<PAGE>
As filed with the Securities and Exchange Commission on April 10, 2000
Registration No. 333-30774
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ORCHID BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
----------
<TABLE>
<S> <C> <C>
Delaware 8731 22-3392819
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
----------
ORCHID BIOSCIENCES, INC.
303 College Road East
Princeton, NJ 08540
(609) 750-2200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------
DALE R. PFOST, Ph.D.
Chairman of the Board, President and Chief Executive Officer
ORCHID BIOSCIENCES, INC.
303 College Road East
Princeton, NJ 08540
(609) 750-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------
Copies to:
<TABLE>
<S> <C>
Joseph E. Mullaney III, Esq. Peter H. Jakes, Esq.
John J. Cheney III, Esq. Gregg B. Shulklapper, Esq.
Mintz, Levin, Cohn, Ferris, Willkie Farr & Gallagher
Glovsky and Popeo, P.C. 787 Seventh Avenue
One Financial Center New York, New York 10019-6099
Boston, Massachusetts 02111 Telephone: (212) 728-8000
Telephone: (617) 542-6000 Telecopy: (212) 728-8111
Telecopy: (617) 542-2241
</TABLE>
----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
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,
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share....... 9,200,000 $13.00 $119,600,000 $31,574
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,200,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) promulgated under the Securities Act of 1933.
(3) $23,760 of this fee was paid in connection with our initial filing on
February 18, 2000 and $7,814.00 was paid in connection with our filing of
Amendment No. 1 to this Registration Statement on April 7, 2000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until 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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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 10, 2000
8,000,000 Shares
LOGO OF ORCHID BIOSCIENCES
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$11.00 and $13.00 per share. We have applied to have our common stock approved
for quotation on The Nasdaq Stock Market's National Market under the symbol
"ORCH."
The underwriters have an option to purchase up to a maximum of 1,200,000
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Orchid
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Robertson Stephens
Salomon Smith Barney
The date of this prospectus is , 2000.
<PAGE>
[Inside front cover depicts the steps involved in the process described in
the "Technology" section.
Caption on inside front cover in upper left hand corner: "Our SNP-IT(TM)
technology is designed to rapidly and efficiently detect and analyze the subtle
genetic variations among people, known as single nucleotide polymorphisms, or
SNPs. Our SNP-IT(TM) technology involves three basic steps:"
Captions centered on the inside front cover page:
"1. Prepare the DNA sample.
2. Selectively add a single base at the location of the SNP.
3. Detect the presence or absence of the SNP."
Gatefold layout of graphic representation of our SNP-IT(TM) primer-extension
technology. Photos will represent our product and service offerings, including
SNPstream, SNPware kits and microfluidic technology, as well as an artistic
rendition of our proposed MegaSNPatron facility.
Captions on the gatefold layout are as follows:
"Orchid's opportunities in genetic diversity"
Caption under artistic rendition of MegaSNPatron: "Artist's rendition of
proposed future MegaSNPatron(TM) facility"
Caption under depiction of microfluidic chips in right hand lower corner:
"Orchid provides products, services and technology for SNP and genetic
diversity analyses."]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 8
Special Note Regarding Forward-
Looking Statements................. 19
Use Of Proceeds..................... 20
Dividend Policy..................... 20
Capitalization...................... 21
Dilution............................ 22
Selected Financial Data............. 23
Unaudited Pro Forma Financial Data.. 24
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations...................... 27
Business............................ 35
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management....................... 55
Transactions With Executive
Officers, Directors And Five
Percent Stockholders............ 68
Principal Stockholders........... 70
Description Of Capital Stock..... 72
Shares Eligible For Future Sale.. 75
Underwriting..................... 76
Notice To Canadian Residents..... 78
Legal Matters.................... 79
Experts.......................... 79
Where You Can Find More
Information..................... 79
Index To Financial Statements.... F-1
</TABLE>
This prospectus contains references to our trademarks SNP-IT(TM) and
GeneScreen(R). SNPstream, SNPware, SNPkit, DNAstream, Chemtel, MegaSNPatron,
SNPcode, Clinical Genetics Network, Regional GeneScreen Center, SNP CONFIRM,
SNP ASSOCIATION, SNP WIDEMAP, GENESCREEN IDENTITY, GENESCREEN FORENSIC,
GENESCREEN TRANSPLANT TESTING, and the Orchid logo are our trademarks for which
registration applications have been filed with the United States Patent and
Trademark Office. All other trademarks or trade names referred to in this
prospectus are the property of their respective owners.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in the offering. Therefore, you should read the entire prospectus
carefully.
Orchid BioSciences
We are a leader in the development and commercialization of technologies,
products and services designed to measure and use information related to
genetic diversity. We expect our proprietary technologies will significantly
enhance the way companies generate information about single nucleotide
polymorphisms, or "SNPs," the most common form of genetic diversity. The
pharmaceutical and medical communities can use genetic diversity information to
facilitate the development of highly specific and efficacious drugs, to improve
the effectiveness of existing drugs, and to increase the likelihood of success
of tissue transplants. Our proprietary technologies also have other commercial
applications outside of the healthcare field, including forensics and paternity
testing, as well as improved crop development and livestock breeding programs.
The Opportunity
As the sequencing of the human genome nears a successful completion, we
believe the scientific community is entering a post-genomics era that will be
driven by the identification of genetic variation from person to person. We
expect that researchers will discover millions of SNPs over the next several
years, fueling a dramatic increase in the demand for studies associating
particular SNPs or combinations of SNPs with medically important attributes. We
expect that these studies will create a need for the analysis of billions of
SNPs. We call the performance of these analyses SNP scoring. Traditional
methods of conducting SNP scoring have significant limitations, including high
expense, low accuracy, lack of flexible design, lack of scalability and
sensitivity to variations in experimental conditions. The transition to the
post-genomics era and the increase in the number of SNP association studies
creates a pressing need for fast and flexible SNP scoring systems that can
score SNPs with a higher level of accuracy and at a lower cost than is
achievable with current methods.
Orchid's Unique Solution
We believe our proprietary SNP-IT primer-extension SNP scoring technology is
superior to conventional SNP scoring technologies. SNP-IT primer extension is a
method of isolating the precise location of the site of a suspected SNP by
using a specially synthesized DNA primer and an enzyme known as a polymerase
which selectively extends the DNA chain by one base at the suspected SNP
location. Our SNP scoring system rapidly generates highly accurate information
relating to SNPs at a cost that is significantly lower than conventional
systems. We have designed our SNP-IT primer-extension technology to be
automated and usable in environments ranging from small scale laboratories to
large scale commercial facilities. It is also adaptable to a wide variety of
instrument platforms and laboratory conditions. We have also developed
proprietary technologies designed to control the flow of chemicals in
miniaturized systems, which we call our microfluidics technologies. We believe
the combination of our SNP-IT primer-extension technology with our proprietary
microfluidics technologies will enable us to gain competitive advantages in the
cost and capacity, or throughput, of SNP scoring conducted at our high-
throughput MegaSNPatron facility. As we refine our microfluidics technologies,
we intend to integrate them into our facility in order to increase its
throughput to millions of SNP scores per day and significantly reduce SNP
scoring costs.
We believe our unique approach to SNP scoring will enable pharmaceutical
companies to improve their identification of lead drug candidates for
optimization and development by allowing them to generate and rapidly convert
genetic variation data into diverse collections of potentially useful targets
and drug candidates. In addition, we believe pharmaceutical companies will use
our technologies to assess the effectiveness and toxicity of drug candidates
which they are developing as well as their currently-marketed drugs. We also
intend to use our technologies to develop proprietary applications of SNPs
designed to improve medical treatment. We believe our proprietary technologies
will also be applicable to the development of agricultural and diagnostic
products. We believe these applications of genetic diversity will be an
important part of the post-genomics era.
4
<PAGE>
Our Target Markets
We are targeting our SNP scoring technologies at a number of the most
rapidly developing markets in the field of genetic diversity. Specifically, we
believe our SNP scoring technologies can provide significant value in many
aspects of drug discovery, development and marketing as well as disease
predisposition assessment, diagnostic test development, transplantation
matching and development of agricultural products. Each of these markets
presents us with a wide range of opportunities for our technologies, including
SNP confirmation and SNP association studies, as well as the application of SNP
scoring to clinical trials and in clinical diagnostics.
Our Strategy
Our objective is to become the premier provider of instruments, consumables,
services and technologies for SNP scoring and of other genetic diversity tests.
The key elements of our strategy to achieve this objective include the
following:
. Rapid commercialization. We intend to rapidly commercialize our products
and services, including our line of SNPstream instruments and SNPware
kits for SNP scoring. We intend to commercialize SNPware kits for use on
our hardware instrument platform, as well as on other SNP scoring
platforms. For example, we are developing our SNPware consumable product
line for Affymetrix, a leading DNA chip company. In addition, we intend
to offer our products and services to other major companies for
distribution to their customers. We currently provide SNP scoring
services at our high-throughput MegaSNPatron facility.
. Market extension. We intend to leverage our strong position in the
research market to expand into the clinical and diagnostic markets. We
believe these markets have the largest long-term growth potential in the
genetic diversity field. We also intend to expand geographically by
establishing international SNP scoring facilities to create additional
service revenue and promote the sale of our entire line of products. We
also intend to provide SNP scoring directly to consumers and physicians
through one of our Web sites.
. Proprietary SNP value creation. We intend to continue to create
proprietary rights covering the association of SNPs with medically
important attributes. We expect this will result in proprietary rights
covering a broad range of new and existing drugs consisting of both
"composition of matter patents," which cover the drugs themselves, and
"use patents," which extend the drug's label coverage.
. Sustained competitive advantage. We plan to build and sustain our
competitive advantage in the genetic diversity field through scientific
collaborations and acquisitions. We intend to use our microfluidics
technologies to leverage our SNP scoring technologies and to maintain a
competitive advantage in SNP scoring costs and capacity.
Our Products and Services
We currently offer our SNPstream hardware system and SNPware consumable kits
to enable customers to conduct SNP scoring. We also offer SNP scoring services
at our high-throughput MegaSNPatron facility and genetic diversity testing
services through our clinical laboratories, or Regional GeneScreen Centers, for
use in forensic and paternity testing as well as to improve the success of bone
marrow transplants.
Our History
We organized our company as a Delaware corporation on March 8, 1995 and in
February 2000 we changed our name from Orchid Biocomputer, Inc. to Orchid
BioSciences, Inc. Our principal office is located at 303 College Road East,
Princeton, NJ 08540 and our telephone number is (609) 750-2200. You can find
our corporate Web site at http://www.orchid.com. We do not intend any of the
information contained on any of our Web sites to be considered a part of this
prospectus.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock we are offering............. 8,000,000 shares
Common stock to be outstanding after this
offering................................ 33,998,606 shares
Use of proceeds.......................... For general corporate and working
capital purposes, including
potential acquisitions and to
construct or acquire a manufacturing
facility. See "Use of Proceeds."
Proposed Nasdaq National Market symbol... ORCH
</TABLE>
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding on March 31, 2000 and
excludes:
. 3,250,995 shares of common stock that we may issue upon exercise of
options outstanding as of March 31, 2000 at a weighted average exercise
price of $4.62 per share; and
. 1,237,138 shares of common stock that we may issue upon exercise of
warrants outstanding or that we were obligated to issue as of March 31,
2000 at a weighted average exercise price of $4.64 per share.
------------
Unless otherwise indicated, information in this prospectus assumes the
following:
. the conversion of all of our outstanding shares of convertible preferred
stock and mandatorily redeemable convertible preferred stock immediately
prior to the closing of this offering, into 24,790,787 shares of common
stock;
. the filing of our amended and restated certificate of incorporation
concurrently with the closing of this offering; and
. no exercise of the underwriters' over-allotment option.
6
<PAGE>
Summary Historical and Pro Forma Financial Data
(in thousands, except per share data)
In the "Pro Forma Year Ended December 31, 1999" column below, we have
adjusted the consolidated statements of operations data to give pro forma
effect to the acquisition of GeneScreen, Inc. on December 30, 1999 as if it had
occurred on January 1, 1999.
In the "Pro Forma" column of the consolidated balance sheet data below, we
have adjusted the balance sheet data as of December 31, 1999 to give pro forma
effect to the automatic conversion of all of our outstanding convertible
preferred stock, including the Series E mandatorily redeemable convertible
preferred stock sold in January 2000 for net proceeds of $29,573,564 and the
issuance in January 2000 of Series E mandatorily redeemable convertible
preferred stock recorded in our Consolidated Financial Statements as "Series E
to be issued" at December 31, 1999, into shares of common stock immediately
prior to the closing of this offering.
In the "Pro Forma As Adjusted" column in the consolidated balance sheet data
below, we have adjusted the actual balance sheet data as of December 31, 1999
to give effect to the same adjustments as in the "Pro Forma" column, and have
further adjusted these amounts to give effect to receipt of the estimated net
proceeds of $88.3 million from the sale of 8,000,000 shares of common stock in
this offering at an assumed initial public offering price of $12.00 per share,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
Period from
March 8, 1995 Pro Forma
(inception) Year Ended December 31, Year Ended
to ------------------------------------ December 31,
December 31, 1995 1996 1997 1998 1999 1999
----------------- ------- ------- -------- -------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenues............................. $2,795 $ 6,230 $ 3,763 $ 2,781 $ 1,793 $ 15,540
Operating expenses:
Cost of laboratory testing.......... -- -- -- -- -- 9,778
General and administrative.......... 37 718 2,927 5,199 9,611 17,109
Research and development............ 2,795 6,727 10,813 7,574 14,447 14,546
Acquisition of in-
process research and development... -- -- -- 2,353 -- --
------ ------- ------- -------- -------- --------
Total operating expenses............. 2,832 7,445 13,740 15,126 24,058 41,433
------ ------- ------- -------- -------- --------
Operating loss....................... (37) (1,215) (9,977) (12,345) (22,265) (25,893)
Other income (expenses), net......... 31 91 49 866 (5,955) (5,935)
------ ------- ------- -------- -------- --------
Net loss............................. (6) (1,124) (9,928) (11,479) (28,220) (31,828)
====== ======= ======= ======== ======== ========
Net loss allocable to common
stockholders........................ (6) (1,124) (9,928) (11,479) (72,774) (76,382)
====== ======= ======= ======== ======== ========
Basic and diluted net loss per share
allocable to common stockholders.... $ (.05) $ (3.45) $(27.57) $ (17.09) $ (95.87) $(100.62)
Shares used in computing basic and
diluted net loss per share allocable
to common stockholders.............. 131 326 360 672 759 759
Pro Forma Net Loss Per Share Data(1):
Pro forma basic and diluted net per
share allocable to common
stockholders (unaudited)............ $ (15.61)
Shares used in computing pro forma
basic and diluted net loss per share
allocable to common stockholders
(unaudited)......................... 4,663
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents...................... $33,804 $ 63,377 $151,657
Working capital................................ 27,175 56,748 145,028
Total assets................................... 94,686 124,260 212,540
Long-term debt, less current position.......... 4,122 4,122 4,122
Mandatorily redeemable convertible preferred
stock......................................... 88,846 -- --
Total stockholders' equity (deficit)........... (8,455) 109,964 198,244
</TABLE>
(1)Please see Note 1 to our consolidated financial statements appearing
elsewhere in this prospectus for an explanation of the method used to calculate
net loss per share allocable to common stockholders and pro forma net loss per
share allocable to common stockholders and the number of shares used in the
computation of per share amounts.
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. If any of the
following risks actually occurs, we may not be able to conduct our business as
currently planned and our financial condition and operating results could be
seriously harmed. In that case, the market price of our common stock could
decline, and you could lose all or part of your investment. See "Special Note
Regarding Forward-Looking Statements."
Risks Related to Our Business
We are at an early stage of development and may never become profitable.
We organized as a Delaware corporation on March 8, 1995 and have a short
operating history. The market for the products and services that we develop,
manufacture and market, all of which are derived from genomics and
microfluidics technologies, is uncertain. We face risks related to our ability
to:
. develop, market and maintain competitive technologies, products and
services;
. anticipate and adapt to changes in our rapidly evolving markets;
. retain current collaborators or customers and attract new collaborators
and customers for our SNPware consumables, kits and SNPstream
instruments;
. implement and successfully execute our business strategy and sales and
marketing initiatives in order to increase our brand recognition for our
SNPware consumables, kits and SNPstream instruments;
. attract, retain and motivate qualified management, technical and
scientific personnel;
. obtain substantial additional capital to support the expenses of
developing our technologies and commercializing our SNPware consumables,
kits and SNPstream instruments; and
. transition successfully from a company with a research focus to a company
capable of supporting commercial activities.
If we fail to adequately manage these risks, we may never become profitable and
our financial condition would suffer.
We had an accumulated deficit of $50.8 million as of December 31, 1999 and
expect to continue to incur substantial operating losses for several years.
We have had substantial operating losses since our inception, and we expect
our operating losses to continue over the next several years. For example, we
experienced net losses of $28.2 million in 1999, $11.5 million in 1998 and $9.9
million in 1997. As of December 31, 1999, we had an accumulated deficit of
$50.8 million. In order to further develop our single nucleotide polymorphism,
or SNP, scoring and microfluidics technologies, we will need to incur
significant expenses in connection with our internal research and development
and commercialization programs. As a result, we expect to incur operating
losses for several years.
Fluctuations in our quarterly revenue and operating results may negatively
impact our stock price.
Our revenue and results of operations have fluctuated significantly in the
past and we expect significant fluctuations to continue in the future due to a
variety of factors, many of which are outside of our control. These factors
include:
. the volume and timing of orders for our SNPware consumables, kits,
SNPstream instruments and our other products and services;
. changes in the mix of our products and services offered;
8
<PAGE>
. the number, timing and significance of new products and services
introduced by our competitors;
. our ability to develop, market and introduce new and enhanced products
and services on a timely basis;
. changes in the cost, quality and availability of reagents and components
required to manufacture or use our products; and
. availability of commercial and government funding to researchers who use
our products and services.
Research and development costs associated with our technologies, products
and services, as well as personnel costs, marketing programs and overhead
account for a substantial portion of our operating expense. We cannot adjust
these expenses quickly in the short term. If our revenue declines or does not
grow as anticipated, we may not be able to reduce our operating expenses
accordingly. Failure to achieve anticipated levels of revenue could therefore
significantly harm our operating results for a particular fiscal period. In
addition, if our operating results in some quarters fail to meet the
expectations of public market analysts or investors, the market price of our
common stock is likely to fall.
We have limited manufacturing experience and will need to acquire new
facilities to manufacture our products on a commercial scale.
We have limited manufacturing experience and currently possess only a single
facility capable of manufacturing limited quantities of our SNPware products
for sale to our customers and for internal use. To achieve the production
levels necessary for successful commercialization, we will need to scale-up our
manufacturing facilities and establish automated manufacturing capabilities. We
are presently searching for a facility to meet our manufacturing needs beyond
2000. If we are unable to acquire additional manufacturing facilities or
successfully scale-up our existing manufacturing capability, we may not be able
to provide our customers with the quantity of products and services they
require, which would result in reduced revenue. If any natural disaster were to
significantly damage our manufacturing facility or if other events were to
cause our operations to fail, these events could prevent us from developing and
manufacturing our products. Furthermore, we may not have adequate insurance to
cover the damage, which would adversely affect our results of operations.
We have limited sales and marketing experience, and as a result, may be unable
to compete successfully with our competitors in commercializing our potential
products and services.
We have limited experience in sales and marketing. We do not have a direct
sales force and rely principally upon a small number of employees who do not
have specific training in sales. We intend to market our SNP scoring and
microfluidics technologies and applications through collaborations and
distribution agreements with pharmaceutical and biotechnology companies. We
cannot assure you that we will be able to establish a successful direct sales
force or to establish collaboration or distribution arrangements to market our
products and services, which could have a material adverse effect on our
financial condition and business strategy.
Our technologies and initial commercial products may not be commercially viable
or successful, which would adversely affect our revenue.
We have not yet completed the development of our SNP scoring technologies or
our high-throughput MegaSNPatron facility for SNP scoring, both of which are
important elements of our business strategy. We may not be able to successfully
develop these technologies or this facility. Even if we develop these
technologies, we cannot be certain that our prospective customers will value
them. We are currently developing and commercializing only a limited number of
products based on our SNP scoring technologies. We cannot assure you that we or
our customers will be able to use these technologies to successfully identify
and score SNPs. In addition, any SNPs, which we or our customers score may not
be useful in assisting pharmaceutical or diagnostic product development. Our
SNP scoring technologies are in part directed toward the role of genes
9
<PAGE>
and polymorphisms in complex diseases. A limited number of companies have
developed or commercialized products based on gene discoveries and/or
polymorphisms to date. Accordingly, even if we or our customers are successful
in scoring SNPs and associating these SNPs with specific drug responses or
diseases, we cannot assure you that these discoveries will lead to the
development of therapeutic or diagnostic products. If we fail to successfully
develop our SNP scoring technologies or any commercially successful therapeutic
or diagnostic products based on such technologies, we may not achieve a
competitive position in the market.
Our SNP scoring technologies involve novel uses of instrumentation, software
and technologies that require validation in commercial applications. Previously
unrecognized defects or limitations of our SNP scoring technologies may become
apparent in these commercial applications. As a result, we may be unable to
validate or achieve the improvements in the components of our SNP scoring
technologies necessary for their successful commercialization.
Our SNP scoring technologies will also need to compete against well-
established techniques and enhancements for discovering novel drugs, including
combinatorial chemistry and high-throughput screening. We may be unable to
compete successfully against existing techniques and instruments, which would
materially and adversely affect our ability to market and sell our products and
services and our revenue.
If our customers do not purchase significant volumes of SNPware consumables,
our rapid commercialization strategy could fail.
Our customers may not generate sufficient data in a cost effective manner
using our SNPstream product line. This may limit their purchases of our SNPware
consumables, kits and other consumables necessary to conduct SNP scoring with
our SNPstream systems. Other factors which may limit the use of our kits and
consumables include the acceptance of our technologies by our customers and the
training of our customers' personnel. If our customers are slow to, or never,
achieve sufficient results using our SNPstream system, or fail to purchase
sufficient quantities of our SNPware consumables and kits, we may never achieve
profitability. Further, our customers may not adopt SNPware consumables and
kits for use with their own instrument systems. Even if they do, our products
may not work on their systems. Either circumstance would materially and
adversely affect our revenue and our rapid commercialization strategy.
If we fail to maintain the paternity testing service contracts we have with
various state agencies or fail to enter into additional such relationships, we
would lose a significant source of revenue.
We currently derive a substantial portion of our revenue from the DNA
testing services we provide in the paternity and forensic fields. These
services are heavily dependent upon contracts we have with various state
agencies, which are typically open to bid and awarded every one to three years.
The process and criteria for these awards are typically complex and highly
competitive. We may not be able to maintain any of our existing state contracts
or be the successful bidder on any additional state contracts which may become
available in the future on terms acceptable to us, which would adversely affect
our results of operations and financial condition.
We will require additional funding to fund our future operating plans which may
not be available on acceptable terms, if at all.
We anticipate that our existing capital resources may not be sufficient to
fund our future operating plans and we may therefore need to raise significant
additional capital. We expect our capital and operating expenses to be
significant over the next several years. We have expended significant resources
in developing our MegaSNPatron facility and expect to continue to expend
significant resources to develop this facility, increase our research and
development and commercialization activities and acquire an additional
manufacturing facility. The amount of additional capital which we will need to
raise will depend on many factors, including:
. our progress with research and development;
. the number and breadth of our research programs;
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. our internal use of and our level of success in selling our SNP scoring
products and associated technologies;
. our ability to establish and maintain successful collaborations; and
. the costs incurred by us in enforcing and defending our patent claims and
other intellectual property rights.
We believe the proceeds from this offering, together with cash on hand, will
be sufficient to fund our operating costs for at least the next 18 months.
However, we may need additional financing sooner if we:
. decide to expand faster than planned;
. develop new or enhanced services or products ahead of schedule;
. need to respond to competitive pressures; or
. decide to acquire complementary products, businesses or technologies.
If we raise additional funds through the sale of equity or convertible debt
or equity-linked securities, your percentage ownership in the company will be
reduced. In addition, these transactions may dilute the value of our
outstanding stock. We may issue securities that have rights, preferences and
privileges senior to our common stock. If we raise additional funds through
collaborations or licensing arrangements, we may relinquish rights to certain
of our technologies or products, or grant licenses to third parties on terms
that are unfavorable to us. We may be unable to raise additional funds on terms
acceptable to us. If future financing is not available to us or is not
available on terms acceptable to us, we may not be able to fund our future
needs which would have a material adverse effect on our results of operations
and financial condition.
If we cannot enter into new collaborations or licensing agreements, we may be
unable to develop or commercialize our technologies, products and services.
Our strategy for developing and commercializing products based on our
discoveries depends upon our ability to form research collaborations and
licensing arrangements. As a result, we may be dependent on our collaborators
and licensees for marketing of SNP scoring systems, regulatory approval and
manufacturing and marketing of therapeutic and diagnostic products resulting
from the application of our technologies. We may not be able to enter into such
research collaborations and licensing arrangements or implement our strategy to
develop and commercialize therapeutic and diagnostic products based upon our
discoveries which would have a material adverse effect on our results of
operation and financial condition.
The early termination of any of our collaborations or licenses, including
our collaboration with Affymetrix, could harm our business and financial
condition.
Our collaboration agreement with Affymetrix may be terminated early under
certain circumstances, including in the event of a breach of a material term by
us. In addition, we intend to seek additional collaborations and licenses with
third parties, who may negotiate provisions with us that allow them to
terminate their agreements with us prior to the expiration of the negotiated
term under certain circumstances. If Affymetrix or any other third party
collaborator or licensee were to terminate its agreement with us or otherwise
fail to perform its obligations under our collaboration or to complete them in
a timely manner, we could lose significant revenue.
We may not be able to attract and retain consultants and scientific
advisors.
We have historically maintained relationships with consultants and
scientific advisors at academic and other institutions who have conducted
research on our behalf critical to the development of our technologies. The
majority of these individuals have commitments to other entities and have
limited time available for us. Some of these entities may also compete with us.
We will need to establish new relationships with consultants
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and scientific advisors in our genetic diversity fields. We will have little,
if any, control over the activities of any new collaborators and can expect
only limited amounts of their time to be dedicated to our activities. Our
ability to discover and score SNPs and commercialize products based on those
discoveries may depend in part on continued collaborations with researchers at
academic and other institutions. We cannot be certain that any of our existing
collaborations will be successful. Further, we may not be able to negotiate
acceptable collaborations in the future with additional consultants or
scientific advisors at academic and other institutions.
If we do not successfully distinguish and commercialize our products and
services, we may be unable to compete successfully with our competitors or to
generate significant revenue.
We are subject to significant competition from organizations that are
pursuing products and services that are substantially similar to our proposed
products and services. Many of the organizations competing with us have greater
experience in financial, manufacturing, marketing, sales distribution and
technical regulatory matters than we do. In the SNP scoring field, we compete
with several companies offering alternative technologies based on indirect
detection of hybridization and/or labeling which differ in the various methods
of amplifying and separating samples or of detecting and analyzing SNPs. We may
also compete against our customers, which could adversely affect our
relationships with them.
We believe our future success will depend, in large part, on our ability to
maintain a competitive position in the instrument and kit-based SNP scoring,
pharmacogenetics and microfluidics product fields and in the SNP scoring
services field. We or others may make rapid technological developments which
may result in our technologies, products or services becoming obsolete, before
we recover the expenses incurred to develop them. Our inability to make the
enhancements to our technologies necessary to compete successfully with newly
emerging technologies would have a material adverse effect on our competitive
position.
If we are unable to protect our proprietary methods and technologies, we may
not be able to commercialize products and services.
If our patent applications do not result in issued patents, our competitors
may obtain rights to commercialize our discoveries which would harm our
competitive position.
Our commercial success will depend, in large part, on our ability to obtain
patent protection on many aspects of our business, including the discovery and
the association of particular SNPs with disease predisposition and adverse drug
metabolism, and on the products, methods and services we develop. We may not be
able to obtain new patents for our SNPware consumables, kits and SNPstream
systems. We intend to apply for patent protection on novel SNPs of known genes
and their uses, as well as novel uses for previously identified SNPs discovered
by third parties. In the latter cases, we would need a license from the holder
of the patent with respect to such SNP in order to make, use or sell any
related products. We may not be able to acquire such licenses on terms
acceptable to us, if at all.
If any genomic sequence information related to a SNP is publicly released
prior to the time we apply for patent protection on a related SNP, we may be
unable to obtain patent protection with respect to that SNP. In addition,
certain parties are attempting to rapidly identify and characterize genes and
SNPs through the use of gene expression analysis and other technologies. To the
extent any patents issue to other parties on such partial or full-length genes
or SNPs or uses for such genes or SNPs, the risk increases that the sale of
products, including therapeutics, or processes developed by us or our
collaborators may give rise to claims of patent infringement against us. Others
may have filed and, in the future, are likely to file patent applications
covering SNPs. Any such patent application could have priority over our patent
applications and could further require us to obtain rights to previously issued
patents covering SNPs. We cannot assure you that any license that we may
require under any such patent will be made available to us on commercially
acceptable terms, if at all.
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The scope of our issued patents may not provide us with adequate protection
of our intellectual property, which would harm our competitive position.
Any issued patents that cover our proprietary technologies may not provide
us with substantial protection or be commercially beneficial to us. The
issuance of a patent is not conclusive as to its validity or its
enforceability. The United States Patent and Trademark Office may invalidate
our patents. In addition, third parties may have patents of their own which
could, if asserted, prevent us from practicing our patented technologies
including the methods we use to conduct SNP scoring. If we are otherwise unable
to practice our patented technologies, we may not be able to commercialize our
technologies, products or services and our competitors could commercialize our
technologies.
If significant data on identified SNPs becomes unavailable or available only
on unacceptable terms, we could experience increased research and development
expenses.
We currently obtain and rely on our continued access to significant data on
SNPs from several sources, including The SNP Consortium, Ltd., a group of
leading pharmaceutical companies identifying SNPs. Although many of these
sources make information relating to identified non-proprietary SNPs publicly
and freely available, we cannot be sure that we will continue to obtain this
SNP data without paying licensing or other fees to third parties. If SNP data
is no longer publicly or freely available or is available only at significant
costs, we may be unable to implement our business strategy.
