<PAGE>
PROSPECTUS
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-32780
7,200,000 Shares
[LOGO]
Common Stock
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This is our initial public offering of shares of common stock. We are offering
7,200,000 shares in a public offering in the United States. No public market
currently exists for our shares. The initial public offering price is $14.00 per
share. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "RSTA."
Agilent Technologies, Inc., a collaborative partner and existing stockholder,
has agreed to purchase 714,285 shares of common stock in a private placement
concurrent with this offering at $14.00 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 7.
<TABLE>
<CAPTION>
Per
Share Total
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<S> <C> <C>
Public offering price....................................... $14.00 $100,800,000
Underwriting discounts and commissions...................... $ 0.98 $ 7,056,000
Proceeds, before expenses, to Rosetta....................... $13.02 $ 93,744,000
</TABLE>
We have granted the underwriters a 30-day option to purchase up to an aggregate
of 1,080,000 additional shares of common stock to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about August 8, 2000.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
LAZARD
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
August 3, 2000
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 3
Risk Factors........................... 7
Special Note Regarding Forward-Looking
Statements........................... 21
Use of Proceeds........................ 22
Dividend Policy........................ 22
Capitalization......................... 23
Dilution............................... 24
Selected Consolidated Financial Data... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 27
</TABLE>
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PAGE
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Business............................... 33
Management............................. 48
Certain Transactions................... 60
Principal Stockholders................. 64
Description of Capital Stock........... 66
Shares Eligible for Future Sale........ 70
Underwriting........................... 72
Legal Matters.......................... 74
Experts................................ 75
Where You Can Find More Information.... 75
Index to Financial Statements.......... F-1
</TABLE>
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW OF OUR BUSINESS
We are a leader in the emerging field of informational genomics.
Informational genomics involves acquiring and analyzing information gathered
from throughout the cell, to identify a majority of the medically important drug
targets and gene functions. We combine the power of informatics, which is the
use of computers and sophisticated algorithms to store, analyze and interpret
large volumes of information, and genomics, which is the study of genomes, or
all of the genetic material in an organism's chromosomes, to create a
proprietary platform that accelerates and enhances the drug discovery process
for pharmaceutical and biotechnology companies and improves agricultural
products.
The growing availability of DNA sequence information, genome-wide expression
data and proteomic measurements, which measure protein levels and activity
within the cell, has created high expectations for improvements in drug
discovery, healthcare and agriculture. However, these desired improvements are
hampered by the limitations of currently available measurement technologies, and
by a shortage of powerful integrated analysis tools that are capable of managing
both large amounts and disparate types of data. Limitations of current
approaches include:
- DNA sequences and protein levels do not give direct clues to cellular
function;
- current gene expression technologies are expensive and of limited
accuracy; and
- current gene expression analysis tools and approaches are inadequate.
Our informational genomics platform can accelerate the transformation of
drug discovery and healthcare research by converting the rapidly growing amount
of gene expression data, or information about a gene's activity, into organized,
statistically driven, information-based solutions. By improving the quality of
lead compounds and providing early indications of the potential side effects of
drugs, we believe our solution is critical to solving fundamental inefficiencies
in the drug discovery process. We provide a proprietary gene expression
profiling platform, consisting of hardware and software products, that uses gene
expression profiles, i.e., patterns of gene activity, to provide seamless
solutions for efficient, cost-effective and powerful discovery programs. Our
technology builds a critical mass of coherent gene expression data, collected
from DNA microarrays which are made of DNA fragments attached to glass slides in
a grid-like formation, and provides comprehensive, simultaneous descriptions of
a compound's effect on all relevant targets within a cell. By coherent data, we
mean data that can be compared in a meaningful manner.
Our integrated technology platform consists of:
- our Rosetta Resolver Expression Data Analysis System;
- our FlexJet DNA microarrays; and
- our coherent expression profile data sets.
We generate revenue by providing our technologies as separate components or
as an integrated informational genomics system. Additionally, we offer
professional consulting services to complement and enhance our products. To
date, our revenue has been derived principally from revenue earned under our
collaboration agreements and from government grants. We have received a purchase
order from Harvard University's Center for Genomics Research for a commercial
sale of the Rosetta Resolver system. In addition, discussions are ongoing with
major pharmaceutical and biotechnology companies regarding additional commerical
sales.
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OUR PRODUCTS AND SERVICES
Our products and services enable efficient and accurate gene expression
reporting and analysis. They can be used as individual components or as an
integrated platform. Our platform of products and services includes:
- ROSETTA RESOLVER EXPRESSION DATA ANALYSIS SYSTEM. The Rosetta Resolver
system is an integrated organization-wide solution for storing, retrieving
and analyzing large quantities of gene expression data generated from DNA
microarrays. It allows users to securely assemble and store information
concerning gene expression in a single database and rapidly conduct
sophisticated matching of expression profile patterns on very large data
sets.
- FLEXJET DNA MICROARRAYS. Our FlexJet DNA microarrays consist of different
DNA sequences built up in a grid at tens of thousands of different
positions on glass slides using a modified inkjet printer head. Our inkjet
technology is flexible, reproducible, economical, and can produce new
designs significantly faster than other array technologies. We synthesize
oligonucleotides, which are short, single strands of DNA, directly on
glass slides.
- COHERENT DATA SETS AND REFERENCE LIBRARIES. We build coherent sets of data
generated from DNA microarrays that represent the responses of cells to
different genetic and disease states and to drug treatments. These data
sets provide detailed biological references against which other expression
measurements, whether generated by us, by our collaborators or by our
customers, can be compared. We refer to this comparibility as being
coherent. We have developed experiment protocols, process controls and
analysis techniques that allow the cross-comparison of data between
experiments.
- INTEGRATED PROFESSIONAL SERVICES. We combine our informational genomics
tools together with our consulting services to provide enhanced value to
selected customers. These services include optimization of the Rosetta
Resolver system, customized FlexJet DNA microarrays and the creation of
highly accurate coherent data sets.
We have entered into a seven-year strategic collaboration with Agilent
Technologies, Inc. to co-market the Rosetta Resolver system and for Agilent to
manufacture and sell FlexJet DNA microarrays.
OUR STRATEGY
Our goal is to be the leader in informational genomics by providing the
standard platform for gene expression data analysis. By providing this standard
platform, we hope to increase demand for each of our component technologies. The
specific elements of our strategy are to:
- become the standard informational genomics approach;
- develop multiple product revenue sources;
- establish collaborations using our gene expression tools;
- expand our informational genomics platform; and
- sell high-value information products.
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THIS OFFERING
Unless otherwise indicated, information in this prospectus assumes that the
underwriters do not exercise their over-allotment options and assumes the
conversion of all of our preferred stock into common stock upon completion of
this offering.
We will also sell to Agilent, concurrent with the closing of this offering,
$10.0 million of our common stock at $14.00 per share.
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<S> <C>
Common stock offered by us..................... 7,200,000 shares
Common stock offered in the concurrent private
placement to Agilent (at the initial public
offering price of $14.00 per share).......... 714,285 shares
Common stock outstanding after this offering... 29,948,400 shares
Nasdaq National Market symbol.................. RSTA
Use of proceeds................................ We intend to use the net proceeds of this
offering for continued research and
development, including expanding our
informational genomics platform to include
other data types and analysis tools. We intend
to use net proceeds of this offering to
purchase DNA microarrays used in our research
and development activities. Subject to certain
conditions, we are required to purchase at
least $29.7 million of DNA microarrays through
the end of 2001 in connection with a supply
agreement we entered into with Agilent. We also
intend to increase our marketing and sales
efforts to support our products and services,
including the Rosetta Resolver system. In
addition, the proceeds will be used for working
capital, reduction of debt incurred pursuant to
equipment financing agreements, and other
general corporate purposes and capital
expenditures.
</TABLE>
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding at March 31, 2000, and
assumes the sale by us of 714,285 shares of our common stock at $14.00 per share
to Agilent in the concurrent private placement, but excludes the following:
- 2,130,946 shares of common stock issuable upon exercise of outstanding
options as of March 31, 2000 at a weighted average exercise price of $2.36
per share;
- 7,423,948 shares of common stock available for issuance as of March 31,
2000 under our stock option and stock purchase plans; and
- 1,363,297 shares of common stock issuable upon exercise of outstanding
warrants as of March 31, 2000, at a weighted average exercise price of
$2.04 per share.
We were incorporated in Delaware in December 1996 as Rosetta Biosystems,
Inc. In September 1997, we changed our name to Rosetta Inpharmatics, Inc. Our
principal executive offices are located at 12040 115th Avenue N.E., Kirkland, WA
98034. Our telephone number is (425) 820-8900 and our fax number is
(425) 821-5354. Our Web site is located at www.rii.com. We do not intend for
information found on our Web site to be incorporated into or be a part of this
prospectus.
Rosetta, Rosetta Inpharmatics, Rosetta Resolver and FlexJet are trademarks
of Rosetta Inpharmatics, Inc. All other brand names or trademarks appearing in
this prospectus are the property of their respective holders.
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SUMMARY CONSOLIDATED FINANCIAL DATA
We have prepared this information using our financial statements for the
period from inception (December 19, 1996) to March 31, 2000, the years ended
December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and
2000. The financial statements for each of the three years in the period ended
December 31, 1999 have been audited. The financial statements for the quarters
ended March 31, 1999 and 2000 and for the period from inception (December 19,
1996) to March 31, 2000 have not been audited. The following summary historical
data should be read in conjunction with our consolidated financial statements
and the related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus. See
Note 1 of notes to consolidated financial statements for an explanation of the
determination of the weighted average shares used to compute pro forma net loss
per share amounts.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED PERIOD FROM
YEARS ENDED DECEMBER 31, MARCH 31, INCEPTION
------------------------------ ------------------------- (DECEMBER 19, 1996)
1997 1998 1999 1999 2000 TO MARCH 31, 2000
---- ---- ---- ---- ---- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ -- $ -- $ 983 $ 292 $ 548 $ 1,531
Total operating expenses....... 2,293 7,693 21,561 3,678 8,712 40,259
Loss from operations........... (2,293) (7,693) (20,578) (3,386) (8,164) (38,728)
Net loss....................... (1,885) (7,112) (20,314) (3,338) (7,896) (37,207)
Deemed dividend upon issuance
of convertible preferred
stock........................ (7,285)
Net loss attributable to common
stockholders................. (1,885) (7,112) (20,314) (3,338) (15,181)
Basic and diluted net loss per
share........................ $ (5.29) $ (5.29) $ (5.04) $ (1.26) $ (2.77)
Pro forma basic and diluted net
loss per share............... $ (1.73) $ (0.49)
Weighted average shares used in
computing pro forma basic and
diluted net loss per share... 11,741 16,171
</TABLE>
The unaudited consolidated pro forma balance sheet data reflects the
automatic conversion of all preferred shares into shares of our common stock on
a one-for-one basis upon the closing of this offering as well as the sale of
7,200,000 shares of our common stock in this offering at the price to the public
of $14.00 per share, after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us, and the proceeds from the sale of
714,285 shares of common stock to Agilent in a concurrent private placement at
the price of $14.00 per share, after deducting estimated expenses payable by us.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
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ACTUAL PRO FORMA
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<S> <C> <C>
(AS
ADJUSTED)
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
Cash, cash equivalents and short-term investments. $ 55,195 $ 157,914
<S> <C> <C>
Working capital............................................. 51,076 153,795
Total assets................................................ 79,550 182,269
Convertible preferred stock................................. 82,738 --
Long-term obligations, less current portion................. 1,123 1,123
Additional paid-in capital.................................. 38,221 223,655
Total stockholders' equity (deficit)........................ (12,946) 172,511
</TABLE>
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS RISKY. YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISKS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS COULD BE
HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND MAY NOT SUCCEED OR BECOME
PROFITABLE.
We commenced operations in December 1996 and are at an early stage of
development. We have a limited operating history on which you can base an
investment decision. We have just begun to incorporate our technologies into
commercialized products and our commercialization of them may not be successful.
We have recently begun commercial sales of the Rosetta Resolver system. All
commercial sales are subject to negotiation and execution of definitive
agreements, and the execution of definitive agreements may not occur in a timely
manner or at all. Agilent, our strategic partner, has not yet begun commercial
distribution of FlexJet DNA microarrays. The Rosetta Resolver system is
currently being used by us internally and by a limited number of customers. As a
result, our business is subject to all of the risks inherent in the development
of a new business enterprise, such as the need:
- to obtain substantial capital to support the expenses of developing our
technology and commercializing our products and services;
- to develop a market for our products and services;
- to successfully transition from a company with a research focus to a
company capable of supporting commercial activities; and
- to attract and retain qualified management, sales, technical and
scientific staff.
WE EXPECT TO INCUR SUBSTANTIAL OPERATING LOSSES IN THE FUTURE AND AS A RESULT,
THE VALUE OF OUR STOCK COULD DECREASE.
Our expenses have significantly exceeded revenue in each of the years since
our inception. We are uncertain when, if ever, we will become profitable. We
have incurred operating losses since our inception and we had no revenue in 1997
and 1998 and only limited revenue in 1999 and in the first three months of 2000
from collaborations and government grants. Our Rosetta Resolver system was
introduced earlier this year and to date we have recorded no revenue from sales
of the system. As of March 31, 2000, we had an accumulated deficit of
$37.2 million. We expect to continue to experience significant operating losses
in the future as we continue our research and development efforts, further
develop our products and services and expand our marketing and sales force in an
effort to commercialize our products. The expansion of our operations will
require substantial expenditures on our part for at least the next several years
to support growth of the organization. In addition, we anticipate continued
spending in research and development to remain a leader in our industry, as well
as to meet our obligations under the supply agreement with Agilent. As a result,
we expect to incur operating losses in the future and the value of our stock
could decrease.
IF OUR EXISTING COLLABORATION WITH AGILENT FAILS OR IS TERMINATED, OUR POTENTIAL
REVENUES AND DEVELOPMENT FUNDS WOULD BE SIGNIFICANTLY REDUCED.
In our collaboration agreement with Agilent, we agreed to partner with
Agilent to make and sell products in the gene expression field including the
Rosetta Resolver system, microarrays, array design services and other products.
As part of our agreement, Agilent has the co-exclusive right to sell the Rosetta
Resolver system and to use our inkjet synthesizer and related chip design
technology in
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exchange for royalty payments. We also rely on Agilent for significant financial
and technical contributions in connection with the development of products
covered by the agreement. Our ability to develop, manufacture and market these
products successfully depends significantly on Agilent's performance under this
agreement. If Agilent experiences manufacturing or distribution difficulties,
has difficulty obtaining or maintaining intellectual property rights, does not
actively market the Resolver system or does not otherwise perform its
obligations under this agreement, our revenue derived from FlexJet DNA
microarrays or the Rosetta Resolver system would be reduced.
Our collaboration agreement with Agilent may be terminated early by Agilent
under certain circumstances, including the breach of a material term by us. If
Agilent were to terminate its agreement with us, we could lose significant
revenue and have limited means to commercialize our products. In addition, we
would need to obtain development funding from other sources, and we may be
required to find one or more other collaborators for the development and
commercialization of our products. Agilent's early termination of our
collaboration could harm our business and financial condition.
IF WE DO NOT RETAIN OUR CUSTOMERS OR OBTAIN NEW CUSTOMERS, OUR OPERATING RESULTS
WILL BE MATERIALLY AND ADVERSELY AFFECTED.
Our strategy depends on selling our informational genomics products and
services to pharmaceutical, biotechnology and agriculture companies.
Historically, we have had very few customers and one commercial partner,
Agilent, from which we have derived the majority of our revenue. If we were to
lose any one of these customers or Agilent, our revenue would decrease
substantially. Agilent accounted for 50.0% of total revenues in fiscal year
1999. We had no customers and no revenue in fiscal year 1998 and 1997. Through
our agreement with Agilent, we jointly introduced the Rosetta Resolver system
commercially in February 2000 and have not yet derived any revenue from the sale
of this product on a commercial basis. We expect that we will continue to rely
on a narrow base of customers and Agilent for the majority of our revenue for
the foreseeable future. Although we are seeking to expand our customer base,
these efforts may not be successful. Our sales and revenues would be adversely
affected if Agilent or a significant customer were to discontinue or
significantly reduce the use of products or services or if we fail to obtain
additional customers.
IF OUR TECHNOLOGIES AND INITIAL COMMERCIAL PRODUCTS DO NOT ACHIEVE MARKET
ACCEPTANCE OR BECOME COMMERCIALLY VIABLE OR SUCCESSFUL, OUR RESULTS OF
OPERATIONS WOULD BE ADVERSELY AFFECTED.
Our application of innovative informational genomics tools to drug discovery
is a new and unproven approach. Market acceptance of our products and services
will depend upon many factors which are not within our control, such as:
- continued growth in the bioinformatics industry;
- the availability and price of competing products, services and
technologies; and
- the success of our marketing and sales efforts.
In addition, our array and informatics technologies and gene expression
analysis approaches will require significant additional funding prior to
commencement of full-scale commercial operations. If we are unable to obtain
additional funding, commercialization of our products may be delayed, which
would adversely affect our revenues.
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IF WE ARE UNABLE TO COMPETE SUCCESSFULLY AGAINST EXISTING TECHNOLOGIES, OUR
RESULTS OF OPERATIONS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
Our business depends upon successfully competing in the development and
commercialization of products and services that improve the efficiency of the
drug discovery process. Our drug discovery technology may not result in any
commercially successful product or results. We may fail to compete successfully
if:
- our products or services are found to be ineffective or unreliable;
- our products are difficult to manufacture or uneconomical to market;
- unforeseen complications in the development or delivery of our products
and services increase the costs of development of our products and
services;
- the proprietary rights of third parties preclude us or our collaborative
partners from marketing our products; or
- potential customers fail to use our technology and instead rely on
existing internal processes or technologies.
If we fail to develop or successfully commercialize our products and compete
against existing technologies, our revenue growth and profitability will be
adversely affected.
IF WE ARE UNABLE TO MAINTAIN OR TO ENTER INTO NEW COLLABORATIONS OR LICENSING
ARRANGEMENTS, WE WILL BE LIMITED IN OUR ABILITY TO FURTHER COMMERCIALIZE OUR
PRODUCTS.
We intend to enter into collaborative arrangements with pharmaceutical,
biotechnology and agricultural companies to apply our technology, to fund
development and to commercialize our potential future products. We may not be
able to negotiate collaborative agreements on acceptable terms, if at all, and
such collaborative agreements may not be successful and may not provide us with
expected benefits. To the extent we choose not to or are unable to enter into
such collaborative agreements, we will require substantially greater capital to
undertake the research, development, marketing, sales and distribution of
systems and technologies at our own expense, which would increase our operating
expenses and harm our revenues.
Additionally, our present or future collaborative partners may not perform
their obligations under our agreements with them or may not devote sufficient
resources to the development, clinical testing or marketing of our potential
products developed under collaborations. If one of our collaboration partners
were to develop technologies or components competitive with our system in
parallel with us, or if we are precluded from entering into competitive
arrangements under the terms of our collaboration agreements, our potential
products could be rendered non-competitive or obsolete, which would adversely
affect our ability to generate sales and revenues. In addition, any premature
termination of a collaboration agreement could have a material adverse effect on
our revenue growth and potential profitability.
Generally, the terms of our collaboration agreements provide for a division
of responsibility between us and our collaborators. Disputes concerning our
obligations and rights under these agreements could result in litigation or
arbitration, which would be time-consuming and expensive.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS, AS NEEDED, WE WOULD HAVE TO REDUCE
OR CEASE OPERATIONS, ATTEMPT TO SELL SOME OR ALL OF OUR OPERATIONS OR MERGE WITH
ANOTHER ENTITY.
Based on our current plans, we believe that the net proceeds of this
offering and the proceeds from the concurrent private placement with Agilent
together with existing cash and marketable securities, borrowings under
equipment financing arrangements and anticipated cash flow from
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operations will be sufficient to support our operations at least until the end
of 2001. We may choose to raise additional capital due to market conditions or
strategic considerations even if we have sufficient funds for our operating
plan. We expect that we will require significant additional funding in the
future. In particular, we will likely need additional funds to generate
additional data and to increase our marketing efforts.
However, the actual amount of funds that we will need until December 31,
2001 and beyond will be determined by many factors, some of which are beyond our
control, and we may need funds sooner than currently anticipated. These factors
include:
- the level of our success and Agilent's success in selling the Rosetta
Resolver system and associated technologies;
- our progress with research and development;
- our ability to introduce and sell new products;
- the level of our sales and marketing expenses;
- the level of our expenses associated with unforeseen litigation;
- the costs and timing of obtaining new patent rights; and
- regulatory changes and competition and technological developments in the
market.
We may seek funding through additional public or private equity offerings,
debt financings or agreements with customers. If we raise additional capital by
issuing equity or convertible debt securities, the issuances may dilute share
ownership and future investors may be granted rights superior to those of
current shareholders. Additional financing may not be available when needed, or,
if available, may not be available on favorable terms. If additional funds are
required and we are unable to obtain them on terms favorable to us, we may be
required to cease or reduce further commercialization of our products to sell
some or all of our technology or assets or to merge with another entity.
FLUCTUATIONS IN OUR QUARTERLY RESULTS OF OPERATIONS COULD CAUSE OUR STOCK PRICE
TO DECLINE.
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. Some of the factors that could cause our operating
results to fluctuate include:
- the timing and amount of revenue resulting from collaborations, product
sales and royalties is not wholly predictable nor consistent from quarter
to quarter;
- changes in our percentage share of revenue generated from our
collaboration with Agilent;
- the success rate of our discovery efforts leading to milestone payments or
royalties;
- the timing and willingness of collaborators to commercialize products
discovered through the use of our products or services which would result
in milestone payments or royalties;
- the expiration of research contracts with collaborators, which may not be
renewed or replaced; and
- general and industry-specific economic conditions, which may affect our
collaborators' research and development expenditures.
Large portions of our expenses are relatively fixed, including expenses for
facilities, equipment and personnel. Accordingly, if revenues decline or do not
grow as anticipated due to expiration of research contracts, failure to obtain
new contracts or other factors, we may not be able to correspondingly
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reduce our operating expenses. In addition, we plan to significantly increase
operating expenses in order to accelerate our product development and sales and
marketing efforts.
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. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price could decline and you could lose a significant
portion or all of your investment.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS ADEQUATELY, OR OPERATE
WITHOUT VIOLATING THE INTELLECTUAL PROPERTY OF OTHERS, OUR COMPETITIVE POSITION
WILL SUFFER AND OUR BUSINESS AND FINANCIAL CONDITION WOULD BE ADVERSELY
AFFECTED.
Our success will depend, in large part, on our ability to obtain patent
protection for our products and technologies, both in the United States and in
other countries, to preserve our trade secrets and to operate without infringing
the proprietary rights of third parties. Our patent portfolio may not protect
our technologies or products for any one or more of the following reasons:
- some or all of our pending patent applications may not result in issued
patents and our competitors may be able to commercialize our discoveries;
- we may develop additional proprietary technologies that are not
patentable;
- any patents issued to us may not cover commercially viable products;
- any patents issued to us may not provide us with reasonable scope so as to
block others from using our or similar technology;
- any patents issued to us or to our licensors may be challenged,
circumvented or invalidated by third parties; and
- third parties may have patents of their own which could, if asserted,
prevent us from practicing our patented technologies.
Even if we are able to obtain new patents, these patents may not provide us
with substantial or meaningful protection or be commercially beneficial to us.
Should third parties file patent applications, or be issued patents,
claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings in the United States Patent
and Trademark Office to determine priority of invention. We also could be
required to participate in interference proceedings involving our issued patents
and pending applications of another entity. An adverse outcome in an
interference proceeding could require us to cease using the technology or to
license rights from prevailing third parties. There is no guarantee that any
prevailing party would offer us a license or that such a license, if made
available to us, could be acquired on commercially-acceptable terms.
In order to protect or enforce our patent rights, we may become involved in
patent litigation. These lawsuits would put our patents at risk of being
invalidated or interpreted narrowly. We may also provoke these third parties to
assert claims against us. We may also participate in patent litigation to
invalidate the patents of another. The outcome of any of these suits is
uncertain. Any lawsuits regarding intellectual property could be expensive, take
significant time, and could divert management's attention from other business
concerns.
Third parties may claim we are infringing, including inducing others to
infringe, their patents and other intellectual property, and we could suffer
significant litigation or licensing expenses. In particular, we are aware that
one of our commercial partners, Oxford Gene Technology, is involved in patent
litigation with a second commercial partner, Affymetrix. In connection with that
litigation, in May 2000 we received a third-party subpoena from Affymetrix
requesting, among other things, documents relating to our DNA microarray
development activities and our relationship with each of Oxford Gene Technology
and Agilent, and we have timely filed our initial response to the subpoena.
While we are
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not currently a party to any litigation against us, third parties, including
Affymetrix, may assert claims against us relating to our activities or to
agreements with our commercial partners, including Oxford Gene Technology or
Agilent, or other matters relating to such third party's intellectual property
rights. In addition, we have been in discussions with, and recently received
correspondence from counsel to, a third party regarding its belief that a
feature contained in the Rosetta Resolver system might infringe certain patents
held by that party. The discussion with this third party is ongoing and may
result in us entering into a license under these patents. Even if a third party
does not assert claims against us, litigation among or involving our commercial
partners could result in claims against us or otherwise adversely affect our
relationship with those parties and our business.
While we do not believe that any of our products or activities infringe any
valid patent or other intellectual property of third parties, we may be unaware
of patent or other intellectual property of others that may cover some of our
technology, products or services. If we do not prevail in any proceeding or
litigation, in addition to any damages we might have to pay, we could be
required to stop the infringing activity or we may need to obtain a license to
the intellectual property in question. We may not be able to obtain the
necessary license to the intellectual property in order to avoid infringement,
or negotiate such a license on reasonable terms, if at all. Even if we were able
to obtain a license to such technology, some licenses may be non-exclusive,
thereby giving our competitors access to the same technologies licensed to us.
Ultimately we may be unable to sell some of our products or may have to cease
certain business operations, which would have a material adverse effect on our
revenues. The complexity of the technology involved and the uncertainty of
intellectual property litigation increase these risks.
WE MAY BE SUBJECT TO LIABILITY FOR PRIOR ACTIVITIES OF OUR EMPLOYEES RELATED TO
OTHER PARTIES' PROPRIETARY INFORMATION.
While we require our employees to disclose their prior inventions to us and
not use or disclose to us proprietary information obtained from former
employers, disputes concerning these prior inventions or proprietary information
may arise. On January 6, 2000 we received, through our legal counsel, a request
for information from the FBI pertaining to one of our recently hired employees
related to his involvement in certain software development activities prior to
his employment with us. On April 11, 2000, we received, through our legal
counsel, a grand jury subpoena requiring the production of an expanded set of
information and documents pertaining to the subject of the original request from
the FBI. We are cooperating fully with the FBI and the grand jury. While we
believe that we, as a company, are not currently the target of the
investigation, we are unable at this time to predict the outcome of this
investigation. The FBI investigation may result in publicity that could
adversely affect our business and revenues.
IF OUR MEASURES TO PROTECT OUR CONFIDENTIAL AND PROPRIETARY INFORMATION FAIL,
THIS INFORMATION MAY BE COMPROMISED AND OUR COMPETITIVE POSITION WILL SUFFER.
We have taken security measures to protect our proprietary technologies,
processes, information systems and data, and continue to explore ways to enhance
such security. These measures may not provide adequate protection for our trade
secrets or other proprietary information. While we require employees, academic
collaborators and consultants to enter into confidentiality agreements where
appropriate, any of the following could occur:
- our proprietary information could be disclosed;
- our trade secrets could be disclosed; or
- others may independently develop substantially equivalent proprietary
information and techniques, otherwise gain access to our trade secrets or
disclose such technology.
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If any of these events occur, our proprietary and confidential information
would be compromised and our competitive position would suffer.
INTENSE COMPETITION IN THE MARKET COULD PREVENT US FROM INCREASING REVENUE AND
ACHIEVING PROFITABILITY OR RESULT IN THE OBSOLESCENCE OF OUR TECHNOLOGY.
The genomics industry is highly competitive. We compete with companies in
the United States and abroad that are engaged in the development and production
of products that analyze, collect and manage genetic information and genomic
data. Our competition in the United States and abroad can be broken down into
the following categories:
- bioinformatics solution providers, which are custom integrators, providers
of desktop analysis tools and providers of database software;
- array providers, which are commercial manufacturers of oligonucleotide
microarrays and cDNA microarrays or providers of systems enabling
customers to make their own microarrays; and
- expression profile program providers, which are dedicated genomics
companies building gene expression databases as well as pharmaceutical and
biotechnology companies who have their own in-house gene expression
profiling efforts.
Many of these organizations that compete with us have greater capital
resources, more experienced research, development, sales, marketing,
distribution and service staffs, superior facilities and manufacturing
capabilities and a more established customer base. Our competitors are pursuing
methods for using software and computers to assist in making the drug discovery
process more efficient and less expensive which would compete with our products
or render our products obsolete. Although we believe that currently we are the
only company with an integrated technology platform that includes all of the
components for an informational genomics solution, we expect to encounter
intense competition from companies that currently offer only certain components,
but which may offer all of the components in an integrated system in the future.
We are also likely to encounter increased competition as we enter new markets.
See "Business--Competition."
The relative speed with which we can develop products or technologies is
expected to have an impact on our competitive position. We believe that
customers in our markets display significant loyalty to specific technologies or
products that they have used successfully in their research and development.
Therefore, we may experience difficulties in generating sales from customers
that initially purchased products or services from competitors. We expect
competition to intensify in the fields in which we are involved as technical
advances in such fields are made and become more widely known. To the extent
that other companies succeed in developing similar products that are introduced
earlier, are more effective, are produced and marketed more effectively or
priced more competitively than our products and services, the commercial success
of our products or technologies to be developed may be harmed.
OUR DEPENDENCE ON THIRD-PARTY PRODUCTS AND SERVICES TO DEVELOP AND MANUFACTURE
SOME COMPONENTS OF OUR PRODUCTS COULD IMPAIR OUR ABILITY TO DEVELOP, MANUFACTURE
AND DELIVER OUR PRODUCTS ON A TIMELY BASIS.
We rely to a substantial extent on outside vendors to supply many of the
hardware and software components of the Rosetta Resolver system. We also rely on
outside vendors to supply us with chemicals and other items necessary to
manufacture microarrays and conduct expression profiling experiments. Some of
these items and components are obtained from a single supplier or a limited
group of suppliers. In particular, in May 2000, we entered into a supply
agreement with Agilent to supply us with DNA microarrays. In addition, we obtain
computer hardware used in our Resolver system from Sun Microsystems and the
Rosetta Resolver system incorporates software programs developed by third
parties, including database software from Oracle. If we are unable to acquire
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required third party products and services, the quality of our products could
deteriorate and we would face higher development costs. Our reliance on outside
vendors generally, and a sole or a limited group of suppliers in particular,
involves several risks, including:
- the inability to obtain an adequate supply of required materials due to
manufacturing capacity constraints, a discontinuance of a product by a
third-party manufacturer or other supply constraints;
- reduced control over quality and pricing of components;
- delays and long lead times in receiving materials from vendors; and
- delay and expense caused by the need to redesign our product to
accommodate a replacement of a vendor.
IF WE FAIL TO MAINTAIN OR OBTAIN RIGHTS TO THIRD PARTY TECHNOLOGY, IT COULD HARM
OUR DEVELOPMENTAL AND COMMERCIAL EFFORTS.
Our success is dependent on our ability to enter into licensing arrangements
with commercial or academic entities for technology that is advantageous or
necessary to the development and commercialization of our technologies. We may
not be able to negotiate additional license agreements in the future on
acceptable terms, if at all.
In our existing and potential future collaborations, disputes may arise as
to the inventorship and corresponding rights in inventions and know-how
resulting from research by us and our licensors or scientific collaborators.
Additionally, our present and future in-licensing agreements may contain
provisions requiring us to meet performance obligations, or milestones, within
specified time periods. If we fail to meet any significant milestones, our
licensors may be permitted to terminate such agreements.
Any of our current license agreements may be terminated under certain
circumstances by the other party, and we may not be able to maintain the
exclusivity of our exclusive licenses. See "Business--Technology Licenses". In
the event we are unable to obtain or maintain licenses to technology necessary
and advantageous to our business, we may be required to expend significant time
and resources to develop or in-license alternative technology. We may not be
successful in this regard. If we cannot acquire or develop necessary technology,
we may be prevented from commercializing some of our products or may need to
limit our operations.
THE SALES CYCLES FOR OUR PRODUCTS ARE LENGTHY, AND WE MAY SPEND CONSIDERABLE
RESOURCES ON UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO COMPLETE DEALS.
Our ability to obtain new customers for our technologies depends in
significant part upon the perception that our products and services can help
accelerate their drug discovery efforts. Our sales cycle and Agilent's sales
cycle are likely to be lengthy because of the need to educate our potential
customers and sell the benefits of our technologies to a variety of
constituencies within such companies. In addition, each agreement involves the
negotiation of unique terms. We and Agilent may be required to expend
substantial funds and management effort with no assurance that an agreement will
result.
OUR EXECUTIVE OFFICERS HAVE LIMITED EXPERIENCE AS EXECUTIVE OFFICERS OF PUBLICLY
TRADED COMPANIES.
Except for our Chief Financial Officer and Chief Operating Officer, our
executive officers do not have prior experience as executive officers of
publicly traded companies. Our new employees include a number of key managerial,
technical and operations personnel who have not yet been fully integrated
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into our operations, and we expect to add additional key personnel in the near
future. If we are unable to manage growth effectively and the addition of these
new employees, our business will be harmed.
IF WE LOST PRINCIPAL MEMBERS OF OUR MANAGEMENT AND SCIENTIFIC STAFF OR ARE
UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL, OUR FUTURE GROWTH AND ABILITY TO
COMPETE WOULD SUFFER.
We are highly dependent on the principal members of our management and
scientific staff, particularly Stephen H. Friend, our Chief Executive Officer,
and Roland Stoughton, our Vice President of Bioinformatics. The loss of the
services of any of these persons could delay or reduce our product development
and commercialization efforts. We do not have "key person" insurance on the
lives of our executives. We are also highly dependent upon our ability to
attract and retain additional qualified scientific and technical personnel. Our
business is located in the Seattle, Washington metropolitan area, where demand
for these types of personnel is extremely high and is likely to remain high. As
a result, competition for and retention of personnel, particularly for employees
with technical expertise, is intense, and the turnover rate for these people is
high. If we are not able to attract, hire, train and retain a sufficient number
of qualified personnel, our ability to compete could be seriously harmed and our
future financial success would be jeopardized.
WE HAVE LIMITED CAPACITY AND EXPERIENCE IN SALES, MARKETING AND MANUFACTURING.
We have only a small internal sales force to market and sell our products
and have only limited experience in sales and marketing. In order to
successfully market our products and services to pharmaceutical, biotechnology
and agricultural companies, we are dependent on Agilent to commercialize our
products. We may not be able to establish a direct sales force or to establish
collaborative or distribution arrangements to market our products and
technologies. If Agilent fails to market our products successfully or if we fail
to establish a significant sales force of our own, our sales and our revenues
would be harmed.
Rosetta Resolver was introduced earlier this year and we have not yet
installed the system on a commercial basis. To achieve successful
commercialization of our products, we will need to scale-up our installation and
customer support capabilities. If we cannot achieve the required level and
quality of system installation and support, we may need to outsource such
services or rely on licensing and other arrangements with third parties who
possess sufficient service capabilities. This could reduce our gross margins and
expose us to the risks inherent in relying on others. We may not be able to
successfully outsource our installation or customer service functions or enter
into licensing or other arrangements with these third parties, which could harm
our sales and our revenues.
IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE OUR EXPANSION, OUR RESULTS OF
OPERATIONS WOULD BE HARMED.
We have expanded rapidly in recent years and expect to experience
significant growth in the number of our employees and customers and the scope of
our operations. This expansion may continue to place a significant strain on our
management and operations. Our ability to manage this expansion will depend upon
our ability to broaden our management team. Our success will also depend on the
ability of our officers and key employees to continue to implement and improve
our operational and other systems, to manage multiple, concurrent customer
relationships and to train and manage our employees.
IF WE ARE UNABLE TO SUCCESSFULLY ADAPT OUR PRODUCTS FOR COMMERCIAL APPLICATIONS,
OUR REVENUES AND RESULTS OF OPERATIONS WILL SUFFER.
We have completed the initial development of the Rosetta Resolver system
technology and FlexJet DNA microarray technology for applications in gene
expression profile analysis. We may not be able to
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successfully adapt our products to the commercial requirements of drug discovery
or healthcare research. A number of potential applications of our technology in
these fields will require significant enhancements in our core technology,
including adaptation of our software. Market acceptance will depend on many
factors, including demonstrating to customers that our technology is superior to
other technologies and products which are available now or which may become
available in the future. We believe that our revenue growth and profitability
will substantially depend on our ability to overcome significant technological
challenges and successfully introduce our products into the marketplace. If we
are unable, for technological or other reasons, to complete the development,
introduction or scale-up of the manufacturing of any product, or if any product
does not achieve a significant level of market acceptance, our revenues and
results of operations will be seriously harmed.
WE ARE EXPOSED TO PRODUCT LIABILITY AND RELATED RISKS WHICH COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION.
We may be exposed to claims of liability from the use of products that
either we or our customers provide. For example, we may be subject to product
liability if our products contain inaccurate information or if any of our
customers develops or commercializes a product discovered through the use of our
technology which results in injury or death to clinical trial participants or
patients. Although we currently maintain errors and omissions insurance for the
Rosetta Resolver system, our insurance coverage may not be adequate to protect
us against future claims. Furthermore, our customers may not indemnify us
against these types of claims or they may not be adequately insured or, in the
case of smaller companies, have a net worth sufficient to satisfy any product
liability claims. A product liability claim, product recall or a medical
malpractice claim could cause our business, financial condition and results of
operations to suffer. In addition, we may be liable to customers if we are
unable to maintain the security and integrity of data generated and analyzed on
their behalf.
IMPROPER HANDLING, STORAGE OR DISPOSAL OF HAZARDOUS CHEMICALS AND BIOLOGICAL
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
We use controlled hazardous and biological materials in our business. The
risk of accidental contamination or injury from these materials cannot be
completely eliminated. If an accident with these substances occurs, we could be
liable for any damages that result, which could seriously harm our business.
Additionally, an accident could damage our research and manufacturing facilities
and operations, resulting in delays and increased costs.
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS.
As part of our business strategy, we may from time to time acquire assets
and businesses principally relating to, or complementary to, our operations. For
example, in 1999 we acquired Acacia Biosciences, Inc. in order to acquire
specific technology. Risks of acquisitions include, among other things, the
following:
- exposure to unknown liabilities of acquired companies;
- acquisition costs and expenses; and
- difficulty and expense of assimilating the technology, operations and
personnel of the acquired businesses.
Our financial condition could be materially and adversely affected if we do not
overcome these potential problems.
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WE MAY BE REQUIRED TO REPURCHASE SHARES OF OUR COMMON STOCK ISSUED UPON THE
EXERCISE OF STOCK OPTIONS AND OPTIONS TO PURCHASE OUR COMMON STOCK THAT MAY HAVE
BEEN ISSUED IN VIOLATION OF STATE SECURITIES LAWS.
We have issued options to purchase common stock under our 1997 stock plan
without filing a notice required under the state securities laws of California.
Therefore, some of our employees, directors and consultants who are California
residents have been granted options to purchase our common stock that may have
been issued in violation of state securities laws. The vast majority of these
individuals were employees of Acacia Biosciences, Inc., a company we acquired in
February 1999. Some of these option recipients have exercised their options. To
remedy this situation and comply with California law, we expect to offer to
repurchase these shares and options to purchase shares of our common stock.
Based upon stock option issuances and exercises prior to June 26, 2000, we
expect to offer to repurchase up to a maximum of 474,143 shares of our common
stock issued upon the exercise of stock options, at a repurchase price of $0.40
per share, and options to purchase 243,276 shares of our common stock at a
weighted average exercise price of $0.62 per share. If the repurchase offer is
accepted by all affected securityholders, we may be required to pay up to a
maximum of approximately $250,000 to repurchase these shares and options.
DELAWARE AND WASHINGTON LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT
COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER, EVEN IF THE TRANSACTION WOULD
BENEFIT OUR STOCKHOLDERS.
Provisions of our certificate of incorporation and bylaws and provisions of
Delaware and Washington law could have the effect of delaying, deferring or
preventing our acquisition, even if an acquisition would be beneficial to our
stockholders. See "Description of Capital Stock."
RISKS RELATED TO THE GENOMICS INDUSTRY
THERE MAY BE ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC
INFORMATION WHICH COULD LIMIT OUR ABILITY TO DEVELOP AND SELL OUR EXISTING
PRODUCTS AND NEW PRODUCTS.
The genetic screening of humans has raised ethical issues regarding the
confidentiality and appropriate uses of the resulting information. Government
authorities may regulate or prohibit the use of genetic testing to determine
genetic predispositions to certain conditions. Additionally, the public may
disfavor and reject the use of genetic testing. It is possible that the
government authorities and the public may fail to distinguish between the
genetic screening of humans and genomic and proteomic research. If this occurs,
our products and the processes for which our products are used, may be subject
to government regulations intended to affect genetic screening. Further, if the
public fails to distinguish between the two fields, it may pressure our
customers to discontinue the research and development initiatives for which our
products are used. If this occurs, the potential market for our products could
be reduced, which could seriously harm our financial condition and results of
operations.
CONSOLIDATION WITHIN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES MAY HARM
OUR EFFORTS TO MARKET AND COMMERCIALIZE OUR PRODUCTS.
Consolidation within the pharmaceutical and biotechnology industries has
heightened the competition for services of the type provided by us. If this
consolidation trend continues, it may result in fewer customers for our
services, price erosion and greater competition among us and our competitors.
Our potential partners may consolidate, which could decrease the value of our
technologies and shrink the research market we target for our products.
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THE PRODUCTS DEVELOPED USING THE INFORMATION FROM OUR DATA MAY BE SUBJECT TO
GOVERNMENT REGULATION.
Any new drug developed by the efforts of our customers as a result of their
use of our technologies must undergo an extensive regulatory review process in
the United States and other countries before it can be marketed. This regulatory
process can take many years and requires substantial expense. Changes in FDA
policies and the policies of similar foreign regulatory bodies can increase the
delay for each new drug, product license and biological license application. We
expect similar delays in the regulatory review process for any diagnostic or
agricultural product, where similar review or other approval is required. Even
if marketing clearance is obtained, a marketed product and its manufacturer are
subject to continuing review. Discovery of previously unknown problems with a
product may result in withdrawal of the product from the market.
No product resulting from the use of our data has been released for
commercialization in the United States or elsewhere. In addition, no
investigational new drug application has been submitted for any such product
candidate. We expect to rely on our customers to file such applications and
generally direct the regulatory review process. Our customers may not submit
applications for regulatory review, or may not obtain marketing clearance for
any products on a timely basis, if at all. If our customers fail to obtain
required governmental clearances, it will prevent them from marketing drugs or
diagnostic products until such clearance can be obtained, if at all. The
occurrence of any of these events may cause our business and results of
operations to suffer.
In addition, our access to and use of human or other tissue samples in the
expansion of our array and informatics and genomic platforms technologies may
become subject to government regulation, both in the United States and abroad.
United States and foreign government agencies may also impose restrictions on
the use of data derived from human or other tissue samples. If our access to or
use of human tissue samples, or our customers' use of data derived from such
samples, is restricted, our business will suffer.
RISKS RELATED TO THE OFFERING
THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.
An active trading market for our common stock may not develop following this
offering. You may not be able to sell your shares quickly or at the market price
if trading in our stock is not active. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters based upon a number of factors. The initial public offering price
may not be indicative of prices that will prevail in the trading market. See
"Underwriting" for more information regarding our arrangement with the
underwriters and the factors considered in setting the initial public offering
price.
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE, AND YOUR INVESTMENT COULD SUFFER A
DECLINE IN VALUE.
The trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to various factors,
many of which are beyond our control, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations by us or our competitors;
- new products or services introduced or announced by us or our competitors;
- changes in financial estimates by securities analysts;
- announcements concerning intellectual property disputes;
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- conditions or trends in the biotechnology, pharmaceutical and genomics
industries;
- changes in the market valuations of other similar companies;
- announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of our common stock.
As a result, you could lose all or part of your investment.
In addition, the stock market in general, and the Nasdaq National Market and
the market for technology companies, in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies. Further, there has been
particular volitality in the market prices of securities of biotechnology and
life sciences companies. These broad market and industry factors may seriously
harm the market price of our common stock, regardless of our operating
performance.
In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a stockholder files a securities class action suit against us, we
would incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation, which could seriously harm our business and results of operations.
YOU WILL SUFFER SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THE
COMMON STOCK YOU PURCHASE.
The initial public offering price of our common stock will be substantially
higher than the pro forma net tangible book value per share of our common stock.
Based on the initial public offering price of $14.00 per share and the private
placement price of $14.00 per share, if you purchase shares of common stock in
this offering, you will suffer immediate and substantial dilution of $8.86 per
share in the net tangible book value of the common stock. To the extent
outstanding options and warrants are exercised, you will suffer further
dilution.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or the perception that these sales could occur. In addition,
these factors could make it more difficult for us to raise funds through future
offerings of common stock. There will be 29,948,400 shares of common stock
outstanding immediately after this offering and the expected concurrent private
placement, or 31,028,400 shares if the representatives of the underwriters
exercise their over-allotment option in full. The 7,200,000 shares sold in the
offering will be freely transferable without restriction or further registration
under the Securities Act, except for any shares purchased by our "affiliates,"
as defined in Rule 144 of the Securities Act, and 22,748,400 shares (including
the shares which will be sold to Agilent in the concurrent private placement)
will be subject to a lock-up agreement with us or the underwriters providing
that the stockholder will not offer, sell or otherwise dispose of any of the
shares of common stock owned by them for a period of 180 days after the date of
this prospectus. 16,904,809 shares of common stock outstanding after the
offering (excluding the shares which will be sold to Agilent in the concurrent
private placement) will be "restricted securities" as defined in Rule 144. These
shares may be sold on the 181st day after the date of this prospectus without
registration under the Securities Act to the extent permitted by Rule 144 or
other exemptions under the Securities Act. See "Shares Eligible for Future
Sale."
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SUBSTANTIAL CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK AMONG OUR EXISTING
EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW
INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Upon completion of this offering and the concurrent private placement with
Agilent, our executive officers, directors and beneficial owners of five percent
or more of our common stock and their affiliates will, in aggregate,
beneficially own approximately 33.7% of our outstanding common stock or 32.5% if
the underwriters' over-allotment option is exercised in full, or more if they
purchase shares in this offering. As a result, these persons, acting together,
will likely have the ability to determine the outcome of all matters submitted
to our stockholders for approval, including the election and removal of
directors and any merger, consolidation or sale of all or substantially all of
our assets. In addition, such persons, acting together, will likely have the
ability to control the management and affairs of our company. Accordingly, this
concentration of ownership may harm the market price of our common stock by:
- delaying, deferring or preventing a change in control of our company;
- impeding a merger, consolidation, takeover or other business combination
involving our company; or
- discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of our company.
Please see "Principal Stockholders" for additional information on
concentration of ownership of our common stock.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN.
Management will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use a majority of the proceeds from this offering for research and
development, working capital and other general corporate purposes and to finance
potential acquisitions or investments. Because of the number and variability of
factors that determine our use of the net proceeds from this offering, these
uses may vary substantially from our currently planned uses. We may not be able
to invest these funds effectively, which would adversely affect our financial
returns.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements are found
in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this prospectus generally. When used
in this prospectus, the words "anticipate," "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Our actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors, including the
risks described in "Risk Factors" and elsewhere in this prospectus.
ABOUT THIS PROSPECTUS
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. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. 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 common stock.
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USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock being
offered by us hereby at the public offering price of $14.00 per share, and the
proceeds to us from the concurrent private placement with Agilent, are estimated
to be $102.7 million. The net proceeds would be $116.8 million if the
underwriters' over-allotment option is exercised in full. The principal purpose
of the offering is to obtain additional working capital. We intend to use the
net proceeds of this offering and the proceeds from the concurrent private
placement with Agilent for continued research and development, including
expanding our informational genomics platform to include other data types and
analysis tools. A significant portion of our current and planned research and
development activities relate to the use of DNA microarrays. Pursuant to a
supply agreement we entered into in May 2000 with Agilent, through the end of
2001 we are required to purchase at least $29.7 million of DNA microarrays,
subject to certain conditions. See "Business--Strategic Collaboration and Supply
Agreement--Agilent Technologies, Inc." We also intend to increase our marketing
and sales efforts to support our products and services, including the Rosetta
Resolver system. In addition, the proceeds will be used for working capital,
reduction of debt incurred pursuant to equipment financing agreements, and other
general corporate purposes and capital expenditures. We may also use a portion
of the proceeds for the acquisition of, or investment in companies,
technologies, or assets that complement our business. However, we have no
present understandings, commitments or agreements to enter into any potential
acquisitions and investments. As a result, our management will have the broad
discretion to allocate the net proceeds from this offering and the proceeds from
the concurrent private placement with Agilent. Pending these uses, we will
invest the net proceeds in short-term investment grade, interest-bearing
instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash dividends
in the foreseeable future. In the future the terms of credit agreements or
contractual provisions may impose restrictions or limitations on the payment of
dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000 on an
actual, pro forma and pro forma as adjusted basis:
- The "actual" column reflects our capitalization as of March 31, 2000
without any adjustments to reflect subsequent events or anticipated
events,
- The unaudited "pro forma" column reflects our capitalization as of
March 31, 2000 with adjustments to give effect to the conversion of all
shares of outstanding preferred stock into 14,597,342 shares of common
stock upon the closing of this offering,
- The unaudited "pro forma as adjusted" column reflects (1) the sale of
7,200,000 shares of the common stock offered in this offering at an
initial public offering price of $14.00 per share and the receipt of the
net proceeds therefrom, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, and the sale of
714,285 shares of common stock to Agilent in a private placement, at
$14.00 per share and the receipt of proceeds therefrom and (2) the change
in the authorized number of shares upon the completion of this offering.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, less current portion........................ $ 1,123 $ 1,123 $ 1,123
-------- -------- --------
Convertible preferred stock:
Preferred Stock, $0.001 par value; authorized: 18,000,000
shares actual and pro forma and 5,000,000 pro forma as
adjusted; outstanding: 14,597,342 shares actual; no
shares issued and outstanding pro forma and pro forma as
adjusted................................................ 82,738 -- --
Stockholders' equity:
Common Stock $0.001 par value; authorized: 40,000,000
shares actual and pro forma and 75,000,000 shares pro
forma as adjusted; outstanding: 7,436,773 shares actual;
22,034,115 shares issued and outstanding pro forma;
29,948,400 shares issued and outstanding, pro forma as
adjusted................................................ 7 22 30
Additional paid-in capital................................ 38,221 120,944 223,655
Notes receivable from stockholders........................ (1,685) (1,685) (1,685)
Deferred stock compensation............................... (12,282) (12,282) (12,282)
Deficit accumulated in the development stage.............. (37,207) (37,207) (37,207)
-------- -------- --------
Total stockholders' equity (deficit)........................ (12,946) 69,792 172,511
-------- -------- --------
Total capitalization........................................ $ 70,915 $ 70,915 $173,634
======== ======== ========
</TABLE>
The information in the table excludes as of March 31, 2000:
- 2,130,946 shares subject to outstanding options at a weighted average
exercise price of $2.36 per share;
- 7,423,948 additional shares available for grants under our stock option
and stock purchase plans; and
- 1,363,297 shares subject to outstanding warrants at a weighted average
exercise price of $2.04 per share.
23
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was $51,306,774
or $2.33 per share, after giving effect to the automatic conversion of all
outstanding shares of preferred stock into an aggregate of 22,034,115 shares of
common stock. Net tangible book value is determined by subtracting total
liabilities from total tangible assets.
After giving effect to (1) our sale of 7,200,000 shares of common stock in
this offering at the initial public offering price of $14.00 per share, assuming
that the underwriters' over-allotment option is not exercised, and our receipt
of the proceeds therefrom, and (2) our sale of 714,285 shares of common stock in
a concurrent private placement to Agilent, at a price of $14.00 per share, and
our receipt of the proceeds therefrom, the adjusted pro forma net tangible book
value at March 31, 2000 would have been $154,025,764, or $5.14 per share.
Pro forma net tangible book value per share before this offering and the
concurrent private placement to Agilent has been determined by dividing pro
forma net tangible book value by the pro forma number of shares of common stock
outstanding at March 31, 2000. This offering and the private placement to
Agilent will result in an increase in pro forma net tangible book value per
share of $2.81 to existing stockholders and dilution in pro forma net tangible
book value per share of $8.86 to new investors who purchase shares in this
offering. Dilution is determined by subtracting pro forma net tangible book
value per share after this offering from the initial public offering price of
$14.00 per share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $14.00
Pro forma net tangible book value per share at March 31,
2000.................................................... $2.33
Increase attributable to private placement with Agilent... 0.36
Increase attributable to new investors.................... 2.45
Pro forma net tangible book value after this offering....... 5.14
------
Dilution in net tangible book value to new investors........ $ 8.86
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000
the difference 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 based on the public
offering price of $14.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 22,034,115 73.6% $101,913,095 47.9% $ 4.63
Agilent private placement............... 714,285 2.4% 9,999,990 4.7% 14.00
New investors........................... 7,200,000 24.0% 100,800,000 47.4% 14.00
---------- ------ ------------ ------
Totals.................................. 29,948,400 100.0% $212,713,085 100.0%
========== ====== ============ ======
</TABLE>
The tables and calculations above assume no exercise of the underwriters'
overallotment option and excludes the following shares:
- 2,130,946 shares of common stock underlying options outstanding at
March 31, 2000 at a weighted average exercise price of $2.36 per share;
- 7,423,948 shares of common stock available for future grants under our
stock option and stock purchase plans; and
- 1,363,297 shares subject to outstanding warrants at a weighted average
price of $2.04 per share.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data presented below for the years ended December 31, 1997, 1998, and
1999, and the balance sheet data at December 31, 1998 and 1999 are derived from
our financial statements which have been audited by PricewaterhouseCoopers LLP,
independent accountants, included elsewhere in this prospectus. The selected
consolidated balance sheet data at December 31, 1997 is derived from our
financial statements that have also been audited by PricewaterhouseCoopers LLP
and that are not included in this prospectus. The selected statements of
operations for the period from inception (December 19, 1996) to March 31, 2000,
the three months ended March 31, 1999 and 2000 and the balance sheet data at
March 31, 2000 are derived from our unaudited financial statements included
elsewhere in this prospectus. The unaudited financial statements include, in the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, which we consider necessary for a fair presentation of our
financial position and results of operations for these periods. The selected
data in this section is not intended to replace our financial statements.
Historical results are not necessarily indicative of the results to be expected
in the future.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31, PERIOD FROM INCEPTION
------------------------------ ------------------- (DECEMBER 19, 1996) TO
1997 1998 1999 1999 2000 MARCH 31, 2000
-------- -------- -------- -------- -------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................. $ -- $ -- $ 983 $ 292 $ 548 $ 1,531
------- ------- -------- -------- -------- --------
Operating expenses:
Research and development(1)........ 1,411 5,313 12,289 2,578 4,092 23,105
General and administrative(1)...... 882 2,380 9,272 1,100 4,620 17,154
------- ------- -------- -------- -------- --------
Total operating expenses......... 2,293 7,693 21,561 3,678 8,712 40,259
------- ------- -------- -------- -------- --------
Loss from operations................. (2,293) (7,693) (20,578) (3,386) (8,164) (38,728)
Other income and (expenses)
Interest income.................... 440 707 639 83 365 2,151
Interest expense................... (46) (207) (293) (65) (71) (617)
Other, net......................... 14 81 (82) 30 (26) (13)
------- ------- -------- -------- -------- --------
Net loss............................. (1,885) (7,112) $(20,314) $ (3,338) $ (7,896) $(37,207)
========
Deemed dividend upon issuance of
convertible preferred stock........ -- -- -- -- (7,285)
------- ------- -------- -------- --------
Net loss attribute to common
stockholders....................... $(1,885) $(7,112) $(20,314) $ (3,338) $(15,181)
======= ======= ======== ======== ========
Basic and diluted net loss per
share.............................. $ (5.29) $ (5.29) $ (5.04) $ (1.26) $ (2.77)
Weighted average shares used in
computing basic and diluted net
loss per share..................... 356 1,344 4,030 2,655 5,473
Pro forma basic and diluted net loss
per share.......................... $ (1.73) $ (0.49)
Weighted average shares used in
computing pro forma basic and
diluted net loss per share......... 11,741 16,171
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------ AS OF MARCH 31,
1997 1998 1999 2000
-------- -------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
Cash, cash equivalents and short-term investments........... $15,347 $ 8,252 $19,263 $55,195
Working capital............................................. 14,902 7,115 15,451 51,076
Total assets................................................ 16,933 11,393 34,788 79,550
Long term obligations, less current portion................. 1,036 1,344 1,389 1,123
Convertible preferred stock................................. 17,001 17,001 41,432 82,738
Stockholders' equity (deficit).............................. (1,723) (8,240) (15,595) (12,946)
</TABLE>
--------------------------
(1) Operating expenses include charges for stock based compensation as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31, PERIOD FROM INCEPTION
------------------------------ ------------------- (DECEMBER 19, 1996) TO
1997 1998 1999 1999 2000 MARCH 31, 2000
-------- -------- -------- -------- -------- ----------------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Research and development..................... $42 $490 $1,496 $440 $ 806 $2,834
General and administrative................... 23 91 2,075 119 1,670 3,859
--- ---- ------ ---- ------ ------
$65 $581 $3,571 $559 $2,476 $6,693
=== ==== ====== ==== ====== ======
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
THE "SELECTED CONSOLIDATED FINANCIAL DATA," CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leader in the emerging field of informational genomics. Our
technology platform consists of the Rosetta Resolver system, our FlexJet DNA
microarrays and our coherent data sets of information generated from DNA
microarrays. We generate revenue by providing our technologies both as separate
components or as integrated informational genomics systems to pharmaceutical,
biotechnology and agricultural customers. From our inception in December 1996
through March 31, 2000, our operating activities were primarily devoted to
research and development of technologies for our informational genomics
platform, including the development of the Rosetta Resolver system, acquiring
assets, recruiting personnel, business development and raising capital.
In October 1999, we entered into a strategic collaboration with Agilent. We
agreed to exclusively partner with Agilent to make and sell products in the gene
expression field including DNA microarrays, DNA microarray design services, gene
expression data analysis systems and other products. In addition, Agilent
purchased 2,285,714 shares of our Series D preferred stock, and in June 2000 we
entered into an agreement to sell Agilent an additional 714,285 shares of common
stock concurrent with this offering in a private placement at the initial public
offering price of $14.00 per share. Under the collaboration agreement, we
co-market the Rosetta Resolver system with Agilent on an exclusive basis and
share revenues for the Rosetta Resolver system sales and DNA microarray design
services. In June 2000, we released and installed a commercial release of the
Rosetta Resolver system at the facilities of our customer, DuPont
Pharmaceuticals Company. We have received a purchase order from Harvard
University's Center for Genomics Research for a commercial sale of the Rosetta
Resolver system. In addition, discussions are ongoing with major pharmaceutical
and biotechnology companies regarding additional commercial sales. Agilent also
has the exclusive right to market and sell DNA microarrays manufactured using
our inkjet and related DNA microarray design technology in exchange for royalty
payments to us. In connection with this agreement, we received payments of
$4.5 million for research and development and for certain licensing rights as of
December 31, 1999 of which $346,000 was recognized as revenue in 1999 and
$4.2 million was recorded as deferred revenue as of December 31, 1999. Agilent
has agreed to pay us additional amounts in 2000 and 2001 for research and
development activities. Amounts received from Agilent for research and
development and licensing rights are recognized as revenue ratably over the term
of the agreement. In addition, in May 2000, we entered into a supply agreement
with Agilent pursuant to which Agilent will supply us with DNA microarrays.
Through the end of 2001 we are required to purchase at least $29.7 million of
DNA microarrays from Agilent, subject to certain conditions. Under the supply
agreement, we may request, and Agilent is required to supply, amounts in excess
of this minimum. See "Business--Strategic Collaboration and Supply
Agreement--Agilent Technologies, Inc."
Since our inception, we have incurred significant losses and as of
March 31, 2000, we had an accumulated deficit of $37.2 million. Our losses have
resulted principally from costs incurred in research and development, and from
general and administrative costs associated with our operations. Operating
expenses increased to $8.7 million in the three months ended March 31, 2000
compared to $3.7 million in the three months ended March 31, 1999. Operating
expenses increased to $21.6 million in 1999 from $7.7 million in 1998 and
$2.3 million in 1997. We expect to incur additional operating losses over at
least the next several years as we continue to expand our research and product
development efforts and infrastructure.
27
<PAGE>
To date, our revenue has been derived principally from revenue earned under
our collaboration agreements and from government grants. We have generated a
substantial portion of our revenue to date from a limited number of sources. Our
potential sources of revenue for the next several years are likely to be from
the sale of products and services sold by Agilent and research payments under
existing and possible future collaborative arrangements.
In view of our limited operating history and the rapidly evolving nature of
our business, we believe that period-to-period comparisons of our operating
results, particularly for each of the years ended 1999, 1998 and 1997, are not
meaningful and should not be relied upon as an indication of future performance.
In March 2000, we sold $41.6 million of Series E preferred stock in a
private equity placement to a number of financial and strategic investors
pursuant to the terms of a stock purchase agreement. We issued a total of
4,442,378 shares of Series E preferred stock at price of $9.36 per share. The
Series E preferred stock will convert to common stock at a one-to-one ratio upon
the closing of this offering. The Series E preferred stock contains
substantially the same rights and preferences as our previously issued series of
preferred stock.
In March 2000, we entered into a license agreement with Oxford Gene
Technology whereby they granted us a nonexclusive, worldwide sublicense to
patents related to the fabrication and use of nucleic acid arrays. In connection
with this license agreement, we issued Oxford Gene Technology 686,928 shares of
our common stock valued at $11.00 per share at the time of issuance and paid a
cash license fee of $1.0 million. Under the agreement, we and Oxford Gene
Technology are required to pay each other quarterly royalty payments based on
the provision of services.
STOCK-BASED COMPENSATION
Stock-based compensation expense for the years ended December 31, 1999 and
1998 and for the three months ended March 31, 2000 and 1999 resulted from stock
options granted to employees at exercise prices less than the fair market value
of the common stock on the date of grant to employees, options granted to
outside consultants for services, and for the sale of restricted stock to
founders deemed to be non-employees. We recorded total deferred stock-based
compensation of $12.5 million in the three months ended March 31, 2000 and
$5.3 million in 1999 and $1.0 million in 1998. Deferred stock-based compensation
is being amortized to expense over the vesting periods of the underlying
options, generally four years. The stock-based compensation expense has been
allocated to research and development expense and general and administrative
expense, as appropriate. Based on deferred stock-based compensation recorded as
of March 31, 2000, we expect to record amortization for deferred stock-based
compensation approximately as follows: $5,884,578 for the remaining nine months
in 2000, $3,956,165 in 2001, $1,859,936 in 2002, $571,894 in 2003 and $9,299 in
2004. The amount of deferred compensation expected to be recorded in future
periods may decrease if unvested options for which deferred stock-based
compensation has been recorded are subsequently cancelled. In addition, the
amount of deferred compensation expense to be recorded in future periods for
stock awards granted to non-employees will fluctuate based on the fair value of
our common stock in future periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES. Revenues increased to $548,000 in the three months ended
March 31, 2000 from $292,000 in the three months ended March 31, 1999. The
increase was due primarily to collaboration revenue recognized in connection
with a collaboration agreement entered into with Agilent in October 1999 and to
a lesser extent from other collaboration agreements entered into in the three
months ended March 31, 2000.
28
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $4.1 million in the three months ended March 31, 2000 from
$2.6 million in the three months ended March 31, 1999. A portion of the increase
resulted from an increase in the amortization of deferred stock-based
compensation to $806,000 in the three months ended March 31, 2000 from $440,000
in the three months ended March 31, 1999. The remainder of the increase was
primarily due to increased payroll and personnel expenses, including recruitment
and relocation expenses, increased usage of laboratory materials and supplies,
facility costs and depreciation of facilities and laboratory equipment. The
number of research personnel was 83 at March 31, 2000 and 45 at March 31, 1999.
Research and development expenses consisted of costs to develop and analyze DNA
microarrays, develop and use proprietary technologies to analyze these arrays,
build our data set of coherent expression profiles and design a large set of
analysis tools. We expect research and development expenses to increase
significantly in the future to support the expansion of our research and
development activities and to fund our obligations under the supply agreement we
entered into with Agilent in May 2000, under which we are required to purchase
at least $29.7 million of DNA microarrays through the end of 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $4.6 million in the three months ended March 31, 2000 from
$1.1 million in the three months ended March 31, 1999. A portion of the increase
resulted from an increase in the amortization of deferred stock based
compensation to $1.7 million in the three months ended March 31, 2000 from
$119,000 in the three months ended March 31, 1999. The remainder of the increase
was primarily due to increased payroll and personnel expenses, including
recruitment and relocation expenses, facility costs, legal fees and business
development activities. In addition, general and administrative expenses for the
three months ended March 31, 2000 included $760,000 of amortization expense as a
result of our acquisition of Acacia in February 1999 as compared to $275,000
included in the three months ended March 31, 1999. See Note 3 to our
consolidated financial statements. We expect general and administrative expenses
to continue to increase in the future to support the expansion of our business
activities and due to costs associated with operating as a public company. In
addition, expenses related to the amortization of intangible assets will
increase as a result of the licensing agreement entered into with Oxford Gene
Technology in March 2000. In connection with this licensing agreement, we
recorded an intangible asset in the amount of $8.8 million which will be
amortized to general and administrative expense over a seven year period. The
amortization of this intangible asset will result in the recognition of
approximately $943,000 of expense for the remainder of 2000 and $1.3 million of
expense per year thereafter for the term of the agreement.
INTEREST INCOME. Interest income increased to $366,000 in the three months
ended March 31, 2000 from $83,000 in the three months ended March 31, 1999. The
increase was primarily due to higher average balances of cash and cash
equivalents and short term investments for the three months ended March 31, 2000
compared to the three months ended March 31, 1999, as a result of the investment
of the proceeds from the sale of Series D preferred stock in October 1999 and
Series E preferred stock in March 2000.
DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK. We recorded a
deemed dividend of $7.3 million in March 2000 upon the issuance of Series E
convertible preferred stock. At the date of issuance, we believed the per share
price of $9.36 represented the fair value of the preferred stock and was in
excess of the fair value of our common stock. Subsequent to the commencement of
our initial public offering process, we re-evaluated the fair market value of
our common stock as of March 2000 and determined it to be $11.00 per share.
Accordingly, the incremental fair value is deemed to be the equivalent of a
preferred stock dividend. We recorded the deemed dividend at the date of
issuance by offsetting charges and credits to additional paid in capital,
without any effect on total stockholders' equity. The amount increased the loss
allocable to common stockholders, in the calculation of basic net loss per share
for the three months ended March 31, 2000.
29
<PAGE>
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Revenues increased to $983,000 in 1999 from none in 1998. The
increase was due primarily to collaboration revenue recognized in connection
with a collaboration agreement entered into with Agilent in October 1999 and
grant revenues recognized in connection with Small Business Innovation Research
Program grants from the National Institutes of Health and a grant from the
Department of Energy. We do not expect to recognize any grant revenues in 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $12.3 million in 1999 from $5.3 million in 1998. The increase was
primarily due to increased payroll and personnel expenses, including recruitment
and relocation expenses, increased usage of laboratory materials and supplies,
facility costs and depreciation of facilities and laboratory equipment. Research
and development expenses also included $1.4 million of license fees incurred in
1999 as compared to $225,000 of license fees incurred in 1998. In addition, a
portion of the increase resulted from an increase in the amortization of stock
based compensation to $1.5 million in 1999 from $490,000 in 1998. The number of
research and development personnel was 70 at December 31, 1999 and 45 at
December 31, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $9.3 million in 1999 from $2.4 million in 1998. The increase was
primarily due to increased expenses related to payroll and personnel, including
recruitment and relocation expenses, facility costs, legal fees and business
development activities. In addition, general and administrative expenses in 1999
included $2.8 million of amortization expense relating to intangible assets as a
result of our acquisition of Acacia Biosciences in February 1999. In addition, a
portion of the increase resulted from an increase in the amortization of
deferred stock based compensation to $2.1 million in 1999 from $91,000 in 1998.
See Note 3 of the notes to our consolidated financial statements.
INTEREST INCOME. Interest income decreased to $639,000 in 1999 from
$707,000 in 1998. The decrease was due to lower average balances of cash and
cash equivalents and short term investments in 1999 as compared to 1998.
INTEREST EXPENSE. Interest expense increased to $293,000 in 1999 from
$207,000 in 1998. The increase in 1999 from 1998 resulted from increased
interest expense associated with higher levels of debt from borrowings under
equipment financing agreements.
OTHER INCOME (EXPENSE). Other income (expense) decreased to an expense of
$82,000 in 1999 from income of $81,000 in 1998. The decrease was due primarily
to the write-off of leasehold improvements and office and laboratory equipment.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUE. We had no revenue in both 1998 and 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $5.3 million in 1998 from $1.4 million in 1997. The increase was
primarily due to increased payroll and personnel expenses, including recruitment
and relocation expenses. In addition, a portion of the increase resulted from an
increase in the amortization of deferred stock based compensation to $490,000 in
1998 from $42,000 in 1997. The number of research and development personnel was
45 at December 31, 1998 and 21 at December 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.4 million in 1998 from $883,000 in 1997. The increase was
primarily due to increased expenses related to payroll and personnel, including
recruitment and relocation expenses, facility costs, legal fees and business
development activities.
30
<PAGE>
INTEREST INCOME. Interest income increased to $707,000 in 1998 from
$440,000 in 1997. The increase was due to higher average balances of cash and
cash equivalents and short term investments in 1998 compared to 1997, as a
result of the investment of the proceeds from the sale of Series A preferred
stock in June through October of 1997.
INTEREST EXPENSE. Interest expense increased to $208,000 in 1998 from
$45,000 in 1997. The increase was primarily the result of increased debt from
borrowings under equipment financing agreements.
OTHER INCOME (EXPENSE). Other income (expense) increased to $81,000 in 1998
from $14,000 in 1997. The increase was due primarily to rental income received
for the subletting of approximately 3,800 square feet of our facilities.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 2000, we have funded our operations with
$79.2 million from private equity financings, $5.1 million from collaboration
agreements and $3.3 million from equipment financing arrangements. At March 31,
2000, cash and cash equivalents, and short term investments totaled
$55.2 million. Our cash reserves are held in a variety of interest-bearing
instruments including high-grade corporate bonds, commercial paper, and money
market accounts.
