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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ARRAY BIOPHARMA INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 54171 84-1460811
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1885 33RD STREET
BOULDER, CO 80301
(303) 381-6600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
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ROBERT E. CONWAY, CHIEF EXECUTIVE OFFICER
ARRAY BIOPHARMA INC.
1885 33RD STREET
BOULDER, CO 80301
(303) 381-6600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to
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ALAN L. DYE CHARLES K. RUCK
CHRISTOPHER D. OZEROFF R. SCOTT SHEAN
HOGAN & HARTSON L.L.P. LATHAM & WATKINS
1800 BROADWAY, SUITE 200 650 TOWN CENTER DRIVE, 20TH FLOOR
BOULDER, CO 80302 COSTA MESA, CA 92626
(720) 406-5300 (714) 540-1235
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
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Common Stock, $.001 par value............. $72,000,000 $19,008
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
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REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY.
Subject to completion, dated , 2000
PROSPECTUS
6,000,000 Shares
[Array BioPharma Logo]
Common Stock
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This is our initial public offering of shares of common stock. We are offering
6,000,000 shares. No public market currently exists for our shares.
We intend to apply to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "ARRY." We expect the public offering price to
be between $10.00 and $12.00 per share.
INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 6.
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Per Share Total
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Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to Array BioPharma Inc. ........................... $ $
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We have granted the underwriters a 30-day option to purchase up to 800,000
additional shares of common stock, and two of our stockholders have granted the
underwriters a 30-day option to purchase up to 100,000 additional shares of
their common stock, on the same terms and conditions as set forth above, solely
to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL 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 , 2000.
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LEHMAN BROTHERS DEUTSCHE BANC ALEXJ BROWN
LEGG MASON WOOD WALKER
INCORPORATED
, 2000
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[Inside front cover graphic depicts Array's range of drug discovery products and
services within the entire drug research and discovery process. Text below
graphic describes this process.]
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 1
Risk Factors.......................... 6
Special Note Regarding Forward-Looking
Statements and Industry Data........ 17
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
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Business.............................. 27
Management............................ 45
Related Party Transactions............ 55
Principal Stockholders................ 57
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 64
Underwriting.......................... 66
Legal Matters......................... 69
Experts............................... 69
Where You Can Find More Information... 69
Index To Financial Statements......... F-1
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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. This preliminary prospectus is
subject to completion prior to this offering.
See the section of this prospectus entitled "Risk Factors" for a discussion
of various factors that you should consider before investing in the common stock
offered in this prospectus.
"Array BioPharma," the Array BioPharma logo, "Array BioPharma The Discovery
Research Company," "The Discovery Research Company," "Optimer" and "Radical" are
trademarks of Array BioPharma Inc. Other trademarks and trade names appearing in
this prospectus are the property of their holders.
Until , 2000 (25 days after commencement of this offering), all
dealers selling shares of our 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.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and the financial statements and notes to those statements appearing
elsewhere in this prospectus.
ARRAY BIOPHARMA
Array BioPharma is a discovery research company creating drug candidates
through innovations in chemistry. Our experienced scientists provide premium
products and services to create, evaluate and optimize potential drug candidates
in collaboration with pharmaceutical and biotechnology companies. We believe our
information-based approach improves the efficiency of the drug discovery process
and increases the quality of potential drug candidates. In addition, we apply
these capabilities internally for our own drug discovery programs.
The drug industry is experiencing revolutionary change fueled by genomics,
or the study of all genes, and by the tremendous progress in the biological
understanding of disease. We believe the drug research and development
bottleneck is shifting from the discovery by biologists of new disease-related
proteins, or targets, to the creation by chemists of safe and effective new
drugs for these targets. Drugs created through chemistry accounted for a
significant percentage of the estimated $337 billion worldwide drug market in
1999. Small changes in chemistry design can differentiate drugs and determine
their potential success or failure in the marketplace. Despite recent advances
in technology, the process of drug discovery remains slow, expensive and risky.
To address these inefficiencies, it is critical to apply high quality chemistry
and predictive information-based technologies early in the discovery process to
identify and eliminate inferior drug candidates and to design safe and effective
new drugs.
We provide a broad range of premium drug discovery products and services to
bridge the gap between target discovery and drug candidate testing in animals
and humans, including:
- Optimer building blocks, or starting materials used to create chemical
compounds for drug discovery;
- Lead generation, or the process of identifying chemical compounds that
have the potential to become drug candidates through further
optimization, including the sale of subscriptions to collections of these
compounds, which we call our Diversity Library;
- Lead optimization, or the iterative process of optimizing the drug
characteristics for a potential drug candidate; and
- Process research and development, or the design and refinement of the
drug manufacturing process.
We believe our information-driven technology platform enables our
scientists to make better decisions throughout the drug discovery process and
thereby create higher quality drugs more quickly and less expensively. Our
technology platform includes:
- Proprietary software and predictive databases to facilitate drug
discovery;
- Proprietary high-speed chemical synthesis technology;
- Analytical and computational technologies to determine and predict the
three-dimensional structure of drug targets and drug candidates; and
- Assay development and high-throughput screening for the rapid
identification of leads and potential drug candidates.
Our objective is to become the leading creator of high quality potential
drug candidates by providing premium discovery chemistry products and services.
Key elements of our strategy are to: (1) provide an integrated chemistry
solution to drug discovery and become the partner of choice for pharmaceutical
and biotechnology companies; (2) combine state-of-the-art technology with
innovative chemistry to accelerate drug
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discovery; (3) create our own drug candidates for partnering with pharmaceutical
and biotechnology companies; (4) increase our scientific resources by continuing
to attract world-class scientists; and (5) expand our capabilities through
acquisitions and internal development.
Our achievements to date include:
- Initiating collaborations with pharmaceutical companies such as Eli Lilly
and Company and Merck & Co., Inc.;
- Initiating collaborations with biotechnology companies such as Celltech
Chiroscience Ltd., ICOS Corporation and Tularik Inc.;
- Discovering a drug candidate for clinical trials with our first
collaboration partner, ICOS;
- Creating a technology platform to identify new drug candidates from
genomic information;
- Creating our own potential drug candidates; and
- Growing our staff from our inception in 1998 to over 100 employees as of
September 2000, including 75 scientists, of whom 69 are chemists, 42 have
Ph.D's and 34 have large pharmaceutical company experience.
We have a multi-faceted business model based on rapid revenue growth. We
plan to achieve profitability through fee-for-service revenue and product sales
while increasing value by sharing in the success we create for our
collaborators. To maximize the value we capture, we intend to allocate our
scientific resources to: (1) build upon our foundation of fee-for-service
business with leading pharmaceutical and biotechnology companies; (2) leverage
our drug discovery products and services through sales to multiple customers;
(3) initiate additional collaborations with leading pharmaceutical and
biotechnology companies that include fee-for-service revenue plus milestone
and/or royalty payments; and (4) generate our own potential drug candidates for
partnering with pharmaceutical and biotechnology companies under terms that
include licensing fees, fee-for-service revenue and milestone and/or royalty
payments.
We have assembled a scientific team with experience in both the
pharmaceutical and biotechnology industries and with a proven track record of
success in drug discovery. At our inception, we had the distinct advantage of
recruiting 20 former Amgen scientists, who had previously been recruited from
large pharmaceutical companies. This nucleus afforded us a critical mass of
experienced chemists, which we believe has proven to be a competitive advantage
in recruiting additional scientists. During their careers, our scientists have
collectively contributed to multiple drug candidates approved by the Food and
Drug Administration for human testing and to over 100 patents and patent
applications.
We incorporated in Delaware in February 1998 under the name Array BioPharma
Inc. Our principal executive offices are located at 1885 33rd Street, Boulder,
Colorado 80301, and our telephone number is 303-381-6600. We can be visited on
the World Wide Web at www.arraybiopharma.com. Information contained on our Web
site does not constitute any part of this prospectus.
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THE OFFERING
Common stock offered by
us....................... 6,000,000 shares
Common stock to be
outstanding after the
offering................. 21,367,409 shares
Use of proceeds............ We expect to use the net proceeds of this offering
to fund our operations, including continued
development and manufacturing of existing products
as well as research and development of additional
products and services, hiring expenses and
expansion of our facilities. We may also use a
portion of the proceeds in strategic acquisitions
or to pay down indebtedness. We intend to use the
balance of the net proceeds for general corporate
purposes, including working capital requirements.
See the section entitled "Use of Proceeds" for more
information.
Proposed Nasdaq National
Market symbol............ ARRY
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of August 31, 2000. This number:
- includes 495,536 shares of common stock issued upon the exercise of
options during July and August 2000;
- excludes 3,018,139 shares of common stock underlying options outstanding
as of August 31, 2000, at a weighted-average exercise price of $0.46 per
share, of which 273,794 were exercisable;
- excludes 110,750 shares of common stock, assuming the automatic
conversion of our Series A preferred stock and Series B preferred stock,
underlying warrants to purchase preferred stock outstanding as of August
31, 2000, at a weighted-average exercise price of $3.15 per share;
- excludes 3,029,484 shares that will be available for issuance under our
stock option plan following this offering; and
- excludes 800,000 shares that will be available for purchase under our
employee stock purchase plan following this offering.
ASSUMPTIONS IN THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus assumes:
- the automatic conversion of our Series A preferred stock, Series B
preferred stock and Series C preferred stock, on a one-for-one basis,
into 11,501,666 shares of our common stock upon the closing of this
offering;
- the filing of our amended and restated certificate of incorporation that
provides for, among other things, an increase in the number of our
authorized shares of common stock from 20,225,000 to 60,000,000 to be
effected concurrently with this offering;
- no exercise by the underwriters of their over-allotment option to
purchase up to 800,000 additional shares of common stock from us and up
to 100,000 shares of common stock from two of our stockholders; and
- no exercise by any of our security holders of any outstanding options or
warrants prior to the closing of this offering.
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SUMMARY FINANCIAL DATA
The following tables summarize our financial data, which have been derived
from our historical financial statements and related notes for the following
periods: (1) our statements of operations data from February 6, 1998 (inception)
to June 30, 1998, and for the twelve-month periods ended June 30, 1999 and June
30, 2000; and (2) our balance sheet data at June 30, 1999 and June 30, 2000.
The pro forma net loss per share data gives effect to the automatic
conversion of all of our outstanding preferred stock upon the closing of this
offering. The pro forma balance sheet data at June 30, 2000 reflects our receipt
of the estimated net proceeds from the sale of 1,666,667 shares of our Series C
preferred stock at $6.00 per share in August 2000 after deducting related
offering expenses and the conversion of all of our outstanding shares of
preferred stock into common stock upon the closing of this offering. The pro
forma as adjusted balance sheet data at June 30, 2000 reflects our receipt of
the estimated net proceeds from the sale of 6,000,000 shares of our common stock
in this offering at an assumed initial public offering price of $11.00 per
share, after deducting the estimated underwriting discount and offering
expenses. The cost of revenue, research and development expense, and selling,
general and administrative expense data below excludes compensation related to
stock option grants.
The summary financial data for the periods indicated should be read
together with our audited financial statements and related notes and other
financial information, including the "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all of which are included
elsewhere in this prospectus.
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PERIOD FROM
FEBRUARY 6, YEARS ENDED JUNE 30,
1998 (INCEPTION) ----------------------------
TO JUNE 30, 1998 1999 2000
------------------ ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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STATEMENTS OF OPERATIONS DATA:
Revenue.............................................. $ -- $ 1,504 $ 6,774
Cost of revenue...................................... -- 1,033 4,402
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Gross profit......................................... -- 471 2,372
Research and development expenses.................... -- 3,301 3,928
Selling, general and administrative expenses......... 62 1,522 2,430
Compensation related to stock option grants.......... -- -- 716
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Total operating expenses............................. 62 4,823 7,074
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Loss from operations................................. (62) (4,352) (4,702)
Interest expense..................................... -- (136) (384)
Interest income...................................... 13 181 356
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Net loss............................................. $ (49) $ (4,307) $ (4,730)
======== ========== ===========
Basic and diluted net loss per basic and diluted
share.............................................. $ (0.06) $ (1.48) $ (1.54)
======== ========== ===========
Shares used in computing basic and diluted net loss
per share.......................................... 863,964 2,918,367 3,063,439
======== ========== ===========
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (0.40)
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Shares used in computing pro forma basic and diluted
net loss per share (unaudited)..................... 11,697,343
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AS OF JUNE 30, 2000
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AS OF PRO FORMA
JUNE 30, PRO FORMA AS ADJUSTED
1999 ACTUAL (UNAUDITED) (UNAUDITED)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Total current assets............................... $ 4,005 $ 8,548 $18,513 $79,093
Property, plant and equipment, net................. 2,872 6,911 6,911 6,911
Total assets....................................... 7,125 15,823 25,788 86,368
Total current liabilities.......................... 2,744 6,338 6,338 6,338
Long-term debt, less current portion............... 1,824 2,833 2,833 2,833
Total stockholders' equity......................... 2,557 6,652 16,617 77,197
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RISK FACTORS
Any investment in shares of our common stock is risky. You should carefully
consider the following risks below before making a decision to buy our common
stock. The risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties not presently known to us, or that we
currently consider immaterial also could harm our business. 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 may lose all or part of
your investment. You should also refer to the other information contained in
this prospectus, including the financial statements and related notes, before
deciding to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY.
We are at an early stage of executing our business plan, and we have a
limited history of offering our products and services. We have incurred
operating and net losses and negative cash flows from operations since our
inception. As of June 30, 2000, we had an accumulated deficit of $9,087,000. For
the fiscal years ended June 30, 1999 and June 30, 2000, we had net losses of
$4,307,000 and $4,730,000, respectively. We may continue to incur operating and
net losses and negative cash flows from operations, due in part to anticipated
increases in expenses for research and product development, acquisitions of
complementary businesses and technologies and expansion of our personnel and our
business development capabilities. We may not be able to achieve or maintain
profitability. Moreover, if we do achieve profitability, the level of any
profitability cannot be predicted and may vary significantly from quarter to
quarter.
IF OUR PRODUCTS AND SERVICES DO NOT BECOME WIDELY USED IN THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES, IT IS UNLIKELY THAT WE WILL BE PROFITABLE.
We are dependent on the pharmaceutical and biotechnology industries to
purchase our products and services, including our drug-relevant building block
and compound library products and our lead generation and lead optimization
services. It is uncertain whether our current customers will continue to use
these products and services or whether new customers will use these products and
services. In order to be successful, our products and services must meet the
requirements of the pharmaceutical and biotechnology industries, and we must
convince potential customers to use our products and services instead of
competing products and services. Market acceptance will depend on many factors,
including our ability to:
- convince potential customers that our technologies are attractive
alternatives to other technologies for drug discovery;
- convince potential customers, especially large pharmaceutical and
biotechnology companies, to purchase our drug discovery products and
services rather than developing them internally;
- perform contracted services in a timely fashion with acceptable quality
and at an acceptable cost; and
- design, create and manufacture sufficient quantities of our chemical
compounds for our customers and collaborators with acceptable quality and
at an acceptable cost.
Because of these and other factors, our products and services may not gain
market acceptance and we may not achieve profitability.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE EXPERIENCED SCIENTISTS AND OTHER
SKILLED EMPLOYEES WE NEED.
Our future success depends on our ability to attract, retain and motivate
highly skilled scientists and other skilled employees, including business
development personnel. Our ability to maintain, expand or renew existing
engagements with our customers, enter into new engagements, and provide
additional services to our existing customers depends on our ability to hire and
retain scientists with the skills necessary to keep pace
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with continuing changes in drug discovery technologies. We compete with
pharmaceutical and biotechnology companies, including our customers and
collaborators, medicinal chemistry outsourcing companies, contract research
companies, and academic and research institutions to recruit scientists. Our
inability to hire additional qualified personnel may also require an increase in
the workload for both existing and new personnel. We may not be successful in
attracting new scientists or other skilled personnel or in retaining or
motivating our existing personnel. The shortage of experienced scientists, and
other factors, may lead to increased recruiting, relocation and compensation
costs for such scientists, which may exceed our expectations. These increased
costs may reduce our profit margins or make hiring new scientists impracticable.
If we cannot attract and retain scientists and other skilled employees, we will
not be able to continue our existing services or expand the services we
currently provide to our customers.
WE MAY LOSE ONE OR MORE OF OUR MAJOR CUSTOMERS.
A relatively small number of customers account for a significant portion of
our revenue. During the fiscal year ended June 30, 2000, our revenue from our
three largest customers represented approximately 45%, 11% and 8% of our total
revenue, respectively. We expect that revenue from a limited number of customers
will account for a large portion of our revenue in future quarters. The terms of
our contracts generally permit our customers to cancel them for a variety of
reasons, many of which are beyond our control. If any one of our major customers
cancels its contract with us, our revenue may decrease.
WE MAY NOT BE SUCCESSFUL IN ENTERING INTO COLLABORATIONS THAT ALLOW US TO
PARTICIPATE IN THE FUTURE SUCCESS OF OUR PROPRIETARY DRUG CANDIDATES THROUGH
MILESTONE AND/OR ROYALTY PAYMENTS.
One of our business strategies is to create our own proprietary drug
candidates and to then enter into collaborations for the development of these
drug candidates that will allow us to earn milestone and/or royalty payments.
Our proprietary drug discovery program is in its early stage development and is
unproven. Although we have expended, and continue to expend, time and money on
internal research and development programs, we may be unsuccessful in creating
valuable proprietary drug candidates that would enable us to form such
collaborations and receive milestone and/or royalty payments. Only one of our
current contracts provides for milestone payments, and none of our current
contracts provides for royalty payments. We have not received any milestone or
royalty payments since our inception. If we are unable to form collaborations
under which we receive substantial milestone and/or royalty payments, we may
fail to fully execute our business strategy.
EVEN IF WE ARE SUCCESSFUL IN NEGOTIATING COLLABORATIONS PROVIDING MILESTONE
AND/OR ROYALTY PAYMENTS, WE MAY FAIL TO DISCOVER AND DEVELOP NEW DRUG PRODUCTS
FOR OUR CUSTOMERS OR TO ACHIEVE ANY PERFORMANCE MILESTONES, AND THEREFORE, WE
MAY NOT EARN ANY SUCH PAYMENTS.
We may fail to negotiate collaborations under which we receive milestone
payments based on achievement of performance milestones or royalty payments
based on future sales of drug products. However, if we are able to negotiate
such collaborations, the use of our services or technologies may not result in
the discovery of potential drug candidates that will be safe or effective and we
may never receive any milestone or royalty payments. Our receipt of milestone or
royalty payments may be beyond our control and will be determined by many
factors, including the desire of our collaborator to continue to pursue a
potential drug candidate and the ultimate commercial success of the drug.
Development and commercialization of potential drug candidates depend not only
on the achievement of research objectives by us and our collaborators, but also
on each collaborator's financial, competitive, marketing and strategic
considerations and regulation by the Food and Drug Administration and other
governmental entities in the United States and other countries, all of which are
beyond our control. Pharmaceutical products developed by our collaborators will
require lengthy and costly pre-clinical and clinical trials and regulatory
approval by governmental agencies prior to commercialization. Approvals may not
be granted despite the substantial time and resources required to obtain
approvals and comply with appropriate statutes and regulations. If unforeseen
complications arise in the development or commercialization of the potential
drug candidates by our collaborators, we may not realize milestone or royalty
payments as expected, and therefore, we may fail to fully execute our business
strategy.
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WE MAY FAIL TO EXPAND CUSTOMER RELATIONSHIPS THROUGH INTEGRATION OF PRODUCTS AND
SERVICES.
One of our business strategies is to expand our existing customer
relationships across the full spectrum of our drug discovery capabilities. We
may be unsuccessful in selling our full range of products and services to
particular customers. We may not be able to expand existing relationships with
customers that currently purchase a limited number of other products and
services to cause them to purchase additional products and services; certain of
our customers and collaborators have chosen not to expand their relationships
with us. If we are unable to expand our customer relationships to include
additional products and services, we may not be able to take full advantage of
potential revenue opportunities.
OUR CONTRACTS ARE SUBJECT TO STANDARD INDUSTRY TERMINATION RISKS AND RISKS OF
COST OVERRUNS ASSOCIATED WITH FIXED PRICE CONTRACTS.
In general, our contracts are terminable by our customers with 30 to 90
days' notice for a number of reasons or, in some cases, for no reason. Many of
our contracts may be terminated for reasons that may be beyond our control, such
as the bankruptcy or insolvency of our customers. The loss of a large contract
or multiple smaller contracts, or a significant decrease in revenue derived from
such contracts, could have a material adverse effect on our business.
Additionally, some of our contracts for the provision of our services have a
fixed price or are subject to a maximum fee. As a result, we bear the risk of
cost overruns with respect to such contracts. We may not be able to perform our
obligations with respect to any of these contracts at a cost equal to or less
than the prescribed fixed fees or applicable maximum fees. Significant cost
overruns with respect to such contracts could have a material adverse effect on
our business.
WE MAY NOT BE ABLE TO ACCELERATE THE DRUG DISCOVERY PROCESS.
One of our business strategies is to facilitate the drug discovery process
by identifying potential drug candidates. We have never identified a drug
candidate that has been developed into a commercial drug. It is uncertain
whether we will be able to make the drug discovery process more efficient or
make higher quality drug candidates. The ability to accelerate the drug
discovery process is dependent on many factors, including the performance and
decision-making capabilities of our scientists. Although we have created an
information-driven technology platform which we believe enables our scientists
to make better decisions, there can be no assurance that the decisions of our
scientists will be correct or that our scientists will develop viable drug
candidates. If we are unable to identify potential drug candidates and
facilitate the drug discovery process, our products, services and technologies
may not be commercially successful.
WE MAY LOSE OUR PROPRIETARY PRODUCTS AND TECHNOLOGIES IF WE ARE UNABLE TO
PROTECT THEM.
Our success will depend in part on our ability to protect our proprietary
drug candidates as well as our drug screening and compound synthesis processes
and other technologies we develop. One of our business strategies is to develop
our own proprietary drug candidates and enter into collaborations with
pharmaceutical and biotechnology companies for the development of these drug
candidates. In order to protect our rights to our proprietary drug candidates we
must obtain the intellectual property rights to such drug candidates. Although
we have seven patent applications on file in the United States, including three
provisional applications, we have not received a patent for any of our
proprietary products or technologies. Some of the products and technologies that
we develop already may be patented by other companies which may prevent us from
obtaining patents on the products or technologies we develop. Even if we are
able to obtain patents, they may be insufficient to protect our interest in
these products and technologies. Protecting our patents, if obtained, may be
costly and time consuming. To the extent we are unable to protect our
proprietary products and technologies, our investment in them may not yield the
benefits we anticipated. We also may be subject to claims that we are infringing
on the intellectual property of others. We could incur significant costs in
defending such claims, and if we were unsuccessful, we would be subject to
liability for infringement.
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OUR SUCCESS WILL DEPEND ON OUR ABILITY TO GROW AND TO MANAGE OUR GROWTH.
We have recently experienced, and expect to continue to experience, growth
in the number of our employees and the scope of our operating and financial
systems. Growth in our operations has placed and is expected to place a
significant strain on our operational, human and financial resources. Our
ability to compete effectively will depend, in large part, on our ability to
hire, train and assimilate additional management, professional, scientific and
technical personnel and our ability to expand, improve and effectively use our
operating, management, business development and financial systems to accommodate
our expanded operations. The physical expansion of our facilities to accommodate
future growth may lead to significant costs and may divert management and
business development resources. If we fail to effectively anticipate, implement
or manage the changes required to sustain our growth, we may not be able to
compete successfully.
WE MAY NOT BE ABLE TO MEET THE DELIVERY AND PERFORMANCE REQUIREMENTS SET FORTH
IN OUR CUSTOMER CONTRACTS.
In order to maintain our current customer relationships and to meet the
performance and delivery requirements in our customer contracts, we must be able
to provide products and services at appropriate levels and with acceptable
quality and at an acceptable cost. Our ability to deliver the products and
provide the services we offer to our customers is limited by many factors,
including the difficulty of the chemistry associated with our products and
services, the lack of predictability in the scientific process and the shortage
of qualified scientific personnel. In particular, revenue from our compound
libraries is dependent on producing compounds, and our current commitments to
provide library compounds to our customers exceeds our current rate of compound
synthesis. If we are unable to meet our contractual commitments, we may delay or
lose revenue, lose customers or fail to expand our existing relationships.
WE HAVE LIMITED MARKETING EXPERIENCE, AND OUR FUTURE SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND OUR SALES AND MARKETING ACTIVITIES.
To date, we have sold our services and products primarily through the
efforts of our senior management and scientists and through customer referrals.
If we are unable to attract and retain additional business development personnel
and to expand our business development activities, we may not be able to achieve
significant long-term growth. Further, even if we are able to build and maintain
a sales and marketing force, we may not be successful in attracting new
customers.
WE DEPEND ON KEY PERSONNEL FOR THE SUCCESS AND CONTINUATION OF OUR OPERATIONS.
Our performance is highly dependent on the principal members of our senior
management and scientific staff, including Robert E. Conway, our Chief Executive
Officer; Dr. Kevin Koch, our President and Chief Science Officer; Dr. David L.
Snitman, our Chief Operating Officer and Vice President, Business Development;
Dr. Anthony D. Piscopio, our Vice President, Chemistry and Director of Process
Chemistry; Michael Carruthers, our Chief Financial Officer; Dr. John A. Josey,
our Senior Director of High-Speed Synthesis; Dr. Laurence Burgess, our Senior
Director of Medicinal Chemistry and Lead Optimization and Dr. Joanna K. Money,
our Director of Business Development. Although we have employment agreements
with each of the above personnel, we do not have employment agreements with all
of our key personnel, and the employment agreements we do have are terminable by
the employees upon 30 days' prior notice. We may not be able to retain key
personnel or attract and retain additional key personnel in the future. The loss
of one or more members of our senior management or scientific staff could have a
material adverse effect on our business, financial condition and results of
operations.
OUR QUARTERLY OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY.
Sales of our compound libraries, lead optimization services, process
research and development services and our proprietary drug candidates can
typically involve significant technical evaluation and/or commitment of capital
by our customers. Accordingly, the sales cycles associated with these products
and services are
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lengthy and subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews that are beyond our
control. Due to these lengthy and unpredictable sales cycles, our operating
results could fluctuate significantly from quarter to quarter. In addition, we
expect to continue to experience significant fluctuations in quarterly operating
results due to a variety of factors, such as general and industry specific
economic conditions that may affect the research and development expenditures of
pharmaceutical and biotechnology companies.
A large portion of our expenses, including expenses for facilities,
equipment and personnel, are relatively fixed. Accordingly, if our revenue
declines or does not grow as anticipated, we might not be able to
correspondingly reduce our operating expenses. Failure to achieve anticipated
levels of revenue could significantly harm our operating results for a
particular fiscal period.
Due to the possibility of fluctuations in our revenue 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.
OUR OPERATIONS EXPOSE US TO POTENTIAL LIABILITY AND RISKS.
We develop, test and manufacture the precursors to pharmaceutical products
intended for use in humans. These activities could expose us to the risk of
liability for personal injury or death to persons using these products. We may
be required to pay substantial damages or incur defense costs in connection with
any of these claims. Our product liability insurance may not be adequate, and we
may be unable to acquire or maintain adequate insurance at acceptable costs or
at all. The failure of our insurance policies to protect us from these claims or
liabilities could have a material adverse effect on our business, financial
condition and results of operations.
WE FACE RISKS ASSOCIATED WITH ACCOMPLISHING POTENTIAL FUTURE ACQUISITIONS AND
INTEGRATING THEM INTO OUR BUSINESS.
We plan to continue to review potential acquisition candidates in the
ordinary course of our business and may use a portion of the proceeds from this
offering for acquisitions. Acquisitions involve numerous risks, including, among
others, difficulties and expenses incurred in the consummation of acquisitions
and assimilation of the operations, personnel and services or products of the
acquired companies, difficulties of operating new businesses, the diversion of
management's attention from other business concerns and the potential loss of
key employees of the acquired companies. If we do not successfully integrate any
businesses we may acquire in the future, our business will suffer. Additionally,
we may fail to identify suitable acquisition candidates or, if we do identify
suitable acquisition candidates, we may not be able to complete such
acquisitions on terms and conditions acceptable to us. We currently have no
agreements or commitments with respect to any acquisition, and we may never
successfully complete an acquisition.
OUR OPERATIONS COULD BE INTERRUPTED BY DAMAGE TO OUR FACILITIES.
Our operations are dependent upon the continued use of our highly
specialized laboratories and equipment in Boulder, Colorado and Longmont,
Colorado. Natural disasters, such as floods, could damage our laboratories or
equipment, and these events may materially interrupt our business. We maintain
business interruption insurance to cover lost revenue caused by such
occurrences. However, this insurance would not compensate us for the loss of
opportunity and potential adverse impact on relations with existing customers
created by our inability to meet our customers' needs in a timely manner.
OUR CUSTOMERS MAY RESTRICT OUR USE OF SCIENTIFIC INFORMATION.
Our ability to improve the efficiency of the drug discovery services we
provide by, among other things, developing an effective informatics database,
depends in part on our ability to generate and use information that is not
proprietary to our customers and that we derive from performing these services.
However, our customers may not allow us to use information with other customers,
such as the general interaction between
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types of chemistries and types of drug targets that we generate when performing
drug discovery services for them. Without the ability to use this information,
we may not be able to develop a database, which may limit our ability to improve
the efficiency of the drug discovery services we provide.