We may need to initiate lawsuits to protect or enforce our patents and other
intellectual property rights, which could result in the forfeiture of these
rights.
In order to protect or enforce our patent rights, we may need to initiate
patent litigation against third parties. These lawsuits could be expensive,
take significant time, and could divert management's attention from other
business concerns. These lawsuits could result in the invalidation or a
limitation in the scope of our patents or forfeiture of the rights associated
with our patents. We cannot assure you that we will prevail or that a court
will not find damages or award other remedies in favor of our opposing party in
any of these suits. During the course of these suits, there may be public
announcements of the results of hearings, motions and other interim proceedings
or developments in the litigation. Securities analysts or investors may
perceive these announcements to be negative, which could cause the market price
of our stock to decline.
Our success will depend partly on our ability to operate without infringing
on or misappropriating the intellectual property rights of others.
We may be sued for infringing on the intellectual property rights of others.
Intellectual property litigation is costly, and could affect our results of
operations. If we do not prevail in any intellectual property litigation, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity, or obtain a license to or design around the intellectual
property in question. If we are unable to obtain a required license on
acceptable terms, or are unable to design around any third party patent, we may
be unable to sell some of our products and services, which would result in
reduced revenue.
Other rights and measures that we rely upon to protect our intellectual
property may not be adequate to protect our products and services and could
reduce our ability to compete in the market.
In addition to patents, we rely on a combination of trade secrets, copyright
and trademark laws, nondisclosure agreements and other contractual provisions
and technical measures to protect our intellectual property rights. While we
require employees, collaborators, consultants and other third parties to enter
into confidentiality and/or non-disclosure agreements where appropriate, any of
the following could still occur:
. the agreements may be breached;
. we may have inadequate remedies for any breach;
. proprietary information could be disclosed to our competitors; or
. others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets
or disclose such technologies.
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If for any of the above reasons our intellectual property is disclosed or
misappropriated, it would harm our ability to protect our rights and our
competitive position.
Future acquisitions or investments could disrupt our ongoing operations,
increase our expenses and adversely affect our revenue.
We have recently completed acquisitions of Molecular Tool and GeneScreen.
Although we have no commitments or agreements with respect to any additional
acquisitions at present, we anticipate that a portion of our future growth may
be accomplished by acquiring existing businesses. Factors that will affect the
success of any acquisition we might make include our ability to integrate
acquired personnel, operations, products and technologies into our organization
effectively, to motivate key personnel and to retain customers of acquired
businesses. We may not be able to identify suitable acquisition opportunities,
obtain any necessary financing for such acquisitions on acceptable terms or
successfully integrate acquired personnel and operations. In addition, as a
public company, the cost of acquiring companies may increase relative to the
cost of acquiring similar companies when we were a private company. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and materially and adversely affect our
revenue.
Our failure to comply with any applicable government regulation may affect our
ability to develop, produce, or market our potential products and may adversely
affect our results of operation.
Our research and development, manufacturing and service activities involve
the controlled use of hazardous materials and chemicals and patient samples. We
are subject to federal, state and local laws and regulations governing the use,
storage, handling and disposal of such materials and certain waste products, as
well as the conveyance, processing, and storage of and data on patient samples.
Further, we are subject to the Clinical Laboratory Improvement Act, or CLIA, as
a result of our recent acquisition of three GeneScreen laboratories. CLIA
imposes certain certification requirements on all clinical laboratories
performing tests on human specimens for the purpose of providing information
for the diagnosis, prevention or testing of any diseases. Although we believe
we comply in all material respects with the standards prescribed by federal,
state and local laws and regulations, if we fail to comply with applicable laws
or regulations, including CLIA, or if an accident occurs, we could be required
to pay significant penalties or be held liable for any damages that result and
this liability could exceed our financial resources.
If we fail to comply with federal and state industry regulations, we may not be
able to provide certain services at our laboratories.
All three of our GeneScreen laboratories must comply with various industry
regulations and accreditation standards in order to continue to provide our
paternity testing, forensic testing and bone marrow typing services. For
example, our GeneScreen laboratories have obtained accreditation from the
American Association of Blood Bank in order to provide paternity testing, from
the National Forensic Science Testing Center in order to provide criminal
forensic testing services and from the American Society of Histocompatibility
and Immunology in order to provide bone marrow donor typing services. We cannot
assure you that we will be able to maintain our accreditations with any of
these authorities. If we fail to comply with the applicable regulations
promulgated by any of these agencies or if we were to lose our accreditation by
any of them, the relevant authority could require us to close our laboratories,
which could eliminate or significantly reduce the revenue supporting our
GeneScreen business results of operation.
The sale of our SNPware consumables, SNPkits, and SNPstream instruments
involves a lengthy and expensive sales cycle that may not result in sales.
Our ability to obtain customers for our SNPware consumables, SNPkits, and
SNPstream instruments will depend in significant part upon the perception that
our products and services can help accelerate or improve drug discovery and
development efforts or have beneficial effects on human health. Our average
sales cycle is lengthy due to the education effort that is required as well as
the need to effectively sell the benefits of our
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products and services to a variety of constituencies within potential
customers, including research and development personnel and key management. As
a result, in many instances we may expend significant human and capital
resources to market our products, without any resulting sales.
If our customers fail to accurately prepare DNA samples for use with our
SNPware and SNPstream product line or for analysis at our MegaSNPatron
facility, our products and services may fail to produce accurate results.
Before using our SNPstream product line and MegaSNPatron SNP scoring service
facility, customers must prepare samples by following several steps that are
prone to human error, including DNA isolation and DNA segment amplification. If
they do not prepare DNA samples appropriately, our SNPstream products and
MegaSNPatron SNP scoring service will not generate an accurate reading.
Alternatively, they may achieve lower levels of throughput than the levels for
which our system was designed. If our customers generate inaccurate readings or
are unable to achieve expected levels of throughput, they may not continue to
purchase our consumables, instruments or services, which could materially and
adversely affect our revenue.
We may be held liable for any inaccuracies associated with our research and DNA
testing services, which may require us to defend ourselves in costly
litigation.
Our Regional GeneScreen Centers provide pharmacogenetic, forensic, and
paternity testing services. Claims may be brought against us for false
identification of paternity or other inaccuracies. Litigation of these claims
can be costly. We could expend significant funds during any litigation
proceeding brought against us. Further, if a court were to require us to pay
damages to a plaintiff, the amount of such damages could significantly harm our
financial condition.
If our vendors fail to supply us with components for which availability is
limited, we may experience delays in our product development and
commercialization.
Certain key components of our SNP scoring and microfluidic chip system
technologies are currently available only from a single source or a limited
number of sources. We currently rely on outside vendors to manufacture certain
components of our SNPstream system and certain reagents we provide in our
SNPware kits. Some or all of these key components may not continue to be
available in commercial quantities at acceptable costs. For example, we have an
agreement with Beckman Coulter under which they supply us with the components
of our SNPstream system and with NEN Life Science Products, Inc. under which
they supply us with some of the key reagents contained in our SNPware kits. We
rely on third parties to provide DNA samples to us and to perform DNA
synthesis. It could be time consuming and expensive for us to seek alternative
sources of supply. Consequently, if any events cause delays or interruptions in
the supply of our components, we may not be able to supply our customers with
our products and services on a timely basis which would adversely affect our
results of operations.
If we fail to retain our key personnel and hire, train and retain qualified
employees, we may not be able to compete effectively, which could result in
reduced revenue.
Our future success will depend on the continued services and on the
performance of our senior management, in particular the services of:
. Dale R. Pfost, Ph.D., our Chairman of the Board, President and Chief
Executive Officer; and
. Donald R. Marvin, our Senior Vice President, Chief Operating Officer,
Chief Financial Officer and Secretary.
If either of Dr. Pfost or Mr. Marvin were to be hired away from us by a
competitor, or if for any reason they could not continue to work for us, we
would have difficulty hiring officers with equivalent skills in general and
financial management. We do not currently carry "key man" life insurance, so
the loss of the services of either of these individuals could seriously impair
our ability to operate or to compete in our industry.
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In addition, our researchers, scientists and technicians have significant
experience in research and development related to genetic diversity. If we were
to lose these employees to our competitors, we could spend a significant amount
of time and resources to replace them, which could impair our research and
development efforts. Further, in order to scale-up our manufacturing capability
and to further our research and development efforts, we will need to hire,
train, and retain additional research, scientific, and technical personnel. If
we are unable to do so, we may experience delays in the research, development
and commercialization of our technologies, products and services.
Risks Related to the Biotechnology Industry
Public opinion regarding ethical issues surrounding the use of genetic
information may adversely affect demand for our products.
Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic
testing. In addition, such authorities could prohibit testing for genetic
predisposition to certain conditions, particularly for those that have no known
cure. Any of these scenarios could reduce the potential markets for our
products, which could materially and adversely affect our revenue.
Commercializing pharmaceutical products has associated risks, including
compliance with pre-clinical and clinical testing and manufacturing
regulations.
Although it is likely to be years before we develop any potential
pharmaceutical products, any future products will require significant research,
development and pre-clinical and clinical testing before we submit any
regulatory application for their commercial use. If we were to undertake any of
these activities without the collaboration of others, we would have to expend
significant funds. Any of our potential pharmaceutical products will be subject
to the risks of failure inherent in the development of pharmaceutical products
based on new technologies. These risks include the following possibilities:
. that such potential pharmaceutical products will be found to be unsafe or
non-efficacious or otherwise fail to receive necessary regulatory
clearances;
. that the products, if safe and efficacious, will be difficult to
manufacture on a large scale or uneconomical to market;
. that proprietary rights of third parties will preclude us or our
collaborative partners from marketing such products; or
. that third parties will market superior or equivalent products.
If we have difficulty managing these risks, we may not be able to develop any
commercially viable products.
In addition, clinical trials or marketing of any such potential
pharmaceutical products may expose us to liability claims from the use of such
pharmaceutical products. We may not be able to obtain product liability
insurance or, even if we do, any coverage we obtain could be insufficient or
costly. In addition, should we choose to manufacture or to develop
pharmaceutical products ourselves, we will have to make significant investments
in pharmaceutical product development, marketing, sales and regulatory
compliance resources, and we will have to establish or contract for the
manufacture of products under the regulations of the FDA regarding good
manufacturing practices. We cannot assure you that we will be able to develop
or commercialize successfully any potential pharmaceutical products.
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Risks Associated With This Offering
Future issuance of our preferred stock may dilute the rights of our common
stockholders.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, privileges and other terms of
these shares. The Board of Directors may exercise this authority without any
further approval of our stockholders. The rights of the holders of common
stock may be adversely affected by the rights of our holders of our preferred
stock that may be issued in the future.
We have various mechanisms in place that you as a stockholder may not consider
favorable, which may discourage takeover attempts.
Following this offering, certain provisions of our certificate of
incorporation and bylaws, as well as Section 203 of the Delaware General
Corporation Law, may discourage, delay or prevent a change in control of our
company, even if the change of control would be beneficial to stockholders.
These provisions include:
. authorizing the issuance of "blank check" preferred stock that could be
issued by our Board of Directors to increase the number of outstanding
shares and thwart a takeover attempt;
. a classified Board of Directors with staggered, three-year terms, which
may lengthen the time required to gain control of our Board of Directors;
. prohibiting cumulative voting in the election of directors, which will
allow a majority of stockholders to control the election of all
directors;
. requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
. limitations on who may call special meetings of stockholders;
. prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of stockholders; and
. establishing advance notice requirements for nominations of candidates
for election to the Board of Directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings.
In addition, our stock incentive plan may discourage, delay or prevent a
change in control of our company.
You could lose all or part of your investment if the market price of our
common stock falls below the initial public offering price.
The initial public offering price will be determined through negotiations
between us and the representatives of the underwriters based on factors that
may not be indicative of future market performance. The initial public
offering price may bear no relationship to the price at which the common stock
will trade upon completion of this offering. An active public market for our
common stock may not develop or be sustained after this offering, and the
market price could fall below the initial public offering price. As a result,
you could lose all or part of your investment.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert
management's attention and resources, which could have a material adverse
effect on our business and the market for our common stock.
Our directors, executive officers and principal stockholders will have
substantial control over our affairs.
Our directors, executive officers and principal stockholders will
beneficially own, in the aggregate, approximately 26.7% of our common stock
following this offering. These stockholders, acting together, will
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have the ability to exert substantial influence over all matters requiring
approval by our stockholders. These matters include the election and removal of
directors and any merger, consolidation or sale of all or substantially all of
our assets. In addition, they may dictate the management of our business and
affairs. This concentration of ownership could have the effect of delaying,
deferring or preventing a change in control, or impeding a merger or
consolidation, takeover or other business combination of which you might
otherwise approve.
We will have broad discretion as to the use of proceeds of this offering and
may fail to use them effectively.
We have no exact plan with respect to the use of the net proceeds of this
offering and have not committed these proceeds to any particular purpose apart
from expenses of the business and general working capital. Accordingly, our
management will have broad discretion in applying the net proceeds of this
offering and may use the proceeds in ways with which you and our other
stockholders may disagree. We may not be able to invest these funds effectively
which would adversely affect our financial condition.
You will suffer substantial dilution in the net tangible book value of the
common stock you purchase in this offering.
The initial public offering price of our common stock will be substantially
higher than the pro forma net tangible book value per share of our common
stock. Based on an assumed initial public offering price of $12.00 per share,
if you purchase shares of common stock in this offering, you will suffer
immediate and substantial dilution of $7.51 per share in the pro forma net
tangible book value of the common stock at December 31, 1999 after giving
effect to the sale of Series E mandatorily redeemable convertible preferred
stock in January 2000. To the extent outstanding options and warrants are
exercised, you will suffer further dilution.
There is a large number of shares that may be sold in the market following this
offering, which may depress the market price of our common stock.
After this offering, we will have approximately 33,998,606 shares of common
stock outstanding. All of the shares being offered in this offering will
generally be freely tradable.
Sales of a substantial number of these shares of our common stock in the
public market following this offering could cause the market price of our
common stock to decline. The number of shares of common stock available for
sale in the public market is limited by restrictions under federal securities
law and under lock-up agreements that our stockholders have entered into with
the underwriters and with us. Those lock-up agreements restrict our
stockholders from selling, pledging or otherwise disposing of their share for a
period of 180 days after the date of this prospectus without the prior written
consent of Credit Suisse First Boston Corporation. However, Credit Suisse First
Boston Corporation may, in its sole discretion, release all or any portion of
the common stock from the restrictions of the lock-up agreements. The following
table indicates approximately when the 26,498,606 shares of our common stock
that are not being sold in the offering but which were outstanding as of March
31, 2000 will be eligible for sale into the public market:
<TABLE>
<CAPTION>
Eligibility of
Restricted
Shares for Sale
in Public Market
----------------
<S> <C>
On the date of this prospectus............................... 1,481,500
180 days after the date of this prospectus................... 5,000,136
At various times after 180 days from the date of this
prospectus.................................................. 19,516,970
</TABLE>
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found
in the material set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Business," as well as in this
prospectus generally. We generally use words such as "believe," "intend,"
"expect," "anticipate," "plan," and similar expressions to identify forward-
looking statements. This prospectus also contains third-party estimates
regarding the size and growth of the biotechnology market in general. You
should not place undue reliance on these forward-looking statements. Our actual
results could differ materially from those anticipated in the forward-looking
statements for many reasons, including the risks described above and elsewhere
in this prospectus.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, they relate only to events as of the date on which
the statements are made, and we cannot assure you that our future results,
levels of activity, performance or achievements will meet these expectations.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements. We are under no
duty to update any of the forward-looking statements after the date of this
prospectus to conform these statements to actual results or to changes in our
expectations.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of 8,000,000 shares of
common stock we are offering, at an assumed initial public offering price of
$12.00 per share, will be $88.3 million after deducting underwriting discounts
and commissions and the estimated offering expenses payable by us. We expect to
use the net proceeds for general corporate purposes, including potential
acquisitions and to construct or acquire additional manufacturing capacity.
The amount and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development and commercialization
efforts, the amount of proceeds actually raised in this offering, the amount of
cash generated by our operations, competition, and sales and marketing
activities. We may also use a portion of the proceeds for the acquisition of,
or investment in, companies, technologies or assets that we believe can
complement our business. However, we have no present understandings,
commitments or agreements to enter into any potential acquisitions or make any
investments. Further, we have not determined the amounts we plan to spend on
any of the areas listed above or the timing of these expenditures. As a result,
our management will have broad discretion to use the net proceeds from this
offering. Pending application of the net proceeds as described above, we intend
to invest the net proceeds of the offering in short-term, investment-grade,
interest-bearing securities.
The principal purposes of this offering are:
. to increase our equity capital;
. to facilitate future access by us to public equity markets;
. to increase visibility and credibility in a marketplace where several of
our current and prospective competitors are, or may in the future be,
public companies; and
. to enhance our ability to use our common stock as consideration for
acquisitions and as a means of attracting and retaining key employees.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently
anticipate retaining all of our future earnings, if any, to support operations
and to finance the growth and development of our business and do not anticipate
paying any cash dividends for the foreseeable future. The terms of future
credit agreements may prevent us from paying any dividend or making any
distributions or payment with respect to our capital stock.
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CAPITALIZATION
The following table presents the following information:
. our actual capitalization as of December 31, 1999;
. our pro forma capitalization reflecting the conversion of all
outstanding shares of mandatorily redeemable convertible preferred stock
and convertible preferred stock into common stock, including Series E
mandatorily redeemable convertible preferred stock sold in January 2000
for net proceeds of $29,573,564 and the issuance in January 2000 of
Series E manditorily redeemable convertible preferred stock recorded as
"Series E to be issued" at December 31, 1999, upon the closing of this
offering; and
. our pro forma as adjusted capitalization reflecting the aforementioned
pro forma adjustments and the estimated net proceeds of $88.3 million
from the sale of 8,000,000 shares of common stock offered by us in this
offering at an assumed initial public offering price of $12.00 per
share, less underwriting discounts and commissions and the estimated
offering expenses payable by us.
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except share and
per share data)
<S> <C> <C> <C>
Current portion of long-term debt............ $ 1,141 $ 1,141 $ 1,141
Long-term debt, less current portion......... 4,122 4,122 4,122
-------- -------- --------
Mandatorily redeemable convertible preferred
stock, $.001 par value, 21,493,692 shares
designated, 15,366,594 shares issued and
outstanding or to be issued on an actual
basis (none designated, issued or
outstanding on a pro forma or pro forma as
adjusted basis)............................. 88,846 -- --
Stockholders' equity (deficit):
Preferred stock, $.001 par value,
authorized 23,400,000 shares, 38,961
shares with no designation, no shares
issued or outstanding on an actual or pro
forma basis (5,000,000 shares authorized
and none issued or outstanding on a pro
forma as adjusted basis).................. -- -- --
Convertible preferred stock, $.001 par
value, 1,867,347 shares designated,
1,074,740 shares issued and outstanding on
an actual basis (none issued or
outstanding on a pro forma basis and none
designated on a pro forma as adjusted
basis).................................... 1 -- --
Common stock, $.001 par value, 30,000,000
shares authorized, 845,450, 25,611,867 and
33,611,867 issued and outstanding on an
actual, pro forma or pro forma as adjusted
basis..................................... 1 26 34
Common stock to be issued (10,000 shares)
.......................................... 76 76 76
Additional paid-in capital................. 50,155 168,550 256,822
Deferred compensation...................... (7,930) (7,930) (7,930)
Accumulated deficit........................ (50,758) (50,758) (50,758)
-------- -------- --------
Total stockholders' equity (deficit)....... (8,455) 109,964 198,244
-------- -------- --------
Total capitalization..................... $ 85,654 $115,227 $203,507
======== ======== ========
</TABLE>
This table excludes the following:
. 1,463,011 shares of common stock that we may issue upon exercise of stock
options outstanding as of December 31, 1999 at a weighted average exercise
price of $1.04; and
. 1,237,138 shares of common stock that we may issue upon the exercise of
warrants outstanding or that we were obligated to issue as of December 31,
1999 at a weighted average exercise price of $4.64.
21
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of December 31,
1999, after reflecting the conversion of all shares of convertible preferred
stock and mandatorily redeemable convertible preferred stock outstanding and
recorded as to be issued at December 31, 1999 into shares of common stock upon
the closing of this offering, was $33.0 million, or $1.68 per share. Pro forma
net tangible book value per share represents the amount of our total tangible
assets less total liabilities divided by the number of shares of common stock
outstanding, assuming conversion, as of December 31, 1999, of all then
outstanding shares (and those shares recorded in our Consolidated Financial
Statements as "Series E to be issued") of mandatorily redeemable convertible
preferred stock and convertible preferred stock into shares of common stock. We
have adjusted this pro forma net tangible book value to show the increase
attributable to the shares of Series E mandatorily redeemable convertible
preferred stock sold in January 2000. Dilution in pro forma net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the pro forma net
tangible book value per share of our common stock immediately afterwards.
Assuming the sale of 8,000,000 shares of common stock offered by this
prospectus at an assumed initial public offering price of $12.00 per share, and
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us, our net tangible book value as of December 31,
1999, after giving effect to the sale of Series E mandatorily redeemable
convertible preferred stock in January 2000, would have been approximately
$150.8 million, or $4.49 per share. This represents an immediate increase in
net tangible book value to existing investors of $2.05 per share and decrease
in net tangible book value of $7.51 per share to new investors purchasing
shares of common stock in this offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share as of December 31,
1999........................................................... $1.68
Increase per share attributable to the Series E sold in January
2000........................................................... 0.76
Increase per share attributable to new investors................ 2.05
-----
Pro forma net tangible book value per share after this offering 4.49
------
Dilution per share to new investors............................... $ 7.51
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, assuming the conversion of all outstanding shares of mandatorily
redeemable convertible preferred stock and convertible preferred stock into
common stock, including the sale of Series E mandatorily redeemable convertible
preferred stock in January 2000 and the Series E mandatorily redeemable
preferred stock recorded in our Consolidated Financial Statements as "Series E
to be issued" at December 31, 1999, differences between the number of shares of
common stock purchased from us, the total cash consideration paid and the
average price per share paid by existing stockholders and by the new investors
purchasing shares of common stock in this offering.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Paid Average
------------------ -------------------- price per
Number Percent Number Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 25,611,867 76.2% $105,258,000 52.3% $4.11
New investors................. 8,000,000 23.8 96,000,000 47.7 12.00
---------- ----- ------------ -----
Total....................... 33,611,867 100.0% $201,258,000 100.0%
========== ===== ============ =====
</TABLE>
22
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The consolidated statements of operations data for the years ended December
31, 1997, 1998 and 1999 and the consolidated balance sheet data as of December
31, 1998 and 1999 have been derived from our consolidated financial statements
included elsewhere in this prospectus which have been audited by KPMG LLP,
independent certified public accountants. The consolidated statement of
operations data for the period from March 8, 1995 (inception) to December 31,
1995 and for the year ended December 31, 1996 and the consolidated balance
sheet data as of December 31, 1995, 1996 and 1997 have been derived from our
audited financial statements not included in this prospectus, which have been
audited by KPMG LLP. Our historical results are not necessarily indicative of
results to be expected for any future period. The data presented below should
be read with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and related
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
March 8, 1995 Year Ended December 31,
(inception) to ------------------------------------
December 31, 1995 1996 1997 1998 1999
----------------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Contract revenue--
related parties....... 2,795 6,230 3,763 2,748 --
Contract revenue--
unrelated parties..... -- -- -- -- 828
Grant revenue.......... -- -- -- 33 811
License and other
revenue............... -- -- -- -- 154
------ ------- ------- -------- --------
Total revenues.......... 2,795 6,230 3,763 2,781 1,793
------ ------- ------- -------- --------
Operating expenses:
General and
administrative........ 37 718 2,927 5,199 9,611
Research and
development........... 2,795 6,727 10,813 7,574 14,447
Acquisition of in-
process research and
development........... -- -- -- 2,353 --
------ ------- ------- -------- --------
Total operating
expenses............... 2,832 7,445 13,740 15,126 24,058
------ ------- ------- -------- --------
Operating loss.......... (37) (1,215) (9,977) (12,345) (22,265)
------ ------- ------- -------- --------
Other income (expense):
Interest income........ 31 91 49 932 203
Interest expense....... -- -- -- (66) (6,158)
------ ------- ------- -------- --------
Total other income
(expenses)............. 31 91 49 866 (5,955)
------ ------- ------- -------- --------
Net loss................ (6) (1,124) (9,928) (11,479) (28,220)
Beneficial conversion
feature of preferred
stock.................. -- -- -- -- 44,554
------ ------- ------- -------- --------
Net loss allocable to
common stockholders.... (6) (1,124) (9,928) (11,479) (72,774)
====== ======= ======= ======== ========
Basic and diluted net
loss per share
allocable to common
stockholders........... $ (.05) $ (3.45) $(27.57) $ (17.09) $ (95.87)
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders........... 131 326 360 672 759
Unaudited Pro Forma Net
Loss Per Share Data:
Pro forma basic and
diluted net loss per
share allocable to
common stockholders.... $ (15.61)
Shares used in computing
pro forma basic and
diluted shares
allocable to common
stockholders........... 4,663
Consolidated Balance
Sheet Data (at end of
period): 1995 1996 1997 1998 1999
------ ------- ------- -------- --------
Cash and cash
equivalents............ 1,710 1,618 6,405 473 33,804
Working capital......... 544 (201) 773 5,751 27,175
Total assets............ 1,961 2,406 6,884 15,599 94,686
Long-term debt, less
current portion........ -- -- -- 3,548 4,122
Mandatorily redeemable
preferred stock........ -- -- 9,230 27,530 88,846
Convertible preferred
stock.................. 1 1 1 212 1
Total stockholders'
equity (deficit)....... 795 188 (8,009) (18,123) (8,455)
</TABLE>
- --------------------
Please see Note 1 to our consolidated financial statements for an
explanation of the method used to calculate the net loss per share allocable to
common stockholders and pro forma net loss per share allocable to common
stockholders and number of shares used in the computation of per share amounts.
The following transactions had a material effect on the comparability of the
data presented in the consolidated financial data above, as follows: contract
revenue received from related parties relating to the SmithKline Beecham
agreement, the acquisition of certain Molecular Tool assets in September 1998,
the acquisition of GeneScreen in December 1999, the sale of Series C
mandatorily redeemable convertible preferred stock in December 1997 and March
1998 and the sale of Series E mandatorily redeemable convertible preferred
stock in December 1999. Please see our notes to the consolidated financial
statements for further discussions of these transactions.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations is
based on our historical consolidated financial statements for the year ended
December 31, 1999 and the historical financial statements of GeneScreen for the
period from January 1, 1999 to December 29, 1999, included elsewhere in this
prospectus, adjusted to give pro forma effect to the acquisition of GeneScreen
on December 30, 1999 as if it occurred on January 1, 1999. Our historical
consolidated balance sheet as of December 31, 1999 reflects our acquisition of
GeneScreen.
On December 30, 1999, we acquired all of the outstanding shares of common
and preferred stock of GeneScreen in exchange for a price of $42.5 million
which was satisfied by consideration consisting primarily of up to 4,000,000
shares of our Series E mandatorily redeemable convertible preferred stock with
a stated value of $4.50 per share. The note payable to GeneScreen related to
our purchase of the Molecular Tool assets in the amount of $3,547,821 and other
liabilities totaling $421,000 were also cancelled. We accounted for our
acquisition of the GeneScreen under the purchase method of accounting. We have
included $28,360,000 as a beneficial conversion feature in the purchase price
which was recorded as an increase to additional paid-in capital. The amount of
the beneficial conversion feature was calculated as the difference between the
$11.75 per share fair value of our common stock on December 22, 1999, the
commitment date, over the $4.50 per share conversion price of the stock.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1999 gives effect to the GeneScreen acquisition as if it had
occurred on January 1, 1999. The unaudited pro forma adjustments are based upon
available information and certain assumptions that we believe are reasonable
under the circumstances. The unaudited pro forma consolidated statement of
operations does not purport to represent what our results of operations would
actually have been had the transaction occurred on such date, nor does it
purport to project our results of operations for any future period.
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Actual
------------------------- Pro Forma
Orchid GeneScreen Adjustments Pro Forma
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Laboratory testing.... $ -- $13,746,615 $ -- $ 13,746,615
Contract revenue from
unrelated party...... 828,000 -- -- 828,000
Grant revenue......... 810,838 -- -- 810,838
License and other
revenue.............. 154,167 -- -- 154,167
------------ ----------- ----------- ------------
Total revenues.... 1,793,005 13,746,615 -- 15,539,620
Operating expenses:
Cost of laboratory
testing.............. -- 10,054,681 (276,374)(1) 9,778,307
General and
administrative....... 9,547,089 5,922,537 (902,490)(2) 17,045,176
(687,960)(1)
3,166,000 (3)
General and
administrative--
related party........ 63,519 -- -- 63,519
Research and
development.......... 11,695,798 97,909 -- 11,793,707
Research and
development--related
party................ 2,751,927 -- -- 2,751,927
------------ ----------- ----------- ------------
Total operating
expenses........... 24,058,333 16,075,127 1,299,176 41,432,636
------------ ----------- ----------- ------------
Operating loss...... (22,265,328) (2,328,512) (1,299,176) (25,893,016)
Other income (expenses):
Interest income....... 202,699 -- (33,000)(4) 169,699
Interest expense...... (6,157,662) (159,698) 212,869 (5) (6,104,491)
------------ ----------- ----------- ------------
Total other income
(expenses)......... (5,954,963) (159,698) 179,869 (5,934,792)
------------ ----------- ----------- ------------
Loss from continuing
operations......... (28,220,291) (2,488,210) (1,119,307) (31,827,808)
------------ ----------- ----------- ------------
Beneficial conversion
feature of preferred
stock.................. 44,554,000 -- -- 44,554,000
------------ ----------- ----------- ------------
Loss from continuing
operations before
nonrecurring
charges directly
attributable to the
acquisition
allocable to common
stockholders....... $(72,774,291) $(2,488,210) $(1,119,307) $(76,381,808)
============ =========== =========== ============
Basic and diluted loss
from continuing
operations before
nonrecurring charges
directly attributable
to the acquisition per
share allocable to
common stockholders.... $ (95.87) $ (100.62)
Shares used in computing
basic and diluted loss
from continuing
operations before
nonrecurring charges
directly attributable
to the acquisition per
share allocable to
common stockholders.... 759,078 759,078
============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of
operations.
