and restricted stock sold during 1999 and 2000, representing the
difference at the date of grant between the option exercise price or stock
purchase price and the estimated fair value of the underlying stock as estimated
by the Company's management for financial statement presentation purposes in
accordance with APB No. 25. The Company is amortizing the deferred compensation
over the vesting period of the options on an accelerated amortization
methodology. The Company recorded $280,907 of compensation expense during the
year ended December 31, 1999, and $955,008 in the six months ended June 30,
2000.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
At June 30, 2000, the Company has reserved shares of common stock for future
issuance as follows:
<TABLE>
<S> <C>
Conversion of convertible preferred stock................... 7,125,585
Conversion of Redeemable Series B preferred stock........... 21,333,334
Warrants to purchase Redeemable Series B preferred stock.... 67,606
Stock options............................................... 1,949,610
----------
30,476,135
==========
</TABLE>
8. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1998 and 1999 are shown
F-17
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
below. A valuation allowance of $778,000 and $3,303,000 as of December 31, 1998
and 1999, respectively, has been recognized as realization of such assets is
uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 675,000 $ 2,848,000
Research and development credits................... 110,000 517,000
Other, net......................................... 7,000 29,000
--------- -----------
Total deferred tax assets............................ 792,000 3,394,000
Deferred tax liabilities:
Depreciation....................................... (14,000) (91,000)
--------- -----------
Total deferred tax liabilities....................... (14,000) (91,000)
Valuation allowance.................................. (778,000) (3,303,000)
--------- -----------
Net deferred tax assets.............................. $ -- $ --
========= ===========
</TABLE>
At December 31, 1999, the Company has federal and state tax net operating
loss carryforwards of approximately $6,987,113 and $7,007,806, respectively. The
federal and state tax loss carryforwards will begin to expire in 2012 and 2005,
respectively, unless previously utilized.
The Company also has federal and state research and development tax credit
carryforwards of approximately $381,546 and $209,851, respectively, which will
begin to expire in 2011 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, there will be an
annual limitation on the use of the Company's net operating loss and credit
carryforwards due to a cumulative change in ownership of more than 50% which
occurred in 1998 and 1999.
9. 401(k) DEFERRED COMPENSATION PLAN
The Company's employees are eligible to participate in a 401(k) deferred
compensation plan sponsored by the Company. Company contributions are
discretionary. The Company has not made any contributions to the plan since its
inception.
10. SUBSEQUENT EVENTS
COLLABORATIVE AGREEMENT WITH LG CHEMICAL LTD.
In May 2000, the Company established a five-year collaboration with LG
Chemical Ltd. ("LG Chem"), a chemical manufacturing company with annual sales of
approximately $4 billion in 1995, to discover, develop and commercialize
products for the treatment or prevention of human bacterial or fungal
infections. We will select optimal drug targets and screen compound libraries
against a subset of those drug targets selected by LG Chem during the research
term. LG Chem will provide the financial support
F-18
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED)
for the initial phases of drug discovery and development at both companies. Once
a clinical candidate is generated, LG Chem will share with us responsibility for
and expenses of developing compounds resulting from the collaboration. The
Company will retain exclusive marketing rights in North America and both parties
will jointly share marketing rights in Western Europe. LG Chem retains exclusive
marketing rights in all territories outside of North America and Western Europe.
Upon entering into the collaboration, LG Chem purchased $5 million of our
preferred stock and committed to annual research funding during the research
term. LG Chem will also make payments to Elitra upon achievement of development
milestones. Both parties have limited rights to terminate the research at the
end of the third year of the collaboration.
AGREEMENT WITH INCYTE GENOMICS, INC.