WE MAY BE SUBJECT TO LIABILITY REGARDING HAZARDOUS WASTE MATERIALS.
Our products and services as well as our research and development processes
involve the controlled use of hazardous materials. We are subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. We cannot
eliminate the risk of accidental contamination or injury from these materials.
In the event of such an accident, we could be held liable for any damages that
result, and any such liability could exceed our resources and disrupt our
business. In addition, we may have to incur significant costs to comply with
environmental laws and regulations related to the handling or disposal of such
materials or waste products in the future.
BECAUSE WE HAVE A LIMITED NUMBER OF SUPPLIERS, WE MAY INCUR INCREASED SUPPLY
COSTS OR EXPERIENCE DELAY IN DELIVERING OUR PRODUCTS OR PERFORMING OUR SERVICES.
Certain key components of biological and chemical materials that we use in
our products and services are currently purchased from a limited number of
outside sources and may only be available through a single or only a few
sources. Our reliance on our suppliers exposes us to risks, including:
- the possibility that one or more of our suppliers could terminate their
services at any time without penalty;
- the potential inability of our suppliers to obtain required materials;
- the potential delays and expenses of seeking alternative sources of
supply; and
- reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternative suppliers.
Consequently, if materials from our suppliers are delayed or interrupted for any
reason, our ability to deliver our products and perform our services could be
delayed or require us to incur increased costs which could have a material
adverse effect on our business.
RISKS RELATED TO OPERATING IN OUR INDUSTRY
THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY IS HIGHLY COMPETITIVE.
We compete with companies in the United States and abroad that are engaged
in the development and production of chemistry discovery products and services,
including pharmaceutical companies, biotechnology companies, medicinal chemistry
outsourcing companies, compound library suppliers and contract research
companies. Academic institutions, governmental agencies and other research
organizations also are conducting research and developing technologies in areas
in which we provide services, either on their own or through collaborative
efforts. Our pharmaceutical and biotechnology company customers have internal
departments that provide products and services that directly compete with the
products and services we offer. We face competition based on several factors,
including size, relative expertise and sophistication, speed and costs of
identifying and optimizing lead compounds and of developing and optimizing
chemical processes. As new companies enter the market, we expect to face
increased competition. Many of our competitors offer a broader range of products
and services and have greater access to financial, technical, scientific,
business development, recruiting and other resources than we do. Some of our
competitors may also operate with a lower cost structure.
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THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, AND WE MAY NOT HAVE THE RESOURCES NECESSARY TO COMPETE SUCCESSFULLY.
The pharmaceutical and biotechnology industries are characterized by rapid
and continuous technological innovation. We anticipate that we will face
increased competition in the future as new companies enter the market and
advanced technologies become available. Our products, services and expertise may
become obsolete or uneconomical due to technological advances or entirely
different approaches developed by us, our customers or one or more of our
competitors. For example, advances in informatics may render some of our
technologies, such as our compound libraries, obsolete. While we plan to develop
technologies that will give us a competitive advantage, we may not be able to
develop the technologies necessary for us to successfully compete in the future.
Additionally, the existing approaches of our competitors or new approaches or
technologies developed by our competitors may be more effective than those we
develop. We may not be able to compete successfully with existing or future
competitors.
OUR SUCCESS WILL DEPEND ON THE PROSPECTS OF THE PHARMACEUTICAL AND BIOTECHNOLOGY
INDUSTRIES AND THE EXTENT TO WHICH THESE INDUSTRIES USE THIRD-PARTY ASSISTANCE
WITH ONE OR MORE ASPECTS OF THEIR DRUG DISCOVERY PROCESS.
Our revenue is highly dependent on research and development expenditures
and the outsourcing of these expenditures by the pharmaceutical and
biotechnology industries. These expenditures are based on a wide variety of
factors, including the resources available for purchasing research services, the
spending priorities among various types of research and the policies regarding
expenditures during recessionary periods. Our financial condition and results of
operations could be materially adversely affected by general economic downturns
in our customers' industries, any decrease in research and development
expenditures or the trend to outsource these services. Any decrease in drug
discovery spending by pharmaceutical and biotechnology companies could cause our
revenue to decline and adversely impact our profitability.
OUR CUSTOMERS AND COLLABORATORS ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION
AND THE POTENTIAL FOR FUTURE REGULATION.
We expect that a substantial portion of our revenue in the foreseeable
future will come from services provided to the pharmaceutical and biotechnology
industries. Accordingly, our future success is dependent upon the success of the
companies within those industries and their continued demand for our services.
Our customers are subject to substantial regulation by governmental entities in
the United States and other countries. Various federal, and in some cases state,
statutes and regulations also govern or influence the manufacture, safety,
labeling, storage, record keeping and marketing of pharmaceutical products. The
process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time consuming and
require substantial resources.
If our customers are found to have failed to comply with applicable
regulatory requirements, a wide variety of enforcement actions are possible,
including fines, injunctions and civil penalties, recall or seizure of products,
the issuance of public notices or warnings, operating restrictions, partial
suspension or total shutdown of production, termination of ongoing research,
refusal of requests for approval, withdrawal of prior approvals and criminal
prosecution. If our customers fail to comply with these regulations, it could
have a material adverse effect on our business. In addition, to the extent our
revenue is based on successful commercialization of drug products developed by
our customers, their failure to obtain necessary regulatory approvals and to
gain market acceptance for these drugs could harm our financial condition and
results of operations.
Our customers may be affected by the continuing efforts of governmental and
third party payors to contain or reduce the costs of health care. For example,
in certain foreign markets, pricing or profitability of pharmaceutical products
is subject to government control. In the United States, there have been, and we
expect that there will continue to be, a number of federal and state proposals
to implement similar government pricing controls. It is uncertain what
legislative proposals may be adopted or what actions federal, state or private
third party payors for health care goods or services may take in response to any
health care
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reform proposals or legislation. To the extent that such proposals or reforms
have a material adverse effect on pharmaceutical and biotechnology companies
that are actual or prospective customers, our business may suffer.
THE CONCENTRATION OF THE PHARMACEUTICAL INDUSTRY AND THE CURRENT TREND TOWARD
INCREASING CONSOLIDATION COULD REDUCE THE NUMBER OF OUR POTENTIAL CUSTOMERS.
The market for our products and services has become increasingly
concentrated as a result of recent mergers and acquisitions among major
pharmaceutical companies. The number of our potential customers could be reduced
even further if the current trend toward consolidation of the pharmaceutical
industry continues. Accordingly, we expect that we will rely on a relatively
small number of customers for a substantial portion of our revenue.
Additional risks associated with a highly concentrated customer base
include:
- larger companies may develop in-house technology and expertise rather
than using our products and services;
- larger customers may negotiate price discounts or other terms for our
products and services that are unfavorable to us; and
- the market for our products and services may become saturated.
THE INTELLECTUAL PROPERTY RIGHTS WE RELY ON TO PROTECT THE TECHNOLOGY UNDERLYING
OUR PRODUCTS AND TECHNIQUES MAY BE INADEQUATE TO PREVENT THIRD PARTIES FROM
USING OUR TECHNOLOGY OR DEVELOPING COMPETING PRODUCTS AND SERVICES BASED ON VERY
SIMILAR TECHNOLOGY OR TO PROTECT OUR INTERESTS IN OUR PROPRIETARY DRUG
CANDIDATES, AND COULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
Our success will depend on our ability to obtain, protect and enforce
patents on our technology. Although we have seven United States patent
applications on file, including three provisional applications, we have not
received any patents. We have engaged in limited patent prosecution in foreign
countries. Any patents that we may own or license in the future may not afford
meaningful protection for our technology and products. Our efforts to enforce
and maintain our intellectual property rights may not be successful and may
result in substantial costs and diversion of management time. In addition,
others may challenge patents we may obtain in the future and, as a result, these
patents could be narrowed, invalidated or rendered unenforceable or we may be
forced to stop using the technology covered by these patents or to license the
technology from third parties. In addition, current and future patent
applications on which we depend may not result in the issuance of patents in the
United States or foreign countries. Even if our rights are valid, enforceable
and broad in scope, competitors may develop products based on similar technology
that is not covered by our patents. Further, since there is a substantial
backlog of patent applications at the U.S. Patent and Trademark Office, the
approval or rejection of our or our competitors' patent applications may take
several years.
In addition to patent protection, we also rely on copyright and trademark
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain the confidentiality and
ownership of our trade secrets and proprietary information, we require our
employees, consultants and advisors to execute confidentiality and proprietary
information agreements. However, these agreements may not provide us with
adequate protection against improper use or disclosure of confidential
information and there may not be adequate remedies in the event of unauthorized
use or disclosure. Furthermore, like many companies in our industry, we may from
time to time hire scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities conducted by us. In some
situations, our confidentiality and proprietary information agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Although we require our employees and consultants to maintain the
confidentiality of all confidential information of previous employers, we or
these individuals may be subject to allegations of trade secret misappropriation
or other similar claims as a result of their prior affiliations.
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Finally, others may independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to our trade secrets. Our
failure to protect our proprietary information and techniques may inhibit or
limit our ability to exclude certain competitors from the market and execute our
business strategies.
OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO OPERATE WITHOUT VIOLATING THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY RESULT IN COSTLY INTELLECTUAL
PROPERTY LAWSUITS.
The drug research and development industry has a history of patent and
other intellectual property litigation and patent lawsuits concerning drug
discovery technologies will likely continue. Because we produce and provide many
different products and services, we face potential patent infringement suits by
a wide variety of companies that control patents for similar products and
services. In order to protect or enforce our intellectual property rights, we
may have to initiate legal proceedings against third parties. In addition,
others may sue us for infringing their intellectual property rights or we may
initiate a lawsuit seeking a declaration from a court that we do not infringe
the proprietary rights of others. The patent positions of pharmaceutical,
biotechnology and drug discovery companies are generally uncertain and involve
complex legal and factual questions. No consistent policy has emerged from the
U.S. Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under patents like those for which
we have applied. Legal proceedings relating to intellectual property would be
expensive, take significant time and divert management's attention from other
business concerns, whether we win or lose. The cost of such litigation could
affect our profitability.
Further, if we do not prevail in an infringement lawsuit brought against
us, we might have to pay substantial damages, including treble damages, and we
could be required to stop the infringing activity or obtain a license to use the
patented technology. Any required license may not be available to us on
acceptable terms, or at all. In addition, some licenses may be nonexclusive, and
therefore, our competitors may have access to the same technology licensed to
us. If we fail to obtain a required license or are unable to design around a
patent, we may be unable to sell some of our products or services.
RISKS RELATED TO THE OFFERING
OUR STOCK PRICE WILL LIKELY BE VOLATILE, AND YOUR INVESTMENT COULD DECLINE IN
VALUE.
The trading price of our common stock is likely to be volatile and 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;
- introductions or announcements of technological innovations or new
products or services by us, our collaborators or our competitors;
- disputes or other developments relating to proprietary rights, including
patents, litigation matters and our ability to patent our technologies;
- changes in financial estimates by securities analysts;
- conditions or trends in the pharmaceutical and biotechnology industries;
- additions or departures of key personnel;
- the loss of a significant customer or collaborator;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- regulatory developments in the United States and abroad;
- public concern as to the efficacy of new drug discovery techniques; and
- economic and political factors.
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In addition, the stock market in general, and the market for life sciences
companies in particular, have experienced significant price and volume
fluctuations that have often been unrelated or disproportionate to operating
performance. These broad market and industry factors may seriously harm the
market price of our common stock, regardless of our operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in potential liabilities,
substantial costs and the diversion of management's attention and resources,
regardless of whether we win or lose.
THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.
Prior to this offering, there has been no public market for our common
stock. An active trading market for our common stock may not develop or be
maintained following this offering. As a result, you may not be able to sell
your shares quickly or at the market price. The initial public offering price
will be determined by negotiation between us and representatives of the
underwriters based upon a number of factors and may not be indicative of prices
that will prevail in the trading market. The market price of our common stock
may decline below the initial public offering price, and you may not be able to
resell your shares at or above the initial offering price. See "Underwriting"
below for a discussion of the factors to be considered in determining the
initial public offering price.
WE MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS THAT DO NOT YIELD A
FAVORABLE RETURN.
We have not yet determined the allocation of the proceeds from this
offering, and we will retain broad discretion over the use of the proceeds. You
may not agree with how we spend the proceeds, and our use of the proceeds may
not yield a significant return or any return at all. For example, we may use the
proceeds to acquire new businesses or technologies that are unproven and may not
ultimately generate revenue for us.
IF WE NEED BUT ARE UNABLE TO OBTAIN ADDITIONAL FUNDING TO SUPPORT OUR
OPERATIONS, WE WOULD HAVE TO REDUCE OR CEASE OPERATIONS OR ATTEMPT TO SELL ALL
OR A PART OF OUR OPERATIONS.
We may need substantial funds to continue to research, develop and enhance
our products and services. To the extent that our capital resources are
insufficient to meet future capital requirements, we will have to raise
additional funds to continue the development of our products and services. We
may not be able to raise funds on favorable terms, if at all. Our current
operating plan could change as a result of many factors, and we could require
additional funding sooner than anticipated. Our requirements for additional
capital may be substantial and will depend on many factors, some of which are
beyond our control, including:
- market acceptance of our products and services;
- continued progress of our research and development of our products and
services;
- acquisitions of other companies in exchange for cash, and the capital
needs of any acquired companies;
- competing technological and market developments;
- the cost of protection of patent and other intellectual property rights;
and
- further development of our production and business development
capabilities.
To the extent that we raise additional capital through the sale of equity
or convertible debt securities, the issuance of those securities would result in
dilution to our stockholders. Moreover, incurring debt financing could result in
a substantial portion of our operating cash flow being dedicated to the payment
of principal and interest on such indebtedness, could render us more vulnerable
to competitive pressures and economic downturns and could impose restrictions on
our operations. If adequate funds are not available, we may be required to
curtail operations significantly or to obtain funds through other arrangements
on unattractive terms.
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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 21,367,409 shares of common stock
outstanding immediately after this offering, or 22,167,409 shares if the
underwriters exercise their over-allotment option in full, based on the number
of shares outstanding at August 31, 2000. All of the shares sold in the offering
will be freely transferable without restriction or further registration under
the Securities Act of 1933, except for any shares purchased by our "affiliates"
as defined in Rule 144 under the Securities Act. Assuming the underwriters do
not exercise their overallotment option, the remaining 15,367,409 shares of
common stock outstanding will be "restricted securities" as defined in Rule 144,
of which 782,107 shares will, subject to Rule 144, be available for sale
immediately following this offering, and 14,585,302 will, subject to Rule 144,
be available for sale following the expiration of the 180 day lock-up period.
These shares may be sold in the future without registration under the Securities
Act to the extent permitted by Rule 144 or other exemptions under the Securities
Act.
After this offering, we intend to register 7,800,000 shares of common stock
that are reserved for issuance upon exercise of options granted or reserved for
grant under our stock option plan and our employee stock purchase plan. Once we
register these shares, they can be sold in the public market upon issuance,
subject to restrictions under the securities laws applicable to resales by
affiliates. The number of shares that are reserved for issuance under our stock
option plan may increase based on our issued and outstanding shares of common
stock, and we may register such additional shares in the future.
BECAUSE IT IS UNLIKELY THAT WE WILL PAY DIVIDENDS, YOU WILL BE ABLE TO BENEFIT
FROM HOLDING OUR STOCK ONLY IF THE STOCK PRICE APPRECIATES.
We have never paid cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future. Therefore, an
investment in our common stock will only generate value if our stock price
appreciates.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS
OFFERING AND MAY EXPERIENCE ADDITIONAL DILUTION IN THE FUTURE.
The initial public offering price of our common stock is expected to be
substantially higher than the net tangible book value per share of our common
stock. Therefore, if you purchase shares of our common stock in this offering,
you will incur immediate and substantial dilution of approximately $7.30 in the
pro forma net tangible book value per share of common stock from the price per
share that you pay for the common stock, based upon an assumed initial public
offering price of $11.00 per share. If the holders of outstanding options or
warrants exercise those options or warrants at prices below the initial public
offering price, you will incur further dilution. We may also acquire other
companies or technologies or finance strategic alliances by issuing equity,
which may result in additional dilution to our stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS MAKE A THIRD PARTY
ACQUISITION OF US DIFFICULT.
Our certificate of incorporation and bylaws contain provisions that could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
We are also subject to provisions of Delaware law that could delay, deter or
prevent a change in control. See "Description of Capital Stock -- Anti-Takeover
Provisions" for additional information.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A LARGE
PERCENTAGE OF OUR VOTING COMMON STOCK AND COULD LIMIT NEW STOCKHOLDERS FROM
INFLUENCING CORPORATE DECISIONS.
Immediately after this offering, our executive officers, directors and
current principal stockholders, and their respective affiliates, will
beneficially own approximately 64% of our outstanding common stock. These
stockholders, if acting together, would be able to control substantially all
matters requiring approval by our stockholders, including mergers, sales of
assets, the election of all directors and approval of other significant
corporate transactions.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus contains forward-looking statements. We use words like
"believe," "intend," "expect," "may," "will," "should," "plan," "project,"
"contemplate," "anticipate" and similar expressions to identify these
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about the growth of our business, our
financial performance and the development of our industry. Because these
statements reflect our current views concerning future events, these forward-
looking statements involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including the risks described in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
Information regarding market and industry statistics contained in the
"Prospectus Summary" and "Business" sections of this prospectus is included
based on information available to us that we believe is accurate. It is
generally based on academic and other publications that are not produced for
purposes of securities offerings or economic analysis. We have not reviewed or
included data from all sources and cannot assure you of the accuracy of the data
we have included.
USE OF PROCEEDS
We estimate our net proceeds from the sale of 6,000,000 shares of common
stock in this offering will be approximately $60,580,000, or approximately
$68,764,000 if the underwriters exercise their over-allotment option in full,
based on an assumed initial public offering price of $11.00 per share, after
deducting the estimated underwriting discount and offering expenses.
We currently intend to use the net proceeds to fund our operations,
including continued development and manufacturing of existing products as well
as research and development of additional products and services, hire additional
personnel and expand our facilities to be able to meet the growing needs of our
business. We also may use a portion of the net proceeds to acquire or invest in
new products, businesses or technologies and pay down our indebtedness. We
intend to use the balance of the net proceeds for general corporate purposes,
including working capital. Our management may spend the proceeds from this
offering in ways that the stockholders may not deem desirable.
Pending the application of the net proceeds towards one of the above uses,
we intend to invest the net proceeds in investment-grade, interest-bearing
securities. We cannot predict whether the investment of the proceeds will yield
a favorable return.
The foregoing represents our current intentions based upon our present
plans and business condition. Our management will have broad discretion in the
application of the net proceeds from this offering, and the occurrence of
unforeseen events or changed business conditions could result in the application
of the net proceeds from this offering in a manner other than as described in
this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and
we do not intend to pay any cash dividends in the foreseeable future. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and to fund future growth.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth our total long-term debt, including current
portion, and capitalization as of June 30, 2000 presented:
- on an actual basis;
- on a pro forma basis to give effect to the issuance of 1,666,667 shares
of our Series C preferred stock in August 2000 and the automatic
conversion of our Series A preferred stock, Series B preferred stock and
Series C preferred stock into shares of our common stock upon the closing
of this offering on a one-for-one basis, as if these events had occurred
as of June 30, 2000; and
- on a pro forma as adjusted basis to give effect to the sale of 6,000,000
shares of our common stock at an assumed initial public offering price of
$11.00 per share, after deducting the estimated underwriting discount and
offering expenses.
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Long-term debt, including current portion................... $ 4,556 $ 4,556 $ 4,556
------- ------- -------
Stockholders' equity:
Preferred stock, par value $.001 per share; 10,100,000
shares
authorized actual, 11,825,000 shares authorized pro forma
and
10,000,000 shares authorized pro forma as adjusted
Series A convertible preferred stock; 6,635,000 shares
issued
and outstanding actual and no shares issued and
outstanding
pro forma and pro forma as adjusted.................. 7 -- --
Series B convertible preferred stock; 3,199,999 shares
issued
and outstanding actual and no shares issued and
outstanding
pro forma and pro forma as adjusted.................. 3 -- --
Series C convertible preferred stock; no shares issued
and outstanding actual, pro forma and pro forma as
adjusted............................................. -- -- --
------- ------- -------
Total preferred stock............................. 10 -- --
------- ------- -------
Common stock, par value $.001 per share; 17,000,000 shares
authorized actual, 20,225,000 shares authorized pro forma
and 60,000,000 shares authorized pro forma as adjusted;
3,370,207 shares issued and outstanding actual, 14,871,873
shares issued and outstanding pro forma and 20,871,873
shares issued and outstanding pro forma as adjusted....... 3 15 21
Additional paid-in capital.................................. 17,430 27,393 87,967
Accumulated deficit......................................... (9,087) (9,087) (9,087)
Notes receivable for common stock -- (related party)........ (394) (394) (394)
Deferred compensation....................................... (1,310) (1,310) (1,310)
------- ------- -------
Total stockholders' equity........................ 6,652 16,617 77,197
------- ------- -------
Total capitalization.............................. $11,208 $21,173 $81,753
======= ======= =======
</TABLE>
The above table does not reflect the following:
- 2,854,844 shares of common stock underlying options outstanding as of
June 30, 2000 at a weighted-average exercise price of $0.384 per share;
- 110,750 shares of common stock, assuming the automatic conversion of our
Series A and Series B preferred stock, underlying warrants to purchase
preferred stock outstanding as of June 30, 2000 at a weighted-average
exercise price of $3.15 per share; and
- 25,816 shares available as of June 30, 2000 for issuance or future grants
under our stock option plan.
18
<PAGE> 23
DILUTION
As of June 30, 2000, our pro forma net tangible book value would have been
$16.5 million, or $1.11 per share of common stock. Our pro forma net tangible
book value per share represents our pro forma total tangible assets less pro
forma total liabilities, divided by the number of shares of common stock
outstanding on that date and assumes the issuance of 1,666,667 shares of our
Series C preferred stock in August 2000 and the conversion of all outstanding
shares of our preferred stock, which convert automatically into shares of common
stock on a one-for-one basis upon the closing of this offering. Without taking
into account any other changes in our pro forma net tangible book value per
share after June 30, 2000, other than to give effect to the sale of the
6,000,000 shares of common stock offered by this prospectus at an assumed
initial public offering price of $11.00 per share, after deducting the estimated
underwriting discount and offering expenses, our pro forma as adjusted net
tangible book value as of June 30, 2000 would have been $77.1 million, or $3.70
per share. This represents an immediate increase in pro forma as adjusted net
tangible book value to existing stockholders of $2.59 per share and an immediate
dilution to new investors who purchase shares of common stock in this offering
of $7.30 per share. Dilution equals the difference between the amount per share
paid by new investors who purchase shares of common stock in this offering and
the pro forma as adjusted net tangible book value per share upon the closing of
this offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of June 30,
2000................................................... $1.11
Increase per share attributable to new investors.......... 2.59
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 3.70
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 7.30
======
</TABLE>
The following table illustrates, on a pro forma as adjusted basis, as of
June 30, 2000, the differences between the number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid to us (1) by existing stockholders, and (2) by the new investors who
purchase shares of common stock in this offering at the assumed initial public
offering price of $11.00 per share, before deducting the estimated underwriting
discount and offering expenses.
<TABLE>
<CAPTION>
SHARES
PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
---------- --------------------- -------------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 14,871,873 71% $25,426,762 28% $ 1.71
New investors............................ 6,000,000 29% 66,000,000 72% 11.00
---------- ------- ----------- -------
Total.......................... 20,871,873 100% $91,426,762 100%
========== ======= =========== =======
</TABLE>
The discussion and table assume:
- the automatic conversion of our Series A, Series B and Series C preferred
stock on a one-for-one basis into 11,501,666 shares of our common stock;
- no exercise of options outstanding under our stock option plan as of June
30, 2000;
- no exercise by the underwriters of their over-allotment option to
purchase up to 800,000 additional shares of common stock from us and up
to 100,000 shares of common stock from two of our stockholders; and
- no exercise by any of our security holders of any outstanding warrants.
As of June 30, 2000, there were options outstanding to purchase a total of
2,854,844 shares of common stock at a weighted-average price of $0.384 per
share. As of the same date, there were warrants to purchase a total of 110,750
shares of common stock, assuming the automatic conversion of our Series A and
Series B preferred stock, at a weighted-average exercise price of $3.15 per
share. There will be further dilution to new investors who purchase shares of
common stock in this offering to the extent any of our options or warrants are
exercised.
19
<PAGE> 24
SELECTED FINANCIAL DATA
The selected financial data presented below are derived from our audited
financial statements appearing elsewhere in this prospectus for the following
periods: (1) our statements of operations data from February 6, 1998 (inception)
to June 30, 1998, and for the twelve-month periods ended June 30, 1999 and June
30, 2000; and (2) our balance sheet data at June 30, 1998, June 30, 1999 and
June 30, 2000.
The pro forma net loss per share data gives effect to the automatic
conversion of all of our outstanding preferred stock upon the closing of this
offering. The cost of revenue, research and development expense, and selling,
general and administrative expense data below excludes compensation related to
stock option grants.
The financial statements as of and for the periods ended June 30, 1998,
June 30, 1999 and June 30, 2000 have been audited by Ernst & Young LLP,
independent auditors. It is important that you also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as our audited financial statements and the related notes included
elsewhere in this prospectus. The historical results presented below are not
necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 6, 1998 YEARS ENDED JUNE 30,
(INCEPTION) TO ------------------------------
JUNE 30, 1998 1999 2000
------------------- ------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.............................................. $ -- $ 1,504 $ 6,774
Cost of revenue...................................... -- 1,033 4,402
----------- ---------- -----------
Gross profit......................................... -- 471 2,372
Research and development expenses.................... -- 3,301 3,928
Selling, general and administrative expenses......... 62 1,522 2,430
Compensation related to stock option grants.......... -- -- 716
----------- ---------- -----------
Total operating expenses............................. 62 4,823 7,074
----------- ---------- -----------
Loss from operations................................. (62) (4,352) (4,702)
Interest expense..................................... -- (136) (384)
Interest income...................................... 13 181 356
----------- ---------- -----------
Net loss............................................. $ (49) $ (4,307) $ (4,730)
=========== ========== ===========
Basic and diluted net loss per share................. $ (0.06) $ (1.48) $ (1.54)
=========== ========== ===========
Shares used in computing basic and diluted
net loss per share................................. 863,964 2,918,367 3,063,439
=========== ========== ===========
Pro forma basic and diluted net loss
per share (unaudited).............................. $ (0.40)
===========
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)..................... 11,697,343
===========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------
1998 1999 2000
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 2,608 $ 2,186 $ 5,784
Other current assets........................................ 192 1,819 2,764
Property, plant and equipment, net.......................... 6 2,872 6,911
Other assets................................................ 4 248 364
Total assets.............................................. $ 2,810 $ 7,125 $15,823
Total current liabilities................................... 57 2,744 6,338
Long-term debt, less current portion........................ -- 1,824 2,833
Total stockholders' equity.................................. 2,753 2,557 6,652
Total liabilities and stockholders' equity................ $ 2,810 $ 7,125 $15,823
</TABLE>
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this prospectus. This discussion
may contain forward-looking statements that involve risks and uncertainties. As
a result of many factors, such as those set forth under "Risk Factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.
OVERVIEW
We offer a broad range of products and services to pharmaceutical and
biotechnology companies to bridge the gap between target discovery and
pre-clinical and clinical development of potential drug candidates. Our
experienced scientists provide premium products and services to create, evaluate
and optimize potential drug candidates. In addition, we have developed an
information-driven technology platform to support our scientists in making
better decisions at each stage of the drug discovery process. We also leverage
our capabilities internally to develop proprietary drug candidates in
collaboration with our customers. We have incurred net losses since inception
and expect to incur losses in the near future as we expand our scientific staff
and continue the scale-up of our operations. To date, we have funded our
operations primarily through the issuance of equity securities, borrowings and
revenue from our collaborators. As of June 30, 2000, we had an accumulated
deficit of $9.1 million.
We generate revenue by selling products and providing services to our
collaborators. Since our existing collaboration agreements provide commingled
revenue, we do not report product and service revenue separately in our
financial statements. In general, we sell our compounds, including our Optimer
building blocks and Diversity Library, on a per-compound basis, although some of
our contracts allow our customers to obtain exclusive rights to particular
compounds upon the payment of additional fees. We are typically paid for our
services under our collaboration agreements based on the number of full-time
equivalent employees contractually assigned to a project, at an annual full-time
equivalent price, plus certain expenses. Custom libraries and other custom
synthesis performed by us under our service agreements are typically charged on
a per-delivered compound basis, plus a charge for research and development. In
addition, one of our collaboration agreements provides for additional payments
upon our achievement of certain milestones. Under future contracts, we may also
receive license fees and royalties. We have not yet generated any license fees
or milestone or royalty payments. In general, our collaborators may terminate
our collaboration agreements with them on 30 to 90 days' prior notice. During
fiscal year 2000, ICOS Corporation, Celltech Chiroscience Ltd. and Merck & Co.,
Inc. accounted for 45%, 11% and 8%, respectively, of our total revenue. We will
seek to generate revenue from new collaboration agreements that will reduce our
concentration of revenue.
We generally recognize revenue upon shipment of our products or upon
performance under our collaboration agreements. Revenue from our full-time
equivalent collaboration service agreements is recognized on a monthly or per
diem basis as work is performed. Revenue from our development, fixed-fee and
fee-per-compound collaboration service agreements is recognized either on a
percentage of completion basis or as compounds are shipped.