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The unaudited pro forma consolidated financial information is based on our
historical consolidated financial statements and those of our subsidiary,
GeneScreen, adjusted to give pro forma effect to our acquisition of GeneScreen.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1999 gives effect to the GeneScreen acquisition as if it
occurred on January 1, 1999. The unaudited pro forma adjustments set forth
below are based upon available information and assumptions that we believe are
reasonable under the circumstances. The unaudited pro forma consolidated
statements of operations do not purport to project our operating results for
any future period. The information set forth below should be read together with
the historical consolidated financial statements of Orchid and GeneScreen and
related notes included elsewhere in this prospectus.
(1) Adjustment to reduce compensation expense from equity issuances directly
attributable to our acquisition of GeneScreen the terms of which required
accelerated vesting for all unvested options and allowed certain cashless
exercise of GeneScreen common stock options. No deferred compensation was
required to be recorded when these options were originally issued.
(2) Adjustment to reduce general and administrative expense for transaction
related costs incurred by GeneScreen in connection with our acquisition of
GeneScreen.
(3) Adjustment to record the amortization of goodwill and other intangible
assets on a straight line basis over their estimated useful lives. In the
application of purchase accounting for our acquisition of GeneScreen, we
allocated $42,900,000 of the net purchase price to intangible assets, as
follows:
<TABLE>
<CAPTION>
Amortization
Value Period
----------- ------------
<S> <C> <C>
Customer lists................................. $ 4,210,000 11 years
Base technology................................ 5,580,000 12 years
Trademark and tradename........................ 1,762,000 15 years
Goodwill....................................... 30,813,000 15 years
Other intangible assets........................ 586,000 4 years
-----------
$42,951,000
===========
</TABLE>
(4) Adjustment to reduce our interest income by $33,000, assuming an interest
rate of 6% per annum. This amount represents interest income that would
have been earned on $550,000, the amount of cash we estimated for payment
to GeneScreen stockholders in lieu of issuing Series E shares and
transaction costs incurred in the acquisition of GeneScreen.
(5) Adjustment to reduce interest expense on our 6% per annum $3,547,821 note
payable to GeneScreen, which was cancelled in connection with the
acquisition of GeneScreen.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read with "Selected
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. This discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. The
cautionary statements made in this prospectus should be read as applying to all
related forward-looking statements wherever they appear in this prospectus. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to these differences include those discussed in "Risk
Factors," as well as those discussed elsewhere. See "Risk Factors" and "Special
Note Regarding Forward-Looking Statements."
Overview
We are a leader in the development and commercialization of genetic
diversity technologies, products and services. Since we began operations in
March 1995, we have devoted substantially all of our resources to the
development and application of a portfolio of products and services using our
proprietary biochemistry for scoring SNPs and microfluidics technologies for
applications in drug discovery, principally in the field of pharmacogenetics
and DNA synthesis.
For the first three years of our existence, we were primarily focused on
developing our microfluidics technologies for applications in high-throughput
synthesis of small molecules under collaborative research programs with
SmithKline Beecham and Sarnoff Corporation. During this period, we derived most
of our revenue from payments from SmithKline Beecham. Revenue during these
early years fluctuated due to the timing of both work performed under the
contract with SmithKline Beecham and of earning milestone revenue. After
management and an independent third-party consulting firm conducted a strategic
review of our business strategy in the first half of 1998, we decided to apply
our research and development efforts to the fields of pharmacogenetics and DNA
synthesis. As a result of this review of our business focus, we acquired
substantially all of the assets of Molecular Tool, Inc. in September 1998, a
wholly-owned subsidiary of GeneScreen, Inc., for approximately $7.1 million in
cash, debt and equity securities. Molecular Tool's proprietary SNP-IT primer-
extension technology for scoring SNPs matched very well with our microfluidics
technologies that we developed earlier and has together formed the basis for
our current SNP technology, products and services.
On December 30, 1999, we acquired GeneScreen, Inc. for a net purchase price
of $42.5 million consisting of a combination of cash and shares of our Series E
mandatorily redeemable convertible preferred stock, offset by the cancellation
of certain debt owed to GeneScreen. We included $28.4 million as a beneficial
conversion feature in the purchase price. The amount of the beneficial
conversion feature was calculated as the difference between the $11.75 per
share fair value of our common stock on December 22, 1999, the commitment date
which was the date of the merger agreement for the acquisition, over the $4.50
per share conversion price of the stock. GeneScreen is a company engaged in DNA
laboratory analysis for paternity, forensics and transplantation testing and
had revenues of approximately $13.7 million in 1999. GeneScreen analyzed over
290,000 specimens for the determination of paternity, which represented 70.6%
of their revenue in 1999. Forensic testing services, which represent a small
but growing segment of GeneScreen's revenue, represented 3.6% of GeneScreen's
revenue in 1999. In 1999, GeneScreen provided transplantation testing for over
71,000 bone marrow donors. Transplantation testing services represented 25.2%
of GeneScreen's revenue in 1999, most of which was related to a contract which
was not renewed. In connection with the acquisition of GeneScreen, we recorded
approximately $43.0 million of goodwill and other intangible assets, which we
will amortize over periods ranging from 4 to 15 years. As a result, our results
of operations during the next 15 years will be impacted by non-cash
amortization charges resulting from the GeneScreen acquisition which will range
from approximately $2.2 to $3.2 million per year.
Most of our current activities and resources are directed toward
commercializing our SNP scoring products and services which apply our
proprietary SNP-IT primer-extension technology. We expect to recognize
27
<PAGE>
revenues from the sale of both our SNPstream instrument systems and our SNPware
consumables. We also expect each SNPstream system we sell or lease will
generate a recurring revenue stream from the sale of our SNPware consumables.
We also provide, or plan to provide, a variety of genetic diversity services to
the pharmaceutical and biotechnology industry through our ultra high-throughput
MegaSNPatron facility.
GeneScreen's established business in paternity testing, forensics and
transplantation supported our goal of building our business in genetic
diversity. We believe our SNP-IT and microfluidics technologies will be able to
improve the performance of GeneScreen's genetic testing laboratories. We plan
on using the clinically approved laboratories at GeneScreen to expand our SNP
scoring services to pharmacogenetics testing of patient samples in
pharmaceutical clinical trials. We also plan on using these laboratories to
conduct the SNP scoring for our planned direct-to-consumer SNP scoring service
which we will provide over the Internet.
GeneScreen's DNA testing business is dependent upon contracts with various
states and counties to provide paternity testing. These contracts are generally
put out to bid by each respective state every one to three years. The contract
bidding process is highly competitive and the award varies from state to state.
Some states and counties award contracts solely based on the lowest price while
others use a scoring matrix to achieve the desired mix of price, quality and
service. GeneScreen derives its transplantation business through contracts on a
bid basis with the National Marrow Donor Program, a not-for-profit agency that
facilitates hematopoietic cell transplants through organizing volunteer donor
drives, maintaining a national donor registry and other educational services.
With the acquisition of GeneScreen, we expect to generate service revenue in
fiscal year 2000 and use GeneScreen's CLIA approved testing laboratories to
expand our genetic diversity testing business and services.
Our ability to achieve profitability will depend in part on our ability to
successfully develop and commercialize our proprietary SNP scoring and
microfluidics technologies in the form of products and services for
pharmaceutical and biotechnology companies and research institutions. We
introduced our SNPstream 25K SNP-IT-based SNP scoring system, SNPware
consumables and related services in late 1999. We intend to develop additional
models of SNPstream instruments with lower throughput capabilities. Because our
proprietary SNP-IT primer-extension technology is very adaptable to other
hardware platforms, we intend to offer our SNPware kits for use on instruments
made or sold by other companies. Our collaboration with Affymetrix, Inc. is an
example of this platform propagation strategy.
We based our proprietary SNP value creation strategy on the creation of
proprietary rights covering the identification of SNPs and their associations
to medically important attributes of patients. We intend to develop
intellectual property rights in this area through collaborations with members
of our Clinical Genetics Network, pharmaceutical and biotechnology companies.
We do not expect royalties from commercial sale or license of intellectual
property rights generated by using our technologies for at least several years,
if at all.
Through December 31, 1999, we had recorded an aggregate of $9.8 million of
deferred compensation expense resulting from the granting of stock options to
employees, directors or consultants covering shares of common stock, which
stock options had exercise prices below the fair value of the underlying common
stock at the date of their grant. Net of prior amortization, net deferred
compensation of $7.9 million at December 31, 1999 related to these deferred
equity-based compensation expenses will be amortized over the vesting periods
of the respective options, typically four years. Accordingly, we anticipate
recording compensation charges resulting from such amortization approximately
as follows: $2.5 million in 2000, $2.2 million in 2001, $1.9 million in 2002
and $1.3 million in 2003. Some of these amounts result from grants to
consultants which are subject to remeasurement at the end of each reporting
period based upon changes in the fair value of our common stock, until the
consultant completes performance under his or her respective option agreement.
Thus, these amortization charges may increase or decrease over the four year
period.
In January and February 2000, we issued 36,500, 679, 400, 40,750 and 40,750
stock options at exercise prices of $1.25, $6.00, $12.00 and at the per share
price of this offering, respectively, for which we will
28
<PAGE>
recognize a compensation charge of $4.2 million over the respective vesting
periods of the options. On March 31, 2000, we granted 289,660 stock options at
exercise prices of $12.00 for which we will recognize an $800,000 compensation
charge over the respective vesting periods of the options. We anticipate
recording total compensation charges resulting from the amortization of the
deferred compensation for both the February and March grants approximately as
follows: $1.4 million in 2000, $1.3 million in 2001, $1.1 million in 2002,
$1.0 million in 2003 and $0.2 million in 2004. Some of these amounts result
from grants to consultants which are subject to remeasurement at the end of
each reporting period based upon the changes in the fair value of the common
stock until the consultant completes performance under his or her respective
option agreement. In addition, we issued 855,000 performance based stock
options at exercise prices of $6 for which compensation expense will be
measured at the time the performance criteria is met.
We have incurred losses since our inception and, as of December 31, 1999, we
had a total stockholders' deficit of $8.5 million, including an accumulated
deficit of $50.8 million. We anticipate incurring additional losses over at
least the next several years. We expect these losses to continue as we expand
the commercialization of our products and services to the research market and
we fully implement our proprietary SNP value creation business strategies. We
expect this expansion to result in increases in research and development,
marketing and sales, and general and administrative expenses. Payments under
strategic alliances, collaborations and licensing arrangements will be subject
to significant fluctuation in both timing and amount and therefore our results
of operations for any period may not be comparable to the results of operations
for any other period.
Sources of Revenue and Revenue Recognition
We have had, and expect in the future to have, several sources of revenue.
Prior to our acquisition of GeneScreen, we derived substantially all of our
revenue from research and development collaborations, technology grants and
awards from several governmental agencies. GeneScreen derives its revenue from
the performance of laboratory DNA testing services. In 1999, we derived our
first revenue from the sale and lease of our first commercial SNPstream
hardware systems, and commencing in 2000, we anticipate deriving increasing
amounts of revenue from the sale of SNPware consumables.
In connection with the research and development collaborations that provided
the majority of our revenue in the early years of our corporate history, we
recognized revenue when related research expenses were incurred and when we
satisfied specific performance obligations under the terms of the respective
research contracts. Up front licensing fees obtained in connection with such
agreements are deferred and amortized over the estimated performance period of
the respective research contract.
GeneScreen DNA laboratory and SNP testing services testing revenue is
recognized on an accrual basis at the time test results are reported. Deferred
revenue represents the unearned portion of payments received in advance of
tests being completed.
To date, we have offered our SNPstream system hardware in two basic types of
transactions, either a purchase and sale or an operating lease. Revenue on the
sale of the hardware is recorded upon transfer of title and after we have met
all of our significant performance obligations. Revenue from lease transactions
is recognized on a straight-line basis over the term of the lease in accordance
with the lease agreement.
We have only recently begun to record revenue from the sale of SNPware
consumables. Such revenue is recognized upon the transfer of title, generally
when the SNPware products are shipped to our customer from our facility.
Results of Operations
Pro forma results discussed below give pro forma effect to our acquisition
of GeneScreen as if it were acquired on January 1, 1999.
29
<PAGE>
Years Ended December 31, 1999 and 1998
Revenue. Revenue decreased to $1.8 million for the year ended December 31,
1999 from $2.8 million for the comparable period in 1998. The $1.0 million
decrease resulted primarily from a $2.7 million decrease in contract revenue
from SmithKline Beecham, which we offset by an increase in grant revenue of $.8
million and contract revenue from Motorola of $.8 million. On a pro forma
basis, revenue was $15.5 million for the year ended December 31, 1999.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for chip development, material costs for prototype
and test units, and other expenses related to the design, development, testing
and enhancement of our products. We expense our research and development costs
as we incur them. Research and development expenses increased to approximately
$14.4 million for the year ended December 31, 1999 from approximately $7.6
million for the comparable period in 1998. We attributed the increase to
continued growth of research and development activities, including increased
personnel costs of $2.2 million and increased lab supplies and chemicals costs
of $1.8 million to support our technology program and development of our
initial products, higher operating expenses as a result of our move to a larger
facility in May 1999 of $0.6 million, increased non-cash expenses from equity
issuances for licensed technology of $1.0 million, and increased amortization
of deferred compensation of $0.6 million. On a pro forma basis, research and
development expenses for 1999 were not materially different from research and
development expenses in 1998. We expect research and development spending to
increase significantly over the next several years as we expand our research
and product development efforts.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
other administrative personnel, recruiting expenses, professional fees, legal
expenses resulting from intellectual property prosecution and protection, and
other corporate expenses including business development and general legal
activities. General and administrative expenses increased to approximately $9.6
million for the year ended December 31, 1999 from approximately $5.2 million
for the comparable period in 1998. The increase was primarily due to increased
compensation for general and administrative personnel of $1.0 million, higher
operating expenses as a result of our move to a larger facility in May 1999 of
$0.7 million, increased costs related to intellectual property prosecution and
protection and other professional services of $0.8 million and increased
amortization of deferred compensation of $0.9 million. We expect general and
administrative expenses to continue to increase over the next several years to
support our growing business activities, the commercialization of our products,
and due to the costs associated with operating as a public company. On a pro
forma basis, general and administrative expense was $17.1 million for the year
ended December 31, 1999. The increase in these expenses was related to
amortization of goodwill and other intangibles of $3.2 million and $4.3 million
of costs related to the additional staffing to operate and to manage GeneScreen
DNA testing business.
Acquisition of in-process research and development. Acquisition of in-
process research and development amounted to $2.4 million in 1998 arising from
our acquisition of certain Molecular Tool assets in 1998, including an
in-process research and development component which we immediately charged to
expense upon acquisition. We did not incur any comparable charge in 1999.
Please see Note 2 to the Notes to Consolidated Financial Statements for a
discussion of this charge.
The principal corporate activity of Molecular Tool at the date of
acquisition was the continued technical development of our product programs in
the areas of SNPware consumables, MegaSNPatron services, SNPstream hardware
systems and SNP-IT Chips. At the date of acquisition, none of the products or
services under development by Molecular Tool, Inc. had achieved technological
feasibility or had been sold on the market. Substantial risks and significant
uncertainty still existed concerning the remaining course of technical
development. Key development risks for this product included validation
testing, engineering of stability into the critical reagents to permit their
use in the field, and developing the means of scaling-up manufacturing of the
reagents and other elements of the product for eventual sale. We identified and
proposed the SNP-IT Chips
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as a new technology development area at the time of the acquisition. However,
Molecular Tool, Inc. had not yet demonstrated major components of the chip as
feasible. These components have required and will continue to require
substantial investment. Molecular Tool, Inc. had not yet shown the following
elements of these components to be feasible: chip materials fabrication and
biocompatibility; method and composition of bioactive surface preparation; and
method and composition of optical detection systems compatible with chip
design. The MegaSNPatron services, while currently more commercially advanced
than the SNP-IT Chips, required additional development and feasibility
demonstration in several key areas, including the method and composition of the
bioarray components; the ability to capture and process results data from the
MegaSNPstream process; and the composition of stable, viable, and cost
effective reagents for the tests. In the case of the SNPstream hardware
systems, development of the analysis machine was largely complete but was still
expected to face engineering challenges before ultimate completion. We faced
challenges in our efforts to successfully commercialize our SNPstreatm hardware
and SNPware reagents such as the feasibility of adapting an off-the-shelf
robotic system as the SNPstream platform; development of software systems for
data management; and development and validation of viable, stable and cost
effective reagents usable in the SNPware kits. An overall risk facing these
projects was the potential development of competing technologies to facilitate
cost reduction in genetic assays prior to marketing the Molecular Tool
products. Accordingly, a significant portion of the purchase price was
allocated to in-process research and development. These product candidates will
significantly impact future results of operations and cash flows.
The primary valuable elements of the product candidates were separated into
base technology, supporting patents, and the element associated with in-process
research & development. The base technology and patent elements were separately
valued and reported in the acquisition balance sheet. The valuable elements
qualified to receive treatment as in-process research and development were
separately valued as such.
The remaining development cost and time required to develop the project
candidates into commercially viable products as of December 31, 1999 are as
follows: $1.5 million through 2003 for SNP-IT Chips and $800,000 through 2001
for MegaSNPatron services. The SNPware consummables, and SNPstream hardware
systems are currently commercial products.
Material risks affecting the timely completion and commercialization of the
products included the ability to secure raw materials and material supply
agreements for our SNPware kits and MegaSNPatrion services, including dyes and
enzymes necessary for the performance of our SNPware kits and services, and
reliance on the development of outside technology for optical components and
some aspects of robotic instrumentation from our SNPstream OEM. The remaining
development cost and time for these products reflect, in part the acquisition
through supply agreement, development and validation of the raw materials
needed for commercialization. Additionally the remaining development cost and
time reflects, in part, the identification, validation and development of the
technologies external to us needed to select our SNP-IT technology. An
additional material risk affecting commercialization was the presence of
competing technologies.
Interest Income. Interest income consists of income from our cash and short-
term investments. Interest income decreased to $.2 million for the year ended
December 31, 1999 from $.9 million for the comparable period of 1998. This $.7
million decrease resulted from a lower average cash and short-term investment
balance due to cash used in operating activities.
Interest Expense. Interest expense increased to $6.2 million for the year
ended December 31, 1999 from $.1 million in the comparable period of 1998. This
$6.1 million increase resulted substantially from interest on the bridge notes
which converted into Series E mandatorily redeemable convertible preferred
stock in December 1999 of $0.5 million, interest on the convertible note
payable to GeneScreen which we cancelled in the GeneScreen acquisition of $0.2
million, and interest attributable to warrants issued in connection with our
bridge financing of $5.2 million and borrowings on our line of credit in 1999
of $0.2 million.
Net Loss. Due to the factors discussed above, our net loss was $28.2 million
for the year ended December 31, 1999 compared with a net loss of $11.5 million
for the comparable period in 1998.
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Years Ended December 31, 1998 and 1997.
Revenue. Revenue decreased to $2.8 million for the year ended December 31,
1998 from $3.8 million for the comparable period in 1997. The $1.0 million
decrease resulted from a decrease in contract revenue recognized from
SmithKline Beecham.
Research and Development Expenses. Our research and development expenses
decreased to $7.6 million for the year ended December 31, 1998 from $10.8
million for the comparable period in 1997. The decrease of $3.2 million was due
to a reduction in our expenditures at Sarnoff Corporation including expenses
recorded in 1997 related to an obligation under the SmithKline Beecham contract
which did not have a corresponding charge in 1998.
General and Administrative Expense. General and administrative expenses
increased to $5.2 million for the year ended December 31, 1998 from $2.9
million for the comparable period in 1997. The $2.3 million increase was
primarily due to increased costs of $0.5 million resulting from the hiring of
additional personnel to support our growing business activities, increased
professional services fees of $1.2 million and increased facility charges of
$0.3 million.
Acquisition of in-process research and development. Acquisition of in-
process research and development was $2.4 million for the year ended December
31, 1998 resulting from our acquisition of certain Molecular Tool assets in
1998, including an in-process research and development component which we
immediately charged to expense upon acquisition. We did not incur any
comparable charge in 1997.
Interest Income. Interest income increased to approximately $.9 million for
the year ended December 31, 1998 from approximately $0 for the comparable
period in 1997. This $.9 million increase resulted from a higher average cash
and short-term investment balance due to the sale of Series C mandatorily
redeemable convertible preferred stock in a private placement in December 1997
and March 1998.
Net loss. Due to the factors discussed above, our net loss was $11.5 million
for the year ended December 31, 1998 compared to $9.9 million for the
comparable period in 1997.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
research and development funding from collaborative partners and two private
placements of equity securities that closed in March 1998 and January 2000 with
aggregate net proceeds from the private placements of approximately $102
million. The sale of the Series E mandatorily redeemable convertible preferred
stock in December 1999 resulted in a $44,554,000 beneficial conversion feature
which is included in net loss allocable to common stockholders in 1999. The
closing of Series E mandatorily redeemable convertible preferred stock in
January 2000 will result in an additional $29,574,000 beneficial conversion
feature which will increase net loss allocable to common stockholders and net
loss per share allocable to common stockholders in the first quarter of 2000.
In December 1998, we obtained a secured $6.0 million equipment line of credit,
for the purchase of plant and equipment at our corporate headquarters and
research and development laboratories. At December 31, 1999, this funding
commitment expired and we had borrowings of $4.6 million outstanding under this
facility. We lease our corporate and primary research facility under an
operating lease which expires in 2008.
In June 1999, we completed a bridge financing in which we issued convertible
promissory notes in the aggregate principal amount of approximately $7.6
million. The principal amount of these notes and all accrued interest thereon
were automatically converted into shares of Series E mandatorily redeemable
convertible preferred stock in December 1999 in connection with the sale of
Series E mandatorily redeemable convertible preferred stock.
In November 1999, we completed a bridge financing in which we issued a
senior convertible promissory note in the original principal amount of
approximately $2.3 million to Affymetrix, Inc. The principal amount of
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this note and all accrued interest thereon also automatically converted into
shares of Series E mandatorily redeemable convertible preferred stock in
December 1999 with the related shares being issued in January 2000.
Net cash used in operations for the year ended December 31, 1999 was
approximately $15.4 million compared with approximately $11.5 million for the
comparable period in 1998. Non-cash charges in 1999 included compensation
expense of $1.6 million and research and development expense from the issuance
of equity securities of $1.8 million, depreciation and amortization expense of
$1.4 million and interest expense related primarily to warrants issued in
connection with our 1999 bridge financing and accrued interest converted into
Series E mandatorily redeemable preferred stock of $6.0 million. Investing
activities included $8.2 million in cash used during the year ended December
31, 1999 for leasehold improvements and equipment purchases for our new
facility in Princeton, New Jersey.
Working capital increased to approximately $27.2 million at December 31,
1999 from approximately $5.8 million at December 31, 1998. The increase in
working capital was primarily due to our Series E mandatorily redeemable
convertible preferred stock financing in December 1999.
At February 29, 2000, we held cash and cash equivalents of approximately
$57.4 million. We believe that our cash reserves, expected short-term revenue,
and the net proceeds of this offering will be sufficient to fund our operations
through at least the next 18 months. We may need to access the capital markets
for additional financing to operate our ongoing business activities.
As part of our transition from a business model based on microfluidics
technologies to one based on SNP scoring technologies, on April 4, 2000 we
entered into a binding agreement with Sarnoff to terminate our License and
Option Agreement subject to our making a single payment of approximately $3.0
million, issuing 250,000 shares of common stock and delivering a five-year
warrant to purchase 75,000 shares of our common stock at the initial public
offering price. Previously on February 2, 2000, we issued 100,000 shares of
common stock to Sarnoff as an advance on the issuances which would be owed for
the two option fields in December 2000 under the License and Option Agreement.
As the licensed technology has not reached technological feasibility and has no
alternative uses, the cash payment and the fair value of the equity securities
will be charged to research and development expense.
As of December 31, 1999, our net operating loss carryforwards were
approximately $40.0 million and $44.0 million for federal and state income tax
purposes, respectively. If not utilized, our federal and state tax loss
carryforwards will begin to expire in 2003. Utilization of our net operating
losses to offset future taxable income, if any, may be substantially limited
due to "change of ownership" provisions in the Internal Revenue Code of 1986.
We have not yet determined the extent to which limitations may have been
triggered as a result of past or future financings, including this offering.
This annual limitation may result in the expiration of certain net operating
losses prior to their use.
We cannot assure you that our business or operations will not change in a
manner that would consume available resources more rapidly than anticipated. We
also cannot assure you that we will not require substantial additional funding
before we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
. our ability to enter into strategic alliances or make acquisitions;
. regulatory changes and competing technological and market developments;
. changes in our existing collaborative relationships;
. the cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights;
. the purchase of additional capital equipment;
. the development of our SNPstream and DNAstream and software product
lines and associated reagent consumables;
. the development of our SNPware consumables and kits;
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. the success rate of establishing new contracts, and renewal rate of
existing contracts, for DNA testing services in the areas of paternity,
forensics and transplantation;
. the progress of our existing and future milestone and royalty producing
activities; and
. the availability of additional funding, if necessary, and if at all, on
favorable terms.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash equivalents,
all of which have maturities of less than one year. We maintain a non-trading
investment portfolio of investment grade, liquid debt securities that limits
the amount of credit exposure to any one issue, issuer or type of instrument.
The fair value of these securities approximates their cost.
Inflation
We do not believe inflation has had a material impact on our business or
operating results during the periods presented.
Recently Issued Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission issued
a Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements, including the recognition of non-refundable fees received
upon entering into arrangements. We are in the process of evaluating this SAB
and the effect it will have in our financial statements and current revenue
recognition policy.
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BUSINESS
Overview
We are a leader in the development and commercialization of technologies,
products and services designed to measure and use information related to
genetic diversity. We expect our proprietary technologies will significantly
enhance the way the companies generate information about single nucleotide
polymorphisms, or "SNPs," the most common form of genetic diversity. The
pharmaceutical and medical communities can use genetic diversity information to
facilitate the development of highly specific and efficacious drugs, to improve
the effectiveness of existing drugs, and to increase the likelihood of success
of tissue transplants. Our proprietary technologies also have other commercial
applications outside of the healthcare field, including forensics and paternity
testing, as well as improved crop development and livestock breeding programs.
History
For the first three years of our existence, we were primarily focused on
developing our microfluidics technologies for applications in high-throughput
synthesis of small molecules under collaborative research programs with
SmithKline Beecham and Sarnoff Corporation. After our management and an
independent third-party consulting firm conducted a strategic review of our
business strategy in the first half of 1998, we decided to apply our technology
to the fields of pharmacogenetics and DNA synthesis. As a result of this review
of our business focus, we acquired substantially all of the assets of Molecular
Tool, Inc., a wholly owned subsidiary of GeneScreen, Inc., in September 1998.
Molecular Tool's proprietary SNP-IT primer-extension technology for scoring
SNPs matched very well with our microfluidics technologies that we had
developed earlier and has together formed the basis for our current SNP
technology, products and services.
Background
Genetic information provides a basis for understanding biological and
medical functions in organisms. In recent years, scientists have begun to
analyze large portions of deoxyribonucleic acid, or DNA, to determine the
sequence of nucleotide bases in DNA within the human genome and within the
genomes of plant and animal species. The Human Genome Project and other major
genetic research programs are identifying hundreds of millions of DNA base
sequences. These studies are expected to be completed within the next few
years.
The first phase of the genomics revolution has centered around sequencing
significant portions of DNA within the human genome. We believe the next phase
of the genomics revolution will involve the identification of genetic variation
within the genome from person to person resulting from differences, or
polymorphisms, in these DNA sequences.
The Impact of Genetic Variation
Pharmacogenetics is the study of the impact of genetic variation on the
efficacy, pharmacology and toxicity of a drug. As scientists and researchers
have acquired a greater understanding of genetic variation, they have realized
that the effect a drug has upon an individual is often a function of that
individual's unique genetic sequence. Genetic variation may indicate why some
individuals contract certain diseases and others do not and may also determine
why two individuals respond differently to the same drug. Typically,
pharmaceutical companies develop drugs to interact with a single version of a
given protein or receptor. Accordingly, a drug may only be effective in
individuals who carry the specific protein or receptor for which the drug was
designed. Individuals who, because of genetic variation, have a slightly
modified version of these proteins or receptors, or the proteins involved in
the metabolism of the drug, may not respond to the drug or may experience
adverse side effects.
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We expect that the methods used by the pharmaceutical industry to develop
new drugs and to improve existing drugs will undergo a fundamental
transformation to take genetic variation into account. However, the usefulness
of genetic variation information is not limited to drug development. In fact,
genetic variation can play a significant role in all stages of drug discovery
and development. Pharmaceutical companies can improve drugs already on the
market by using genetic variation information to select the best drug for a
particular patient. Genetic variation information may also be used to improve
the success of organ and bone marrow transplantations by matching the
compatibility of donors to recipients as well as for paternity testing,
forensics testing and for agricultural and livestock breeding programs.
SNPs: A Key Indicator of Genetic Variation
DNA sequences contain a variety of known polymorphisms. The most common form
of polymorphism involves a change in a single nucleotide base and is called a
single nucleotide polymorphism, or SNP. Because SNPs are the most common type
of polymorphism, they can have significant effects on both susceptibility to
disease as well as drug response. As a result, the biotechnology and
pharmaceutical industries have recently focused attention on the discovery of
SNPs. For example, in 1999, a group of leading pharmaceutical companies formed
The SNP Consortium Ltd. for the primary purpose of discovering new SNPs and
making them publicly available. The SNP Consortium members include: The
Wellcome Trust, Amersham Pharmacia Biotech, AstraZeneca, Aventis, Bayer,
Bristol-Myers Squibb, F. Hoffmann-LaRoche, Glaxo Wellcome, IBM, Motorola,
Novartis, Pfizer, Searle, and SmithKline Beecham.