Cash used in operations in the three months ended March 31, 2000 was
$4.0 million compared to $1.9 million in the three months ended March 31, 1999.
Our net loss of $7.9 million in the three months ended March 31, 2000 was
partially offset by non-cash charges of $3.6 million related to deferred stock
compensation, amortization, depreciation expense and amortization of intangible
assets. Cash used in operations in 1999 was $7.4 million compared with
$5.8 million in 1998. Our net loss of $20.3 million in 1999 was partially offset
by non-cash charges of $7.4 million related to deferred stock compensation
amortization, depreciation expense, and amortization of intangible assets, and
working capital changes of $4.7 million.
Investing activities in the three months ended March 31, 2000, other than
changes in our short term investments, used $1.7 million due to leasehold
improvements and capital expenditures and expenditures pursuant to license
agreements. Investing activities in 1999, other than the changes in our short
term investments, used $2.5 million due primarily to leasehold improvements and
capital expenditures. We expect capital expenditures to increase in the future
as we build additional infrastructure for our informational genomics systems and
expand our facilities.
Cash provided by financing activities was $41.6 million in the three months
ended March 31, 2000 compared to cash used by financing activities of $145,000
in the three months ended March 31, 1999. Financing activities included the sale
of preferred stock to investors in the three months ended March 31, 2000. Cash
provided by financing activities was $20.9 million in 1999 compared to $589,000
in 1998. Financing activities included the receipt of $20.9 million from the
sale of preferred stock to investors in 1999.
In 1997, we entered into a financing arrangement for the purchase of
property and equipment, which, as amended in 1998 and 1999, provides for an
aggregate facility of $3.3 million. As of March 31, 2000, we had drawn down
$3.1 million and had $200,000 remaining available under this arrangement. These
obligations are collateralized by the equipment financed, bear interest at a
weighted-average fixed rate of approximately 12.3%, and are due in monthly
installments through December 2003. In addition, through March 31, 2000, we had
drawn down $223,000 on a bank line of credit to finance capital expenditures.
The amount available under the line of credit was $375,000 at March 31, 2000. At
March 31, 2000, we had $2.1 million in capitalized lease obligations and notes
payable, of which $749,000 is due for the remainder of 2000. The bank line of
credit had an interest rate of 10.5% and was paid off in its entirety in
March 2000.
31
<PAGE>
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing and supporting
our products, and other factors. We expect to devote substantial capital
resources to expand our research and development efforts, to expand marketing
and sales efforts to support our products and services, and for other general
corporate activities. In connection with our research and development efforts,
in May 2000, we entered into a supply agreement with Agilent pursuant to which
we are required to purchase at least $29.7 million of DNA microarrays through
the end of 2001. Our purchase obligations under this agreement may be reduced
based on certain financial thresholds or if the parties otherwise agree, or
these amounts may be increased by us providing revised forecasts to Agilent. See
"Business--Strategic Collaboration and Supply Agreement--Agilent Technologies,
Inc." We believe that our current cash balances, together with the net proceeds
of this offering, the proceeds of the concurrent private placement to Agilent
and revenue to be derived from our collaboration with Agilent, including revenue
from the sales of the Rosetta Resolver System, will be sufficient to fund our
operations at least through December 31, 2001. After this period, we may need to
sell additional equity or debt securities or obtain additional credit
arrangements. Additional financing may not be available on terms acceptable to
us or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Financial Instruments and for Hedging Activities, SFAS 133, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on our
results of operations or financial condition when adopted as we hold no
derivative financial instruments and do not currently engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. We believe our revenue
recognition practices are in conformity with the guidelines of SAB 101.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates, particularly
because the majority of our investments are in short-term debt securities issued
by U.S. corporations. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive
without significantly increasing risk. To minimize risk, we maintain our
portfolio of cash, cash equivalents and short term investments in a variety of
high-grade securities and with a variety of issuers, including corporate notes,
commercial paper and money market funds. Due to the nature of our short-term
investments, we believe that we are not subject to any material market risk
exposure. We do not have any foreign currency or other derivative financial
instruments.
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BUSINESS
OVERVIEW OF OUR BUSINESS
We are a leader in the emerging field of informational genomics.
Informational genomics involves acquiring and analyzing information gathered
from throughout the cell to identify a majority of the medically important drug
targets and gene functions. We combine the power of informatics and genomics to
create a proprietary platform that accelerates and enhances the drug discovery
process for pharmaceutical and biotechnology companies and improves agricultural
products.
Our informational genomics platform can accelerate drug discovery and
healthcare research by converting the rapidly growing amount of expression
profiling data into information critical for these processes. We provide a
proprietary genomic expression profiling platform of hardware and software
products that is designed to provide seamless solutions for efficient,
cost-effective and powerful discovery programs. Our technology builds a critical
mass of coherent gene expression data and provides a comprehensive description
of a given drug compound's effect on all relevant targets within a cell
simultaneously.
Our technology platform consists of the Rosetta Resolver Expression Data
Analysis System, our FlexJet DNA microarrays and our coherent data sets of
information generated from microarrays. We generate revenue by providing our
technologies as separate components or as integrated informational genomics
systems to pharmaceutical, biotechnology and agricultural customers. In
October 1999, we entered into a seven-year strategic partnership with Agilent
Technologies, Inc. to co-market the Rosetta Resolver system and for Agilent to
manufacture and sell FlexJet DNA microarrays.
BACKGROUND
All living cells contain molecules of DNA. DNA molecules determine the
inherited characteristics of all organisms. Each double helix DNA molecule
contains two complementary strands comprised of four different types of
nucleotide bases, commonly known as G, C, A and T. The order of these bases,
called the DNA sequence, is used by the cell to make proteins, replicate itself
and perform its specific role in the organism. Each G on one DNA strand pairs
with a C on the complementary strand, and similarly each A pairs with a T. This
pairing is the basis for many of the measurement technologies discussed below.
The entire DNA content of an organism is called its genome.
Genes, which are segments of DNA, contain a set of instructions for the cell
to produce a specific protein. Each cell contains a full set of genes, but each
cell type expresses only those genes necessary for its specific function. When
genes are expressed, copies of the DNA sequence, called messenger RNA, are used
to direct the manufacture of a protein. Cells use proteins to carry out their
functions. For example, the insulin receptor protein on pancreatic cells is
essential for the proper metabolism of sugar. For an individual to be healthy,
the correct proteins must be produced at the right time in the appropriate
amounts in the correct cells. DNA variations, along with effects of environment
and infectious disease, can change the amount and function of a protein. Drugs
are effective to the extent that they modify specific protein functions.
Efforts to discover the order of the nucleotide bases in large segments of
the human genome, known as sequencing, began in the mid-1980s when high
throughput sequencing became available. The goal was to develop new medical
treatments and diagnostics based on genetic information. In the early 1990s,
governments and foundations sponsored an intensification of these efforts, which
came to be known as the Human Genome Project. According to the Human Genome
Project, the overall public sector expenditure on the Human Genome Project is
expected to total approximately $2 billion by 2001. In parallel with the public
sector effort, a large private sector effort emerged in the mid 1990s. It is
expected that the entire human genome will be fully sequenced by the end of
2000. However, the
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vast amount of sequence information produced cannot be directly used for the
development of medical applications without a more sophisticated understanding
of gene function.
As sequencing of the human genome nears completion, researchers are
increasingly focusing their efforts on interpreting this broad base of sequence
information. This will result in a better understanding of the roles genes and
proteins play in biochemical pathways and the mechanisms of disease. These
advances in genomics have generated high expectations that the drug discovery
process may be transformed through rapid and efficient discovery of new drug
targets in model organisms and human cells. Drug targets are proteins within
each cell that are potentially responsive to drug therapies. When these targets
are identified, researchers test many compounds against them, and, based on the
reaction of the target to the compound, attempt to determine if a potential drug
candidate is likely to be successful.
Genomics has given rise to a variety of methodologies that are now being
used to discover new targets and therapeutic approaches. For example, the
discovery of new targets is often facilitated by comparing the DNA sequence of
the potential target with that of known targets. This approach may also be used
to identify which molecular target in humans is likely to be analogous to a
target previously identified in an animal model. Targets can also be identified
by determining which genes are responsible for a given disease.
Genomics has helped identify genetic variations which are a major component
of nearly all diseases, including cancer, diabetes and cardiovascular disease.
Disease risks can be identified by monitoring variations in responsible genes.
This can be done by analyzing the change in a single nucleotide base, called a
single nucleotide polymorphism. Although analysis of single nucleotide
polymorphisms may potentially help select which drug will be best for a given
individual, this analysis requires large scale human studies to establish these
useful associations. This makes it an expensive and difficult process.
Additionally, this analysis may be inaccurate, non-automated, inflexible or slow
and is therefore primarily effective as a research tool.
Much of the current focus of genomic companies has been on generating large
amounts of DNA sequence data. Without knowledge of a gene's function, however,
DNA sequence data are insufficient to materially impact the drug development
process. Associations between sequence and detailed cellular function are
complex and still mostly unknown.
Detailed measurements of the actual biological functioning of the cell at a
molecular level are important to identify the best targets and illuminate
mechanisms of disease. Recently, two approaches have been developed that attempt
to address this need by monitoring changes in the levels of selected cellular
components. The first approach, expression profiling, monitors the level of
messenger RNA for each gene within a cell. The most promising expression
profiling technologies allow the monitoring of tens of thousands of genes. This
is made possible by arranging either unique DNA fragments, called cDNAs, or
shorter single-stranded DNA pieces, called oligonucleotides, in a dense grid on
a glass surface. This grid is known as a DNA microarray. Each cDNA or
oligonucleotide in a microarray binds to the messenger RNA of a specific gene,
thereby providing a report on that gene's expression level. The second approach,
proteomics, monitors the level of protein expressed by each gene within a cell.
Proteomics measurements most often are obtained by separating the mix of
proteins in the cell by dragging them through a resistive substance, often a
gel, with the result that proteins of different sizes and properties end up in
different spots on the gel. To the extent that these spots can be separated and
identified, current methods allow the monitoring of protein levels within a
cell.
Two approaches currently being used for determining the function of proteins
include the use of model organisms and the use of a standard biochemical assay.
Model organisms are those for which all or most of the genetic sequence of the
organism's genome is known. Standard model organisms include yeast, flatworms
and fruit flies. The use of model organisms for determining protein function in
humans is based on the concept that genetic sequence and biochemical pathways
and mechanisms are conserved
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or maintained through genes of similar or identical sequence across different
organisms. The other approach, biochemical assays, involves the use of an assay
that uses enzymes to determine the function of a protein.
LIMITATIONS AND DEFICIENCIES OF CURRENT APPROACHES
The availability of DNA sequence information and of genome-wide expression
and proteomic measurements has created high expectations for improvements in
drug discovery, healthcare and agriculture. However, these improvements are
hampered by current limitations of the measurement technologies, and by a
shortage of powerful integrated analysis tools that are capable of managing both
large amounts and disparate types of data.
NEITHER DNA SEQUENCES NOR PROTEIN LEVELS GIVE DIRECT CLUES TO CELLULAR
FUNCTION.
Current DNA sequencing technologies, which provide information about the
sequence of a gene, and proteomics technologies, which provide information about
protein levels, give little direct insight into protein function. Consequently,
this information is of minimal value in drug discovery and analyzing disease
response. The high cost of existing DNA microarrays and the accuracy limitations
of arrays and the measurement process generally discourage the widespread use of
them to determine protein function.
The use of model organisms to determine protein function in a target species
such as humans has some of the same limitations as relying solely on gene
sequence information. While some protein function is conserved or maintained
across species, frequently functions are only loosely conserved or maintained
across species. In addition, determining protein function by using model
organisms or a standard biochemical assay is limited because these approaches
can only analyze a single protein at a time.
CURRENT GENE EXPRESSION TECHNOLOGIES ARE EXPENSIVE AND OF LIMITED ACCURACY.
A single DNA microarray used in gene expression typically costs from $1,000
to $10,000, depending on the type of array purchased. In addition, due to
limited accuracy in the measurement process, subtle changes in gene expression
are usually not detected. Although expression profiling can be used to monitor
protein functions in the cell, large numbers of high-accuracy DNA microarray
experiments are needed to accomplish this.
CURRENT GENE EXPRESSION ANALYSIS TOOLS AND APPROACHES ARE INADEQUATE.
The increasing use of genomics and proteomics tools in the drug discovery
process has generated tremendous quantities of data from disparate array
platforms and experimental conditions. Current tools are inadequate for
effectively analyzing these large volumes of disparate data. Cross-comparisons
between experiments could be informative. However, these comparisons are
hampered by a lack of consistency in the data and by a lack of informatics
tools. Even when the data are of sufficient quality to support
cross-comparisons, current approaches for analyzing gene expression data do not
have the ability to report multiple protein functions. Thus, potentially
valuable information on drug toxicity, therapeutic targets and disease
mechanisms, as well as on individual human differences, is wasted.
OUR SOLUTION
Our proprietary technologies overcome many of the limitations of other
current technologies by providing an integrated system of informatics tools, DNA
microarrays and gene expression profile data sets that rapidly and accurately
determine protein function simultaneously across the entire cell. Our platform
technologies enable pharmaceutical, biotechnology and agricultural companies to
convert large volumes of data from disparate sources into information that can
accelerate and enhance their
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discovery process. We believe our solution is critical to solving fundamental
inefficiencies in drug discovery, improving the quality of lead compounds and
providing an early indication of potential side effects. Our solution includes
the following:
INTEGRATED, ENTERPRISE-LEVEL SOFTWARE.
The Rosetta Resolver Expression Data Analysis System is the first
enterprise-level software product enabling organizations to securely assemble,
store in a single database and analyze gene expression data from multiple
experiments generated from the most commonly used expression profiling
technologies. Customers use the Rosetta Resolver system as a stand-alone
informatics tool to streamline their independent drug discovery efforts. The
Rosetta Resolver system can also be used by our collaborators to take advantage
of the high quality and coherent data that we generate.
HIGHLY SENSITIVE AND COST-EFFECTIVE GENOME WIDE SENSORS.
We have developed a flexible DNA microarray platform, our FlexJet DNA
microarray, based on inkjet printing technology. Our FlexJet DNA microarrays
allow us to simultaneously monitor small changes in the expression levels of
thousands of genes. These measurements reveal changes in protein functions more
reliably than direct measurements of protein levels. We believe our FlexJet DNA
microarrays are more cost-effective than traditional oligonucleotide microarrays
and can be customized for individual customer needs more quickly than competing
technologies.
COHERENT DATA SETS CREATE MORE VALUABLE INFORMATION.
Using our experience with tens of thousands of array experiments and several
different expression technology platforms, we have developed standardized
protocols and processes to ensure that expression profiling data reflect
departures from a known biological reference. Our approach enables meaningful
comparisons to be made among many disparate expression experiments. This allows
us and our collaborators to discover medically important cellular pathways,
identify useful disease subclassifications and predict unexpected drug
toxicities and interactions and to develop other high value information
products. Because the number of possible intercomparisons grows much faster than
the number of experiments, the value of information generated by our platform
grows more rapidly than the amount of data analyzed. This is a fundamental
strength of informational genomics.
INTEGRATED PLATFORM FOR DRUG DISCOVERY.
Components of our informational genomics system can be used individually or
as an integrated platform. The integration of the Rosetta Resolver system,
FlexJet DNA microarrays and coherent data sets is designed to provide seamless
solutions for efficient, cost-effective and powerful drug discovery.
OUR PRODUCTS AND SERVICES
Our primary products are the Rosetta Resolver Expression Data Analysis
System, FlexJet DNA microarrays and coherent data sets of information generated
from microarrays. We also offer professional consulting services to complement
and enhance our products. As an integrated platform or as individual components,
our products and services offer essential tools to accelerate and improve the
drug discovery process.
RESOLVER EXPRESSION DATA ANALYSIS SYSTEM.
The Rosetta Resolver system is an integrated, enterprise-wide solution for
storing, retrieving and analyzing large quantities of gene expression data
generated using cDNA microarrays, oligonucleotide microarrays and other
technologies. Its architecture supports the concurrent analysis and comparison
of
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tens of thousands of expression profiling experiments and is designed to
accommodate the increasing diversity of data types and analysis algorithms.
The Rosetta Resolver system enables users to securely assemble, store in a
single database and analyze gene expression data from multiple expression
technology platforms. The product's flexible interfaces allow users to add, edit
and maintain cell type, RNA and experiment annotations, and to collaborate and
share information with other users. The Rosetta Resolver system provides tools
to find and analyze expression profiling information quickly and efficiently
through custom database queries. Users of the Rosetta Resolver system can
instantly link to expression profile databases and other databases on corporate
intranets or the Internet.
The Rosetta Resolver system's proprietary architecture and seamless
integration of software and hardware allow users to rapidly conduct
sophisticated matching of expression profile patterns, known as pattern matching
on very large data sets. The Rosetta Resolver system's architecture and analysis
features were initially developed to meet the needs of our internal research and
development environment, which represented a realistic high-throughput
enterprise context. Our scientists have performed and analyzed tens of thousands
of array experiments, and interact with our molecular biologists, laboratory
technicians and applied mathematicians on product development efforts. Our
experience together with our interactive approach has resulted in design
decisions and algorithm choices that enable quick delivery of the most relevant
analysis results.
The advantages of the Rosetta Resolver system include:
- data compatibility across microarray platforms;
- rapid access to large data sets for clustering and pattern matching
applications;
- fast visualization tools to view and draw assumptions about large data
sets;
- similarity searches based on our proprietary understanding of the most
biologically meaningful criteria; and
- administrator controlled storage and retrieval of organization-wide data.
We offer professional bioinformatics services to integrate the Rosetta
Resolver system with our customers' unique enterprise resources, to produce
state-of-art expression profile data, and to develop special analysis software
for their research needs. The Rosetta Resolver system is jointly marketed by
Agilent and us and is being sold by Agilent pursuant to our collaboration
agreement.
FLEXJET DNA MICROARRAYS.
FlexJet DNA microarrays consist of different DNA sequences built up at tens
of thousands of different positions on glass slides using a modified inkjet
printer head to deliver the individual DNA building blocks G, C, A or T to the
appropriate locations. This inkjet technology is fast, flexible, reproducible
and economical and it can produce new array designs in a matter of hours, which
is significantly faster than other array technologies. We synthesize
oligonucleotides directly on glass slides.
Prior to our FlexJet DNA microarray methodology, there were two standard
methods used for creating microarrays on slides: the deposition of
pre-synthesized cDNAs and the photolithographic synthesis of oligonucleotides.
Unlike the manufacture of cDNA microarrays, our FlexJet DNA microarrays can be
directly manufactured using sequence information stored in computer files, thus
eliminating the expense and difficulties associated with manufacturing
pre-synthesized cDNAs. In contrast to photolithographic arrays, our FlexJet DNA
microarrays do not require the manufacture of an extensive series of chromium
masks for each array designed, thereby eliminating the time and expense
associated with chromium mask manufacturing.
Prior to synthesizing our FlexJet DNA microarrays, we perform extensive
calculations to determine the possible interactions between DNA sequences in the
genome to choose the oligonucleotide probes that will report the desired genes
and no others. This process, coupled with the high accuracy with
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which the oligonucleotide sequences are synthesized, allows sensitive and
specific gene expression reporting using only a single reporter feature per
gene, rather than the many reporters used in other technologies. This, in turn,
allows more than 25,000 genes to be monitored using a single microscope slide.
The flexibility of the inkjet approach is an attractive feature for
applications in which a large number of different array designs are needed, or
where the microarray design needs to change quickly in response to new
information. The benefits of this flexibility include:
- the ability to update microarray designs in response to ongoing human
sequencing efforts;
- looking for alternative forms of genes in different tissues under
different conditions;
- microarrays for newly sequenced organisms; and
- microarrays for focused subsets of genes.
We use our proprietary oligonucleotide sequence design methods to generate
FlexJet DNA microarrays for use in our collaborative relationships and for use
in our own internal operations. In addition, we have exclusively licensed to
Agilent the rights to manufacture, sell and distribute FlexJet DNA microarrays
to third parties. Agilent has agreed to pay us royalties on the FlexJet DNA
microarrays that they sell. We also provide our microarray design services to
customers of Agilent-manufactured arrays. We will receive additional royalties
on arrays that are designed by us and sold by Agilent to third parties.
COHERENT DATA SETS AND REFERENCE LIBRARIES.
We build coherent sets of data generated from DNA microarrays that represent
the responses of cells to different genetic and disease states and to drug
treatments. These data sets provide detailed references against which other
expression measurements, either generated by us or by our collaborators or
customers, can be compared. Using our extensive experience, we have developed
experiment protocols, process controls and analysis techniques that allow the
sharing of data between experiments. This coherence requirement is a key aspect
of our reference library approach. Data that have not been derived using this
rigorous approach are much less valuable.
The following useful information may be derived from our coherent data sets:
- characteristics of drug candidates, including toxicity;
- compounds with novel mechanisms of action;
- functions of newly sequenced genes;
- gene reporters that can monitor pathways to enable construction of high
throughput screens; and
- interpretation of genetic traits in terms of individual biochemical
disturbances.
INTEGRATED PROFESSIONAL SERVICES.
We combine our informational genomics tools together with our consulting
services to provide enhanced value to selected customers. These services include
customization of the Rosetta Resolver system, customized FlexJet DNA microarrays
and creation of highly accurate and coherent data sets. The integration of our
unique tools and expertise presents significant capabilities to customers
desiring the power of informational genomics technologies.
STRATEGY
Our goal is to be the leader in informational genomics by providing the
standard platform for gene expression data integration. By providing this
standard platform, we hope to increase demand for each of our component
technologies. The specific elements of our strategy are to:
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BECOME THE STANDARD INFORMATIONAL GENOMICS APPROACH.
We intend to establish the Rosetta Resolver system as the preferred software
and database platform for gene expression data storage and analysis. The Rosetta
Resolver system can accept most major types of expression data and has superior
capabilities for analyzing and managing large data sets. In addition, our
FlexJet DNA microarrays, sold and distributed by Agilent, enable the creation of
coherent data sets, which we believe will drive the demand for our array
technology and informatics platform in this rapidly growing array market.
DEVELOP MULTIPLE PRODUCT REVENUE SOURCES.
We seek to establish a widely installed base of the Rosetta Resolver systems
in order to generate license fees, maintenance and support payments, and
opportunities for professional services. The Rosetta Resolver system is jointly
marketed by Agilent and us. We intend to make our FlexJet DNA microarrays
available directly to our customers for research collaborations. Outside of
research collaborations, customers needing arrays can purchase them from
Agilent, and we will receive royalty payments on these sales.
ESTABLISH COLLABORATIONS USING OUR GENE EXPRESSION TOOLS.
We intend to continue to enter into gene expression collaborations with
pharmaceutical, biotechnology and agricultural companies. We anticipate that
these collaborations will validate the power of our gene expression tools. In
addition, we anticipate these collaborations will result in sales of the Rosetta
Resolver system and royalties from FlexJet DNA microarrays. These collaborations
may also provide us with a mix of technology license fees, research funding,
milestone payments and royalties or profit-sharing income from commercialization
of products resulting from the collaborations.
EXPAND OUR INFORMATIONAL GENOMICS PLATFORM.
We intend to expand our informational genomics platform to include other
data types and analysis tools. For example, linking gene expression profiling
data with genotyping methods such as single nucleotide polymorphism analysis,
and with clinical data, can greatly enhance our ability to identify genes
imparting risks for specific diseases. We expect our current development work in
this area to result in analysis methods that will significantly reduce the
number of patients required to identify disease-causing genes, thereby providing
us and our collaborators with significant advantages in this area.
SELL HIGH-VALUE INFORMATION PRODUCTS.
We plan to gradually transition from being a provider of gene expression
tools to creating information products derived through the use of our gene
expression tools and coherent data sets. We expect that the earliest information
products will be new pairings of therapeutic targets and compounds specific for
those targets. These pairings are more valuable than the identification of new
targets alone because this provides a lead compound at the same time the target
is analyzed.
SALES AND MARKETING
The Rosetta Resolver system is jointly marketed by Agilent and us and is
being sold by Agilent pursuant to our collaboration agreement. We have received
a purchase order from Harvard University's Center for Genomics Research for a
commercial sale of the Rosetta Resolver system. In addition, discussions are
ongoing with major pharmaceutical and biotechnology companies regarding
additional commercial sales. Agilent is also responsible for selling and
marketing FlexJet DNA microarrays, and we will receive royalty revenues from
these sales. We have not received any royalties to date from Agilent. Agilent's
direct sales force has a strong worldwide presence among our targeted customer
base.
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Additionally, we anticipate our collaborations will stimulate demand for our
informational genomic tools. Our collaborations are established by our business
development group and our internal sales and marketing group. We expect to
expand our sales and marketing efforts to increase our market presence
worldwide. In 1999, sales to Agilent accounted for 50% of our revenues.
STRATEGIC COLLABORATION AND SUPPLY AGREEMENT
AGILENT TECHNOLOGIES, INC.
In October 1999, we entered into a strategic collaboration with Agilent. We
agreed to exclusively partner with Agilent to make and sell products in the gene
expression field including the Rosetta Resolver system, FlexJet DNA microarrays,
array design services and certain other products. Under the agreement, we agreed
to conduct specific research and development activities related to our
technologies for which Agilent is obligated to provide funding. In connection
with this agreement, we have received payments of approximately $5.0 million for
research and development and for certain licensing rights. Agilent has also
agreed to pay us an additional $1.3 million in 2000 and $2.1 million in 2001 for
research and development activities.
Our relationship with Agilent provides us with the scale and expertise of a
leading technology company to commercialize our inkjet array technology and to
bring the Rosetta Resolver system to market more rapidly. Agilent has integrated
our inkjet technology for manufacturing DNA microarrays with their previously
developed inkjet technology. Agilent has agreed that it will further develop,
manufacture and distribute FlexJet DNA microarrays as well as provide and
further develop the Rosetta Resolver Expression Data Analysis System.
Under the agreement, Agilent has the exclusive right to market and sell
FlexJet DNA microarrays manufactured using our inkjet synthesizer and related
microarray design technology, in exchange for royalty payments. Agilent also has
the right, co-exclusive with us, under the agreement to market and sell the
Rosetta Resolver system. Agilent will share revenues with us for Rosetta
Resolver system sales and microarray design services.
Our agreement with Agilent further contemplates that we will provide certain
services related to the customized design of microarrays to customers. Revenue
received in connection with these services and royalties received in connection
with the sales of arrays will be shared by Agilent and us. As part of this
relationship, Agilent has agreed to sell DNA microarrays to us at a discount and
we anticipate that Agilent will be the primary supplier of such arrays for our
internal use. We will not receive royalties on DNA microarrays that we purchase
from Agilent.
In this relationship, we primarily focus on developing the Rosetta Resolver
system and our microarray design services, including the capability to select
oligonucleotides that are used on FlexJet DNA microarrays. Agilent focuses
primarily on manufacturing and distribution of FlexJet DNA microarrays,
development of other instruments and overall system integration. Both of us are
involved in developing the business plan for the products under this agreement.
The agreement provides that a party's consent must be obtained before the other
party may introduce a product that could compete with products that are covered
by the collaboration.
The Agilent agreement has a seven-year term and expires in October 2006
unless extended by mutual agreement of the parties. At the end of this period,
we will retain the right to purchase DNA microarrays from Agilent at a
discounted price and Agilent will retain the right to sell FlexJet DNA
microarrays manufactured using our technology. If the agreement was terminated
by Agilent as a result of a breach by us, Agilent would retain the right to
sell, and we will receive a royalty on, FlexJet DNA microarrays sold by Agilent
that are manufactured using our technology. In addition, Agilent will retain the
right to be a value added reseller of the Rosetta Resolver system.
Either of us may terminate the agreement prior to the end of the seven-year
term upon material breaches of the agreement or upon bankruptcy of the other
party. In the event of an early termination of this agreement, we will still
receive royalties from FlexJet DNA microarrays sold by Agilent. However, the
royalty rate is adjusted depending upon which party terminates the agreement.
Upon an early termination of this agreement, we retain rights to the Rosetta
Resolver system.
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In addition, Agilent purchased 2,285,714 shares of our Series D preferred
stock at a per share price of $5.25. We have exercised our right to sell Agilent
an additional $10.0 million of our common stock at any time before or concurrent
with the closing of this offering. Accordingly, we will sell Agilent
714,285 shares of our common stock, at the initial offering price of $14.00 per
share, in a private placement concurrent with the closing of this offering. See
"Description of Capital Stock--Concurrent Private Placement."
In May 2000, we entered into a supply agreement with Agilent. This agreement
obligates us to purchase, and Agilent to supply, DNA microarrays. The agreement
has a three year term and may be extended for additional one-year periods.
Through the end of 2001, we are required to purchase at least $29.7 million of
DNA microarrays from Agilent pursuant to this agreement. The aggregate amount of
DNA microarrays we are required to purchase may be less, depending on certain
financing thresholds or if the parties otherwise agree during semi-annual
performance review meetings. Under the supply agreement, we may request to
purchase more than the minimum amount and Agilent is obligated to supply such
additional microarrays at our request. In connection with this agreement,
Agilent has agreed to pay us up to $3.0 million for the transfer of know how and
technology related to our inkjet technology. The agreement may be terminated at
any time by mutual consent of the parties and either of us may terminate the
agreement prior to the end of the three-year term upon material breach of the
agreement or upon bankruptcy of the other party.
Under the terms of our collaboration agreement and our supply agreement with
Agilent, Agilent has agreed to indemnify us against claims, damages or other
liabilities that may arise from an alleged infringement of any third party's
intellectual property rights covering our use of certain products developed
under the collaboration and the DNA microarrays supplied to us by Agilent.
Pursuant to this obligation, Agilent may, among other remedies and at its sole
option, elect to procure for us the right to continue to use the DNA microarrays
causing the alleged infringement. If Agilent elects to pursue this remedy and is
required to make additional royalty payments to third parties to procure such
rights, these additional payments may be reflected in increased prices of the
DNA microarrays sold to us by Agilent up to certain limitations.
CUSTOMER COLLABORATIONS
DUPONT PHARMACEUTICALS COMPANY
In September 1999, we entered into an early access program agreement with
DuPont Pharmaceuticals Company. Under the terms of this agreement, DuPont agreed
to purchase a pre-release version of the Rosetta Resolver system. DuPont also
agreed to provide us feedback with respect to both feature development and user
satisfaction to assist in the development of our product. We have received
$670,000 to date and expect to receive an additional $221,000 in 2000. We
granted DuPont a limited, non-exclusive license to use the Rosetta Resolver
system, and in June 2000, we installed a commercial version of the system at
DuPont's facilities. The license reverts to us upon termination of this
agreement.
The agreement will terminate in June 2001 unless extended upon DuPont's
election and payment of an additional amount by DuPont. The amount to be paid to
extend the agreement will vary depending on our licensing rates in effect at
that time. The agreement may be terminated earlier upon breach by either party,
which is not subsequently cured.
CORIXA CORPORATION
In December 1999, we entered into a collaboration agreement with Corixa
Corporation. Under the agreement, Corixa is exploring the difference between
types of tissue using gene expression technology. Under this agreement, Corixa
will pay us up to an aggregate of $533,000. The agreement expires on December
31, 2000, unless terminated earlier by either party for breach and failure to
cure by the
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other party. The agreement may also be terminated by either party without cause
upon 90 days prior notice.
MONSANTO COMPANY
We entered into a pilot project collaboration agreement with the Monsanto
Company in February 2000. Under this agreement, Monsanto is evaluating the use
of our FlexJet DNA microarray technology and microarray design capabilities for
gene expression profiling across several species. Monsanto is also evaluating
the Rosetta Resolver system for analyzing gene expression data. We have received
$125,000 from Monsanto to date and expect to receive an additional $50,000 in
2000. Upon the successful completion of the pilot project, we have agreed with
Monsanto to discuss a follow-on agreement, but the parties are not required to
enter into a follow-on agreement. In certain circumstances, we have agreed to
non-exclusively license to Monsanto some discoveries made by Monsanto that
utilize our data.
The agreement will terminate upon completion of the pilot project, which we
expect to occur in 2000, or earlier upon breach by either party, which is not
subsequently cured.
COMPETITION
Competition is intense among companies providing drug discovery and
development tools and methods to our target markets. For some of our products,
we face competition from biotechnology and bioinformatics companies, in-house
bioinformatics efforts of pharmaceutical and agricultural companies, academic
institutions and government agencies, both in the United States and abroad. We
expect that the intensity of such competition will continue to increase.
Competition for our market can be broken down into the following categories:
- BIOINFORMATICS SOLUTIONS. Bioinformatics competitors fall into three
groups: custom integrators, providers of desktop analysis tools, and
providers of database software, and include GeneData AG, InforMax, Inc.,
Lion Bioscience AG, NetGenics, Inc., Silicon Genetics and Spotfire, Inc.
Some competitors provide both desktop analysis tools and database software
which provide many of the basic functions of the Rosetta Resolver system.
Custom integrators are direct competitors for some aspects of our
informatics consulting services.
- ARRAY PROVIDERS. FlexJet DNA microarrays sold by Agilent will have
competition from other commercial manufacturers of oligonucleotide
microarrays and of cDNA microarrays, in particular Affymetrix. There also
are providers of systems that enable the customer to make their own cDNA
microarrays.
- EXPRESSION PROFILE PROGRAMS. Many potential pharmaceutical and
biotechnology customers have in-house gene expression profiling efforts
either in place or planned. These internal efforts may compete with our
informational genomics products and services. External genomics
competitors, including CuraGen Corporation, Gene Logic, Inc. and Incyte,
many with greater financial resources than we have, are building gene
expression databases.
Future competition will come from expanded offerings of existing competitors
and other companies developing new technologies for drug discovery based on gene
sequences, target gene identification, bioinformatics and related technologies.
Many of our competitors have greater capital and research and development
resources. In addition, many have a more established customer base and have
pre-existing relationships with our potential customers. Our future success will
depend, in large part, on our ability to maintain a competitive position in the
genomics and bioinformatics fields.
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INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
We rely on a combination of patent, trademark, copyright and trade secret
laws to protect our proprietary technologies and products. We aggressively seek
U.S. and international patent protection to further our business strategy and
for major components of our technology platform, including elements of our array
design, data analysis software and bioinformatics technologies, as well as
methods relating to genes of interest and potential drug targets. We also rely
upon trade secret protection for our confidential and proprietary information,
and we enter into licenses to access external technologies we view as necessary
to pursue our corporate goals.
As of June 30, 2000, we owned one issued U.S. patent and 34 pending U.S.
patent applications and corresponding international and foreign patent
applications. In addition, we had exclusive rights to three issued U.S. patents
and seven U.S. patent applications and corresponding international and foreign
patent applications.
In general, we apply for patent protection for methods and products relating
to gene expression analysis technologies and relating to individual disease
genes and targets we discover. These patent applications may include claims
relating to novel uses for known genes or gene fragments identified through our
discovery programs.
With respect to proprietary know-how that is not patentable, we have chosen
to rely on trade secret protection and confidentiality agreements to protect our
interests. In addition, we have developed a proprietary data set that provides
gene expression data and that is updated on an ongoing basis. We expect that
some of the data contained within this data set will be the subject of patent
applications, whereas other data will be maintained as proprietary trade secret
information. We have taken security measures to protect our proprietary
know-how, technologies and confidential data and continue to explore further
methods of protection.