Cost of revenue consists mainly of compensation, associated fringe
benefits, and other product- or service-related costs, including recruiting and
relocation, fine chemicals, supplies, small tools, facilities, depreciation, and
other direct and indirect chemical handling and laboratory support costs,
excluding any costs related to research and development.
Research and development expenses consist of the same type of scientific
expenditures that comprise cost of revenue, except that the expenses are related
to the development of our early-stage intellectual property and products where
we have not yet proven technological feasibility. Costs of routine, or
production-related, activities are charged to cost of revenue.
Selling, general and administrative expenses consist mainly of compensation
and associated fringe benefits and other management, business development,
accounting, information technology and administration
21
<PAGE> 26
costs, including consulting and professional services, travel and meals,
advertising, sales commissions, facilities, depreciation and other office
expenses.
We currently sell our products and services directly to pharmaceutical and
biotechnology companies through our senior management and scientists and through
customer referrals. In addition, we sell our products and services in Japan
through an agent. International revenue represented 9% of our total revenue
during fiscal year 2000. The majority of our international revenue was
attributed to European sales, and the remaining was attributed to sales in
Japan. All of our collaboration agreements and purchase orders are denominated
in United States dollars.
We intend to grow our revenue with existing customers and to realize new
revenue streams through collaborations with a diversified group of
pharmaceutical and biotechnology companies. In addition, we expect to enter into
contracts that allow us to participate in the success of potential drug
candidates with our collaborators through milestone and/or royalty payments and
to participate in the success of our proprietary potential drug candidates
through a combination of licensing fees, milestone and/or royalty payments. We
expect our growth to require significant ongoing investment in facilities,
scientific personnel and business development resources.
RESULTS OF OPERATIONS
The following table presents our results of operations for the eight
quarters in the period ending June 30, 2000. This information has been compiled
from our unaudited interim financial statements. Our unaudited financial
statements have been prepared on the same basis as our audited financial
statements. All adjustments, consisting only of normal recurring accruals
considered necessary for a fair presentation, have been included. The cost of
revenue, research and development expense, and selling, general and
administrative expense data in the following table excludes compensation related
to stock option grants. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1999 1999 1999 1999
------------- ------------ ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue.............. $ -- $ 39 $ 462 $ 1,002 $1,350 $ 1,351
Cost of revenue...... 11 23 328 671 817 801
----- ------- ------- ------- ------ -------
Gross profit......... (11) 16 134 331 533 550
Research and
development
expenses........... 778 751 962 810 696 920
Selling, general and
administrative
expenses........... 206 462 354 500 439 739
Compensation related
to stock option
grants............. -- -- -- -- -- 283
----- ------- ------- ------- ------ -------
Total operating
expenses........... 984 1,213 1,316 1,310 1,135 1,942
----- ------- ------- ------- ------ -------
Loss from
operations......... (995) (1,197) (1,182) (979) (602) (1,392)
----- ------- ------- ------- ------ -------
Interest expense..... -- (16) (44) (75) (84) (87)
Interest income...... 58 48 36 39 25 86
----- ------- ------- ------- ------ -------
Net loss..... $(937) $(1,165) $(1,190) $(1,015) $ (661) $(1,393)
===== ======= ======= ======= ====== =======
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31, JUNE 30,
2000 2000
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Revenue.............. $ 1,825 $ 2,248
Cost of revenue...... 1,168 1,616
------- -------
Gross profit......... 657 632
Research and
development
expenses........... 1,016 1,296
Selling, general and
administrative
expenses........... 550 702
Compensation related
to stock option
grants............. 199 234
------- -------
Total operating
expenses........... 1,765 2,232
------- -------
Loss from
operations......... (1,108) (1,600)
------- -------
Interest expense..... (87) (126)
Interest income...... 126 119
------- -------
Net loss..... $(1,069) $(1,607)
======= =======
</TABLE>
FISCAL YEARS ENDED JUNE 30, 2000 AND 1999
Revenue. Total revenue increased to $6.8 million in fiscal year 2000 from
$1.5 million in fiscal year 1999. The revenue increase from fiscal year 1999 to
fiscal year 2000 was primarily a result of a full year of operations in fiscal
year 2000 versus start-up activities during a portion of fiscal year 1999. Sales
increased in all products and services offered, and most significantly in lead
optimization services, process chemistry services and subscriptions to our
Diversity Library.
22
<PAGE> 27
Cost of revenue. Cost of revenue increased to $4.4 million in fiscal year
2000 from $1.0 million in fiscal year 1999, reflecting the increased cost to
support our revenue growth in the same period. The cost increases were primarily
attributed to recruiting and relocating additional scientific staff, associated
salaries and benefits and the start-up expenditures associated with equipping
and commencing operations in our new and expanded facilities. These and other
costs are expected to continue to increase in the future to support our growth.
We expect salaries for our scientific personnel to increase in future years at a
rate in excess of general inflation because of the increased market demand for
scientists. Cost of revenue was 65% of revenue in fiscal year 2000, compared to
69% in fiscal year 1999. The reduction in cost of revenue as a percentage of
revenue in 2000 as compared to 1999 was due primarily to a larger revenue base
against which to apply certain fixed costs.
Research and development expenses. Research and development expenses
increased to $3.9 million in fiscal year 2000 from $3.3 million in fiscal year
1999. The increase in research and development expenses in fiscal year 2000 was
primarily attributed to expanded research efforts for our collections of our
Diversity Library compounds and custom synthesis collaborations. These expanded
research efforts required the recruitment and relocation of additional
scientific staff, associated salaries and benefits and the start-up expenditures
associated with equipping and commencing operations in our new and expanded
facilities. We plan to increase our research and development efforts related to
the discovery of additional intellectual property, which will result in
increased research and development expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses totaled $2.4 million in fiscal year 2000, compared to
$1.5 million in fiscal year 1999. The increase in selling, general and
administrative expenses in fiscal year 2000 was primarily attributed to our
increased staffing levels and expanded management. The recruitment and
relocation of senior management was a significant component of our selling,
general and administrative expense in fiscal year 2000.
Compensation related to stock option grants. Compensation related to stock
option grants was $716,000 in fiscal year 2000. There was no compensation
related to stock option grants in fiscal year 1999. In fiscal year 2000, we
recorded deferred stock compensation of $1.3 million. Both the current and
deferred compensation related to stock option grants are the result of options
awarded to employees with exercise prices below the fair value of our common
stock for financial accounting purposes on the dates these options were granted.
This expense relates primarily to the selling, general and administrative
functional area. Additional deferred compensation totaling $3.9 million will be
recorded for options granted between June 30, 2000 and August 31, 2000. Assuming
the consummation of this offering, we expect to amortize deferred stock
compensation as follows: $2.2 million in fiscal year 2001; $1.2 million in
fiscal year 2002; $931,000 in fiscal year 2003; $883,000 in fiscal year 2004 and
$19,000 in fiscal year 2005. Of the $2.2 million in deferred compensation we
expect to amortize in fiscal year 2001, $793,000 is directly attributable to
unvested options that will be accelerated and exercisable upon the closing of
this offering. To date, we have granted our employees stock options as annual
incentive bonus awards. Any future annual incentive bonus awards may include a
partial cash component in addition to stock-based compensation. You should read
Note 5 of the notes to our financial statements included elsewhere in this
prospectus for additional information.
Interest income or expense. We had net interest expense of approximately
$28,000 in fiscal year 2000, compared to net interest income of approximately
$45,000 in fiscal year 1999. The net interest expense in fiscal year 2000
compared with net interest income in fiscal year 1999 was primarily due to
increased borrowing to finance equipment purchases, offset partially by larger
interest income from our larger balances of cash, cash equivalents and
marketable securities in fiscal year 2000.
FOR THE PERIOD FROM FEBRUARY 6, 1998 (INCEPTION) TO JUNE 30, 1998
We were formed in February 1998, but we did not begin incurring costs until
May 1998. Our operations in May and June of 1998 consisted primarily of
obtaining equity financing, leasing facilities, hiring personnel and travelling
to prospective customer locations. A comparison of this period to operations
data from fiscal year 1999 would not be meaningful.
23
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations principally with $25.3 million of private
equity financing and $7.9 million in short-term and long-term debt and equipment
financing arrangements. Equity investments came from a common stock offering and
a series of three preferred stock offerings that occurred from May 1998 through
August 2000.
Between May 19, 1998 and January 15, 1999, we issued 6,635,000 shares of
our Series A preferred stock resulting in gross proceeds of $6.6 million and
2,913,367 shares of our common stock resulting in gross proceeds of $685,000. On
November 16, 1999, we issued 3,199,999 shares of our Series B preferred stock
resulting in gross proceeds of $8.0 million. On August 31, 2000, we issued
1,666,667 shares of our Series C preferred stock resulting in gross proceeds of
$10.0 million.
In May 1998, we loaned an aggregate of $350,000 to three of our founders to
purchase shares of our common stock. These loans are secured by pledges of
certain shares of common stock owned by these founders, bear interest at a rate
of 6.0% per annum and, in the case of two of the founders who are employees, are
due on the earlier of September 1, 2002 or the date the founder's employment
with us is terminated. In the case of the third founder, who is not an employee,
the note is due on May 18, 2002. As of June 30, 2000, approximately $394,000 in
principal and accrued interest remains outstanding under these loans. See
"Related Party Transactions" included elsewhere in this prospectus.
In November 1998 and February 1999, we drew down the entirety of a $1.5
million loan from Silicon Valley Bank for the acquisition of equipment pursuant
to a Loan and Security Agreement dated as of October 9, 1998. The notes
reflecting this loan are payable in monthly installments with a final payment of
8.0% of the initial loan draw due at maturity, mature 42 months from the date of
the initial funding under the loan and bear interest at a rate equal to the
yield to maturity of the 42-month United States Treasury note as of the funding
date, plus 3.0%. As of June 30, 2000, approximately $1.0 million in principal
and accrued interest remained outstanding under these notes. In addition, on
October 9, 1998, we issued a warrant to Silicon Valley Bank in connection with
this loan to purchase 40,000 shares of our Series A preferred stock at an
exercise price of $1.00 per share, subject to certain adjustments.
In February 1999, we entered into a Master Note and Security Agreement with
Leasing Technologies International, Inc. for a $1.5 million secured installment
loan to finance our acquisition of equipment. We drew down the entire loan
during the following 13 months. The notes reflecting this loan are payable in
monthly installments with a final payment of 8.0% of the initial funding due at
maturity, mature 42 months from the date of the initial funding and bear
interest at a rate averaging approximately 11.9%. As of June 30, 2000,
approximately $1.4 million in principal and accrued interest remained
outstanding under this loan. In addition, on March 30, 1999, we issued a warrant
to Leasing Technologies International, Inc. in connection with this loan to
purchase 13,750 shares of our Series A preferred stock at an exercise price of
$3.00 per share, subject to certain adjustments.
In April 1999, we drew down the entirety of a $500,000 loan from Silicon
Valley Bank for the acquisition of equipment pursuant to a Loan and Security
Agreement dated as of March 26, 1999. The notes reflecting this loan are payable
in monthly installments with a final payment of 8.0% of the initial loan draw
due at maturity, mature 42 months from the date of the initial funding under the
loan and bear interest at a rate equal to the yield to maturity of the 42-month
United States Treasury note as of the funding date, plus 3.0%. The notes do not
have a prepayment option. As of June 30, 2000, approximately $354,000 in
principal and interest remained outstanding under these notes. In addition, on
March 31, 1999, we issued a warrant to Silicon Valley Bank in connection with
this loan to purchase 7,000 shares of our Series B preferred stock at an
exercise price of $2.50 per share, subject to certain adjustments.
In May 2000, we entered into a Loan and Security Agreement with Silicon
Valley Bank for a $4.0 million line of credit permitting advances over a
one-year period to finance the acquisition of equipment. Each advance plus
interest must be paid in monthly installments within 36 months of the date of
such advance. Interest accrues on outstanding amounts at a rate of 1.25% over
Silicon Valley Bank's prime rate, which may be reduced based on our financial
performance. We may prepay the line of credit upon paying an
24
<PAGE> 29
early termination fee. As of June 30, 2000, approximately $2.0 million was
outstanding, and in July 2000, we drew down the remaining $2.0 million. In
addition, we issued Silicon Valley Bank a warrant to purchase 50,000 shares of
our Series B preferred stock at an exercise price of $5.00 per share, subject to
certain adjustments.
At June 30, 2000, cash, cash equivalents and marketable securities totaled
$5.8 million compared to $2.2 million at June 30, 1999. Net cash used in
operating activities was $1.3 million for fiscal year 2000. Our net loss of $4.7
million was offset by non-cash charges of $1.7 million, while a reduction in
working capital of $1.3 million accounted for most of the remainder of net cash
used in operations. Working capital declined due to increased accounts payable,
and advances from customers which exceeded the increases in accounts receivable
and inventories. The increase in these operating assets and liabilities reflect
the expansion of our business during fiscal year 2000.
In fiscal year 2000, we invested in capital equipment and leasehold
improvements totaling $5.0 million. Financing activities provided $10.1 million
consisting of $8.0 million from the sale of our Series B preferred stock and
$2.9 million from borrowings under our bank loans, less the repayment of
$871,000 in equipment financing.
Our future capital requirements will depend on a number of factors,
including our success in increasing sales of both existing and new products and
services, expenses associated with unforeseen litigation, regulatory changes,
competition, technological developments and potential future merger and
acquisition activity. We believe that our existing cash, cash equivalents and
marketable securities and anticipated cash flow from existing collaboration
agreements together with the net proceeds of this public offerings will be
sufficient to support our current operating plan for at least the next 12
months. We have based this estimate on assumptions that may prove to be wrong.
Our forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary as a result of a number
of factors. Our future capital requirements will depend on many factors,
including:
- the progress of our research activities;
- the number and scope of our research programs;
- the progress of our preclinical and clinical development activities;
- the progress of the development efforts of our collaborators;
- our ability to establish and maintain current and new collaboration
agreements;
- the costs involved in enforcing patent claims and other intellectual
property rights;
- the costs and timing of regulatory approvals; and
- the costs of establishing business development and distribution
capabilities.
Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. Until we can
generate sufficient levels of cash from our operations, which we do not expect
to achieve for at least several years, we expect to finance future cash needs
through the sale of equity securities, strategic collaboration agreements and
debt financing as well as interest income earned on cash balances. We cannot
assure you that additional financing or collaboration agreements will be
available when needed or that, if available, this financing will be obtained on
terms favorable to us or our stockholders. Insufficient funds may require us to
delay, scale back or eliminate some or all of our research or development
programs or to relinquish greater or all rights to product candidates at an
earlier stage of development or on less favorable terms than we would otherwise
choose or may adversely affect our ability to operate as a going concern. If
additional funds are raised by issuing equity securities, substantial dilution
to existing stockholders may result.
At June 30, 2000, we had federal and Colorado income tax net operating loss
carryforwards for income tax purposes of approximately $8.4 million, which will
expire through 2020. We have provided a
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100% valuation allowance against the related deferred tax assets as realization
of such tax benefits is not assured.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Short-term investments. Our interest income is sensitive to changes in the
general level of United States interest rates, particularly since a significant
portion of our investments are and will be in short-term marketable securities.
Due to the nature and maturity of our short-term investments, we have concluded
that there is no material market risk exposure.
Foreign currency rate fluctuations. We have not taken any action to reduce
our exposure to changes in foreign currency exchange rates, such as options or
futures contracts, with respect to transactions with our worldwide customers.
Inflation. We do not believe that inflation has had a material impact on
our business or operating results during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS No. 133 requires that all derivatives be recognized
at fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of relationship that
exists. In July 1999, the Financial Accounting Standards Board issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective
date until fiscal years beginning after June 15, 2000. We have not engaged in
hedging activities or invested in derivative instruments.
In December 1999, the Securities and Exchange Commission issued SAB 101,
Revenue Recognition, which provides guidance on the recognition, presentation
and disclosure on 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 disclosure related to revenue
recognition policies. We believe that our current revenue recognition policy is
in compliance with SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB 25 ("FIN 44"). This interpretation
clarifies (1) the definition of employee for purposes of applying APB 25, (2)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(3) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (4) the accounting for an exchange
of stock compensation awards in a business combination. This interpretation is
effective July 1, 2000, but certain conclusions in this interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 will not have a
material impact on our financial statements.
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BUSINESS
OVERVIEW OF ARRAY'S BUSINESS
Array BioPharma is a discovery research company creating drug candidates
through innovations in chemistry. Our experienced scientists provide premium
products and services to create, evaluate and optimize potential drug candidates
in collaboration with pharmaceutical and biotechnology companies. We believe our
information-based approach improves the efficiency of the drug discovery process
and increases the quality of potential drug candidates. We also apply these
capabilities internally for our own drug discovery programs.
The drug industry is experiencing revolutionary change fueled by genomics,
or the study of all genes, and by the tremendous progress in the biological
understanding of disease. We believe the drug research and development
bottleneck is shifting from the discovery by biologists of new disease-causing
proteins, or targets, to the creation by chemists of safe and effective new
drugs for these targets. We provide a broad range of premium drug discovery
products and services to bridge the gap between target discovery and drug
candidate testing in animals and humans. We believe that our integrated approach
to drug discovery combined with our information-driven technology platform will
enable both our collaborators and our internal discovery teams to create higher
quality drugs and to do so more quickly and less expensively.
Our objective is to become the leading creator of high quality potential
drug candidates by providing premium discovery chemistry products and services.
Our achievements to date include:
- Initiating collaborations with pharmaceutical companies such as Eli Lilly
and Company and Merck & Co., Inc.;
- Initiating collaborations with biotechnology companies such as Celltech
Chiroscience Ltd., ICOS Corporation and Tularik Inc.;
- Discovering a drug candidate for clinical trials with our first
collaboration partner, ICOS;
- Creating a technology platform to identify new drug candidates from
genomic information;
- Creating our own potential drug candidates; and
- Growing our staff from our inception in 1998 to over 100 employees as of
September 2000, including 75 scientists, of whom 69 are chemists, 42 have
Ph.D's and 34 have large pharmaceutical company experience.
We have a multi-faceted business model based on growing revenue and
achieving profitability while sharing in the success we create for our
collaborators. We intend to maximize the value we capture by focusing our
scientific resources on our proprietary drug programs and collaborations that
utilize our full breadth of products and services and that enable us to
participate in the success of the potential drug candidates we create.
Our company was founded in 1998 in Boulder, Colorado by four Ph.D.
chemists. Our early employees included 20 former Amgen scientists who had
previously been recruited from large pharmaceutical companies. The founders were
able to obtain venture capital financing, lease part of Amgen's former research
facilities and begin operations in May 1998.
DRUG RESEARCH AND DEVELOPMENT
Drug research and development is the process of creating drugs for the
treatment of human disease. The drug research process aims to generate safe and
effective drugs while drug development tests these drugs for safety and efficacy
in animals and humans. The role of biology in drug research is primarily focused
on the early stages of drug research, including understanding the mechanism of
diseases and the identification of potential drug targets, or targets for
therapeutic intervention. The role of chemistry in drug research is the actual
creation of potentially safe and effective drug candidates to address these
targets.
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Drug Characteristics
Drug characteristics, which are the criteria against which all drugs are
measured, include:
- Potency, or the amount of a drug required to effectively treat the
disease; the greater the potency, the smaller the required dose and
therefore the smaller the likelihood of harmful side effects;
- Selectivity, or the extent to which a drug interacts only with the
disease-causing target; the greater the selectivity, the lower the
probability of harmful side effects;
- Toxicity, or the presence and significance of any harmful side effects;
- Metabolism, or how rapidly the drug works and how long it stays
effective; and
- Formulation, or how the drug is administered to patients, for example,
orally or by injection.
Drugs created through chemistry are known as small molecule drugs. These
drugs, which are generally administered orally, remain the preferred treatment
for most diseases and are particularly appropriate for the treatment of chronic
diseases requiring the daily administration of medications over many years. In
1999, small molecule drugs accounted for a significant percentage of the
estimated $337 billion worldwide drug market.
Drug Research and Development Process
Currently, the process of researching and developing a safe and effective
drug is slow and expensive and has a high failure rate. This process is
estimated to take an average of 12 years and to have a risk adjusted cost of
$500 million per drug. This long and costly process is due largely to the
inability of science to predict which of a virtually infinite number of possible
small molecule drugs will prove to be safe and effective. We believe that
improved decision making by chemists early in drug discovery can improve the
success rate of, and lower the cost and time required for, the development of
safe and effective drugs.
The following is a more detailed description of the drug research and
development process, which includes:
- Target discovery, including target identification and validation;
- Drug discovery, including lead generation, lead optimization, and process
research and development;
- Pre-clinical development, or testing a potential drug candidate for
safety and efficacy in animals; and
- Clinical development, or testing a drug candidate for safety and efficacy
in humans.
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DRUG RESEARCH AND DEVELOPMENT PROCESS
[GRAPHIC DEPICTING THE DRUG RESEARCH AND DEVELOPMENT PROCESS]
Target Discovery
The mapping and sequencing of the human genome, or set of all human genes,
has identified large numbers of genes that encode the chemical information for
cells to produce proteins. These proteins determine human physiology, and some
cause disease. These disease-related proteins are potential targets for
therapeutic intervention with a drug. Biologists identify the targets against
which chemists create drugs. Organizations that develop new drugs, principally
pharmaceutical and biotechnology companies, are advancing many of these newly
identified potential drug targets into drug discovery. Many of these potential
drug targets have not yet been validated, in that their roles in disease are
imperfectly understood.
Drug Discovery
LEAD GENERATION
Lead generation is the process of finding a hit, or chemical compound, that
interacts with a potential drug target with sufficient potency and selectivity
to become a possible lead, or drug candidate, for further optimization.
Assay development and compound screening. Once a potential drug target has
been identified, assays, or tests, must be developed to screen, or evaluate,
potential drug compounds for their therapeutic value. Depending on the target
and what is understood about its biology, many types of primary in vitro, or
test tube, assays can be developed to measure the relative potency and
specificity of interaction of a potential drug compound with a target. More
complex, secondary in vitro and in vivo, or animal model-based, assays are
developed to evaluate other drug characteristics. A typical screening campaign
for a given target entails screening small amounts of thousands of chemical
compounds from collections known as libraries.
Compound libraries. Chemists design screening libraries to provide a
starting point in the drug discovery process. A well-designed library increases
the likelihood of finding a hit that is suitable for optimization of its drug
characteristics. High-throughput screening of low quality libraries often
produces either numerous false hits or hits that are not suitable for
optimization, creating a bottleneck in secondary screening and downstream
chemistry. Therefore, we believe high quality libraries should produce better
candidates at a lower cost.
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Libraries can consist of newly synthesized compounds or of historical
collections of synthetic compounds or natural products. It is estimated that
over 10(60), or virtually an infinite number, of possible chemical structures
are of an appropriate size and contain the right elements to be potential drugs.
Since it would be impossible to create or screen even a small fraction of this
universe of possible compounds, the choice of which compounds to synthesize is
based on several factors, including ease of synthesis, desired drug
characteristics and chemical properties. A high quality library for drug
discovery will have high purity compounds with valuable drug characteristics,
from which hits can be rapidly optimized to leads. At the same time, the design
of a high quality library should maximize the differences between compounds,
also known as diversity, so that each compound provides important information
about its potential as a drug candidate against a specific target. Furthermore,
high quality libraries should not contain compounds with metabolic or toxic
liabilities or compounds that may interact nonspecifically with many different
targets.
Compound synthesis. New compounds are typically synthesized from a small
set of commercially available starting materials called building blocks.
Compound synthesis is accomplished by adding building blocks to a scaffold, or
core chemical structure, through a chemical reaction, either one reaction at a
time or in a parallel fashion using automated high-speed synthesis. Chemists
determine which compounds to prepare and try to choose a method that will
minimize the number of steps and the time required for synthesis. Compound
synthesis often involves multiple separate chemical steps. While new
technologies have increased productivity, the synthesis of drug-relevant
compounds remains a rate limiting step in the drug discovery process.
LEAD OPTIMIZATION
Lead optimization is an iterative process of engineering a hit's chemical
structure to improve its drug characteristics with the goal of producing a
pre-clinical drug candidate. The process of lead optimization typically falls
between two extremes of empirical lead optimization and rational drug design.
Empirical lead optimization emphasizes screening large numbers of compounds,
often generated through combinatorial chemistry, to optimize leads.
Combinatorial chemistry relates to the mechanics of mixing and matching
different building blocks, in combination with a scaffold, to create a library
that may or may not be designed to have optimal drug characteristics and maximum
diversity. Combinatorial chemistry libraries are typically created using
high-speed synthesis. Rational drug design is accomplished through a detailed
knowledge of the three-dimensional structure of the target and the required
chemical structure for a potential drug compound to interact with that target.
We believe a combination of the two approaches that optimizes leads through an
iterative process based on knowledge gained at each stage generally results in
higher quality potential drug candidates at lower cost than either one alone.
Hits to quality leads. By definition, a quality lead can be readily
optimized into a potential drug candidate. At the initiation of a drug discovery
project, goals defining the desired drug characteristics, or candidate criteria,
are established. Medicinal chemistry involves the design, selection and
synthesis of compounds to achieve these specified drug characteristics. Any hits
obtained from screening against targets are evaluated relative to these
candidate criteria. Typically, one or more hits are evaluated in secondary
assays, and a set of structurally-related compounds, or analogs, are synthesized
and screened as well. Chemists determine which hits or analogs to optimize based
on a combination of their potential drug characteristics, ease of synthesis and
structure-activity relationship, or SAR. SAR is quantitative information that
correlates changes in chemical structure to biological data generated from
screening assays. The ability of chemists to make informed decisions as to which
changes in structure will lead to valuable drug characteristics, which is based
mostly on experience, is a key parameter for productivity in drug discovery.
This optimization process can be accomplished by an empirical, linear
approach where each analog is evaluated to determine its drug characteristics
and, based upon this analysis, an additional analog is synthesized.
Alternatively, a rational, parallel approach can be used to simultaneously
create multiple analogs, called focused libraries. These focused libraries can
be screened against targets to generate a matrix of SAR information, resulting
in accelerated optimization.
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Leads to pre-clinical candidates. A pre-clinical candidate is a lead that
has been optimized to meet the drug candidate criteria. Chemists utilize SAR
information, derived from focused libraries, complex secondary assays, x-ray
crystallography, molecular modeling and other chemoinformatic tools, to engineer
desired drug characteristics into leads. Complex secondary assays, such as those
using human tissues and animal models, can help define the potential of drugs to
be safe and effective in humans. Technologies that help improve the prediction
of clinical success include x-ray crystallography, which can determine the exact
three-dimensional structure of potential drug compounds bound to targets, and
molecular modeling, a computational method that helps chemists to design more
potent and selective compounds. In addition, databases correlating chemical
structure to biology, or chemoinformatics, can be used to help predict SAR to
optimize desired drug characteristics. While historically performed in a linear
process, drug characteristics are now refined in parallel at every point in the
lead optimization process, even in library creation. Ultimately, the experience,
intuition and synthetic skills of medicinal chemists are still the determining
factors in creating a successful drug candidate.
PROCESS RESEARCH AND DEVELOPMENT
The compounds created for screening in lead generation and lead
optimization are typically synthesized in relatively small, milligram
quantities. The synthetic process to make compounds for screening typically uses
a parallel synthesis approach to explore drug characteristics, rather than to
optimize ease of synthesis. Before a drug candidate can be taken into
pre-clinical and clinical trials, kilogram quantities must be synthesized. The
goal of process research is to improve the ease with which compounds can be
synthesized in these larger quantities, typically by minimizing the number of
synthetic steps, and to determine how to reduce the time and cost of production.
Process development refers to the production scale up and further refinement
required for clinical trials and commercial manufacturing.
Pre-Clinical Development
For regulatory purposes, a potential drug candidate must undergo extensive
in vitro and in vivo studies to predict human drug safety, including toxicity
over a wide range of doses, and how the drug is metabolized. The objective of
pre-clinical testing is to obtain results that will enable the pre-clinical drug
candidate to be approved for human testing by the Food and Drug Administration,
or FDA, through an Investigational New Drug, or IND, application.
Clinical Development
Clinical trials, or human tests of a potential drug candidate to determine
safety and efficacy, are typically conducted in three sequential phases,
although the phases may overlap. A successful clinical trial will result in the
filing of a New Drug Application, or NDA, with the FDA to grant permission to
market the drug in the United States. Similarly, clinical trials must be
conducted and regulatory approvals secured before a drug can be marketed in
other countries.
THE OPPORTUNITY
The drug industry. In 1999, worldwide drug sales were an estimated $337
billion, with overall sales growing 10.7%. Pharmaceutical companies in
particular are under increasing pressure to introduce novel drugs to grow
revenue. It is estimated that research and development spending over the last 20
years has increased approximately five fold, growing from nearly 12% in 1980 to
an estimated 20% of pharmaceutical company revenue in 2000. Despite this
increase in research spending, the FDA approved only 36 new drugs in 1999,
compared with 22 new drugs in 1989.
Problems with current drug discovery and development. Despite all of the
recent technological advances in genomics, biology and chemistry, drug research
and development remains slow, expensive and risky. Currently, fewer than 1% of
all drug discovery programs yield marketable drugs. The drug industry faces
multiple challenges in reducing the cost and time of drug discovery and
development. These include the early identification and elimination of
unsuccessful potential drug candidates and increasing the success rate at each
stage of the drug development process.