In June 2000, the Company acquired the source code and microbial sequence
data unique to the PathoSeq Database, and licensed related source code,
software, patent rights and the trademark for PathoSeq from Incyte. Under the
terms of our agreement, the Company has the right to modify the licensed
software for internal purposes, and to add Elitra's proprietary antimicrobial
genomics information to the data included in PathoSeq. The Company also obtained
the right from Incyte to market and sell the PathoSeq Database. For a period of
two years, Incyte retained the right of first refusal to be the exclusive
distributor of the PathoSeq Database in the event the Company elects to offer it
over the Internet.
In exchange for the exclusive software, source code and database licenses,
Incyte received $5.0 million of our preferred stock. The Company agreed to make
additional quarterly payments beginning in 2001 and to purchase future services
from Incyte, and they agreed to make future equity investments in us. Pursuant
to our agreement, in August 2000, Incyte purchased $2.0 million of Series E
preferred stock. Our agreement also requires, in the event that the Company
undertakes an initial public offering of common stock, that Incyte, at Elitra's
option, purchase, in a private placement that will close concurrently with that
initial public offering, the lesser of:
- $5.0 million of common stock at the initial public offering; or
- an amount equal to 15% of the total number of shares sold in the initial
public offering.
MODIFICATION OF CONSULTING AGREEMENTS
In June 2000, the Company modified the consulting agreements with all of its
outside consultants. Under the modified consulting agreements, the consultants
agreed to pay a substantial financial penalty if they did not fulfill their
performance obligations under the agreements. The amount of the penalty was
determined for each consultant based on the intrinsic value of the unvested
restricted common stock previously issued to consultants based on the original
purchase price and the fair value of the common stock as estimated by the
Company's management for financial reporting purposes on the date of
modification. Each consultant had already vested in a portion of the original
restricted common stock based upon the services already provided, and the
amounts related to the vested common stock was expensed. The deferred
consultants' compensation related to unvested stock, aggregating $477,000 was
recorded in June 2000 and will be amortized ratably over the contracted service
periods.
F-19
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED)
PRIVATE PLACEMENT
In August 2000, the Company completed the sale of 6,722,327 shares of
Series E Preferred Stock at $3.25 per share for total proceeds of
$21.8 million, including the sale of shares to Incyte. The rights and
preferences related to the Series E preferred stock are substantially the same
as the rights and preferences assigned to the Series A preferred stock. Each
investor in a share of Series E preferred stock also received a warrant to
purchase one-fourth of a share of Series E preferred stock. These warrants have
a five-year term, and are not exercisable until February 2002. In the event the
Company successfully completes an initial public offering or is acquired by
another company prior to that date, the warrants will be canceled with no
residual right remaining for the warrant.
INITIAL PUBLIC OFFERING
In August 2000, 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 shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the preferred stock outstanding will automatically convert into shares of
common stock. Unaudited pro forma stockholders' equity, as adjusted for the
assumed conversion of the preferred stock, is set forth on the balance sheet.
2000 EMPLOYEE STOCK PURCHASE PLAN
In August 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 500,000 shares of the Company's
common stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan permits eligible employees to purchase common stock at a discount,
but only through payroll deductions, during defined offering periods. The price
at which stock is purchased under the Purchase Plan is equal to 85% of the fair
market value of the common stock on the first day of the offering period or on
the relevant purchase date, whichever is lower. The initial offering period will
commence on the effective date of the offering. In addition, the Purchase Plan
provides for annual increases of shares available for issuance under the
Purchase Plan beginning with fiscal 2001.
2000 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
In August 2000, the Company adopted the 2000 Non-employee Directors Stock
Option Plan and reserved a total of 500,000 shares of common stock for issuance
thereunder. Each nonemployee director who becomes a director of the Company will
be automatically granted a nonstatutory stock option to purchase 40,000 shares
of common stock on the date on which such person first becomes a director. At
each board meeting immediately following each annual stockholders meeting
beginning with the first board meeting after the 2000 Annual Stockholders
Meeting, each nonemployee director will automatically be granted a nonstatutory
option to purchase 15,000 shares of common stock. The exercise price of options
under the director plan will be equal to the fair market value of the common
stock on the date of grant. The maximum term of the options granted under the
director plan is ten years. Each initial grant under the director plan will vest
on a monthly basis over a three-year period. Each subsequent grant will vest in
F-20
<PAGE>
ELITRA PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED)
full one year after the date of grant. The director plan will terminate on the
tenth anniversary of this initial public offering, unless terminated earlier in
accordance with the provisions of the director plan.