We also rely on trade secrets and proprietary know-how, especially in
circumstances where patent protection is not believed to be appropriate or
obtainable. We require all employees, consultants and collaborators to enter
into confidentiality agreements, and all employees and most consultants enter
into invention agreements with us. These confidentiality agreements generally
provide that all confidential information developed or made known to the
individual during the course of such relationship will be kept confidential and
not disclosed to third parties, except in specified circumstances. These
invention agreements generally provide that all inventions conceived by the
individual in the course of rendering services to us shall be our exclusive
property. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for any breach, or that our trade
secrets will not otherwise become known or be independently discovered by our
competitors. Any of these events could adversely affect our competitive position
in the marketplace.
In the case of a strategic partnership or other collaborative arrangement
which requires the sharing of data, our policy is to disclose to our partner
only such data as are relevant to the partnership or arrangement, under
controlled circumstances and only during the contractual term of the strategic
partnership or collaborative arrangement, subject to a duty of confidentiality
on the part of our partner or collaborator. Disputes may arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
research by us and our corporate partners, licensors, scientific collaborators
and consultants. There can be no assurance that we will be able to maintain our
proprietary position, or that third parties will not circumvent any proprietary
protection we have. Our failure to maintain exclusive or other rights to such
technologies could have a material adverse effect on our competitive position.
We are a party to various license agreements which give us rights to use
technologies in our research, development and commercialization activities. One
of these license agreements is with
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Affymetrix, a company that possesses a substantial intellectual property
position in the area of oligonucleotide array fabrication and use. This
agreement permits us to make and use DNA microarrays for our internal use. We
have also sublicensed rights under patents related to the fabrication and use of
DNA microarrays from Oxford Gene Technology.
To continue developing and commercializing our current and future products,
we may license intellectual property from commercial or academic entities to
obtain the rights to technology that is required for our discovery, research,
development and commercialization activities.
The biotechnology industry, including companies using DNA microarrays, has
experienced significant litigation over alleged infringement of various patents.
Under the terms of our collaboration agreement and our supply agreement with
Agilent, Agilent has agreed to indemnify us against claims, damages or other
liabilities that may arise from an alleged infringement of any third party's
intellectual property rights covering our use of certain products developed
under the collaboration and the DNA microarrays supplied to us by Agilent.
Pursuant to this obligation, Agilent may, among other remedies and at its sole
option, elect to procure for us the right to continue to use the DNA microarrays
causing the alleged infringement. If Agilent elects to pursue this remedy and is
required to make additional royalty payments to third parties to procure such
rights, these additional payments may be reflected in increased prices of the
DNA microarrays sold to us by Agilent up to certain limitations.
In anticipation of the commercial distribution of our products and services,
we have filed a number of trademark applications.
TECHNOLOGY LICENSES
Where consistent with our strategy, we seek to obtain technologies that
complement and expand our existing technology base. We have licensed and will
continue to license product and marketing rights from selected research and
academic institutions, as well as other organizations. Under these license
agreements, we generally seek to obtain unrestricted sublicense rights. We are
generally obligated under these agreements to pursue product development, make
development milestone payments and pay royalties on any product sales. In
addition to license agreements, we seek relationships with other entities which
may benefit us and support our business goals. For the year ended December 31,
1999, we paid an aggregate of approximately $1.3 million in annual royalties
pursuant to the license agreements described below, a majority of which was paid
to Affymetrix. We expect to pay at least $2.1 million in annual royalties
pursuant to the license agreements described below in 2000, a majority of which
we expect to pay to Affymetrix. This amount may increase or decrease for 2000
and future periods, depending on our future sales, sublicensing revenues and
other activities.
AFFYMETRIX, INC.
In November 1998, we entered into a three-year internal use license
agreement with Affymetrix, which is renewable on an annual basis. Under the
license agreement, Affymetrix granted us a nonexclusive, nontransferable,
nonsublicensable, worldwide license to certain patents related to the
fabrication and use of nucleic acid arrays. We paid an up-front license fee of
$10,000 upon execution of the license agreement and pay an annual usage royalty.
Affymetrix licensed to us rights under its patents to mechanically fabricate
arrays and to internally use those arrays for analyzing expressed messenger RNA
in cells for commercial research use.
The agreement has a term of three years and automatically renews for
successive one year periods unless earlier terminated by either party. Either
party may early terminate the agreement upon breach by the other party, which is
not subsequently cured. If this agreement is terminated and we were to lose the
right to make arrays for our own use, or if we find that the arrays we make are
insufficient for our purposes, we would seek to acquire arrays from Affymetrix
or another source.
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FRED HUTCHINSON CANCER RESEARCH CENTER
In December 1997, we entered into a license agreement with the Fred
Hutchinson Cancer Research Center. Under the agreement, the Hutchinson Center
granted us an exclusive, worldwide, sublicensable license to certain drug
screening technology. The license is subject to the rights of certain U.S.
governmental agencies and a grant-back to the Hutchinson Center for
non-commercial research purposes. Upon execution of the license agreement we
issued 352,000 shares of our common stock to the Hutchinson Center. In addition,
we are obligated under the agreement to pay the Hutchinson Center $50,000 per
year upon issuance of the first U.S. patent containing claims covering the
licensed technology.
This agreement has a term of the longer of 20 years or the expiration of the
last to expire patent rights covered by the agreement. The Hutchinson Center may
terminate the agreement upon 30 days' written notice if we fail to pay amounts
due under the agreement. In addition, the agreement may be terminated upon
material breach by either party which is not subsequently cured, automatically
upon bankruptcy of either party, or for any reason by us upon notice to the
Hutchinson Center.
OXFORD GENE TECHNOLOGY IP LIMITED
In March 2000, we entered into a License Agreement with Oxford Gene
Technology IP Limited. Under the agreement, Oxford Gene Technology granted us a
nonexclusive worldwide sublicense to patents related to the fabrication and use
of DNA microarrays for internal purposes. We issued 686,928 shares of our common
stock to Oxford Gene Technology and paid them $1.0 million. We are also
obligated to pay royalties to Oxford Gene Technology on sales of products and
services covered by the patents licensed to us under the agreement. The term of
the agreement continues until the last of the licensed patents expire.
The license agreement terminates upon the last to expire patent licensed
under the agreement, which expiration dates vary patent by patent and which we
do not expect to expire in the next two years. If we are in breach of the
agreement or if we undergo a change in control of more than 50% of our equity
securities, Oxford Gene Technology may terminate the agreement earlier. In
addition either party may terminate the licenses granted under the agreement in
the event of bankruptcy of either party. If this agreement is terminated and we
were to lose the right to make arrays for our own use, or if we find that the
arrays we make are insufficient for our purposes, we would need to acquire
arrays from third parties.
UNIVERSITY OF CALIFORNIA, BERKELEY
As part of our merger with Acacia Biosciences in February 1999, we assumed
an agreement with the University of California. Under this agreement, we have an
exclusive license to two issued U.S. patents, 5,569,588 and 5,777,888 (the '888
patent) and patent applications related to these patents. The '888 patent covers
a fundamental analysis approach useful for gene expression analysis. Under the
agreement, we are obligated to pay the University of California an annual
minimum royalty and a percentage of revenues that we obtain from sublicensing
this technology. As part of the initial license issue fee, Acacia paid the
University of California $80,000 and 25,000 shares of its common stock.
The agreement lasts until the termination of the last to expire patent
licensed under the agreement, which expiration dates vary patent by patent and
which we do not expect to expire in the next two years. The agreement may be
terminated by the University of California earlier if we breach the agreement
and fail to cure our breach.
UNIVERSITY OF WASHINGTON
In September 1997, we entered into a license agreement with the University
of Washington. The University of Washington granted us an exclusive, worldwide,
sublicensable license to certain technology
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pertaining to inkjet synthesis of oligonucleotides. The license is subject to
the rights of certain U.S. governmental agencies and a grant-back to the
University of Washington for non-commercial research purposes. Upon execution of
the license agreement we issued 90,000 shares of our common stock to the
University of Washington. We are also obligated to make future periodic payments
on the anniversary date of the agreement. In addition, we are obligated to make
royalty payments on a quarterly basis on any product sales, subject to an annual
minimum royalty. In addition to the common stock issued upon execution of the
agreement, we issued 30,000 shares of our common stock because of the issuance
of the first U.S. patent containing claims covering the licensed technology and
the first commercial sale of a product incorporating the licensed technology.
The agreement terminates in September 2017 or the expiration of the last
licensed patent, whichever is later. The agreement may be earlier terminated by
the University of Washington upon breach of the agreement by us which is not
subsequently cured, or by us for any reason.
XENOMETRIX, INC.
In November 1998, we entered into a license agreement with Xenometrix, Inc..
Under the agreement, Xenometrix granted us a non-exclusive worldwide
sublicenseable license to certain technology pertaining to gene profiling. Upon
execution of the license, we paid $250,000 to Xenometrix. Under the agreement,
we are obligated to pay Xenometrix an annual royalty fee. This agreement lasts
until the termination of the last to expire patent licensed under the agreement,
which expiration dates vary patent by patent and which we do not expect to
expire in the next two years. This agreement may be terminated by either party
upon breach of the agreement that is not substantially cured, or by us for any
reason.
GOVERNMENT REGULATION
Our products are not currently subject to regulation by governmental
agencies other than the laws and regulations generally applicable to businesses
in the jurisdictions in which we operate. However, the products of many of the
pharmaceutical and biotechnology companies to which we market our products are
regulated by the FDA, and the interest of the FDA or other governmental agencies
in our products may increase as the number of pharmaceutical and other products
developed using our technology increases.
EMPLOYEES
As of July 31, 2000, Rosetta employed 150 personnel, 41 of whom hold Ph.D.s,
and 3 of whom hold M.D.s. Of these employees, 117 are employed in Research,
Development and Informatics, and 33 are employed in marketing and
administration. Each of our employees has signed a confidentiality agreement. We
have never experienced employment-related work stoppages and consider our
employee relations to be good.
FACILITIES
We maintain our principal headquarters in Kirkland, Washington, where we
lease approximately 40,000 square feet of laboratory and general administration
space. The lease for this facility expires in June 2002, with an option to renew
the lease for an additional three year period. We also lease approximately
14,000 square feet of additional laboratory space in Bothell, Washington. The
lease for this facility expires in February 2003, with options to renew for two
twelve month periods. We believe that our existing facilities are adequate to
meet our immediate needs and that suitable additional space will be available in
the future on commercially reasonable terms as needed.
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LEGAL PROCEEDINGS
We may become involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this prospectus, we are not
involved in any pending material legal proceedings. However, on January 6, 2000
we received, through our legal counsel, a request for information from the FBI.
The information requested pertains to one of our recently hired employees and
relates to the employee's involvement in software development activities prior
to his employment with us. On April 11, 2000, we received, through our legal
counsel, a grand jury subpoena requiring the production of an expanded set of
information and documents pertaining to the subject of the original request from
the FBI. We are cooperating fully with the FBI and the grand jury. Although the
FBI has not disclosed to us the specific substance of the matters being
investigated, we, as a company, are not currently a target of the investigation,
and we are unable at this time to predict the outcome of this investigation. The
FBI investigation may result in adverse publicity that could adversely affect
our reputation and revenues.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information regarding our executive officers
and directors as of July 11, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- -------------------------------------------
<S> <C> <C>
Stephen H. Friend, M.D., Ph.D. .............. 46 President, Chief Executive Officer and
Director
John J. King II.............................. 48 Senior Vice President, Chief Operating
Officer and Director
Mark Boguski, M.D., Ph.D..................... 45 Senior Vice President of Research
Gregory Sessler.............................. 47 Senior Vice President and Chief Financial
Officer
Roland Stoughton, Ph.D. ..................... 45 Vice President of Bioinformatics
William I. Buffington........................ 51 Director
William W. Ericson........................... 42 Director
Steven Gillis, Ph.D.(1)...................... 47 Director
Ruth Kunath(1)(2)............................ 49 Director
Harvey S. Sadow, Ph.D(2)..................... 77 Director
Peter Svenillson............................. 38 Director
Charles P. Waite(1)(2)....................... 45 Director
</TABLE>
------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
STEPHEN H. FRIEND, M.D., PH.D. Dr. Friend co-founded our company in 1996 and
has served as our President since June 1997, Chief Scientific Officer and
director since April 1997, and Chief Executive Officer since February 2000. From
April 1997 to June 1997, Dr. Friend served as our Acting President. From
December 1996 to April 1997, Dr. Friend served as our Vice President of
Functional Genomics. Dr. Friend joined the Fred Hutchinson Cancer Research
Center, a research organization, as a visiting scientist in 1994 and has been a
Full Member and Head of the Program of Molecular Pharmacology from 1995 to the
present. In 1995, he co-founded the Seattle Project, an Advanced Institute for
Drug Discovery, at the Hutchinson Center and was a co-director from 1995 through
March 2000. Dr. Friend held faculty positions at Harvard Medical School from
1987 to 1995 and at Massachusetts General Hospital from 1990 to 1995.
Dr. Friend graduated from Indiana University with a B.A. in Philosophy and
received his Ph.D. in Biochemistry and his M.D. from Indiana University.
JOHN J. KING, II. Mr. King has served as our Senior Vice President, Chief
Operating Officer and director since April 1997. From 1992 to 1996, Mr. King
served as Executive Vice President of KidStar Interactive Media, Inc., a media
company. He co-founded Biotope, Inc., a biotechnology company, and served as its
President and Chief Operating Officer from 1986 to 1988 and its Chairman from
1988 to 1992. Mr. King co-founded IMRE Corporation, a biotechnology company, and
served as its President and Chief Operating Officer from 1981 to 1986. Mr. King
graduated from the University of Pennsylvania with a B.A. in Anthropology.
MARK BOGUSKI, M.D., PH.D. Dr. Boguski has been our Senior Vice President of
Research since March 2000. From 1995 to March 2000, he was a Senior Investigator
at the U.S. National Center for Biotechnology Information, a division of the
National Library of Medicine at the National Institutes of Health in Bethesda,
Maryland and was a Senior Staff Fellow at the National Center from 1989 to 1995.
In addition, Dr. Boguski has been an Assistant Professor in the Department of
Molecular Biology and Genetics at Johns Hopkins University School of Medicine
from 1995 to present. Dr. Boguski received a
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B.A. from Johns Hopkins University and a Ph.D. and M.D. from the Washington
University School of Medicine.
GREGORY SESSLER. Mr. Sessler has served as our Senior Vice President and
Chief Financial Officer since March 2000. From 1995 to March 2000, Mr. Sessler
served as Chief Financial Officer and Senior Vice President, Strategic Market
Development, of Sonus Pharmaceuticals, Inc., a developer of ultrasound contrast
agents. From 1990 to 1995, Mr. Sessler was with MicroProbe Corporation (now
Epoch Biosciences), a developer of proprietary chemistry with applications in
genomics and diagnostics, most recently as Senior Vice President, Chief
Financial Officer and a member of its Board of Directors. Mr. Sessler has a B.S.
from Syracuse University and a M.B.A. from the Stanford University Graduate
School of Business and is a Certified Public Accountant.
ROLAND STOUGHTON, PH.D. Dr. Stoughton has served as our Vice President of
Bioinformatics since November 1998 and from July 1997 through November 1998,
Dr. Stoughton served as our Informatics Team Leader. From September 1982 through
July 1997, he was the Division Manager and Senior Research Scientist at Science
Applications International Corporation, a research and engineering company.
Mr. Stoughton has a B.A. in Physics from Amherst College, an M.S. in
Astrophysics, and a Ph.D. in Physics and Astronomy from the University of
California, Santa Cruz.
WILLIAM I. BUFFINGTON. Mr. Buffington has served as one of our Directors
since October 1999. From August 1998 to the present, Mr. Buffington has been
General Manager, Bioscience Products Business at Agilent Technologies, Inc, a
technology company formerly part of Hewlett-Packard Company. Prior to that, he
held various positions at Hewlett-Packard Company, a technology company,
including Group R&D Manager, Bioscience Products Business from January 1996 to
August 1998, General Manager and Director at Hewlett Packard and Yokogawa
Electrical JV from April 1992 to May 1995, and R&D Manager, Avondale Division,
from 1984 to April 1992. Mr. Buffington holds a B.S. in Electrical Engineering
and a M.S. in Physics from Pennsylvania State University.
WILLIAM W. ERICSON. Mr. Ericson has served as one of our directors since
March 2000. Since April 2000, Mr. Ericson has been a General Partner with Mohr
Davidow Ventures, a venture capital firm. From 1995 to April 2000, Mr. Ericson
was a director at Venture Law Group, a law firm specializing in the
representation of technology companies. Prior to joining Venture Law Group,
Mr. Ericson was an associate at the law firm of Brobeck, Phleger and
Harrison, LLP from 1992 through 1995. Mr. Ericson holds a Bachelor of Science in
Foreign Service from Georgetown University and a J.D. from Northwestern
University School of Law. Mr. Ericson is on the board of Onvia.com, Inc. and
several privately-held companies.
STEVEN GILLIS, PH.D. Dr. Gillis has served as one of our Directors since
June 1997. He has served as Chairman of the Board of Corixa Corporation, a
biotechnology company, since March 1999 and either President or Chief Executive
Officer and director of Corixa since 1994. Dr. Gillis was a founder of Immunex
Corporation, a biotechnology company. From 1981 to 1994, Dr. Gillis served as
Executive Vice President and Director of Research and Development of Immunex,
and from 1993 to 1994, served as Acting Chief Executive Officer and Chairman of
the Board of Immunex. From 1990 to 1994, Dr. Gillis also served as President and
Chief Executive Officer of Immunex Research and Development Corporation, a
wholly-owned subsidiary of Immunex, and Chief Scientific Officer of Immunex. In
addition, Dr. Gillis is a director of Micrologix Biotech, Inc., a biotechnology
company, Genesis Research and Development Corporation Limited, a biotechnology
company, and Koronis Pharmaceuticals, a biotechnology company. Dr. Gillis
graduated from Williams College with a B.A. in Biology and English and received
his Ph.D. in Biological Sciences from Dartmouth College.
RUTH KUNATH. Ms. Kunath has served as one of our directors since June 1997.
Since 1992, Ms. Kunath has managed the public and private biotechnology and
emerging healthcare technology portfolios for Vulcan Ventures, Inc., a venture
capital firm founded by Paul G. Allen in 1992. From
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1975 to 1992, Ms. Kunath was the Biotechnology Analyst and then the Senior
Portfolio Manager for the healthcare sector at Bank of America Capital
Management, a financial services company. Ms. Kunath is currently a director of
VaxGen, Inc., a biotechnology company, and Dendreon Corporation, a biotechnology
company. Ms. Kunath is a Certified Financial Analyst and holds a B.A. from
DePauw University in Indiana.
HARVEY S. SADOW, PH.D. Dr. Sadow has served as one of our directors since
February 1999. Prior to that, Dr. Sadow served as Chairman of the Board of
Directors of Acacia Biosciences, Inc., a biotechnology company, until our
acquisition of Acacia in February 1999. He was President and Chief Executive
Officer and a director of Boehringer Ingelheim Ltd., a pharmaceuticals company,
from 1971 until 1981 and as President and Chief Executive Officer of its
successor company, Boehringer Ingelheim Pharmaceuticals, Inc. and its parent,
Boehringer Ingelheim Corporation, until 1988, retiring as Chairman of the Board
of both companies in 1990. He is currently a director of Anika
Therapeutics, Inc., a biomedical company, Cholestech Corp., a medical
diagnostics company, and Trega Biosciences, Inc., a biotechnology company.
Dr. Sadow received a B.S. from the Virginia Military Institute in 1947, a M.S.
from the University of Kansas in 1949 and a Ph.D. in bioanalytical chemistry
from the University of Connecticut in 1953.
PETER SVENILLSON. Mr. Svenillson has served as one of our directors since
June 1997. From 1995 to the present, he has been a Managing Director and Partner
of Hamilton Capital Ltd., an investment company, and of Broadview Ltd., an
investment company. From 1993 to 1995, Mr. Svenillson was Managing Director and
Partner of Stone Porch Ltd., an investment company in London, England. From 1987
to 1993, Mr. Svenillson was Associate Managing Director of Nomura International
PLC, a financial services company, in London, England, in charge of European
investment banking. He is a director of PTC Therapeutics, a biotechnology
company, and Somalogic, Inc., a biotechnology company. Mr. Svenillson received
his B.A. and his M.B.A. from the Stockholm School of Economics. He has also
attended M.B.A. programs at INSEAD and at the London Business School.
CHARLES P. WAITE. Mr. Waite has served as one of our directors since
June 1997. From 1987 to the present, Mr. Waite has been a General Partner with
Olympic Venture Partners, a venture capital firm. From 1983 to 1987, he was a
General Partner at Hambrecht & Quist Venture Partners. Mr. Waite currently
serves on a number of boards including: Cardima, Inc., a medical device company,
Loudeye Technologies, Inc., an Internet media company, Seattle Genetics, a
biotechnology company, SignalSoft Corporation, a wireless services company,
WatchGuard Technologies, Inc, an Internet security company, and Verity, Inc., a
software company. Mr. Waite received his A.B. from Kenyon College and received
his M.B.A. from Harvard University.
BOARD COMPOSITION
We currently have nine directors and have one vacancy. Upon the closing of
this offering, our Board of Directors will be divided into three classes. The
Class I directors are Peter Svenillson, Harvey S. Sadow, and Stephen Gillis, and
they will serve an initial term until the 2001 annual meeting of stockholders or
special meeting held in lieu thereof, the Class II directors are John J. King,
William W. Ericson, and Ruth Kunath, and they will serve an initial term until
the 2002 annual meeting of stockholders or special meeting held in lieu thereof,
and the Class III directors are Stephen H. Friend, Bill Buffington, and Charles
P. Waite, and they will serve an initial term until the 2003 annual meeting of
stockholders or special meeting held in lieu thereof.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the second annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the classes so that, as nearly
as possible, each class will consist of approximately one-third of the
directors. This classification of the board of directors may
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have the effect of delaying or preventing changes in control or management of
the company, although directors of the company may be removed for cause by the
affirmative vote of the holders of a majority of the common stock.
BOARD COMMITTEES
AUDIT COMMITTEE. In March 2000, our Board established its audit committee.
The Board's Audit Committee currently consists of Ms. Kunath, Mr. Waite and
Dr. Sadow. The Audit Committee
- makes 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. In July 1997, our Board established a Compensation
Committee. The Compensation Committee consists of Dr. Gillis, Ms. Kunath and
Mr. Waite. The Compensation Committee's functions are
- to review and approve the compensation and benefits for our executive
officers;
- to administer our stock purchase and stock option plans; and
- make recommendations to our Board regarding such matters.
COMPENSATION OF DIRECTORS
COMPENSATION COMMITTEE. We do not currently compensate our directors, with
the exception of Dr. Sadow who receives $1,500 per meeting. However, directors
are reimbursed for out-of-pocket expenses incurred in connection with attendance
at meetings of the board of directors or its committees. Directors are eligible
to receive stock options in consideration of their services pursuant to our 1997
stock plan, our 2000 directors' stock option plan and our 2000 stock option plan
and, to the extent that a director is an employee, to participate in our 2000
employee stock purchase plan. See "Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors established its compensation committee in July 1997.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. None of
the members of the compensation committee is currently, or has even been at any
time since our formation, once of our officers or employees. No member of the
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more officers serving as a
member of our board of directors or compensation committee.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board is composed of leading academic scientists and
clinicians with expertise in fields related to our technology and business
focus. The Scientific Advisory Board meets at
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least twice annually with our scientific staff and management to discuss our
research and development programs and long-term scientific strategy.
<TABLE>
<CAPTION>
SCIENTIFIC ADVISORY BOARD MEMBER AFFILIATED INSTITUTION
-------------------------------- ----------------------
<S> <C>
Leland H. Hartwell, Ph.D..................... President, Fred Hutchinson Cancer Research Center
Ruedi Aebersold, Ph.D........................ Professor of Biotechnology, University of Washington
Alfred G. Gilman, M.D., Ph.D................. Professor and Chairman of Pharmacology, Southwestern
Medical Center, University of Texas
William G. Kaelin, Jr., M.D.................. Associate Professor, Dana Farber Cancer Institute
Andrew W. Murray, Ph.D....................... Professor of Physiology, University of California at
San Francisco
Maynard Olson, Ph.D.......................... Professor of Medicine and Genetics, University of
Washington
Jasper D. Rine, Ph.D......................... Professor of Biology and Genetics, University of
California, Berkeley
Bruce W. Stillman, Ph.D...................... Director, Cold Spring Harbor Laboratory
Hans Wigzell, Ph.D........................... President, Karolinska Institute, Stockholm, Sweden
</TABLE>
EXECUTIVE COMPENSATION
The following table provides summary information concerning the compensation
received for services rendered to us during the fiscal year ended December 31,
1999 by the Chief Executive Officer and our only other executive officers whose
aggregate compensation during our last fiscal year exceeded $100,000. We
sometimes refer to these officers as the Named Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) UNDERLYING OPTIONS COMPENSATION(2)
--------------------------- ------ -------- ------------------ ---------------
<S> <C> <C> <C> <C>
Stephen H. Friend, M.D., Ph.D. .......... $172,500 $16,500 -- $3,291
President, Chief Executive Officer and
Chief Scientific Officer
John J. King, II ......................... $136,500 $13,100 -- $7,424
Senior Vice President and
Chief Operating Officer
Roland Stoughton, Ph.D. .................. $138,342 $13,000 -- $ 713
Vice President of Bioinformatics
</TABLE>
------------------------
(1) Bonus represents the amount paid to the employee in 1999.
(2) Includes amounts paid for life insurance premiums for each of the named
officers, health insurance premiums for Mr. King, and automobile expenses
for Dr. Friend.
OPTION GRANTS
None of our Named Officers received option grants or stock appreciation
rights in fiscal year 1999.
OPTION EXERCISES AND HOLDINGS
The following table sets forth the number of shares of common stock acquired
upon the shares exercise of stock options by the Named Officers during our last
fiscal year, and the number and value
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of securities underlying unexercised options held by the Named Officers as of
December 31, 1999. Options to purchase shares of our common stock under our 1997
stock plan are exercisable in full six months after the date of grant but are
subject to a right of repurchase pursuant to the vesting schedule of each
specific grant. The repurchase option generally lapses over a four year period
with 12.5% vesting on the six month anniversary date and 1/48th of the total
number of shares vesting monthly thereafter. None of our Named Officers
exercised any grants in 1999. There was no public trading market for our common
stock as of December 31, 1999. Accordingly, the value of unexercised in-the-
money options listed below has been calculated on the basis of the initial
public offering price of $14.00 per share, less the applicable exercise price
per share, multiplied by the number of shares underlying such options.
AGGREGATED OPTION EXERCISES IN 1999
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen H. Friend, M.D., Ph.D................ -- -- -- --
John J. King, II............................. -- -- -- --
Roland Stoughton, Ph.D.(1)................... 151,500 -- $ 2,060,400 --
</TABLE>
------------------------
(1) As of December 31, 1999, 44,657 were fully vested. All 151,500 options were
exercisable at that date, with 106,843 subject to our right of repurchase.
(2) Based on the initial offering price of $14.00 per share, minus the exercise
price, multiplied by the number of shares underlying the option.
STOCK PLANS
2000 STOCK PLAN
PURPOSES OF PLAN; SHARE RESERVE. Our 2000 stock plan was adopted by our
Board of Directors in March 2000 and was approved by our stockholders in July
2000. A maximum of 5,286,913 shares of our common stock may be sold under the
2000 stock plan. The plan provides for an automatic annual increase on the first
day of each of our fiscal years beginning in 2001 and ending in 2009 equal to
the lesser of:
- 1,200,000 shares,
- 4% of our outstanding common stock on the last day of the preceding fiscal
year or
- a lesser number of shares that the board determines.
As of March 31, 2000 no shares had been granted under the 2000 stock plan.
Options granted under the 2000 stock plan may be "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, or
nonstatutory stock options. The 2000 stock plan will terminate in March 2010
unless the board terminates it earlier.
ADMINISTRATION. The 2000 stock plan is administered by our Board or a
committee appointed by our Board. The administrator has the authority to
determine:
- the fair market value of the common stock;
- which individuals will be granted options under the 2000 stock plan;
- the number of shares of common stock to be covered by each award of
options granted under the 2000 stock plan;
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- to approve the form of agreement(s) under the 2000 stock plan;
- to determine the terms and conditions of any award granted under the 2000
stock plan, so long as they are not inconsistent with the plan;
- to implement an option exchange program;
- to adjust the vesting of an option;
- to construe and interpret the terms of the plan and awards granted
pursuant to the plan; and
- without amending the plan, to modify grants of options or stock purchase
rights to participants who are foreign nationals or are employed outside
of the United States in order to recognize differences in local law, tax
policies, or customs.
ELIGIBILITY. The 2000 stock plan provides for the grant to our employees
and officers of incentive stock options and for the grant of nonstatutory stock
options and stock purchase rights to our employees, officers, directors and
consultants. To the extent an optionee would have the right in any calendar year
to exercise for the first time one or more incentive stock options for shares
having an aggregate fair market value in excess of $100,000, any such excess
options shall be treated as nonstatutory options.
ANNUAL LIMITATION. No employee may receive awards to purchase more than
2,000,000 shares of common stock during any fiscal year of Rosetta.
TERM. The term of each option shall be no more than ten years from the date
of grant or a shorter term as may be provided in the option agreement. In the
case of an incentive stock option granted to an optionee who, at the time the
option is granted, owns stock representing more than 10% of the total combined
voting power of all classes of our stock or any parent or subsidiary, the term
of the option shall be five years from the date of grant or shorter term as may
be provided in the written option agreement.
VESTING AND EXERCISABILITY. Options granted under the 2000 stock plan
generally vest at a rate of 1/4th of the total number of shares subject to the
options twelve months after the date of grant and 1/48th of the total number of
shares subject to the options each month thereafter. The administrator may
permit the immediate exercise of unvested options. However, we reserve the right
to repurchase any unvested shares at the time of the optionee's termination of
employment at the exercise price paid for such shares.
EXERCISE PRICE. The exercise price of each incentive stock option granted
under the 2000 stock plan must be at least equal to the fair market value of our
common stock on the date of grant. The exercise price of each nonstatutory stock
option granted under the 2000 stock plan shall be as determined by the
administrator. However, we expect that the exercise price of any non-statutory
stock option granted to our executive officers will equal at least 100% of the
fair market value of the common stock on the date of grant in order to qualify
the option as performance-based compensation under applicable tax law.
PAYMENT. The method of payment of the exercise price shall be determined by
the administrator and may consist of cash, or any other consideration allowed by
the plan.
TRANSFERABILITY. Options are generally nontransferable. The administrator
may grant nonstatutory stock options with limited transferability rights. Each
option may generally be exercised during the lifetime of the optionee only by
the optionee or permitted transferee.
TERMINATION OF OPTIONEE. Upon the termination of an optionee's employment
or other relationship with us, such optionee will have a limited time within
which to exercise any outstanding options, which time period will vary depending
on the reason for termination. To the extent that an optionee was not
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<PAGE>
entitled to exercise the option at the date of such termination, or if the
optionee does not exercise such option to the extent so entitled within the time
specified in the 2000 stock plan, the option shall terminate. No termination
shall be deemed to occur if the optionee is a consultant who becomes an employee
or the optionee is an employee who becomes a consultant.
STOCK PURCHASE RIGHTS. In addition to stock options, the administrator may
issue stock purchase rights under the 2000 stock plan to employees, non-employee
directors and consultants. The administrator determines the number of shares,
price, terms, conditions and restrictions related to the grant of stock purchase
rights. The purchase price of a stock purchase right granted under the 2000
stock plan will be determined by the administrator. The period during which the
stock purchase right is held open is determined by the administrator. Unless the
administrator determines otherwise, the recipient of a stock purchase right must
execute a restricted stock purchase agreement granting Rosetta an option to
repurchase unvested shares at the purchaser's original cost upon termination of
the purchaser's relationship with us.
CHANGE OF CONTROL. If we merge with or consolidate into another corporation
or sell all or substantially all of our assets, we would expect that the
successor corporation will assume the options or substitute equivalent options.
In such case, immediately before the consummation of the transaction, each
outstanding award will accelerate as to 50% of the then unvested shares. In
addition, if the successor corporation terminates without casue the employment
or consulting relationship of any participant within twelve months of the
consummation of the transaction, his or her award will vest as to all of the
remaining unvested shares. However, if the successor corporation refuses to
assume or substitute outstanding awards, each award will accelerate and become
fully vested immediately prior to the consummation of the transaction.
AMENDMENTS. Our board has the authority to amend or terminate the 2000
stock plan provided such action does not adversely affect the rights and
obligations of any optionee under any grant with respect to options or unvested
stock issuances then outstanding under the 2000 stock option plan without his or
her consent. In addition, to the extent necessary and desirable to comply with
applicable laws, we shall obtain stockholder approval of any 2000 stock plan
amendment in such a manner and to such a degree as required.
CORPORATE EVENTS. Outstanding awards, the number of shares remaining
available for issuance under the 2000 stock plan, the maximum number of shares
subject to awards that may be granted to an employee during a year and the fixed
number in the plan's evergreen formula will adjust in the event of a stock
split, stock dividend or other similar change in our captial stock.
1997 STOCK PLAN
PURPOSES OF PLAN; SHARE RESERVE. Our 1997 stock plan was adopted by our
board in June 1997, approved by our stockholders in June 1997 and was amended in
1999, among other things, to increase the shares available for issuance under
the plan. A maximum of 5,286,913 shares of our common stock may be sold under
the 1997 stock plan. As of March 31, 2000, a total of 2,130,946 shares has been
reserved for issuance under the 1997 stock plan, options to purchase a total of
1,968,932 shares of our common stock had been exercised and 1,187,035 shares
remained available for grant under the 1997 stock plan. Options granted under
the 1997 stock plan may be "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, or nonstatutory stock options.
Stock purchase rights may also be granted under the 1997 stock plan. To date, no
stock purchase rights have been granted.
The terms of the 1997 stock plan are substantially similar to those of the
2000 stock plan except that prior to the date on which our common stock becomes
a listed security, the exercise price of any nonstatutory stock option granted
to an optionee who is a 10% stockholder must equal at least 110% of the fair
market value of our common stock on the date of grant and all other
non-statutory stock options must have exercise prices equal to at least 85% of
the fair market value on the date of grant.
55
<PAGE>
The 1997 stock plan does not impose an annual limit on the number of shares
subject to awards that may be granted under the plan.
Some of our employees, directors and consultants reside in California and
received options under our 1997 stock plan. The vast majority of these
individuals were employees of Acacia BioSciences, Inc., a company we acquired in
February 1999. Some of these recipients have exercised their options. We may not
have complied with the securities laws of the state of California by failing to
file a notice required under the laws of that state. To remedy this situation
and comply with California law, we expect to offer to repurchase these shares
and options to purchase shares of our common stock. Based upon stock option
issuances and exercises prior to June 26, 2000, we expect to offer to repurchase
up to a maximum of 474,143 shares of our common stock issued upon the exercise
of stock options and options to purchase 243,276 shares of our common stock. The
243,276 options to purchase common stock have a weighted average exercise price
of $0.62 per share and the shares had a weighted average exercise price of
$0.40. Upon approval by the California Department of Corporations, we will
distribute a repurchase offer memorandum to holders of these shares and options,
and the offer will remain open for a period of 30 days from the date of receipt.
If the offer is accepted by all affected securityholders, we may be required to
pay up to a maximum of approximately $250,000 to repurchase these shares and
options. We do not plan to use the proceeds from this offering to repurchase the
shares and options subject to the rescission offer.