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Capitalizing on the genomics revolution. The drug research and development
process is experiencing a fundamental change fueled by the revolution in
genomics and the tremendous progress in the biological understanding of disease.
The success of publicly and privately funded genomics initiatives, including the
Human Genome Project, in sequencing the entire human genome heralds a new era in
drug research and development. Heavy investment in the technologies to work out
the biological understanding of gene function is widely expected to result in a
dramatic increase in the number of potential drug targets. All of the human
therapeutic drugs on the market today are directed at approximately 500 targets.
The genomics revolution is projected to expand the number of potential
therapeutic targets to between 5,000 and 10,000.
The importance of chemistry. We believe the bottleneck in drug research and
development is shifting from the identification and validation of new targets to
the creation of safe and effective new drugs for these targets. During the next
decade, we believe the significant investment in genomics and biology will give
rise to a dramatic increase in investment in discovery chemistry.
The chemical make-up of a drug is the key determinant of its safety and
efficacy. Modifications in chemical structure can differentiate drugs and
determine their success or failure in the marketplace. A good example of the
importance of chemistry is the rapid growth of Lipitor, a cholesterol lowering
drug. While on the market for only 3 years, Lipitor has matched the sales of the
prior market leader Zocor, which has been on the market for 12 years, for the
first half of 2000. During that period, sales of Lipitor grew 43% compared to
Zocor's 19% growth rate. While the biological target, and therefore the
mechanism of action, for Lipitor and Zocor are identical, small changes in
chemistry resulted in Lipitor's improved efficacy and greater market acceptance.
While targets are generally used as tools for screening potential drug
candidates, chemistry is necessary to create the actual drug provided to a
patient. Therefore, while the ultimate value of intellectual property associated
with newly identified targets is currently unknown, the value of intellectual
property associated with drugs has proven to be significant.
Pharmaceutical industry challenges. The demand for new and improved drugs
coupled with the emerging potential of new targets has created a shortage of
qualified chemistry resources. Some pharmaceutical companies have revealed plans
to significantly increase their internal discovery chemistry capacity over the
next five years. However, we believe there will be a continuing shortage of
qualified chemists to fill these positions. To the extent that they cannot hire
qualified chemists, these companies must substantially increase the productivity
of their internal chemistry departments, outsource these activities or otherwise
acquire additional discovery capabilities. In fact, many pharmaceutical
companies are augmenting their internal chemistry research capacities by
outsourcing to discovery research companies.
Biotechnology industry challenges. Many biotechnology companies are
increasing their focus on creating drugs against their proprietary targets.
Historically, they have partnered with pharmaceutical companies to create small
molecule drugs. These arrangements have often resulted in biotechnology
companies relinquishing much of the economic value of their potential drug
candidates. Accordingly, several biotechnology companies have announced their
intention to develop an internal discovery chemistry capability. However, they
face barriers in the form of the scale required to justify creating internal
chemistry discovery capabilities, hiring and effectively integrating capable
chemists and the significant investment necessary to create chemistry
laboratories.
THE ARRAY SOLUTION
We address the discovery chemistry bottleneck by offering a broad range of
products and services to bridge the gap between target discovery and
pre-clinical and clinical development of a potential drug candidate. We are a
discovery research company run by experienced chemists. We offer our products
and services both individually and on a fully integrated basis. We provide lead
generation and optimization products, including building blocks and compound
libraries, on both a custom and nonexclusive basis. We also provide a broad
spectrum of drug discovery services, including lead generation, lead
optimization and process research and development. Furthermore, we are
leveraging our internal capabilities to create our own potential drug
candidates, which we plan to optimize, develop and commercialize in
collaboration with pharmaceutical and biotechnology companies.
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We have developed an information-driven technology platform that we believe
enables our scientists to make better decisions at each step of the drug
discovery process. Our organizational structure emphasizes large,
multi-disciplinary teams to improve problem solving, which streamlines the drug
discovery process. We believe that our integrated approach to drug discovery
will enable both our collaborators and our internal discovery teams to create
higher quality drugs and to do so more quickly and less expensively.
We have assembled a scientific team with experience in both the
pharmaceutical and biotechnology industries and with a proven track record of
success in drug discovery. We had the distinct advantage of recruiting 20 former
Amgen scientists at our inception. This nucleus afforded us a critical mass of
experienced chemists, which we believe has proven to be a competitive advantage
in recruiting additional scientists. As of September 2000, after two years in
operation, our workforce exceeds 100 employees, including 75 scientists. Of our
scientists, 69 are chemists, 42 have Ph.D.'s and 34 have large pharmaceutical
company experience. Importantly, we have recruited scientists who during their
careers have contributed collectively to multiple IND's and over 100
drug-related patents and patent applications.
STRATEGY
Our objective is to become the leading creator of high quality potential
drug candidates by providing premium discovery chemistry products and services.
Our strategies to achieve this objective are as follows:
Provide an integrated chemistry solution to drug discovery. We provide a
broad range of premium drug discovery products and services to bridge the gap
between target discovery and pre-clinical testing. In addition to selling our
chemistry products and services individually, we seek to expand our existing
customer relationships across the full spectrum of our drug discovery
capabilities. We further intend to enhance the value we provide by entering into
new collaborations that leverage our integrated capabilities. Because of the
breadth and quality of our products and services, we expect to become the
discovery chemistry partner of choice for pharmaceutical and biotechnology
companies.
Combine state-of-the-art technology with innovative chemistry to accelerate
drug discovery. We intend to provide premium discovery chemistry to create drugs
more efficiently in collaboration with the leading pharmaceutical and
biotechnology companies and for our internal drug discovery programs. Central to
this strategy are our integrated approach and our proprietary information-driven
platform, which support our ability to provide premium products and services
across the entire drug discovery process. We rely on our highly qualified and
experienced chemists and our proprietary chemoinformatics tools to create the
highest quality potential drug candidates by understanding the complex
relationships between chemical structure and desirable drug characteristics. We
are committed to continuous process improvement, implementation of new
technologies, shared learning among our scientists and innovative organizational
design.
Create our own potential drug candidates. We intend to maximize the value
we extract from our integrated drug discovery platform by creating our own
potential drug candidates. We intend to commercialize these potential drug
candidates by entering into collaborations in which we both optimize these
potential drug candidates and provide other services in exchange for licensing
fees, fee-for-service revenue and future value through milestone and/or royalty
payments.
Attract world-class scientists. We intend to grow our business by
continuing to aggressively recruit world-class scientific talent. Our success in
recruiting and retaining these scientists depends on our continued focus on
quality science and the maintenance of our culture, which emphasizes innovation
and empowerment of our chemists, and our ability to provide industry competitive
salaries and equity participation in our company.
Expand our capabilities through internal development and acquisitions. We
intend to increase our current capacity by expanding our state-of-the art
facilities. In addition, we intend to acquire additional laboratory sites both
domestically and internationally to meet our collaborators' needs and improve
access to regional scientific talent. We further intend to acquire or develop
new technologies and capabilities to expand our existing products and services.
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ARRAY'S TECHNOLOGY PLATFORM
We believe we have created an organization able to make better decisions
across every aspect of the drug discovery process through the application of
predictive tools. We believe our integrated, information-driven technology
platform, as described below, will enable us to reduce the cost and improve the
efficiency of drug discovery resulting in more successful clinical development
candidates.
Biology. We have assembled an experienced team of biologists from some of
the leading biotechnology companies who are experts in protein cloning,
expression and purification. We focus this team on the creation of large
quantities of highly pure protein and protein crystals that are critical for use
in the lead generation and optimization stages of drug discovery.
Assay development and compound screening. We develop assays, format them to
run automated high-throughput screens and screen against multiple classes of
targets. In addition, we have developed complex secondary assays, including
those that can help define specificity and predict metabolism. Our automated
high-throughput screening capacity can accommodate tens of thousands of
compounds per week.
High-speed synthesis automation. As a result of our focus on the creation
of quality compound libraries, we have integrated commercial and proprietary
instrumentation to create multiple platforms for the automation of high-speed
synthesis. These platforms provide us with the flexibility to synthesize
multiple classes of compounds in order to identify potential drug candidates
with desirable drug characteristics.
Structure-based drug design. Our structure-based drug design process is an
iterative method for lead identification and optimization. We integrate
high-speed synthesis, high-throughput screening and our predictive databases, as
well as x-ray crystallography and molecular modeling, to rapidly create high
quality potential drug candidates. Utilizing target proteins that we have
cloned, expressed and crystallized, our scientists determine their x-ray crystal
structure and conduct screening assays. Based on the SAR information generated,
our chemists synthesize focused libraries, which are evaluated for biological
relevance in secondary high-throughput screens. The crystal structure is then
re-determined with active hits bound to the protein. Based on what is learned
from that interaction and utilizing computer modeling, second generation focused
libraries are created to improve drug characteristics. These focused libraries
are then screened against the therapeutic target, against related family members
of the target and in predictive metabolism assays to select the potential drug
candidate with the most desirable drug characteristics.
Chemoinformatics. We are continuing to develop a customized database to
capture information generated by our scientists, which is accessible to our
entire scientific staff. This database provides our scientists with access to
this shared information, thereby facilitating experimental design, scientific
calculations, data analysis and patent filing.
We have also developed a number of specialized software programs that
facilitate the generation of high quality drug leads and their rapid
optimization into potential drug candidates. We have created proprietary
software to identify promising building blocks, to help design diverse libraries
and to evaluate potential drug candidates against the candidate criteria. These
tools, which we do not make available commercially, facilitate the drug
discovery efforts of our scientists working with our collaborators, as well as
our own drug discovery efforts. These software products include:
- Radical, which identifies promising building blocks by analyzing a
database of small molecules that have entered into clinical trials and
determining which fragments of these molecules occur repeatedly in drug
candidates;
- Cracker, which is designed to eliminate drug-irrelevant building blocks
from library design; and
- Eigen, Combiner and Select, which are designed to support optimization of
chemical diversity in our libraries.
Predictive databases for human metabolism and toxicology. A majority of
drugs fail in clinical development because they cannot be taken in doses
sufficient to provide efficacy without unacceptable side effects. We are
currently developing a relational database that uses our Diversity Library as a
basis to predict
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human metabolism and toxicity. Our libraries are profiled through well-defined
human and in vitro metabolism and toxicity assays to create this predictive SAR
database. We expect this information will allow our chemists to make improved
drug design choices and therefore create potential drug candidates with a higher
probability of clinical success.
Chemical genomics. The recent mapping of the human genome has created a
wealth of information for the development of potential new drugs. However, full
elucidation of the function of newly discovered potential targets and their role
in disease is expected to require decades of research. Our libraries can be
utilized both to identify novel leads and to better understand the biochemistry
and therapeutic relevance of orphan targets, or targets with unknown function.
We currently participate in a chemical genomics collaboration with Neurocrine
Biosciences, Inc., in which we create focused libraries that are designed to
modulate families of orphan targets and define their therapeutic importance.
ARRAY'S PRODUCTS AND SERVICES
We provide a broad range of premium drug discovery products and services,
including:
- Optimer building blocks;
- Lead generation;
- Lead optimization; and
- Process research and development.
We offer products and services to collaborators across the drug discovery
process and also use them internally for our own drug discovery programs. Our
proprietary chemoinformatics platform supports the entire drug discovery
process.
[Graphic depicting Array's role in the Drug Discovery Process.]
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<PAGE> 40
Optimer building blocks
Quality building blocks enable chemists to make higher quality compounds
more rapidly. We have recognized that a rate-limiting step in drug discovery is
the availability of high-quality building blocks for initiating chemical
synthesis. Our chemists have designed a series of drug-relevant building blocks
using our proprietary Radical software and based on their experience in
assessing the chemical structures that are likely to have drug-relevant
properties. These building blocks are added to a scaffold during compound
synthesis.
Our proprietary building blocks have become an important component of our
overall drug discovery strategy. We produce primary building blocks for
construction of lead generation libraries, and we use sets of complementary,
secondary building blocks for creating focused libraries to determine SAR in
lead optimization programs. In addition, we sell approximately 300 of these
building blocks under the trade name Optimer. Our building block customers
include a number of large pharmaceutical companies, such as Astra-Zeneca, Merck
and Schering Plough Research Institute, biotechnology companies such as Biogen,
Inc., Millennium Pharmaceuticals, Inc. and Vertex Pharmaceutics, Inc., and
combinatorial chemistry companies such as ArQule, Inc., BioFocus plc and Siddco,
Inc.
Lead generation
Another rate-limiting step in the discovery chemistry process is the
availability of high quality compound libraries that have been designed with
structures relevant for screening specifically against important target classes
and that are designed for rapid lead optimization. We believe that the
production of large compound libraries, by itself, has limited value for
creating high quality leads. Instead, we design our libraries so that any leads
generated require less optimization and will result in clinical candidates with
a greater likelihood of clinical success.
Our library design criteria. We design our libraries according to the
following criteria:
- Incorporation of drug-relevant building blocks. We use our drug-relevant
building blocks to create libraries that facilitate our ability to
rapidly optimize a hit due to the availability of secondary building
blocks to create a focused library to study the SAR around that hit. More
than 30% of the building blocks used to create our Diversity Library are
proprietary to us and not commercially available.
- Target-directed scaffolds. Our chemists create scaffolds directed toward
disease-related families of targets. We attach building blocks to these
scaffolds to create library compounds.
- Best-in-class quality. Our scientists recognize that it is the
best-in-class drug that wins the market. Our library compounds are
designed to economically achieve optimal drug characteristics.
- Optimized chemical synthetic processes. We invest significant effort in
the process design and synthesis of each library to ensure that the
compounds generated are of high purity and can be readily optimized. The
library undergoes analysis during each stage of its development to ensure
the identity of each compound and maintain quality.
- Biologically-relevant diversity. We have created a number of parameters
to define the diversity in a compound library. Our proprietary
chemoinformatics tools analyze how changes in chemical structure
correlate with biological activity, or SAR, by analyzing published data
of known drug candidates and correlating this information with our
diversity parameters. Libraries can be constructed to optimize diversity
and therefore maximize the information provided by each hit.
Diversity Library. We sell nonexclusive subscriptions to our Diversity
Library and retain the right to utilize these compounds for our internal and
collaborative programs, as well as the rights to the synthetic processes used to
create these compounds. In future years, we intend to increase our compound
production for our Diversity Library up to 100,000 compounds annually. We create
sub-libraries that interact with specific target families, including G-protein
coupled receptors, nuclear receptors, enzymes and protein-protein interactions.
The majority of all drugs on the market today are aimed at targets within these
families. Both Celltech Chiroscience and Tularik have multi-year subscriptions
to our Diversity Library. We have also sold
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portions of our Diversity Library to Asahi Chemical Industry Co., Ltd., Curis,
Inc., DuPont, Fujisawa Pharmaceutical Co., Ltd., ICOS, Schering Plough and
Suntory Pharmaceutical Research Laboratories LLC, among others.
Custom libraries. We design custom libraries for our collaborators. These
libraries are generally focused towards specific target families or our
collaborators' proprietary scaffolds, and the compounds are of very high purity.
Merck has been the largest purchaser of custom libraries, working with us for
over a year.
Screening. We have the capability to perform high-throughput screening of
our compound libraries for lead generation on behalf of our collaborators and in
our internal drug discovery programs. Collaborators would pay a per-compound
charge and compensate us on a headcount basis for the service. We have the
capability to create our own assays or to format assays supplied by a
collaborator for high-throughput screening. We also screen our compound
libraries against metabolism and toxicology assays both to establish quality and
to populate our predictive database.
[Graphic depicting lead optimization of a hit.]
Lead optimization
Our chemists optimize leads generated from multiple starting points,
including:
- Leads provided by our collaborators;
- Leads generated internally or by our collaborators through screening our
Diversity Library; and
- Leads generated through structure-based drug design.
Regardless of a lead's source, we take an iterative, structure-based
approach to lead optimization. This typically begins with the design and
synthesis of focused libraries developed to identify the SAR of a lead. From
this, we can utilize x-ray crystallography and our chemoinformatics platform to
iteratively design and synthesize additional focused libraries until we achieve
the drug candidate criteria. We screen these libraries against secondary assays
to minimize the potential for toxicity or metabolic deficiencies.
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Because no single technology exists to accurately predict clinical outcomes
for potential drug candidates, experienced chemists with success in generating
clinical candidates are vital to an effective lead optimization program. Our
approach is to work closely with our collaborators, putting multi-disciplinary
teams of experienced chemists on projects to identify potential drug candidates.
We have successfully validated this approach to lead optimization with a lead
provided to us by ICOS. Within 12 months from the initiation of the program,
Array and ICOS scientists identified a potential drug candidate. In addition,
our lead optimization capabilities have been recognized by Eli Lilly, which
selected us to collaborate on multiple lead optimization programs. We have
contracted to supply Eli Lilly with up to 30 scientists to work on some of their
medicinal chemistry programs.
Process research and development
The processes to synthesize many pre-clinical candidates can be long,
complex and costly to scale-up. Our process chemists have solved significant
synthetic challenges in their careers, including the development of patentable
processes for synthesizing drugs that have entered clinical trials, and have
contributed to the synthesis of several complex drugs derived from natural
products, such as rapamycin, brevetoxin and taxol. Our goal is to apply these
skills and experience to create novel yet efficient processes to synthesize
complex molecules.
Process design. Once a potential drug candidate has been identified, it is
critical to be able to reach a rapid decision whether to advance that candidate
into the clinic. In many cases, lack of an adequate quantity of a specific
compound for pre-clinical testing is a bottleneck to that decision. Our efforts
are designed to take complex medicinal chemistry processes and reduce the number
of steps and improve yields to allow for the rapid synthesis and scale-up of
pre-clinical and clinical drug candidates.
Custom synthesis. Our chemists can undertake challenging syntheses to
produce building blocks, complex intermediates and final products on a custom
basis or from small-scale through bulk quantities. We synthesize compounds both
on a proprietary and non-proprietary basis. A number of customers have asked us
to synthesize larger quantities of compounds we previously produced for them. We
expect to create proprietary processes that can be licensed to collaborators as
they advance potential drug candidates into clinical trials.
Process scale-up. Often a synthetic process can face unknown challenges
upon scale-up. Our chemists have demonstrated their ability to rapidly scale-up
compound production to meet customer deadlines. We have the capacity to produce
lots of up to 10 kilograms.
PROPRIETARY DRUG DISCOVERY
We leverage all of our capabilities internally to create our own potential
drug candidates for partnering with pharmaceutical and biotechnology companies.
We generate our own early-stage leads against therapeutically important targets
and target families that have been identified in the academic literature or
through patent applications. We typically focus on targets to which we believe
no promising lead has been identified. We generate quality leads by screening
our Diversity Library against the target and applying our chemoinformatic tools.
We then apply our iterative structure-based drug design approach. Once we have
qualified a valuable lead through secondary screening, we will seek to initiate
a collaboration in which we license the lead to a partner for subsequent
development and commercialization and in which we participate in the lead
optimization program. To date, we have not entered into any such collaboration
agreements. We expect these collaborations to provide up-front fees and
headcount reimbursement and to allow us to participate in the success of these
potential drug candidates through milestones and/or royalty payments.
We have worked on a number of targets, including those related to asthma,
diabetes and cancer. Two programs have developed early-stage leads for which we
are currently seeking licensing partners for further optimization. These
programs address a target for diabetes, phosphotyrosine phosphatase 1B, called
PTP1B, and a target for asthma, called tryptase. For example, shortly after the
publication of PTP1B as a key target for diabetes in March 1999, we initiated
structure-based lead generation and have now identified very promising leads. We
are currently in discussions with several companies that have expressed interest
in
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licensing our intellectual property and in working with us for further lead
optimization. These discussions may not, however, lead to any definitive
agreement.
COMMERCIALIZATION
We have a multi-faceted business model based on growing revenue and
achieving profitability while sharing in the success we create for our
collaborators. We intend to maximize the value we capture by focusing our
scientific resources on our proprietary drug programs and collaborations that
utilize our full breadth of products and services and that enable us to
participate in the success of the potential drug candidates that we create.
Our diverse products and services provide multiple revenue streams. Our
products, including our Diversity Library and Optimer building blocks, once
synthesized, can be sold to multiple customers, creating a recurring revenue
stream. Our services are sold on a fee-for-service basis to pharmaceutical and
biotechnology companies. Generally, a collaboration begins through a single
service or product area. Our intent is to increase revenue by expanding customer
relationships across our multiple products and services to eventually
collaborate across the entire discovery chemistry process. As we become more
valuable to our collaborators, we intend to add milestones and/or royalty
payments to capture a larger portion of the value we create. To date, one of our
collaborations includes milestone payments for achieving key drug discovery
events, and none have included royalty payments.
We create proprietary drug candidates with the intent of furthering their
development and increasing their potential commercial value through
collaborating with biotechnology or pharmaceutical partners. We expect generally
to license potential drug candidates to a partner prior to lead optimization. We
will seek the collaboration to provide us with an initial licensing fee for
exclusive rights to the compound, fee-for-service lead optimization and
downstream payments that may include milestone and/or royalty payments.
CUSTOMERS
The following table lists, in alphabetical order, 12 of our top customers
based on revenue from our inception and indicates the products and services we
have provided:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
PROCESS OPTIMER
LEAD LEAD RESEARCH & BUILDING CHEMICAL
CUSTOMER/COLLABORATOR GENERATION OPTIMIZATION DEVELOPMENT BLOCKS GENOMICS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Biogen, Inc. X X
Celltech Chiroscience Limited X
CV Therapeutics, Inc. X X X
DuPont X X
Eli Lilly and Company X
Fujisawa Pharmaceuticals Co., Ltd. X
Gilead Sciences, Inc. X
ICOS Corporation X X X
Merck & Co., Inc. X X X
Neurocrine Biosciences, Inc. X X
Schering Plough Research Institute X X
Tularik, Inc. X
</TABLE>
A key element of our strategy is to increase the value we provide to our
customers by expanding our relationships with them across complementary products
and services. Below we describe several customers that chose to expand their
initial relationship with us.
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<PAGE> 44
ICOS. ICOS was one of our first customers. Our first agreement with ICOS
addressed lead optimization of up to four ICOS targets. This agreement,
initiated in December 1998, called for our scientists, in collaboration with
ICOS' scientists, to develop clinical candidates from ICOS' preliminary leads.
Based upon the success of this program, ICOS expanded this relationship in the
spring of 1999, by both initiating a second lead optimization program on a
separate set of targets, and subscribing to our Diversity Library. In less than
one year, our initial collaboration led to the development of a potential
clinical candidate for a target called phosphodiesterase 4, or PDE 4. In order
to speed the development of this clinical candidate, ICOS chose to access our
chemistry process research service to refine the production process in order to
produce sufficient quantities for pre-clinical and early phase clinical testing.
In July 2000, ICOS announced that they have expanded and consolidated these
earlier lead optimization agreements, providing additional milestones and more
favorable terms. This new agreement includes lead generation on hits identified
during ICOS' screening of our Diversity Library.
ICOS has now taken advantage of our lead generation, lead optimization and
process chemistry. We anticipate that clinical trials for this PDE 4 inhibitor
will be initiated approximately in mid-2001. We are entitled to milestone
payments based on the successful clinical development of this drug.
Tularik. Our initial interaction with Tularik came through their interest
in our approach to creating lead generation libraries. In order to evaluate the
quality of our libraries, Tularik acquired a small subset of our Diversity
Library in April 1999. Within three months they initiated a one-year
subscription to our entire Diversity Library. Six months later, Tularik
exercised an option to subscribe to our entire second-year Diversity Library. We
have also expanded our relationship with Tularik by creating focused libraries
to an important class of targets called orphan nuclear receptors.
Merck. Merck began working with us in May 1999 by purchasing building
blocks from our Optimer collection on a non-exclusive basis. This initial
introduction led to an agreement between the parties for the exclusive
development and supply of custom synthesized compounds for Merck. Building on
this relationship, we announced in September 2000 an agreement with Merck for
the exclusive synthesis, development and supply of custom libraries, whereby we
will supply high quality focused libraries for Merck's drug discovery programs.
Eli Lilly. In March 2000, Eli Lilly purchased from us medicinal chemistry
services of up to 30 of our scientists. To date, this collaboration is moving
forward successfully. Our scientists are fully integrated into some of Eli
Lilly's drug discovery project teams. Initially this collaboration focused on
certain aspects of our lead optimization chemistry; however, Eli Lilly is
exploring expansion of joint efforts to other aspects of our technology platform
for drug discovery. This exploration may not result in an expanded
collaboration.
BUSINESS DEVELOPMENT
To date, our business development activities have been conducted primarily
through direct customer contact by our senior management and scientists and
through customer referrals. Because our customers are primarily skilled
scientists, we use our scientific expertise to initiate and to build upon strong
customer relationships. In Japan, we have relied upon the services of a
consulting company, Transpect, Inc. to help introduce and promote our company.
We market our Optimer building blocks through multiple channels, including
targeted mailing of a hardcopy catalog and through an Internet catalog. We plan
to continue to grow our business development resources.
RESEARCH AND DEVELOPMENT
Our research and development expenses were approximately $3.3 million in
fiscal year 1999, and $3.9 million in fiscal year 2000. We conduct research and
development in the following areas:
Assay development and high-throughput screening automation. We are
investing in the development of new assay and high speed screening technologies
in order to more effectively evaluate potential drug compounds for their
therapeutic value, including specificity and metabolism, and to increase the
speed of our screening capability.
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Chemoinformatics. We are continuing our development of database technology,
to more effectively capture, organize and link the data generated by our
scientists, and to make this information more seamlessly accessible to any of
our drug discovery efforts. In addition, we are continuing the development of
internal software technologies designed to increase the speed and efficacy of
our lead generation and lead optimization chemistry.
Libraries. We have ongoing projects to develop and refine technologies
necessary to create high quality compound libraries composed of drug-relevant
compounds that can be rapidly optimized. Our research is focused in the areas of
designing drug-relevant building blocks and scaffolds, maximizing drug-like
characteristics of our library compounds, optimizing library synthesis processes
and maximizing biologically-relevant compound diversity.
Internal Drug Discovery Projects. We will continue to invest in internal
drug discovery programs intended to create our own potential drug candidates. We
intend to commercialize any potential drug candidates that we are successful in
developing in these programs through partnerships with pharmaceutical and
biotechnology companies.
COMPETITORS
Competition across the range of our drug discovery products and services is
currently fragmented. We compete, however, with a number of companies in each of
the functional areas of drug discovery that we serve. In addition, we compete
with the internal research departments of biotechnology, pharmaceutical and
contract research companies. Many of these companies, which also represent a
significant market for our products and services and some of which are our
collaborators or customers, are developing or already possess internally the
technologies and services that we offer. Academic institutions and other
research organizations are also conducting research in areas in which we provide
services, either on their own or through collaborative efforts.
Many of our competitors are larger than we are and have greater financial
and other resources. We expect that we will face increased competition in the
future as new companies enter the market and advanced technologies become
available. Any of our competitors could broaden the scope of their drug
discovery offerings through acquisition, collaboration or internal development
to integrate their offerings or compete with us comprehensively across the drug
discovery process. Our competitors may also develop new, more effective or
affordable approaches or technologies that compete with our products and
services or render them obsolete.
In addition, we compete with pharmaceutical and biotechnology companies,
including our customers and collaborators, academic and research institutions,
contract research companies and other firms to hire qualified scientists. Some
of our competitors may have stronger financial resources, offer more attractive
equity compensation or have a proven operating history, any of which may make
our competitors more attractive employers than us to potential employees.
GOVERNMENT REGULATION
In the course of our business, we handle, store and dispose of chemicals.
We are subject to various federal, state and local laws and regulations relating
to the use, manufacture, storage, handling and disposal of hazardous materials
and waste products. These environmental laws generally impose liability
regardless of the negligence or fault of a party and may expose us to liability
for the conduct of, or conditions caused by, others. We have not incurred, and
do not expect to incur, material costs to comply with these laws and
regulations. Because the requirements imposed by these laws and regulations
change frequently, however, we may be unable to accurately predict the cost of
complying with these laws and regulations. In addition, although we believe that
we currently comply with the standards prescribed by these laws and regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In that event, we could be liable for any resulting damages, which
could exceed our resources and harm our results of operations.
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Our customers and collaborators are subject to substantial regulation by
governmental agencies in the United States and other countries. Virtually all
pharmaceutical products are subject to rigorous pre-clinical and clinical
testing and other approval procedures by the FDA and by foreign regulatory
agencies. Various federal and state laws and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of these pharmaceutical products. This approval process is
time-consuming and expensive and there are no assurances that approval will be
granted on a timely basis, or at all. Even if regulatory approvals are granted,
a marketed product is subject to continual review. Later discovery of previously
unknown problems or a failure to comply with applicable regulatory requirements
may result in restrictions on the marketing of a product or the withdrawal of
the product, as well as possible civil or criminal sanctions. To the extent our
customers or collaborators are unable to obtain the necessary regulatory
approvals to market their products, or fail to continue to comply with
regulatory requirements, we may be unable to realize revenue from milestone
and/or royalty payments.
We are subject to other regulations, including regulations under the
Occupational Safety and Health Act, regulations promulgated by the United States
Department of Agriculture, and other federal, state and local laws.
INTELLECTUAL PROPERTY
Our success will depend in part on our ability to protect our proprietary
software, potential drug candidates and other intellectual property rights. To
establish and protect our proprietary technologies and products, we rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality provisions in our contracts with our collaborators, customers,
employees, consultants and other third parties.