INCREASE IN SHARES RESERVED UNDER THE 1998 EQUITY INCENTIVE PLAN
In August 2000, the Company increased the number of shares reserved under
the 1998 Equity Incentive Plan to 8,000,000 from 3,688,425.
F-21
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
------------------
, 2000.
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, COMMON SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY
SALE OF OUR COMMON SHARES.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON SHARES OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000 (THE 25TH DAY AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON SHARES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee, the NASD filing fee and
the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 22,770
NASD filing fee............................................. 9,125
Nasdaq Stock Market Listing Application fee................. 95,000
Blue sky qualification fees and expenses.................... 15,000
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 300,000
Transfer agent and registrar fees........................... 25,000
Miscellaneous............................................... 83,105
----------
Total..................................................... $1,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's amended and restated certificate of incorporation and
bylaws include provisions to (i) eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to Section 145 of the Delaware Law, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its stockholders, for improper
transactions between the director and the Registrant and for improper
distributions to stockholders and loans to directors and officers. The provision
also does not affect a director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
II-1
<PAGE>
The Registrant has entered into Indemnity Agreements with each director or
officer designated by the board of directors. The Indemnity Agreements require
that the Registrant indemnify directors and officers who are parties thereto in
all cases to the fullest extent permitted by Delaware law. Under the Delaware
GCL, except in the case of litigation in which a director of officer is
successful on the merits, indemnification of a director or officer is
discretionary rather than mandatory. Consistent with the Registrant's Bylaw
provision on the subject, the Indemnity Agreements require the Registrant to
make prompt payment of litigation expenses at the request of the director or
officer in advance of indemnification provided that he undertakes to repay the
amounts if it is ultimately determined that he is not entitled to
indemnification for such expenses. The advance of litigation expenses is
mandatory; under the Delaware GCL such advance would be discretionary. Under the
Indemnity Agreements, the director or officer is permitted to bring suit to seek
recovery of amounts due under the Indemnity Agreements and is entitled to
recover the expenses of seeking such recovery unless a court determines that the
action was not made in good faith or was frivolous. Without the Indemnity
Agreements, the Registrant would not be required to pay the director or officer
for his expenses in seeking indemnification recovery against the Registrant.
Under the Indemnity Agreements, directors and officers are not entitled to
indemnity or advancing of expenses (i) if such director or officer has recovered
payment under an insurance policy for the subject claim, or has otherwise been
indemnified against the subject claim, (ii) for actions initiated or brought by
the director or officer and not by way of defense (except for actions seeking
indemnity or expenses from the Registrant), (iii) if the director or officer
violated section 16(b) of the Exchange Act or similar provisions of law or
(iv) if a court of competent jurisdiction determines that the director or
officer failed to act in good faith and in a manner reasonably believed to be in
or not opposed to the best interests of the Registrant or, with respect to any
proceeding which is of a criminal nature, had reasonable cause to believe his
conduct was unlawful. Absent the Indemnity Agreements, indemnification that
might be made available to directors and officers could be changed by amendments
to the Registrant's amended and restated certificate of incorporation or bylaws.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Registrant's inception on July 1997, the Registrant has issued the
following unregistered securities:
(a) From July 1997 to June 1998, the Registrant sold and issued 2,740,333
shares of its common stock to seven founding employees and consultants in
exchange for an aggregate purchase price of approximately $2,740.
(b) On October 27, 1998, the Registrant sold and issued 4,545,456 shares of
its Series A preferred stock to six investors and consultants in exchange for an
aggregate purchase price of $3,000,000.