The increased focus on the discovery of SNPs highlights the important
distinction between SNP discovery and SNP scoring. SNP discovery refers to the
identification of the specific location in a gene where there is variability in
a single nucleotide base across a population. By contrast, SNP scoring refers
to the measurement of the presence or absence of a particular SNP in the
genetic sequence of a particular individual. We believe that the mere discovery
of SNPs has not been of significant value in the treatment of disease. Unlike
SNP discovery, SNP scoring focuses on what we believe is a compelling and
potentially more valuable opportunity of correlating a given SNP or combination
of SNPs with important medical attributes. Recently reported data indicates
that there are in excess of one million SNPs in each individual. While some of
these SNPs have obvious and immediate medical relevance, the significance of
the vast majority of SNPs is currently unknown. We believe the commercial value
of SNPs will be realized by identifying SNPs with medical relevance by
performing SNP scoring studies on hundreds of thousands of SNPs in hundreds of
thousands of individuals.
As the Human Genome Project nears completion, the number of identified SNPs
will increase dramatically. Scientists and researchers will require SNP
association studies to find the potential relevance of identified SNPs to human
health. As a result, we expect the demand for SNP scoring to increase
significantly over the next few years. This increase in demand will be driven
not only by a small group of dedicated laboratories conducting large-scale
experiments, but also by a large number of smaller research and clinical
laboratories conducting a more diverse set of experiments. To find the subset
of SNPs that occurs with the greatest frequency in human disease or that are
potentially responsible for variations in drug response, hundreds of millions
of SNP scores must be made and correlated with health and other features of
interest. Research and clinical laboratories will require the use of a highly
accurate, high-throughput SNP scoring technology that can be implemented at a
competitive cost to find these valuable SNPs.
The SNP Consortium has announced its intention to identify a set of
approximately 300,000 SNPs by the end of 2001. If research laboratories were to
score all of these SNPs in a group of 1,000 patients, they would require large-
scale experiments consisting of over 300,000,000 individual SNP scores. Since
there are many research laboratories currently conducting research on SNPs, we
estimate they will require the performance of billions of SNP scores over the
next few years and potentially a thousand-fold more over the next decade. Since
performing SNP scoring using conventional sequencing methods can cost several
dollars per SNP score, these studies would be cost-prohibitive without further
technological advancement.
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Traditional Methods of SNP Analysis and Their Limitations
Current methods for discovering SNPs rely on DNA sequencing, which is
currently conducted by large dedicated laboratories using automated
electrophoresis instruments. While DNA sequencing is an efficient SNP discovery
tool, it is expensive and complex when used to conduct SNP scoring.
Researchers have developed variations upon standard DNA sequencing methods,
such as DNA hybridization. DNA hybridization relies upon the principle that a
unique piece of DNA will hybridize most strongly to its exact complement as
opposed to a complement containing a SNP. A significant problem with
hybridization as a DNA sequencing method, however, is that it requires ideal
testing conditions. Slight changes in temperature, salt concentration or DNA
composition will dramatically affect the reliability of the hybridization
reaction. As a result, some commercial tests based on hybridization require ten
or more repetitive analyses for every SNP scored. While various commercial
variations of the hybridization technique have improved the reliability of
hybridization, the technique remains complex and costly.
SNP Scoring Systems
SNP scoring systems typically contain two basic elements: an instrument
platform or "hardware" component and a biochemistry or "wetware" component. The
hardware component, which is the instrument platform where the SNP scoring
takes place, typically consists of a means of detection, such as fluorescence,
mass spectroscopy or optical density; a separation apparatus such as
electrophoresis, beads or multi-well plates; and a liquid dispensing apparatus
having such features as pipetting or microfluidics. The wetware component,
which is a specifically designed set of biochemical reagents, conducts the
test, or assay, that recognizes the SNP at the molecular level as being present
or absent at its expected location. The actual recognition, or scoring of the
SNP, takes place by having molecules bind or react with or near the location of
the SNP in a test tube or other suitable chamber. Since the wetware component
consists of consumable reagents designed for a specific set of procedures and
packaged within a single kit, multiple kits must be purchased for multiple SNP
analyses.
There are certain key criteria of both hardware and wetware components that
contribute to the success of the overall SNP scoring system. For the hardware
component, these criteria include throughput, cost, flexibility, automation and
ease of use. For the wetware component, these criteria include the following:
. Accuracy. The sensitivity of the biochemistry wetware in accurately
recognizing and scoring a single SNP or a group of SNPs in a large group
of samples.
. Flexibility. The adaptability of the biochemistry wetware for use on many
different instrument platform hardware systems having various degrees of
automation and detection methods.
. Cost. The cost of the reagents and the labor used to perform each SNP
score.
. Robustness. The ability of the assay to perform well under a variety of
experimental conditions and the user-friendliness of the protocol
required to conduct the test.
. Scalability. The ability of the biochemistry wetware to function through
a range of production size requirements from single sample tests to large
scale mass production.
Because each SNP scoring customer will have specific system requirements,
the ideal SNP scoring system should be capable of addressing all of the
criteria described above.
With the increased focus of the biotechnology and pharmaceutical industries
on the value of SNPs and the increase in the number of discovered SNPs, there
is a pressing need for a fast and flexible SNP scoring system that can score
SNPs with a higher level of accuracy and at a lower cost than is achievable
with current methods.
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Orchid's Unique Solutions
Our Proprietary Wetware -- SNP-IT
We conduct SNP scoring using our proprietary SNP-IT primer-extension
technology. SNP-IT primer extension is a method of isolating the precise
location of the site of a suspected SNP and utilizing the inherent accuracy of
DNA polymerase to determine the presence or absence of the SNP. In order to
conduct SNP-IT primer extension, we first bind a specially synthesized DNA
primer to the sample DNA to expose the DNA site of interest where a SNP may be
present. We then add DNA polymerase, a naturally occurring molecule that
accurately and reliably inserts the appropriate complementary base to a chain
of DNA, to extend the DNA chain by one base at the suspected SNP location. We
then use one of several conventional methods, including fluorescence, optical
density, electrophoresis and mass spectroscopy, to detect this single base
extension. The result is a direct read-out method of detecting SNPs that
creates a simple binary "bit" of genetic information representing the presence
of a SNP in a DNA sample.
We believe our proprietary SNP-IT primer-extension technology is superior to
conventional SNP scoring technologies and overcomes most of the limitations
present in other SNP scoring systems. Further, our SNP-IT primer-extension
technology uses experimental steps and instruments already familiar to
technicians and scientists in the life sciences field. SNP-IT primer extension
is distinct from other currently available SNP scoring technologies in the
following ways:
. Accuracy. We believe our proprietary technologies permit users to realize
higher levels of accuracy without incurring the time and expense of
conducting repetitive analyses of the same SNP. Unlike most alternative
hybridization-based methods, our SNP scoring technologies rely on the
inherent accuracy of DNA polymerase. The use of DNA polymerase enables
our SNP-IT primer-extension technology to achieve the accuracy and
reproducibility of DNA sequencing, while lowering costs and reducing
complexity. Since a SNP scoring technology that is susceptible to even a
one percent error rate could double the sample requirements and
significantly increase the costs of a clinical trial, the degree of
accuracy of our SNP scoring technologies should improve the design and
reduce the cost of entire clinical studies. One of our customers who
conducted a recent independent analysis has confirmed the accuracy of our
SNP scoring technologies and reported that our technologies were 100%
accurate in performing 4,000 SNP scores.
. Flexibility. Our biochemistry wetware component is compatible not only
with our hardware platform, but also with the 100,000 other instrument
systems we estimate are already installed around the world. Unlike the
wetware components of competing systems, we may apply our wetware to a
wide range of formats and systems including: arrays, gels and beads, as
well as mass spectroscopy and optical systems. We believe the unique
flexibility of our SNP-IT primer-extension technology permits
commercialization opportunities on multiple platforms to provide the best
combination of price and performance for a wide range and large number of
customers.
. Cost. We expect the use of our SNP-IT primer-extension technology for SNP
scoring will provide a significant reduction in data point analysis
relative to current hybridization-based methods. We believe eliminating
the need for repetitive SNP scoring tests will reduce costs associated
with both clinical trial sample collection and SNP scoring.
. Robustness. Our SNP-IT primer-extension technology provides accurate
results over a wide range of testing conditions and is less vulnerable to
failure or false results if testing conditions are not ideal.
. Scalability. We believe we are unique in our ability to scale our SNP
technologies to meet the needs of potential customers who will require
tests ranging from a single SNP per sample to hundreds of thousands of
SNPs on thousands of samples.
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Our Complementary Technologies
We also have a portfolio of microfluidics technologies which we are applying
to the field of SNP scoring. We plan to use our microfluidics systems to
increase the throughput and decrease the costs of SNP scoring. We also plan to
use our microfluidics systems to synthesize DNA for use as primers in SNP
scoring. We can manufacture our primer arrays for use in a wide variety of
formats, including industry standard 384-well plates in our MegaSNPatron
facility and arrays compatible with other DNA chip systems. This should allow
us to format SNP arrays and tailor them rapidly on a project-by-project basis
and give us the ability to produce DNA arrays on demand. By applying these
technologies, we believe we will be able to increase the throughput and reduce
the cost of SNP scoring to pennies per score.
We have also developed additional chemistries and technologies which augment
our SNP scoring capabilities, including detection methods, target preparation
methods, signaling chemistries, surface chemistries, SNP scoring algorithms,
primer design software, data management tools and primer extension
permutations. We have designed proprietary algorithms which allow for the
automated selection of important SNP patterns associated with the scoring of
inherited SNPs. Many of our chemistries and technologies involve novel uses of
instrumentation, software and technologies that still require validation in
commercial applications. Many alternative chemistries and technologies
currently in use have been demonstrated to be commercially viable. Nonetheless,
rapid changes in the development of technology in the field of genetic
diversity can quickly make genetic diversity technologies, including our own,
obsolete. We intend to continue to pursue new chemistries and technologies
which improve our core technology position in SNP scoring and analysis.
Genetic Diversity Markets
Due to the key role of SNPs as indicators of genetic diversity, we believe
SNP scoring will have significant applicability in all stages of drug discovery
and development. In each of these stages, we believe SNP scoring can provide
significant value for our customers and create market opportunities for us
described below:
The Use of SNP Scoring in Drug Discovery
. Target Identification. Researchers can use correlations between
individuals with a given disease and SNPs to identify candidate genes
that are related to the disease. These candidate genes can then serve as
candidate targets for new drug development.
. Target Validation. A target containing many SNPs is likely to be a poor
target for traditional drug discovery since too much variability may lead
to a lack of uniform response in a patient population. Researchers can
use SNP studies to validate candidate targets by either taking into
account the target's variability or by eliminating targets with excessive
variability at an early stage of the drug discovery process.
. Lead Identification. Pharmaceutical companies can identify lead compounds
which act not only on the proteins encoded by the target gene, but also
the proteins encoded by the SNP variants of the gene. In this manner,
they can identify lead compounds that act on multiple versions of a
target protein.
. Lead Validation. Pharmaceutical companies can conduct biological assays
on lead compounds against SNP variants of a given protein, thereby
validating a lead candidate.
The Use of SNP Scoring in Drug Development
. Lead Optimization. Pharmaceutical companies can use studies on known SNP
variants of targets to improve existing drugs by seeking broader efficacy
over larger populations with genetic variations. They can also use SNP
scoring to re-evaluate and modify drugs that previously failed or that
have been dropped from the market through evaluation of efficacy on
specific SNP variants of drug targets.
. Preclinical Testing. Studies with model systems to correlate drug
response or lack of response and metabolism to known SNPs in the target
or in related enzymes can yield better efficacy and permit more accurate
safety predictions for a drug.
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. Clinical Trials. Pharmaceutical companies may select patients for
clinical trials based on the presence or absence of SNPs known to be
associated with drug response. Our technologies may reduce the duration
and expense of clinical trials through the use of SNP scoring in smaller
patient populations.
The Use of SNP Scoring in Drug Marketing
. Market Extension. Pharmaceutical companies can use SNP scoring in
marketing programs to expand or extend markets of an existing drug to new
patient groups based on SNP variants. This may lead to label extensions
and longer commercial lives for existing compounds based on patient SNP
type. In addition, these companies may use SNP scoring to exclude
patients that are more likely to experience toxicity when treated with a
certain drug. This should permit drugs to remain on the market for a
longer period of time.
. Generic Drugs. Pharmaceutical companies can use SNP scoring to discover
novel uses of existing non-proprietary drugs.
. Drug Revival. Pharmaceutical companies can use SNP scoring to bring drugs
which previously failed due to adverse drug response or lack of response
in a given indication back to the market for different indications or for
use on better defined populations.
The Use of SNP Scoring and Other Polymorphism Analyses in Healthcare Delivery
. Clinical Diagnostics. Healthcare providers can use SNP scoring in patient
testing for disease diagnosis or in determining the appropriate medical
treatment for a patient.
. Drug Selection. Healthcare providers can use SNP scoring to tailor
formulations of drug treatments selected specifically for a patient
having a unique set of SNPs. This could revolutionize drug prescription,
significantly reducing erroneous or ineffective prescriptions. They may
also use tailored formulations to develop more cost-effective formularies
for managed care systems.
. Medical Treatment Selection. Healthcare providers can use SNP scoring not
only for drug selection but also to modulate drug dosage and to select
non-pharmaceutical treatment, such as surgery, in cases where drugs may
not be effective in a particular patient. We expect the reduction of the
time required to identify an effective treatment will improve medical
outcomes.
. Transplantation Matching. Genetic variability in genes plays a key role
in the success of transplantation therapy. The ability to rapidly and
accurately match donated tissues to recipients through polymorphism
matching has become increasingly important.
Potential Impact of SNP Scoring on Our Prospective Markets
The market potential for SNP scoring is a function not only of the variety
of different markets as described above but also of the impact of our SNP
scoring technologies on each of these markets. We describe the impact of new
and expanding uses of SNP scoring as the lifecycle of a SNP, consisting of the
following five stages.
Stage 1: Discovery. Discovery of a SNP, typically through high-throughput
DNA sequencing.
Stage 2: Confirmation. Confirmation that the suspected SNP is indeed a SNP
and not a sequencing mistake or rare mutation. This is accomplished by scoring
the SNP on hundreds of patients, plants or animals to determine its frequency
of occurrence.
Stage 3: Association. Association of the confirmed SNP with the occurrence
of an adverse drug response, the lack of response to a drug or perhaps the
presence or absence of a disease through SNP scoring on a set of patient
samples grouped by medical attributes. In this manner, healthcare providers can
use SNP associations to determine the optimal drug selection for each patient
SNP type.
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Stage 4: Clinical Trials. Use of the knowledge of the presence or absence of
one or more SNPs to predict or improve the outcome of clinical trials.
Stage 5: Diagnostic Testing and Industrial Application. Use of SNPs in the
clinical diagnostic testing of a patient to determine appropriate drug or
alternative treatment or in industrial applications.
Each of these stages of the SNP lifecycle represents a separate business
opportunity with unique market dynamics and product or service requirements. As
a SNP progresses through this lifecycle, the throughput requirements at any
given laboratory for scoring this SNP may decrease. However, we expect the
number of laboratories performing SNP scoring in these later stages to increase
substantially. For example, it may take a laboratory with a throughput of a
million SNPs per day to identify the one specific SNP from a potential pool of
several thousand that can predict the response to a specific drug. In order to
make such association studies commercially viable, the laboratory would
probably want to use a SNP scoring technology such as SNP-IT primer extension,
that can provide accurate results without the need for repetitive testing. Once
a SNP progresses through the SNP association stage, that one SNP might find its
way into thousands of clinical laboratories performing tests on a few hundred
patients a day in order to complete clinical trials or diagnostic testing.
Thus, as the field of genetic diversity matures over the next few years, we
expect that researchers will use more and more SNPs in a larger number of
smaller laboratories such as clinical laboratories. Following the completion of
the sequencing of the human genome and the progression of many SNPs through the
early stages of the SNP lifecycle, we expect that our SNP-IT primer-extension
technology, which can adapt to existing diagnostic testing instruments, will
have significant market appeal.
Industrial Applications of Genetic Diversity
Genetic diversity also has many commercial and industrial applications.
State and other government agencies can use information related to genetic
diversity between individuals to determine identity and paternity. For example,
we can test DNA material collected from a crime scene to determine if a
particular individual was involved in the crime. Similarly, we can match the
DNA of a child to that of the mother and the purported father to determine
unambiguously the actual parents of the child. These two applications have
revolutionized forensics and child support enforcement. We also test DNA for
likely compatibility of organs or tissues for transplantation between
individuals. Our technologies enable us to screen large numbers of potential
donors for compatibility. We estimate that the market size for DNA testing in
these areas is more than $100 million per year.
As with humans, genetic diversity in plants and animals results in
differences between species as well as differences in characteristics within
the members of given species. For example, plants have genetic variations
responsible for differences in crop yield as well as product size and flavor.
Animals also have genetic variations responsible for traits such as fertility
and resistance to disease. Agricultural companies and livestock breeders can
optimize traditional plant hybridization and breeding programs by using genetic
variation information to more rapidly attain desired quality traits of plants
and animals without engaging in genetic engineering.
Our Business and Commercialization Strategy
Our objective is to become the premier provider of instruments, consumables,
services and technologies for SNP scoring and other genetic diversity tests.
The key elements of our strategy to achieve this objective include the
following:
Rapid Commercialization
We intend to rapidly commercialize our growing line of instruments,
consumables and services for SNP scoring. Our product lines currently include
our SNPstream hardware instruments, our SNPware wetware consumables and our
high-throughput MegaSNPatron facility for SNP scoring services. We intend to
expand our existing products and services to offer a wide range of performance
options.
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We currently sell SNPware consumables for use in SNP scoring and provide
non-exclusive, one-time use licenses of our SNP-IT primer-extension technology
in connection with each sale solely for the purpose of performing SNP scoring
using the quantity of samples and SNPs contained in each kit. We also expect to
generate substantial recurring revenue from the sale of our SNPware consumables
to purchasers of our SNPstream hardware systems.
We also intend to expand the market for our proprietary SNP scoring
biochemistry wetware through our platform propogation strategy by offering it
for use on instruments made and sold by other companies. We expect to implement
this strategy in the third quarter of 2000 by selling SNPware consumables and
kits directly to the existing customer base of such companies. In addition, we
will continue to develop, manufacture and supply kits directly to instrument
companies to take advantage of their existing marketing and distribution
channels. Our collaboration with Affymetrix is an example of this strategy. We
also intend to form marketing distribution relationships to enhance the
distribution of our products. We believe our proprietary biochemistry
underlying our wetware is flexible enough to be adapted to various instrument
platforms, including capillary and slab-gel electrophoresis, DNA sequencers,
mass spectrometers, optical plate readers, fluorescence plate readers, micro
array readers and DNA chip systems. We believe the installed base of these
instrument platforms is more than 100,000 instruments in the aggregate. We
believe this strategy will allow us to establish our technologies as the
leading means of SNP scoring more quickly than if our technologies were limited
to a single platform.
Market Extension
The pharmaceutical and research communities are currently our largest SNP
scoring markets. Although we expect these markets to grow rapidly over the next
several years, we believe the application of SNP scoring in the clinical and
diagnostic markets, which are still in the early stages of development, has the
most significant long-term potential. We designed our market extension strategy
to leverage our developing research market position, which we expect to
establish using our SNPstream and SNPware product lines, as well as the
services we conduct in our high-throughput MegaSNPatron facility, to enable us
to expand into the clinical markets within the next 12 months. As researchers
find more medically important SNPs using our technologies, products and
services, we believe more suppliers to the clinical and diagnostic markets will
select our SNP scoring technologies. Due to the flexibility and scalability of
our SNP scoring technologies, we also believe we can readily adapt these
technologies to many systems in the clinical and diagnostic markets. As a
result, we believe we are well positioned to collaborate with companies with
large installed bases of clinical systems.
We have already started to expand our genetic diversity services by
acquiring GeneScreen. GeneScreen sells genetic diversity testing services for
use in forensic and paternity testing as well as for improving the success of
transplantation of bone marrow. As a result of this acquisition, we believe we
are currently the second largest provider of paternity tests in the United
States. We intend to consider other acquisition opportunities to further expand
applications of SNP scoring in industrial and clinical markets.
We also intend to expand our markets geographically by establishing SNP
scoring facilities and distribution channels in many countries through what we
call our Regional GeneScreen Centers. Through this strategy, we intend to
rapidly penetrate the global market and form relationships with a diverse group
of scientists throughout the world. The Regional GeneScreen Centers are
intended not only to create service revenue but also to serve as applications
laboratories to promote the local sale of our products. We expect to establish
the first of these Regional GeneScreen Centers within the next 12 months.
As the clinical value of SNPs becomes more accepted, we believe consumers
and their physicians will represent a significant potential market for our
products and services. We plan to develop a Web site based service which we
expect will become operational in the first quarter of 2001. This service would
offer SNP scoring on patient samples. This service would provide a report on
the patients, which patients may share with their doctors, that would indicate
the adverse drug responses to which they may be susceptible or assist in the
selection of drugs which may work best for the patient. We plan to provide a
related service to the healthcare
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industry which we would design to provide important topical information about
our available services and the field of pharmacogenetics generally. We plan to
provide leadership in establishing high standards of medical ethics,
confidentiality and data security in introducing and establishing these
services. If implemented, we intend to perform this type of testing at our
Regional GeneScreen Centers.
We also intend to expand into industrial applications of SNP scoring,
including agricultural applications which represent a growing market
opportunity for our products and services. We believe the SNP scoring needs in
the agricultural industry will be similar to those for the pharmaceutical
industry and may involve similar products and/or SNP scoring facilities.
Therefore, we believe we are well-positioned to take advantage of this market
and expect to form collaborations with members of the agricultural industry
community in the last quarter of 2001.
Proprietary SNP Value Creation
We have based our proprietary SNP value creation strategy on the creation of
proprietary rights covering the identification of SNPs and their associations
to medically important attributes of patients. We believe the knowledge gained
from such associations will allow healthcare providers to screen patients more
accurately for appropriate medication and treatment. We expect this will result
in proprietary rights covering a broad range of new and existing drugs,
consisting of both "composition of matter" patents which cover the drugs
themselves and "use patents" which extend their label coverage. Because this
approach leverages existing drugs and molecular targets, we expect our drug
development programs will be faster and less expensive than those relying
solely on new chemical entities or new molecular targets.
We believe we can also use our proprietary SNP value creation strategy to
extend patent coverage on existing drugs as well as drugs that are off patent.
We also believe, in some cases, SNP-enhanced pharmaceuticals will be tantamount
to novel drugs and we may either license these extended patents to
pharmaceutical companies or develop them commercially.
We believe SNPs will be useful in a variety of research and clinical
applications. As researchers and scientists associate SNPs with medically or
commercially important attributes, we can assemble them into SNP scoring panels
designed for specific applications. Once researchers and scientists find these
SNP associations, we expect to file patents on the use of specific SNPs. For
example, we could package a panel of five SNPs that were all known to correlate
with a lack of response to a certain drug as a SNP scoring kit. Individual
patients might be able to benefit from such a SNP panel by receiving an
effective drug in a shorter period of time. We believe we will generate revenue
from the licensed use of our SNP-IT primer extension technology as well as from
our growing portfolio of proprietary uses of SNPs.
Sustained Competitive Advantage
In order to build and sustain our competitive advantage in the field of
genetic diversity, we plan to form strategic alliances and scientific
collaborations and make strategic acquisitions. We believe our financial and
technology positions will make us an attractive partner to a variety of other
participants in this industry. In early 2001, we will seek to expand our
paternity, forensic and transplant genetic testing services in our Regional
GeneScreen Centers to include new testing services marketed to new groups of
customers. We believe we can use our SNP scoring technologies at GeneScreen and
in other Regional GeneScreen Centers to reduce costs or increase the types of
testing offered. Through our collaborations and acquisitions, we will seek
access to distribution channels and opportunities to improve operational
efficiencies. We have already formed a number of collaborations with research
physicians in what we call our Clinical Genetics Network. Through this network,
we believe we will gain access to clinical samples which will enable us to find
correlations between SNPs and medically important attributes. This may create
additional intellectual property rights for us.
We also intend to continue our aggressive investment in our proprietary
technologies through internal development and by licensing third-party
technologies. Examples of this include the application of our microfluidics
technology to DNA synthesis for use in genomics research and to increase the
throughput and
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reduce the costs of SNP scoring in our MegaSNPatron facility. We will also seek
to improve the cost-effectiveness of our products and services through
increased automation and development of improved information technologies.
Products and Services
We are currently marketing or developing the following products and
services:
Instruments and Systems -- Hardware
We have developed our instrument systems using an original equipment
manufacturer, or OEM, strategy by modifying instruments already produced by
other companies. We intend to continue this OEM strategy to expand the number
of instruments that we offer while minimizing the engineering expenses normally
associated with the internal development of these systems.
SNPstream Product Line
We introduced our SNPstream 25K system in September 1999 and currently have
five systems in operation. This system is based on an OEM robotic system
optimized for use with our proprietary SNP-IT primer-extension SNP scoring
assays, formatted in 384-well plates, and uses our dedicated consumables and
software and provides the user with turn-key SNP scoring capabilities of
approximately 25,000 SNPs per day. The equipment manufacturer installs and
services this system. We support the SNP scoring applications. We intend to
develop a lower-throughput version of our SNPstream system that will enable
users to analyze up to 1,000 SNPs per day. In addition, we intend to introduce
a medium-throughput SNP scoring system capable of scoring between 1,000 and
10,000 SNPs per day. These systems are in development and we expect completion
of beta testing by the end of 2000.
DNAstream Product Line
We are designing our DNAstream line of products to enable the simultaneous
synthesis of up to 384 oligonucleotides. Purchasers of DNAstream products may
use these oligonucleotides as the DNA primers for our SNP-IT primer-extension
technology. We are also developing our proprietary Chemtel microfluidic chips
for use in DNA synthesis instruments. We expect the unique control features of
our Chemtel chip will enable our customers to use standard chemistry to produce
DNA of exceptional purity using controlled pore glass or polystyrene supports
in arrays of microreactors. Potential benefits of our DNAstream products
include reduced reagent usage and lower cost enabled by the execution of
reactions in a microreactor well, instead of on the surface of glass plates or
in flow-through cartridges commonly used in current commercial DNA
synthesizers. We may also use the high-throughput versions of this line of
products internally to produce the DNA required for our high-throughput
MegaSNPatron facility and/or offered on a service basis. We currently expect to
launch the DNAstream product line in 2003.
SNPware Consumables -- Wetware
Customers may conduct our SNP scoring biochemistry by using a set of
approximately ten reagents. These reagents can be pre-dispensed in the
necessary amounts to run a specific number of SNP scores. We assemble this set
of reagents along with the labware and instructions in a kit for the
convenience of our customers. We intend to sell these kits under our SNPware
brand name for use on our own SNPstream systems as well as the systems of other
companies. We also intend to market our SNPware on one of our Web sites, where
individuals could order custom panels of SNPs to fit their needs. Our SNPware
consumable product line includes the following:
SNPkits
SNPkits are the custom 384-plate kits supplied with SNPstream 25K,
containing optimized reagents and software for performing accurate, robust SNP
scoring. We typically format these kits for scoring of specific sets of SNPs at
the request of our customers. A given panel may screen thousands of samples for
a small number of SNPs.
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SNPcode 100, 1000 and custom kits
We designed the initial version of SNPcode kits for use with the Affymetrix
GeneChip system, which will enable users to run SNP-IT primer extension for SNP
scoring on the Affymetrix GeneChip system. We currently anticipate launching
this line of kits in the third quarter of 2000.
Additional SNPware Products
In the future, we anticipate commercializing SNP-IT primer-extension
technology kits for use on other platforms or for other readout methods,
including fluorescence polarization, gel-based sequencers, optical readers and
mass spectroscopy.
The following chart summarizes the important features of our SNPstream,
DNAstream and SNPware product lines:
<TABLE>
<CAPTION>
Assay Expected Expected
Products Media Mode Platform/Readout Beta Test Launch
- ------------------------ -------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
SNPstream Product Line
SNPstream 25K (high Plate Orchid 1999 1999
throughput)............
SNPstream 1K (low Plate Orchid 2000 2001
throughput)............
SNPstream 10K (medium Plate, bead or Orchid 2000 2001
throughput) ........... glass slide
DNAstream Product Line
DNAstream 96............ Bead/cleave Orchid 2002 2003
DNAstream 384........... Bead/cleave Orchid 2003 2004
SNPware Product Line
SNPkit.................. Custom kit Orchid 1999 1999
SNPcode 100............. Generic kit Affymetrix 2000 2000
SNPcode 1000............ Generic kit Affymetrix 2000 2000
SNPcode custom.......... Custom SNP kit Affymetrix 2000 2001
Additional SNPware Generic kits Multiple 2000 to 2002 2001 to 2003
Products............... instruments
</TABLE>
Services
We provide, or intend to provide, a variety of genetic diversity services
through our high-throughput MegaSNPatron facility and Regional GeneScreen
Centers.
MegaSNPatron Facility Services
We intend to continue to provide the highest throughput and lowest cost SNP
scoring services available in the industry. We introduced the first phase of
our MegaSNPatron facility in March 1999. We are continuing to expand throughput
capabilities in order to perform over one million SNP scores per day by the
first quarter of 2001.
. SNP CONFIRM service. We offer customers SNP confirmation services in
which we score new SNPs and verify the existence of SNPs discovered
through DNA sequencing. We currently provide this service to The SNP
Consortium.
. SNP ASSOCIATION service. We offer our SNP association service to
pharmaceutical companies who design and undertake studies in order to
discover associations between SNPs and multiple patients'
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medically important attributes. The discovery of these associations is a
critical phase in the lifecycle of a SNP. Further, we are able to enhance
these studies with information that we gather from our Clinical Genetics
Network, whose members have expertise in specific areas of medical
science.
. SNP WIDEMAP service. We are able to perform genome-wide SNP studies at
the chromosome or genome scale. In order to identify genome regions of
interest for further mapping studies and candidate gene location a
researcher or scientist typically uses 300 to 3,000 SNPs. We believe we
are well positioned with our relationship with The SNP Consortium to
utilize the SNP sets from its discovery effort in these genome-wide
mapping studies.