We attempt to protect our trade secrets in part by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees also sign agreements requiring that they assign to us their interests
in inventions and original expressions and any corresponding patents and
copyrights arising from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered unenforceable, and if so,
there may not be an adequate corrective remedy available. Despite the measures
we have taken to protect our intellectual property, parties to our agreements
may breach the confidentiality provisions in our contracts or infringe or
misappropriate our patents, copyrights, trademarks, trade secrets and other
proprietary rights. In addition, third parties may independently discover or
invent competing technologies or reverse engineer our trade secrets or other
technology.
We also have implemented a patent strategy designed to protect technology,
inventions and improvements to inventions that are commercially important to our
business. We currently have seven patent applications on file in the United
States, including three provisional applications, and we are pursuing limited
patent coverage in foreign countries. Provisional patent applications provide no
substantive rights but do secure a priority date on which later patent
applications may be based, including both United States and foreign patent
applications. Provisional applications expire one year from the date of filing.
Four of our patent applications filed in the United States relate to proprietary
compounds that are pharmaceutical candidates, two relate to inventions based on
and used in our research efforts, and one relates to compounds that are
pharmaceutical candidates and the compound synthesis process. Two of the United
States patent applications relating to proprietary pharmaceutical candidates,
along with related foreign patent rights, were assigned to us by Amgen Inc. in
November 1998.
United States patents issued from applications filed on or after June 8,
1995 have a term of 20 years from the application filing date or earlier claimed
priority. All of our patent applications were filed after June 8, 1995. Patents
in most other countries have a term of 20 years from the date of filing of the
patent application. Because the time from filing patent applications to issuance
of patents is often several years, this process may result in a period of patent
protection significantly shorter than 20 years, which may adversely affect our
ability to exclude competitors from our markets. Our success will depend in part
upon our ability to develop proprietary products and technologies and to obtain
patent coverage for these products and technologies. We intend to continue to
file patent applications covering newly developed products and
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technologies. We may not, however, commercialize the technology underlying any
or all of our existing or future patent applications.
Patents provide some degree of protection for our proprietary technology.
However, the pursuit and assertion of patent rights, particularly in areas like
pharmaceuticals and biotechnology, involve complex legal and factual
determinations and, therefore, are characterized by some uncertainty. In
addition, the laws governing patentability and the scope of patent coverage
continue to evolve, particularly in biotechnology. As a result, patents may not
issue from any of our patent applications or from applications licensed to us.
The scope of any of our patents, if issued, may not be sufficiently broad to
offer meaningful protection. In addition, our patents or patents licensed to us,
if they are issued, may be successfully challenged, invalidated, circumvented or
rendered unenforceable so that our patent rights might not create an effective
competitive barrier. Moreover, the laws of some foreign countries may not
protect our proprietary rights to the same extent as do the laws of the United
States. Any patents issued to us or our strategic partners may not provide a
legal basis for establishing an exclusive market for our products or provide us
with any competitive advantages. Moreover, the patents held by others may
adversely affect our ability to do business or to continue to use our
technologies freely. In view of these factors, our intellectual property
positions bear some degree of uncertainty.
The source code for our proprietary software programs is protected both as
a trade secret and as a copyrighted work.
We have registrations pending in the United States for the following
trademarks: "Array BioPharma," "Array Biopharma The Discovery Research Company,"
the Array Biopharma logo, "The Discovery Research Company," "Optimer" and
"Radical." We may not be able to obtain registrations for these marks in the
United States or other jurisdictions in which we may submit applications, or to
protect the use of these marks effectively.
Although we are not a party to any legal proceedings, in the future, third
parties may file claims asserting that our technologies or products infringe on
their intellectual property. We cannot predict whether third parties will assert
such claims against us or our licensees or against the licensors of technology
licensed to us, or whether those claims will harm our business. If we are forced
to defend against such claims, whether they are with or without merit, and
whether they are resolved in favor of or against us, our licensees or our
licensors, we may incur significant expenses and diversion of management's
attention and resources. As a result of such disputes, we may have to develop at
a substantial cost non-infringing technology or enter into licensing agreements.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
EMPLOYEES
As of September 2000, we had over 100 employees, consisting of 75
scientists, 42 with Ph.D. degrees in chemistry and 34 with large pharmaceutical
company experience. None of our employees is covered by a collective bargaining
agreement. We consider our employee relations to be good.
FACILITIES
We are headquartered in Boulder, Colorado, where we lease approximately
26,400 square feet of space under a lease that expires July 15, 2001, or on July
15, 2003 if we exercise our option to extend the term. In February 2000, we
leased approximately 24,000 square feet of space in a building in Longmont,
Colorado under a lease that expires on May 31, 2005, and has an option to renew
for two additional five-year terms. We also have an option to lease an
additional 19,200 square feet after October 1, 2001 at our Longmont facility and
an additional 28,800 square feet in a building adjacent to this facility when it
becomes available for lease. We believe that these facilities, including our
option to expand our Longmont facility, will be sufficient for our anticipated
growth for the next 12 months.
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CERTAIN KEY CONTRACTS
ICOS. In July 2000, we consolidated and expanded our lead optimization
agreements with ICOS into a drug discovery collaboration agreement for lead
optimization on undisclosed targets. Under the agreement, ICOS has the exclusive
worldwide right to develop and market any products resulting from the
collaboration. We are compensated based on an annual rate for each full-time
equivalent employee working on an ICOS project and will receive milestone
payments upon achievement of identified development and commercialization goals
for products resulting from the collaboration. The agreement expires in July
2002, and may be terminated upon 90 days' notice by ICOS following the first
anniversary of the agreement.
Merck. In May 1999, we entered into a custom synthesis agreement with Merck
under which we provide custom compounds. Under the terms of this agreement, we
have entered into multiple exclusive custom library agreements with Merck in
which we are reimbursed on a headcount and per compound basis. In September
2000, we entered into a custom synthesis development and supply agreement with
Merck under which we synthesize and develop custom libraries specified by Merck.
We are compensated for development services and for the delivery of compounds.
The agreement begins in January 2001 and expires in December 2003, and may be
terminated by Merck upon six months' prior notice after the first anniversary of
the agreement.
Eli Lilly. In March 2000, we entered into a Research Services Agreement
with Eli Lilly to form a chemistry-based research collaboration. Under the terms
of the agreement, up to 30 of our scientists will provide drug research services
in collaboration with Eli Lilly scientists on identified Eli Lilly drug
discovery projects. We are compensated based on an annual rate for each
full-time equivalent employee working on an Eli Lilly project. Eli Lilly may
terminate the agreement upon payment of an early termination payment.
Compound Library Agreements. We have entered into agreements with
customers, including Celltech Chiroscience in April 1999, Tularik in June 1999,
which Tularik extended in April 2000, and DuPont in August 2000, providing
nonexclusive access on a fee basis to compounds in our Diversity Library for
their internal lead generation efforts. These customers have the option to gain
exclusive rights to compounds they intend to commercialize upon payment of
either a one-time activation fee or annual fees. We retain ownership of the
intellectual property rights to the compounds, our Diversity Library and to any
inventions made by our scientists working under these agreements. These
agreements are terminable upon breach or insolvency of a party.
SCIENTIFIC ADVISORS
We have established a group of scientific advisors made up of leading
scholars in various functional disciplines of synthetic and medicinal chemistry.
Our scientific advisors are as follows:
<TABLE>
<CAPTION>
ADVISOR TITLE AND INSTITUTION
------------------------------------- -----------------------------------------------
<S> <C>
Gregory C. Fu, Ph.D.................. Professor, Department of Chemistry,
Massachusetts Institute of Technology
Ashit Ganguly, Ph.D.................. Former Vice President of Chemistry, Schering
Plough, Professor of Chemistry, Stevens
Institute of Technology
K.C. Nicolaou, Ph.D.................. Chairman, Department of Chemistry, The Scripps
Research Institute
Nicos A. Petasis, Ph.D............... Professor of Chemistry, University of Southern
California
Masakatsu Shibasaki, Ph.D............ Professor, The University of Tokyo
</TABLE>
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
Shown below are the names, ages and positions of our executive officers,
directors and other key employees as of August 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
--------------------------------------- --- --------------------------------------------
<S> <C> <C>
Robert E. Conway....................... 46 Chief Executive Officer and Director
Kevin Koch, Ph.D....................... 40 President, Chief Science Officer and
Director
David L. Snitman, Ph.D................. 48 Chief Operating Officer, Vice President,
Business Development and Director
Michael Carruthers..................... 42 Chief Financial Officer and Secretary
Anthony D. Piscopio, Ph.D.............. 38 Vice President, Chemistry and Director of
Process Chemistry
John A. Josey, Ph.D.................... 39 Senior Director of High-Speed Synthesis
Laurence Burgess, Ph.D................. 38 Senior Director of Medicinal Chemistry and
Lead Optimization
Joanna K. Money, Ph.D.................. 39 Director of Business Development
Kyle Lefkoff (a)(b).................... 41 Chairman
Francis J. Bullock, Ph.D. (a)(b)....... 63 Director
Marvin H. Caruthers, Ph.D.............. 60 Director
Kirby L. Cramer (a).................... 62 Director
Robert W. Overell, Ph.D. (b)........... 45 Director
</TABLE>
---------------
(a) Member of our audit committee.
(b) Member of our compensation committee.
Robert E. Conway has served as our Chief Executive Officer and a member of
our board of directors since November 1999. From October 1996 to October 1999,
Mr. Conway was the Chief Operating Officer and Executive Vice President of the
Clinical Trials Division of Hill Top Research, Inc. where he managed 22
company-owned research centers conducting clinical trials for pharmaceutical and
biotechnology companies. From 1979 until 1996, Mr. Conway held various executive
positions with Corning, Inc., including Corporate Vice President and General
Manager of Corning Hazleton, Inc., a pre-clinical contract research
organization, where he was responsible for North American operations. Mr. Conway
serves on the board of directors of DEMCO, Inc. Mr. Conway received a B.S. in
accounting from Marquette University, received an M.B.A. from the University of
Cincinnati and is a Certified Public Accountant.
Kevin Koch, Ph.D. has served as our President, our Chief Science Officer
and a member of our board of directors since May 1998. Prior to joining us, Dr.
Koch was an Associate Director of Medicinal Chemistry and Project Leader for the
Protease Inhibitor and New Leads project teams from May 1995 to April 1998 for
Amgen Inc. From September 1988 until May 1995, Dr. Koch held various positions
with Pfizer Central Research, including Senior Research Investigator-Project
Coordinator for the Cellular Migration and Immunology Project Teams. Dr. Koch is
chairman of the Strategic Research Institute's Anti-inflammatory Drug Discovery
Summit and is an elected board member of the Inflammation Research Association.
Dr. Koch received a B.S. in chemistry and in biochemistry from the State
University of New York at Stony Brook and a Ph.D. in synthetic organic chemistry
from the University of Rochester.
David L. Snitman, Ph.D. has served as our Vice President, Business
Development, our Chief Operating Officer and a member of our board of directors
since May 1998. Prior to joining us, Dr. Snitman held various positions with
Amgen Inc. since December 1981, including Associate Director, New Products and
Technology and Manager of Amgen's Boulder facility. Dr. Snitman received a B.S.
in chemistry from Northeastern University, received a Ph.D. in the synthesis of
natural products from the University of Colorado and was a National Institute of
Health Postdoctoral Fellow at the Massachusetts Institute of Technology.
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<PAGE> 50
Michael Carruthers has served as our Chief Financial Officer and Secretary
since December 1998. Prior to joining us, Mr. Carruthers was Chief Financial
Officer from October 1993 until December 1998 of Sievers Instrument, Inc. From
May 1989 until October 1993 Mr. Carruthers was the treasurer and controller for
the Waukesha division of Dover Corporation. Mr. Carruthers is a Certified Public
Accountant and was previously employed as an accountant with Coopers & Lybrand,
LLP. Mr. Carruthers received a B.S. in accounting from the University of
Colorado and an M.B.A. from the University of Chicago.
Anthony D. Piscopio, Ph.D. has served as our Vice President, Chemistry and
Director of Process Chemistry since May 1998. Prior to joining us, Dr. Piscopio
had been employed by Amgen Inc. since June 1995 in various capacities, including
as a founder of Amgen's small molecule drug discovery program. While at Amgen,
Dr. Piscopio worked in the area of protease inhibition and pioneered novel
high-speed synthesis methodologies for the preparation of B-turn mimetics and
other heterocyclic classes. From August 1992 until June 1995, Dr. Piscopio was
employed with Pfizer, Inc.'s Inflammation Group and worked in the areas of
G-protein coupled receptor modulation and computer-assisted design of protease
inhibitors. Dr. Piscopio received a B.A. in chemistry from West Virginia
University, received a Ph.D. in synthetic organic chemistry from the University
of Wisconsin-Madison and completed his postdoctoral fellowship at the Scripps
Research Institute in La Jolla, California as a National Institute of Health
Postdoctoral Fellow.
John A. Josey, Ph.D. has served as our Senior Director of High-Speed
Synthesis since May 1998. Prior to joining us, Dr. Josey had been employed by
Amgen Inc. since September 1995 in the New Leads/ Combinatoral Chemistry Group
of Amgen's small molecule drug discovery program. From August 1991 until
September 1995, Dr. Josey was a research investigator in the Medicinal Chemistry
Department of Glaxo Research Institute. Dr. Josey received a B.S. in chemistry
from Colorado State University, received a Ph.D. in organic chemistry from the
University of Texas at Austin and was a Damon Runyon-Walter Winchell Fellow at
the California Institute of Technology.
Laurence Burgess, Ph.D. has served as our Senior Director of Medicinal
Chemistry and Lead Optimization since May 1998. Prior to joining us, Dr. Burgess
had been employed by Amgen Inc. since August 1995 in various capacities,
including as a project leader in its small molecule drug discovery research
program in the areas of respiratory and allergic disease. From February 1992
until August 1995, Dr. Burgess was employed by Pfizer Central Research working
in the areas of inflammation and immunology. Dr. Burgess received a B.S. in
chemistry from the Georgia Institute of Technology, received a Ph.D. from the
University of Texas and completed his postdoctoral research at Colorado State
University.
Joanna K. Money, Ph.D. has served as our Director of Business Development
since September 1999. Prior to joining us, Dr. Money was the Director of
Business Development from May 1998 to July 1999 for NeXstar Pharmaceuticals.
From September 1987 to April 1998, Dr. Money held various positions with Amoco
Chemical Company's Research Center, including research chemist and business
development manager for the Asia Pacific Region as well as positions in
marketing, strategic planning and product management. Dr. Money received a B.Sc.
in chemistry from Imperial College, London and a Ph.D. in inorganic chemistry
from Indiana University.
Kyle Lefkoff has served as the Chairman of our board of directors since May
1998. Since 1995, Mr. Lefkoff has been a General Partner of Boulder Ventures
Limited, a venture capital firm and investor in our company. From June 1986
until June 1995, Mr. Lefkoff was employed by Colorado Venture Management, a
venture capital firm. Mr. Lefkoff serves on the boards of directors of Trust
Company of America, Vexcel Corporation and Metabolite Laboratories Inc. Mr.
Lefkoff received a B.A. in economics from Vassar College and an M.B.A. from the
University of Chicago.
Francis J. Bullock, Ph.D. has served as a member of our board of directors
since May 1998. Since 1993, Dr. Bullock has been a senior consultant for Arthur
D. Little, Inc., concentrating on pharmaceutical and biotechnology research and
development, as well as the fine chemicals and agricultural chemicals
industries. From April 1981 until September 1993, Dr. Bullock served as Senior
Vice President, Research Operations at Schering Plough Research Institute. Dr.
Bullock serves on the boards of directors of Genzyme Transgenics Corporation,
Neogenesis and Atherex. Dr. Bullock received a B.S. in pharmacy from the
Massachusetts
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<PAGE> 51
College of Pharmacy, an A.M. in organic chemistry from Harvard University and a
Ph.D. in organic chemistry from Harvard University.
Marvin H. Caruthers, Ph.D. has served as a member of our board of directors
since August 1998. Since 1979, Dr. Caruthers has been a Professor of
Biochemistry and Bioorganic Chemistry at the University of Colorado. Dr.
Caruthers is a member of the National Academy of Sciences and the American
Academy of Arts and Sciences and was previously a member of the scientific
advisory board of Amgen Inc. Dr. Caruthers serves on the boards of directors of
Oxigene and Genomics, Inc. Dr. Caruthers received a B.S. in chemistry from Iowa
State University and a Ph.D. in chemistry from Northwestern University.
Kirby L. Cramer has served as a member of our board of directors since
August 2000. Mr. Cramer is the Chairman Emeritus of Hazleton Laboratories
Corporation, a Covance company, Chairman of the Board of Directors of
Northwestern Trust and Investors Advisory Company and Chairman of the Board of
Directors of SonoSite, Inc. From 1987 until 1991, Mr. Cramer served as the
Chairman of the Board of Directors of Kirschner Medical Corporation. Mr. Cramer
serves on the boards of directors of Immunex Corporation, SonoSite, Inc.,
Huntingdon Life Sciences Group plc, Landec Corporation, D.J. Orthopedics, Inc.
and Commerce Bank of Washington. Mr. Cramer received a B.A. in history from
Northwestern University, received an M.B.A. from the University of Washington
and is a graduate of Harvard Business School's Advanced Management Program. Mr.
Cramer is a Chartered Financial Analyst.
Robert W. Overell, Ph.D. has served as a member of our board of directors
since December 1999. Since 1996, Dr. Overell has been with Frazier & Company, a
venture capital firm and investor in our company, and has served as a General
Partner since 1998 and a venture partner from 1996 until 1998. Dr. Overell's
operational experience in biotechnology companies includes joining Immunex
Corporation early in its development and co-founding Target Genetics. Dr.
Overell serves on the board of directors of FastTrack Systems, GeneMachines,
InPharos, Inc., SkeleTech, Inc. and XenoPort, Inc. Dr. Overell received his B.S.
in biological sciences from the University of Newcastle-upon-Tyne and a Ph.D. in
biochemistry from the Institute of Cancer Research, University of London.
Certain of our current directors were elected as designees of our preferred
stockholders and our founders in accordance with voting agreements that will
terminate following this offering. The current designees of our preferred
stockholders are Dr. Caruthers, Dr. Overell and Messrs. Lefkoff and Cramer, and
the current designees of our founders are Dr. Bullock, Dr. Koch and Dr. Snitman.
BOARD COMPOSITION
Our board of directors currently consists of eight directors. Upon
completion of this offering, our board of directors will be divided into three
classes: Class I, whose term will expire at the annual meeting of stockholders
to be held in 2001; Class II, whose term will expire at the annual meeting of
stockholders to be held in 2002; and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2003. The initial Class I directors
will be Dr. Overell and Dr. Snitman, the initial Class II directors will be
Messrs. Conway and Lefkoff and Dr. Caruthers, and the initial Class III
directors will be Dr. Bullock, Dr. Koch and Mr. Cramer.
At each annual meeting of the stockholders beginning in 2001, the
successors to the class of directors whose terms expired will be elected to
serve three-year terms. If the number of directors on our board increases, the
newly created directorships will be distributed among the three classes so that
each class will, as nearly as possible, consist of one-third of the directors.
The classification of our board of directors may delay or prevent changes in our
control or management. In addition, our directors may be removed only with cause
and upon the vote of holders of two-thirds of our outstanding common stock.
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<PAGE> 52
BOARD COMMITTEES
Our board of directors has established an audit committee and a
compensation committee.
The audit committee consists of Dr. Bullock, Mr. Cramer and Mr. Lefkoff.
The audit committee meets periodically with management and our independent
accountants to review their work and confirm that they are properly discharging
their respective responsibilities. The audit committee also:
- recommends the appointment of independent accountants to audit our
financial statements and perform services related to the audit;
- reviews the scope and results of the audit with the independent
accountants;
- reviews with management and the independent accountants our annual
operating results;
- considers the adequacy of the internal accounting control procedures; and
- considers the independence of our accountants.
The compensation committee consists of Dr. Bullock, Mr. Lefkoff and Dr.
Overell. The compensation committee determines the salary and incentive
compensation of our officers and provides recommendations for the salaries and
incentive compensation of our other employees. The compensation committee also
administers our stock option plan and our employee stock purchase plan,
including reviewing management recommendations with respect to option grants and
taking other actions as may be required in connection with our compensation and
incentive plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee currently consists of Dr. Bullock, Mr. Lefkoff
and Dr. Overell. No current member of the compensation committee has been an
officer or employee of ours at any time. None of our executive officers serve as
a member of the board of directors or compensation committee of any other
company that has one or more executive officers serving as a member of our board
of directors, nor has such a relationship existed in the past. Prior to July
2000, our board of directors, as a whole, including Mr. Conway, Dr. Koch and Dr.
Snitman, made decisions relating to the compensation of our executive officers
following recommendations from the compensation committee. In July 2000, our
board of directors delegated its authority to determine salaries of our
executive officers and administer our benefit plan to the compensation
committee. Mr. Conway, our Chief Executive Officer, served as a member of the
compensation committee from November 1999 through August 2000.
DIRECTOR COMPENSATION
We reimburse our directors for reasonable out-of-pocket expenses related to
attending board and committee meetings. Following the completion of this
offering, we intend to compensate each non-employee director who is not
affiliated with one of our preferred stock investors $12,000 annually, $1,000
for attending each board meeting and each committee meeting and $1,000 for
serving as chairman of a board meeting or a committee meeting. We have granted
certain non-employee directors non-qualified options to purchase our common
stock, including 10,000 options to Dr. Bullock in July 2000 for service during
fiscal year 2000 and 20,000 options to each of Dr. Bullock and Mr. Cramer in
August 2000 for service during fiscal year 2001. It is our current intent that
non-employee directors who are not affiliated with our venture capital investors
will receive a yearly grant of non-qualified options to purchase shares of our
common stock in an amount and with a vesting schedule to be determined by the
compensation committee.
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<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid during the fiscal year ended June 30, 2000 to our chief
executive officer and each of our other four most highly compensated executive
officers who were serving as executive officers at June 30, 2000. We refer to
these individuals as our named executive officers.
EXECUTIVE COMPENSATION SUMMARY
<TABLE>
<CAPTION>
COMPENSATION FOR THE LONG-TERM
FISCAL YEAR ENDED COMPENSATION
JUNE 30, 2000 ------------------
-------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- --------- -------- ------------------ ------------
<S> <C> <C> <C> <C>
Robert E. Conway(a)........................ $141,477 $60,000 800,000 $78,458(b)
Chief Executive Officer
Kevin Koch, Ph.D. ......................... 160,500 -- 58,125 --
President and Chief Science Officer
David L. Snitman, Ph.D. ................... 160,500 -- 58,125 --
Chief Operating Officer and Vice
President, Business Development
Anthony D. Piscopio, Ph.D. ................ 139,800 -- 50,625 --
Vice President, Chemistry and Director of
Process Chemistry
Michael Carruthers......................... 112,300 -- 41,250 --
Chief Financial Officer and Secretary
</TABLE>
---------------
(a) Mr. Conway became Chief Executive Officer in November 1999. His annual
salary during the first year of his employment agreement is $225,000.
(b) Consists of reimbursement of relocation expenses.
OPTION GRANTS DURING THE FISCAL YEAR ENDED JUNE 30, 2000
The following table sets forth information related to each grant of stock
options to our named executive officers during the fiscal year ended June 30,
2000. We have never granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF SHARE PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(C)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR(A) SHARE(B) DATE 5% 10%
---- ---------- -------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Conway(d)........... 800,000 44.1% $0.600 11/15/09 $13,854,273 $22,344,934
Kevin Koch, Ph.D.(e).......... 58,125 3.2% 0.235 7/1/09 1,027,815 1,644,715
David L. Snitman, Ph.D.(e).... 58,125 3.2% 0.235 7/1/09 1,027,815 1,644,715
Anthony D. Piscopio,
Ph.D.(e).................... 50,625 2.8% 0.235 7/1/09 895,194 1,432,493
Michael Carruthers(e)......... 41,250 2.3% 0.235 7/1/09 729,417 1,167,217
</TABLE>
---------------
(a) Based on options to purchase an aggregate of 1,815,740 shares of common
stock granted to our employees between June 30, 1999 and June 30, 2000.
(b) The exercise price per share of each option was equal to the fair market
value of our common stock on the date of grant as determined by the board
of directors.
(c) Potential realizable values are computed by (1) multiplying the number of
shares of common stock subject to a given option by the assumed initial
public offering price of $11.00 per share, (2) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option, and (3)
subtracting from that result the aggregate option exercise price. The 5%
and 10% assumed annual rates of stock price appreciation are
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<PAGE> 54
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.
(d) Of Mr. Conway's 800,000 options, 133,333 vested on December 31, 1999 based
on his continuous service as of such date and 106,667 vested on July 1,
2000 based on our achievement of certain performance milestones. If we do
not close an initial public offering of our common stock, the vesting of
the remaining 560,000 unvested options is based on Mr. Conway's continuous
service in accordance with the following schedule: 55,000 will vest on
November 15, 2000; 5,000 will vest each month between December 15, 2000 and
October 15, 2003; 10,000 will vest on November 15, 2003 and 320,000 will
vest on July 1, 2005. Upon the closing of this offering, the vesting of
420,000 of Mr. Conway's unvested options will be accelerated and become
immediately exercisable, and the remaining 140,000 unvested options will
vest and become exercisable one year from the date of the consummation of
this offering.
(e) All options vest monthly over a four-year period ending June 1, 2003.
OPTIONS EXERCISED DURING THE FISCAL YEAR ENDED JUNE 30, 2000, AND OPTION VALUES
AS OF JUNE 30, 2000
The following table provides summary information for each of our named executive
officers with respect to stock options held as of June 30, 2000, and with
respect to stock options exercised during the fiscal year ended June 30, 2000.
The value realized upon exercise and the value of unexercised in-the-money
options shown below have been calculated on the basis of the assumed initial
public offering price of $11.00 per share, less the applicable exercise price
per share, multiplied by the number of shares underlying these options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AS OF MONEY OPTIONS AS OF
SHARES JUNE 30, 2000 JUNE 30, 2000
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ----------- -------- ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Conway................. -- $ -- 666,667 133,333 $7,176,670 $1,435,330
Kevin Koch, Ph.D................. 7,265 78,208 43,594 7,266 469,289 78,218
David L. Snitman, Ph.D........... -- -- 43,594 14,531 469,289 156,426
Anthony D. Piscopio, Ph.D........ 10,546 113,528 38,969 2,110 419,501 22,714
Michael Carruthers............... 34,401 370,327 80,938 5,911 871,298 63,632
</TABLE>
EMPLOYMENT AGREEMENTS
Effective November 15, 1999, we entered into an employment agreement with
Mr. Conway to serve as our Chief Executive Officer. The agreement is for an
initial term of two years and may be then renewed for additional one-year terms.
Either party may terminate the agreement for any reason upon 30 days' prior
notice to the other party. Under the agreement, we will pay Mr. Conway an annual
salary of $225,000 subject to subsequent adjustment. In addition, we granted to
Mr. Conway options to purchase 800,000 shares of our common stock that vest
periodically over a six-year term subject to his continued employment. Upon a
change in control of our company or the closing of this offering, 75% of Mr.
Conway's options will vest and become immediately exercisable prior to the event
and all remaining options will vest one year from that date. Mr. Conway is also
eligible to receive a cash bonus each fiscal year beginning in 2001 based on a
percentage of his base salary provided he meets minimum performance criteria to
be established by our board of directors. The cash bonus, if any, may be paid in
equity in lieu of cash. We also agreed to reimburse Mr. Conway for reasonable
out-of-pocket expenses he incurred in connection with his performance of
services under this agreement and for relocation costs of up to $80,000 for
moving him and his family from Cincinnati, Ohio to Boulder, Colorado.
If Mr. Conway's employment is terminated as a result of his disability or
by us without cause, we agreed to pay him a severance payment equal to one year
of his then current base salary in equal monthly installments and he will be
entitled to receive, pro-rated to the date of termination, any cash performance
bonus he would have received for that year and any performance options that
would have vested in that year.
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Mr. Conway agreed to execute a release acceptable to us in consideration for our
severance obligations under the agreement. If Mr. Conway terminates his
employment without cause, he will not receive any performance bonus for that
year or acceleration of any of his options granted under the agreement. Mr.
Conway is also subject to a non-compete agreement in which he agreed for a
period of two years not to engage in any competing activities in a 50-mile
radius of any area where we are doing business and not to recruit or solicit any
of our employees or customers.
Effective September 1, 2000, we entered into employment agreements with Dr.
Koch, Dr. Snitman, Dr. Piscopio, Mr. Carruthers, Dr. Josey, Dr. Burgess and Dr.
Money. These agreements are for an initial term of two years and may then be
renewed for additional one-year terms. Either party may terminate for any reason
upon 30 days' prior notice to the other. Under these agreements we will pay the
employees annual salaries ranging from $120,000 to $175,000. If the employee is
terminated as a result of disability or by us without cause, including a
reduction in the employee's salary, we have agreed to pay the employee a
severance payment equal to the greater of one year, or the remaining term, of
his or her then-current base salary in equal monthly installments. Upon a change
of control of the company, 75% of each employee's outstanding options will vest
and the remaining 25% of such options will vest one year later, if the employee
is still working for us. Each of these employees is also subject to a
non-compete agreement in which he or she has agreed for a period of two years
following his or her termination not to engage in any competing activities
within a 50-mile radius of any area where we are doing business and not to
recruit or solicit any of our employees or customers.
In connection with our employment agreements with Dr. Koch and Dr.