(c) From June 9, 1999 to September 20, 1999, the Registrant sold and issued
21,333,334 shares of its Series B preferred stock to new investors and existing
stockholders in exchange for an aggregate purchase price of $16,000,000.
(d) On May 10, 2000, the Registrant sold and issued 1,041,667 shares of its
Series C preferred stock to LG Chemical Ltd. in connection with entering into a
five-year collaboration with them. LG Chemical paid an aggregate of $5,000,000
for the shares.
(e) On June 30, 2000, in exchange for certain licenses with Incyte
Genomics, Inc., the Registrant sold and issued 1,538,462 shares of its Series D
preferred stock valued at $5,000,000.
II-2
<PAGE>
(f) In August 2000, the Registrant sold and issued 6,722,327 shares of its
Series E preferred stock to investors and existing stockholders in exchange for
an aggregate purchase price of $21,800,000.
(g) Since July 1998, the Registrant has granted stock options to purchase
shares of its common stock to various employees, directors and consultants
pursuant to its 1998 Equity Incentive Plan and pursuant to stock options not
under any plan. As of August 15, 2000, the Registrant has issued and sold, in
the aggregate, 1,942,611 shares of its common stock for per share exercise
prices ranging from $0.07 to $0.17 to employees and consultants pursuant to
their exercise of stock options granted under the Registrant's 1998 Equity
Incentive Plan.
(h) The Registrant issued to Comdisco, warrants to purchase (i) 17,606
shares of its Series B preferred stock for an exercise price of $0.71 per share
in June 1999 and (ii) 50,000 shares of its Series B preferred stock for an
exercise price of $0.75 per share in November of 1999.
(i) In July 2000, the Registrant issued to Transamerica Business Credit
Corporation warrants to purchase 26,050 shares of its stock for an exercise
price of $3.25 per share.
The offers, sales and issuances of the above securities were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, and/or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions under compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through employment or other
relationships, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws, as amended.
3.3 Form of Amended and Restated Certificate of Incorporation,
to be filed and to become effective prior to the
effectiveness of this Registration Statement.
3.4 Form of Amended and Restated Certificate of Incorporation,
to be filed and to become effective upon completion of the
offering.
3.5 Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, and 3.5.
4.2* Form of Common Stock Certificate.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.2 Registrant's 1998 Equity Incentive Plan, as amended.
10.3 Form of Stock Option Agreement under the 1998 Equity
Incentive Plan, as amended.
10.4 Registrant's 2000 Employee Stock Purchase Plan and related
offering document.
10.5 Registrant's 2000 Non-Employee Directors' Stock Option Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
10.6 Form of Nonstatutory Stock Option under Registrant's 2000
Non-Employee Directors' Stock Option Plan.
10.7 Employment Agreement by and between the Registrant and Harry
F. Hixson, Ph.D., dated April 3, 1998, as amended.
10.8 Employment Agreement by and between the Registrant and J.
Gordon Foulkes, Ph.D., dated December 30, 1998.
10.9 Employment Agreement by and between the Registrant and
Edgardo Baracchini, Jr., Ph.D., dated June 18, 1999.
10.10 Employment Agreement by and between the Registrant and Alana
B. McNulty dated July 12, 1999.
10.11 Consulting Agreement, as amended, by and between the
Registrant and Judith W. Zyskind, Ph.D., dated September 1,
1999.
10.12 Series D Stock Purchase Agreement by and between the
Registrant and Incyte Genomics, Inc. dated June 30, 2000.
10.13 Third Amended and Restated Investor Rights Agreement, dated
August 18, 2000, by and among the Registrant and certain
holders of the Registrant's common stock and preferred
stock.
10.14 Third Amended and Restated Right of First Offer and Co-Sale
Agreement, dated August 18, 2000, by and among the
Registrant and certain holders of the Registrant's common
stock and preferred stock.
10.15 Second Amended and Restated Voting Agreement, dated
August 18, 2000, by and among the Registrant and certain
holders of the Registrant's common stock and preferred
stock.