2000 DIRECTORS' STOCK OPTION PLAN
The 2000 Directors' Stock Option Plan was adopted by the board in
March 2000 and was approved by our stockholders in July 2000. A total of 600,000
shares of common stock has been reserved for issuance under the directors' plan,
none of which have been issued. The directors' plan will be effective as of the
effective date of this offering.
Under the directors' plan, each individual who serves as a non-employee
director as of the effective date of this offering will receive an automatic
grant of an option to purchase 25,000 shares of common stock upon the effective
date of this offering. Each individual who first becomes a non-employee director
after the effective date of the directors' plan will receive an automatic
initial grant of an option to purchase 25,000 shares of common stock upon
appointment or election to the Board. The automatic grants to purchase 25,000
shares will vest and become exercisable in installments of 1/48th of the total
number of shares subject to the option each month following the date of grant.
The directors' plan also provides for automatic annual grants of options to
purchase 5,000 shares of common stock on the date of each annual meeting of our
stockholders to each non-employee director who has served on the Board for at
least six months prior to the meeting and who continues to serve on the Board
following the meeting. The automatic grants to purchase 5,000 shares will vest
and become exercisable in installments of 1/12th of the total number of shares
subject to the option each month following the date of grant. The exercise price
of all stock options granted under the directors' plan shall be equal to the
fair market value of a share of our common stock on the date of grant of the
option. The exercise price of options granted to directors on the date of this
offering will be equal to the price to the public of shares sold in this
offering. Options granted under the directors' plan have a term of ten years.
However, unvested options will terminate when the optionee ceases to serve as a
director and vested options will terminate if they are not exercised within
twelve months after the director's death or disability or within 90 days after
the director ceases to serve as a director for any other reason. In addition,
options issued under the plan terminate in their entirety if a director commits
certain acts of misconduct against us.
In the event of a sale of all or substantially all of our assets or our
merger or consolidation of with or into another corporation, all outstanding
options will accelerate and become fully vested effective upon the consummation
of the transaction.
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<PAGE>
The directors' plan is designed to work automatically without
administration. However, to the extent administration is necessary, it will be
performed by our board of directors, with any director who has a personal
interest at stake abstaining. Although our board of directors may amend or
terminate the directors' plan, it may not take any action that may adversely
affect any outstanding option without the optionee's consent. Outstanding
awards, the number of shares remaining available for grant under the plan, and
the number of shares subject to the automatic director grants described above
will each adjust in the event of a stock split, stock dividend or other similar
change in our capital stock. The directors' plan will have a term of ten years
unless terminated earlier.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by the board in
March 2000 and was approved by our stockholders in July 2000. A total of 350,000
shares of common stock has been reserved for issuance under the Purchase Plan,
none of which have been issued as of the date of this offering. The number of
shares reserved for issuance under the Purchase Plan will be increased on the
first day of each of our fiscal years from 2001 to 2010 by the lesser of:
- 350,000 shares;
- 1.4% of our outstanding common stock on the last day of the preceding
fiscal year; or
- the number of shares determined by the board of directors.
The Purchase Plan becomes effective on the effective date of this offering.
Unless terminated earlier by the Board of Directors, the Purchase Plan shall
terminate in March 2020.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by a series of overlapping offering
periods of 24 months' duration, with new offering periods, other than the first
offering period, commencing on February 1 and August 1 of each year. Each
offering period will consist of four consecutive purchase periods of six months'
duration, and at the end of each six month period an automatic purchase will be
made for participants. The initial offering period is expected to commence on
the date of this offering and end on July 31, 2002; the initial purchase period
is expected to begin on the date of this offering and end on January 31, 2001.
The Purchase Plan will be administered by our board of directors or by a
committee appointed by the board. Our employees (including officers and employee
directors), or those of any majority-owned subsidiary designated by the board,
are eligible to participate in the Purchase Plan if they are employed for at
least 20 hours per week and more than five months per year. Under the Purchase
Plan, eligible employees may generally purchase common stock only through
payroll deductions, which in any event may not exceed 20% of an employee's
compensation, at a price equal to 85% of the lesser of the fair market value of
the common stock at the beginning of each offering period or on each purchase
date. During the initial offering period under the plan, participants will be
granted options to purchase stock under the plan that may be exercised either
through lump sum payment or by payroll deductions. If the fair market value of
the common stock on a purchase date is less than the fair market value at the
beginning of the offering period, each participant in the Purchase Plan shall
automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new twenty-four month offering period
beginning on the first business day following the purchase date. Employees may
end their participation in the Purchase Plan at any time during an offering
period by withdrawing from the plan and participation ends automatically on
termination of employment.
Under the Purchase Plan no employee shall be granted an option if
immediately after the grant the employee would own stock and/or hold outstanding
options to purchase stock equaling 5% or more of the total voting power or value
of all classes of stock of Rosetta or any Rosetta subsidiary. No employee shall
be granted an option under the Purchase Plan if the option would permit the
employee to purchase stock under all of our employee stock purchase plans and
our subsidiaries' in an amount
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that exceeds $25,000 of fair market value for each calendar year in which the
option is outstanding at any time. In addition, no employee may purchase more
than 1,800 shares of common stock under the Purchase Plan in any one purchase
period.
The Purchase Plan provides that in the event of our merger or consolidation
with or into another corporation or a sale of all or substantially all of our
assets, each right to purchase stock under the Purchase Plan will be assumed or
an equivalent right will be substituted by the successor corporation. However,
if the successor corporation refuses to assume or substitute the options, any
ongoing offering period will automatically be shortened so that employees'
rights to purchase stock under the Purchase Plan are exercised prior to
consummation of the transaction. The board has the power to amend or terminate
the Purchase Plan and to change or terminate offering periods as long as any
action does not adversely affect any outstanding rights to purchase stock under
the Purchase Plan. However, the Board may amend or terminate the Purchase Plan
or an offering period even if it would adversely affect outstanding options in
order to avoid our incurring adverse accounting charges. Outstanding awards,
shares remaining available for issuance under the plan, the fixed number in the
plan's evergreen formula, and the maximum number of shares that may be purchased
during a six-month purchase period will each adjust in the event of a stock
split, stock dividend or other similar change in our capital stock. We have not
issued any shares under the Purchase Plan to date.
401(k) PLAN
Effective November 1997, we adopted the Rosetta Inpharmatics, Inc. 401(k)
plan covering our eligible employees. The 401(k) plan is intended to qualify
under Section 401(k) of the Internal Revenue Code of 1986 so that contributions
to the 401(k) plan by employees or by us, and the investment earnings thereon,
are not taxable to employees until withdrawn from the 401(k) plan, and so that
contributions by us, if any, will be deductible by us when made. Under the
401(k) plan, employees can contribute up to the statutorily prescribed annual
limit ($10,500 in 2000) and to have that amount contributed to the 401(k) plan.
The 401(k) plan permits, but does not require, additional matching contributions
to the 401(k) plan by us on behalf of all participants in the 401(k) plan. To
date, we have not made any matching contributions to the 401(k) plan.
EMPLOYMENT OFFER LETTERS
In connection with the hiring of Stephen H. Friend as our president, we
entered into a letter agreement with Dr. Friend. Dr. Friend's employment is for
no specified length of time, and we have the right to terminate Dr. Friend's
employment with or without cause. In the event we terminate Dr. Friend's
employment for any reason other than cause, we have agreed to pay salary and
benefits to Dr. Friend for a period of six months.
In connection with the hiring of Roland B. Stoughton, we entered into a
letter agreement with Dr. Stoughton. Dr. Stoughton's options vest in accordance
with our standard vesting schedule. Dr. Stoughton's employment is for no
specified length of time, and either party has the right to terminate
Dr. Stoughton's employment at any time with or without cause.
In connection with the hiring of John J. King II, we entered into a letter
agreement with Mr. King. Mr. King's options vest in accordance with our standard
vesting schedule. Mr. King's employment is for no specified length of time, and
either party has the right to terminate Mr. King's employment at any time with
or without cause.
In connection with the hiring of Mark Boguski as our Senior Vice President
of Research, we entered into a letter agreement with Dr. Boguski. His options
have been exercised, subject to our right of repurchase. Dr. Boguski's
employment is for no specified length of time, and either party has the right to
terminate his employment at any time with or without cause. Dr. Boguski received
a signing bonus in the amount of $135,000, of which $100,000 has already been
paid. In the event that
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Dr. Boguski is terminated for reasons other than good cause, we have agreed to
continue Dr. Boguski's salary and benefits for a period of one year past his
termination and to continue to vest his options over one year. These severance
payments will be offset by any other salary Dr. Boguski may receive during that
time from other employment.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS AND INDEMNIFICATION MATTERS
Our Amended and Restated Certificate of Incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of such individual's fiduciary duties as a director,
except for liability (i) for any breach of such director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Delaware law; or (iv) for any transaction from which
a director derives an improper personal benefit. Delaware law does not eliminate
a director's duty of care and this provision has no effect on the availability
of equitable remedies such as an injunction or recession based upon a director's
breach of the duty of care.
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify its employees and other agents to the fullest extent permitted by
law. We believe that indemnification under our bylaws covers at least negligence
and gross negligence on the part of an indemnified party and permits us to
advance expenses incurred by an indemnified party in connection with the defense
of any action or proceeding arising out of such party's status or service as a
director, officer, employee or other agent of ours upon an undertaking by such
party to repay such advances if it is ultimately determined that such party is
not entitled to indemnification.
We have entered into separate indemnification agreements with each of our
directors and officers. These agreements require us, among other things, to
indemnify such director or officer against certain expenses (including
attorney's fees), judgments, fines and settlement amounts paid by such
individual in connection with any action, suit or proceeding arising out of such
individual's status or service as our director or officer (subject to certain
exceptions, including liabilities arising from willful misconduct or conduct
that is knowingly fraudulent or deliberately dishonest or a violation of
Section 16(b) of the Exchange Act) and to advance expenses incurred by such
individual in connection with any proceeding against such individual with
respect to which such individual may be entitled to indemnification by us. We
believe that our Amended and Restated Certificate of Incorporation, bylaws
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers. We also maintain directors' and
officers' liability insurance.
We are not aware of any pending litigation or proceeding involving any
director, officer, employee or agent of ours where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers, or persons controlling us, we
have been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
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CERTAIN TRANSACTIONS
Since January 1, 1999 there has not been any transaction or series of
similar transactions to which we were or are a party in which the amount
involved exceeded or exceeds $60,000 and in which any director or executive
officer of ours, any holder of more than 5% of any class of our voting
securities or any member of the immediate family of any of the foregoing persons
had or will have a direct or indirect material interest, other than the
transactions described below.
Certain stock option grants to our directors and executive officers are
described in this prospectus under the caption "Management--Executive
Compensation."
PRIVATE PLACEMENT TRANSACTIONS
Since our inception, we have issued, in private placement transactions,
shares of preferred stock, common stock, warrants for the purchase of shares of
preferred stock, and warrants for the purchase of common stock as follows:
- a total of 4,462,500 shares of Series A preferred stock at $4.00 per share
in June, August, September and October 1997 to 13 investors;
- warrants to purchase a total of 255,408 shares of Series A preferred stock
with a weighted average exercise price of $4.01 per share in June,
September, October and December 1997, and July 1998 to three investors;
- in connection with the acquisition of Acacia Biosciences, Inc. in February
1999, a total of 1,387,298 shares of Series B preferred stock valued at
$4.00 per share, a total of 2,300,071 shares of common stock valued at
$2.50 per share, warrants to purchase 33,339 shares of common stock with a
weighted average exercise price of $4.28 per share and valued at $0.43 to
$0.53 per share and warrants to purchase 134,596 shares of Series B
preferred stock with a weighted average exercise price of $6.20 per share
and valued at $1.20 to $1.72 per share to 232 investors. The acquisition
was accounted for under the purchase method and the purchase price was
$13,365,231, which included expenses in the amount of $313,376;
- a total of 2,019,452 shares of Series C preferred stock at $4.50 per share
in April 1999 to seven investors;
- in connection with the sale of our Series C preferred stock, in April
1999, we issued warrants to purchase an aggregate of 608,297 shares of our
common stock with an exercise price of $0.45 per share to seven investors;
- a warrant to purchase 54,949 shares of Series C preferred stock at an
exercise price of $4.50 per share in April 1999 to one investor;
- a total of 2,285,714 shares of Series D preferred stock at $5.25 per share
in October 1999 to one investor;
- a total of 4,442,378 shares of Series E preferred stock at $9.36 per share
in March 2000 to 16 investors; and
- a warrant to purchase 26,709 shares of Series E preferred stock at an
exercise price of $9.36 per share in March 2000 to one investor.
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<PAGE>
The following table summarizes the shares of preferred stock purchased by
named executive officers, directors and 5% stockholders and persons and entities
associated with them, in private placement transactions. Each share of preferred
stock converts into one share of common stock.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Vulcan Ventures, Inc.(1).................. 1,000,000 -- 740,741 -- 1,602,564
Lombard Odier & Cie....................... 750,000 -- 222,222 -- 209,036
Olympic Venture Partners, L.P.(2)......... 687,500 -- 342,359 -- 262,484
Agilent Technologies, Inc.(3)............. -- -- -- 2,285,714 459,792
</TABLE>
------------------------
(1) Ruth Kunath, one of our directors, is an investment advisor of Vulcan
Ventures. See the Principal Stockholders table for more information.
(2) Charles Waite, one of our directors, is a General Partner of Olympic Venture
Partners. See Principal Stockholders table for more information.
(3) Bill Buffington, one of our directors, is a general manager of Agilent.
RELATED PARTY TRANSACTIONS
Simultaneously with the closing of our Series A preferred stock financing,
entities affiliated with Olympic Venture Partners were issued a warrant to
purchase up to 250,000 shares of our common stock at an exercise price of $0.05
per share. Olympic has assigned to Tredegar Investments the right to acquire
78,125 shares of our common stock pursuant to the terms of the Olympic warrant.
Charles Waite, a general partner of Olympic, is one of our directors and Steve
Johnson, a former director of ours, is the president of Tredegar Investments.
The Olympic warrant is held as follows: OVP IV Entrepreneurs Fund, LP, holds a
warrant for 8,594 shares of our common stock and Olympic Venture Partners IV,
LP, holds a warrant for 163,281 shares of common stock. TGI Fund I, LC (formerly
Tredegar) now holds the Tredegar warrant. Each warrant has a four year term.
In connection with the original issuance of the warrants to Olympic and
Tredegar, Dr. Leroy Hood, Dr. Stephen Friend and the Fred Hutchinson Cancer
Research Center agreed to contribute up to an aggregate of 200,000 shares of
common stock to us upon the exercise of the warrants issued to Olympic and
Tredegar, pursuant to a Contribution Agreement dated June 7, 1997, and as
amended and restated November 14, 1997.
Leland Hartwell, Chairperson of our Scientific Advisory Board, is President
and a Director of the Fred Hutchinson Cancer Research Center. Dr. Hartwell is
one of our co-founders. Because of Dr. Hartwell's position at the Hutchinson
Center, he transferred his right as a co-founder of ours to purchase our common
stock to the Hutchinson Center. In May 1997, the Hutchinson Center purchased
283,200 shares of our common stock at a price of $0.034 per share. In
December 1997, we entered into a license agreement with the Hutchinson Center
whereby the Hutchinson Center granted us an exclusive, worldwide, sublicensable
license (subject to the rights of certain U.S. governmental agencies and a
grant-back to the Hutchinson Center for non-commercial research purposes) to
certain drug screening technology. We paid an up-front license fee upon
execution of the license agreement which consisted of the issuance of 352,000
shares of our common stock with an aggregate value of $11,900 on the date of
issuance to the Hutchinson Center. In addition to the common stock issued upon
execution of the agreement, we are obligated to pay the Hutchinson Center a
fixed annual payment upon issuance of the first U.S. patent containing claims
covering the licensed technology. In May 1999 we waived a right of repurchase we
had as to 88,000 of the shares held by Hutchinson Center.
Dr. Leroy Hood, a former director of ours, was formerly the William
Gates III Professor of Biomedical Sciences and chairperson of the Department of
Molecular Biotechnology at the University
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<PAGE>
of Washington. In September 1997, we entered into a license agreement with the
University of Washington. The University of Washington granted us an exclusive,
worldwide, sub-licensable license (subject to the rights of certain U.S.
governmental agencies and a grant-back to the University of Washington for
non-commercial research purposes) to certain technology pertaining to ink jet
synthesis of oligonucleotides. We paid an up-front license fee upon execution of
the license agreement which consisted of issuance of 90,000 shares of our common
stock with an aggregate value of $3,000 on the date of issuance to the
University of Washington. We are also obligated to make future periodic payments
on the anniversary date of the agreement. In addition, we are obligated to make
royalty payments on any product sales, subject to an annual minimum royalty. In
addition to our common stock issued upon execution of the agreement, we issued
an aggregate of 30,000 shares of our common stock in connection with certain
patent issuance and product sale milestones under the agreement. There are no
future commitments to issue stock under this agreement.
In April 1997, we entered into an agreement with Hamilton Capital Ltd., an
entity affiliated with Peter Svenillson, one of our directors, which provided
for certain payments to Hamilton Capital in connection with investments by
certain stockholders. Generally, the agreement provides that should we raise
money from certain listed parties, Hamilton Capital will receive a cash fee
equal to 5% of the gross proceeds of the financing, and warrants to purchase
7.5% of the amount of equity securities issued in the financing. In connection
with this Agreement, Hamilton Capital and Broadview Ltd., an affiliate of
Hamilton Capital and of which Mr. Svenillson is also a partner, have received an
aggregate of $1,127,345, warrants to purchase an aggregate of 228,751 shares of
Series A preferred stock at an exercise price of $4.00, a warrant to purchase
54,949 shares of Series C preferred stock at an exercise price of $4.50, and a
warrant to purchase 26,709 shares of Series E preferred stock at an exercise
price of $9.36.
In January and May 1997, we granted Stephen Friend, our Chief Executive
Officer, the right to purchase 147,493 and 548,707 shares of common stock,
respectively. Dr. Friend issued a promissory note dated May 15, 1997 in the
amount of $16,740 in our favor in order to purchase certain of such shares.
Dr. Friend has paid the full balance of this note and is no longer indebted to
us. As of March 31, 2000, we have the right to repurchase 157,826 shares held by
Dr. Friend should he leave our employ and not become a consultant to us.
In May of 1997, we granted John J. King II, our Chief Operating Officer, the
right to purchase 48,500 shares of common stock. In June 1997, he purchased
these shares for $1,644. As of March 31, 2000 we have the right to repurchase
13,135 shares held by Mr. King should he leave our employ and not become a
consultant to us. In July 1997, we also granted John J. King II an option to
purchase 145,500 shares of our common stock. Mr. King issued a promissory note
dated December 31, 1998 in the amount of $58,200 in our favor in order to
exercise his option to purchase such shares. This note is still outstanding and
is due December 31, 2000. As of March 31, 2000, we have the right to repurchase
39,406 shares held by Mr. King should he leave our employ and not become a
consultant to us.
In April 1999, in connection with the sale of our Series C preferred stock,
we issued the following warrants, each at an exercise price of $0.45 per share:
- a warrant to purchase 223,125 shares of our common stock to Vulcan
Ventures. Ruth Kunath, one of our directors, is an investment advisor of
Vulcan Ventures;
- a warrant to purchase 66,937 shares of common stock to Lombard Odier; and
- warrants to purchase 103,125 shares of common stock to entities affiliated
with Olympic Venture Partners. Charles Waite, one of our directors, is a
general partner of Olympic Venture Partners.
On January 29, 1999, we entered into an agreement to acquire Acacia
Biosciences, Inc. In February 1999, we acquired all the outstanding stock of
Acacia for 1,387,298 shares of our Series B preferred stock, 2,300,071 shares of
our common stock, warrants to purchase 134,596 shares of Series B
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<PAGE>
preferred stock, warrants to purchase an additional 33,339 shares of common
stock and 937,169 options to purchase common stock issued to employees and
consultants of Acacia. Dr. Sadow was the Chairman of the Board of Acacia. The
valuation of Acacia and our preferred and common stock was established based
upon an independent appraisal. After the acquisition, Dr. Sadow joined our
board.
In December 1999, we entered into an agreement with Corixa Corporation
providing for our joint collaboration for identifying potential antigen targets
for vaccine development. Dr. Gillis, one of our directors, is the Chief
Executive Officer and Chairman of the Board of Corixa.
In December 1999, we waived our right to repurchase 126,607 shares of common
stock held by Leroy Hood, one of our founders and a former director.
In October 1999, we entered into a strategic partnership with
Hewlett-Packard Company, under which we agreed to partner with Hewlett-Packard
to make and sell products in the gene expression field. In addition, we sold
2,285,714 shares of our Series D preferred stock to Hewlett-Packard at a
purchase price of $5.25 per share. Hewlett-Packard assigned its rights and
transferred its shares to Agilent in connection with Hewlett-Packard's spin-out
of certain business units to Agilent. In connection with the original
transaction, Mr. Buffington was named to our board. Mr. Buffington is a general
manager at Agilent. In June of 2000 we entered into an agreement to sell 714,285
shares of our common stock to Agilent, at the initial offering price of $14.00
per share, in a private placement to occur upon closing of this public offering.
In October 1997, Tularik, Inc. purchased 237,500 shares of our Series A
preferred stock at a per share price of $4.00 per share and 125,000 shares of
common stock at $0.40 per share, the fair market value at such date as
determined by our board of directors, and entered into an agreement with us in
which we were to provide certain research. Stephen McKnight, a former director
of ours, is also a director of Tularik.
For fiscal year 1999, we paid approximately $618,000 to our corporate
counsel, Venture Law Group, for legal services. William Ericson, one of our
directors, was formerly the managing director of Venture Law Group's Pacific
Northwest office in Kirkland, Washington. In May 1997, we issued an aggregate of
75,000 shares of common stock to attorneys and an investment fund affiliated
with Venture Law Group for a purchase price of $0.034 per share. We have a right
to repurchase such shares if Venture Law Group ceases providing services to us,
which lapses ratably over 48 months. As of March 31, 2000, 4,688 shares may be
repurchased by us if Venture Law Group ceases to provide services to us.
In March 2000, we granted an option to Mark Boguski, our Senior Vice
President of Research, the right to purchase 300,000 shares. Mr. Boguski issued
us a promissory note dated March 14, 2000 in the amount of $1,575,000 in order
to exercise his option. The note is due in March 2003. As of March 31, 2000, we
have the right to repurchase all 300,000 shares held by Mr. Boguski should he
leave our employ and not become a consultant to us.
INDEMNIFICATION AGREEMENTS. We have entered into indemnification agreements
with certain of our officers and directors containing provisions which may
require us to, among other things, indemnify our officers and directors against
certain liabilities that may arise by reason of their status or service as
officers or directors (other than liabilities arising from willful misconduct of
a culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. For a description
of limitations of liability and certain indemnification arrangements with
respect to our directors and officers, see "Management--Limitation of Liability
and Indemnification Matters."
REGISTRATION RIGHTS AGREEMENTS. Certain holders of common stock and
preferred stock have certain registration rights with respect to their shares of
common stock. See "Description of Capital Stock--Registration Rights of Certain
Holders."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 31, 2000 and as adjusted to reflect
the sale of the common stock offered by us under this prospectus and the
concurrent private placement by:
- each of our directors and named officers;
- all directors and executive officers as a group; and
- each person who is known to us to own beneficially more than 5% of our
common stock.
The table includes all shares of common stock issuable within 60 days of
March 31, 2000 upon the exercise of options and other rights beneficially owned
by the indicated stockholders on that date. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. To our knowledge,
except under applicable community property laws or as otherwise indicated, the
persons named in the table have sole voting and sole investment control with
respect to all shares beneficially owned. The applicable percentage of ownership
for each stockholder is based on 22,034,115 shares of common stock outstanding
as of March 31, 2000 and 29,948,400 shares of common stock outstanding after
this offering and the concurrent private placement, together with applicable
options for that stockholder. Shares of common stock issuable upon exercise of
options and other rights beneficially owned were deemed outstanding for the
purpose of computing the percentage ownership of the person holding these
options and other rights, but are not deemed outstanding for computing the
percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES ISSUABLE
SHARES UNDER OPTIONS PERCENTAGE OF
TOTAL SUBJECT TO A AND WARRANTS SHARES
NUMBER OF RIGHT OF EXERCISABLE WITHIN OUTSTANDING
SHARES REPURCHASE AS 60 DAYS OF ------------------------
BENEFICIALLY OF MARCH 31, MARCH 31, BEFORE THIS AFTER THIS
OWNED 2000 2000 OFFERING OFFERING
------------ ------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Ruth Kunath(1)...................... 3,566,430 -- 223,125 16.0% 11.8%
Vulcan Ventures, Inc.
110 110th Avenue N.E., Suite 550
Bellevue, WA 98004
William I. Buffington(2)............ 2,745,506 -- -- 12.5% 11.6%
Agilent Technologies, Inc
3500 Deer Creek Rd.
Palo Alto, CA 94304
Charles P. Waite(3)................. 1,567,343 -- 275,000 7.0% 5.2%
Olympic Venture Partners
2420 Carillon Point
Kirkland, WA 90833
Lombard Odier & Cie(4).............. 1,248,195 -- 66,937 5.6% 4.2%
11 rue de la Corraterie
1204 Geneve, Switzerland
Stephen H. Friend, M.D., Ph.D.(5)... 696,200 157,826 -- 3.2% 2.3%
John J. King, II(6)................. 194,000 39,406 -- * *
Roland B. Stoughton, Ph.D.(7)....... 151,500 100,499 -- * *
Mark Boguski(8)..................... 320,000 300,000 20,000 1.5% 1.1%
Peter Svenillson(9)................. 310,409 -- 310,409 1.4% 1.0%
Harvey S. Sadow, Ph.D............... 54,084 -- 20,000 * *
Steven Gillis, Ph.D................. 50,000 -- 50,000 * *
William W. Ericson.................. 10,534 -- -- * *
All directors and officers as a
group (12 persons)(10)............ 9,676,006 607,731 898,534 43.6% 34.5%
---------- ------- ------- ----- -----
</TABLE>
64
<PAGE>
------------------------
* Less than 1% of outstanding shares.
(1) Includes 3,566,430 shares held by Vulcan Ventures, Inc. which includes
warrants to purchase 223,125 shares exercisable within 60 days of
March 31, 2000. Ruth Kunath, one of our directors, is an Investment Advisor
at Vulcan and as such may be deemed to share voting and investment power
with respect to such shares. Ms. Kunath disclaims beneficial ownership of
such shares except to the extent of her pecuniary interest in such shares.
(2) Includes 2,745,506 shares owned by Agilent. Mr. Buffington, one of our
directors, is General Manager of Agilent, and as such may be deemed to
share voting and investment power with respect to shares owned by Agilent
Technologies, Inc. The percentage of shares outstanding for Agilent after
this offering includes the 714,285 shares of common stock we will issue to
Agilent in a private placement concurrent with the closing of this
offering. Mr. Buffington disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest in such shares.
(3) Includes 971,519 shares held by Olympic Venture Partners IV, L.P., 262,484
shares held by Olympic Venture Partners V, L.P., and 58,340 shares held by
Olympic Venture Partners Entrepreneurs Fund, L.P. Also includes warrants to
purchase 259,187 shares and 15,813 shares held by Olympic Venture Partners
IV, L.P. and Olympic Venture Partners Entrepreneurs Fund, L.P.,
respectively. Charles P. Waite, one of our directors, is a general partner
of Olympic Venture Partners and as such may be deemed to share voting and
investment power with respect to such shares. Mr. Waite disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest in such shares.
(4) Includes warrants to purchase 66,937 shares of common stock exercisable
within 60 days of March 31, 2000. Lombard Odier & Cie is a private Swiss
banking institution. The shares consist of shares held by Lombard Odier for
the benefit of the Lombard Odier Immunology Fund, a Swiss publicly traded
mutual fund, and private and institutional clients over which Lombard has
sole voting and dispositive power through its asset managers. No single
person exercises voting and dispositive control over the shares held by
Lombard Odier.
(5) The repurchase right lapses ratably each month through May 2001. Also
includes 92,186 shares of our Common Stock that will be contributed to the
capital of our stock upon the exercise of certain warrants by certain of
our stockholders. See "Certain Transactions."
(6) Such repurchase right lapses ratably each month through April 2001.
(7) Such repurchase right lapses ratably each month through November 2002.
(8) Includes options to purchase 20,000 shares exercisable within 60 days of
March 31, 2000. 5,000 shares are vested and the remainder vest annually in
equal installments through November 2002. Our right to repurchase
300,000 shares held by Mr. Boguski lapses ratably each month through March
2004.
(9) Includes warrants to purchase 310,409 shares exercisable within 60 days of
March 31, 2000 held by Hamilton Capital Ltd. and Broadview Ltd, an
affiliate of Hamilton Capital. Peter Svenillson, one of our directors, is a
general partner of Hamilton Capital Venture Partners and as such may be
deemed to share voting and investment power with respect to such shares.
Mr. Svenillson disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest in such shares.
(10) Includes 10,000 shares of our common stock held by our chief financial
officer, Gregory Sessler. Such shares are subject to repurchase by us.
Such repurchase right lapses ratably each month through March 2004. The
percentage of shares outstanding after this offering for the directors and
officers as a group includes the 714,285 shares of common stock we will
issue to Agilent in a private placement concurrent with the closing of
this offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will amend our articles of
incorporation to change our authorized capital stock to 75,000,000 shares of
common stock, $0.001 par value per share and 5,000,000 shares of undesignated
preferred stock, $0.001 par value per share. The following description of our
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by, our certificate of incorporation and bylaws, which we have
included as exhibits to the registration statement of which this prospectus
forms a part.
COMMON STOCK
As of March 31, 2000, there were 22,034,115 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
Series A, Series B, Series C, Series D and Series E preferred stock, held of
record by 349 stockholders. Options to purchase 2,130,946 shares of common stock
were also outstanding. There will be 29,948,400 shares of common stock
outstanding after the completion of this offering and the concurrent private
placement, assuming no exercise of the underwriter's overallotment option or
exercise of outstanding options under our stock option plans, after giving
effect to the sale of the shares offered hereby.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to the prior distribution
rights of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 14,597,342 shares of common stock. Thereafter, the Board
of Directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock, $0.001 par
value, in one or more series. The Board of Directors will also have the
authority to designate the rights, preferences, privileges and restrictions of
each such series, including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of our company without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. We currently have no
plans to issue any shares of preferred stock.
WARRANTS
At March 31, 2000, there were warrants outstanding to purchase an aggregate
of 858,297 shares of common stock with a weighted average exercise price of
$0.33 per share that will expire upon the consummation of this offering,
warrants to purchase an aggregate of 33,339 shares of common stock with a
weighted average exercise price of $4.28 per share that will survive the
effectiveness of this offering, warrants to purchase an aggregate of 26,657
shares of Series A preferred stock with a
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<PAGE>
weighted average exercise price of $4.08 per share which expire upon the
effectiveness of this offering, warrants to purchase an aggregate of 228,751
shares of Series A preferred stock that will expire in 2007 with an exercise
price of $4.00, warrants to purchase an aggregate of 134,595 shares of Series B
preferred stock with a weighted average exercise price of $6.20 per share that
will survive the effectiveness of this offering, a warrant to purchase 54,949
shares of Series C preferred stock with an exercise price of $4.50 that will
expire in 2009 and a warrant to purchase 26,709 shares of Series E preferred
stock with an exercise price of $9.36 per share that will expire in 2010. The
warrants to purchase shares of preferred stock that survive the closing of this
offering will convert into warrants to purchase shares of common stock on the
closing of this offering on a one-to-one basis. Generally, each warrant contains
provisions for the adjustment of the exercise price and the aggregate number of
shares issuable upon the exercise of the warrant under certain circumstances,
including stock dividends, stock splits, reorganizations, reclassifications,
consolidations and certain dilutive issuances of securities at prices below the
then existing warrant exercise price.
REGISTRATION RIGHTS
Upon completion of this offering and the concurrent private placement to
Agilent, the holders of 18,555,344 shares of common stock and options and
warrants to purchase 478,343 shares of common or preferred stock or their
transferees will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. These rights are provided under the
terms of an agreement between ourselves and the holders of these securities.
Subject to limitations in the agreement, the holders of at least 50% of these
securities then outstanding may require, on two occasions beginning six months
after the date of this prospectus, that we use our best efforts to register
these securities for public resale if Form S-3 is not available. If we register
any of our common stock either for our own account or for the account of other
security holders, the holders of these securities are entitled to include their
shares of common stock in that registration, subject to the ability of the
underwriters to limit the number of shares included in the offering. The holders
of at least 20% of these securities then outstanding may also require us, not
more than once in any twelve-month period or three times total, to register all
or a portion of these securities on Form S-3 when the use of that form becomes
available to us, provided, among other limitations, that the proposed aggregate
selling price, net of any underwriters' discounts or commissions, is at least
$1,000,000. We will be responsible for paying all registration expenses, and the
holders selling their shares will be responsible for paying all selling
expenses. Registration of their shares under the Securities Act would result in
these shares becoming freely tradable without restriction under the Securities
Act, except for shares purchased by affiliates, immediately upon the
effectiveness of such registration.
Upon closing of this offering and the concurrent private placement to
Agilent, the shares purchased by Agilent in the concurrent private placement
will become registrable securities and, therefore, will have the same
registration rights as those described in the preceding paragraph. These shares
are included in the numbers stated above.
ANTI-TAKEOVER PROVISIONS
Provisions of Delaware and Washington law, our certificate of incorporation
and bylaws could make more difficult the acquisition of us by a third party and
the removal of incumbent officers and directors. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire control
of us to first negotiate with us. We believe that the benefits of increased
protection of our ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
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We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- the board of directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to such date the business combination is approved by the
board of directors and authorized by 66 2/3% vote at an annual or special
meeting or stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
The laws of the State of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, the WBCA prohibits a "target corporation,"
with certain exceptions, from engaging in certain "significant business
transactions" with a person or group of persons who beneficially own 10% or more
of the voting securities of the target corporation an acquiring person for a
period of five years after such acquisition unless the transaction or
acquisition of such shares is approved by a majority of the members of the
target corporation's board of directors prior to the time of acquisition.
Such prohibited transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive disproportionate benefit as a
stockholder.
After the five-year period, a significant business transaction may take
place as long as it complies with certain fair price provisions of the statute.
A target corporation includes a foreign corporation if:
- the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act;
- the corporation's principal executive office is located in Washington;
- any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of record
by Washington residents, or (c) 1,000 or more of its stockholders of
record are Washington residents;
- a majority of the corporation's employees are Washington residents or more
than 1,000 Washington residents are employees of the corporation; and
- a majority of the corporation's tangible assets are located in Washington
or the corporation has more than $50.0 million of tangible assets located
in Washington.
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A corporation may not "opt out" of this statute and, therefore, we
anticipate this statute will apply to us. Depending upon whether we meet the
definition of a target corporation, Chapter 23B.19 of the WBCA may have the
effect of delaying, deferring or preventing a change in control.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of us. These and other
provisions may have the effect of deterring hostile takeovers or delaying
changes in our control or management.
Our certificate of incorporation provides for the division of our board of
directors into three classes, as nearly as equal in size as possible, with
staggered three year terms. The classification of the board of directors has the
effect of requiring more than one annual stockholder meeting to replace a
majority of the directors. Our bylaws provide that special meetings of
stockholders can be called only by the board of directors, the chairman of the
board, if any, the president and holders of 25% of the votes entitled to be cast
at a meeting. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the business brought before the meeting by
the board of directors, the chairman of the board, if any, the president or any
25% holder. Our bylaws set forth an advance notice procedure with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors and with regard to business to be brought
before a meeting of stockholders. These and other provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
us.