Regional GeneScreen Center Services
. GENESCREEN IDENTITY service. We offer a variety of paternity tests,
consisting primarily of a standard test involving the mother, child and
purported father.
. GENESCREEN TRANSPLANT TESTING service. We provide screening test
services for the typing of bone marrow specimens containing human
leukocyte antigen, or HLA, through both DNA and serological testing.
. GENESCREEN FORENSIC service. We test a variety of forensic samples found
at crime scenes, such as hair, blood, semen, saliva, skin, bone, muscle
tissue and urine.
. INTERNET-BASED service. We plan to provide SNP scoring services via the
Internet through one of our Web sites within the next 12 months.
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Technology
SNP-IT
An experiment using SNP-IT primer extension would typically include the
following steps:
. Preparation of the target DNA sample.
. Capture of the target DNA from a patient sample by hybridization. The
SNP-IT primer, which includes approximately twenty nucleotide bases
ending immediately prior to the location of the suspected SNP on the
patient's sample, is then synthesized. Selective extension of the SNP-IT
primer with labeled DNA, or primer extension, will only occur when the
base available at the expected location of the SNP matches the modified
base available for extension.
. Analysis of the SNP-IT primer-extension product. We can analyze the SNP-
IT primer extension product by a variety of means including
fluorescence, optical density and mass spectroscopy.
[Graphic Illustration of the three steps in SNP-IT primer extension]
Step 1: Step 2: Step 3:
Prepare SNP-IT Detect
Since we can perform SNP-IT primer extension in both solution and solid-
phase formats, the operational advantages of our system can be significant. We
can automate the biochemistry using liquid handling robots and can automate the
data acquisition and analysis of test results using readily available array
scanners or Microtiter plate readers that transmit quantitative information to
a computer. We can then automatically interpret this digitized data to provide
custom tailored reports and statistical information on SNP scoring results.
We facilitate the standardization and reproducibility of SNP-IT primer
extension by the stable attachment or capture and detection of oligonucleotide
primers to the solid phase. This permits large-scale batch preparation of the
SNP-IT arrays, signal uniformity and quality control of the test.
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Microfluidics
Microfluidics is a set of technologies designed to control the flow,
reactions and measurements of minute amounts of chemicals and biochemicals in
miniaturized systems. Our microfluidics chips are multi-layered devices
consisting of arrayed networks of liquid reagent flow paths in channels or
conduits. These chips allow the processing of sequential and/or parallel
reactions. The reagents conveyed in the conduits and delivered to the location
of the reactions can range in volume from nanoliters to milliliters with a
typical reactor volume being from 100 to 800 nanoliters. We can use a variety
of materials to create our chips, including glass, silicon and polymers. These
structures are typically flat and layered to create the desired three-
dimensional structures with the required network of fluidic channels in the
upper reusable portions and an array of reactors in a consumable lower portion.
We employ a variety of means to create the defined fluidic conduits or reactors
within our chips, which may include laser ablation, etching, photolithography,
milling, molding and embossing.
Proprietary rights and patents cover our pumping and valving techniques
which control the timing, location and amount of desired reagent delivery
within our chips. Our proprietary valving technology relies on a capillary
break, which halts the reagent flow at a defined expansion point in a fluidic
channel. Electrodes in the channel create simple pneumatic or hydraulic
pressure and electrohydrodynamic pumping. Once the flow is halted, pressure or
electric current can reinitiate the flow.
Combined Technologies
We design our microfluidics technologies to drive genetic analysis and drug
discovery to higher throughput while achieving lower costs. By applying our
SNP-IT primer-extension technology to our two-dimensional arrays of identical
reactors and channels, we intend to process in parallel a large number of
similar samples to create highly automated internal facilities capable of
performing millions of SNP scoring experiments per day. Traditional SNP scoring
techniques, including DNA sequencing, cost several dollars per SNP score. We
plan to use our microfluidics technologies to synthesize the DNA for use in our
MegaSNPatron facility. We expect that this will accelerate our ability to
introduce new SNPs and increase the throughput at this facility. By
significantly increasing the throughput of SNP scoring, we intend to
significantly reduce the cost of SNP scoring.
Research and Development
We intend to continue our aggressive investment in our proprietary
technologies through internal development and licensing of third-party
technologies to increase and improve other characteristics of our systems. We
will also continue to invest in improving the cost-effectiveness of our
products through automation and information technologies. We are actively
pursuing research projects aimed at identifying and developing new technologies
to improve and expand on our genetic diversity, microfluidics and software
products. These projects involve research conducted by us, collaborations with
other researchers and the acquisition of chemistries and other technologies
developed by universities and other academic institutions.
Collaborations and Licenses
A significant element of our business strategy is to enter into
collaborative research programs and licenses with major pharmaceutical,
biotechnology and agricultural companies which have proven capabilities in
gene-based product discovery and commercialization. We believe this strategy
will allow us to apply our technologies to a broader range of product
development efforts, thereby generating a growing base of intellectual property
rights and revenue for us.
We have entered into license agreements with Affymetrix and NEN Life Science
Products, Inc. We have also entered into license and collaboration agreements
with SmithKline Beecham and Motorola relating to the microfluidics field,
neither of which is material to our current business. In addition, we have a
license agreement with Sarnoff which is no longer material to our current
business and which we have agreed to terminate upon certain terms described
below.
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Affymetrix, Inc.
In November 1999, as part of our platform propagation strategy, we entered
into a Collaboration Agreement with Affymetrix, Inc. to develop, manufacture,
market and sell kits capable of performing SNP-IT-based SNP detection on
Affymetrix's GeneChip system and software applications for certain instruments
commercialized by Affymetrix. We agreed to collaborate on the development of
three types of kits, designated under our agreement as Generic Kits, Standard
Kits and Custom Kits. We are responsible for all development costs associated
with the development of Generic Kits and Custom Kits and the optimization of
the SNP-IT primer-extension tests to be used on the Affymetrix GeneChip system.
We will share costs associated with the development of approved Standard Kits.
Affymetrix will market and distribute all Generic and Standard Kits developed
under the agreement, and we will market and distribute all Custom Kits.
Affymetrix has agreed to purchase, and we have agreed to manufacture and
supply, all of Affymetrix's requirements of Generic and Standard kits at
agreed-upon prices. The parties have agreed, through a collaboration committee
to set minimum annual sales requirements for Affymetrix in connection with
sales of its Generic and Standard Kits. The collaboration agreement has an
initial term of five years and may be renewed for additional one year terms
upon written notice by either party to the other.
Sarnoff Corporation
In December 1997, we entered into a License and Option Agreement with
Sarnoff Corporation pursuant to which Sarnoff granted us rights under certain
technology to research, develop and sell products and services in the field of
combinatorial chemistry and in vitro diagnostics. Sarnoff also granted us
options to acquire exclusive licenses in certain other fields related to
microfluidics, including the fields of genomics, high throughput screening,
research products and cell-based assays. These options extend for a period of
four years and expire one per year over such four year period. In consideration
of the grant of these licenses, in December 1997 we issued to Sarnoff 82,500
shares of our common stock with a fair value of $185,626 and 167,500 shares of
our Series A convertible preferred stock with a fair value of $1,289,750. Upon
the exercise of each option, we are obligated to issue to Sarnoff 33,300 shares
of our common stock and 66,700 shares of our Series A convertible preferred
stock and to fund research to be performed by Sarnoff in an amount of not less
than $5.5 million in the aggregate over a four year period. We exercised one
option in each of December 1998 and December 1999. In consideration for the
options, we issued to Sarnoff 33,300 shares of common stock in each of 1998 and
1999, with a fair value of $114,885 in 1998 and $391,275 in 1999 and 66,700
shares of Series A in each of 1998 and 1999 with a fair value of $400,200 in
1998 and $783,725 in 1999. In addition, we are obligated to issue Sarnoff
50,000 shares of our common stock at the end of each year during the term of
the agreement for each option exercised. Accordingly, we issued 50,000 shares
of common stock with a fair value of $587,500 in 1999 to Sarnoff related to the
option exercised in December 1998. We are also obligated to make royalty
payments on future net sales of products and services developed under these
licenses, if any. The Sarnoff agreement has a term which continues until
terminated by mutual agreement or by Sarnoff if we fail to make any payment due
unless the agreement which is cured within 90 days of notice from Sarnoff.
As part of our transition from our historical business model based on
microfluidics technologies to our current business model based on our SNP
scoring technologies, on April 4, 2000 we entered into a binding letter of
intent with Sarnoff to terminate our License and Option Agreement, subject to
payment of certain consideration. Under the terms of this agreement, we have
agreed, in lieu of our future cash payment and stock issuance obligations, to
make a one-time payment to Sarnoff in the aggregate amount of approximately
$3.0 million and to issue to Sarnoff 250,000 shares of our common stock and a
warrant to purchase 75,000 shares of our common stock at the price of this
initial public offering. Upon payment of this consideration, we will receive
exclusive licenses in the fields formerly covered by options under our License
and Option Agreement. Previously on February 2, 2000, we issued 100,000 shares
of common stock to Sarnoff as an advance on the issuances which would be owed
for the two option fields in December 2000 under the License and Option
Agreement. As this licensed technology has not reached technological
feasibility and has no alternative uses, the cash payment and the fair value of
the equity securities will be charged to research and development expense.
NEN Life Science Products, Inc.
In February 2000, we entered into an agreement with NEN Life Science
Products, Inc., under which NEN has agreed to supply us with all of our
required terminators for use in our SNPkits. Terminators are nucleotides
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which stop the extension of a DNA chain. As part of the agreement, we issued to
NEN 125,000 shares of our common stock and will pay to NEN an agreed upon price
for the terminators. Either party can terminate the agreement any time after
four years from the commencement date, without cause, upon 90 days prior
written notice. Either party can also terminate the agreement for cause, such
as a failure to make payments or for any breach that remains uncured following
60 days from the receipt of notice of the breach.
Other Licenses and Collaborations
In the past, we have entered into license and collaboration agreements with
respect to our microfluidics technology with Motorola and various other third
parties which are nearing completion and which are not material to our SNP
scoring business. We intend to continue to enter into similar agreements to
enable us to apply our microfluidics technologies for use in our SNP scoring
products and services.
Manufacturing and Suppliers
We manufacture biochemical kits and microfluidic chips at our Princeton, New
Jersey facility. We believe we currently have sufficient manufacturing capacity
to meet commercial demand for our products through the end of 2000. Although
our manufacturing capacity may be scaled up at our facility, we may need to
acquire additional facilities during the period from 2000 to 2002 and beyond.
We plan to increase our manufacturing capacity by constructing additional
facilities which we believe will be completed within the next 12 months. We may
need to enter into manufacturing arrangements with third parties to produce
commercial quantities of our products.
Our manufacturing facility is designed to optimize material flow and
personnel movement with centrally located manufacturing and quality control
operations. We produce critical components in an environmentally controlled
clean room which is isolated from the rest of the facility. We are planning to
comply with quality system requirements, or QSRs, analyte specific reagents, or
ASRs, and ISO 9001 registration standards over the next two years. Access and
safety features are designed to meet federal, state and local health
ordinances.
We rely on outside vendors to manufacture a number of components of our
SNPstream system and some reagents which we provide in our SNPware kits. We
have agreements with Beckman Coulter for the components of our SNPstream system
and NEN Life Science Products, Inc. for some of the key reagents in our SNPware
kits. We also have an agreement with Motorola that relates to the manufacture
and supply of our microfluidics chips. We also currently rely on DNA provided
by suppliers and rely on other third parties to perform DNA synthesis for us.
We are establishing a company-wide enterprise resource planning system to
manage and control our material and product inventories. This system will
encompass product costing, materials procurement, production planning and
scheduling, inventory tracking and control and batch records, with links to
document control for all manufacturing, quality control, quality assurance and
regulatory compliance procedures.
We also perform service testing at all of our facilities. Three of our
facilities have the Clinical Laboratory Improvement Act, or CLIA,
accreditations necessary to be in compliance with the required regulations.
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Distribution
We intend to expand our business internationally by establishing
relationships with distributors in several countries. In larger countries, we
will consider establishing our own direct sales force. Our international
operations would also serve as service locations and redistribution centers for
our consumables.
Intellectual Property
We have implemented and continue to implement an aggressive patent strategy
designed to provide us with a unique proprietary position in the fields of
pharmacogenetics and microfluidics. This strategy will continue to focus on
protecting and commercializing our current and future products. Our patent
portfolio reflects our international ambitions and includes pursuing patent
protection in many of the industrialized nations of the world. We currently
own, or have exclusive licenses to, 44 United States patents and 6 foreign
patents, and have received notices of allowance for 4 additional U.S. and 1
Australian patent applications. Additionally, we have 175 pending patent
applications of which 70 are United States applications and 105 are foreign
patent applications.
Our commercial success will also depend, in part on our ability to obtain
patent protection on the SNPs for which we discover utility and on the
products, methods and services for which we base such discoveries. We have
sought and intend to continue to seek patent protection for novel uses of SNPs,
which may have initially been patented by third parties. In such cases, we may
need to license these SNPs from the patent holders to make, use of or sell
products using these SNPs.
We also rely on both patent and trade secret protection of our intellectual
property. Complex legal and factual determinations and evolving laws make
patent protection uncertain. As a result, we cannot be certain that patents
will be issued from any of our patent applications or from applications
licensed to us or that any issued patents will have sufficient breadth to offer
meaningful protection. In addition, our issued patents or patents licensed to
us may be successfully challenged, invalidated, circumvented or unenforceable
so that our patent rights would 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 U.S. and Canadian laws.
We attempt to protect our trade secrets by entering into confidentiality
agreements with third parties, employees and consultants. Most of our employees
and consultants also sign agreements requiring that they assign to us their
interests in discoveries, inventions, patents and copyrights arising from their
work for us, maintain the confidentiality of our intellectual property, and
refrain from unfair competition with us during their employment and for a
period of time after their employment with us, which includes solicitation of
our employees and customers. We cannot be certain that these agreements will
not be breached or invalidated. In addition, we cannot assure you that third
parties will not independently discover or invent competing technologies or
reverse engineer our trade secrets or other technologies.
Although we are not a party to any material 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 against the licensors of
technologies 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
any merit or whether they are resolved in favor of or against us or our
licensors, we may face costly litigation and diversion of management's
attention and resources. As a result of such disputes, we may have to develop
costly non-infringing technologies, or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business and financial condition.
Competition
The markets for our products are competitive, and we expect the intensity of
competition to increase. Currently, we compete primarily with other companies
that are pursuing technologies and products that are similar to our
technologies and products. Many of our competitors have greater financial,
operational, sales and
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marketing resources, and more experience in research and development and
commercialization than we have. Moreover, competitors may have greater name
recognition than we do, and may offer discounts as a competitive tactic. These
competitors and other companies may have developed or could in the future
develop new technologies that compete with our products or which could render
our products obsolete. We cannot assure you that we will be able to make the
enhancements to our technologies necessary to compete successfully with newly
emerging techniques.
In the SNP scoring field, we compete with several companies offering
alternative technology concepts based on indirect detection of the molecule
through hybridization and/or labeling. These companies include: Affymetrix,
Inc., Amersham Pharmacia Biotech Ltd., Genometrix Inc., Luminex Corporation,
Nanogen, Inc., PE Corporation, Rapigene, Inc., Sequenom, Inc., Third Wave
Technologies, Inc. and Visible Genetics, Inc.
Our principal competitors in the field of pharmacogenetics research and
development include: Celera Genomics Corporation, CLONTECH Laboratories, Inc.,
CuraGen Corporation, Genaissance Pharmaceuticals, Inc., GENSET Corp.,
Millennium Pharmaceuticals, Inc., Myriad Genetics, Inc. and Variagenics, Inc.
Our competitors in the field of DNA testing include: Identagene Corporation,
Laboratory Corporation of America and Lifecodes Corporation, and in the field
of microfluidics include: ACLARA Biosciences Corporation and Caliper
Technologies Corporation.
Government Regulation
While most of our initial research products will not be subject to
government regulation, we anticipate the manufacturing, labeling, distribution
and marketing of some or all of our future diagnostic products and services
developed or performed using our SNP-related technologies or microfluidics will
be subject to government regulation in the United States and in certain other
countries.
In the United States, the FDA regulates, as medical devices, most diagnostic
tests and in vitro reagents that companies market as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analyses, and, using those reagents, develop and prepare
their own finished diagnostic tests. The FDA has not generally exercised
regulatory authority over these individual reagents or the finished tests
prepared from them by the clinical laboratories. The FDA has recently proposed
a rule that, if adopted, would regulate reagents sold to clinical laboratories
as medical devices. The proposed rule would also restrict sales of these
reagents to clinical laboratories certified under CLIA as high complexity
laboratories. We intend to market some diagnostic products as finished test
kits or equipment and others as individual reagents. Consequently, some or all
of these products will be regulated as medical devices. The American
Association of Blood Banks, or AABB, has accredited our CLIA laboratories. The
AABB does not permit publicly funded DNA testing services to be offered
together with privately funded testing services in a CLIA laboratory. As a
result, we must maintain the separation of our DNA testing services or risk
losing our accreditation which would adversely affect our business.
The FDA has also adopted a set of regulations known as Analyte Specific
Reagents, or ASRs, which cover the production of assays and their components
consistent with Good Manufacturing Practices for use in clinical research and
by clinical reference laboratories producing their own assays. We are planning
to satisfy these ASR guidelines within two years in connection with our
manufacture of any SNPstream product that these guidelines may affect.
The Food, Drug, and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance, also known as a 510(k) or an
approved premarket approval, or PMA. Some of our products may require a PMA and
others may require a 510(k). With respect to devices reviewed through the
510(k) process, we may not market a device until the FDA issues an order
finding the product to be substantially equivalent to a legally marketed device
known as a "predicate device." A 510(k) submission may involve the presentation
of a substantial volume of data, including clinical data, and may require a
substantial FDA review. The FDA may agree the product is
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substantially equivalent to a predicate device and allow the product to be
marketed in the United States. The FDA, however, may (i) determine that the
device is not substantially equivalent and require a PMA, or (ii) require
further information, such as additional test data, including data from clinical
studies, before it is able to make a determination regarding substantial
equivalence. By requesting additional information, the FDA can further delay
market introduction of our products. If the FDA indicates that a PMA is
required for any of our products, the application will require extensive
clinical studies, manufacturing information and likely review by a panel of
experts outside the FDA. The FDA could also require us to conduct clinical
studies to support either a 510(k) submission or a PMA application in
accordance with FDA requirements. Failure to comply with FDA requirements could
result in the FDA's refusal to accept the data or the imposition of regulatory
sanctions. FDA approval of a PMA application could take significantly longer
than a 510(k) approval.
Medical device laws and regulations are also in effect in many countries in
which we may do business outside the United States. These range from
comprehensive device approval requirements for some or all of our medical
device products to requests for product data or certifications. The number and
scope of these requirements are increasing. Medical laws and regulations are
also in effect in some states in which we do business. We cannot assure you
that we will obtain regulatory approvals in such countries or that we will not
be required to incur significant costs in obtaining or maintaining any such
foreign regulatory approvals. In addition, the export by us of certain of our
products which have not yet been cleared for domestic commercial distribution
may be subject to FDA export restrictions. The failure to obtain product
approvals in a timely fashion or to comply with state or foreign medical device
laws and regulations may have a material adverse impact on our business and
results of operations.
Our current DNA testing laboratories are regulated under CLIA. The intent of
CLIA is to ensure the quality and reliability of clinical laboratories in the
United States by mandating specific standards in the areas of personnel
qualifications, administration, participation in proficiency testing, patient
test management, quality control, quality assurance and inspections. The
regulations promulgated under CLIA establish three levels of diagnostic tests,
waived, moderately complex and highly complex, and the standards applicable to
a clinical laboratory depend on the level of the tests it performs. Therefore
we cannot assure you that the CLIA regulations and future administrative
interpretations of CLIA will not have a material adverse impact on us by
limiting the potential market for our DNA testing services.
We are also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on our business and results of operations.
Employees
As of March 31, 2000, we employed 220 persons, of whom 38 hold Ph.D. or M.D.
degrees and 13 hold other advanced degrees. Approximately 71 employees are
engaged in research and development, 18 employees are engaged in business
development, sales and marketing, 80 employees are engaged in manufacturing and
DNA testing services and 51 employees are engaged in intellectual property,
finance and other administrative functions. None of our employees is
represented by a collective bargaining agreement, nor have we experienced any
work stoppage. We believe we maintain good relations with our employees.
Facilities
We lease two facilities which provide us with 40,000 square feet for our
operations in Princeton, New Jersey which serve as our headquarters and as the
base for marketing and product support operations, research and development and
manufacturing activities. We also lease an approximate 19,000 square foot
facility in Dallas, Texas; an approximate 12,500 square foot facility in
Dayton, Ohio; and an approximate 5,100 square foot facility in Sacramento,
California. The latter three facilities include CLIA approved laboratories
where our genetic DNA diversity testing services are located. We currently
believe our facilities are sufficient to meet our space requirements through
the year 2000.
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Legal Proceedings
We are not a party to any material legal proceedings. We are engaged in
discussions with Motorola in an attempt to resolve certain areas of
disagreement that have arisen under our existing collaboration in the area of
microfluidics. The primary issue of disagreement between the parties relates to
whether, under the terms of our agreement, Motorola has a right to obtain a
license to our SNP-IT technology for use with Motorola's microfluidic chips.
While we believe that, under the terms of our agreement, Motorola has no rights
to our SNP-IT technology, we cannot assure you that we can reach agreement with
Motorola on this issue or that we would prevail if this dispute were to develop
into arbitration or litigation. Furthermore, we are likely to incur substantial
costs and expend substantial personnel time in resolving this issue if it
becomes the subject of arbitration or litigation. Nonetheless, we believe that,
even if we fail to successfully resolve this issue or to prevail in any such
arbitration or litigation, we would only be obligated to grant Motorola a non-
exclusive license to use our SNP-IT technology with their microfluidic chips on
terms no less favorable than those offered to other licensees. We do not
believe that this result is likely to have a material adverse affect on our
business or financial condition.
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MANAGEMENT
Executive Officers, Directors and Key Employees
Our executive officers, directors and key employees and their respective
ages and position(s) as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dale R. Pfost, Ph.D................ 42 Chairman, Chief Executive Officer,
President
Donald R. Marvin................... 47 Senior Vice President, Chief Operating
Officer, Chief Financial Officer and
Secretary
Keith W. Brown..................... 46 Vice President and General Manager of
GeneScreen
Michael T. Boyce-Jacino, Ph.D. .... 40 Vice President of Research and
Development
Sarajane N. Mackenzie.............. 45 Vice President of Human Resources and
Chief People Officer
Russell T. Granzow................. 37 Executive Director of Business
Development and Marketing
Gary J. Schnerr.................... 56 Executive Director of Engineering and
Manufacturing
Robert C. Giles, Ph.D. ............ 47 Science Director of GeneScreen
Denis M. Grant, Ph.D. ............. 42 Senior Director of Pharmacogenetics
Frank A. Shemansky, Jr., Ph.D. .... 38 Senior Director of Microsystems
Development
Kevin B. Nash, Esquire............. 35 Senior Director of Licensing and
Intellectual Property Counsel
William M. Testa, CPA.............. 34 Corporate Controller
Peter A. Bell, Ph.D. .............. 38 Director of Kit Development
Sheldon M. Kugelmass, Ph.D. ....... 35 Director of Manufacturing and Process
Development
Michael S. Pettigrew............... 38 Director of Worldwide Commercial
Programs
Rolf E. Swenson, Ph.D. ............ 37 Director of Chemistry
Sidney M. Hecht, Ph.D.(1),(2)...... 55 Director
Samuel D. Isaly(1),(2)............. 55 Director
Jeremy M. Levin, D.Phil., 45 Director
MB.BChir.(1),(2)..................
Ernest Mario, Ph.D. ............... 61 Director
George Poste, DVM, Ph.D. .......... 55 Director
Robert M. Tien, M.D., M.P.H. ...... 42 Director
Anne M. VanLent(1),(2)............. 51 Director
</TABLE>
- ---------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Dale R. Pfost, Ph.D. has served as our Chairman, Chief Executive Officer and
President since November 1996. From 1988 to 1996, Dr. Pfost was the President
and Chief Executive Officer of Oxford GlycoSciences, a leader in proteomics and
glycobiology. From 1982 to 1984, Dr. Pfost was the President and a founder of
Infinitek, Inc., the company that developed the Biomek 1000. From 1984 to 1988,
Dr. Pfost served as the General Manager of the Robotics and Automated Chemistry
Systems business at SmithKline Beckman following its acquisition of Infinitek.
Dr. Pfost received his B.S. in Physics from the University of California Santa
Barbara and his Ph.D. in Physics from Brown University. Dr. Pfost also serves
on the Board of Directors of Spectra Science, an optical science company.
Donald R. Marvin has served as our Senior Vice President, Chief Operating
Officer and Secretary since November 1997 and has served as our Chief Financial
Officer since February 2000. From 1994 to 1997, Mr. Marvin was the founder and
President of Cairn Associates Inc., a firm providing management and financial
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services to emerging growth life services companies. From 1986 to 1994, Mr.
Marvin was President and Chief Executive Officer of Diatron Corporation, a
biomedical company developing fluorescence-based instrument systems for the
clinical diagnostics industry. Mr. Marvin received his B.S. in Microbiology
from Ohio State University and his M.B.A. from Iona College. Mr. Marvin serves
on the Board of Directors of GenoVision AS, a diagnostic test systems company.
Keith W. Brown has served as our Vice President and General Manager of our
GeneScreen business, since January 2000. Mr. Brown co-founded GeneScreen in
1987 and from 1988 through December 1999 served as its President and Chief
Executive Officer. Mr. Brown received his B.S. in Computer Science and
Statistics from the University of Manitoba and his M.B.A. from Harvard Graduate
School of Business Administration.
Michael T. Boyce-Jacino, Ph.D. has served as our Vice President of Research
and Development since September 1998. From 1991 until our acquisition of
Molecular Tool, Inc. in 1998, Dr. Boyce-Jacino served in various capacities at
Molecular Tool as a scientist, General Manager and Director, Research and
Development and most recently President. Dr. Boyce-Jacino received his B.S. in
Medical Microbiology from the University of Wisconsin Madison, and his Ph.D. in
Microbiology from the University of Minnesota.
Sarajane N. Mackenzie has served as our Vice President of Human Resources
and Chief People Officer since January 2000. From 1998 to 1999, Ms. Mackenzie
was founder and President of Mackenzie Strategic Human Resources, Inc., a
consulting firm. From 1987 to 1997, Ms. Mackenzie was with Novo Nordisk A/S,
first as head of international human resources and then as Vice President of
Human Resources for their U.S. affiliate. Ms. Mackenzie received her B.A. in
Psychology from the University of California at Santa Cruz, and her M.S. in
Organization Development and Human Resources from the University of San
Francisco.
Russell T. Granzow has served as our Executive Director of Business
Development and Marketing since 1997. From 1996 to 1997, Mr. Granzow served as
Manager, Business Development at Sarnoff Corporation. Mr. Granzow was a founder
of Pharmacia Biosensor, now BIAcore, and from 1992 to 1996 served in various
positions, most recently as Manager, Marketing and Business Development. Prior
to 1992, Mr. Granzow was involved in drug discovery in the Inflammation Group
at Schering-Plough Corp. Mr. Granzow received his B.S. in Biochemistry from the
University of Illinois.
Gary J. Schnerr has served as our Executive Director of Engineering and
Manufacturing since May 1998. From 1993 to 1997, Mr. Schnerr served as Vice
President Manufacturing and Technology of Peak Instruments. From 1985 to 1993,
he served as Vice President of Operations at Applied Color Systems. Mr. Schnerr
received his B.S. in Electrical Engineering from Drexel University and his
M.B.A. in Marketing/Finance from the Wharton School of the University of
Pennsylvania.
Robert C. Giles, Ph.D. has served as our Science Director of our GeneScreen
business since January 2000. Dr. Giles co-founded GeneScreen in October 1987
and most recently served as Corporate Science Director and Operations Manager
of its Dallas facility through December 1999. Dr. Giles has served as an
auditor for laboratory accreditation for human parentage testing for the
American Association of Blood Banks since 1995. Dr. Giles received his B.S. in
General Science and his M.S. in Microbiology from Mississippi State University
and his Ph.D. in Immunology and Medical Microbiology from the University of
Florida.
Denis M. Grant, Ph.D. has served as our Senior Director of Pharmacogenetics
since May 1999. From 1995 to 1998, Dr. Grant was a Senior Scientist in the
Genetics and Genomic Biology Program, Research Institute at the Hospital for
Sick Children in Toronto, Canada. Prior to joining the Hospital for Sick
Children Dr. Grant was a faculty member in the Department of Pharmacology at
the University of Toronto. Dr. Grant received his B.S. in Biochemistry from
McMaster University and his Ph.D. in Pharmacology from the University of
Toronto.
Frank A. Shemansky, Jr., Ph.D. has served as our Senior Director of
Microsystems since March 1999. From September 1991 to March 1999, Dr. Shemansky
worked at Motorola, Inc., where he held several
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positions and was most recently Manager of Sensor Technology Development for
the Semiconductor Products Sector. Dr. Shemansky received his B.S. in Chemical
Engineering from The Pennsylvania State University, and his M.S. and Ph.D. in
Chemical Engineering from Arizona State University.
Kevin B. Nash, Esq. has served as our Senior Director of Licensing and
Intellectual Property Counsel since April 1999. From 1995 to 1998, Mr. Nash was
patent counsel for Integra Life Sciences Corporation. Prior to joining Integra
Life Sciences he was a special project assistant in the Office of Technology
Licensing at Stanford University. Mr. Nash received his B.A. in Genetics from
University of California, Berkeley and his J.D. from Golden Gate University
School of Law.
William M. Testa, has served as our Corporate Controller since February
1998. From 1996 to 1998, Mr. Testa worked as a tax accountant for Sarnoff
Corporation, where he was involved in maintaining the accounting functions of
several spin-off companies, including Orchid. From 1994 to 1996, Mr. Testa
served as the Controller of a manufacturing company. Prior to that, he spent
seven years in public accounting. Mr. Testa received his B.S. in Accounting
from Rider College.