Piscopio, we agreed to extend the due dates for a $100,000 note that we hold
from Dr. Koch and a $125,000 note that we hold from Dr. Piscopio to coincide
with the initial term of their employment agreements and to reduce the number of
shares of our common stock pledged as security for these notes to 50,000 shares
each.
EMPLOYEE BENEFIT PLANS
Amended and Restated Stock Option and Incentive Plan
Our Amended and Restated Stock Option and Incentive Plan is the successor
equity incentive program to our 1998 Stock Option Plan. Our amended stock option
plan was adopted by our board of directors and approved by our stockholders in
September 2000. Upon the closing of this offering, our amended stock option plan
will become effective, and we will make no further grants under our current
stock option plan. At that time, all awards under our current stock option plan
will be transferred to our amended stock option plan, however, such awards will
continue to be subject to their existing terms. The primary differences between
our current stock option plan and our amended stock option plan are described
below. This summary is qualified in its entirety by the detailed provisions of
our current stock option plan and our amended stock option plan, which have been
filed as exhibits to the registration statement of which this prospectus is a
part.
At August 31, 2000, there were 4,837,500 shares of common stock reserved
for issuance under the stock option plan and options to purchase 866,984 shares
of common stock remain available for issuance under the stock option plan.
Effective as of the closing of this offering, there will be 7,000,000 shares of
common stock reserved for issuance under the stock option plan. The stock option
plan provides that the number of shares reserved for issuance under the stock
option plan shall be increased, but not decreased, by any additional authorized
shares. Additional authorized shares, for purposes of the stock option plan,
means on any given day the difference between:
- 25% of our issued and outstanding shares of common stock, on a fully
diluted, as converted basis, minus
- the number of outstanding shares relating to awards under the stock
option plan plus the number of shares available for future grants of
awards under the stock option plan on that date.
The number of shares available for issuance under the stock option plan as
incentive stock options may not initially exceed 7,000,000 shares, provided that
this number will be increased each January 1 for the next
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<PAGE> 56
five years beginning in 2001 by 250,000 shares. At no time can the number of
shares available for issuance under our stock option plan as incentive stock
options exceed the total number of shares reserved for issuance under our stock
option plan.
The maximum number of shares subject to options that can be awarded under
the stock option plan to any person is 2,000,000 per year. The maximum number of
shares that can be awarded under the stock option plan to any person, other than
pursuant to an option, is 400,000 per year. The maximum amount that may be
earned as an annual incentive award or other cash award in any fiscal year by
any one person is $1,000,000 and the maximum amount that may be earned as a
performance award or other cash award in respect of a performance period by any
one person is $3,000,000.
Administration. The stock option plan is administered by our compensation
committee. Subject to the terms of the stock option plan, the compensation
committee may select participants to receive awards, determine the types of
awards and terms and conditions of awards, and interpret provisions of the stock
option plan.
The common stock issued or to be issued under the stock option plan
consists of authorized but unissued shares. Shares covered by an award that are
not purchased or that are forfeited will again be available for issuance as
awards under the stock option plan.
Eligibility. Awards may be made under our stock option plan to our
employees, officers, directors or consultants, or to any of our affiliates, or
their officers or directors, and to any other individual whose participation in
the stock option plan our compensation committee determines to be in our best
interests.
Amendment or Termination of the Plan. The board of directors may terminate
or amend the stock option plan at any time and for any reason as long as the
amendment does not adversely impair the rights of grantees with respect to
outstanding awards. Further, unless terminated earlier, the stock option plan
will terminate on the date 10 years from the date of the closing of this
offering. Amendments will be submitted for stockholder approval to the extent
required by the Internal Revenue Code or other applicable laws.
Options. We may grant options under the stock option plan that are either
intended to qualify as incentive stock options under the Internal Revenue Code
or not to qualify as incentive stock options, referred to as non-qualified stock
options.
The exercise price of each stock option may not be less than 100% of the
fair market value of our common stock on the date of grant. In the case of
specified 10% stockholders who receive incentive stock options, the exercise
price may not be less than 110% of the fair market value of our common stock on
the date of grant. An exception to these requirements is made for options that
we grant in substitution for options held by employees of companies that we
acquire. In this case, the exercise price is adjusted to preserve the economic
value of the employee's stock option from his or her former employer.
The term of each stock option is fixed by the compensation committee and
may not exceed 10 years from the date of grant. The compensation committee
determines when each option may be exercised and the period of time, if any,
after retirement, death, disability or termination of employment during which
options may be exercised. Options granted under our current stock option plan,
however, are generally exercisable, to the extent vested, for up to 30 days
after the optionee terminates employment without cause if the termination occurs
more than six months after the option is granted, unless the option agreement
provides otherwise.
Options may be exercisable in installments. Options granted under our
current stock option plan vest 25% per year over a four-year period based on
continued service with us, unless the option agreement provides otherwise. The
exercisability of options may be accelerated by the compensation committee.
In general, an optionee may pay the exercise price of an option by cash,
certified check, by tendering shares of our common stock, which if acquired from
us have been held by the optionee for at least six months, or by means of a
broker-assisted cashless exercise.
Stock options granted under our stock option plan may not be sold,
transferred, pledged, or assigned other than by will or under applicable laws of
descent and distribution. However, we may permit limited
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<PAGE> 57
transfers of non-qualified options for the benefit of immediate family members
of grantees to help with estate planning concerns.
Other Awards. The compensation committee may also award under the stock
option plan:
- shares of common stock subject to restrictions;
- deferred stock, credited as deferred stock units, but ultimately payable
in the form of unrestricted shares of common stock in accordance with the
participant's deferral election;
- common stock units subject to restrictions;
- unrestricted shares of common stock, which are shares of common stock
issued at no cost or for a purchase price determined by the compensation
committee which are free from any restrictions under the stock option
plan;
- dividend equivalent rights entitling the grantee to receive credits for
dividends that would be paid if the grantee had held a specified number
of shares of common stock;
- a right to receive a number of shares or, in the discretion of the
compensation committee, an amount in cash or a combination of shares and
cash, based on the increase in the fair market value of the shares
underlying the right during a stated period specified by the compensation
committee;
- a right to receive a number of shares, subject to the attainment of
specified performance goals; and
- performance and annual incentive awards, ultimately payable in stock or
cash, as determined by the compensation committee. The compensation
committee may grant multi-year and annual incentive awards subject to
achievement of specified performance goals tied to business criteria
described below.
Section 162(m) of the Internal Revenue Code limits publicly-held companies
to an annual deduction for federal income tax purposes of $1,000,000 for
compensation paid to their chief executive officer and the four highest
compensated executive officers (other than the chief executive officer)
determined at the end of each year. However, performance-based compensation is
excluded from this limitation. Although our stock option plan is currently not
subject to Section 162(m) because Section 162(m) provides for a grace period
following an initial public offering, the stock option plan is designed to
permit the compensation committee to grant awards that qualify as
performance-based for purposes of satisfying the conditions of Section 162(m)
after the stock option plan becomes subject to Section 162(m).
Business Criteria. The compensation committee may use exclusively one or
more of the following business criteria to establish performance goals for
awards granted to "covered employees" as defined by to Section 162(m) of the
Internal Revenue Code:
- total stockholder return;
- such total stockholder return as compared to total return, on a
comparable basis, of a publicly available index such as, but not limited
to, the Standard & Poor's 500 Stock Index;
- net income;
- pretax earnings;
- earnings before interest expense, taxes, depreciation and amortization;
- pretax operating earnings after interest expense and before bonuses,
service fees, and extraordinary or special items;
- operating margin;
- earnings per share;
- return on equity;
- return on capital;
- return on investment;
- operating earnings;
- working capital;
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- ratio of debt to stockholders' equity; and
- revenue.
Effect of Certain Corporate Transactions. Certain change of control
transactions involving us, such as a sale of all or substantially all of our
assets or stock, may cause awards granted under the stock option plan to vest,
unless the awards are continued or substituted for by the surviving company in
connection with the change of control transaction.
Adjustments for Stock Dividends and Similar Events. The compensation
committee will make appropriate adjustments in outstanding awards and the number
of shares available for issuance under the stock option plan, including the
individual limitations on awards, to reflect common stock dividends, stock
splits and other similar events.
Employee Stock Purchase Plan
The following is a summary description of our Employee Stock Purchase Plan,
which our board of directors adopted and stockholders approved in September
2000, effective upon the closing of this offering. Our stock purchase plan has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
The purpose of our stock purchase plan is to permit eligible employees to
purchase shares of our common stock at a discount. Our stock purchase plan is
administered by the compensation committee. All of our employees whose customary
employment is more than 20 hours per week and for more than 5 months in any
calendar year will be eligible to participate in this plan, provided that any
employee who would own 5% or more of the total combined voting power or value of
our common stock immediately after any grant is not eligible to participate.
We have reserved 800,000 shares of common stock for issuance under our
stock purchase plan. We intend that our stock purchase plan meet the
requirements for an employee stock purchase plan under Section 423 of the
Internal Revenue Code.
During an offering period, we will withhold amounts through payroll
deductions for eligible employees who elect to participate in the stock purchase
plan. At the end of each offering period, we will use accumulated payroll
deductions to purchase, on behalf of eligible employees who are participating in
the plan, stock at a price equal to the lesser of 85% of the market price of the
common stock at either the beginning of the offering period or the end of the
offering period. The duration of each offering period will be determined by the
compensation committee.
An employee may not sell shares of common stock purchased under the stock
purchase plan until three months have elapsed from the date the shares were
purchased on the employee's behalf. Shares of common stock purchased under the
stock purchase plan will be held in the custody of an agent appointed by the
board of directors until two years have elapsed since the first day of the
offering period in which the shares were purchased and one year has elapsed
since the date the shares were purchased.
401(k) Plan
We sponsor a 401(k) Savings Plan, a defined contribution plan intended to
qualify under Section 401 of the Internal Revenue Code. All employees who are at
least 21 years old are eligible to participate. Participants may make pre-tax
contributions to our 401(k) plan of up to 15% of their eligible earnings,
subject to a statutorily prescribed annual limit. We may make matching
contributions at 50% up to the first 4% contributed by employees under the
401(k) plan. Each participant is fully vested in his or her contributions. Our
matching contributions vest over four years. Contributions by the participants
or by us to the 401(k) plan, and the income earned on such contributions, are
generally not taxable to the participants until withdrawn. Our contributions, if
any, are generally deductible when made. All contributions are held in trust as
required by law. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
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RELATED PARTY TRANSACTIONS
Since our inception, we have issued shares of common and preferred stock in
private placement transactions as follows:
On May 18, 1998, we issued and sold 2,913,367 shares of our common stock at
a purchase price of $0.235 per share and 2,500,000 shares of our Series A
preferred stock at a purchase price of $1.00 per share. Between August 8, 1998
and January 15, 1999, we issued and sold an additional 4,135,000 shares of our
Series A preferred stock at a purchase price of $1.00 per share. On November 16,
1999, we issued and sold 3,199,999 shares of our Series B preferred stock at a
purchase price of $2.50 per share. On August 31, 2000, we issued and sold
1,666,667 shares of our Series C preferred stock at a purchase price of $6.00
per share. Each share of Series A preferred stock, Series B preferred stock and
Series C preferred stock currently converts into one share of common stock. Upon
the closing of this offering, the following shares of preferred stock convert
into common stock at a rate of one share of common stock for each share of
preferred stock.
The following table identifies our executive officers, directors and five
percent stockholders who have made equity investments in our company, excluding
the exercise of options to purchase shares of our common stock. See "Principal
Stockholders" for additional information relating to the beneficial ownership of
shares of our preferred and common stock of these stockholders.
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SHARES OF SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED
NAME STOCK STOCK STOCK STOCK
---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS
Kevin Koch, Ph.D.(a)................................. 648,654 5,000 54,000 --
David L. Snitman, Ph.D. ............................. 648,654 250,000 385,548 266,667
Anthony D. Piscopio, Ph.D. .......................... 648,654 -- 30,000 1,667
Michael Carruthers................................... -- 25,000 16,000 3,332
DIRECTORS
Kyle Lefkoff(b)...................................... 150,000 1,000,000 463,409 161,163
Marvin H. Caruthers, Ph.D.(c)........................ 18,750 250,000 80,000 33,936
Kirby L. Cramer...................................... -- -- -- 83,333
Robert Overell, Ph.D.(d)............................. -- 1,500,000 604,446 16,667
FIVE PERCENT STOCKHOLDERS
ARCH Venture Fund III, L.P. ......................... -- 1,500,000 604,446 204,779
Boulder Ventures II, L.P.(e)......................... 150,000 1,000,000 463,409 156,997
Falcon Technology Partners L.P. ..................... 150,000 1,000,000 463,409 156,997
Frazier Healthcare II, L.P. ......................... -- 1,500,000 604,446 16,667
K.C. Nicolaou, Ph.D. ................................ 648,654 -- 252,000 50,000
Rovent II Limited Partnership........................ -- 750,000 120,000 50,000
</TABLE>
---------------
(a) Includes 5,000 shares of Series A preferred stock and 2,000 shares of
Series B preferred stock purchased by Dr. Koch's spouse.
(b) Includes 130,500 shares of common stock, 870,000 shares of Series A
preferred stock, 403,166 shares of Series B preferred stock and 136,587
shares of Series C preferred stock purchased by Boulder Ventures II, L.P.;
19,500 shares of common stock, 130,000 shares of Series A preferred stock,
60,243 shares of Series B preferred stock and 20,410 shares of Series C
preferred stock purchased by Boulder Ventures II (Annex), L.P., an
affiliate of Boulder Ventures II, L.P. and 4,166 shares of Series C
preferred stock purchased by Mr. Lefkoff's father. The general partner of
Boulder Ventures II L.P. and Boulder Ventures II (Annex), L.P. is BV
Partners II, LLC. Mr. Lefkoff is a member and manager of BV Partners II,
LLC, and he disclaims beneficial ownership in the above shares except to
the extent of his pecuniary interest in Boulder Ventures II L.P. and
Boulder Ventures II (Annex), L.P.
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(c) All shares of common stock and preferred stock were purchased by the
Caruthers Family, L.L.C., of which Dr. Caruthers is the manager and a
member. Dr. Caruthers disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest in the Caruthers Family, L.L.C.
(d) Includes 1,500,000 shares of Series A preferred stock, 604,446 shares of
Series B preferred stock and 16,667 shares of Series C preferred stock
purchased by Frazier Healthcare II, L.P. The general partner of Frazier
Healthcare II, L.P. is Frazier Healthcare Management II, LLC. Dr. Overell
is a member and manager of Frazier Healthcare Management II, LLC, and he
disclaims beneficial ownership in the above shares except to the extent of
his pecuniary interest in Frazier Healthcare II, L.P.
(e) Includes 19,500 shares of common stock, 130,000 shares of Series A
preferred stock, 60,243 shares of Series B preferred stock and 20,410
shares of Series C preferred stock purchased by Boulder Ventures II,
(Annex) L.P., an affiliate of Boulder Ventures II, L.P.
We believe that the shares issued in the above described transactions were
sold at the then fair market value and that the terms of all the above-described
transactions were no less favorable than we could have obtained from
unaffiliated third parties.
In connection with the above-described transactions, we entered into an
agreement with the investors providing for registration rights with respect to
the shares of common stock, including those issuable upon conversion of each
series of preferred stock. For more information, please see "Description of
Capital Stock -- Registration Rights."
Mr. Lefkoff is a general partner of Boulder Ventures II, L.P. and Boulder
Ventures II (Annex), L.P. and was appointed as one of our directors by our
stockholders under the terms of a voting agreement that will terminate upon the
consummation of this offering. Dr. Overell is a member and manager of Frazier
Healthcare Management II, LLC and was appointed as one of our directors by
Frazier Healthcare Management II, LLC.
In connection with Dr. Koch's purchase of 648,655 shares of our common
stock on May 18, 1998, he issued us a promissory note with a principal balance
of $100,000, an interest rate of 6.0% per annum and a maturity date on the
earlier of May 18, 2001 or the date he voluntarily terminates his employment
with us. Dr. Koch initially pledged all 648,655 shares of common stock as
security for his loan. On September 1, 2000, we released 598,655 shares of
common stock from Dr. Koch's pledge and extended the maturity date of his loan
to the earlier of September 1, 2002 or the date Dr. Koch voluntarily terminates
his employment with us.
In connection with Dr. Nicolaou's purchase of 648,655 shares of our common
stock on May 18, 1998, he issued us a promissory note with a principal balance
of $125,000, an interest rate of 6.0% per annum and a maturity date of the
earlier of May 18, 2002 or the date Dr. Nicolaou terminates his consulting
arrangement with us. Dr. Nicolaou pledged all 648,655 shares of common stock as
security for his loan.
In connection with Dr. Piscopio's purchase of 648,655 shares of our common
stock on May 18, 1998, he issued us a promissory note with a principal balance
of $125,000, an interest rate of 6.0% per annum and a maturity date of the
earlier of May 18, 2002 or the date Dr. Piscopio terminates his employment with
us. Dr. Piscopio initially pledged all 648,655 shares of common stock as
security for his loan. On September 1, 2000, we released 598,655 shares of
common stock from Dr. Piscopio's pledge and extended the maturity date of his
loan to the earlier of September 1, 2002 or the date Dr. Piscopio terminates his
employment with us.
Stock option grants to our directors and executive officers are described
in this prospectus under the heading "Management -- Director Compensation" and
"Management -- Executive Compensation." In addition, we have employment
agreements with our executive officers and some of our other employees which are
discussed under "Management -- Employment Agreements."
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PRINCIPAL STOCKHOLDERS
The following table shows information with respect to beneficial ownership
of our common stock, as of August 31, 2000, after giving pro forma effect to the
conversion of all of our outstanding shares of preferred stock into common stock
on a one-for-one basis, and as adjusted to reflect the sale of the common stock
offered by us in this offering, for:
- each of our named executive officers;
- each of our directors;
- all of our directors and executive officers as a group; and
- each person known by us to beneficially own more than 5% of our common
stock.
We have calculated the percentage of stock beneficially owned based on
15,367,409 shares of common stock outstanding as of August 31, 2000, after
giving effect to the conversion of our convertible preferred stock, and
21,367,409 shares of common stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(A)
SHARES ---------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
---- ------------ -------- --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
Robert E. Conway(b)......................................... 640,000 4.1% 2.9%
Kevin Koch, Ph.D.(c)........................................ 726,570 4.7 3.4
David L. Snitman, Ph.D.(d).................................. 1,537,659 10.0 7.2
Anthony D. Piscopio, Ph.D.(e)............................... 699,648 4.6 3.3
Michael Carruthers(f)....................................... 90,385 * *
DIRECTORS
Kyle Lefkoff(g)............................................. 1,770,406 11.5 8.3
Francis J. Bullock, Ph.D.(h)................................ 40,000 * *
Marvin H. Caruthers, Ph.D.(i)............................... 382,686 2.5 1.8
Kirby L. Cramer(j).......................................... 103,333 * *
Robert W. Overell, Ph.D.(k)................................. 2,121,113 13.8 9.9
All directors and executive officers as a group (10
persons)(l)............................................... 8,110,133 51.1 38.0
FIVE PERCENT STOCKHOLDERS
ARCH Venture Fund III, L.P.(m).............................. 2,309,225 15.0 10.8
Boulder Ventures II, L.P.(n)................................ 1,770,406 11.5 8.3
Falcon Technology Partners L.P.(o).......................... 1,770,406 11.5 8.3
Frazier Healthcare II, L.P.(p).............................. 2,121,113 13.8 9.9
K.C. Nicolaou, Ph.D.(q)..................................... 950,654 6.2 4.4
Rovent II Limited Partnership(r)............................ 920,000 6.0 4.3
</TABLE>
---------------
* Less than 1% beneficial ownership.
(a) Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to
the securities. Unless indicated by footnote, the address for each listed
director, officer and principal stockholder is Array BioPharma Inc., 1885
33rd Street, Boulder, Colorado 80301. Except as indicated by footnote, the
persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock
underlying options held by that person that are currently exercisable or
are exercisable within 60 days of August 31, 2000, but excludes shares of
common stock underlying options held by any other person.
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(b) Includes 20,000 shares of common stock held in uniform gift to minor
accounts for the benefit of Mr. Conway's children and options to purchase
420,000 shares that will vest upon the closing of this offering.
(c) Includes options to purchase 6,448 shares of common stock that are
exercisable within 60 days of August 31, 2000, and the following shares
held by Dr. Koch's spouse: options to purchase 1,769 shares of common stock
that are exercisable within 60 days of August 31, 2000, 10,457 shares of
common stock, 5,000 shares of Series A preferred stock and 12,500 shares of
Series B preferred stock. Dr. Koch has granted the underwriters an
over-allotment option. If the over-allotment option is exercised in full,
Dr. Koch will sell 50,000 shares of common stock in this offering. The
percentage of shares after the offering in the table above assumes no
exercise of the over-allotment option. If the over-allotment option is
exercised in full, Dr. Koch's percentage of shares beneficially owned would
be 3.1%.
(d) Includes options to purchase 6,448 shares of common stock that are
exercisable within 60 days of August 31, 2000, and 100,000 shares of common
stock held in trust for the benefit of Dr. Snitman's children.
(e) Includes options to purchase 5,004 shares of common stock that are
exercisable within 60 days of August 31, 2000. Dr. Piscopio has granted the
underwriters an over-allotment option. If the over-allotment option is
exercised in full, Dr. Piscopio will sell 50,000 shares of common stock in
this offering. The percentage of shares after the offering in the table
above assumes no exercise of the over-allotment option. If the
over-allotment option is exercised in full, Dr. Piscopio's percentage of
shares beneficially owned would be 2.9%.
(f) Includes options to purchase 7,881 shares of common stock that are
exercisable within 60 days of August 31, 2000.
(g) Includes 130,500 shares of common stock, 870,000 shares of Series A
preferred stock, 403,166 shares of Series B preferred stock and 136,587
shares of Series C preferred stock held by Boulder Ventures II, L.P., and
19,500 shares of common stock, 130,000 shares of Series A preferred stock,
60,243 shares of Series B preferred stock and 20,410 shares of Series C
preferred stock held by Boulder Ventures II (Annex), L.P., an affiliate of
Boulder Ventures II, L.P. The general partner of Boulder Ventures II L.P.
and Boulder Ventures II (Annex), L.P. is BV Partners II, LLC. Mr. Lefkoff
is a member and manager of BV Partners II, LLC, and he disclaims beneficial
ownership in the above shares except to the extent of his pecuniary
interest in Boulder Ventures II L.P. and Boulder Ventures II (Annex), L.P.
(h) Includes options to purchase 30,000 shares of common stock that are
exercisable within 60 days of August 31, 2000.
(i) All shares of common stock and preferred stock are held by the Caruthers
Family, L.L.C., of which Dr. Caruthers is the manager and a member. Dr.
Caruthers disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest in the Caruthers Family, L.L.C.
(j) Includes options to purchase 20,000 shares of common stock that are
exercisable within 60 days of August 31, 2000.
(k) Includes 1,500,000 shares of Series A preferred stock, 604,446 shares of
Series B preferred stock and 16,667 shares of Series C preferred stock
owned by Frazier Healthcare II, L.P. The general partner of Frazier
Healthcare II, L.P. is Frazier Healthcare Management II, LLC. Dr. Overell
is a member and manager of Frazier Healthcare Management II, LLC, and he
disclaims beneficial ownership in the above shares except to the extent of
his pecuniary interest in Frazier Healthcare II, L.P.
(l) Includes options to purchase 497,550 shares of common stock that are
exercisable within 60 days of August 31, 2000 or upon consummation of this
offering.
(m) The business address of ARCH Venture Fund III, L.P. is 8725 West Higgins
Road, Suite 290, Chicago, IL 60631.
(n) Includes 19,500 shares of common stock, 130,000 shares of our Series A
preferred stock, 60,243 shares of Series B preferred stock and 20,410
shares of Series C preferred stock held by Boulder Ventures II (Annex),
L.P., an affiliate of Boulder Ventures II, L.P. The business address of
Boulder Ventures II, L.P. and Boulder Ventures II (Annex), L.P. is 1941
Pearl Street, No. 300, Boulder, CO 80302.
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(o) The business address of Falcon Technology Partners L.P. is 600 Dorset Road,
Devon, PA 19333.
(p) The business address of Frazier Healthcare II, L.P. is 601 Union Street,
Suite 3300, Seattle, WA 98101.
(q) The business address of Dr. Nicolaou is 10550 North Torrey Pines Road, La
Jolla, CA 92037.
(r) The business address of Rovent II Limited Partnership is 75 State Street,
Boston, MA 02109.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and material provisions of
our certificate of incorporation and bylaws, which will become effective upon
the closing of this offering, is only a summary. The description is qualified in
its entirety by the complete provisions of our certificate of incorporation and
bylaws, which have been filed as exhibits to the registration statement of which
this prospectus is a part. Upon the closing of this offering, our certificate of
incorporation will authorize the issuance of up to 60,000,000 shares of common
stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share. As of August 31, 2000, 3,865,743 shares of common stock
were outstanding and 11,501,666 shares of convertible preferred stock,
convertible on a one-for-one basis into shares of common stock upon the
completion of this offering, were issued and outstanding. As of August 31, 2000,
we had 85 stockholders.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders. Holders of common stock are not
entitled to cumulative voting rights with respect to the election of directors.
Subject to preferences that may be applicable to any preferred stock outstanding
at the time, holders of common stock are entitled to receive ratable dividends,
if any, as may be declared from time to time by the board of directors out of
funds legally available for that purpose. In the event of our liquidation,
dissolution or winding up, holders of common stock would be entitled to share
ratably in all assets remaining after the payment of liabilities and liquidation
preferences on any outstanding preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and shares of common stock offered by us
in this offering, when issued and paid for, will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of our preferred
stock will convert into shares of common stock on a one-for-one basis.
Thereafter, our board of directors will be authorized, without stockholder
approval, to issue up to an aggregate of 10,000,000 shares of preferred stock in
one or more series. The board of directors can fix the rights, preferences and
privileges of, and any qualifications, limitations or restrictions on, the
shares of each series of our preferred stock.
The issuance of preferred stock may have the effect of delaying or
preventing a change in our control or make removal of our management more
difficult. Additionally, the issuance of preferred stock could decrease the
amount of earnings and assets available for distribution to the holders of the
common stock or could adversely affect the rights and powers, including voting
rights, of the holders of our common stock. The issuance of preferred stock
could also cause the market price of our common stock to decline. At present, we
have no plans to issue any shares of preferred stock.
WARRANTS
Prior to the closing of this offering, we will have outstanding warrants to
purchase a total of 53,750 shares of Series A preferred stock and 57,000 shares
of Series B preferred stock, including warrants to purchase 40,000 shares of
Series A preferred stock at $1.00 per share held by Silicon Valley Bank, which
will expire on October 9, 2005; warrants to purchase 13,750 shares of Series A
preferred stock at $3.00 per share held by Leasing Technologies International,
Inc., which will expire on March 31, 2006; warrants to purchase 7,000 shares of
Series B preferred stock at $2.50 per share held by Silicon Valley Bank, which
will expire on March 9, 2006; and warrants to purchase 50,000 shares of Series B
preferred stock at $5.00 per share held by Silicon Valley Bank, which will
expire on May 17, 2007. Upon completion of this offering, warrants to purchase
110,750 shares of preferred stock will convert automatically into warrants to
purchase an equal number of shares of common stock.
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REGISTRATION RIGHTS
At any time following three months from the effective date of this
offering, the holders of up to 14,356,901 shares of our common stock, or their
transferees, will be entitled to require the registration of those shares under
the Securities Act. Under an agreement with these holders, the holders of at
least 30% of these shares may on up to two occasions require us to register
their shares under the Securities Act, subject to some limitations described in
the agreement. In connection with this offering, some of our stockholders have
agreed with the underwriters not to exercise any demand registration rights for
a period of 365 days from the effective date of this offering. In addition,
these holders can require us to include their shares in future registrations of
our shares for our account or the account of another stockholder. After we
become eligible to register securities on Form S-3, these holders may require us
to register their shares on up to two occasions in any calendar year on Form
S-3. These registration rights are subject to limitations and conditions,
including the right of underwriters to limit the number of shares of common
stock held by existing stockholders to be included in a registration. The
registration rights as to any holder will terminate when all securities held by
the holder entitled to registration rights can be sold within a three-month
period under Rule 144 of the Securities Act and when the number of shares held
by the holder is less than 1% of our outstanding capital stock on an as
converted to common stock basis. In addition, we are generally required to bear
all expenses of registration, including the reasonable fees of a single counsel
acting on behalf of all selling stockholders, except underwriting discounts and
selling commissions.
Registration of any shares with registration rights would result in those
shares becoming freely tradeable without restriction under the Securities Act.
Sales of these shares could have a material adverse effect on the trading price
of our common stock.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation effective upon the closing of this offering provides that our
directors are not personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, relating to
unlawful dividends or unlawful stock purchases or redemptions; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Upon the closing of this offering, our bylaws will provide for the
indemnification of our directors and officers to the fullest extent authorized
by the Delaware General Corporation Law. We will indemnify a director or officer
in connection with an action initiated by that person if the action was
authorized by our board of directors. The indemnification provided under our
bylaws includes the right to be paid expenses in advance of the final
disposition of a proceeding for which indemnification may be had if the director
or officer agrees to repay all amounts paid in advance if it is ultimately
determined that the director or officer is not entitled to be indemnified. Under
our bylaws, if we do not pay a claim for indemnification within 60 days after we
have received a written claim, the director or officer may bring an action to
recover the unpaid amount of the claim. If successful, the director or officer
also will be entitled to be paid the expense of prosecuting the action to
recover these unpaid amounts.