10.16 Master Lease Agreement by and between Comdisco, Inc. and the
Registrant dated May 7, 1999, as amended on May 11, 1999.
10.17 Warrant Agreement to purchase 17,606 shares of Series B
preferred stock by and between the Registrant and Comdisco,
Inc. dated as of June 9, 1999.
10.18 Warrant Agreement to purchase 50,000 shares of Series B
preferred stock by and between the Registrant and Comdisco,
Inc. dated as of November 12, 1999.
10.19 Standard Industrial/Commercial Multi-Tenant Lease--Modified
Net by and between the Registrant and General Atomics dated
July 1, 1998 and Notice Non-Responsibility dated July 28,
1998, as amended.
10.20 Lease Agreement between the Registrant and Sorrento West
Partners, L.P./Yale Properties dated April 20, 2000.
10.21+ License Agreement by and between the Registrant and San
Diego State University Foundation dated April 30, 1998, as
amended.
10.22+ License Agreement by and between the Registrant and San
Diego State University Foundation, dated June 11, 1999.
10.23+ Collaborative Research, Development and License Agreement
dated May 10, 2000 by and between the Registrant and LG
Chemical Ltd.
10.24+ Microbial Information Agreement by and between the
Registrant and Incyte Genomics, Inc., dated June 30, 2000.
10.25+ Microbial Dataflow Software License Agreement by and between
the Registrant and Incyte Genomics, Inc., dated June 30,
2000.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
10.26+ Technology License Agreement, by and between the Registrant
and Incyte Genomics, Inc., dated June 30, 2000.
10.27 Stock Subscription Warrant by and between the Registrant and
TBCC Funding Trust II, dated July 27, 2000, as amended.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-7.
27.1 Financial Data Schedule
</TABLE>
------------------------
+ Confidential Treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* To be filed by amendment.
(b) SCHEDULES.
All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated 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 provisions described in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the registration statement 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.
(2) That, 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
II-5
<PAGE>
(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.
(3) 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of San
Diego, State of California, on the 5th day of September, 2000.
<TABLE>
<S> <C> <C>
By: /s/ HARRY F. HIXSON, JR.
-------------------------------------------------
Harry F. Hixson, Jr., Ph.D.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Harry F. Hixson, Jr. and
Alana B. McNulty, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and to sign any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, and all post-effective amendments thereto, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact, or his
or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. This Power of Attorney may be signed in several counterparts.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ HARRY F. HIXSON, JR. Chief Executive Officer, President
------------------------------------ and Chairman of the Board September 5, 2000
Harry F. Hixson, Jr., Ph.D. (PRINCIPAL EXECUTIVE OFFICER)
/s/ ALANA B. MCNULTY Chief Financial Officer
------------------------------------ (PRINCIPAL FINANCIAL AND September 5, 2000
Alana B. McNulty ACCOUNTING OFFICER)
/s/ J. GORDON FOULKES Executive Vice President,
------------------------------------ Research & Development and September 5, 2000
J. Gordon Foulkes, Ph.D. Director
/s/ CHARLES HSU
------------------------------------ Director September 5, 2000
Charles Hsu, Ph.D.
/s/ WENDE S. HUTTON
------------------------------------ Director September 5, 2000
Wende S. Hutton
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ARNOLD L. ORONSKY
------------------------------------ Director September 5, 2000
Arnold L. Oronsky, Ph.D.
/s/ ARTHUR M. PAPPAS
------------------------------------ Director September 5, 2000
Arthur M. Pappas
/s/ LOWELL E. SEARS
------------------------------------ Director September 5, 2000
Lowell E. Sears
/s/ ANDREW E. SENYEI
------------------------------------ Director September 5, 2000
Andrew E. Senyei, M.D.
/s/ JUDITH W. ZYSKIND
------------------------------------ Director September 5, 2000
Judith W. Zyskind, Ph.D.