Peter A. Bell, Ph.D. has served as our Director of Kit Development since
March 2000. From 1997 to 2000, Dr. Bell was employed at Amersham Pharmacia
Biotech as Research and Development Section Manager of Expression Technologies
and Genotyping--SNP Analysis. From 1992 to 1997, he was at Pharmacia Biotech
where he held various senior scientific positions in the research areas of gene
expression, mutation detection, DNA sequencing and recombinant antibodies. Dr.
Bell received his B.S. in Biology from the University of Illinois, Urbana-
Champaign and his Ph.D. in Oncology from the University of Wisconsin-Madison.
Sheldon M. Kugelmass, Ph.D. has served as our Director of Manufacturing and
Process Development since October 1997. From 1992 to 1997, Dr. Kugelmass held a
number of positions at Lepton, Inc., and was most recently Manager of Customer
Applications. Dr. Kugelmass received his B.S.E. in Electrical Engineering from
the University of Pennsylvania and his Ph.D. in Electrical Engineering from
Cornell University.
Rolf E. Swenson, Ph.D. has served as our Director of Chemistry since October
1998. From 1990 to 1998, Dr. Swenson was employed at Abbott Laboratories in a
variety of capacities, where most recently he was Chemistry Group Leader for
Combinatorial Chemistry. Dr. Swenson received his B.A. in Chemistry from the
University of California at San Diego and his M.S. and Ph.D. in Organic
Chemistry from Cornell University. Dr. Swenson served as a Postdoctoral
Research Associate at the University of Wisconsin, Madison and the Universite
de Geneve in Geneva, Switzerland.
Michael S. Pettigrew has served as our Director of Worldwide Commmercial
Programs since February 2000. From January 1997 to January 2000, he was at
Amersham Pharmacia Biotech, Inc., where his most recent position was Director
of Applied Genomics Marketing and Sales Support. From February 1986 to January
1997, he was at Pharmacia Biotech, Inc., where his most recent position was
Senior Marketing Manager of Chromatography Instruments, Software and Media. Mr.
Pettigrew received his B.S. in Biology from Fairleigh Dickinson University.
Sidney M. Hecht, Ph.D. has served as a member of our Board of Directors
since 1995. He has served as John W. Mallet Professor of Chemistry and
Professor of Biology at University of Virginia since 1978. From 1981 to 1987,
Dr. Hecht held concurrent appointments first as Vice President, Preclinical
Research and Development, and then Vice President, Chemical Research and
Development at SmithKline & French Laboratories, where he was appointed a
Distinguished Fellow. From 1971 to 1979, he was Assistant Professor and then
Associate Professor of Chemistry at the Massachusetts Institute of Technology.
Dr. Hecht received his B.A. in Chemistry from the University of Rochester and
his Ph.D. in Chemistry from the University of Illinois.
Samuel D. Isaly has served as a member of our Board of Directors since
February 1998. He has served as the Managing Member of OrbiMed Advisors LLC
since January 1998. Mr. Isaly founded the investment consulting firm Mehta and
Isaly in 1989, which provided consulting and investment management services to
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the biotechnology and healthcare industries, where he was a General Partner
until 1998. He received his B.A. from Princeton University and his M.Sc. in
International Economics, Mathematics and Econometrics at the London School of
Economics, where he was a Fulbright Scholar.
Jeremy M. Levin, D.Phil., MB.BChir. has served as a member of our Board of
Directors since May 1998. From 1996 to 2000, Dr. Levin served as the Chairman
of Physiome Sciences, Inc., and was appointed as Physiome Sciences' Chief
Executive Officer in 2000. From 1998 through 1999, he was Managing Director of
Perseus Capital LLC and from 1992 to 1998, Dr. Levin served as the President
and Chief Executive Officer of Cadus Pharmaceutical Corporation, where he also
served as Chairman from 1996 to 1998. Prior to 1992, Dr. Levin was a Vice
President at IG Laboratories, a wholly owned subsidiary of Genzyme Corporation.
Dr. Levin has served on a number of public biosciences companies and on the
Executive Committee and the Emerging Companies Section of the Biotechnology
Industry Organization. He currently serves as an advisor to a global
agricultural research company and on the Board of NeuroNZ. Dr. Levin received
an MB.BChir. from the University of Cambridge and a D.Phil. in DNA structure
from the University of Oxford.
Ernest Mario, Ph.D. has served as a member of our Board of Directors since
March 2000. Since 1993, Dr. Mario has served as Chairman and Chief Executive
Officer of ALZA, a designer and producer of therapeutic drug delivery systems.
From 1986 to 1993, Dr. Mario was at Glaxo, where his most recent position was
Deputy Chairman and Chief Executive of Glaxo Wellcome. From 1977 to 1985, Dr.
Mario worked with Squibb Corporation where he served most recently President
and Chief Executive Officer of its medical products division and as a member of
the Board of Directors for the company. Dr. Mario currently serves as Chairman
of the Board of the Duke University Health System and the American Foundation
for Pharmaceutical Education. Dr. Mario received his B.S. degree in pharmacy
from Rutgers University and his M.S. and Ph.D. degrees in physical science from
the University of Rhode Island.
George Poste, DVM, Ph.D. has served as a member of our Board of Directors
since March 2000. He currently serves as Chief Executive Officer of Health
Technology Networks, a consulting group specializing in the impact of genetics,
computing and other advanced technologies on healthcare research and
development and internet-based systems for healthcare delivery. From 1992 to
1999, Dr. Poste was President of Research and Development, Chief Science and
Technology Officer and a member of the Board of Directors at SmithKline
Beecham. Dr. Poste is a non-executive chairman of diaDexus, LLC, the joint
venture in molecular diagnostics between SmithKline Beecham and Incyte
Pharmaceuticals, and a non-executive chairman of Structural GenomiX. He serves
on the Board of Directors of Maxygen, Inc. and Illumina, Inc. Dr. Poste
received his degree in veterinary medicine and his Ph.D. in virology from the
University of Bristol, England. He is a Board-certified pathologist and a
Fellow of the Royal Society.
Robert M. Tien, M.D. M.P.H. has served as a member of our Board of Directors
since February 2000. He is Founder and Chairman of Electronic Business
International and Vice President and member of the International Scientific
Advisory Board for the American Academy of Anti-Aging Medicine. He has several
academic and hospital appointments, including a tenured Professorship at Duke
University Medical Center, where his most recent positions included Director of
Neuroradiology and Director of Neuro-MR from 1991 to 1996. He has authored or
co-authored more than 160 papers. Dr. Tien received his B.S. and M.D. from the
National Taiwan University and School of Medicine and his Master of Public
Health, or M.P.H., from Harvard University Graduate School of Public Health.
Anne M. VanLent has served as a member of our Board of Directors since June
1999. She has served as Vice President, Ventures of Sarnoff Corporation since
July 1997. From March 1994 to July 1997, she was the founder and President of
AMV Associates, which provides consulting services to emerging growth life
sciences companies. Ms. VanLent received her B.S. in Physics from Mount Holyoke
College and completed a graduate fellowship at Universite de Strasbourg,
Strasbourg, France. She serves on the Board of Directors of Penwest
Pharmaceuticals Co. and i-STAT Corp., both publicly traded life science
companies, as well as several private companies.
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<PAGE>
Composition of the Board of Directors
Following this offering, our Board of Directors will be divided into three
staggered classes. The Board will initially consist of two Class I directors
(Ms. VanLent and Dr. Hecht), three Class II directors (Messrs. Tien, Levin and
Mario) and three Class III directors (Messrs. Pfost, Isaly and Poste). At each
annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring. The terms of the Class I directors, Class II directors and Class III
directors will expire upon the election and qualification of successor
directors at the annual meeting of our stockholders to be held during calendar
years 2001, 2002, and 2003 respectively.
Each officer serves at the discretion of the Board of Directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal. There are no family relationships among any of
our directors or executive officers.
Committees of the Board of Directors
Our Board of Directors has standing audit and compensation committees. The
audit committee consists of Dr. Hecht, Mr. Isaly, Dr. Levin and Ms. VanLent.
The audit committee oversees the engagement of our independent public
accountants, reviews the annual financial statements and the scope of the
annual audits and considers matters relating to accounting policy and internal
contracts. The compensation committee reviews, approves and makes
recommendations to our Board of Directors concerning our compensation
practices, policies and procedures for our executive officers, including our
Chief Executive Officer. The compensation committee's duties include the
administration of our 1995 Stock Incentive Plan and 2000 Employee, Director and
Consultant Stock Plan. The compensation committee is currently composed of Dr.
Hecht, Mr. Isaly, Dr. Levin and Ms. VanLent.
Compensation Committee Interlocks and Insider Participation
Dr. Hecht, Mr. Isaly, Dr. Levin and Ms. VanLent, all of whom are non-
employee directors, constitute our compensation committee. None of our
executive officers serve as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of our Board of Directors or compensation committee.
Scientific Advisory and Medical Advisory Boards
Our Scientific Advisory and Medical Advisory Boards consist of individuals
with demonstrated expertise in various fields who advise us concerning long-
term scientific and medical planning, research and development. Members also
evaluate our research program, recommend personnel to us and advise us on
technology and medical matters.
Scientific Advisory Board
Dr. Sidney M. Hecht has served as Chairman of our Scientific Advisory Board
since March 1997. Dr. Hecht is the John W. Mallet Professor of Chemistry and
Professor of Biology at University of Virginia. A member of our Board of
Directors, Dr. Hecht has been an Alfred P. Sloan Fellow and a John Simon
Guggenheim Fellow. Throughout his career, Dr. Hecht has been the recipient of
numerous distinguished awards, including the 1996 Cope Scholar Award of the
American Chemical Society and Virginia's Outstanding Scientist for 1996. He is
also the author or co-author of more than 250 scientific papers. Dr. Hecht
received his B.A. in Chemistry from the University of Rochester and his Ph.D.
in Chemistry from the University of Illinois.
Dr. Richard J. Roberts has served as Research Director of New England
Biolabs since 1992. In 1993, Dr. Roberts was awarded a Nobel Prize for the
discovery of introns. From 1972 to 1992, Dr. Roberts served as Assistant
Director of Research at Cold Spring Harbor Laboratory. He has served as an
advisor to many research
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<PAGE>
organizations including HUGO, EMBO, and GENBANK. He is executive editor of
Nucleic Acids Research and an editor of Bioinformatics, Inc. as well as several
other scientific journals. Dr. Roberts has been a long-time advisor to
Molecular Tool, Inc. and to us. He is also the Chairman of the Scientific
Advisory Board for Celera Corporation. He received his Ph.D. in Organic
Chemistry from the University of Sheffield and performed postdoctoral work at
Harvard University.
Dr. Michael C. Pirrung has been our first appointed President's Fellow since
December 1999. He is a Professor of Chemistry at Duke University and Director
of the University's Biotechnology for Business Program and Director of the
Program in Biological Chemistry and was formerly an Assistant Professor of
Chemistry at Stanford University. Dr. Pirrung is the co-inventor of the VLSIPS
technology for using photolithography to perform chemical synthesis. He also is
a founder of and former Senior Scientist at Affymax Research Institute. He is
the author or co-author of more than one hundred scientific papers and has
previously been appointed an Alfred P. Sloan Fellow and a John Simon Guggenheim
Fellow. Dr. Pirrung received his B.A. in Chemistry from the University of Texas
and his Ph.D. in Organic Chemistry from the University of California, Berkeley.
Dr. Nabil M. Lawandy has been a Research Professor of Engineering and
Physics at Brown University since August 1981 and the Chief Executive Officer
of Spectra Science Corporation and SpectraDisc Corporation since November 1996.
From 1974 to 1980, Dr. Lawandy worked as a physicist at the Laser Technology
Branch of NASA's Goddard Space Flight Center where he developed lasers for
submillimeter heterodyne astronomy and upper atmospheric LIDAR. While at Brown
University, Dr. Lawandy worked primarily on non-linear optics, opto-electronic
devices and micro-structures. Dr. Lawandy has authored over 170 papers, holds
over 30 patents, is a recipient of a Presidential Young Investigator Award and
an Alfred P. Sloan Fellowship. He received his B.S. in Physics and M.S. and
Ph.D. in Chemistry from The Johns Hopkins University.
Dr. Nathan Lewis has been teaching at the California Institute of
Technology, or CalTech, since 1988, and has served as Professor since 1991. He
has also served as the Principal Investigator of the Beckman Institute
Molecular Materials Resource Center at CalTech since 1992. From 1981 to 1986,
he taught at Stanford where his most recent position was Associate Professor
with tenure. Dr. Lewis has been an Alfred P. Sloan Fellow, a Camille and Henry
Dreyfus Teacher-Scholar, and a Presidential Young Investigator. He received the
Fresenius Award in 1990 and the ACS Award in Pure Chemistry in 1991. He has
published approximately 150 papers and supervised approximately 50 graduate
students and postdoctoral associates. Dr. Lewis received his Ph.D. in Chemistry
from the Massachusetts Institute of Technology.
Dr. F. Peter Guengerich has served as a Professor of Biochemistry and
Director of the Center in Molecular Toxicology at Vanderbilt University since
1981. He has been the recipient of numerous awards, including Outstanding
Investigator Awards from the National Cancer Institute, John Jacob Abel Award,
Bernard B. Brodie Award in Drug Metabolism, and George H. Scott Award. Dr.
Guengerich has also recently been awarded the distinction of AAAS Fellow by the
American Association of the Advancement of Science. Dr. Guengerich received his
B.S. in Agricultural Science from the University of Illinois, Urbana, and his
Ph.D. in Biochemistry from Vanderbilt University.
Dr. Philip Goelet serves as Director for Ribo Targets, Ltd., The Rhode
Island Corporation and Boyce Thompson Institute for Plant Research, Inc. From
1996 to 1999, Dr. Goelet served as Director of GeneScreen, Inc. prior to its
acquisition by Orchid. In 1989, he founded Molecular Tool, Inc. and served as
Chairman and Chief Executive Officer until the company merged with GeneScreen
in 1996. While at Molecular Tool, Dr. Goelet participated in the invention and
development of a number of the company's key technologies and products. He has
authored or co-authored more than 30 papers. Dr. Goelet received his B.A. from
Oxford University and his M.Phil. and Ph.D. in Biochemistry from Cambridge
University.
Dr. Jonathan Karn is a leading molecular biologist who has made significant
contributions in the areas of gene discovery, recombinant DNA technology and
virology. Dr. Karn is a member of the Board of Directors of
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RiboTargets Ltd., and Chairman of its Scientific Advisory Board. In 1997, Dr.
Karn founded RiboTargets, and served as the Company's Chief Scientific Officer
until 1999. Since 1984, as a Senior Scientist at the MRC Laboratory of
Molecular Biology, Dr. Karn has headed the laboratory's research efforts on
AIDS, playing a leading role in the establishment of the UK's research effort
into AIDS. During 1984, as a visiting scientist at the Salk Institute in
California, he initiated his current program in the area of gene expression in
retroviruses. He has authored more than 80 papers. Dr. Karn received his B.S.
in Biology from Yale College and his Ph.D. in Molecular Biology from
Rockefeller University.
Medical Advisory Board
Dr. Daniel J. Rader has been an Assistant Professor of Medicine at the
University of Pennsylvania since 1994. At the University of Pennsylvania, Dr.
Rader is Director of the Lipid Research Center and co-directs the
Cardiovascular Disease Program in the Institute for Human Gene Therapy. From
1991 to 1993, he was a Research Associate at the National Institute of Health
and from 1987 to 1988, was Chief Resident and Instructor in Medicine at Yale
School of Medicine. Dr. Rader has authored more than 50 publications on lipid
metabolism, including familial hyper-cholesterolemia and the influence of
genetic polymorphisms on lipid metabolism. He received his B.A. from Lehigh
University and his M.D. summa cum laude from the Medical College of
Pennsylvania.
Dr. Richard J. Davies is Chairman and Professor of the Department of Surgery
at the Hackensack University Medical Center since 1993, as well as Professor of
Surgery at University of Medicine and Dentistry New Jersey. From 1983 to 1993,
he held various positions at the University of California at San Diego, School
of Medicine. From 1981 to 1983, Dr. Davies was a fellow in surgical oncology at
Memorial Sloan Kettering Cancer Center, New York, and Chief Surgical Fellow. He
formerly served as Chairman of the Scientific Advisory Board of Biofield
Corporation of Atlanta, GA, and is a member of the Scientific Advisory Board of
Dynamic Imaging, as well as the holder of many other national committee
memberships. Dr. Davies is an internationally recognized specialist in surgical
oncology who has published over 80 articles and chapters. Dr. Davies received
his M.D. from the London Hospital Medical College, University of London.
Dr. Garret A. FitzGerald has been a Professor of Medicine and Pharmacology
and Director of the Clinical Research Center since 1994, and chair of the
Department of Pharmacology since 1996, at the University of Pennsylvania. From
1991 to 1994, he was Professor and Chairman of the Department of Medicine and
Experimental Therapeutics at the University of Dublin. From 1981 to 1991, he
served in various positions at Vanderbilt University School of Medicine, most
recently as Director of the Division of Clinical Pharmacology. He is the author
of nearly 200 articles and has served as an editor of several clinical research
journals including Circulation. Dr. FitzGerald received his M.D. from the
University College of Dublin, Ireland and performed postgraduate work at
several institutions including Max Planck.
Dr. Michael B. Harris is Professor of Pediatrics at the University of
Medicine and Dentistry of New Jersey since 1997. He also serves as Chief of
Pediatric Hematology-Oncology and Director of the Tomorrow's Children's
Institute at the Hackensack University Medical Center since 1987. Dr. Harris
previously served as an Associate Professor at Mount Sinai School of Medicine
from 1977 to 1987. He has published more than 50 peer reviewed articles in the
field of pediatric oncology. He received his M.D. from Albert Einstein School
of Medicine, New York, and completed post-doctoral training at the Children's
Hospital of Philadelphia.
Dr. Stephen Anderson is Chair, Department of Molecular Biology and
Biochemistry at Rutgers University. He has served as Associate Professor of
this department and Resident Member of the Center for Advanced Biotechnology
and Medicine at Rutgers University since 1988. From 1987 to 1989, Dr. Anderson
was an Associate Adjunct Professor in the Department of Pharmaceutical
Chemistry, School of Pharmacy, at the University California at San Francisco.
From 1982 to 1988, he was Associate Director of the Biocatalysis Department and
leader of the Second Generation t-PA project team at Genentech, Inc. Dr.
Anderson has authored or co-authored over 60 papers and holds over 20 patents.
He received his A.B. in Biochemical Sciences from Harvard College and his Ph.D.
in Biochemistry from Harvard University.
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Each member of our Scientific Advisory and Medical Advisory Boards has
entered into a consulting agreement with us covering the terms of such person's
position as a consultant to us and member of the Scientific Advisory and
Medical Advisory Boards. All scientific or medical advisors own shares and/or
options to acquire shares of our common stock, some of which are subject to
vesting. All of our scientific or medical advisors are employed by employers
other than us and may have commitments to, or consulting or advisory contracts
with, other entities which may conflict or compete with their obligations to
us. Generally, scientific or medical advisors are not expected to devote a
substantial portion of their time to our matters.
Stock Incentive Plans
We maintain two stock incentive plans for the benefit of our employees,
directors and consultants: our 1995 Stock Incentive Plan and our 2000 Employee,
Director and Consultant Stock Plan.
1995 Stock Incentive Plan
Our 1995 Stock Incentive Plan was approved by our Board of Directors and
stockholders in November 1995. The 1995 plan authorizes the issuance of stock
options and restricted stock grants to our employees, directors and
consultants.
Share Reserve. A total of 3,500,000 shares of our common stock have been
reserved for issuance under the 1995 plan.
Administration. The compensation committee of our Board of Directors
administers the 1995 plan. The compensation committee has the authority to
determine the following:
. the persons to whom stock-based awards will be granted;
. the number of shares to be covered by each stock-based award; and
. the terms and conditions upon which a stock-based award may be granted.
Stock-based awards under the 1995 plan will be subject to such terms and
conditions as the compensation committee deems to be appropriate and in our
best interest. These terms may include conditions relating to our right to
reacquire the shares subject to a stock-based award, including the time and
events upon which such rights shall accrue and the purchase price of the
shares.
Eligibility. Options granted under the 1995 plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended or (ii) non-qualified stock options.
Incentive stock options may be granted to our employees. The compensation
committee may also grant options at an exercise price less than, equal to or
greater than the fair market value of the common stock on the date of grant.
Under present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value of
the common stock on the date of grant or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of our voting power. The 1995 plan permits the compensation committee
to determine how optionees may pay the exercise price of their options,
including by cash, check or in connection with a "cashless exercise" through a
broker, by surrender of shares of common stock, by delivery of a promissory
note, or by any combination of the permitted forms of payment. Non-qualified
stock options may be granted to our consultants, non-employee directors or
employees.
General Provisions. The aggregate fair market value, determined on the date
of grant, of shares issuable pursuant to incentive stock options that become
exercisable in any calendar year under the 1995 plan and any of our other
existing or future potential incentive stock plans may not exceed $100,000.
Incentive stock options granted under the 1995 plan may not be granted at a
price less than the fair market value of our common stock on the date of grant,
or 110% of fair market value in the case of employees holding 10% or more of
our voting
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stock. Non-qualified stock options granted under the 1995 plan may not be
granted at an exercise price less than the par value per share of our common
stock on the date of the grant. Incentive stock options granted under the 1995
plan expire not more than ten years from the date of grant, or not more than
five years from the date of grant in the case of incentive stock options
granted to an employee or officer holding 10% or more of our voting stock.
Effect of Employment Termination. An incentive stock option granted under
the 1995 plan may be exercised after the termination of the optionholder's
employment with us, other than by reason of death, disability or termination
for "cause" as defined in the 1995 plan, to the extent exercisable on the date
of termination, at any time prior to the earlier of the option's specified
expiration date or 90 days after such termination. The compensation committee
may specify the termination or cancellation provisions applicable to a non-
qualified stock option. In the event of the optionholder's death or disability,
both incentive stock options and non-qualified stock options generally may be
exercised, to the extent exercisable on the date of death or disability, by the
optionholder or the optionholder's survivors at any time prior to the earlier
of the option's specified expiration date or one year from the date of death or
six months from the date of disability. Generally, in the event of the
optionholder's termination for cause, all outstanding and unexercised options
shall be forfeited.
Effect of a Change in Control. The 1995 plan provides that in the event of a
"change in control" as defined in the 1995 plan in the beneficial ownership of
us, all options may, at the discretion of the compensation committee, become
fully vested and exercisable immediately prior to the change in control.
2000 Employee, Director and Consultant Stock Plan.
Our 2000 Employee, Director and Consultant Stock Plan was approved by our
Board of Directors in February 2000, and by our stockholders in March 2000. The
2000 plan authorizes the issuance of stock options and restricted stock grants
to our employees, directors and consultants.
Share Reserve. A total of 1,500,000 shares of our common stock have been
reserved for issuance under the 2000 plan.
Administration. Our Board of Directors has the authority to adopt, amend and
repeal the administrative rules, guidelines and practices relating to the 2000
plan and to interpret its provisions and may delegate authority under the 2000
plan to a committee of the Board of Directors. The compensation committee of
our Board of Directors administers the 2000 plan. The compensation committee
has the authority to determine the following:
. the persons to whom stock-based awards will be granted;
. the number of shares to be covered by each stock-based award; and
.the terms and conditions upon which a stock-based award may be granted.
Stock-based awards under the 2000 plan will be subject to such terms and
conditions as the compensation committee deems to be appropriate and in our
best interest. These terms may include conditions relating to our right to
reacquire the shares subject to a stock-based award, including the time and
events upon which such rights shall accrue and the purchase price of the
shares.
Eligibility. Options granted under the 2000 plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended or (ii) non-qualified stock options.
Incentive stock options may be granted to our employees. The compensation
committee may also grant options at an exercise price less than, equal to or
greater than the fair market value of the common stock on the date of grant.
Under present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value of
the common stock on the date of grant or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of our
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voting power. The 2000 plan permits the Board of Directors to determine how
optionees may pay the exercise price of their options, including by cash, check
or in connection with a "cashless exercise" through a broker, by surrender of
shares of common stock, by delivery of a promissory note, or by any combination
of the permitted forms of payment. Non-qualified stock options may be issued to
our consultants, directors or employees.
General Provisions. The aggregate fair market value, determined on the date
of grant, of shares issuable pursuant to incentive stock options that become
exercisable in any calendar year under the 2000 plan and under any of our other
existing or future potential incentive stock plans may not exceed $100,000.
Incentive stock options granted under the 2000 plan may not be granted at a
price less than the fair market value of our common stock on the date of grant,
or 110% of fair market value in the case of employees holding 10% or more of
our voting stock. Non-qualified stock options granted under the 2000 plan may
not be granted at an exercise price less than the par value per share of our
common stock on the date of the grant. Incentive stock options granted under
the 2000 plan expire not more than ten years from the date of grant, or not
more than five years from the date of grant in the case of incentive stock
options granted to an employee or officer holding 10% or more of our voting
stock. An option granted under the 2000 plan is not transferable by the
optionholder except by will or by the laws of descent and distribution or as
otherwise determined by the compensation committee and set forth in the
applicable option agreement.
Effect of Termination of Employment. An incentive stock option granted
under the 2000 plan may be exercised after the termination of the
optionholder's employment with us, other than by reason of death, disability or
termination for "cause" as defined in the 2000 plan, to the extent exercisable
on the date of termination, at any time prior to the earlier of the option's
specified expiration date or 90 days after such termination. The compensation
committee may specify the termination or cancellation provisions applicable to
a non-qualified stock option. In the event of the optionholder's death or
disability, both incentive stock options and non-qualified stock options
generally may be exercised, to the extent exercisable on the date of death or
disability, by the optionholder or the optionholder's survivors at any time
prior to the earlier of the option's specified expiration date or one year from
the date of death or disability. Generally, in the event of the optionholder's
termination for cause, all outstanding and unexercised options shall be
forfeited.
Effect of Acquisition. If we are to be consolidated with or acquired by
another entity in a merger, sale of all or substantially all of our assets or
otherwise, the compensation committee or the board of directors of any entity
assuming our obligations under the 2000 plan shall, as to outstanding options
under the 2000 plan, either (i) make appropriate provision for the continuation
of such options by substituting, on an equitable basis, for the shares then
subject to such options, the consideration payable with respect to the
outstanding shares of common stock in connection with such an acquisition or
securities of the successor or acquiring entity; or (ii) upon written notice to
the optionholders, provide that all options must be exercised (either to the
extent then exercisable or, at the discretion of the compensation committee,
all options being made fully exercisable for purposes of the transaction)
within a specified number of days of the date of such notice, at the end of
which period the options shall terminate; or (iii) terminate all options in
exchange for a cash payment equal to the excess of the fair market value of the
shares subject to each such option (either to the extent then exercisable or,
at the discretion of the compensation committee, all options being made fully
exercisable for purposes of the transaction) over the exercise price thereof.
Director Compensation
All of the directors are reimbursed for expenses incurred to attend meetings
of our Board of Directors and any committees of the Board of Directors. We have
in the past granted non-employee directors options to purchase our common stock
pursuant to the terms of our 1995 Incentive Stock Plan and our Board of
Directors continues to have the discretion to grant options to new non-employee
directors. All non-employee directors have received stock options.
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Executive Compensation
The following table sets forth the total compensation paid to or earned for
the fiscal year ended December 31, 1999 by our chief executive officer and by
all of our executive officers whose salary and bonus exceed $100,000. We refer
to these persons as named executive officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Dale R. Pfost, Ph.D.......................... $291,500(1) $66,250 160,300
Chairman, Chief Executive Officer and
President
Donald R. Marvin............................. $220,500(2) $52,500 67,300
Senior Vice President, Chief Operating
Officer,
Chief Financial Officer and Secretary
</TABLE>
(1) Includes $26,500 contributed by us to a non-qualified retirement plan on
behalf of Dr. Pfost in accordance with Dr. Pfost's employment agreement.
(2) Includes $10,500 contributed by us to a non-qualified retirement plan on
behalf of Mr. Marvin in accordance with Mr. Marvin's employment agreement.
On February 2, 2000, the Compensation Committee of our Board of Directors
increased Dr. Pfost's and Mr. Marvin's annual compensation retroactive to
January 1, 2000 as follows:
<TABLE>
<CAPTION>
Annual
Compensation
--------------
Name Salary Bonus
- ---- -------- -----
<S> <C> <C>
Dale R. Pfost, Ph.D.............................................. $350,000 (1)
Donald R. Marvin................................................. $275,000 (2)
</TABLE>
(1) We will pay Dr. Pfost an annual bonus of up to 25% of his salary upon our
achievement of specific performance milestones. If we substantially exceed
these milestones, Dr. Pfost's annual bonus may be increased to up to 35%
of his salary, as determined in good faith by the Board of Directors in
its sole discretion.
(2) We will pay Mr. Marvin an annual bonus of up to 25% of his salary upon our
achievement of specific performance milestones. If we substantially exceed
these milestones, Mr. Marvin's annual bonus may be increased to up to 35%
of his salary, as determined in good faith by the Board of Directors in
its sole discretion.
On February 2, 2000, the Compensation Committee of our Board of Directors
also granted additional options to purchase common stock to Dr. Pfost and Mr.
Marvin as follows.
<TABLE>
<CAPTION>
Long-Term
Performance-Based
Options
-----------------
<S> <C>
Dale R. Pfost, Ph.D........................................... 730,000(1)
Donald R. Marvin.............................................. 557,000(1)
</TABLE>
(1) A portion of these options will vest upon our achievement of certain price
per share targets.
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Option Grants in Last Fiscal Year
The following table sets forth information regarding options granted by us
to our named executive officers during the fiscal year ended December 31, 1999.