Our bylaws also authorize us to purchase and maintain insurance on behalf
of any person who is or was one of our directors, officers, employees or agents,
or is or was serving at our request as a director, officer, employee, partner or
agent of another corporation or other entity or enterprise, against any
liability asserted
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<PAGE> 66
against the person or incurred by the person in any of these capacities, or
arising out of the person's fulfilling one of these capacities, and related
expenses. We may obtain this insurance whether or not we would have the power to
indemnify the person against the claim under the provisions of the Delaware
General Corporation Law. We have purchased director and officer liability
insurance on behalf of our directors and officers. The indemnification
provisions under our certificate of incorporation and bylaws are not exclusive
of any other rights to indemnification under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
ANTI-TAKEOVER PROVISIONS
General
Upon the closing of this offering, our certificate of incorporation and
bylaws will contain some provisions that are intended to enhance the likelihood
of continuity and stability in the composition of our board of directors and in
the policies formulated by our board of directors. In addition, provisions of
Delaware law may hinder or delay an attempted takeover of us other than through
negotiation with our board of directors. These provisions could have the effect
of discouraging attempts to acquire us or remove incumbent management even if
some or a majority of our stockholders believe this action is in their best
interest, including attempts that might result in the stockholders receiving a
premium over the market price for the shares of common stock they hold.
Classified Board
Our certificate of incorporation provides for the division of our board of
directors into three classes of directors serving staggered three-year terms.
Our certificate of incorporation further provides that the approval of the
holders of at least two-thirds of the shares entitled to vote is necessary for
the alteration, amendment or repeal of sections of our certificate of
incorporation relating to the election and classification of our board of
directors, limitation of director liability, indemnification and the vote
requirements for these amendments to our certificate of incorporation. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management.
Removal of Directors and Vacancies
Our certificate of incorporation provides that directors may be removed
only with cause upon the affirmative vote of holders representing two-thirds of
our outstanding shares. In addition, vacancies and newly created directorships
resulting from any increase in the size of the board of directors may be filled
only by the affirmative vote of a majority of the directors then in office, even
if they do not constitute a quorum, or by the sole remaining director. These
provisions would prevent stockholders from removing incumbent directors without
cause and filling the resulting vacancies with their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations
of Directors
Our bylaws establish an advance notice procedure with regard to the
nomination, other than by the board of directors, of candidates for election to
the board of directors and with regard to matters to be brought before an annual
meeting of our stockholders by a stockholder. For nominations and other business
to be brought properly before an annual meeting by a stockholder, the
stockholder must notify us between 60 and 90 days prior to the first anniversary
of the preceding year's annual meeting. Separate provisions based on public
notice by us specify how this advance notice requirement operates if the date of
the annual meeting is advanced by more than 30 days or delayed by more than 60
days from the anniversary date. The stockholder's notice must contain specified
information regarding the stockholder and its holdings, as well as background
information regarding any director nominee, together with that person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected, and a brief description of any business desired to be
brought before the meeting, the reasons for conducting the business at the
meeting and any material interest of the stockholder in the business proposed.
Although our bylaws do not give our
62
<PAGE> 67
board of directors any power to approve or disapprove stockholder nominations
for the election of directors or any other business desired by stockholders to
be conducted at an annual meeting, the bylaws:
- may have the effect of precluding a nomination for the election of
directors or precluding the conduct of business at a particular annual
meeting if the proper procedures are not followed; or
- may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of us, even if the conduct of this solicitation or the
attempt to obtain control might be beneficial to us and our stockholders.
Special Stockholders' Meetings
Under our certificate of incorporation and bylaws, special meetings of
stockholders, unless otherwise prescribed by statute, may be called only by the
board of directors, the chairperson, or the chief executive officer.
Stockholder Action Only by Written Consent
Our certificate of incorporation provides that any action required or
permitted to be taken at a stockholders' meeting may be taken only by unanimous
written consent.
Section 203 of the Delaware General Corporation Law
Under Section 203 of the Delaware General Corporation Law, we may not
engage in a "business combination," which includes a merger or sale of more than
10% of our assets, with any "interested stockholder," namely, a stockholder who
owns 15% or more of our outstanding voting stock, as well as affiliates and
associates of any of these persons, for three years following the time that
stockholder became an interested stockholder, unless:
- the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding those shares owned by persons who are directors and
also officers; or
- at or after the time the stockholder became an interested stockholder the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
Authorized but Unissued Shares
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
our company. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management of our company.
TRANSFER AGENT AND REGISTRAR
We will retain a transfer agent and registrar for our common stock prior to
the closing of this offering.
LISTING
We intend to apply to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "ARRY."
63
<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also may make it more difficult for us to sell equity or equity-related
securities in the future and at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
21,367,409 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options, based on the
number of shares issued and outstanding as of August 31, 2000. Of these shares,
all of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. This leaves 15,367,409 shares eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
----------------------------------------- -----------------------------------------
<S> <C>
782,107.................................. After 90 days from the date of this
prospectus.
12,889,235............................... After 180 days from the date of this
prospectus (subject, in some cases, to
volume limitations).
1,696,067................................ At various times after 180 days from the
date of this prospectus (subject, in some
cases, to volume limitations).
</TABLE>
LOCK-UP AGREEMENTS
All of our officers and directors and stockholders holding substantially
all of our outstanding stock have signed lock-up agreements with our
underwriters under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of Lehman Brothers Inc. This consent may
be given at any time without public notice.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock 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:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 213,674 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares of our common
stock from us in connection with a compensatory stock or
64
<PAGE> 69
option plan or other written agreement is eligible to resell those shares 90
days after the effective date of this offering in reliance on Rule 144, but
without compliance with some of the restrictions, including the holding period,
contained in Rule 144. As of August 31, 2000, a total of 3,970,516 shares of
common stock had been issued or were issuable upon the exercise of options. Of
these shares of common stock, 1,720,658 will be restricted by lock-up
agreements.
REGISTRATION RIGHTS
After this offering, the holders of 14,356,901 shares of our common stock,
or their transferees, will be entitled to rights with respect to the
registration of those shares under the Securities Act. After such a
registration, these shares of our common stock become freely tradeable without
restriction under the Securities Act. Sales of these shares could have a
material adverse effect on the trading price of our common stock.
STOCK OPTIONS
As soon as practicable after this offering, we intend to file a
registration statement on Form S-8 covering the shares of common stock reserved
for issuance under our stock option plan and our employee stock purchase plan.
As of August 31, 2000, options to purchase 3,018,139 shares of common stock were
outstanding. The registration statement is expected to be filed and become
effective as soon practicable after the effective date of this offering. Shares
of common stock registered under any registration statement will, subject to
Rule 144 volume limitations applicable to affiliates, be available for sale in
the open market, unless the shares are subject to vesting restrictions or the
lock-up agreements described above.
65
<PAGE> 70
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., Deutsche Bank Securities Inc. and Legg
Mason Wood Walker, Incorporated are acting as representatives, have each agreed
to purchase from us the respective number of shares of common stock shown
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc. .......................................
Deutsche Bank Securities Inc. ..............................
Legg Mason Wood Walker, Incorporated........................
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement must be purchased. The conditions
contained in the underwriting agreement include the requirements that:
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at this public offering price. The underwriters may allow, and
the dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After completion of the offering, the underwriters may
change the offering price and other selling terms.
We have granted the underwriters an option to purchase up to an additional
800,000 shares of common stock and two of our founding stockholders, Dr. Koch
and Dr. Piscopio, have granted the underwriters an option to purchase up to an
additional 100,000 shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting discount
shown on the cover page of this prospectus. The underwriters may exercise this
option at any time until 30 days after the date of the underwriting agreement.
If this option is exercised, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to purchase a number of
additional shares of common stock proportionate to the underwriter's initial
commitment as indicated in the table above, and we and the selling stockholders
will be obligated, under the over-allotment option, to sell the shares of common
stock to the underwriters. If this option is exercised and the selling
stockholders fail to deliver some or all of the 100,000 shares, we have agreed
to deliver to the underwriters an amount of shares that will permit the
underwriters to exercise this option in full.
We have agreed not to, without the prior consent of Lehman Brothers Inc.,
directly or indirectly, offer, sell or otherwise dispose of any shares of common
stock or any securities which may be converted into or exchanged for any such
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors, and stockholders
holding an aggregate of at least % of the shares of our capital stock, have
agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities which may be
converted into or exchanged for any such shares for the period ending 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale,"
included elsewhere in this prospectus.
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<PAGE> 71
The underwriting discount is equal to the public offering price per share
of common stock less the amount paid by the Underwriters to us per share of
common stock. The underwriting discount is % of the public offering price. We
have agreed to pay the underwriters the following total amount, assuming either
no exercise or full exercise by the underwriters of their over-allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------
NO FULL
EXERCISE EXERCISE
OF OVER- OF OVER-
PER ALLOTMENT ALLOTMENT
SHARE OPTIONS OPTIONS
--------- --------- ---------
<S> <C> <C> <C>
Underwriting discount paid by Array BioPharma.......... $ $ $
Underwriting discount paid by selling stockholders..... --
--- ---
Total........................................ $ $
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding the underwriting discount, will be approximately $800,000.
Before this offering, there has been no public market for the shares of
common stock. The initial public offering price was negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives considered, among other things and in addition
to prevailing market conditions:
- our historical performance and capital structure;
- estimates of our business potential and earning prospects;
- an overall assessment of our management; and
- the consideration of the above factors in relation to market valuations
of companies in related businesses.
We intend to apply to list our common stock for quotation on the Nasdaq
National Market under the symbol "ARRY."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of common
stock offered by them.
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 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 additional 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 in 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
67
<PAGE> 72
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.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
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.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
At our request, the underwriters have reserved up to 300,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates at the initial
public offering price set forth on the cover page of this prospectus. These
persons must commit to purchase no later than the close of business on the day
following the date of this prospectus. The number of shares available for sale
to the general public will be reduced to the extent these persons purchase the
reserved shares.
68
<PAGE> 73
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Hogan & Hartson L.L.P., Boulder, Colorado. Legal
matters relating to the sale of common stock in this offering will be passed
upon for the underwriters by Latham & Watkins, Costa Mesa, California. William
R. Roberts and Christopher D. Ozeroff, partners of Hogan & Hartson L.L.P., own
13,607 shares and 37,621 shares, respectively, of our preferred stock. These
shares will be converted into shares of our common stock upon completion of this
offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at June 30, 2000 and 1999, and for each of the two years in the
period ended June 30, 2000 and the period from February 6, 1998 (inception) to
June 30, 1998, as set forth in their report. We have included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
amendments to it, relating to the common stock offered by us. This prospectus
does not contain all of the information in the registration statement and its
exhibits and schedules. For further information with respect to our company and
our common stock, you should review the registration statement and its exhibits
and schedules. You may inspect a copy of the registration statement and the
exhibits and schedules to the registration statement without charge at the SEC's
principal office in Washington, D.C. You may obtain copies of all or any part of
the registration statement from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, the New York Regional Office located
at Seven World Trade Center, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, upon payment of fees prescribed by the SEC. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains reports,
proxy and information statements and other information regarding companies that
file electronically with the SEC. The address of the SEC's Web site is
www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements certified by our independent auditors.
69
<PAGE> 74
ARRAY BIOPHARMA INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 75
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Array BioPharma Inc.
We have audited the accompanying balance sheets of Array BioPharma Inc. as
of June 30, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended June 30, 2000 and the period from February 6, 1998 (inception) to June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Array BioPharma Inc. at June
30, 2000 and 1999, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 2000 and the period from February
6, 1998 (inception) to June 30, 1998, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Denver, Colorado
July 28, 2000,
except for the fourth paragraph
of Note 9, as to which the date is
September 1, 2000
F-2
<PAGE> 76
ARRAY BIOPHARMA INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
AS OF JUNE 30, EQUITY
------------------------- AS OF JUNE 30,
1999 2000 2000
----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,185,915 $ 3,846,407
Marketable securities..................................... -- 1,937,099
Accounts receivable....................................... 507,242 885,522
Deposits.................................................. 252,888 120,129
Inventories............................................... 979,158 1,557,376
Prepaid expenses and advances............................. 79,323 201,560
----------- -----------
Total current assets............................... 4,004,526 8,548,093
Property, plant and equipment, net.......................... 2,871,854 6,910,757
Other assets................................................ 248,244 364,342
----------- -----------
Total assets....................................... $ 7,124,624 $15,823,192
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade.................................. $ 713,379 $ 1,708,750
Advance payments from customers........................... 1,063,754 1,940,433
Accrued compensation...................................... 65,127 359,871
Current portion of long-term debt......................... 764,206 1,723,837
Other current liabilities................................. 137,794 605,309
----------- -----------
Total current liabilities.......................... 2,744,260 6,338,200
Long-term debt, less current portion........................ 1,823,490 2,832,423
Stockholders' equity:
Preferred stock, par value $0.001, 10,100,000 and
11,825,000 shares authorized actual and pro forma.......
Series A convertible preferred stock; 6,635,000 shares
issued and outstanding in 1999 and 2000, no shares
outstanding pro forma (unaudited); preference in
liquidation of $6,635,000 at
June 30, 2000........................................... 6,635 6,635 $ --
Series B convertible preferred stock; 3,199,999 shares
issued and outstanding in 2000, no shares outstanding
pro forma (unaudited); preference in liquidation of
$8,000,000 at June 30, 2000............................. -- 3,200 --
Series C convertible preferred stock; no shares
outstanding pro forma (unaudited)....................... -- -- --
----------- ----------- -----------
Total preferred stock.............................. 6,635 9,835 --
Common stock, $0.001 par value;
17,000,000 shares authorized actual and 20,225,000
shares authorized pro forma (unaudited), and 2,923,367,
3,370,207 and 14,871,873 shares issued and outstanding
in 1999, 2000 and pro forma (unaudited), respectively... 2,923 3,370 14,872
Additional paid-in capital................................ 7,276,776 17,430,100 27,393,433
Accumulated deficit....................................... (4,356,710) (9,087,128) (9,087,128)
Notes receivable for common stock - (related party)....... (372,750) (393,750) (393,750)
Deferred compensation..................................... -- (1,309,858) (1,309,858)
----------- ----------- -----------
Total stockholders' equity......................... 2,556,874 6,652,569 $16,617,569
----------- ----------- ===========
Total liabilities and stockholders' equity......... $ 7,124,624 $15,823,192
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 77
ARRAY BIOPHARMA INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 6,
1998
(INCEPTION) TO YEARS ENDED JUNE 30,
JUNE 30, -------------------------
1998 1999 2000
-------------- ----------- -----------
<S> <C> <C> <C>
Revenue................................................ $ -- $ 1,503,859 $ 6,773,634
Cost of revenue, excluding stock compensation.......... -- 1,032,910 4,402,269
-------- ----------- -----------
Gross profit........................................... -- 470,949 2,371,365
Expenses:
Research and development expenses, excluding stock
compensation...................................... -- 3,300,941 3,928,041
Selling, general and administrative expenses,
excluding stock compensation...................... 62,359 1,522,067 2,429,790
Compensation related to stock option grants.......... -- -- 715,811
-------- ----------- -----------
Total operating expenses.......................... 62,359 4,823,008 7,073,642
-------- ----------- -----------
Loss from operations.............................. (62,359) (4,352,059) (4,702,277)
Interest expense....................................... -- (135,904) (384,378)
Interest income........................................ 13,055 180,557 356,237
-------- ----------- -----------
Net loss............................................... $(49,304) $(4,307,406) $(4,730,418)
======== =========== ===========
Basic and diluted net loss per share................... $ (0.06) $ (1.48) $ (1.54)
======== =========== ===========
Shares used in computing basic and diluted net loss per
share................................................ 863,964 2,918,367 3,063,439
======== =========== ===========
Pro forma basic and diluted net loss per share
(unaudited).......................................... $ (0.40)
===========
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)....................... 11,697,343
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 78
ARRAY BIOPHARMA INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FOR COMMON
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
------------------ ------------------ PAID-IN ACCUMULATED (RELATED DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT PARTY) COMPENSATION
--------- ------ --------- ------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 6, 1998
(inception)............... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock for
cash and notes
receivable................ -- -- 2,913,367 2,913 681,493 -- (350,000) --
Issuance of Series A
convertible preferred
stock, net of issuance
cost of $30,116........... 2,500,000 2,500 -- -- 2,467,384 -- -- --
Interest accrued on notes
receivable................ -- -- -- -- -- -- (1,750) --
Net loss for the period..... -- -- -- -- -- (49,304) -- --
--------- ------ --------- ------ ----------- ----------- --------- -----------
Balance at June 30, 1998.... 2,500,000 2,500 2,913,367 2,913 3,148,877 (49,304) (351,750) --
Issuance of Series A
convertible preferred
stock, net of issuance
costs of $60,381.......... 4,135,000 4,135 -- -- 4,070,484 -- -- --
Exercise of stock options... -- -- 10,000 10 2,340 -- -- --
Interest accrued on notes
receivable................ -- -- -- -- -- -- (21,000) --
Warrants issued in
connection with equipment
financing................. -- -- -- -- 55,075 -- -- --
Net loss.................... -- -- -- -- -- (4,307,406) -- --
--------- ------ --------- ------ ----------- ----------- --------- -----------
Balance at June 30, 1999.... 6,635,000 6,635 2,923,367 2,923 7,276,776 (4,356,710) (372,750) --
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $63,204.......... 3,199,999 3,200 -- -- 7,933,594 -- -- --
Exercise of stock options... -- -- 446,840 447 104,561 -- -- --
Interest accrued on notes
receivable................ -- -- -- -- -- -- (21,000) --
Compensation related to
stock option grants....... -- -- -- -- 2,025,669 -- -- (1,309,858)
Warrants issued in
connection with equipment
financing................. -- -- -- -- 89,500 -- -- --
Net loss.................... -- -- -- -- -- (4,730,418) -- --
--------- ------ --------- ------ ----------- ----------- --------- -----------
Balance at June 30, 2000.... 9,834,999 $9,835 3,370,207 $3,370 $17,430,100 $(9,087,128) $(393,750) $(1,309,858)
========= ====== ========= ====== =========== =========== ========= ===========
<CAPTION>
TOTAL
-----------
<S> <C>
Balance at February 6, 1998
(inception)............... $ --
Issuance of common stock for
cash and notes
receivable................ 334,406
Issuance of Series A
convertible preferred
stock, net of issuance
cost of $30,116........... 2,469,884
Interest accrued on notes
receivable................ (1,750)
Net loss for the period..... (49,304)
-----------
Balance at June 30, 1998.... 2,753,236
Issuance of Series A
convertible preferred
stock, net of issuance
costs of $60,381.......... 4,074,619
Exercise of stock options... 2,350
Interest accrued on notes
receivable................ (21,000)
Warrants issued in
connection with equipment
financing................. 55,075
Net loss.................... (4,307,406)
-----------
Balance at June 30, 1999.... 2,556,874
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $63,204.......... 7,936,794
Exercise of stock options... 105,008
Interest accrued on notes
receivable................ (21,000)
Compensation related to
stock option grants....... 715,811
Warrants issued in
connection with equipment
financing................. 89,500
Net loss.................... (4,730,418)
-----------
Balance at June 30, 2000.... $ 6,652,569
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 79
ARRAY BIOPHARMA INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 6, 1998 YEARS ENDED JUNE 30,
(INCEPTION) TO -------------------------
JUNE 30, 1998 1999 2000
---------------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $ (49,304) $(4,307,406) $(4,730,418)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation...................................... -- 530,932 989,127
Accrued interest on notes receivable for common
stock.......................................... (1,750) (21,000) (21,000)
Compensation related to stock option grants....... -- -- 715,811
Accreted interest related to warrants............. -- 6,683 15,053
Changes in operating assets and liabilities:
Accounts receivable............................ -- (507,242) (378,280)
Deposits....................................... (190,500) (62,388) 132,759
Inventories.................................... -- (979,158) (578,218)
Prepaid expenses and advances.................. (1,668) (77,655) (122,237)
Accounts payable -- trade...................... -- 713,379 995,371
Advance payments from customers................ -- 1,063,754 876,679
Accrued compensation........................... 37,922 27,205 294,744
Other current liabilities...................... 18,869 118,925 467,515
---------- ----------- -----------
Net cash used in operating activities..... (186,431) (3,493,971) (1,343,094)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (5,794) (3,396,992) (5,028,030)
Purchase of marketable securities................... -- -- (1,937,099)
Additions to other long-term assets................. (4,144) (244,100) (116,098)
---------- ----------- -----------
Net cash used in investing activities..... (9,938) (3,641,092) (7,081,227)
FINANCING ACTIVITIES:
Proceeds from sale of preferred and common stock,
net of issuance costs............................. 2,804,290 4,074,619 7,936,794
Proceeds from exercise of stock options............. -- 2,350 105,008
Proceeds from the issuance of long-term debt........ -- 2,837,917 2,913,792
Payment on long-term debt........................... -- (201,829) (870,781)
---------- ----------- -----------
Net cash provided by financing
activities.............................. 2,804,290 6,713,057 10,084,813
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 2,607,921 (422,006) 1,660,492
Cash and cash equivalents, beginning of year........ -- 2,607,921 2,185,915
---------- ----------- -----------
Cash and cash equivalents, end of year.............. $2,607,921 $ 2,185,915 $ 3,846,407
========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was $0, $90,516 and $301,111 in 1998, 1999 and 2000,
respectively.
See accompanying notes.
F-6
<PAGE> 80
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations
Array BioPharma Inc. (the "Company") offers a broad range of products and
services to biotechnology and pharmaceutical companies to bridge the gap between
target discovery and pre-clinical and clinical development of a potential drug
candidate. In addition, the Company has developed an information-driven
technology platform to enable its scientists to make better decisions at each
stage of the drug discovery process. The Company also leverages its capabilities
internally to develop proprietary drug candidates in collaboration with its
customers.
Initial Public Offering
In August 2000, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering ("IPO") is closed under the terms presently anticipated,
all of the convertible preferred stock outstanding at the time of the IPO will
automatically convert into shares of common stock. Unaudited pro forma
stockholders' equity, as adjusted for the assumed conversion of the preferred
stock, is set forth on the balance sheets.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents consists of money market accounts, commercial
paper and overnight deposits. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The Company's marketable securities, classified as
available-for-sale securities for purposes of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, consist of high-grade
corporate bonds maturing between July 15, 2000 and June 15, 2003. As of June 30,
2000, there were no unrealized gains or losses related to the Company's
marketable securities.
Inventories
Inventories primarily consisting of finished goods, diversity libraries in
process and raw materials, are stated at the lower of cost (first-in, first-out
basis) or market. The Company designs and produces diversity libraries and
optimer building blocks and begins capitalizing costs into inventory only after
technological feasibility has been established.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repairs and maintenance
are charged to operations as incurred, and significant expenditures for
additions and improvements are capitalized. Depreciation and amortization of
equipment are computed using the straight-line method based on the following
estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
TYPE OF PROPERTY AND EQUIPMENT USEFUL LIFE
------------------------------ -----------
<S> <C>
Laboratory and analytical equipment...................... 5 years
Computer hardware and software........................... 3 years
Leasehold improvements................................... 4 years
Furniture and fixtures................................... 7 years
</TABLE>
F-7
<PAGE> 81
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Long-lived Assets
Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable.
Recoverability is measured by comparison of the assets' carrying amount to
future net undiscounted cash flows the assets are expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
projected discounted future net cash flows arising from the assets.
Revenue Recognition
Net revenue from product sales is recognized as products are shipped and
revenues from the Company's full-time equivalent contracts are recognized on a
per diem basis as work is performed. Development and fixed fee type contract
revenues are recognized on a percentage of completion basis. In general,
contract provisions include predetermined payment schedules, or the submission
of appropriate billing detail establishing prerequisites for billings. During
fiscal year 2000, revenue from the Company's three largest customers represented
approximately 45%, 11% and 8% of total revenue, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising and Promotion Expenses
Advertising and promotion costs are expensed when incurred. The amount
charged against operations for the years ended June 30, 1999 and 2000 was
approximately $18,000 and $70,000, respectively. There were no such expenses
incurred during the period ended June 30, 1998.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, and long-term debt. The carrying values of cash,
accounts receivable and accounts payable approximate fair value due to their
short-term nature. The carrying amount of the Company's long-term debt
approximates fair value as these borrowings are at an interest rate comparable
to the current market rate.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounting for Stock-Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related pronouncements. Under the provisions
of APB 25, no compensation expense is recognized when stock options are granted
with exercise prices equal to or greater than market value on the date of grant.
Employee Savings Plan
The Company has a 401(k) plan which allows participants to contribute 1% to
15% of their salary, subject to eligibility requirements and annual limits. All
employees are eligible to participate in the plan on
F-8
<PAGE> 82
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
January 1, April 1, July 1, or October 1. The Company's Board of Directors may,
at its sole discretion, approve matching contributions and profit sharing
contributions. No such matching contributions were made during fiscal 1998, 1999
or 2000.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss for the period by
the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and potential common shares outstanding
during the period, if their effect is dilutive. Potential common shares include
incremental shares of common stock issuable upon the exercise of stock options
and warrants and upon the conversion of convertible preferred stock. The
potential shares of common stock have not been included in the diluted net loss
per share calculation because to do so would be anti-dilutive.
Pro Forma Stockholders' Equity and Pro Forma Net Loss Per Share
Immediately prior to the effective date of the offering, all of the
convertible preferred stock outstanding will automatically convert into common
stock at a one-to-one ratio. The pro forma effects of these transactions,
including the proceeds received from the Series C convertible preferred stock in
the private placement closed in August 2000 (see note 9), are unaudited and have
been reflected in the accompanying Pro Forma Stockholders' Equity as of June 30,
2000. Pro forma net loss per share for the year ended June 30, 2000 is computed
using the weighted average number of common shares outstanding including the pro
forma effects of the automatic conversion of the Company's convertible preferred
stock into shares of the Company's common stock effective upon the closing of
the Company's initial public offering as if such conversion occurred on July 1,
1999, or at the date of original issue, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic net loss of 8,633,904 shares for the year ended June 30, 2000. The
calculation of pro forma diluted net loss per share excludes incremental common
stock issuable upon the exercise of stock options and warrants as their effect
would be anti-dilutive.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS No. 133 requires that all derivatives be recognized
at fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of relationship that
exists. In July 1999, the Financial Accounting Standards Board issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective
date until fiscal years beginning after June 15, 2000. The Company has not
engaged in hedging activities or invested in derivative instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
101, Revenue Recognition, which provides guidance on the recognition,
presentation and disclosure on 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 disclosure related to revenue recognition policies.
The Company believes that its current revenue recognition policy is in
compliance with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB 25
("FIN 44"). This interpretation clarifies (1) the definition
F-9
<PAGE> 83
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
of employee for purposes of applying APB 25; (2) the criteria for determining
whether a plan qualifies as a noncompensatory plan; (3) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award; and (4) the accounting for an exchange of stock compensation
awards in a business combination. This interpretation is effective July 1, 2000,
but certain conclusions in this interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this interpretation are recognized on a prospective basis
from July 1, 2000. The adoption of FIN 44 will not have a material impact on the
Company's financial statements.
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------
1999 2000
---------- -----------
<S> <C> <C>
Property, plant and equipment:
Laboratory and analytical equipment......................... $2,571,256 $ 5,875,863
Computer hardware and software.............................. 692,554 1,369,293
Leasehold improvements...................................... 97,954 751,132
Furniture and fixtures...................................... 41,022 409,866
---------- -----------
3,402,786 8,406,154
Less accumulated depreciation............................... (530,932) (1,495,397)
---------- -----------
Total property, plant and equipment, net.......... $2,871,854 $ 6,910,757
========== ===========
Inventories:
Fine chemicals and solvents................................. $ 393,827 $ 372,562
Building blocks and diversity libraries..................... 585,331 1,184,814
---------- -----------
Total inventories................................. $ 979,158 $ 1,557,376
========== ===========
</TABLE>
3. LEASES
The Company leases office space and equipment under various noncancelable
operating lease agreements. Rental expense was $540,242 and $682,551 for the
years ended June 30, 1999 and 2000, respectively, and was immaterial for the
period ended June 30, 1998. As of June 30, 2000, future minimum rental
commitments, by fiscal year and in the aggregate, for the Company's operating
leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
2001..................................................... $ 854,952
2002..................................................... 317,419
2003..................................................... 248,244
2004..................................................... 7,332
2005..................................................... 4,800
----------
Total minimum lease payments................... $1,432,747
==========
</TABLE>
4. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
Accounting for Income Taxes. Under the provisions of Statement No. 109, a
deferred tax liability or asset (net of a valuation allowance) is provided in
the financial statements by applying the provisions of applicable tax laws to
measure the deferred
F-10
<PAGE> 84
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES -- (CONTINUED)
tax consequences of temporary differences that will result in net taxable or
deductible amounts in future years as a result of events recognized in the
financial statements in the current or preceding years.
At June 30, 2000, the Company has federal and state net operating loss
carryforwards for income tax purposes of approximately $8,403,000 which expire
through 2020.
The Tax Reform Act of 1986 contains provisions that limit the utilization
of net operating loss and tax credit carryforwards if there has been a "change
of ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carryforwards, and could be triggered by an initial public
offering or by subsequent sales of securities by the Company or its
stockholders.