CONCURRENT PRIVATE PLACEMENT
In May 2000, we exercised our right to have Agilent purchase $10.0 million
worth of our common stock in a private placement concurrent with this offering.
In June 2000, we entered into a common stock purchase agreement with Agilent
under which we agreed to sell to Agilent shares of our common stock in a private
placement concurrent with and conditioned upon the sale of shares in this
offering. The price of the shares in the concurrent private placement is the
initial public offering price of $14.00 per share. The number of shares we are
selling to Agilent concurrent with this offering is equal to $10.0 million worth
of common stock priced at $14.00 per share.
TRANSFER RESTRICTIONS. We will require Agilent to agree not to sell,
transfer, encumber or otherwise dispose of any of the shares of common stock
acquired in the concurrent private placement in a public or private sale for a
period of 180 days following the closing of the offering.
REGISTRATION RIGHTS. We expect to grant Agilent registration rights
relating to the shares of common stock they will purchase in the concurrent
private placement. See "--Registration Rights."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Computershare
Investor Services, LLC, and their telephone number is (312) 360-5454.
69
<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 our common stock in the public
market could reduce prevailing market prices. Furthermore, since no shares will
be available for sale shortly after this offering because of contractual and
legal restrictions on resale as described below, sales of substantial amounts of
our common stock in the public market after any restrictions on sale lapse could
adversely affect the prevailing market price of the common stock and impair our
ability to raise equity capital in the future.
Upon completion of the offering and the concurrent private placement, we
will have 29,948,400 outstanding shares of common stock, assuming no exercise of
the over-allotment option and no exercises of outstanding options or warrants
after March 31, 2000. Of these shares, all of the shares sold in the offering
will be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates. The remaining
22,748,400 shares of common stock held by existing stockholders are restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration described below
under Rules 144, 144(k) or 701 promulgated under the Securities Act.
As a result of contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
- unless held by affiliates, the 7,200,000 shares sold in the public
offering will be freely tradable upon completion of the offering;
- 16,904,809 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 180 days after the date of
this prospectus;
- 693,457 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus; and
- 714,285 shares will be eligible for sale pursuant to Rule 144 beginning
one year after the date of this offering.
LOCK-UP AGREEMENTS
Each of our directors and officers and most of our employees and other
stockholders, have entered into lock-up agreements in connection with this
offering. These lock-up agreements provide that these holders will not offer,
sell, contract to sell pledge, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or excercisable or exchangeable for our common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of Lehman Brothers Inc. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by the representatives of the
underwriters of this offering.
RULE 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding which
will equal approximately 299,484 shares immediately after the offering;
and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
70
<PAGE>
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
RULE 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144, but without compliance
with certain restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 90 days after effectiveness without complying
with the holding period requirement and that non-affiliates may sell such shares
in reliance on Rule 144 90 days after effectiveness without complying with the
holding period, public information, volume limitation or notice provisions of
Rule 144.
STOCK OPTIONS
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant to
our employee and director benefit plans. As a result, any options or rights
exercised under the 1997 stock plan, the 2000 stock option plan, the 2000
employee stock purchase plan and the 2000 directors' stock option plan will also
be freely tradable in the public market. However, shares held by affiliates will
still be subject to the volume limitation, manner of sale, notice and public
information requirements of Rule 144 unless otherwise resalable under Rule 701.
As of March 31, 2000, we had granted options to purchase 2,130,946 shares of
common stock that had not been exercised, of which options to purchase 255,065
shares of common stock were both exercisable and not subject to a right of
repurchase in our favor.
71
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Lazard Freres & Co. LLC, Prudential
Securities Incorporated and Fidelity Capital Markets, a division of National
Financial Services Corporation, are acting as representatives, have each agreed
to purchase from us the respective number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Lehman Brothers Inc. ....................................... 3,100,000
Lazard Freres & Co. LLC..................................... 1,550,000
Prudential Securities Incorporated.......................... 1,550,000
Fidelity Capital Markets,
a division of National Financial Services Corporation..... 75,000
Chase Securities Inc........................................ 75,000
CIBC World Markets Corp..................................... 75,000
A.G. Edwards & Sons, Inc. .................................. 75,000
FleetBoston Robertson Stephens Inc. ........................ 75,000
ING Barings LLC............................................. 75,000
J.P. Morgan Securities Inc. ................................ 75,000
SG Cowen Securities Corporation............................. 75,000
William Blair & Company, L.L.C. ............................ 40,000
Gerard Klauer Mattison & Co., Inc. ......................... 40,000
Gruntal & Co., L.L.C. ...................................... 40,000
Oscar Gruss & Son, Incorporated............................. 40,000
Edward D. Jones & Co., L.P. ................................ 40,000
Pennsylvania Merchant Group................................. 40,000
Raymond James & Associates, Inc. ........................... 40,000
Ragen MacKenzie Incorporated................................ 40,000
Wm Smith Securities, Incorporated........................... 40,000
Wachovia Securities, Inc. .................................. 40,000
---------
Total..................................................... 7,200,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $0.58 per share. The underwriters may also allow to dealers, and such dealers
may reallow, a concession not in excess of $0.10 per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to thirty days after the date of this prospectus,
permits the underwriters to purchase a maximum of 1,080,000 additional shares of
our common stock to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is
72
<PAGE>
exercised in full, the underwriters will purchase shares from us, the total
price to the public will be $115,920,000, and the total proceeds to us will be
$106,805,600. The underwriters have severally agreed that, to the extent the
over-allotment option is exercised, each of the underwriters will purchase a
number of additional shares proportionate to its initial amount reflected in the
above table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us:
<TABLE>
<CAPTION>
PAID BY US
---------------------------------
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
OPTION OPTION
-------------- ----------------
<S> <C> <C>
Per Share........................................ $ 0.98 $ 0.98
Total............................................ $7,056,000 $8,114,400
</TABLE>
We estimate that the total expenses of this offering, excluding the
underwriter discount, will be approximately $1,000,000.
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
We and each of our directors and executive officers, and most of the other
holders of our common stock and securities convertible into or exercisable or
exchangeable for common stock issued prior to this offering, have agreed,
pursuant to certain "lock-up" agreements with the underwriters, that we and they
will not offer, sell, contract to sell, pledge, grant any option to sell, or
otherwise dispose of, directly or indirectly, any shares of common stock or
securities convertible into or exercisable or exchangeable for common stock for
a period of 180 days after the date of this prospectus without the prior written
consent of Lehman Brothers Inc. Lehman Brothers Inc., in its sole discretion,
may release the shares subject to the lock-up agreements in whole or in part at
any time with or without notice. However, Lehman Brothers Inc. has no current
plan to do so.
At our request, the underwriters have reserved for sale at the initial
public offering price up to 350,000 shares of our common stock for our officers,
directors, employees, customers, collaborative partners, friends and related
persons who express an interest in purchasing these shares. The number of shares
of our common stock available for sale to the general public will be reduced to
the extent these persons purchase these reserved shares. The underwriters will
offer any shares not so purchased by these persons to the general public on the
same basis as the other shares in this initial public offering.
Lehman Brothers Inc. intends to distribute and deliver this Prospectus only
by hand or by mail and intend to use only printed prospectuses. One of the
representatives, Prudential Securities Incorporated, also markets securities
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor may view offering terms and a prospectus online and place orders through
their financial advisors. Fidelity Capital Markets, a division of National
Financial Services Corporation, is acting as an underwriter of this offering and
will be facilitating electronic distribution through the Internet.
Prior to this offering, there has been no public market for our common
stock. Consequently, the offering price for our common stock will be determined
by negotiations between us and the underwriters and will not necessarily be
related to our asset value, net worth or other established criteria of value.
The factors to be considered in these negotiations, in addition to prevailing
market conditions, will include the history of and prospects for the industry in
which we compete, an assessment of our management, our prospects, our capital
structure and certain other factors as are deemed relevant.
73
<PAGE>
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of shares is
completed. However, the underwriters may engage in the following activities in
accordance with the rules:
- STABILIZING TRANSACTIONS. The representatives may make bids for or
purchases of the shares for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
- OVER-ALLOTMENTS AND SYNDICATE COVERING TRANSACTIONS. The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with this offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
- PENALTY BIDS. If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover short positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in an
amount not greater than the underwriters' option to purchase additional shares
from the issuer in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase to the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Venture Law Group, Professional Corporation, Kirkland, Washington. Certain legal
matters will be passed upon for the underwriters by Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., Boston, Massachusetts.
74
<PAGE>
Investment partnerships associated with Venture Law Group and individual
attorneys of Venture Law Group beneficially own an aggregate of 69,273 shares of
our common stock.
EXPERTS
The financial statements of Rosetta Inpharmatics, Inc. as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999 included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Acacia Biosciences, Inc. as of December 31, 1998
and 1997 and for the years then ended, and for the period from inception
(February 7, 1995) to December 31, 1998 included in this prospectus, have been
so included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The statements in the Prospectus relating to United States patent matters
under the captions "Risk Factors--If we are unable to protect our proprietary
rights adequately, or operate without violating the intellectual property of
others, our competitive position will suffer and our business and financial
condition would be adversely affected," and "Business--Intellectual Property and
Proprietary Technology," except for statements relating to our licenses or
agreements, or statements relating to the Affymetrix litigation with Oxford Gene
Technology, have been reviewed and approved by Pennie & Edmonds LLP, New York,
New York, special patent counsel, and have been included in reliance upon the
review and approval by such firm as experts in United States patent law.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement, which includes this prospectus, on Form S-1 with respect to the
common stock being offered by this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to us and the shares
of common stock offered hereby, reference is made to the registration statement,
including any exhibits and schedules thereto. Statements contained in this
prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete and, where any contract is an exhibit to the
registration statement, each statement with respect to the contract is qualified
in all respects by the provisions of the relevant exhibit, to which reference is
hereby made. You may read and copy any document we file at the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and the Securities and Exchange Commision's
Regional Offices located at the Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, NY 10048. You may call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information about the operation of the public
reference rooms.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. Upon approval of the common stock
for quotation on the Nasdaq National Market, such reports, proxy and information
statements and other information may also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington D.C.
20006.
The Securities and Exchange Commission maintains a Web site at www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission.
75
<PAGE>
ROSETTA INPHARMATICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
<CAPTION>
ROSETTA INPHARMATICS, INC.
FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and March 31, 2000........................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999, the three months ended
March 31, 1999 and 2000 and the period from inception
(December 19, 1996) to March 31, 2000..................... F-4
Consolidated Statements of Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the period from
inception (December 19, 1996) to March 31, 2000........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999, the three months ended
March 31, 1999 and 2000 and the period from inception
(December 19, 1996) to March 31, 2000..................... F-7
Notes to Consolidated Financial Statements.................. F-8
<CAPTION>
ACACIA BIOSCIENCES, INC.
FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants........................... F-30
Balance Sheets as of December 31, 1998 and 1997............. F-31
Statements of Operations for the years ended December 31,
1998 and 1997 and for the period from inception (February
7, 1995) to December 31, 1998............................. F-32
Statements of Stockholders' Equity for the period from
inception (February 7, 1995) to December 31, 1998......... F-33
Statements of Cash Flows for the years ended December 31,
1998 and 1997 and for the period from inception (February
7, 1995) to December 31, 1998............................. F-35
Notes to Financial Statements............................... F-36
<CAPTION>
ROSETTA INPHARMATICS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<S> <C>
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999.............................. F-44
Notes to Unaudited Pro Forma Combined Statement of
Operations................................................ F-45
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Rosetta Inpharmatics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of convertible preferred stock and
stockholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of Rosetta Inpharmatics, Inc. and subsidiary (a
development stage company) at December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
February 18, 2000
F-2
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, MARCH 31, EQUITY AT
-------------------------- ------------- MARCH 31,
1998 1999 2000 2000
----------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................... $3,270,944 $ 8,311,852 $ 46,511,289
Short-term investments........................ 4,980,632 10,951,496 8,683,640
Accounts receivable........................... 1,906 155,729 25,000
Interest receivable........................... 27,424 32,045 244,848
Prepaid expenses and other current assets..... 122,240 254,898 709,827
----------- ------------ -------------
Total current assets........................ 8,403,146 19,706,020 56,174,604
Property and equipment, net..................... 2,163,497 4,109,159 4,416,088
Business acquisition expenses................... 787,048 -- --
Intangible assets, net.......................... -- 10,497,709 18,485,087
Deposits and other assets....................... 39,517 475,326 474,091
----------- ------------ -------------
Total assets................................ $11,393,208 $ 34,788,214 $ 79,549,870
=========== ============ =============
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.............................. $ 529,360 $ 1,112,680 $ 1,487,181
Accrued expenses.............................. 132,627 219,148 610,344
License fees payable.......................... -- 666,667 166,667
Deferred revenue.............................. -- 1,259,761 1,820,490
Current portion of capital lease obligation... -- 209,333 215,510
Current portion of notes payable.............. 626,650 787,388 798,721
----------- ------------ -------------
Total current liabilities................... 1,288,637 4,254,977 5,098,913
Capital lease obligation, net of current
portion....................................... -- 145,754 89,503
Notes payable, net of current portion........... 1,343,552 1,242,926 1,033,674
Deferred revenue................................ -- 3,307,974 3,535,919
----------- ------------ -------------
Total liabilities........................... 2,632,189 8,951,631 9,758,009
----------- ------------ -------------
Contingencies and commitments
Convertible preferred stock, par value $0.001;
18,000,000 shares authorized; 4,462,500,
10,154,964 and 14,597,342 shares issued and
outstanding (aggregate liquidation preference
of $17,850,000, $44,486,725 and
$86,067,384).................................. 17,001,491 41,431,806 82,738,293 --
Stockholders' equity
Common stock, par value $0.001; 40,000,000
shares authorized; 2,630,555, 5,182,382,
7,436,773 and 22,034,115 pro forma shares
issued and outstanding...................... 2,631 5,183 7,437 22,034
Additional paid-in capital.................... 1,350,541 16,024,708 38,220,579 120,944,275
Notes receivable from stockholders............ (74,940) (58,200) (1,685,700) (1,685,700)
Deferred stock compensation................... (521,673) (2,255,640) (12,281,872) (12,281,872)
Deficit accumulated during the development
stage....................................... (8,997,031) (29,311,274) (37,206,876) (37,206,876)
----------- ------------ ------------- ------------
Total stockholders' equity (deficit)............ (8,240,472) (15,595,223) (12,946,432) $ 69,791,861
----------- ------------ ------------- ============
Total liabilities, convertible preferred stock,
and stockholders' equity (deficit)............ $11,393,208 $ 34,788,214 $ 79,549,870
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(DECEMBER 19,
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, 1996) TO
---------------------------------------- ----------------------------- MARCH 31,
1997 1998 1999 1999 2000 2000
----------- ----------- ------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Collaboration agreements..... $ -- $ -- $ 835,892 $ 257,500 $ 547,977 $ 1,383,869
Government grants............ -- -- 146,863 34,007 -- 146,863
----------- ----------- ------------ ----------- ------------ ------------
Total revenues............. -- -- 982,755 291,507 547,977 1,530,732
----------- ----------- ------------ ----------- ------------ ------------
Operating expenses
Research and development
(includes stock-based
compensation expense of
$41,527, $490,120,
$1,496,365, $439,934,
$806,205 and $2,834,217,
respectively).............. 1,410,536 5,313,256 12,288,661 2,577,808 4,092,237 23,104,690
General and administrative
(includes stock-based
compensation expense of
$23,217, $90,444,
$2,075,264, $119,202,
$1,670,121 and $3,859,046,
respectively).............. 882,526 2,379,390 9,272,312 1,099,632 4,620,153 17,154,381
----------- ----------- ------------ ----------- ------------ ------------
Total operating expenses... 2,293,062 7,692,646 21,560,973 3,677,440 8,712,390 40,259,071
----------- ----------- ------------ ----------- ------------ ------------
Loss from operations........... (2,293,062) (7,692,646) (20,578,218) (3,385,933) (8,164,413) (38,728,339)
Other income (expense)
Interest income.............. 439,744 706,796 639,474 82,663 365,596 2,151,610
Interest expense............. (45,272) (207,737) (293,196) (65,407) (70,915) (617,120)
Other, net................... 13,777 81,369 (82,303) 30,121 (25,870) (13,027)
----------- ----------- ------------ ----------- ------------ ------------
Net loss....................... (1,884,813) (7,112,218) (20,314,243) (3,338,556) (7,895,602) $(37,206,876)
----------- ----------- ------------ ----------- ------------ ============
Deemed dividend upon issuance
of Series E convertible
preferred stock (Note 16).... -- -- -- -- (7,285,500)
----------- ----------- ------------ ----------- ------------
Net loss attributable to common
stockholders................. $(1,884,813) $(7,112,218) $(20,314,243) $(3,338,556) $(15,181,102)
=========== =========== ============ =========== ============
Basic and diluted net loss per
share........................ $ (5.29) $ (5.29) $ (5.04) $ (1.26) $ (2.77)
=========== =========== ============ =========== ============
Weighted average shares used in
computing basic and diluted
net loss per share........... 356,451 1,344,007 4,030,103 2,655,239 5,472,798
=========== =========== ============ =========== ============
Pro forma basic and diluted net
loss per share (unaudited)... $ (1.73) $ (0.49)
============ ============
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited)... 11,740,509 16,170,719
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
INCEPTION (DECEMBER 19, 1996) TO MARCH 31, 2000
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
----------------------- -------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
--------- ----------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued in January and May 1997 to
founders at $0.034 per share.................... -- $ -- 1,315,037 $1,315 $ 43,265 $ --
Common stock issued in May 1997 at $0.034 per
share in exchange for services.................. -- -- 75,000 75 2,467 --
Common stock issued in May, 1997 for notes
receivable at $0.034 per share.................. -- -- 493,805 494 16,246 (16,740)
Series A preferred stock issued in June through
October 1997 at $4.00 per share, net of issuance
costs of $848,509............................... 4,462,500 17,001,491 -- -- -- --
Common stock issued in September and December 1997
in exchange for transfer of technology at time
of inception.................................... -- -- 442,000 442 -- --
Common stock issued in October 1997 at $0.40 per
share........................................... -- -- 125,000 125 49,875 --
Deferred stock compensation related to grants of
stock options................................... -- -- -- -- 157,347 --
Amortization of deferred stock compensation....... -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- --
--------- ----------- --------- ------ ----------- --------
BALANCES, DECEMBER 31, 1997......................... 4,462,500 17,001,491 2,450,842 2,451 269,200 (16,740)
Common stock issued in October and November 1998
in connection with stock option exercises....... -- -- 34,213 34 13,653 --
Common stock issued in December 1998 in connection
with stock option exercises for notes
receivable...................................... -- -- 145,500 146 58,054 (58,200)
Deferred stock compensation related to grants of
stock options................................... -- -- -- -- 1,009,634 --
Amortization of deferred stock compensation....... -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- --
--------- ----------- --------- ------ ----------- --------
BALANCES, DECEMBER 31, 1998......................... 4,462,500 17,001,491 2,630,555 2,631 1,350,541 (74,940)
<CAPTION>
DEFICIT
ACCUMULATED
DEFERRED DURING THE
STOCK DEVELOPMENT
COMPENSATION STAGE
------------ ------------
<S> <C> <C>
Common stock issued in January and May 1997 to
founders at $0.034 per share.................... $ -- $ --
Common stock issued in May 1997 at $0.034 per
share in exchange for services.................. -- --
Common stock issued in May, 1997 for notes
receivable at $0.034 per share.................. -- --
Series A preferred stock issued in June through
October 1997 at $4.00 per share, net of issuance
costs of $848,509............................... -- --
Common stock issued in September and December 1997
in exchange for transfer of technology at time
of inception.................................... -- --
Common stock issued in October 1997 at $0.40 per
share........................................... -- --
Deferred stock compensation related to grants of
stock options................................... (157,347) --
Amortization of deferred stock compensation....... 64,744 --
Net loss.......................................... -- (1,884,813)
----------- ------------
BALANCES, DECEMBER 31, 1997......................... (92,603) (1,884,813)
Common stock issued in October and November 1998
in connection with stock option exercises....... -- --
Common stock issued in December 1998 in connection
with stock option exercises for notes
receivable...................................... -- --
Deferred stock compensation related to grants of
stock options................................... (1,009,634) --
Amortization of deferred stock compensation....... 580,564 --
Net loss.......................................... -- (7,112,218)
----------- ------------
BALANCES, DECEMBER 31, 1998......................... (521,673) (8,997,031)
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
F-5
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
INCEPTION (DECEMBER 19, 1996) TO MARCH 31, 2000
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------------ --------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
---------- ----------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Series B preferred stock issued in February
1999 at $4.00 per share as part of the
purchase of Acacia....................... 1,387,298 5,549,192 -- -- -- --
Common stock issued in February 1999 at
$2.50 per share as part of the purchase
of Acacia................................ -- -- 2,300,071 2,300 5,747,877 --
Options and warrants granted as part of
purchase of Acacia....................... -- -- -- -- 1,002,485 --
Series C preferred stock issued in April
1999 at $4.50 per share, net of issuance
costs of $196,896........................ 2,019,452 6,917,880 -- -- -- --
Issuance of common stock warrants in April
1999 in connection with the issuance of
Series C Preferred Stock................. 1,972,758
Common stock issued in September 1999 in
exchange for transfer of technology...... -- -- 30,000 30 149,970 --
Series D preferred stock issued in October
1999 at $5.25 per share, net of issuance
costs of $36,756......................... 2,285,714 11,963,243 -- -- -- --
Common stock issued in connection with
stock option exercises................... -- -- 221,756 222 88,481 --
Acceleration of restricted stock........... -- -- -- -- 407,000 --
Payments received on notes receivable from
stockholders............................. -- -- -- -- -- 16,740
Deferred stock compensation related to
grants of stock options.................. -- -- -- -- 5,305,596 --
Amortization of deferred stock
compensation............................. -- -- -- -- -- --
Net loss................................... -- -- -- -- -- --
---------- ----------- ---------- ------ ------------ -----------
BALANCES, DECEMBER 31, 1999................ 10,154,964 41,431,806 5,182,382 5,183 16,024,708 (58,200)
Series E preferred stock issued in March
2000 at $9.36 per share, net of issuance
costs of $274,182 (unaudited)............ 4,442,378 41,306,487 -- -- -- --
Common stock issued in connection with
stock option exercises (unaudited)....... -- -- 1,257,463 1,257 510,602 --
Common stock issued in March 2000 in
connection with stock option exercises
for notes receivable (unaudited)......... -- -- 310,000 310 1,627,190 (1,627,500)
Common stock issued in connection of
purchase sub-license (unaudited)......... -- -- 686,928 687 7,555,521 --
Deferred stock compensation related to
grants of stock options (unaudited)...... -- -- -- -- 12,502,558 --
Amortization of deferred stock compensation
(unaudited).............................. -- -- -- -- -- --
Net loss (unaudited)....................... -- -- -- -- -- --
---------- ----------- ---------- ------ ------------ -----------
BALANCES, MARCH 31, 2000 (UNAUDITED)....... 14,597,342 $82,738,293 7,436,773 $7,437 $ 38,220,579 $(1,685,700)
========== =========== ========== ====== ============ ===========
<CAPTION>
DEFICIT
ACCUMULATED
DEFERRED DURING THE
STOCK DEVELOPMENT
COMPENSATION STAGE
------------ ------------
<S> <C> <C>
Series B preferred stock issued in February
1999 at $4.00 per share as part of the
purchase of Acacia....................... -- --
Common stock issued in February 1999 at
$2.50 per share as part of the purchase
of Acacia................................ -- --
Options and warrants granted as part of
purchase of Acacia....................... -- --
Series C preferred stock issued in April
1999 at $4.50 per share, net of issuance
costs of $196,896........................ -- --
Issuance of common stock warrants in April
1999 in connection with the issuance of
Series C Preferred Stock.................
Common stock issued in September 1999 in
exchange for transfer of technology...... -- --
Series D preferred stock issued in October
1999 at $5.25 per share, net of issuance
costs of $36,756......................... -- --
Common stock issued in connection with
stock option exercises................... -- --
Acceleration of restricted stock........... -- --
Payments received on notes receivable from
stockholders............................. -- --
Deferred stock compensation related to
grants of stock options.................. (5,305,596) --
Amortization of deferred stock
compensation............................. 3,571,629 --
Net loss................................... -- (20,314,243)
------------ ------------
BALANCES, DECEMBER 31, 1999................ (2,255,640) (29,311,274)
Series E preferred stock issued in March
2000 at $9.36 per share, net of issuance
costs of $274,182 (unaudited)............ -- --
Common stock issued in connection with
stock option exercises (unaudited)....... -- --
Common stock issued in March 2000 in
connection with stock option exercises
for notes receivable (unaudited)......... -- --
Common stock issued in connection of
purchase sub-license (unaudited)......... -- --
Deferred stock compensation related to
grants of stock options (unaudited)...... (12,502,558) --
Amortization of deferred stock compensation
(unaudited).............................. 2,476,326 --
Net loss (unaudited)....................... -- (7,895,602)
------------ ------------
BALANCES, MARCH 31, 2000 (UNAUDITED)....... $(12,281,872) $(37,206,876)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
THREE MONTHS ENDED (DECEMBER 19,
YEARS ENDED DECEMBER 31, MARCH 31, 1996) TO
------------------------------------------ ------------------------- MARCH 31,
1997 1998 1999 1999 2000 2000
------------ ------------ ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................ $ (1,884,813) $ (7,112,218) $(20,314,243) $(3,338,556) $(7,895,602) $(37,206,876)
Adjustments to reconcile net loss to net
cash used in
operating activities
Depreciation and amortization....... 118,135 445,068 1,059,885 163,206 346,204 1,969,292
Stock compensation.................. 64,744 580,564 3,571,629 559,136 2,476,326 6,693,263
Loss on sale and write-off of
property and equipment............ -- -- 298,262 45,789 35,004 333,266
Amortization of intangible assets... -- -- 2,754,377 275,304 814,778 3,569,155
Investment amortization............. -- (160,277) (57,486) 3,301 (53,513) (271,276)
Stock issued for licensed
technology........................ -- -- 556,970 -- -- 556,970
Changes in operating assets and
liabilities, net of effects of
purchase of Acacia................
Accounts receivable............... -- -- (102,557) 30,066 130,729 28,172
Interest receivable............... (170,336) 142,912 (4,621) (25,546) (212,803) (244,848)
Prepaid expenses and other
assets.......................... (38,171) (125,492) (509,315) (19,361) (453,694) (1,126,672)
Accounts payable.................. 239,175 290,185 394,278 353,300 374,501 1,298,139
Accrued expenses.................. 20,608 112,019 673,793 164,462 (354,752) 451,668
Deferred revenue.................. -- -- 4,267,735 (107,500) 788,674 5,056,409
------------ ------------ ------------ ----------- ----------- ------------
Net cash used in operating
activities................... (1,650,658) (5,827,239) (7,411,293) (1,896,399) (4,004,148) (18,893,338)
------------ ------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..... (1,495,867) (1,230,833) (2,253,111) (376,129) (688,137) (5,667,948)
Purchase of trademark and trade name.... -- -- (40,000) -- (1,000,000) (1,040,000)
Purchases of short-term investments (11,220,283) (15,820,220) (15,738,379) (1,700,000) (5,697,631) (48,476,513)
Proceeds from sale and maturity of
short-term investments................ 3,700,000 18,520,148 9,825,000 3,000,000 8,019,000 40,064,148
Proceeds from sale of property and
equipment............................. -- -- 27,500 -- -- 27,500
Business acquisition expenses, net of
cash acquired......................... -- (787,048) (231,468) (231,468) -- (1,018,516)
------------ ------------ ------------ ----------- ----------- ------------
Net cash provided by (used in)
investing activities......... (9,016,150) 682,047 (8,410,458) 692,403 633,232 (16,111,329)
------------ ------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable............. 1,507,410 1,054,148 766,687 -- -- 3,328,245
Payments on capital lease obligation.... -- -- (156,776) (15,002) (50,074) (206,850)
Payments on notes payable............... (112,725) (478,631) (706,575) (152,864) (197,919) (1,495,850)
Proceeds from issuance of preferred
stock................................. 17,001,933 -- 20,853,881 -- 41,306,487 79,162,301
Proceeds from issuance of common
stock................................. 97,122 13,687 88,702 22,633 511,859 711,370
Payments received on notes receivable
from stockholders..................... -- -- 16,740 -- -- 16,740
------------ ------------ ------------ ----------- ----------- ------------
Net cash provided by (used in)
financing activities......... 18,493,740 589,204 20,862,659 (145,233) 41,570,353 81,515,956
------------ ------------ ------------ ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents........................... 7,826,932 (4,555,988) 5,040,908 (1,349,229) 38,199,437 46,511,289
Cash and cash equivalents, beginning of
period................................ -- 7,826,932 3,270,944 3,270,944 8,311,852 --
------------ ------------ ------------ ----------- ----------- ------------
Cash and cash equivalents, end of
period................................ $ 7,826,932 $ 3,270,944 $ 8,311,852 $1,921,715 $46,511,289 $ 46,511,289
============ ============ ============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest................ $ 45,272 $ 207,737 $ 293,196 $ 65,407 $ 70,915 $ 617,120
============ ============ ============ =========== =========== ============
Common stock issued for notes
receivable.......................... $ 16,740 $ 58,200 $ -- $ -- $1,627,500 $ 1,702,440
============ ============ ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Rosetta Inpharmatics, Inc. ("Rosetta") was incorporated on December 19, 1996
in the state of Delaware. Rosetta is a developer of DNA microarray expression
technologies and information systems for obtaining comprehensive knowledge of
compound and drug target activities within any cell type, including human,
animal, and plant cells. Rosetta's integrated tools and consulting services
consist of the analysis of proprietary DNA microarrays, a powerful, flexible
informatics platform, and advanced molecular biology techniques to support the
needs of pharmaceutical, biotechnology, and agriculture companies. Rosetta
believes that its planned integrated approach to analysis of targets,
toxicities, and compound activities will greatly reduce the time, cost and risk
inherent in the current drug discovery process by eliminating or greatly
reducing its sequential nature.
Since inception, Rosetta has been in the development stage and its
activities have principally consisted of obtaining financing, recruiting
personnel, and conducting research and development. Rosetta is working on
several long-term development projects that involve experimental technology and
may require several years and substantial expenditures to complete. Revenues to
date have not resulted from Rosetta's planned principal operations. Rosetta's
ability to meet its business plan objectives is dependent upon its ability to
raise additional financing, substantiate its technology and, ultimately, to fund
its operations from revenues.
The statements of operations, stockholders' equity, and cash flows reflect
Rosetta's activities from inception (December 19, 1996) to March 31, 2000.
Rosetta had no activity for the period from December 19, 1996 through
December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Rosetta and its wholly owned subsidiary, Acacia Biosciences, Inc. ("Acacia").
All significant intercompany transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The financial information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited but includes all adjustments, consisting of
only normal recurring adjustments, that Rosetta considers necessary for a fair
presentation, in all material respects, of its financial position, operating
results, and cash flows for the interim dates and periods presented. Results for
the three month periods ended March 31, 2000 are not necessarily indicative of
results for the entire fiscal year or future periods.
CASH AND CASH EQUIVALENTS
Rosetta generally considers all highly liquid investments with insignificant
interest rate risk and with original or remaining maturities of three months or
less at the date of purchase to be cash and cash equivalents.
F-8
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and cash equivalents are recorded at cost, which approximates market
value, and consisted of the following amounts at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Bank deposits........................................ $ 229,542 $ 534,262
Money market account................................. 157,694 1,001,725
Commercial paper..................................... 1,984,990 6,775,865
Corporate bonds...................................... 898,718 --
---------- ----------
$3,270,944 $8,311,852
========== ==========
</TABLE>
Rosetta invests its cash in deposits with one financial institution that
may, at times, exceed federally insured limits. Management believes that the
risk of loss is minimal. To date, Rosetta has not experienced any losses related
to temporary cash investments.
SHORT-TERM INVESTMENTS
Investments in securities with maturities of less than one year or where
management's intent is to use the investments to fund current operations are
classified as short-term investments. Management classifies, at the date of
acquisition, its marketable securities into categories in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Currently, Rosetta
classifies its securities as available-for-sale which are reported at fair
market value with the related unrealized gains and losses included as a separate
component in stockholders' equity. Realized gains and losses and declines in
value of securities judged to be other than temporary are included in other
income (expense). The fair value of Rosetta's investments is based on quoted
market prices. The carrying value of those investments approximates their fair
value. Realized and unrealized gains and loss are based on the specific
identification method.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Interest and dividends on all securities are included in
interest income.
Rosetta's short-term investments are diversified among high-credit quality
securities in accordance with Rosetta's investment policy.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Disposals are removed at cost
less accumulated depreciation or amortization and any gain or loss from
disposition is reflected in the statement of operations in the year of
disposition. Depreciation is provided over the estimated useful lives of the
depreciable assets, generally five years, using the straight-line method.
Equipment under capital leases is recorded at the present value of minimum lease
payments and is amortized using the straight-line method over the shorter of the
estimated useful lives of the related asset or the term of the lease. Leasehold
improvements are amortized using the straight-line method over the shorter of
the life of the lease or the estimated useful lives of the improvements.
Additions and improvements that increase
F-9
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the value or extend the life of an asset are capitalized. Maintenance and
repairs are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), Rosetta reviews long-lived
assets, including intangible assets and property and equipment for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. In determining expected
future cash flows, assets are reviewed at the lowest level for which cash flows
are identifiable. Under SFAS 121, an impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount. An
impairment loss would be measured by comparing the fair value of the impaired
asset to its carrying value. An impairment loss would be recognized for the
excess of the carrying value over an asset's fair value. While Rosetta's current
and historical operating and cash flow losses are indicators of impairment,
Rosetta believes the future cash flows to be received from the long-lived assets
will exceed the assets' carrying value, and accordingly Rosetta has not
recognized any impairment losses through December 31, 1999.
REVENUE RECOGNITION
Revenue from grants and development activities under collaboration
agreements are recorded in the period in which the services are performed.
Revenues from grants and customer sponsored research and development contracts
are not refundable if the research efforts are not successful. Direct costs
associated with these contracts and grants are reported as research and
development expenses. Deferred revenue is recognized when funds are received in
advance of the services to be performed. Revenue from license and maintenance
fees under collaboration agreements is recognized over the term of the
agreements. Product revenue will be recognized when the following conditions are
met:
- Title and risk of ownership have transferred to the customer;
- The price for the product is fixed or determinable;
- All of Rosetta's performance obligations have been satisfied; and,
- The amount of future returns can be reasonably estimated.
Revenue from the license of software products under software license
agreements and from the delivery of maintenance services on Rosetta's products,
are accounted for under Statement of Position 97-2, "Software Revenue
Recognition." When contracts contain multiple elements, and vendor specific
objective evidence exists for all undelivered elements, Rosetta accounts for the
delivered elements in accordance with the "Residual Method" prescribed by
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." In circumstances where
Rosetta has established vendor specific objective evidence of the undelivered
elements, the difference between the total value and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered elements.
In the event that vendor specific evidence does not exist and all elements other
than the post-contract customer support have been delivered, revenues for the
entire arrangement are recognized ratably over the contractual post contract
customer support period.