We have never granted any stock appreciation rights. The potential realizable
value is calculated based on the term of the option at its time of grant. It is
calculated assuming that the fair market value of common stock on the date of
grant appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. Actual gains, if any, on
stock option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the table
may not necessarily be achieved. The percentage of total options granted to
employees in the last fiscal year is based on options to purchase an aggregate
of shares of common stock granted under our option plans. There was no
public market for our common stock as of December 31, 1999. Accordingly, the
fair market value on December 31, 1999 is based on an assumed initial public
offering price of $12.00 per share.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential
Realizable Value at
Assumed Annual
Number of Percent of Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in Price Per Expiration ---------------------
Granted 1999 Share Date 5% 10%
---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dale R. Pfost, Ph.D..... 160,300 16.7 $1.25 2009 $2,932,966 $4,788,948
Donald R. Marvin........ 67,300 7.0 $1.25 2009 $1,231,370 $2,010,581
</TABLE>
Aggregate Stock Option Exercises in Fiscal Year 1999 and
Fiscal Year-End Option Values
The following table sets forth certain information concerning the number of
unexercised options held by each of our named executive officers on December
31, 1999 and the value realized by named executive officers. None of our
executive officers exercised stock options in the fiscal year ended December
31, 1999. There was no public market for our common stock as of December 31,
1999. Accordingly, the fair market value on December 31, 1999 is based on an
assumed initial public offering price of $12.00 per share.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1999 December 31, 1999
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dale R. Pfost, Ph.D. ....... 65,017 197,336 $2,398,679 $746,693
Donald R. Marvin............ 41,933 110,367 $1,159,496 $ 94,842
</TABLE>
Corporate 401(k) Plan
We sponsor a 401(k) plan covering employees who meet certain defined
requirements. Under the terms of our 401(k) plan, participants may elect to
make contributions on a pre-tax and after-tax basis, subject to certain
limitations under the Internal Revenue Code and we may match a percentage of
employee contributions, on a discretionary basis, as determined by our Board of
Directors. We may make other discretionary contributions to the 401(k) plan,
although pursuant to a determination by our Board, we currently match 50% of
the first 4% of employee contributions.
Executive Deferred Compensation Plan
We have established an executive deferred compensation plan, which took
effect on February 3, 1999. It was established primarily for the purpose of
providing life and disability insurance and retirement benefits as
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well as deferred compensation for our executive officers, directors and highly
compensated employees. Participants in the plan are permitted to defer receipt
of, and income taxation on, up to 50% of their regular base salary and all or
any portion of any bonus until they terminate their employment with us. Under
the terms of the plan, we will also provide an annual cash allowance to each
eligible participant to pay the premiums for their supplemental life and
disability insurance.
GeneScreen 401(k) Plan
We sponsor a 401(k) plan covering our GeneScreen employees who meet certain
defined requirements. Under the terms of the GeneScreen 401(k) plan,
participants may elect to make contributions on a pre-tax basis, up to 15% of
compensation, subject to certain limitations under the Internal Revenue Code.
We may at our discretion match employee contributions at a discretionary rate
and make discretionary profit sharing contributions to the 401(k) Plan.
Employment Agreements
We entered into a three year employment agreement with Dale R. Pfost, Ph.D.,
effective as of January 2000, to serve as our President and Chief Executive
Officer at an annual base salary of $350,000. Under the terms of his employment
agreement, Dr. Pfost is entitled to receive an annual bonus of up to 25% of his
base salary to be awarded based upon our achievement of specific performance
milestones. If our Board determines in good faith that our performance has
exceeded such milestones, it may increase Dr. Pfost's bonus to up to 35% of his
base salary. We also contribute an additional amount equal to 10% of
Dr. Pfost's annual salary to a non-qualified retirement plan for the sole
benefit of Dr. Pfost. In addition, upon execution of the agreement, we issued
to Dr. Pfost options to purchase an aggregate of 730,000 shares of our common
stock. A total of 360,000 of these newly issued options shall vest if and when
the price of our stock exceeds certain specified levels for 45 consecutive
trading days. We may terminate the agreement with or without cause at any time.
If we terminate Dr. Pfost's employment for cause, we are only obligated to pay
him severance equal to his accrued base salary up to the date of termination.
If we terminate Dr. Pfost's employment without cause, or if Dr. Pfost
terminates his employment for good reason, we are obligated to pay Dr. Pfost a
severance amount equal to his annual base salary and benefits for an eighteen
month period following the effective date of termination. We must provide Dr.
Pfost with notice of termination in advance of the effective termination date.
The advance notice period ranges from six to eighteen months, depending on the
timing of the effective date of the termination.
We entered into a three year employment agreement with Donald R. Marvin,
effective as of January 2000, to serve as our Senior Vice President, Corporate
Development and Chief Operating Officer at an annual base salary of $275,000.
Under the terms of his employment agreement, Mr. Marvin is entitled to receive
an annual bonus of up to 25% of his base salary to be awarded based upon our
achievement of specific performance milestones. If our Board determines in good
faith that our performance has exceeded such milestones, it may increase
Mr. Marvin's bonus to up to 35% of his base salary. In addition, upon execution
of the agreement, we issued to Mr. Marvin options to purchase an aggregate of
557,000 shares of our common stock. A total of 240,000 of these newly issued
options shall vest if and when the price of our stock exceeds certain specified
levels for 45 consecutive trading days. We also contribute an additional amount
equal to 5% of Mr. Marvin's annual salary to a non-qualified retirement plan
for the sole benefit of Mr. Marvin. We may terminate the agreement with or
without cause at any time. If we terminate Mr. Marvin's employment for cause,
we are only obligated to pay him severance equal to his accrued base salary up
to the date of termination. If we terminate Mr. Marvin's employment without
cause, or if Mr. Marvin terminates his employment for good reason, we are
obligated to pay Mr. Marvin a severance amount equal to his annual base salary
and benefits for an eighteen month period following the effective date of
termination. We must provide Mr. Marvin with notice of termination in advance
of the effective termination date. The advance notice period ranges from six to
eighteen months, depending on the timing of the effective date of the
termination.
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TRANSACTIONS WITH EXECUTIVE OFFICERS,
DIRECTORS AND FIVE PERCENT STOCKHOLDERS
Since January 1999, there has not been nor is there currently proposed, any
transaction or series of similar transactions to which were or are to be a
party in which the amount involved exceeded or exceeds $60,000 and in which any
director, executive officer, holder of more than 5% of our common stock or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest other than the transactions described
below.
In December 1997, we entered into a License and Option Agreement with
Sarnoff Corporation, a five percent beneficial stockholder, pursuant to which
we received a license under certain technology to research, develop and sell
products and services in the field of combinatorial chemistry and in vitro
diagnostics and options to obtain exclusive licenses for the use of technology
in four designated areas of microfluidics. In consideration of the grant of the
license, we issued Sarnoff 82,500 shares of our common stock and 167,500 shares
of our Series A convertible preferred stock. Concurrent with the exercise of
each option, we are obligated to issue Sarnoff 33,300 shares of our common
stock and 66,700 shares of our Series A convertible preferred stock and to fund
research to be performed by Sarnoff at an amount defined in the agreement, but
no less than $5.5 million in the aggregate. We exercised one option in each of
December 1998 and 1999. In consideration of the exercise of each option, we
issued Sarnoff 33,300 shares of our common stock and 66,700 shares of our
Series A convertible preferred stock in 1998 and in 1999. We are also obligated
to issue Sarnoff an additional 50,000 shares of common stock at the end of each
year during the term of the agreement for each option exercised. We issued
Sarnoff 50,000 shares of common stock in 1999 in connection with the option we
exercised in December 1998. Since the technology licensed to us under the
License and Option Agreement with Sarnoff relates to, and was developed under
funding provided in part by, and involves certain rights of, SmithKline Beecham
Corporation, we also agreed, as a condition to the execution of the agreement,
to issue SmithKline Beecham additional shares of our common stock as options
are exercised by us. Consequently, in connection with the exercise of the two
options, we issued SmithKline Beecham 10,000 shares of our common stock on
February 2, 2000, 5,000 of which shares should have been issued as of December
31, 1998 and as of December 31, 1999, respectively.
In June 1999, we completed a bridge financing in which we issued
subordinated convertible term notes in the aggregate principal amount of
$7,590,000 and warrants to purchase an aggregate of 381,500 shares of common
stock. In connection with this offering, we issued OrbiMed Advisors, LLC, a
five percent beneficial stockholder, through each of Eaton Vance Worldwide
Health Sciences Fund, Finsbury Worldwide Pharmaceutical Trust and
PHARMAw/HEALTH, notes in the aggregate principal amount of $2,750,000 and
warrants to purchase an aggregate of 137,500 shares of our common stock. We
also issued INVESCO Global Health Sciences Fund, a five percent beneficial
stockholder, through its affiliate Pirate Ship & Co., a note in the aggregate
principal amount of $1,800,000 and warrants to purchase 90,000 shares of our
common stock. On December 22, 1999, in accordance with the terms of the bridge
financing, we issued OrbiMed Advisors and INVESCO Global Health Sciences Fund,
additional warrants to purchase an additional 137,500 and 89,910 shares of
stock, respectively.
In November 1999, we completed a bridge financing in which we issued a
subordinated convertible term note in the aggregate principal amount of
$2,250,000 to Affymetrix, Inc., a five percent beneficial owner of the Series E
mandatorily redeemable convertible preferred stock. In November 1999, we also
entered into a collaboration agreement with Affymetrix to develop, manufacture,
market and sell SNP-IT based SNP detection kits on Affymetrix GeneChip systems.
See "Business--Collaborations and Licenses" for a description of this
agreement.
In December 1999 and January 2000, we completed a private placement in which
we issued 18,882,691 shares of Series E convertible preferred stock, which
amount includes the shares issued in connection with the acquisition of
GeneScreen. INVESCO Global Health Sciences Fund, a five percent beneficial
stockholder, through each of Global Health Sciences Fund and Pirate Ship & Co.,
purchased an aggregate of 645,189 shares of Series E convertible preferred
stock in this offering for an aggregate purchase price of $2,903,350 consisting
of cash in the aggregate principal amount of $1,000,000, and the conversion of
the principal amount of and accrued interest on a bridge note held by Pirate
Ship & Co. in the aggregate amount of $1,903,350. OrbiMed
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Advisors, LLC, a five percent beneficial stockholder, through each of Caduceus
Capital II, L.P., Eaton Vance Worldwide Health Sciences Fund, Finsbury
Worldwide Pharmaceutical Trust, PHARMAw/HEALTH and Winchester Global Trust
Company Limited, as Trustee for Caduceus Capital Trust, purchased an aggregate
of 1,312,864 shares of Series E convertible preferred stock for an aggregate
purchase price of $5,907,888 in this offering consisting of cash in the
aggregate amount of $3,000,000, and the conversion of the principal of and all
accrued interest on the three bridge notes held by each of Eaton Vance
Worldwide Health Sciences Fund, Finsbury Worldwide Pharmaceutical Trust and
PHARMA w/HEALTH in the aggregate amount of $2,907,860. Oracle Strategic
Partners, LP, a five percent beneficial stockholder, purchased an aggregate of
2,150,000 shares of Series E convertible preferred stock in this offering for
an aggregate purchase price of $9,675,000. Affymetrix, Inc., a five percent
beneficial owner of the Series E convertible preferred stock, purchased an
aggregate of 1,005,897 shares of the Series E convertible preferred stock for
an aggregate purchase price of $4,526,537, consisting of cash in the aggregate
amount of $2,250,000 and the conversion of the principal amount of and accrued
interest on a bridge note held by Affymetrix in the aggregate amount of
$2,276,888. Deutsche Vermogensbildungsgesellschaft mbH (DVG), a five percent
beneficial owner of the Series E convertible preferred stock, purchased an
aggregate of 1,100,000 shares of the Series E convertible preferred stock in
this offering for an aggregate purchase price of $4,950,000. President (BVI)
International Investment Holdings, Ltd., a five percent beneficial owner of the
Series E convertible preferred stock, purchased an aggregate of 1,000,000
shares of the Series E convertible preferred stock in this offering for an
aggregate purchase price of $4,500,000. The holders of Series E convertible
preferred stock were also granted certain registration rights. See "Description
of Capital Stock -- Registration Rights."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us regarding the
beneficial ownership of our common stock as of March 31, 2000 and as adjusted
to reflect the sale of the shares of our common stock in this offering for:
. each person known by us to beneficially own more than 5% of our common
stock;
. each of our directors;
. each of our executive officers named in the summary compensation table;
and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock under options held by that person that are currently
exercisable or exercisable within 60 days of March 31, 1999 are considered
outstanding. These shares, however, are not considered outstanding when
computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting
and investment power for the shares shown as beneficially owned by them.
Percentage of ownership is based on 25,998,606 shares of common stock
outstanding on March 31, 2000 and 33,998,606 shares of common stock outstanding
after completion of this offering. This table assumes no exercise of the
underwriters' over-allotment option. Unless otherwise indicated in the
footnotes, the address of each of the individuals named below is: c/o Orchid
BioSciences, Inc., 303 College Road East, Princeton, NJ 08540.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially
Owned
-----------------
Shares Prior to After
Name and Address of Beneficial Owner(1) Beneficially Owned Offering Offering
--------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Stockholders owning approximately 5% or
more
OrbiMed Advisors, LLC (2)................ 2,469,031 9.4% 7.2%
767 Third Avenue, 6th Floor
New York, NY 10017
Oracle Strategic Partners, LP (3)........ 2,150,000 8.3% 6.3%
712 5th Avenue, 45th Floor,
New York, NY 10019
INVESCO Global Health Sciences Fund(4)... 1,703,023 6.5% 5.0%
7800 East Union Avenue, Mail Stop 1102
Denver, CO 80237
Sarnoff Corporation(5)................... 1,588,328 6.1% 4.3%
201 Washington Road
Princeton, NJ 08543-5300
SmithKline Beecham plc(6)................ 1,321,474 5.0% 3.8%
New Horizons Court, Brentford
Middlesex, TW89EP, England
Directors and Executive Officers
Dale R. Pfost, Ph.D.(7).................. 223,905 0.8% 0.6%
Donald R. Marvin(8)...................... 162,012 0.6% 0.4%
Sidney M. Hecht, Ph.D.(9)................ 15,054 * *
Samuel D. Isaly(10)...................... 2,469,031 9.4% 7.2%
Jeremy M. Levin, D.Phil., MB.BChir.(11).. 9,999 * *
Ernest Mario, Ph.D.(12).................. 833 * *
George Poste, DVM, Ph.D.(13)............. 4,166 * *
Robert M. Tien, M.D., M.P.H.(14)......... 2,500 * *
Anne M. VanLent(15)...................... 2,000 * *
All directors and executive officers as a
group (8 persons)(16)................... 5,779,002 10.9% 8.4%
</TABLE>
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- ---------------------
* Represents beneficial ownership of less than one percent of our common
stock.
(1) Unless otherwise indicated, the address of each shareholder is c/o Orchid
BioSciences, Inc., 303 College Road East, Princeton, New Jersey, 08540.
(2) Represents 808,336 shares of common stock held by Eaton Vance Worldwide
Health Sciences Fund, 100,000 shares of common stock subject to a
currently exercisable warrant held by Eaton Vance Worldwide Health
Sciences Fund, 410,542 shares of common stock held by Finsbury Worldwide
Pharmaceutical Trust, 100,000 shares of common stock subject to a
currently exercisable warrant held by Finsbury Worldwide Pharmaceutical
Trust, 527,369 shares of common stock held by PHARMAw/HEALTH, 75,000
shares of common stock subject to a currently exercisable warrant held by
PHARMAw/HEALTH, 74,074 shares of common stock held by Caduceus Capital II,
L.P., 148,148 shares held by Winchester Global Trust Company Limited as
Trustee For Caduceus Capital Trust, 222,222 shares of common stock held by
Hare & Co. for the benefit of Finsbury Worldwide Pharmaceutical Trust and
3,333 shares of common stock subject to a currently exercisable option
held by OrbiMed Advisors, LLC. OrbiMed Advisors, LLC is the investment
advisor for each of these funds, whose Managing Member, Samuel D. Isaly,
has sole authority to vote such shares and as such is considered the
beneficial owner of the common stock held by each of these funds.
(3) Larry Fineberg, who is a general partner of Oracle Strategic Partners, LP,
has the authority to vote such shares.
(4) Represents 1,300,801 shares of common stock held by Pirate Ship & Co.,
222,222 shares of common stock held by Global Health Sciences Fund and
180,000 shares of common stock subject to a currently exercisable warrant
held by Pirate Ship & Co. John Schroer, Senior Vice President of INVESCO
Global Health Science Fund, which manages each of Pirate Ship & Co. and
Global Health Science Fund, has authority to vote such shares.
(5) Represents 1,264,539 shares of common stock held by Sarnoff Corporation
and 323,789 shares of common stock owned by certain current and former
employees of Sarnoff Corporation with respect to which Sarnoff Corporation
maintains voting discretion pursuant to the terms of a Common Stock
Purchase Agreement by and among Sarnoff Corporation and each such
stockholder. The executive officers of Sarnoff Corporation have sole
authority to vote such shares.
(6) Represents 473,237 shares of common stock owned by SmithKline Beecham plc,
573,237 shares of common stock owned by SmithKline Beecham Corporation and
275,000 shares of common stock subject to a warrant held by SmithKline
Beecham Corporation of which 137,500 shares are currently exercisable.
Donald F. Parman, Vice President and Secretary of Smithkline Beecham
Corporation, has sole authority pursuant to a limited power of attorney
granted by SmithKline Beecham, plc to vote such shares.
(7) Includes 109,014 shares of common stock subject to currently exercisable
options.
(8) Includes 49,862 shares of common stock subject to currently exercisable
options, 70,000 shares of common stock subject to currently exercisable
warrants held by Cairn Investments Inc. and 42,150 shares of common stock
held by Cairn Investments Inc. Cairn Investments Inc. is an investment
corporation whose stockholders consist of Mr. Marvin and his wife.
(9) Represents 15,054 shares of common stock subject to currently exercisable
options. Mr. Hecht disclaims any beneficial ownership of the shares of
common stock beneficially owned by SmithKline Beecham Corporation and
SmithKline Beecham plc, except to the extent of his pecuniary interest in
such shares, if any.
(10) Mr. Isaly who is the Managing Member of OrbiMed Advisors, LLC is deemed to
be the beneficial owner of shares of common stock attributed to OrbiMed
Advisors, LLC. See footnote number 2, above.
(11) Represents 9,999 shares of common stock subject to currently exercisable
options.
(12) Represents 833 shares of common stock subject to a currently exercisable
option.
(13) Represents 4,166 shares of common stock subject to a currently exercisable
option.
(14) Represents 2,000 shares of common stock subject to a currently exercisable
option. Mr. Tien disclaims any beneficial ownership of EB Finance Co.,
Ltd., except to the extent of his pecuniary interest in such shares, if
any.
(15) Ms. VanLent disclaims any beneficial ownership of the shares of common
stock beneficially owned by Sarnoff Corporation, except to the extent of
her pecuniary interest in such shares, if any. See footnote number 5.
(16) Represents 194,761 shares subject to currently exercisable options and
345,000 shares subject to currently exercisable warrants.
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DESCRIPTION OF CAPITAL STOCK
After this offering, our authorized capital stock will consist of 50,000,000
shares of common stock, $.001 par value per share, and 5,000,000 shares of
preferred stock, $.001 par value per share.
After the closing of this offering, there will be:
. 33,998,606 shares of common stock outstanding;
. 3,250,995 options to purchase shares of common stock outstanding of which
441,077 will be exercisable upon the closing of the offering;
. 1,237,138 warrants to purchase shares of common stock outstanding,
1,079,638 of which will be exercisable upon the closing of this offering;
and
. no shares of preferred stock outstanding.
Common Stock
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to
receive proportionately any such dividends declared by the board of directors,
out of legally available funds for the dividends subject to the rights of the
holders of our preferred stock and any preferences that may be applicable to
any other then outstanding preferred stock. Upon our liquidation, dissolution
or winding up, the holders of our common stock are entitled to receive ratably
with the holders of our Series C Convertible Preferred Stock and Series E
Convertible Preferred Stock our net assets available after the payment of all
debts and other liabilities and subject to the liquidation preferences of any
outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights and are not subject to future
calls or assessments by us. No sinking fund provisions apply to our common
stock. The outstanding shares of common stock are, and the shares offered by us
in this offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of our common
stock are subject to the rights of the holders of shares of any series of
preferred stock which we may designate and issue in the future. Some holders of
common stock have the right to require us to register their shares of common
stock under the Securities Act in specified circumstances. See "Shares Eligible
for Future Sale."
Preferred Stock
Upon the closing of this offering, all of our outstanding shares of Series A
convertible preferred stock, Series B convertible preferred stock, Series C
mandatorily redeemable convertible preferred stock and Series E mandatorily
redeemable convertible preferred stock will be converted into 24,790,787 shares
of common stock.
Under the terms of our certificate of incorporation, our Board of Directors
will be authorized to issue up to 5,000,000 shares of preferred stock in one or
more series without stockholder approval. Our Board of Directors also has
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of preferred stock.
The purpose of authorizing our Board of Directors to issue preferred stock
in one or more series and determine the number of shares in the series and its
rights and preferences is to eliminate delays associated with a stockholder
vote on specific issuances. Examples of rights and preferences that the Board
of Directors may fix are (1) dividend rights, (2) dividend rates, (3)
conversion rights, (4) voting rights, (5) terms of redemption, including
sinking price or prices, and (6) liquidation preferences. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could make it more
difficult for a third party to acquire, or could discourage a third party from
acquiring, a
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majority of our outstanding voting stock. The rights of holders of our common
stock described above will be subject to, and may be adversely affected by, the
rights of any preferred stock that we may designated and issue in the future.
Warrants
As of March 31, 2000, there were outstanding warrants to purchase 1,237,138
shares of common stock held by 16 investors. Such warrants have expiration
dates ranging from June 2002 to June 2004, and have a weighted average exercise
price of $4.64 per share. The number of shares for which the warrants are
exercisable is subject to adjustment for stock splits, combinations or
dividends and reclassifications, exchanges or substitutions.
Registration Rights
After this offering, the holders of approximately 24,790,787 shares of
common stock will be entitled to rights with respect to the registration of
those shares under the Securities Act of 1933 as follows:
Demand Rights. Under the terms of the agreements between us and the holders
of those registrable shares, the former holder of Series A convertible
preferred stock, the former holder of Series B convertible preferred stock and
the holders of not less than one-third of the former holders of Series C
convertible preferred stock and Series E convertible preferred stock may at any
time require us to file a registration statement under the Securities Act with
respect to shares of common stock owned by them and we are required to use our
reasonable best efforts to effect that registration. This right will accrue to
the former holder of Series A convertible preferred stock and the former holder
of Series B convertible preferred stock at any time after the closing of this
offering and to the former holders of Series C convertible preferred stock and
Series E convertible preferred stock at any time after the first anniversary of
the closing of this offering.
Registration Rights. Also, if we propose to register any of our securities
under the Securities Act, other than in connection with demand registrations,
registrations on Form S-8 or in connection with our initial public offering,
the foregoing holders are entitled to notice of and to include in the
registration shares of common stock owned by them. This right will accrue to
the former holder of Series A convertible preferred stock and the former holder
of Series B convertible preferred stock at any time after the closing of this
offering and to the former holders of Series C convertible preferred stock and
Series E convertible preferred stock at any time after the first anniversary of
the closing of this offering.
S-3 Registration Rights. Finally, the former holders of not less than 25% of
the Series C convertible preferred stock and Series E convertible preferred
stock may at any time after the completion of this offering require us to file
a registration statement under the Securities Act on Form S-3 with respect to
shares of common stock owned by them having an offering price of at least
$150,000.
All of these registration rights are subject to various conditions and
limitations, among them certain rights of the underwriters of an offering to
limit the number of shares included in a registration and our right not to
effect a requested registration within 90 days after the effective date of a
previous registration on a Form S-1 or within 90 days after the effective date
of a registration which included all shares requested by holders of registrable
shares. We will bear all of the expenses incurred in connection with all
exercises of these registration rights.
Delaware Law and Certain Charter and By-law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law statute. Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes an interested
stockholder, unless the business combination is approved in a prescribed
manner. A business combination includes mergers, asset sales
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and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an interested stockholder is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.
Our by-laws divide the Board of Directors into three classes with staggered
three-year terms. See "Management." Under the by-laws, any vacancy on our Board
of Directors, including a vacancy resulting from an enlargement of our Board of
Directors, may only be filled by vote of a majority of the directors then in
office. The classification of the Board of Directors and the limitation on
filling of vacancies could make it more difficult for a third party to acquire,
or discourage a third party from acquiring, control of our company.
Our by-laws also provide that after this offering, stockholders can only
take action at an annual meeting or special meeting, and not by written action
in lieu of a meeting. Our by-laws further provide that only stockholders
holding a majority of outstanding shares, our Chairman of the Board, President
or our Board of Directors may call a special meeting of stockholders.
Our stockholders must comply with advance notice and information disclosure
requirements in order for any matter to be considered "properly brought" before
a meeting. Stockholders must deliver written notice to us between 60 and 90
days prior to the meeting. If we give less than 70 days' notice or prior public
disclosure of the meeting date, stockholders must deliver written notice to us
within ten days following the date upon which the notice of the meeting was
mailed or such public disclosure was made, whichever occurs first. If the
matter relates to the election of directors, the notice must set forth specific
information regarding each nominee and the nominating stockholder. For any
other matter, the notice must set forth a brief description of the proposed
matter and certain information regarding the proponent stockholder. These
provisions could delay until the next stockholders' meeting proposed actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions could also discourage a third party from making a
tender offer for our common stock, because even if it acquired a majority of
the outstanding voting securities, the third party would be able to take action
as a stockholder only at a duly called stockholders' meeting, and not by
written consent.
The Delaware General Corporation Law statute provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our by-laws require the affirmative vote of
holders of at least 75% of the votes which all the stockholders would be
entitled to cast in any annual election of directors or class of directors to
amend or repeal any of the provisions described in the prior two paragraphs.
Our certificate of incorporation contains certain provisions permitted under
the Delaware General Corporation Law statute relating to the limitation of
liability of directors. These provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the certificate of incorporation contains
provisions to indemnify our directors and officers to the fullest extent
permitted by the Delaware General Corporation Law statute. We believe these
provisions will assist us in attracting and retaining qualified individuals to
serve as our directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our securities.
After completion of this offering and assuming no exercise of the underwriter's
over-allotment option, there will be 33,998,606 shares of common stock
outstanding based upon the number of shares outstanding as of March 31, 1999.
Of these shares, the 8,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act
of 1933, except that any shares purchased by our "affiliates," as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
Sales of Restricted Shares
All of the shares offered under this prospectus will be freely tradable in
the open market. The remaining 25,998,606 shares of common stock that will be
outstanding after this offering will be considered "restricted securities"
under Rule 144 of the Securities Act. Generally, restricted securities that
have been owned for a period of at least two years may be sold immediately
after the completion of this offering, and restricted securities that have been
owned for at least one year may be sold 90 days after the completion of this
offering. Certain of the restricted securities are subject to lock-up
agreements with the underwriters. Persons subject to lock-up agreements have
agreed not to sell shares of our common stock without the prior permission of
Credit Suisse First Boston Corporation for a period of 180 days after the
completion of this offering. Credit Suisse First Boston Corporation has
indicated that it does not intend to release anyone from the lock-up agreement.
The table below sets forth information regarding potential sales of restricted
securities.
. 1,481,500 shares may be sold immediately after completion of this
offering; and
. 5,000,136 additional shares may be sold upon the expiration of the lock-
up agreements.
Options
Shares of common stock may also be issued and sold upon the exercise of
options. After this offering, we intend to register substantially all of the
common stock, which may be issued under our 1995 Stock Incentive Plan and our
2000 Employee, Director and Consultant Stock Plan and other stock options not
issued under a plan. Shares issued upon the exercise of stock options after the
effective date of the registration statements on Form S-8 will be eligible for
resale in the public market without restriction, subject to Rule 144
limitations applicable to affiliates and the lock-up agreements noted above, if
applicable.
Registration Rights
Upon completion of this offering, the holders of 24,790,787 shares of common
stock will be entitled to various rights with respect to the registration of
these shares under the Securities Act. Registration of these shares under the
Securities Act would result in these shares becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of the
registration, except for shares purchased by affiliates. See "Description of
Capital Stock--Registration Rights" for a more complete description of these
registration rights.
Effect of Sales of Shares
Prior to this offering, there has been no public market for our common
stock, and we cannot advise you as to the effect, if any, that sales in the
public market of shares of our common stock, or the availability of shares for
sale, will have on the market price of our common stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of our common stock
in the public market could adversely affect the market price of our common
stock and could impair our ability to raise capital.
75
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc. and Salomon Smith Barney Inc. are acting as representatives, the
following respective numbers of shares of our common stock:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
FleetBoston Robertson Stephens Inc. ...............................
Salomon Smith Barney Inc. .........................................
---------
Total............................................................ 8,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,200,000 additional shares of our common stock from us at
the initial public offering price less the underwriting discounts and
commissions. The option may be exercised only to cover any over-allotments of
the common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions
paid by us............. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the common stock being offered.
We, our directors and officers and the majority of our stockholders agreed
that we will not and they will not:
. offer, sell, contract to sell, announce our intention to sell, pledge or
otherwise dispose of, directly or indirectly; or
. file with the Securities and Exchange Commission a registration statement
under the Securities Act relating to;
76
<PAGE>
any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus, except in connection with our incentive
stock plan. In addition, we may issue shares of our common stock in connection
with any acquisition of another company if the terms of such issuance provide
that such common stock shall not be resold prior to the expiration of the 180
day period referenced above.
The underwriters have reserved for sale, at the initial public offering
price, up to 400,000 shares of the common stock for our employees, directors
and certain other persons associated with us who may wish to purchase common
stock in the offering. The number of shares available for sale to the general
public in the offering will be reduced to the extent these persons purchase
these reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933, or to contribute to payments which the underwriters may
be required to make as a result of these liabilities.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "ORCH."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price will be:
. the information presented in this prospectus and otherwise available to
the underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for our future earnings;
. the present state of our development and our current financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the shares of common stock originally sold
by such syndicate member are purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
77
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (3) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. This report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
78
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Boston,
Massachusetts. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Willkie Farr & Gallagher, New York, New
York. Members of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. own 833
shares of common stock and options to purchase an aggregate of 4,267 shares of
common stock.