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws, as amended.
3.3 Form of Amended and Restated Certificate of Incorporation,
to be filed and to become effective prior to the
effectiveness of this Registration Statement.
3.4 Form of Amended and Restated Certificate of Incorporation,
to be filed and to become effective upon completion of the
offering.
3.5 Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, and 3.5.
4.2* Form of Common Stock Certificate.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.2 Registrant's 1998 Equity Incentive Plan, as amended.
10.3 Form of Stock Option Agreement under the 1998 Equity
Incentive Plan, as amended.
10.4 Registrant's 2000 Employee Stock Purchase Plan and related
offering document.
10.5 Registrant's 2000 Non-Employee Directors' Stock Option Plan.
10.6 Form of Nonstatutory Stock Option under Registrant's 2000
Non-Employee Directors' Stock Option Plan.
10.7 Employment Agreement by and between the Registrant and Harry
F. Hixson, Ph.D., dated April 3, 1998, as amended.
10.8 Employment Agreement by and between the Registrant and J.
Gordon Foulkes, Ph.D., dated December 30, 1998.
10.9 Employment Agreement by and between the Registrant and
Edgardo Baracchini, Jr., Ph.D., dated June 18, 1999.
10.10 Employment Agreement by and between the Registrant and Alana
B. McNulty dated July 12, 1999.
10.11 Consulting Agreement, as amended, by and between the
Registrant and Judith W. Zyskind, Ph.D., dated September 1,
1999.
10.12 Series D Stock Purchase Agreement by and between the
Registrant and Incyte Genomics, Inc. dated June 30, 2000.
10.13 Third Amended and Restated Investor Rights Agreement, dated
August 18, 2000, by and among the Registrant and certain
holders of the Registrant's common stock and preferred
stock.
10.14 Third Amended and Restated Right of First Offer and Co-Sale
Agreement, dated August 18, 2000, by and among the
Registrant and certain holders of the Registrant's common
stock and preferred stock.
10.15 Second Amended and Restated Voting Agreement, dated
August 18, 2000, by and among the Registrant and certain
holders of the Registrant's common stock and preferred
stock.
10.16 Master Lease Agreement by and between Comdisco, Inc. and the
Registrant dated May 7, 1999, as amended on May 11, 1999.
10.17 Warrant Agreement to purchase 17,606 shares of Series B
preferred stock by and between the Registrant and Comdisco,
Inc. dated as of June 9, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
10.18 Warrant Agreement to purchase 50,000 shares of Series B
preferred stock by and between the Registrant and Comdisco,
Inc. dated as of November 12, 1999.
10.19 Standard Industrial/Commercial Multi-Tenant Lease--Modified
Net by and between the Registrant and General Atomics dated
July 1, 1998 and Notice Non-Responsibility dated July 28,
1998, as amended.
10.20 Lease Agreement between the Registrant and Sorrento West
Partners, L.P./Yale Properties dated April 20, 2000.
10.21+ License Agreement by and between the Registrant and San
Diego State University Foundation dated April 30, 1998, as
amended.
10.22+ License Agreement by and between the Registrant and San
Diego State University Foundation, dated June 11, 1999.
10.23+ Collaborative Research, Development and License Agreement
dated May 10, 2000 by and between the Registrant and LG
Chemical Ltd.
10.24+ Microbial Information Agreement by and between the
Registrant and Incyte Genomics, Inc., dated June 30, 2000.
10.25+ Microbial Dataflow Software License Agreement by and between
the Registrant and Incyte Genomics, Inc., dated June 30,
2000.
10.26+ Technology License Agreement, by and between the Registrant
and Incyte Genomics, Inc., dated June 30, 2000.
10.27 Stock Subscription Warrant by and between the Registrant and
TBCC Funding Trust II, dated July 27, 2000, as amended.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-7.
27.1 Financial Data Schedule
</TABLE>
------------------------
+ Confidential Treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* To be filed by amendment.