F-10
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
License revenues are recognized when persuasive evidence of an arrangement
exists, the fee is fixed and determinable, collectibility is probable, and
delivery and customer acceptance, if required under the terms of the license
agreement, of the software products have occurred. Maintenance services consist
of technical support, including telephone consultation, problem resolution, and
software updates. Customers are typically billed for maintenance services in
advance for the term of the maintenance agreement, and revenue is recognized on
a straight-line basis over the term of the agreement, generally one year.
Unearned maintenance revenue is classified as deferred revenue.
SOFTWARE COSTS
Software developed for use in Rosetta's products is expensed as incurred
until both (i) technological feasibility for the software has been established,
and (ii) all research and development activities for the other components of the
system have been completed. Rosetta believes this will occur after it has
received evaluations from the beta sites and has completed any resulting
modifications to the products. Expenditures to date have been classified as
research and development expense.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenses consist of costs incurred for
Rosetta-sponsored as well as collaborative research and development activities.
These costs include direct and research-related overhead expenses, and are
expensed as incurred. Costs to acquire technologies which are utilized in
research and development and which have no alternative future use are expensed
when incurred. Research and development expenses under government grants
approximate the revenue recognized under such agreements.
BUSINESS ACQUISITION EXPENSES
Direct costs incurred by Rosetta for acquisitions accounted for under the
purchase method of accounting are included as part of the purchase price. As of
December 31, 1998, Rosetta deferred $787,048 of costs related to the acquisition
of Acacia, which closed in February 1999.
INCOME TAXES
Deferred tax assets and liabilities are recorded under the liability method
of accounting. Under the liability method, deferred taxes are determined based
on the differences between the financial statement and tax bases of the assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is recorded for the amount of income tax
payable or refundable for the period, increased or decreased by the change in
deferred tax assets and liabilities during the period.
PATENT COSTS
Costs related to filing and pursuing patent applications are expensed as
incurred, as recoverability of such expenditures is uncertain.
F-11
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK PURCHASE WARRANTS
The fair value of stock purchase warrants is determined using the
Black-Scholes option pricing model. The fair value of warrants issued in
connection with preferred stock financings has been recorded by offsetting
charges and credits to additional paid-in capital. The fair value of warrants
issued in connection with equipment and line of credit financings are
capitalized and amortized over the period of the financing agreement.
STOCK-BASED COMPENSATION
Rosetta accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price of
the option. Unearned compensation is being amortized on an accelerated basis
using the method prescribed in Financial Accounting Standards Board
Interpretation No. 28 over the vesting period of the individual options.
The Company accounts for equity instruments issued to nonemployees in
accordance with the provisions of SFAS No. 123. Compensation expense related to
equity instruments issued to nonemployees is recognized as the equity
instruments vest. At each reporting date, Rosetta revalues the compensation. As
a result, stock-based compensation expense related to equity instruments issued
to nonemployees will fluctuate as the fair value of Rosetta's common stock
fluctuates.
COMPREHENSIVE INCOME
Rosetta has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity from transactions and other events
and circumstances other than those resulting from investments by owners and
distributions to owners. SFAS No. 130 had no impact on Rosetta and, accordingly,
a separate statement of comprehensive income has not been presented.
SEGMENT REPORTING
Effective in January 1998, Rosetta adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Rosetta has determined that it operates in only one segment. Accordingly, the
adoption of SFAS No. 131 had no impact on Rosetta's financial statements.
F-12
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
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 the weighted-average number of unvested shares of common stock issued that
are subject to repurchase. Basic and diluted pro forma net loss per share, as
presented in the statements of operations, has been computed as described above
and also gives effect to the conversion of the convertible preferred stock
(using the if-converted method) from the original date of issuance. Rosetta has
excluded all convertible preferred stock, warrants to purchase convertible
preferred stock, outstanding options and warrants to purchase common stock and
common stock subject to repurchase from the calculation of diluted net loss per
share, as such securities are antidilutive for all periods presented.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted (unaudited) net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss attributable to common stockholders....... $(1,884,813) $(7,112,218) $(20,314,243) $(3,338,556) $(15,181,102)
=========== =========== ============ =========== ============
Basic and diluted
Weighted-average shares used in computing basic
and diluted net loss per share................. 356,451 1,344,007 4,030,103 2,655,239 5,472,798
=========== =========== ============ =========== ============
Basic and diluted net loss per share............. $ (5.29) $ (5.29) $ (5.04) $ (1.26) $ (2.77)
=========== =========== ============ =========== ============
Pro forma (unaudited):
Net loss attributable to common stockholders as
above.......................................... $(20,314,243) $(15,181,102)
Pro forma adjustment for deemed dividend......... -- 7,285,500
------------ ------------
Pro forma net loss attributable to common
stockholders................................... $(20,314,243) $ (7,895,602)
============ ============
Shares used above................................ 4,030,103 5,472,798
Pro forma adjustment to reflect weighted effect
of assumed conversion of convertible preferred
stock.......................................... 7,710,316 10,697,921
------------ ------------
Weighted-average shares used in computing pro
forma basic and diluted net loss per common
share.......................................... 11,740,509 16,170,719
============ ============
Pro forma basic and diluted net loss per common
share.......................................... $ (1.73) $ (0.49)
============ ============
Antidilutive securities not included in net loss
per share calculation
Convertible preferred stock...................... 4,462,500 4,462,500 10,154,964 5,849,798 14,597,342
Options to purchase common stock................. 868,000 1,092,500 2,089,184 2,130,497 2,148,945
Warrants to purchase common stock................ 250,000 250,000 891,636 283,339 891,636
Warrants to purchase Series A preferred stock.... 246,490 255,408 255,408 255,408 255,408
Warrants to purchase Series B preferred stock.... -- -- 134,596 134,596 134,596
Warrants to purchase Series C preferred stock.... -- -- 54,949 -- 54,949
Warrants to purchase Series E preferred stock.... -- -- -- -- 26,709
Unvested shares of common stock subject to
repurchase..................................... 1,493,048 1,075,186 371,459 908,344 1,033,871
----------- ----------- ------------ ----------- ------------
7,320,038 7,135,594 13,952,196 9,561,982 19,143,456
=========== =========== ============ =========== ============
</TABLE>
F-13
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 that effect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on
Rosetta's results of operations or financial condition when adopted as Rosetta
holds no derivative financial instruments and does not currently engage in
hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that Rosetta's
revenue recognition practices are in conformity with the guidelines of SAB 101.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Upon the closing of Rosetta's initial public offering, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. The unaudited pro forma stockholders' equity presented on the
balance sheet reflects the effect of the conversion of the preferred stock into
common stock on a one-for-one basis.
3. BUSINESS ACQUISITION
On February 22, 1999, Rosetta acquired Acacia Biosciences, Inc. ("Acacia"),
a company conducting drug discovery utilizing recent advances in genome science
and combinatorial chemistry. Under the Agreement and Plan of Reorganization (the
"Agreement"), Rosetta issued a total of 1,387,298 shares of Series B preferred
stock, warrants to acquire an additional 134,596 shares of Series B preferred
stock, 2,300,071 shares of common stock and warrants to purchase an additional
33,339 shares of common stock in exchange for all of Acacia's outstanding
capital stock. Pursuant to the Agreement, ten percent (10%) of the preferred and
common shares were issued and placed in escrow to cover normal representations
and warranties at the acquisition date. Consistent with APB 16, these shares
were measured and recorded on the acquisition date. In addition, all outstanding
stock options to purchase Acacia common stock were replaced with options to
purchase 937,169 shares of common stock. All outstanding vested options were
replaced with fully vested options to purchase 383,969 shares of common stock.
The value of these options has been included in the purchase price of Acacia.
Unvested
F-14
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITION (CONTINUED)
employee stock options of Acacia in the amount of 553,200 were cancelled and the
Acacia employees holding options were granted new unvested options in Rosetta
which vest over 48 months, based on continued employment. The intrinsic value of
these new unvested options is being amortized over 48 months in a manner
consistent with the accelerated method described in FIN 28.
The acquisition was accounted for under the purchase method. The purchase
price of $13,365,231 has been allocated to the assets acquired and liabilities
assumed by Rosetta based on their fair values at the date of acquisition.
The allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Book value of net assets acquired at cost................... $ 153,145
Fair value adjustments
Fair value of purchased technology........................ 9,443,000
Fair value of licensing agreements........................ 500,000
Fair value of assembled workforce......................... 1,298,571
-----------
Fair value of net assets acquired........................... 11,394,716
-----------
Purchase price
Cash...................................................... 750,000
Fair value of shares, warrants and options issued......... 12,301,855
Acquisition costs......................................... 313,376
-----------
13,365,231
-----------
Excess of purchase price over net assets acquired, allocated
to goodwill............................................... $ 1,970,515
===========
</TABLE>
The purchased technology, goodwill and licensing agreements are being
amortized over their estimated useful lives of five years and the assembled
workforce is being amortized over its estimated useful life of one to three
years.
The following unaudited pro forma information shows the results of Rosetta
for the years ended December 31, 1998 and 1999, as if the acquisition of Acacia
had occurred on January 1, 1998. The pro forma information includes adjustments
relating to the effect of amortizing goodwill and other intangible assets
acquired, and assumes that Rosetta preferred and common shares issued in
conjunction with the acquisition were outstanding as of January 1, 1998. The pro
forma results of operations are unaudited, have been prepared for comparative
purposes only, and do not purport to indicate the results of operations which
would actually have occurred had the acquisition been in effect on the date
indicated, or which may occur in the future:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenue.......................................... $ 1,258,158 $ 1,233,447
Net loss......................................... $(14,318,883) $(20,855,499)
Basic and diluted net loss per share............. $ (3.93) $ (4.78)
</TABLE>
F-15
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Available-for-sale securities
Corporate notes................................... $1,980,632 $ 7,451,496
Market auction preferreds......................... 3,000,000 3,500,000
---------- -----------
$4,980,632 $10,951,496
========== ===========
</TABLE>
The amortized cost of available-for-sale securities approximated their fair
values at both December 31, 1998 and 1999. For the years ended 1997, 1998 and
1999 there were no realized gains or losses on sales of securities.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Computer equipment................................... $ 953,093 $1,877,724
Lab equipment........................................ 838,870 1,833,498
Technology development equipment..................... 513,017 592,594
Manufacturing equipment.............................. -- 39,770
Office equipment..................................... 56,848 81,313
Office furniture and fixtures........................ 110,847 212,482
Leasehold improvements............................... 254,025 833,266
---------- ----------
2,726,700 5,470,647
Less: Accumulated depreciation and amortization...... (563,203) (1,361,488)
---------- ----------
$2,163,497 $4,109,159
========== ==========
</TABLE>
Property and equipment at December 31, 1999 includes assets acquired from
Acacia under a capital lease in the net amount of $364,729. Accumulated
amortization related to these leased assets was $112,567 at December 31, 1999.
F-16
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1999 (there
were no intangible assets at December 31, 1998):
<TABLE>
<S> <C>
Purchased technology........................................ $ 9,443,000
Goodwill.................................................... 1,970,515
Licensing agreements........................................ 500,000
Assembled workforce......................................... 1,298,571
Trademarks and trade names.................................. 40,000
-----------
13,252,086
Less: Accumulated amortization.............................. (2,754,377)
-----------
$10,497,709
===========
</TABLE>
7. NOTES PAYABLE
In 1997 and as amended in 1998 and 1999, Rosetta entered into an equipment
financing arrangement with a finance company to provide equipment financing up
to an aggregate amount of $3,300,000. Each separate financing agreement under
this arrangement has a term of forty-eight months with interest rates ranging
from 12.2% to 12.8%, and is collateralized by the related equipment. The
financing arrangement includes a provision that in the event that the
unrestricted cash balance of Rosetta falls below certain levels (as defined in
the arrangement), Rosetta may be required to set aside restricted cash as
additional collateral. At December 31, 1999, the unrestricted cash balance
requirement was $2,000,000. No cash was restricted under this provision as of
December 31, 1998 or 1999.
At December 31, 1998 and 1999, $1,867,674 and $2,017,102, respectively, was
payable under these equipment financing agreements, and $194,794 was unused and
available for additional financing at December 31, 1999. In connection with the
equipment financing agreements, Rosetta issued two six year warrants to purchase
9,375 and 8,918 shares of Series A Preferred Stock at exercise prices of $4.00
and $4.25 per share in 1997 and 1998, respectively.
At December 31, 1999, Rosetta has a $750,000 line of credit with a bank
which bears interest at prime plus 2% (10.5% at December 31, 1999) and will
expire in June 2000. The amount available under the line of credit is reduced by
any outstanding letters of credit. As of December 31, 1999, Rosetta had one
outstanding letter of credit in the amount of $375,000 related to its office
facility lease. At December 31, 1998 and 1999, $102,528 and $13,212,
respectively, was payable under the line of credit agreement with the bank.
F-17
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE (CONTINUED)
The aggregate amount of required principal payments under the equipment
financing arrangement and the line of credit as of December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000........................................................ $ 787,388
2001........................................................ 754,571
2002........................................................ 366,998
2003........................................................ 121,357
----------
2,030,314
Less: Current portion....................................... (787,388)
----------
$1,242,926
==========
</TABLE>
8. CAPITAL LEASE
In connection with the acquisition of Acacia in February 1999, Rosetta
assumed a capital lease obligation of Acacia. The remainder of the capital lease
obligation is to be repaid over 26 months through April 2001 and is
collateralized by the related equipment. Upon completing the lease term, the
Company has the option to purchase the equipment for 12% of the original
purchase price or extend the lease term for 12 months, after which the Company
will have title to the equipment.
The following is a schedule of future minimum lease payments under the
capital lease obligation at December 31, 1999:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000........................................................ $239,856
2001........................................................ 150,340
--------
390,196
Less: Amounts representing interest......................... (35,109)
--------
Present value of minimum lease payments..................... 355,087
Less: Current portion....................................... (209,333)
--------
Long-term portion........................................... $145,754
========
</TABLE>
9. INCOME TAXES
At December 31, 1999, Rosetta had net operating loss carryforwards of
approximately $16.6 million, which begin to expire in 2013. Utilization of
approximately $660,000 of these net operating loss carryforwards is subject to
the "change of ownership" provisions under Section 382 of the Internal Revenue
Code. During 1997, Rosetta experienced ownership changes as defined by the
Internal Revenue Code. Accordingly, Rosetta's use of losses incurred through the
date of any ownership changes will be limited during the carryforward period,
which may result in the expiration of a portion of the net operating losses
before utilization. In connection with Rosetta's acquisition of Acacia, Rosetta
acquired Acacia's net operating losses of approximately $7.8 million which begin
to
F-18
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
expire in 2010. Utilization of the entire Acacia net operating losses will be
subject to the limitations imposed by Section 382 of the Internal Revenue Code.
The difference between the income tax benefit per the statements of
operations and the amount calculated based on the statutory federal tax rate of
34% and the state apportioned rate, net of the federal tax benefit, is primarily
due to the increase in the deferred tax valuation allowance.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Rosetta has placed a
valuation allowance against the excess of its deferred tax assets over taxable
temporary differences which will reverse in the carryforward period due to the
uncertainty surrounding the ultimate realization of such assets. Management
evaluates, on a quarterly basis, the recoverability of the deferred tax asset
and the amount of the valuation allowance. At such time as it is determined that
it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.
The effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................ $ 2,882,128 $ 8,311,922
Deferred revenue................................ -- 1,553,029
Research and experimentation credit............. 378,669
Other........................................... 30,155 30,630
----------- ------------
2,912,283 10,274,250
----------- ------------
Deferred tax liabilities
Depreciation.................................... (77,204) (240,497)
Intangible assets (other than goodwill)......... (3,033,240)
----------- ------------
(77,204) (3,273,737)
----------- ------------
2,835,079 7,000,513
Less: Valuation allowance......................... (2,835,079) (7,000,513)
----------- ------------
Net deferred tax asset............................ $ -- $ --
=========== ============
</TABLE>
10. 401(K) PLAN
Rosetta maintains a 401(k) plan ("the Plan") that covers all employees who
satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the Plan, eligible employees may make pretax
elective contributions of up to 25% of their compensation, subject to maximum
limits on contributions prescribed by law. Under the profit-sharing portion of
the Plan, Rosetta may make an annual contribution for the benefit of eligible
employees in an amount determined by the Board of Directors. Rosetta has not
made any such contribution through December 31, 1999.
F-19
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
The authorized capital stock of Rosetta consists of 36,000,000 shares of
common stock, $0.001 par value per share and 18,000,000 shares of preferred
stock, $0.001 par value per share. See Note 16.
CONVERTIBLE PREFERRED STOCK
At December 31, 1999, convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
COMMON STOCK
SHARES ISSUED AND RECORDED RESERVED FOR LIQUIDATION
SERIES DESIGNATED OUTSTANDING AMOUNT CONVERSION PREFERENCE
------ ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
A 6,225,000 4,462,500 $17,001,491 4,462,500 $17,850,000
B 1,600,000 1,387,298 5,549,192 1,387,298 5,549,192
C 2,750,000 2,019,452 6,917,880 2,019,452 9,087,534
D 2,285,714 2,285,714 11,963,243 2,285,714 11,999,999
---------- ---------- ----------- ---------- -----------
12,860,714 10,154,964 $41,431,806 10,154,964 $44,486,725
========== ========== =========== ========== ===========
</TABLE>
Subject to the rights of future series of preferred stock, holders of
Series A, B, C and D convertible preferred stock, in preference to the holders
of any other stock of Rosetta, shall be entitled to receive dividends at a rate
of $0.32, $0.32, $0.36, and $0.42, respectively, per share per annum, when and
as declared by Rosetta's Board of Directors, but only out of funds that are
legally available therefor. Such dividends shall not be cumulative and no right
shall accrue to holders of such shares of preferred stock by reason of the fact
that dividends on such shares are not declared in any prior year, nor shall any
undeclared or unpaid dividend bear or accrue interest.
All holders of Series A, B, C and D convertible preferred stock are entitled
to voting rights equal to the number of shares of common stock into which each
share of preferred stock could be converted, and have voting rights and powers
equal to the voting rights and powers of the shares of common stock. In
addition, the holders of Series A, B, C and D preferred stock have certain
registration rights.
In the event of any liquidation, dissolution, or winding up of Rosetta,
either voluntary or involuntary, including a merger, acquisition or sale of
assets where the beneficial owners of Rosetta's common and preferred stock own
less than 50% of the resulting voting power of the surviving entity, the holders
of Series A, B, C, and D convertible preferred stock are entitled to receive,
prior to and in preference to any distribution of any of the assets of Rosetta
to the holders of common stock by reason of their ownership, an amount equal to
the sum of $4.00, $4.00, $4.50, and $5.25, respectively, for each outstanding
share of Series A, B, C, and D preferred stock (as adjusted for any stock
dividends, combinations, or splits), plus any declared, but unpaid dividends, if
any, on such shares (collectively, the "Series A, B, C, and D Liquidation
Preference"). Consequently convertible preferred stock has been classified
outside of stockholders' equity (deficit) in the accompanying balance sheets.
After payment in full of the Series A, B, C, and D Liquidation Preference and
any other distribution that may be required with respect to any future Series of
preferred stock, if assets remain in Rosetta, the holders of the common stock
shall receive all of the remaining assets of Rosetta.
The Series A, B, C and D convertible preferred stock are convertible at the
option of the holder or automatically upon sale of common stock in a qualified
public offering as defined in the Certificate of Incorporation. In addition,
each share of Series A, B, C and D preferred stock shall be automatically
F-20
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
converted in the event the majority of the Series A, B, C, and D preferred stock
so elect. Each share of Series A, B, C and D preferred stock is convertible into
that number of shares as is determined by dividing the original per share
purchase price by a conversion price. The initial conversion price for the
Series A, B, C, and D preferred stock is $4.00, $4.00, $4.50, and $5.25 per
share, respectively. The conversion price is subject to adjustment upon the
occurrence of certain events, including a stock split, stock dividend,
subdivision, or similar distribution with respect to the common stock.
The Company has the right to sell the holder of Series D convertible
preferred stock an additional $10,000,000 of common stock at fair value at any
time prior to or upon closing of Rosetta's initial public offering.
COMMON STOCK
Common stock issued to founders of Rosetta generally vest over four years,
with 12.50% of the shares vesting six months from the date of grant, and on a
monthly, pro rata basis thereafter. From inception through December 31, 1999,
the founders of Rosetta have purchased 2,031,335 shares of common stock, of
which 265,300 shares are unvested and remain subject to repurchase at the
original issuance price ($0.034 per share) in the event of termination of
employment or services to Rosetta. Rosetta has repurchased 147,494 shares in
accordance with these rights. Options for 83,984 shares of common stock have
been exercised as of December 31, 1999 which are subject to repurchase by
Rosetta at the weighted-average exercise price of $0.40 per share. Pursuant to
FAS 123, Rosetta recognizes stock compensation expense for founder shares that
have been issued to nonemployees and that are subject to performance criteria.
As the common stock vests, Rosetta remeasures the compensation based on the
then-existing fair value of its common stock; consequently, the amount of
deferred compensation and compensation expense will vary based upon changes in
the fair value of the Company's common stock. For the years ended December 31,
1997, 1998 and 1999 and for the period from inception (December 19, 1996) to
December 31, 1999, Rosetta recognized stock compensation for restricted founder
shares held by nonemployees in the amounts of $56,255, $394,940, $1,473,923 and
$1,925,117, respectively.
In connection with certain license agreements entered into by Rosetta in
1997, Rosetta issued 442,000 and 30,000 shares of common stock in 1997 and 1999,
respectively. In connection with the issuance of Series A convertible preferred
stock (see below), Rosetta issued warrants to purchase 250,000 shares of common
stock for $0.05 per share, subject to adjustment (as defined in the warrant
agreement). Under the terms of the warrant agreement, Rosetta has the right to
repurchase the warrants based on a five-year vesting schedule. These warrants
shall expire upon the earlier of (i) October 1, 2002, (ii) the closing of an
initial public offering of Rosetta's common stock, or (iii) ninety days
following disengagement. Pursuant to an agreement reached by Rosetta with
certain of its stockholders, when the warrants to purchase the common stock are
exercised, certain of Rosetta's stockholders have agreed to sell back 200,000
shares of common stock to Rosetta at the original issuance price.
F-21
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS
In connection with the 1997 Series A preferred stock financing, Rosetta
issued warrants to purchase 228,751 shares of Series A convertible preferred
stock for $4.00 per share. Of these warrants, 17,813 expire on December 16, 2007
and 210,938 expire on October 30, 2007. The value ascribed to these warrants was
$53,335 and $632,968, respectively.
In connection with the 1999 Series C preferred stock financing, Rosetta
issued warrants to purchase 54,949 shares of Series C convertible preferred
stock for $4.50 per share. These warrants expire on April 1, 2009. The value
ascribed to these warrants was $184,396. Also in connection with the Series C
financing, Rosetta issued warrants to purchase 608,297 shares of common stock
for $0.45 per share. The value ascribed to these warrants was $2,535,326. The
net proceeds of the convertible Series C preferred stock financing were
allocated between Series C convertible preferred stock and additional paid in
capital based on the relative fair values of the Series C preferred stock and
the common stock warrants. These common stock warrants expire upon the earliest
of (i) March 31, 2004 or (ii) the closing of an initial public offering.
The following table summarizes warrants outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE FAIR VALUE
----------------------------------------- PRICE PER SHARE AT EXPIRATION
COMMON SERIES A SERIES B SERIES C PER SHARE GRANT DATE DATE
-------- -------- -------- -------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A preferred stock
financing warrants........... 250,000 -- -- -- $0.05 $0.37 10/01/02
Series A preferred stock
financing warrants........... -- 210,938 -- -- $4.00 $3.00 10/30/07
Series A preferred stock
financing warrants........... -- 17,813 -- -- $4.00 $2.99 12/16/07
Line of credit warrants........ -- 8,364 -- -- $4.00 $2.07 10/01/01
Equipment financing warrants... -- 9,375 -- -- $4.00 $3.03 09/01/03
Equipment financing warrants... -- 8,918 -- -- $4.25 $2.94 07/01/04
Warrants issued to former
Acacia shareholders.......... 33,339 -- -- -- $3.92-$4.56 $0.43-$0.53 01/31/01
Warrants issued to former
Acacia shareholders.......... -- -- 127,513 -- $6.21 $1.20 01/06/02
Warrants issued to former
Acacia shareholders.......... -- -- 7,083 -- $5.93 $1.72 08/28/03
Series C preferred stock
financing warrants........... 608,297 -- -- -- $0.45 $4.17 03/31/04
Series C preferred stock
financing warrants........... -- -- -- 54,949 $4.50 $3.36 04/01/09
------- ------- ------- ------
891,636 255,408 134,596 54,949
======= ======= ======= ======
</TABLE>
F-22
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS
In 1997, Rosetta approved the 1997 Stock Plan (the "Plan") for employees,
directors, consultants and independent contractors under which 3,107,825 shares
of common stock were reserved. In November 1999, the number of shares reserved
under the plan was increased to 5,286,913. Pursuant to the Plan, the Board of
Directors has the ability to grant nonqualified and incentive stock options and
to establish the vesting period, exercise price and expiration period of all
options. Options generally vest over a four-year period and expire ten years
from the date of grant. Certain options have been granted that are immediately
exercisable, subject to Rosetta's right of repurchase, which expires over a four
year vesting period.
Option activity for the period from inception (December 19, 1996) to
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE
AVAILABLE SHARES PRICE
---------- --------- ---------
<S> <C> <C> <C>
Shares reserved.............................. 3,107,825 --
Options granted in 1997...................... (868,000) 868,000 $0.40
---------- ---------
Balances, December 31, 1997.................. 2,239,825 868,000 $0.40
Options granted.............................. (449,500) 449,500 $0.40
Options exercised............................ -- (179,713) $0.40
Options cancelled............................ 45,287 (45,287) $0.40
---------- ---------
Balances, December 31, 1998.................. 1,835,612 1,092,500 $0.40
Additional shares reserved................... 2,179,088 --
Options granted.............................. (1,499,098) 1,499,098 $0.42
Options exercised............................ -- (221,756) $0.40
Options cancelled............................ 280,658 (280,658) $0.40
---------- ---------
Balances, December 31, 1999.................. 2,796,260 2,089,184 $0.41
========== =========
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1999 as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE OF SHARES PRICE
--------------------- ----------- --------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.40 - $0.53 2,089,184 8.28 $0.41 1,792,334 $0.40
</TABLE>
At December 31, 1997 no shares were exercisable and at December 31, 1998,
options for 847,000 shares were exercisable with a weighted-average exercise
price of $0.40 per share.
F-23
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
Had compensation expense for employee-related options been determined at the
date of grant consistent with the fair value method prescribed in SFAS 123,
Rosetta's net loss and net loss per share would have changed to the following
pro forma amounts:
<TABLE>
<CAPTION>
INCEPTION
YEARS ENDED DECEMBER 31, (DECEMBER 19, 1996)
---------------------------------------- TO DECEMBER 31,
1997 1998 1999 1999
----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
As reported
Net loss........................... $(1,884,813) $(7,112,218) $(20,314,243) $(29,311,274)
Net loss per share, basic and
diluted.......................... $ (5.29) $ (5.29) $ (5.04) $ (15.34)
Pro forma
Net loss........................... $(1,909,015) $(7,153,231) $(20,477,286) $(29,539,532)
Net loss per share, basic and
diluted.......................... $ (5.36) $ (5.32) $ (5.08) $ (15.46)
</TABLE>
For the SFAS No. 123 pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the minimum value method allowable
for nonpublic companies with the following weighted-average assumptions:
<TABLE>
<CAPTION>
INCEPTION
YEARS ENDED DECEMBER 31, (DECEMBER 16, 1996)
------------------------------ TO DECEMBER 31,
1997 1998 1999 1999
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Risk free interest rates......... 6.1% 5.0% 5.2% 5.4%
Expected lives................... 5 years 5 years 5 years 5 years
Expected dividends............... None None None None
Volatility....................... 0% 0% 0% 0%
</TABLE>
For the year ended December 31, 1997, all options granted had exercise
prices that equaled the estimated market value of Rosetta's common stock at the
date of grant, and had a weighted-average fair value of $0.12 per share. For the
years ended December 31, 1998 and 1999, all options granted had exercise prices
below the estimated market value of Rosetta's common stock at the date of grant,
and had weighted-average fair values of $1.20 and $2.99, respectively.
DEFERRED STOCK COMPENSATION
During 1998 and 1999, Rosetta granted stock options to certain employees
under the 1997 Stock Plan with exercise prices below the fair value of Rosetta's
common stock at the date of grant. In accordance with the requirements of APB
25, Rosetta has recorded deferred stock compensation for the difference between
the exercise price of the stock options and the fair value of Rosetta's common
stock at the date of grant. This deferred stock compensation is amortized to
expense over the period during which the options or common stock subject to
repurchase vest, generally four years, using an accelerated method as described
in Financial Accounting Standards Board Interpretation No. 28. Rosetta recorded
deferred stock compensation related to these options in the amounts of $365,669
and $2,845,970 for the years ended December 31, 1998 and 1999, respectively.
Amortization of this deferred stock compensation amounted to $104,955 and
$1,420,245 for the years ended December 31, 1998 and 1999, respectively.
F-24
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
During 1997, 1998 and 1999, Rosetta granted stock options to certain
consultants and other third parties. Rosetta has recorded deferred stock
compensation using the fair value method calculated using the Black-Scholes
option pricing model and is amortizing the deferred stock compensation over the
vesting or performance period using the accelerated method discussed above.
Rosetta recorded deferred stock compensation related to these options in the
amounts of $37,394, $185,623 and $1,110,205 for the years ended December 31,
1997, 1998 and 1999, respectively. Amortization of this deferred stock
compensation amounted to $8,489, $80,669, $677,461 and $766,619 for the years
ended December 31, 1997, 1998 and 1999 and for the period from inception
(December 19, 1996) to December 31, 1999, respectively.
13. LICENSE AGREEMENTS
In September 1997, Rosetta entered into a license agreement with the
University of Washington. The University of Washington granted Rosetta an
exclusive, worldwide, sublicensable license (subject to the rights of certain
U.S. governmental agencies and a grant-back to the University of Washington for
non-commercial research purposes) to certain technology pertaining to ink jet
synthesis of oligonucleotides. Rosetta paid an up-front license fee upon
execution of the license agreement that consisted of the issuance of 90,000
shares of common stock to the University of Washington. Rosetta is also
obligated to make future periodic payments on the anniversary date of the
agreement. In addition, Rosetta is obligated to make royalty payments on any
product sales. Rosetta was also obligated to issue 30,000 additional shares of
common stock upon the occurrence of certain events. In 1999, Rosetta issued the
additional 30,000 shares of common stock. In connection with the issuance,
Rosetta recognized $150,000 in stock based compensation expense for the
estimated market value of the stock on the date of the issuance.
In December 1997, Rosetta entered into a license agreement with the Fred
Hutchinson Cancer Research Center (the "FHCRC"). Under the agreement, the FHCRC
granted Rosetta an exclusive, worldwide, sublicensable license (subject to the
rights of certain U.S. governmental agencies and a grant-back to the FHCRC for
non-commercial research purposes) to certain drug screening technology. Rosetta
paid an up-front license fee upon execution of the license agreement that
consisted of the issuance of 352,000 shares of common stock to the FHCRC. Of
these shares issued, 88,000 shares were subject to repurchase by Rosetta if
certain milestones were not met by December 2002. In May 1999, Rosetta waived
the repurchase option and in conjunction with the waiver, recognized $407,000 of
stock-based compensation expense for the estimated fair market value of the
stock on the date of the waiver. Rosetta is also obligated to pay the FHCRC a
fixed annual payment of $50,000 upon issuance of the first U.S. patent
containing claims covering the licensed technology.
In November 1998, Rosetta entered into a three-year internal-use license
agreement with Affymetrix, Inc. ("Affymetrix"), which is renewable on an annual
basis. Under the license agreement, Affymetrix granted Rosetta a nonexclusive,
nontransferable, nonsublicensable, worldwide license to certain patents related
to the fabrication and use of nucleic acid arrays.
As part of our merger with Acacia Biosciences in February 1999, we assumed
an agreement with the University of California. Under this agreement, we have an
exclusive license to two issued U.S. patents, 5,569,588 and 5,777,888 (the '888
patent) and patent applications related to these patents. The '888 patent covers
a fundamental analysis approach useful for gene expression analysis. Under the
F-25
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LICENSE AGREEMENTS (CONTINUED)
agreement, we are obligated to pay the University of California an annual
minimum royalty and a percentage of revenues that we obtain from sublicensing
this technology.
In October 1999 Rosetta entered into an agreement with Agilent Technologies.
This seven year agreement provides the following:
- Agilent and Rosetta to make and sell products in the gene expansion field.
- Agilent has the exclusive right to market and sell FlexJet DNA microarrays
manufactured using Rosetta's inkjet synthesizer and related design
technology, in exchange for certain royalty payments.
- Revenues from the research and development and licensing rights payments
have been deferred and are being recognized ratably over the seven year
term of the agreement.
- Rosetta received payments of $4,318,323 for research and development and
for certain licensing rights.
- The agreement expires in 2006.
14. RELATED PARTY TRANSACTIONS
In 1997, a stockholder of Rosetta guaranteed the bank line of credit. In
connection with the guarantee, the stockholder received warrants to purchase
8,364 shares of Series A preferred stock for $4.00 per share. In connection with
the renewal of the bank line of credit in 1999, the line of credit is no longer
guaranteed by the stockholder.
In connection with the issuance of Series A preferred stock in 1997 and in
accordance with a commission agreement, Rosetta paid $712,500 and issued
warrants to purchase 228,751 shares of Series A preferred stock at $4.00 per
share, to a member of its Board of Directors for providing sources of equity
financing.
In connection with a collaboration agreement Rosetta entered into with one
of its preferred stock holders in 1999, Rosetta received payments of $4,468,323
for research and development and for certain licensing rights, of which $345,892
was recorded as revenue and $4,122,431 was recorded as deferred revenue at
December 31, 1999. In addition, Rosetta has a receivable in the amount of
$150,000 from this stockholder at December 31, 1999.
In connection with the issuance of Series C preferred stock in April 1999
and in accordance with a commission agreement, Rosetta paid $165,000 and issued
warrants to purchase 54,949 shares of Series C preferred stock at $4.50 per
share to a member of its Board of Directors for providing sources of equity
financing.
15. OPERATING LEASES
Rosetta leases its facilities under noncancelable operating leases expiring
through July 2002. Rosetta pays taxes, insurance, normal maintenance and certain
other operating expenses. As a condition for one of the leases, Rosetta was
required to issue a stand-by letter of credit in the amount
F-26
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. OPERATING LEASES (CONTINUED)
of $375,000. To date, no portion of the letter of credit has been utilized. At
December 31, 1999, future rental payments due under the leases for the remainder
of the lease terms are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000........................................................ $ 686,543
2001........................................................ 637,916
2002........................................................ 299,074
----------
$1,623,533
==========
</TABLE>
Rent expense incurred under operating leases for the years ended
December 31, 1997, 1998 and 1999 was approximately $189,000, $410,000 and
$677,000, respectively, and for the period from inception (December 19, 1996) to
December 31, 1999 was approximately $1,276,000.
In March 2000, Rosetta entered into an additional three year facility lease,
which will increase the minimum operating lease payments by approximately
$270,000 per year over the term of the lease.