The components of the Company's deferred tax assets and liabilities as of
June 30 are as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 1,485,891 $ 2,856,869
Organizational costs..................................... 3,575 2,680
----------- -----------
1,489,466 2,859,549
Valuation allowance........................................ (1,425,586) (2,780,379)
----------- -----------
63,880 79,170
Deferred tax liabilities:
Depreciation............................................. (63,880) (79,170)
----------- -----------
Net deferred tax assets and liabilities.................... $ -- $ --
=========== ===========
</TABLE>
The Company has recorded a valuation allowance equal to the excess of
deferred tax assets over deferred tax liabilities as the Company was unable to
determine that it is more likely than not that the deferred tax asset will be
realized.
5. EMPLOYEE AND CONSULTANT STOCK OPTION PLAN AND STOCK WARRANTS
Stock Options
In July 1998, the Company's Board of Directors approved the Option Plan
(the "1998 Plan") pursuant to which (including subsequent amendments) a total of
3,337,500 shares of common stock have been reserved for issuance to eligible
employees, consultants and directors of the Company.
The 1998 Plan provides for awards of both nonstatutory stock options and
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and stock purchase rights to purchase shares
of the Company's common stock.
The 1998 Plan is administered by the Board of Directors, which has the
authority to select the individuals to whom awards will be granted and to
determine whether and to what extent stock options and stock purchase rights are
to be granted, the number of shares of common stock to be covered by each award,
F-11
<PAGE> 85
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE AND CONSULTANT STOCK OPTION PLAN AND STOCK WARRANTS -- (CONTINUED)
the vesting schedule of stock options, and all other terms and conditions of
each award. A summary of activity in the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance, July 1, 1998
Granted................................................. 1,532,500 $0.235
Exercised............................................... 10,000 0.235
Terminated or expired................................... 26,000 0.235
--------- ------
Balance, June 30, 1999.................................... 1,496,500 0.235
Granted................................................. 1,815,740 0.469
Exercised............................................... 446,840 0.235
Terminated or expired................................... 10,556 0.235
--------- ------
Balance, June 30, 2000.................................... 2,854,844 $0.384
========= ======
</TABLE>
A summary of options outstanding as of June 30, 2000 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE SHARES
EXERCISE SHARES UNDER REMAINING WEIGHTED-AVERAGE CURRENTLY WEIGHTED-AVERAGE
PRICE OPTION CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ ------------ ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$0.235 1,688,544 8.5 $0.235 366,741 $0.235
0.600 1,166,300 9.5 0.600 133,333 0.600
--------- --- ------ ------- ------
2,854,844 8.9 $0.384 500,074 $0.332
========= === ====== ======= ======
</TABLE>
Fair Value Disclosure
As described in Note 1, the Company accounts for its stock compensation
arrangements under the provisions of APB 25, Accounting for Stock Issued to
Employees, and intends to continue to do so.
Pro forma information regarding net loss is required by SFAS 123,
Accounting and Disclosure of Stock-Based Compensation, and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using the minimum value method available to nonpublic
companies under SFAS 123. Under this method, option value is determined as the
excess of the fair value of the stock at the date of grant over the present
value of both the exercise price (lump sum) and the expected dividend payments
(annuity), each discounted at the risk-free rate, over the expected exercise
life of the option. A risk-free interest rate of 5.0% for 1999 and 6.25% for
2000, a dividend yield of 0% for 1999 and 2000, and an expected life of 5 years
were applied for 1999 and 2000 grants. The weighted average fair value of
options granted during 1999 and 2000 was $0.05 and $1.34 per share,
respectively.
Option valuation models such as the minimum value method described above
require the input of highly subjective assumptions. 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.
F-12
<PAGE> 86
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE AND CONSULTANT STOCK OPTION PLAN AND STOCK WARRANTS -- (CONTINUED)
The following summarized, pro forma results of operations assume the
estimated fair value of the options granted is amortized to expense over the
option vesting period.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net loss................................................... $(4,307,406) $(4,730,418)
Pro forma expense under Statement No. 123................ (76,625) (406,706)
----------- -----------
Pro forma net loss....................................... $(4,384,031) $(5,137,124)
----------- -----------
Pro forma basic and diluted net loss per share........... $ (1.50) $ (1.68)
=========== ===========
</TABLE>
Deferred Stock-Based Compensation
As of June 30, 2000, the Company has recorded $1,309,858 of deferred stock
compensation in accordance with APB 25 and SFAS 123, related to stock options
granted to employees. Stock compensation expense is being recognized over the
vesting periods of the related options, generally four years or when certain
performance criteria have been met. The Company recognized stock compensation
expense of $715,811 for the year ended June 30, 2000. This expense relates
primarily to the selling, general and administrative functional area.
Stock Warrants
The Company has issued warrants to purchase shares of the Company's
preferred stock, generally in connection with the Company's equipment financing.
Upon consummation of an IPO, assuming the automatic conversion of the Series A
and Series B preferred stock, these warrants are exercisable into the same
number of shares of common stock. The warrants expire on various dates through
fiscal 2009.
The following table summarizes warrant data at June 30, 2000:
<TABLE>
<S> <C>
Issued and outstanding.................................. 110,750
Exercise price.......................................... $1.00-$5.00
Weighted-average exercise price......................... $3.15
</TABLE>
6. PREFERRED AND COMMON STOCK
Common Stock
On May 18, 1998, the Company completed a private sale of 2,913,367 shares
of its common stock to a group of private investors and founders at a purchase
price of $0.235 per share. The net proceeds to the Company from the sale were
$334,406, plus notes receivable from founders of $350,000. The notes, including
accrued interest at 6% per year, totaled $393,750 as of June 30, 2000, and are
payable in full in May 2002. The notes are secured only by the underlying stock
certificates and have been included with related accrued interest as a component
of stockholders' equity. During fiscal year 2000 various employees exercised
stock options to purchase 446,840 shares of common stock.
Preferred Stock
Concurrent with the May 1998 sale of common stock, the Company sold
2,500,000 shares of Series A convertible preferred stock (Series A preferred),
in a first closing, to a group of private investors at a purchase price of $1.00
per share. The net proceeds to the Company from the sale were $2,469,884. During
August 1998, the Company completed issuance of 4,135,000 shares of Series A
preferred stock, in a second
F-13
<PAGE> 87
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PREFERRED AND COMMON STOCK -- (CONTINUED)
closing, to another group of private investors in which the net proceeds to the
Company were $4,074,619. In November 1999, the Company issued 3,199,999 shares
of Series B convertible preferred stock (Series B preferred) to substantially
the same owners as Series A preferred, at a purchase price of $2.50 per share.
The net proceeds to the Company were $7,936,794. All of the preferred shares
have preferences before common stock in liquidation equal to the initial
preferred purchase price, plus any accrued but unpaid non-cumulative dividends.
The preferred shares are convertible into common on a one-to-one basis
(subject to certain anti-dilution provisions) at the option of the preferred
shareholder and automatically convert in the event of an initial public offering
exceeding $15.0 million. The preferred shares have voting rights, on a per share
basis, equal to the Company's common stock.
7. LONG-TERM DEBT
Long-term debt as of June 30, 2000 is for equipment loan facilities
negotiated with financial institutions. The facilities allow for $2.0 million in
borrowings beyond the $4.7 million outstanding as of June 30, 2000. The
agreements require monthly principal and interest payments over a term of 36 to
42 months, at which time, on certain facilities, a final payment representing 8%
of the amount borrowed is due.
The interest rate on these borrowings approximates 11.4% at June 30, 2000.
All assets acquired under the equipment loan facilities represent collateral for
the amounts outstanding and the Company must conform to certain loan covenants,
for which the Company was in compliance as of June 30, 2000.
In connection with the negotiated equipment loan facilities during 2000 and
1999, the Company issued warrants to purchase 110,750 shares of its preferred
stock at exercise prices ranging from $1.00 to $5.00 per share. The warrants
expire during, or prior to fiscal year 2009. In accordance with EITF 86-35,
Debenture with Detachable Stock Purchase Warrants, the Company is required to
assess the value of these warrants, and allocate the debt proceeds between the
debt liability and the related warrant. The Company assessed the value of these
warrants using the Black-Scholes methodology, which ascribed a cumulative value
of approximately $145,000 to these warrants. As a result, an allocation between
the warrant and the related loan has been made for these warrant grants. Total
accreted interest expense was $6,683 and $15,053, respectively, during fiscal
years 1999 and 2000.
Aggregate debt maturities as of June 30, 2000 in each of the following
fiscal years are:
<TABLE>
<S> <C>
2001..................................................... $1,723,837
2002..................................................... 1,765,719
2003..................................................... 1,101,392
2004..................................................... 88,151
----------
4,679,099
Less unamortized discount associated with warrants....... (122,839)
----------
$4,556,260
==========
</TABLE>
8. COLLABORATIVE AGREEMENTS
ICOS Corporation. In July 2000, the Company consolidated and expanded its
lead optimization agreements with ICOS into a drug discovery collaboration
agreement for lead optimization on undisclosed targets. Under the agreement,
ICOS has the exclusive worldwide right to develop and market any products
resulting from the collaboration. The Company compensated based on an annual
rate for each full-time equivalent employee working on an ICOS project and will
receive milestone payments upon achievement of
F-14
<PAGE> 88
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COLLABORATIVE AGREEMENT -- (CONTINUED)
identified development and commercialization goals for products resulting from
the collaboration. The agreement expires in July 2002 and may be terminated upon
90 days notice by ICOS following the first anniversary of the agreement.
Eli Lilly and Company. In March of 2000, the Company entered into a
Research Services Agreement with Eli Lilly to form a chemistry-based research
collaboration. Under the terms of the agreement, up to 30 of the Company's
scientists will provide drug research services in collaboration with Eli Lilly
scientists on identified Eli Lilly drug discovery projects. The Company is
compensated based on an annual rate for each full-time equivalent employee
working on an Eli Lilly project. Eli Lilly may terminate the agreement upon
payment of an early termination payment.
Compound Library Agreements. The Company has entered into agreements with
customers, including Celltech Chiroscience in April 1999, Tularik in June 1999,
which Tularik extended in January 2000, and DuPont in August 2000, providing
nonexclusive access on a fee basis to compounds in the Company's Diversity
Library for their internal lead generation efforts. These customers have the
option to gain exclusive rights to compounds they intend to commercialize upon
payments of either a one-time activation fee or annual fees. The Company retains
all ownership of the intellectual property rights to the compounds and to the
Company's Diversity Library, and to any inventions made by its scientists
working under these agreements. These agreements are terminable only upon breach
or insolvency of a party.
9. SUBSEQUENT EVENTS
In July 2000, the Company's Board of Directors adopted and in August 2000
the stockholders approved an amendment to the 1998 Plan increasing the number of
shares of common stock reserved for issuance under the 1998 Plan from 3,337,500
to 4,837,500. In addition, on July 1, 2000 the Board authorized and directed
officers of the Company to execute and deliver approximately 436,000 bonus stock
options to existing employees subject to terms and conditions of the 1998 Plan,
at an exercise price of $0.60 per share.
Subsequent to year end, the Company borrowed the remaining $2.0 million on
its $4.0 million line of credit.
In August 2000, the Company completed a private placement, under which it
issued 1,666,667 shares of Series C convertible preferred stock to substantially
the same owners as Series A preferred and Series B preferred, at $6.00 per
share. This offering closed on August 31, 2000 resulting in gross proceeds of
approximately $10,000,000.
F-15
<PAGE> 89
[Inside back cover graphic depicts an inverted triangle with the text
"Products," "Services" and "Innovation," respectively, on each corner, and the
text "The Discovery Research Company" placed in the center, of the triangle.
Text below this graphic reads "Array's sole focus is the chemistry of drug
discovery."]
<PAGE> 90
6,000,000 SHARES
[Array BioPharma Logo]
COMMON STOCK
---------------------
PROSPECTUS
, 2000
---------------------
LEHMAN BROTHERS
DEUTSCHE BANC ALEXJ BROWN
LEGG MASON WOOD WALKER
(INCORPORATED)
LOGO
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the various fees and expenses, other than the
underwriting discounts and commissions, payable by Registrant in connection with
the sale of the common stock being registered under this registration statement.
All amounts shown are estimates except for the Securities and Exchange
Commission registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
INITIAL ONGOING
-------- --------
<S> <C> <C>
Registration fee............................................ $ 19,008
NASD filing fee............................................. 7,700
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses (including legal fees)........... *
Transfer agent and registrar fees and expenses.............. *
Miscellaneous............................................... *
--------
Total............................................. $800,000
========
Array BioPharma will bear all expenses shown above
</TABLE>
---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Upon completion of this offering, the Bylaws of Registrant will provide for
the indemnification of Registrant's directors and officers to the fullest extent
authorized by, and subject to the conditions set forth in the Delaware General
Corporation Law (the "DGCL"), except that Registrant will indemnify a director
or officer in connection with a proceeding (or part thereof) initiated by the
person only if the proceeding (or part thereof) was authorized by Registrant's
Board of Directors. The indemnification provided under the Bylaws includes the
right to be paid by Registrant, the expenses (including attorneys' fees) for any
proceeding for which indemnification may be had in advance of its final
disposition, provided that the payment of those expenses (including attorneys'
fees) incurred by a director or officer in advance of the final disposition of a
proceeding may be made only upon delivery to Registrant of an undertaking by or
on behalf of the director or officer to repay all amounts so paid in advance if
it is ultimately determined that the director or officer is not entitled to be
indemnified. Under the Bylaws of Registrant, if Registrant does not pay a claim
for indemnification within 60 days after it has received a written claim, the
director or officer may bring an action to recover the unpaid amount of the
claim and, if successful, the director or officer also will be entitled to be
paid the expense of prosecuting the action to recover these unpaid amounts.
As permitted by the DGCL, Registrant's Certificate of Incorporation will
provide that directors of Registrant shall not be liable to Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to unlawful payment of dividends or unlawful
stock purchase or redemption or (iv) for any transaction from which the director
derived an improper personal benefit. As a result of this provision, Registrant
and its stockholders may be unable to obtain monetary damages from a director
for breach of his or her duty of care.
Under the Bylaws, Registrant will have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of Registrant, or is or was serving at the request of Registrant as a
director, officer, employee, partner or agent of another corporation or of a
partnership, joint
II-1
<PAGE> 92
venture, limited liability company, trust or other enterprise, against any
liability asserted against the person or incurred by the person in that
capacity, or arising out of the person's fulfilling one of these capacities, and
related expenses, whether or not Registrant would have the power to indemnify
the person against the claim under the provisions of the DGCL. Registrant has in
force as of date of this offering director and officer liability insurance on
behalf of its directors and officers in the amount of $2 million.
The Underwriting Agreement provides that the underwriters must, under
specified circumstances, indemnify Registrant's directors, officers and
controlling persons against specified liabilities, including liabilities under
the Securities Act of 1933, as amended. Reference is made to the form of
Underwriting Agreement to be filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities issued or sold by
Registrant within the last three years. All such securities were offered and
sold in reliance upon the exemption from registration under Section 4(2) of the
Securities Act, relating to sales by an issuer not involving any public
offering, including offers and sales under Regulation D or Rule 701 under the
Securities Act.
The sales of securities were made without the use of an underwriter and the
certificates evidencing the shares bear a restrictive legend permitting the
transfer thereof only upon registration of the shares or an exemption under the
Securities Act.
(1) On February 6, 1998, Registrant issued in total 1,000 shares of its common
stock to Kevin Koch, K.C. Nicolaou, Anthony Piscopio and David Snitman in
connection with its incorporation for an aggregate purchase price of $400.
(2) On May 18, 1998, Registrant entered into a Preferred and Common Stock
Purchase Agreement, as amended on August 7, 1998, with certain accredited
investors pursuant to which Registrant issued between May 19, 1998 and
January 15, 1999 a total of 6,635,000 shares of Series A preferred stock for
an aggregate purchase price of $6,635,000 and 2,912,367 shares of common
stock for an aggregate purchase price of $684,406.
(3) From July 1, 1998 to June 30, 2000, Registrant granted options to purchase
an aggregate of 3,348,240 shares of common stock to employees, directors and
consultants under its 1998 Stock Option Plan dated July 1, 1998, as amended.
As of June 30, 2000, 456,840 shares have been purchased for an aggregate
purchase price of $107,358. In addition, 500,074 shares were fully vested
and 36,556 shares have been cancelled.
(4) On October 9, 1998, Registrant entered into a Loan and Security Agreement
with Silicon Valley Bank and, in connection with the loan, Registrant issued
the bank a warrant to purchase 40,000 shares of Series A preferred stock at
an initial exercise price of $1.00 per share.
(5) On February 26, 1999, Registrant entered into a Master Note and Security
Agreement with Leasing Technologies International, Inc. and in connection
with the line of credit, Registrant issued Leasing Technologies
International, Inc. a warrant to purchase 13,750 shares of Series A
preferred stock at an initial exercise price of $3.00 per share.
(6) On March 26, 1999, Registrant entered into a Loan and Security Agreement
with Silicon Valley Bank and in connection with the loan, Registrant issued
the bank a warrant to purchase 7,000 shares of Series B preferred stock at
an initial exercise price of $2.50 per share.
(7) On November 16, 1999, Registrant entered into a Series B Preferred Stock
Purchase Agreement with certain accredited investors for the issuance of
3,199,999 shares of Series B preferred stock for an aggregate purchase price
of approximately $8,000,000.
(8) On May 17, 2000, Registrant entered into a Loan and Security Agreement with
Silicon Valley Bank and, in connection with the loan, Registrant issued the
bank a warrant to purchase 50,000 shares of Series B preferred stock at an
initial exercise price of $5.00 per share.
II-2
<PAGE> 93
(9) On August 31, 2000, Registrant entered into a Series C Preferred Stock
Purchase Agreement with certain accredited investors for the issuance of
1,666,667 shares of Series C preferred stock for an aggregate purchase price
of approximately $10,000,000.
The issuances of securities described in paragraph (3) above were deemed to
be exempt from the registration requirements of the Securities Act in reliance
on Rule 701 promulgated under Section 3(b) of the Securities Act as transactions
by an issuer pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701.
The issuances described in paragraphs (1), (2) and (4) through (9) above
were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) and pursuant to Regulation D, Rule 506 of the Securities Act.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to
information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement
3.1 -- Amended and Restated Certificate of Incorporation of
Array BioPharma Inc.
3.2* -- Form of Amended and Restated Certificate of Incorporation
of Array BioPharma Inc. to be effective upon the closing
of the offering being made pursuant to this Registration
Statement
3.3 -- Amended and Restated Bylaws of Array BioPharma Inc.
3.4* -- Form of Amended and Restated Bylaws of Array BioPharma
Inc. to be effective upon the closing of the offering
being made pursuant to this Registration Statement
4.1* -- Specimen certificate representing the common stock
5.1* -- Opinion of Hogan & Hartson L.L.P. with respect to
legality of the common stock
10.1 -- 1998 Stock Option Plan effective July 1, 1998, as amended
10.2* -- Form of Amended and Restated Stock Option and Incentive
Plan to be effective upon the closing of the offering
being made pursuant to this Registration Statement
10.3* -- Form of Employee Stock Purchase Plan to be effective upon
the closing of the offering being made pursuant to this
Registration Statement
10.4 -- Preferred and Common Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated May 18, 1998
10.5 -- Amendment to Preferred and Common Stock Purchase
Agreement dated August 7, 1998
10.6 -- Series B Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.7 -- Series C Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated August 31, 2000
10.8 -- Lease Agreement by and between Registrant, as Tenant, and
Amgen Inc., as Landlord, dated July 1998
</TABLE>
II-3
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9 -- First Amendment to Lease Agreement by and between
Registrant, as Tenant, and Amgen Inc., as Landlord, dated
April 1, 1999
10.10 -- Lease Agreement by and between Registrant, as Tenant, and
Pratt Land Limited Liability Company, as Landlord, dated
February 28, 2000
10.11 -- Revised Employment Agreement by and between Registrant
and Robert E. Conway dated November 16, 1999
10.12* -- Form of Employment Agreement dated September 1, 2000 by
and between Registrant and each of Laurence Burgess,
Jonathan Josey, Anthony D. Piscopio, David L. Snitman,
Kevin Koch, Michael Carruthers and Joanna Money
10.13 -- Promissory Note and Pledge Agreement of Kevin Koch to
Registrant dated May 18, 1998, as amended
10.14 -- Promissory Note and Pledge Agreement of KC Nicolaou to
Registrant dated May 18, 1998
10.15 -- Promissory Note and Pledge Agreement of Anthony D.
Piscopio to Registrant dated May 18, 1998, as amended
10.16 -- Amended and Restated Investors Rights Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.17 -- Amendment No. 1 to Amended and Restated Investors Rights
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.18 -- Amended and Restated Stockholders Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.19 -- First Amendment to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated April 2000
10.20 -- Amendment No. 2 to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.21 -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated October 9, 1998
10.22 -- Warrant to Purchase 40,000 Shares of Series A Preferred
Stock issued to Silicon Valley Bank, issue date October
9, 1998
10.23 -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated March 26, 1999
10.24 -- Warrant to Purchase Shares of Series Preferred Stock
issued to Silicon Valley Bank, issue date March 31, 1999
10.25 -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated May 17, 2000
10.26 -- Warrant to Purchase Stock issued to Silicon Valley Bank,
issue date May 17, 2000
10.27 -- Master Note and Security Agreement by and between
Registrant and Leasing Technologies International, Inc.
dated February 26, 1999
10.28 -- Warrant to Purchase 13,750 Shares of Series A Preferred
Stock issued to Leasing Technologies International, Inc.,
issue date March 30, 1999
10.29+ -- Custom Synthesis Fee-For-Service Agreement between
Registrant and Merck & Co., Inc. dated May 14, 1999
</TABLE>
II-4
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.30+ -- Array Library Screening Agreement between Registrant and
E.I. du Pont de Nemours and Company dated August 1, 2000
10.31+ -- Lead Optimization Agreement between Registrant and ICOS
Corporation dated December 22, 1998
10.32+ -- Cell Cycle Checkpoint Optimization Agreement between
Registrant and ICOS Corporation dated April 6, 1999
10.33+ -- Drug Discovery Collaboration Agreement between Registrant
and ICOS Corporation dated July 31, 2000
10.34+ -- Compound Library Agreement between Registrant and Darwin
Discovery Limited dated April 22, 1999
10.35+ -- Diversity Library Screening Agreement between Registrant
and Tularik Inc. dated June 10, 1999, as amended
10.36+ -- Research Services Agreement between Registrant and Eli
Lilly and Company dated March 22, 2000, as amended
10.37+ -- Custom Synthesis Development and Supply Agreement between
Registrant and Merck & Co., Inc. dated September 6, 2000
16.1 -- List of Subsidiaries
23.1 -- Consent of Independent Auditors -- Ernst & Young LLP
23.2* -- Consent of Hogan & Hartson L.L.P. (included in Exhibit
5.1)
24.1 -- Power of Attorney (included on signature page)
27.1 -- Financial Data Schedule
</TABLE>
---------------
* To be filed by amendment.
+ Confidential treatment applied for.
(b) Financial Statement Schedules:
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Registrant
pursuant to the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE> 96
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Boulder, State of
Colorado, on September 15, 2000.
Array BioPharma Inc.
By: /s/ ROBERT E. CONWAY
----------------------------------
Robert E. Conway
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Robert
E. Conway, Michael Carruthers, David L. Snitman and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, from such person and in each person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement or any registration statement
relating to this registration statement under Rule 462 under the Securities Act
of 1933 and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT E. CONWAY Chief Executive Officer and September 15, 2000
----------------------------------------------------- Director (Principal
Robert E. Conway Executive Officer)
/s/ KYLE LEFKOFF Chairman of the Board of September 15, 2000
----------------------------------------------------- Directors
Kyle Lefkoff
/s/ MICHAEL CARRUTHERS Chief Financial Officer September 15, 2000
----------------------------------------------------- (Principal Financial and
Michael Carruthers Accounting Officer)
/s/ FRANCIS J. BULLOCK, PH.D. Director September 15, 2000
-----------------------------------------------------
Francis J. Bullock, Ph.D.
/s/ MARVIN H. CARUTHERS, PH.D. Director September 15, 2000
-----------------------------------------------------
Marvin H. Caruthers, Ph.D.
/s/ KIRBY L. CRAMER Director September 15, 2000
-----------------------------------------------------
Kirby L. Cramer
</TABLE>
II-7
<PAGE> 98
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KEVIN KOCH, PH.D. Director September 15, 2000
-----------------------------------------------------
Kevin Koch, Ph.D.
/s/ ROBERT W. OVERELL, PH.D. Director September 15, 2000
-----------------------------------------------------
Robert W. Overell, Ph.D.
/s/ DAVID L. SNITMAN, PH.D. Director September 15, 2000
-----------------------------------------------------
David L. Snitman, Ph.D.
</TABLE>
II-8
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement
3.1 -- Amended and Restated Certificate of Incorporation of
Array BioPharma Inc.
3.2* -- Form of Amended and Restated Certificate of Incorporation
of Array BioPharma Inc. to be effective upon the closing
of the offering being made pursuant to this Registration
Statement
3.3 -- Amended and Restated Bylaws of Array BioPharma Inc.
3.4* -- Form of Amended and Restated Bylaws of Array BioPharma
Inc. to be effective upon the closing of the offering
being made pursuant to this Registration Statement
4.1* -- Specimen certificate representing the common stock
5.1* -- Opinion of Hogan & Hartson L.L.P. with respect to
legality of the common stock
10.1 -- 1998 Stock Option Plan effective July 1, 1998, as amended
10.2* -- Form of Amended and Restated Stock Option and Incentive
Plan to be effective upon the closing of the offering
being made pursuant to this Registration Statement
10.3* -- Form of Employee Stock Purchase Plan to be effective upon
the closing of the offering being made pursuant to this
Registration Statement
10.4 -- Preferred and Common Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated May 18, 1998
10.5 -- Amendment to Preferred and Common Stock Purchase
Agreement dated August 7, 1998
10.6 -- Series B Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.7 -- Series C Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated August 31, 2000
10.8 -- Lease Agreement by and between Registrant, as Tenant, and
Amgen Inc., as Landlord, dated July 1998
10.9 -- First Amendment to Lease Agreement by and between
Registrant, as Tenant, and Amgen Inc., as Landlord, dated
April 1, 1999
10.10 -- Lease Agreement by and between Registrant, as Tenant, and
Pratt Land Limited Liability Company, as Landlord, dated
February 28, 2000
10.11 -- Revised Employment Agreement by and between Registrant
and Robert E. Conway dated November 16, 1999
10.12* -- Form of Employment Agreement dated September 1, 2000 by
and between Registrant and each of Laurence Burgess,
Jonathan Josey, Anthony D. Piscopio, David L. Snitman,
Kevin Koch, Michael Carruthers and Joanna Money
10.13 -- Promissory Note and Pledge Agreement of Kevin Koch to
Registrant dated May 18, 1998, as amended
10.14 -- Promissory Note and Pledge Agreement of KC Nicolaou to
Registrant dated May 18, 1998
10.15 -- Promissory Note and Pledge Agreement of Anthony D.
Piscopio to Registrant dated May 18, 1998, as amended
10.16 -- Amended and Restated Investors Rights Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17 -- Amendment No. 1 to Amended and Restated Investors Rights
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.18 -- Amended and Restated Stockholders Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.19 -- First Amendment to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated April 2000
10.20 -- Amendment No. 2 to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.21 -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated October 9, 1998
10.22 -- Warrant to Purchase 40,000 Shares of Series A Preferred
Stock issued to Silicon Valley Bank, issue date October
9, 1998
10.23 -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated March 26, 1999
10.24 -- Warrant to Purchase Shares of Series Preferred Stock
issued to Silicon Valley Bank, issue date March 31, 1999
10.25 -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated May 17, 2000
10.26 -- Warrant to Purchase Stock issued to Silicon Valley Bank,
issue date May 17, 2000
10.27 -- Master Note and Security Agreement by and between
Registrant and Leasing Technologies International, Inc.
dated February 26, 1999
10.28 -- Warrant to Purchase 13,750 Shares of Series A Preferred
Stock issued to Leasing Technologies International, Inc.,
issue date March 30, 1999
10.29+ -- Custom Synthesis Fee-For-Service Agreement between
Registrant and Merck & Co., Inc. dated May 14, 1999
10.30+ -- Array Library Screening Agreement between Registrant and
E.I. du Pont de Nemours and Company dated August 1, 2000
10.31+ -- Lead Optimization Agreement between Registrant and ICOS
Corporation dated December 22, 1998
10.32+ -- Cell Cycle Checkpoint Optimization Agreement between
Registrant and ICOS Corporation dated April 6, 1999
10.33+ -- Drug Discovery Collaboration Agreement between Registrant
and ICOS Corporation dated July 31, 2000
10.34+ -- Compound Library Agreement between Registrant and Darwin
Discovery Limited dated April 22, 1999
10.35+ -- Diversity Library Screening Agreement between Registrant
and Tularik Inc. dated June 10, 1999, as amended
10.36+ -- Research Services Agreement between Registrant and Eli
Lilly and Company dated March 22, 2000, as amended
10.37+ -- Custom Synthesis Development and Supply Agreement between
Registrant and Merck & Co., Inc. dated September 6, 2000
16.1 -- List of Subsidiaries
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 -- Consent of Independent Auditors -- Ernst & Young LLP
23.2* -- Consent of Hogan & Hartson L.L.P. (included in Exhibit
5.1)
24.1 -- Power of Attorney (included on signature page)
27.1 -- Financial Data Schedule
</TABLE>
---------------
* To be filed by amendment.
+ Confidential treatment applied for.