16. SUBSEQUENT EVENTS (UNAUDITED)
Effective March 15, 2000, Rosetta issued 4,442,378 shares of its Series E
preferred stock at a price of $9.36 for total proceeds to Rosetta of
$41,580,667. The rights and preferences of Series E preferred stock are
substantially the same as the rights and preferences of Series A through D
preferred stock. In connection with the issuance of the Series E preferred stock
and in accordance with a commission agreement, Rosetta paid $250,000 and issued
warrants to purchase 26,709 shares of Series E preferred stock at $9.36 per
share to a member of its Board of Directors for providing sources of equity
financing. The Series E preferred stock is convertible into common stock at a
conversion price of $9.36 per share. Rosetta will record the beneficial
conversion feature of these preferred shares which represents the difference
between the conversion price and the estimated fair market value of the common
stock upon issuance. The accretion resulting from this beneficial conversion
feature may have a material effect on net loss applicable to common stockholders
in calendar 2000. The accretion will not affect Rosetta's net loss, financial
position or cash flows.
At the date of issuance of the Series E preferred stock, Rosetta believed
the per share price of $9.36 represented the fair value of the preferred stock
and was in excess of the fair value of its common stock. Subsequent to the
commencement of the Company's initial public offering process, Rosetta
re-evaluated the fair market value of its common stock as of March 2000 and
determined it to be $11.00 per share. Pursuant to EITF 98-5, the incremental
fair value is deemed to be the equivalent of a preferred stock dividend. Rosetta
recorded the deemed dividend at the date of issuance by offsetting charges and
credits to additional paid in capital, without any effect on total stockholders'
equity. The amount increased the loss allocable to common stockholders in the
calculation of basic net loss per share for the three months ended March 31,
2000.
On March 16, 2000, Rosetta entered into a licensing agreement with Oxford
Gene Technology IP Limited ("OGT"). Under the terms of this agreement OGT
granted Rosetta a non-exclusive, worldwide sub-license to manufacture, have
manufactured and use nucleic acid arrays. Rosetta paid OGT an up-front license
fee upon execution of this license agreement, which consisted of $1,000,000 in
cash and
F-27
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
686,928 shares of common stock. Rosetta recorded a prepaid license fee based on
the cash paid and the estimated fair market value of the common stock on the
date of the agreement, $7,556,208. This license agreement will be amortized on a
straight-line basis over its estimated useful life of seven years. Rosetta
agreed during the term of the agreement to license to OGT all patents or other
intellectual property which it owns or controls related to instrumentation and
methods for making nucleic acid arrays. Rosetta additionally consented to allow
Agilent to sublicense certain of Rosetta's Inkjet patents to OGT. Both Rosetta
and OGT are required to pay each other quarterly royalty payments based upon the
provision of services.
Effective March 13, 2000, Rosetta's Certificate of Incorporation were
amended to increase the total number of authorized shares to 40,000,000 shares
of common stock and 18,000,000 shares of preferred stock.
Effective March 15, 2000, Rosetta's Board of directors adopted the 2000
Stock Plan. The 2000 Stock Plan provides for the grant of incentive stock
options to employees (including officers and employee directors) and for the
grant of nonstatutory stock options to employees, officers, directors (including
nonemployee directors) and consultants. A total of 5,286,913 shares of Rosetta's
common stock have been reserved for issuance under the 2000 Stock Plan. Options
have a maximum term of 10 years and vest according to schedules as determined by
the Board of Directors. The exercise price of options issued as incentive stock
options must be at least equal to the fair market value of Rosetta's common
stock on the issuance date. The exercise price of each nonstatutory stock option
granted under this plan must equal at least 85% of the fair market value of
Rosetta common stock on the date of grant.
Effective March 15, 2000, Rosetta adopted the 2000 Director's Stock Option
Plan ("Director's Plan"). Under the terms of the Director's Plan, each
nonemployee director who first becomes a nonemployee director after the
effective date of this plan will be entitled to receive an option to purchase
25,000 shares of common stock subject to monthly vesting over 48 months. The
Director's Plan also provides for annual grants of options to purchase 5,000
shares of common stock to each nonemployee director who has served on Rosetta's
Board of Directors for at least six months. These annual grants become
exerciseable in full on the fourth anniversary date of the grant. Options issued
under the Director's Plan will have a maximum term of 10 years. A total of
600,000 shares of Rosetta's common stock has been reserved for issuance under
the Director's Plan.
Effective March 15, 2000, Rosetta adopted the 2000 Employee Stock Purchase
Plan ("the Purchase Plan"). The Purchase Plan allows all eligible employees to
participate by purchasing the Company's common stock using a uniform percentage
of compensation at a discount allowed under guidelines issued by the Internal
Revenue Service. The Purchase Plan is intended to qualify under Section 423 of
the Internal Revenue Code. A total of 350,000 shares of Rosetta's common stock
has been reserved for issuance under the Purchase Plan. Each year, the number of
shares reserved under the Purchase Plan will be increased by the lesser of
(1) 350,000 shares; (2) 1.4% of the Company's outstanding common stock on the
last day of the immediately preceding fiscal year; (3) or an amount as
determined by the Board of Directors.
F-28
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Subsequent to December 31, 1999, Rosetta granted options to purchase
1,764,450 shares of common stock with a weighted-average exercise price of $3.91
per share and recorded deferred compensation of approximately $12.5 million.
In May 2000, Rosetta entered into a supply agreement with Agilent. This
agreement obligates Rosetta to purchase, and Agilent to supply, DNA microarrays.
The agreement has a three year term and may be extended for additional one-year
periods. Rosetta is required to purchase at least $29.7 million of DNA
microarrays from Agilent pursuant to this agreement through the end of 2001. The
aggregate amount of DNA microarrays Rosetta is required to purchase may be less,
depending on certain financing thresholds or if the parties otherwise agree
during semi-annual performance review meetings. Rosetta may also purchase more
than this amount. In connection with this agreement, Agilent has agreed to pay
Rosetta up to $3.0 million for the transfer of certain know how and technology
related to Rosetta's inkjet technology. The agreement may be terminated at any
time by mutual consent of the parties and either of the parties may terminate
the agreement prior to the end of the three-year term upon material breach of
the agreement or upon bankruptcy of the other party.
Certain employees, directors and consultants reside in California and have
received options under the 1997 stock plan. Some of these recipients have
exercised their options. Rosetta may not have complied with the securities laws
of the state of California by failing to file a notice required under the laws
of that state. To remedy this situation and comply with California law, Rosetta
expects to offer to repurchase shares and options to purchase shares of its
common stock. Based upon stock option issuances and exercises prior to June 26,
2000, Rosetta expects to offer to repurchase up to a maximum of 474,143 shares
of our common stock issued upon the exercise of stock options and options to
purchase 243,276 shares of our common stock. The 243,276 options to purchase
common stock have a weighted average exercise price of $0.62 per share and the
shares had a weighted average exercise price of $0.40. Upon approval by the
California Department of Corporations, Rosetta will distribute a repurchase
offer memorandum to holders of these shares and options, and the offer will
remain open for a period of 30 days from the date of receipt. If the offer is
accepted by all affected securityholders, Rosetta may be required to pay up to a
maximum of approximately $250,000 to repurchase these shares and options.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Acacia Biosciences, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Acacia Biosciences, Inc. (a
development stage company) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended and for the period from
inception (February 7, 1995) to December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
March 19, 1999
F-30
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 705,524 $ 2,957,122
Accounts receivable....................................... 152,189 134,008
Prepaid expenses and other current assets................. 21,232 5,376
----------- -----------
Total current assets.................................... 878,945 3,096,506
Property and equipment, net................................. 1,123,755 956,219
Deposits and other assets................................... 8,670 8,670
----------- -----------
$ 2,011,370 $ 4,061,395
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 321,211 $ 197,304
Accrued sponsored research................................ 6,000 6,750
Other accrued liabilities................................. 52,954 14,402
Deferred revenue.......................................... 162,500 75,000
Current portion of capital lease obligations.............. 186,348 165,887
Notes payable............................................. 1,500,000 --
----------- -----------
Total current liabilities............................... 2,229,013 459,343
Capital lease obligations, non-current...................... 355,087 541,436
----------- -----------
Total liabilities....................................... 2,584,100 1,000,779
----------- -----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 25,000,000 shares
authorized:
Series A convertible preferred stock; 8,000,000 shares
authorized; 6,423,722 shares issued and
outstanding at December 31, 1998 and 1997
aggregate liquidation preference of $6,423,722
at December 31, 1998 and 1997........................... 6,424 6,424
Common stock, $0.001 par value, 50,000,000 shares
authorized;
12,759,616 and 12,747,276 shares issued and outstanding
at
December 31, 1998 and 1997, respectively................ 12,760 12,747
Additional paid-in capital................................ 7,202,897 7,200,442
Deferred stock compensation............................... (7,533) (24,733)
Deficit accumulated during the development stage.......... (7,787,278) (4,134,264)
----------- -----------
Total stockholders' equity (deficit)........................ (572,730) 3,060,616
----------- -----------
$ 2,011,370 $ 4,061,395
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 7,
YEARS ENDED DECEMBER 31, 1995) TO
------------------------- DECEMBER 31,
1998 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Contract revenues.................................... $662,500 $50,000 $712,500
Grant revenues....................................... 595,658 15,000 610,658
----------- ----------- -----------
Total revenues..................................... 1,258,158 65,000 1,323,158
----------- ----------- -----------
Operating expenses:
Research and development............................. 4,018,214 2,457,779 7,097,181
General and administrative........................... 1,132,639 871,903 2,521,217
----------- ----------- -----------
Total operating expenses........................... 5,150,853 3,329,682 9,618,398
----------- ----------- -----------
Loss from operations................................... (3,892,695) (3,264,682) (8,295,240)
Interest income........................................ 72,142 226,640 354,579
Interest expense....................................... (82,461) (14,156) (96,617)
Other income........................................... 250,000 -- 250,000
----------- ----------- -----------
Net loss........................................... $(3,653,014) $(3,052,198) $(7,787,278)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1995) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE DEFICIT
PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DEFERRED DURING THE
-------------------- --------------------- PAID-IN STOCK DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE
--------- -------- ---------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock at
$0.00025 per share for cash in
March 1995..................... -- $ -- 4,000,000 $ 4,000 $ (3,000) $ -- $ --
Issuance of common stock at
$0.00025 per share for license
agreement in September 1995.... -- -- 100,000 100 (75) -- --
Issuance of common stock at
$0.00025 for cash in October
and November 1995.............. -- -- 5,000,000 5,000 (3,750) -- --
Issuance of common stock at
$0.0070 per share for cash in
December 1995.................. -- -- 1,426,400 1,426 8,574 -- --
Issuance of common stock at
$0.625 per share in December
1995, net of expenses of
$50,000........................ -- -- 800,000 800 449,200 -- --
Net loss......................... -- -- -- -- -- -- (55,253)
--------- ------ ---------- ------- ---------- -------- -----------
Balances at December 31, 1995.... -- -- 11,326,400 11,326 450,949 -- (55,253)
Issuance of common stock at
$0.725 per share for cash in
February 1996, net of expenses
of $83,070..................... -- -- 1,145,792 1,146 746,483 -- --
Issuance of common stock at
$0.725 per share for consulting
services in May 1996........... -- -- 19,600 20 14,190 -- --
Issuance of common stock at
$0.725 per share for cash in
May 1996, net of expenses of
$8,701......................... -- -- 154,484 154 103,146 -- --
Issuance of common stock at
$0.725 per share for license
agreeent in June 1996.......... -- -- 100,000 100 72,400 -- --
Issuance of Series A convertible
preferred stock at $1.00 per
share for cash in October
through December 1996, net of
expenses of $646,164........... 5,401,500 5,402 -- -- 4,749,934 -- --
Issuance of Series A convertible
preferred stock at $1.00 per
share for consulting services
in November 1996............... 22,222 22 -- -- 22,200 -- --
Deferred compensation related to
the grant of stock options to
non-employees.................. -- -- -- -- 51,600 (51,600) --
Amortization of deferred stock
compensation................... -- -- -- -- -- 9,667 --
Net loss......................... -- -- -- -- -- -- (1,026,813)
--------- ------ ---------- ------- ---------- -------- -----------
Balances at December 31, 1996
(carried forward).............. 5,423,722 5,424 12,746,276 12,746 6,210,902 (41,933) (1,082,066)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock at
$0.00025 per share for cash in
March 1995..................... $ 1,000
Issuance of common stock at
$0.00025 per share for license
agreement in September 1995.... 25
Issuance of common stock at
$0.00025 for cash in October
and November 1995.............. 1,250
Issuance of common stock at
$0.0070 per share for cash in
December 1995.................. 10,000
Issuance of common stock at
$0.625 per share in December
1995, net of expenses of
$50,000........................ 450,000
Net loss......................... (55,253)
-----------
Balances at December 31, 1995.... 407,022
Issuance of common stock at
$0.725 per share for cash in
February 1996, net of expenses
of $83,070..................... 747,629
Issuance of common stock at
$0.725 per share for consulting
services in May 1996........... 14,210
Issuance of common stock at
$0.725 per share for cash in
May 1996, net of expenses of
$8,701......................... 103,300
Issuance of common stock at
$0.725 per share for license
agreeent in June 1996.......... 72,500
Issuance of Series A convertible
preferred stock at $1.00 per
share for cash in October
through December 1996, net of
expenses of $646,164........... 4,755,336
Issuance of Series A convertible
preferred stock at $1.00 per
share for consulting services
in November 1996............... 22,222
Deferred compensation related to
the grant of stock options to
non-employees.................. --
Amortization of deferred stock
compensation................... 9,667
Net loss......................... (1,026,813)
-----------
Balances at December 31, 1996
(carried forward).............. 5,105,073
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
F-33
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1995) TO DECEMBER 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
SERIES A DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED DURING THE TOTAL
-------------------- --------------------- PAID-IN STOCK DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY
--------- -------- ---------- -------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996.. 5,423,722 $5,424 12,746,276 $12,746 $6,210,902 $(41,933) $(1,082,066) $ 5,105,073
(brought forward)
Issuance of Series
A convertible
preferred stock
at $1.00 per
share for cash in
February 1997,
net of expenses
of $9,659........ 1,000,000 1,000 -- -- 989,341 -- -- 990,341
Exercise of stock
options.......... -- -- 1,000 1 199 -- -- 200
Amortization of
deferred stock
compensation..... -- -- -- -- -- 17,200 -- 17,200
Net loss........... -- -- -- -- -- -- (3,052,198) (3,052,198)
--------- ------ ---------- ------- ---------- -------- ----------- -----------
Balances at
December 31, 1997.. 6,423,722 6,424 12,747,276 12,747 7,200,442 (24,733) (4,134,264) 3,060,616
Exercise of stock
options.......... -- -- 12,340 13 2,455 -- -- 2,468
Amortization of
deferred stock
compensation..... -- -- -- -- -- 17,200 -- 17,200
Net loss........... -- -- -- -- -- -- (3,653,014) (3,653,014)
--------- ------ ---------- ------- ---------- -------- ----------- -----------
Balances at
December 31, 1998.. 6,423,722 $6,424 12,759,616 $12,760 $7,202,897 $ (7,533) $(7,787,278) $ (572,730)
========= ====== ========== ======= ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 7,
YEARS ENDED DECEMBER 31, 1995) TO
------------------------- DECEMBER 31,
1998 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATION ACTIVITIES
Net loss.................................................. $(3,653,014) $(3,052,198) $(7,787,278)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 378,249 199,160 603,311
Issuance of common stock for license agreements......... -- -- 72,525
Issuance of common stock for consulting services........ -- -- 14,210
Issuance of convertible preferred stock for consulting
services.............................................. -- -- 22,222
Changes in operating assets and liabilities:
Receivables........................................... (18,181) 38,516 (152,189)
Prepaid expenses and other current assets............. (15,856) 66,813 (21,232)
Accounts payable...................................... 123,907 164,890 321,211
Accrued sponsored research............................ (750) 6,750 6,000
Other accrued liabilities............................. 38,552 (69,416) 52,954
Deferred revenue...................................... 87,500 75,000 162,500
----------- ----------- -----------
Net cash used in operating activities............... (3,059,593) (2,570,485) (6,705,766)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (528,585) (290,164) (941,470)
Proceeds from sale of equipment........................... -- -- 11,602
Deposits and other assets................................. -- (8,670) (8,670)
----------- ----------- -----------
Net cash used in investing activities............... (528,585) (298,834) (938,538)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable................................. 1,500,000 -- 1,500,000
Principal payments on capital lease obligations............. (165,888) (45,808) (211,696)
Proceeds from issuance of common stock...................... 2,468 200 1,315,847
Proceeds from issuance of convertible preferred stock....... -- 990,341 5,745,677
----------- ----------- -----------
Net cash provided by financing activities........... 1,336,580 944,733 8,349,828
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........ (2,251,598) (1,924,586) 705,524
Cash and cash equivalents at beginning of period............ 2,957,122 4,881,708 --
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 705,524 $ 2,957,122 $ 705,524
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid............................................. $ 73,968 $ 14,156 $ 88,124
=========== =========== ===========
NON-CASH INVESTING ACTIVITIES:
Capital lease obligation from purchase of furniture and
equipment............................................... $ -- $ 753,131 $ 753,131
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Acacia Biosciences, Inc. ("the Company") is a development stage enterprise.
The Company was originally incorporated on February 7, 1995 as Aurora
Biosciences, Inc. under the laws of the State of Utah, and was reincorporated
under the laws of the State of Delaware on July 16, 1996. The Company is a drug
discovery company utilizing recent advances in genome science and combinatorial
chemistry to develop a genetic assay for screening molecules against entire
disease pathways, at the same time providing an early indication of toxicity and
side effects. The Company's near-term strategy is to use its technology to
discover and develop therapeutic compounds through strategic alliances with
major pharmaceutical companies. The Company's longer range objective is to
develop therapeutic compounds that are highly selective for the treatment of
common forms of cancer and heart disease, or that have potential anti-fungal
therapeutic value.
The Company's activities since inception have principally consisted of
obtaining financing, recruiting personnel and conducting research and
development. The Company is working on several long-term development projects
that involve experimental technology and may require several years and
substantial expenditures to complete. The Company's ability to meet its business
plan objectives is dependent upon its ability to raise additional financing,
substantiate its technology and, ultimately, to fund its operations from
revenues.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents generally consist of highly liquid investments with
original or remaining maturities of 90 days or less at the date of purchase.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, which range from three to five years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful lives of the assets. Capital lease equipment is depreciated
over the life of the equipment as the ownership of the equipment transfers to
the Company at the end of the lease.
REVENUE RECOGNITION
Contract revenues related to collaborative research and development
agreements and government grants are recognized based on the performance of
services. Deferred revenue is recognized when funds are received in advance of
services to be performed.
F-36
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to operations as incurred and
consist of costs for Company-sponsored and collaborative research and
development activities. These costs include direct and research-related overhead
expenses. Research and development expenses under the government grants
approximate the revenue recognized under such agreements.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS 123"), the
Company has elected to continue to apply Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 23"), and related
interpretations and to adopt the pro forma disclosure alternative as described
in SFAS 123 in accounting for its employee stock option plan. Option grants to
all others are accounted for using the fair value method prescribed by
SFAS 123.
2. COLLABORATIVE AGREEMENTS:
The Company has entered into several collaborative agreements to provide the
use of the Company's Genome Reporter Matrix-TM- to assess a limited number of
developmental compounds, and limited rights to the Company's databases. For the
years ended December 31, 1998 and 1997, and for the period from inception
(February 7, 1995) to December 31, 1998, revenues of $662,500, $50,000 and
$712,500 had been recognized under these agreements, respectively. A $75,000
receivable from a partner was recorded as deferred revenue at December 31, 1997.
3. LICENSE AND RESEARCH AGREEMENTS:
The Company has entered into several license agreements. Two of these
agreements, with academic institutions, grant the Company exclusive licenses to
certain technologies, patents and patent applications that the Company believes
will be useful in the development of therapeutic products. Under the exclusive
licenses, the Company will be required to make royalty payments based on net
sales, if any, of products or services upon commencement of sales and is
obligated for all future patent costs on two of the agreements. In consideration
for the exclusive and other licenses, the Company has paid $299,000 and issued
200,000 shares of common stock. In January 1999, the Company made an additional
payment of $20,000 under the above agreements and is required to make future
payments of up to $40,000.
The Company has also entered into three research agreements with academic
institutions. Under the terms of the agreements, the Company has paid
approximately $585,000 and accrued an additional $6,000 for expenses to be
reimbursed to the academic institutions. There are no future payments required
under these agreements.
During 1996, the Company entered into two Option and Bailment agreements
that grant the Company the option to negotiate exclusive licenses with an
academic institution that has patent rights to the technologies under the
agreements. In consideration for the option rights, the Company has paid
$75,000, and has options to renew the agreements. The Company is also obligated
to pay present and future patent costs under the agreements, if renewed.
F-37
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31,
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Laboratory equipment................................. $1,226,933 $ 770,520
Computer equipment................................... 232,747 182,975
Furniture and fixtures............................... 100,187 97,437
Leasehold improvements............................... 120,409 100,757
---------- ----------
1,680,276 1,151,689
Less accumulated depreciation and amortization....... (556,521) (195,470)
---------- ----------
Property and equipment, net.......................... $1,123,755 $ 956,219
========== ==========
</TABLE>
The Company has approximately $753,000 of assets under capital leases that
are included in laboratory equipment. Accumulated amortization for these assets
was approximately $282,000 and $112,000 at December 31, 1998 and 1997,
respectively.
5. NOTES PAYABLE:
At December 31, 1998 the Company had a $1 million note payable to Penny Lane
Advisors, Inc. with interest at 10%. Subsequent to December 31, 1998, the note
was paid in full by the issuance of the Company's Series B Preferred Stock.
In connection with a proposed merger (see Note 11) and pursuant to an
exclusivity agreement executed in November 1998, the Company received $500,000
from Rosetta Inpharmatics, Inc. for which the Company issued a $250,000 note
payable and recorded $250,000 in other income as $250,000 of the amount received
was not refundable and not subject to any future performance conditions. In
December 1998 an additional $250,000 was received for which the Company issued a
note payable. Under the terms of the exclusivity agreement and related notes,
the notes bear interest at 7.5% and become immediately due if the merger is not
consummated.
6. CAPITAL LEASE OBLIGATIONS:
In April 1997, the Company entered into a capital lease line agreement for
up to $1,500,000 expiring July 31, 1998. As of December 31, 1998, the Company
had utilized approximately $753,000 for equipment purchases under this
agreement. The capital lease obligation is to be repaid over 42 months at an
interest rate of 6.71% and is collateralized by the related equipment. Upon
completing the lease term, the Company has the option to purchase the equipment
for 12% of the original purchase price or extend the lease term for 12 months,
after which the Company will have title to the equipment. The Company issued the
lessor a warrant to purchase shares of Series A convertible preferred stock. The
warrant shares will be for 4% of the equipment cost at the price of $1.00 per
share. At December 31, 1998 and 1997, 30,000 shares are issuable under the
warrant. The warrant expires April 2003. The assigned value of the warrant was
immaterial for financial statement purposes.
F-38
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASE OBLIGATIONS: (CONTINUED)
Following is a schedule of future minimum lease payments under the capital
lease line agreement at December 31, 1998:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $ 239,856
2000........................................................ 239,856
2001........................................................ 150,340
---------
630,052
Less amounts representing interest.......................... (88,617)
---------
Present value of net minimum lease payments................. 541,435
Less current portion........................................ (186,348)
---------
Long-term portion........................................... $ 355,087
=========
</TABLE>
7. FACILITY LEASE:
The Company leases its facility under non-cancelable operating leases. These
leases expired in February 2000 and include renewal options at the end of the
leases for three additional one-year terms. Minimum annual rental commitments
under the operating leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $113,156
2000........................................................ 14,226
--------
$127,382
========
</TABLE>
Rent expense for operating leases was $105,978, $77,368 and $187,670 for the
years ended December 31, 1998 and 1997 and for the period from inception
(February 7, 1995) to December 31, 1998, respectively.
8. RELATED PARTY TRANSACTIONS:
In January 1996, the Company appointed a member of Trautman Kramer & Company
("TKC") to its board of directors. The Company also engaged TKC as investment
consultants. Under the terms of this agreement, the Company is obligated to pay
a monthly fee to TKC of $3,000 after the February 1997 final closing of the
Series A convertible preferred stock over a 24-month period (see Note 9). In
May 1996, certain employees of TKC, including the aforementioned board member
and other related parties, purchased 120,000 shares of common stock at $0.725
per share. For the years ended December 31, 1998 and 1997 and for the period
from inception (February 7, 1995) to December 31, 1998, the Company paid fees
and commissions in connection with equity transactions of approximately $36,000,
$25,000 and $846,000 to TKC, respectively. In conjunction with TKC's efforts in
completing common stock and Series A convertible preferred stock financings
prior to 1998, the Company granted warrants to purchase 720,150 shares of
Series A convertible preferred stock at an exercise price of $1.10 per share,
and warrants to purchase 110,000 and 80,000 shares of common stock at exercise
prices of $0.7975 and $0.6875 per share, respectively. Such warrants expire in
January 2002, January 2001 and December 2000, respectively.
F-39
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK
The Company has authorized 25,000,000 shares of preferred stock of which
8,000,000 shares have been designated as Series A convertible preferred stock.
The Series A stockholders are entitled to vote together with the common
stockholders as a single class on all matters, except as otherwise required by
law. Each Series A preferred stockholder will be entitled to one vote for each
share of common stock into which his Series A preferred stock is convertible.
The Series A preferred stock may be converted into common stock at any time at
the option of the holder, on a one-for-one basis, subject to adjustment for
stock splits, stock dividends and recapitalizations. Additionally, the Series A
preferred stock shall be automatically converted in common stock on a
one-for-one basis upon the closing of an initial public offering. In the event
of any liquidation, dissolution or winding up of the Company, funds available
for distribution to stockholders shall be paid to the holders of Series A
preferred stock in an amount per share equal to $1.00 (subject to adjustment)
plus all declared and unpaid dividends prior to any distribution to holders of
common stock. Non-cumulative annual dividends shall be paid on the Series A
convertible preferred stock when and as declared by the board of directors.
COMMON STOCK REPURCHASE RIGHTS
Pursuant to the agreements with certain stockholders, the Company has the
right to repurchase 71,111 common stock at $0.00025 per share should the
stockholders cease their association with the Company or not perform certain
tasks prior to a specified date. Such repurchase rights lapse monthly over the
respective three-to five-year terms.
STOCK OPTION PLAN
In fiscal years 1995 and 1996, the Company granted 635,000 non-qualified
stock options to directors, employees and other key individuals providing
services to the Company. In June 1996, the board of directors approved an equity
incentive plan (the "1996 Plan"). The 1996 Plan allows the Company to grant
incentive stock options, non-statutory stock options, stock bonuses, rights to
purchase restricted stock and stock appreciation rights to employees,
consultants and affiliates of the Company. The exercise price of all stock
options granted must be at least equal to the estimated fair value of the stock
as determined by the board of directors at the date of grant, with the exception
of non-statutory stock options granted under the 1996 Plan wherein the exercise
price shall not be less than 85% of the fair value of the stock at the date of
grant. Options expire no later than ten years from the date of grant. The number
of shares, terms and exercise period are determined by the board of directors on
an option-by-option basis. Options generally vest 24% one year after the date of
grant and on a pro rata basis over the remaining 38-month vesting period. A
total of 4,400,000 shares of the
F-40
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
Company's authorized but unissued common stock have been reserved for issuance
under the 1996 plan. A summary of the activity of grants follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
--------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................ 3,000,000 635,000 $0.0025-$0.20 $0.1371
Options granted........................... (966,154) 966,154 $0.20 $ 0.20
Options exercised......................... -- (1,000) $0.20 $ 0.20
Options canceled.......................... 15,000 (15,000) $0.20 $ 0.20
--------- ---------
Balance at December 31, 1997................ 2,048,846 1,585,154 $0.0025-$0.20 $0.1748
Additional authorization.................. 1,400,000
Options granted........................... (721,500) 721,500 $0.20 $ 0.20
Options exercised......................... -- (12,340) $0.20 $ 0.20
Options canceled.......................... 124,800 (124,800) $0.20 $ 0.20
--------- ---------
Balance at December 31, 1998................ 2,852,146 2,169,514 $0.0025-$0.20 $0.1816
========= =========
</TABLE>
The weighted average fair value of stock options granted in 1998 and 1997
were $0.05 and $0.06, respectively. Options were exercisable to purchase 816,704
shares (at a weighted-average exercise price of $0.15 per share) and 295,336
shares (at a weighted-average exercise price of $0.11 per share) at
December 31, 1998 and 1997, respectively.
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE --------------------------
NUMBER WEIGHTED- REMAINING NUMBER
OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT
DECEMBER 31, EXERCISE LIFE (IN DECEMBER 31, WEIGHTED-
EXERCISE PRICE RANGE 1998 PRICE YEARS) 1998 AVERAGE
-------------------- -------------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.00025 200,000 $ 0.00025 6.7 200,000 $0.00025
$0.20 1,969,514 $ 0.20 8.5 616,704 $ 0.20
--------- -------
$0.00025-$0.20 2,169,514 $ 0.18 8.3 816,704 $ 0.15
========= =======
</TABLE>
During 1996, the Company granted 240,000 options to non-employees. These
options have been recorded as deferred compensation at their estimated fair
value, which was estimated to be $51,600 using the Black-Scholes option
valuation model. Deferred compensation is amortized as general and
administrative expense over a three-year vesting period.
PRO FORMA INFORMATION
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company accounted for its employee 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 minimum value method
F-41
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
allowable for non-public companies with the following assumptions: risk-free
interest rate of between 4.49% and 5.84% for grants in fiscal 1998 and between
5.64% and 6.68% for grants in fiscal 1997; a weighted-average expected life of
the option from grant date of three years; volatility of 0% and a dividend yield
of zero.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to its employees is amortized over the option's vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net loss as reported.............................. $(3,653,014) $(3,052,198)
Pro forma net loss................................ (3,679,260) (3,078,807)
</TABLE>
10. INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6,700,000. The net operating
loss carryforwards will expire at various dates from 2010 through 2019, if not
utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
Section 382 of the Internal Revenue Code. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
As of December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $3,195,000 and $1,700,000, respectively. Deferred tax assets
relate primarily to net operating loss carryforwards and research and
development costs capitalized for tax purposes. The net deferred tax asset has
been fully offset by a valuation allowance. The net valuation allowance
increased by $1,495,000 during the year ended December 31, 1998.
11. SUBSEQUENT EVENT:
In February 1999, the board of directors of the Company approved an
agreement to combine with Rosetta Inpharmatics, Inc. ("Rosetta"), in a strategic
business combination (the "Merger"). Also in February 1999, the stockholders of
both the Company and Rosetta approved the Merger. The effective date of the
Merger is February 23, 1999. Pursuant to the Merger (and subject to certain
escrow provisions), Rosetta will issue to the Company's stockholders (i) 0.1754
of a share of Rosetta Common Stock for each share of the Company's Common Stock,
(ii) 0.1771 of a share of Rosetta Series B Preferred Stock for each share of the
Company's Series A Preferred Stock and (iii) 0.1771 of a share of Rosetta
Series B Preferred Stock for each share of the Company's Series B Preferred
Stock.
F-42
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT: (CONTINUED)
Additionally, Rosetta issued 134,596 warrants for the purchase of Rosetta
Series B Preferred Stock to replace all of the Company's outstanding Series A
and B Preferred Stock warrants, except for 30,000 warrants issued in conjunction
with capital leases which expired upon the Merger and were not exercised.
Further, Rosetta issued 33,339 warrants for the purchase of Rosetta Common Stock
to replace the Company's outstanding common stock warrants.
Also pursuant to the Merger (and subject to certain escrow provisions), the
Company's optionholders will receive (1) fully-vested options to purchase an
aggregate of 383,969 shares of Rosetta Common Stock in exchange for cancellation
of all the vested options to purchase shares of the Company's Common Stock held
by such Company optionholders and (2) options (subject to vesting) to purchase
an aggregate of 553,200 shares of Rosetta Common Stock in exchange for
cancellation of all the unvested options to purchase shares of the Company's
Common Stock held by such Company optionholders.
F-43
<PAGE>
ROSETTA INPHARMATICS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
In February 1999, Rosetta acquired Acacia Biosciences, Inc. (Acacia) in a
transaction accounted for under the purchase method of accounting. Total
consideration for Acacia was $13,184,439, which consisted of the issuance of
1,387,298 shares of Series B preferred stock, warrants to acquire an additional
134,596 shares of Series B preferred stock, 2,300,071 shares of common stock,
warrants to purchase an additional 33,339 shares of common stock and
miscellaneous cash expenses. In addition, all outstanding stock options to
purchase Acacia common stock were replaced with options to purchase 937,169
shares of Rosetta's common stock.
The following unaudited pro forma combined statement of operations for the
year ended December 31, 1999 gives effect to the acquisition as if it had
occurred on January 1, 1999.
The unaudited pro forma combined statement of operations should be read in
conjunction with the historical financial statements and notes thereto of
Rosetta and Acacia, included elsewhere in this prospectus. The unaudited pro
forma combined statement of operations is presented for illustrative purposes
only and is not necessarily indicative of results of operations that would have
actually occurred had the acquisition of Acacia been effected on the date
assumed.
ROSETTA INPHARMATICS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
ROSETTA ACACIA COMBINED ADJUSTMENTS PRO FORMA
------- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues................................. $ 535,892 $ 697,555 $ 1,233,447 $ -- $ 1,233,447
------------ ------------ ------------ ------------ ------------
Operating expenses...........................
Research and development................... 7,561,293 3,037,303 10,598,596 -- 10,598,596
General and administrative................. 7,432,432 964,791 8,397,223 550,608 (1) 8,947,831
Stock-based compensation................... 3,571,629 -- 3,571,629 -- 3,571,629
------------ ------------ ------------ ------------ ------------
Total operating expenses................. 18,565,354 4,002,094 22,567,448 550,608 23,118,056
------------ ------------ ------------ ------------ ------------
Loss from operations......................... (18,029,462) (3,304,539) (21,334,001) (550,608) (21,884,609)
Other income (expense)
Interest income............................ 632,156 4,909 637,065 -- 637,065
Interest expense........................... (243,791) (68,302) (312,093) -- (312,093)
Other, net................................. 19,663 398,034 417,697 (500,000)(2) (82,303)
------------ ------------ ------------ ------------ ------------
Net loss..................................... $(17,621,434) $ (2,969,898) $(20,591,332) $ (1,050,608) $(21,641,940)
============ ============ ============ ============ ============
Basic and diluted net loss per share......... $ (8.54) $ (5.37)
============ ============
Weighted average shares used in computing net
loss per share............................. 2,064,015 4,030,103 (3)
============ ============
</TABLE>
F-44
<PAGE>
ROSETTA INPHARMATICS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(1) Reflects the amortization of trained and assembled workforce, licensing
agreements, patents and goodwill acquired in the business combination, which
is being amortized over 1-3 years for trained and assembled workforce and
5 years for licensing agreements, patents and goodwill.
(2) Reflects the other income recognized by Acacia when their $500,000 note
payable to Rosetta was contractually waived as part of Acacia fulfilling the
terms of a previous agreement between these two entities in January 1999.
(3) Basic and diluted net loss per share is computed using the weighted-average
number of shares of common stock outstanding after the issuance of Rosetta
common stock in connection with the Acacia acquisition.
F-45
<PAGE>
7,200,000 Shares
[LOGO]
Common Stock
Background Map
----------------
PROSPECTUS
August 3, 2000
---------------------
LEHMAN BROTHERS
LAZARD
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
FIDELITY CAPITAL MARKETS
a division of National Financial Services Corporation
Until August 28, 2000, all dealers selling shares of
the common stock, whether or not participating in the
public offerings, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