EXPERTS
The consolidated financial statements of Orchid Biosciences, Inc. and
subsidiaries as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of GeneScreen, Inc. and subsidiaries
as of December 29, 1999, and for the period from January 1, 1999 to December
29, 1999, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of GeneScreen, Inc. and subsidiaries
as of December 31, 1998 and for the year then ended have been included herein
and in the registration statement in reliance upon the report of Deloitte &
Touche LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 (including its exhibits
and schedules) with the Securities and Exchange Commission under the Securities
Act with respect to our common stock to be sold in this offering. This
prospectus, which is a part of the registration statement, does not contain all
of the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any contract, agreement
or other document of Orchid BioSciences, Inc., such references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document. You may review a copy of the registration statement, including
exhibits, at the Securities and Exchange Commission's public reference room at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the SEC located at Seven World Trade Center, 13th
Floor, New York, New York 10048 or at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Please call 1-800-SEC-0330 for further
information about the operation of the public reference rooms.
After we have filed this registration statement, we will file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
The registration statement and our other Securities and Exchange Commission
filings can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Securities and Exchange Commission.
79
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Orchid BioSciences, Inc. and subsidiaries:
Independent Auditors' Report............................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and 1999............... F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999.................................................... F-5
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1997, 1998 and 1999....................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999.................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
GeneScreen, Inc. and subsidiaries:
Independent Auditors' Report............................................. F-30
Independent Auditors' Report............................................. F-31
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and December 29, 1999.. F-32
Consolidated Statements of Operations for the year ended December 31,
1998 and the period from January 1, 1999 to December 29, 1999.......... F-33
Consolidated Statements of Stockholders' Equity (Deficit) for the year
ended December 31, 1998 and the period from January 1, 1999 to December
29, 1999............................................................... F-34
Consolidated Statements of Cash Flows for the year ended December 31,
1998 and the period from January 1, 1999 to December 29, 1999.......... F-35
Notes to Consolidated Financial Statements.............................. F-36
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Orchid BioSciences, Inc.:
We have audited the accompanying consolidated balance sheets of Orchid
BioSciences, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orchid
BioSciences, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Princeton, New Jersey
February 11, 2000 except as to
the seventh paragraph of note 16
which is as of March 17, 2000,
the eighth paragraph of note 16
which is as of February 15,
2000, the ninth paragraph of
note 16 which is as of
February 21, 2000, the tenth
paragraph of note 16 which is as
of March 31, 2000 and the
eleventh paragraph of note 16
which is as of April 4, 2000.
F-2
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Pro Forma
December 31,
1999
1998 1999 (see note 1)
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 472,725 $33,803,935 $33,803,935
Restricted cash.......................... -- 400,000 400,000
Short-term investments................... 7,615,127 -- --
Accounts receivable, net................. -- 2,102,563 2,102,563
Laboratory materials and supplies........ -- 182,532 182,532
Other current assets..................... 307,340 858,774 858,774
----------- ----------- -----------
Total current assets..................... 8,395,192 37,347,804 37,347,804
Equipment and leasehold improvements,
net..................................... 1,736,654 9,474,416 9,474,416
Goodwill, net of accumulated amortization
of $2,275 and $10,075 in 1998 and 1999,
respectively............................ 75,725 30,880,518 30,880,518
Other intangibles, net................... 4,840,590 16,518,757 16,518,757
Other assets............................. 551,264 464,815 464,815
----------- ----------- -----------
Total assets............................. $15,599,425 $94,686,310 $94,686,310
=========== =========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Note payable--bank....................... $ -- $ 1,000,000 $ 1,000,000
Current portion of long-term debt........ -- 1,141,230 1,141,230
Accounts payable......................... 1,004,860 2,302,123 2,302,123
Accrued expenses......................... 1,008,536 4,877,157 4,877,157
Due to related party..................... 381,033 63,519 63,519
Deferred revenue......................... 250,000 789,091 789,091
----------- ----------- -----------
Total current liabilities................ 2,644,429 10,173,120 10,173,120
Long-term debt, less current portion..... 3,547,821 4,122,357 4,122,357
Commitments and contingencies............
Manditorily redeemable convertible
preferred stock, $.001 par value
(converts into 17,719,774 shares of
common stock on an unaudited pro forma
basis at December 31, 1999 upon
consummation of the offering
contemplated herein):
Series C, at redemption value, designated
2,493,692 shares; issued and outstanding
2,480,176 shares at December 31, 1998
and 1999 (Aggregate liquidation value of
$27,530,000 at December 31, 1999) ...... 27,530,000 27,530,000 --
Series E, designated 19,000,000 shares;
issued and outstanding 7,934,966 shares
at December 31, 1999 (Aggregate
liquidation value of $35,707,320 at
December 31, 1999)...................... -- 39,034,609 --
Series E to be issued, at redemption
value, (4,951,452 shares, including
518,534 shares subject to repurchase
rights at December 31, 1999) (Aggregate
liquidation value of $22,281,534 at
December 31, 1999)...................... -- 22,281,533 --
----------- ----------- -----------
27,530,000 88,846,142 --
----------- ----------- -----------
</TABLE>
F-3
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Pro
Forma
December 31,
1999
1998 1999 (see note 1)
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Stockholders' equity (deficit):
Preferred stock, $.001 par value.
Authorized 23,400,000 shares; 38,961
shares with no designation; no shares
issued or outstanding................. $ -- $ -- $ --
Convertible preferred stock, $.001 par
value (converts into 1,074,740 shares
of common stock on an unaudited pro
forma basis at December 31, 1999 upon
consummation of the offering
contemplated herein):
Series A, designated 1,200,000 shares;
issued and outstanding 904,200 and
970,900 shares at December 31, 1998
and 1999, respectively (Liquidation
value--see note 13).................. 904 971 --
Series B, designated 300,000 shares;
issued and outstanding 68,640 and
103,840 shares at December 31, 1998
and 1999, respectively (Liquidation
value--see note 13).................. 69 104 --
Series B, to be issued (35,200 shares
at December 31, 1998) (Liquidation
value--see note 13).................. 211,200 -- --
Series D, designated 367,347 shares;
no shares issued or outstanding...... -- -- --
Common stock, $.001 par value.
Authorized 30,000,000 shares; issued
and outstanding 726,751 and 845,450
shares at December 31, 1998 and 1999,
respectively (19,639,964 shares on an
unaudited pro forma basis at December
31, 1999 upon conversion of the
manditorily redeemable convertible
preferred stock and the convertible
preferred stock)...................... 727 845 19,640
Common stock to be issued (5,000 and
10,000 shares at December 31, 1998 and
1999, respectively)................... 17,500 76,250 76,250
Additional paid-in capital............. 4,808,773 50,154,522 138,982,944
Deferred compensation.................. (624,318) (7,930,030) (7,930,030)
Accumulated deficit.................... (22,537,680) (50,757,971) (50,757,971)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (18,122,825) (8,455,309) 80,390,833
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $15,599,425 $94,686,310 $94,686,310
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Contract revenue-related party...... $ 3,763,000 $ 2,747,800 $ --
Contract revenue-unrelated party.... -- -- 828,000
Grant revenue....................... -- 33,152 810,838
License and other revenue........... -- -- 154,167
----------- ------------ ------------
Total revenues.................... 3,763,000 2,780,952 1,793,005
----------- ------------ ------------
Operating expenses:
General and administrative ......... 2,812,815 4,947,786 9,547,089
General and administrative-related
party.............................. 114,636 251,449 63,519
Research and development............ 46,845 4,984,575 11,695,798
Research and development-related
party.............................. 10,765,767 2,589,538 2,751,927
Acquisition of in-process research
and development.................... -- 2,352,838 --
----------- ------------ ------------
Total operating expenses.......... 13,740,063 15,126,186 24,058,333
----------- ------------ ------------
Operating loss.................... (9,977,063) (12,345,234) (22,265,328)
----------- ------------ ------------
Other income (expense):
Interest income..................... 49,303 931,390 202,699
Interest expense.................... -- (65,635) (6,157,662)
----------- ------------ ------------
Total other income (expenses)..... 49,303 865,755 (5,954,963)
----------- ------------ ------------
Net loss.......................... (9,927,760) (11,479,479) (28,220,291)
Beneficial conversion feature of
preferred stock...................... -- -- 44,554,000
----------- ------------ ------------
Net loss allocable to common
stockholders..................... $(9,927,760) $(11,479,479) $(72,774,291)
=========== ============ ============
Basic and diluted net loss per share
allocable to common stockholders
(note 1)............................. $ (27.57) $ (17.09) $ (95.87)
=========== ============ ============
Shares used in computing basic and
diluted net loss per share allocable
to common stockholders (note 1)...... 360,079 671,589 759,078
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Convertible preferred stock
--------------------------------------
Series A Series B
-------------- --------------
Number Number Series B
of of To be
shares Amount shares Amount issued
------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... 670,000 $670 68,640 $ 69 --
Issuance of
common stock for
technology
licenses........ -- -- -- -- --
Issuance of
restricted
common stock.... -- -- -- -- --
Issuance of
Series A
convertible
preferred stock
for technology
license......... 167,500 167 -- -- --
Deferred
compensation
resulting from
the grant of
options......... -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- --
Exercise of
common stock
options......... -- -- -- -- --
Net loss........ -- -- -- -- --
------- ---- ------- ---- --------
Balance, December
31, 1997......... 837,500 837 68,640 69 --
Exercise of
common stock
options......... -- -- -- -- --
Issuance of
stock for
technology
licenses........ 66,700 67 -- -- --
Series B
convertible
preferred stock
to be issued.... -- -- -- -- 211,200
Deferred
compensation
resulting from
the grant of
options......... -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- --
Issuance of
common stock
options in
connection with
acquisition of
Molecular Tool,
Inc............. -- -- -- -- --
Net loss........ -- -- -- -- --
------- ---- ------- ---- --------
Balance, December
31, 1998......... 904,200 904 68,640 69 211,200
Issuance of
stock for
technology
licenses........ 66,700 67 -- -- --
Series B
convertible
preferred stock
to be issued.... -- -- 35,200 35 (211,200)
Warrants in
connection with
convertible term
loans........... -- -- -- -- --
Warrants in
connection with
draws on line of
credit.......... -- -- -- -- --
Warrants in
connection with
sale of Series E
manditorily
redeemable
convertible
preferred
stock........... -- -- -- -- --
Beneficial
conversion
feature on
issuance of
Series E
manditorily
redeemable
convertible
preferred stock
in connection
with acquisition
of GeneScreen... -- -- -- -- --
Deferred
compensation
resulting from
the grant of
options......... -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- --
Exercise of
common stock
options......... -- -- -- -- --
Net loss........ -- -- -- -- --
------- ---- ------- ---- --------
Balance, December
31, 1999......... 970,900 $971 103,840 $104 --
======= ==== ======= ==== ========
<CAPTION>
Common stock
--------------
Number Common stock Additional Deferred Total
of to be paid-in compen- Accumulated stockholders'
shares Amount issued capital sation deficit deficit
------- ------ ------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... 330,829 $331 -- 1,317,812 -- (1,130,441) 188,441
Issuance of
common stock for
technology
licenses........ 157,500 158 -- 354,218 -- -- 354,376
Issuance of
restricted
common stock.... 109,333 109 -- 131,657 (131,766) -- --
Issuance of
Series A
convertible
preferred stock
for technology
license......... -- -- -- 1,289,583 -- -- 1,289,750
Deferred
compensation
resulting from
the grant of
options......... -- -- -- 314,562 (314,562) -- --
Amortization of
deferred
compensation.... -- -- -- -- 85,697 -- 85,697
Exercise of
common stock
options......... 4,117 4 -- -- -- -- 4
Net loss........ -- -- -- -- -- (9,927,760) (9,927,760)
------- ------ ------------ ----------- ----------- ------------ -------------
Balance, December
31, 1997......... 601,779 602 -- 3,407,832 (360,631) (11,058,201) (8,009,492)
Exercise of
common stock
options......... 1,582 2 -- (2) -- -- --
Issuance of
stock for
technology
licenses........ 123,390 123 17,500 762,643 -- -- 780,333
Series B
convertible
preferred stock
to be issued.... -- -- -- -- -- -- 211,200
Deferred
compensation
resulting from
the grant of
options......... -- -- -- 438,300 (438,300) -- --
Amortization of
deferred
compensation.... -- -- -- -- 174,613 -- 174,613
Issuance of
common stock
options in
connection with
acquisition of
Molecular Tool,
Inc............. -- -- -- 200,000 -- -- 200,000
Net loss........ -- -- -- -- -- (11,479,479) (11,479,479)
------- ------ ------------ ----------- ----------- ------------ -------------
Balance, December
31, 1998......... 726,751 727 17,500 4,808,773 (624,318) (22,537,680) (18,122,825)
Issuance of
stock for
technology
licenses........ 83,300 83 58,750 1,762,350 -- -- 1,821,250
Series B
convertible
preferred stock
to be issued.... -- -- -- 211,165 -- -- --
Warrants in
connection with
convertible term
loans........... -- -- -- 5,232,000 -- -- 5,232,000
Warrants in
connection with
draws on line of
credit.......... -- -- -- 76,000 -- -- 76,000
Warrants in
connection with
sale of Series E
manditorily
redeemable
convertible
preferred
stock........... -- -- -- 753,000 -- -- 753,000
Beneficial
conversion
feature on
issuance of
Series E
manditorily
redeemable
convertible
preferred stock
in connection
with acquisition
of GeneScreen... -- -- -- 28,360,000 -- -- 28,360,000
Deferred
compensation
resulting from
the grant of
options......... -- -- -- 8,937,071 (8,937,071) -- --
Amortization of
deferred
compensation.... -- -- -- -- 1,631,359 -- 1,631,359
Exercise of
common stock
options......... 35,399 35 -- 14,163 -- -- 14,198
Net loss........ -- -- -- -- -- (28,220,291) (28,220,291)
------- ------ ------------ ----------- ----------- ------------ -------------
Balance, December
31, 1999......... 845,450 $845 76,250 50,154,522 (7,930,030) (50,757,971) (8,455,309)
======= ====== ============ =========== =========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(9,927,760) $(11,479,479) $(28,220,291)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Noncash research and development
expense............................. 1,644,126 3,133,171 1,821,250
Noncash compensation expense......... 85,697 174,613 1,631,359
Noncash amortization of debt
issuance costs and interest expense
.................................... -- -- 5,985,749
Depreciation and amortization........ 99,235 513,444 1,359,772
Changes in assets and liabilities:
Other current assets................ 279,307 (242,371) (395,326)
Other assets........................ (25,694) (525,570) 155,745
Accounts payable.................... 117,460 609,699 756,938
Accrued expenses.................... 481,457 309,352 1,519,486
Due to related party................ (1,469,907) 51,074 (317,514)
Milestone advance................... 1,320,000 (1,108,800) --
Deferred revenue.................... (133,000) 161,000 346,045
Obligation under research and
development contract............... 3,130,000 (3,130,000) --
----------- ------------ ------------
Net cash used in operating
activities........................ (4,399,079) (11,533,867) (15,356,787)
----------- ------------ ------------
Cash flows from investing activities:
Acquisition of certain assets and
liabilities of Molecular Tool,
Inc................................. -- (3,392,293) --
Cash acquired in acquisition of
GeneScreen, Inc. and subsidiaries,
net of costs........................ -- -- 1,051,207
Capital expenditures................. (43,229) (1,691,404) (8,246,338)
Increase in restricted cash.......... -- -- (400,000)
Purchase of short-term investments... -- (15,545,308) --
Maturities of short-term
investments......................... -- 7,930,181 7,615,127
----------- ------------ ------------
Net cash used in (provided by)
investing activities.............. (43,229) (12,698,824) 19,996
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Series C
mandatorily redeemable convertible
preferred stock..................... 9,230,000 18,300,000 --
Net proceeds from issuance of Series
E manditorily redeemable convertible
preferred stock..................... -- -- 34,165,197
Proceeds from convertible term
notes............................... 8,765,000
Proceeds from issuance of debt from
line of credit...................... -- -- 5,036,570
Proceeds from common stock warrants.. -- -- 1,075,000
Repayment of debt on line of credit.. -- -- (387,964)
Proceeds from issuance of common
stock/ exercise of options.......... 4 -- 14,198
----------- ------------ ------------
Net cash provided by financing
activities........................ 9,230,004 18,300,000 48,668,001
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents..................... 4,787,696 (5,932,691) 33,331,210
Cash and cash equivalents at beginning
of year.............................. 1,617,720 6,405,416 472,725
----------- ------------ ------------
Cash and cash equivalents at end of
year................................. $ 6,405,416 $ 472,725 $ 33,803,935
=========== ============ ============
Supplemental disclosure of noncash
financing and investing activities:
Deferred compensation from issuance
of restricted stock, grant of
options and warrants................ $ 446,328 $ 438,300 $ 10,185,707
Issuance of common stock and Series A
convertible preferred stock for
technology licenses................. 1,475,376 762,833 1,762,500
Common stock granted or to be issued
to SB............................... 168,750 17,500 58,750
Beneficial conversion feature on
issuance of Series E mandatorily
redeemable convertible preferred
stock in connection with acquisition
of GeneScreen....................... -- -- 28,360,000
Series E mandatorily redeemable
convertible preferred stock to be
issued in connection with
acquisition of GeneScreen........... -- -- 17,600,000
Conversion of bridge notes and
accrued interest into Series E
mandatorily redeemable convertible
preferred stock..................... -- -- 10,302,329
Issuance of long-term debt in
connection with acquisition of
Molecular Tool, Inc................. -- 3,547,821 --
Issuance of Series B convertible
preferred stock in exchange for
milestone advance................... -- 211,200 --
Cancellation of long-term debt in
connection with acquisition of
GeneScreen, Inc..................... -- -- (3,547,821)
Issuance of warrants in connection
with borrowings on line of credit... -- -- 76,000
Issuance of common stock options in
connection with acquisition of
Molecular Tool, Inc................. -- 200,000 --
Issuance of common stock warrants in
connection with the Series E
mandatorily redeemable convertible
preferred stock private placement... -- -- 753,000
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
(1) Summary of Significant Accounting Policies
Organization and Business Activities
Orchid BioSciences, Inc. (previously known as Orchid Biocomputer, Inc.) and
subsidiaries (the "Company"), was organized under the laws of the State of
Delaware on March 8, 1995 to develop and commercialize genetic diversity
technologies, products and services using the Company's proprietary
biochemistry for scoring single nucleotide polymorphisms ("SNPs") and
microfluidics technologies for applications in drug discovery, principally in
the field of pharmacogenetics and DNA synthesis. The Company was a wholly-owned
subsidiary of Sarnoff Corporation ("Sarnoff") at inception, was reduced to a
majority-owned subsidiary of Sarnoff in 1995 and as a result of the December
1997 financing, Sarnoff's ownership in the Company was reduced to less than a
majority (see notes 11 and 13).
On December 30, 1999, the Company acquired GeneScreen, Inc. ("GeneScreen"),
a wholly-owned subsidiary of the Company, which operates genetic diversity
testing laboratories in Dallas, Texas; Dayton, Ohio, and Sacramento,
California. GeneScreen performs DNA laboratory analyses for paternity,
transplantation and forensic testing. GeneScreen's primary sources of revenue
represent paternity testing under contracts with several state and county
government agencies and transplantation testing under grants from the National
Marrow Donor Program.
The Company has not yet achieved profitable operations or positive cash flow
from operations. There is no assurance that profitable operations, if ever
achieved, could be sustained on a continuing basis. In addition, development
and commercialization activities will require significant additional financing.
The Company's accumulated deficit aggregated $50,757,971 through December 31,
1999 and it expects to incur substantial losses in future periods.
Consolidated Financial Statements
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation. As a result of
the acquisition of GeneScreen, Inc. ("GeneScreen") during 1999, the Company is
no longer considered to be in the development stage for financial reporting
purposes as it was in the prior years.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States financial institutions and
money market funds. To date, the Company has not experienced any losses on its
cash and cash equivalents. The carrying amount of cash and cash equivalents
approximates its fair value due to its short-term and liquid nature.
Short-term Investments
Short-term investments consist of corporate debt securities with original
maturities greater than three months. In accordance with Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities," the Company classifies its short-term
investments as available for sale. Available for sale securities are recorded
at fair value, which approximates costs, of the investments based on quoted
market prices at December 31, 1998. The Company considered all of these
investments to be available for sale.
F-8
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Laboratory Materials and Supplies
Laboratory materials and supplies are stated at the lower of cost or market.
Cost is determined by the first-in, first-out method.
Equipment and Leasehold Improvements
Equipment is carried at cost, less accumulated depreciation, which is
computed on the straight-line basis over the estimated useful lives of the
related assets, which range from two to eight years. Leasehold improvements are
recorded at cost, less accumulated depreciation, which is computed on the
straight-line basis over the shorter of their useful lives or the remaining
lease term. Expenditures for maintenance and repairs are charged to expense as
incurred.
Goodwill and Other Intangibles
Goodwill, which represents the excess purchase price over fair value of net
assets acquired, and other intangibles are amortized on a straight-line basis
over its estimated useful lives, as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Customer lists..................................................... 11
Base technology.................................................... 12-15
Trademarks and tradename........................................... 15
Goodwill........................................................... 10-15
Patents............................................................ 15
Other intangibles.................................................. 4
</TABLE>
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews
long-lived assets, certain identifiable intangibles and goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the
undiscounted future net cash flows expected to be generated by the asset. 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
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to dispose.
Income Taxes
The Company accounts for income taxes in accordance with the asset and
liability method prescribed by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using tax rates in effect for
the years in which the differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits which are not expected to be realized. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted.
F-9
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Revenue Recognition
Revenue related to research and development contracts and grants is
recognized when the related research expenses are incurred and the Company's
specific performance obligations under the terms of the respective contract are
satisfied. To the extent expended, funding related to research and development
contracts for equipment is deferred and amortized over the shorter of its
useful life or the life of the related contract. Revenue recognized in the
accompanying consolidated financial statements is not subject to repayment.
Payments, if any, received in advance of performance under the contract are
deferred and recognized as revenue when earned. Up-front licensing fees are
deferred and amortized over the estimated performance period.
Revenue on DNA laboratory testing and from SNP testing services are
recognized on an accrual basis at the time test results are reported. Deferred
revenue represents the unearned portion of payments received in advance of
tests being completed. Unbilled receivables represent revenue which has been
earned on completed tests which have not been billed to the customer.
Revenue on product sales is recorded on transfer of title and after all
significant performance obligations of the Company have been met. Revenue from
operating lease transactions is recognized on a straight-line basis over the
term of the lease in accordance with the lease agreement.
Research and Development
Costs incurred for research and product development, including costs
incurred in obtaining license rights to technology in the development stage are
expensed as incurred. In addition, the Company recognizes research and
development expenses in the period incurred and in accordance with the specific
contractual performance terms of such research agreements. Costs incurred in
obtaining technology licenses are charged to research and development expense
if the technology licensed has not reached technological feasibility and has no
alternative uses.
Stock-based Compensation
The Company accounts for its stock-based compensation to employees and
members of the Board of Directors in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such, compensation is
recorded on the date of issuance or grant as the excess of the current
estimated fair value of the underlying stock over the purchase or exercise
price. Any deferred compensation is amortized over the respective vesting
periods of the equity instruments, if any. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," which permits non-
public entities to provide pro forma net loss and net loss per share
disclosures for stock-based compensation as if the minimum value method defined
in SFAS No. 123 had been applied. As required by SFAS No. 123, transactions
with non-employees, in which goods or services are the consideration received
for the issuance of equity instruments, are accounted for under the fair value
basis in accordance with SFAS 123.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Net Loss Per Share
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share," by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock
F-10
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
outstanding. As of December 31, 1999, the Company has certain options,
warrants, convertible preferred stock and mandatorily redeemable convertible
preferred stock (see notes 11, 12 and 13), which have not been used in the
calculation of diluted net loss per share because to do so would be anti-
dilutive. As such, the numerator and the denominator used in computing both
basic and diluted net loss per share allocable to common stockholders for each
year are equal. The Company has reflected $44,554,000 as a beneficial
conversion feature in the net loss allocable to common stockholders for the
Series E mandatorily redeemable convertible preferred stock ("Series E") issued
or issuable in exchange for cash at December 31, 1999. The amount of the
beneficial conversion feature was calculated as the difference between the fair
value of the Company's common stock on the commitment date of $11.75 per share
over the conversion price of $4.50 per share, with a limitation that the
beneficial conversion feature can not exceed the gross proceeds received from
the issuance of the stock.
Pro Forma Net Loss Per Share (Unaudited)
The following pro forma basic and diluted net loss per share allocable to
common stockholders and shares used in computing pro forma basic and diluted
net loss per share allocable to common stockholders have been presented
reflecting the automatic conversion into shares of common stock of the
convertible preferred stock and mandatorily redeemable convertible preferred
stock upon completion of the offering contemplated herein (see note 13), using
the if converted method from their respective dates of issuance:
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------
<S> <C>
Pro forma basic and diluted net loss per share allocable to
common stockholders.......................................... $ (15.61)
==========
Shares used in computing pro forma basic and diluted net loss
per share allocable to common stockholders................... 4,662,952
==========
</TABLE>
Pro Forma Balance Sheet (Unaudited)
Upon the closing of the offering contemplated herein, all of the outstanding
shares and shares to be issued of convertible preferred stock and mandatorily
redeemable convertible preferred stock at December 31, 1999 automatically
convert into 18,794,514 shares of common stock (see note 13) and the repurchase
rights of certain Series E holders expire (see note 3). The December 31, 1999
unaudited pro forma balance sheet has been prepared assuming the conversion of
the convertible preferred stock outstanding and the mandatorily redeemable
convertible preferred stock outstanding and to be issued as of December 31,
1999, into common stock as of December 31, 1999.
Recent Pronouncement
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by registrants in connection with research collaborations with third parties.
SAB 101 states that in certain circumstances the SEC staff believes that up-
front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB 101 requires
registrants to adopt the accounting guidance contained therein by no later than
the second fiscal quarter of the fiscal year beginning after December 15, 1999.
The Company is currently assessing the requirements of SAB 101 and has not yet
determined the impact of applying the accounting guidance of SAB 101 on its
financial position or results of operations or current revenue recognition
policy.
F-11
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Reclassifications
Certain reclassifications have been made in the 1998 consolidated financial
statements to conform to the 1999 presentation.
(2) Acquisition of Molecular Tool, Inc.
On September 11, 1998, the Company acquired substantially all the assets and
assumed certain liabilities of Molecular Tool, Inc. (MT), a subsidiary of
GeneScreen. The acquisition has been accounted for by the purchase method and,
accordingly, the assets and liabilities acquired have been recorded at their
fair values. The purchase price was approximately $7.1 million of which $3.2
million was paid in cash, $3,548,000 was in the form of a note (see note 7) and
$200,000 represented the fair value of 93,289 Orchid stock options exchanged
for GeneScreen options held by employees of MT and others.
The purchase price, including acquisition costs of approximately $163,000,
was allocated as follows:
<TABLE>
<S> <C>
Patents.......................................................... $1,100,000
Base technology.................................................. 3,635,000
Other intangibles................................................ 240,000
Goodwill......................................................... 78,000
In-process research and development.............................. 2,353,000
Other assets..................................................... 35,000
Liabilities...................................................... (300,000)
----------
$7,141,000
==========
</TABLE>
The results of operations of MT have been included in the Company's
consolidated financial statements from September 11, 1998.
Acquired in this transaction were a variety of intellectual property and
intangible assets including Molecular Tool's patent portfolio, assembled
workforce of research and development staff, and base technology upon which its
research efforts were based.
Molecular Tool was engaged in the development of proprietary technologies
and products for the identification and analysis of DNA sequence variation,
including an approach called SNP-IT, an approach to analyzing large numbers of
DNA samples for a given genetic effect, and the use of genetic variations
called single nucleotide polymorphisms ("SNPs").
The charge relating to the acquisition of Molecular Tool consists of
acquired in-process research and development of $2,352,838 which was
immediately charged to expense.
The value of acquired research and development related to this acquisition
represents the fair value of Molecular Tool products and services under
development. These products were associated with the application of SNP and
SNP-IT technologies under development by Molecular Tool as of the closing date
of the transaction. They include SNP Kits valued at $273,000, representing
collections of SNPs contained in plates and arrays to facilitate genetic
analysis; SNP Services valued at $418,000, representing the provision of
genetic analysis by Molecular Tool based on the SNP Kits under development; SNP
OEM equipment and machinery valued at $1.605 million, which is designed to
perform automated genetic analysis based on the technology and procedures
inherent in the SNP Kits; and SNP-IT Chips valued at $57,000, representing a
system permitting genetic analysis to be performed at the level of a silicon
chip in an effort to further automate genetic analysis.
F-12
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
At the date of acquisition, none of the products or services under
development by Molecular Tool, Inc. had achieved technological feasibility and
none were being sold on the market. There still remained substantial risks and
significant uncertainty concerning the remaining course of technical
development. Key development risks for this product included validation
testing, engineering of stability into the critical reagents to permit their
use in the field, and developing the means of scaling-up manufacturing of the
reagents and other elements of the product for eventual sale. The SNP-IT chips
had been identified and proposed as a new technology development area at the
time of the acquisition. However, major components of the chip had not been
demonstrated as feasible and have required and will continue to require
substantial investment. Areas not yet shown to be feasible included: chip
materials fabrication and biocompatibility; method and composition of bioactive
surface preparation; method and composition of optical detection systems
compatible with chip design. The Mega SNPatron Services, while now more
commercially advanced than the SNP-IT chips, faced the need for development and
feasibility demonstration in several key areas, most notably: method and
composition of the bioarray components; the ability to capture and process
results data from the Mega SNPstream process; and the composition of stable,
viable, and cost effective reagents for the tests. In the case of the SNP OEM
equipment, development of the analysis machine was largely complete but was
still expected to face engineering challenges before ultimate completion. The
challenges faced by SNPstream hardware and SNPware reagents to complete
successful commercialization included: feasibility of adapting an off-the-shelf
robotic system as the SNPstream platform; development of software systems for
data management; and development and validation of viable, stable and cost
effective reagents usable in the SNPware kits. An overall risk facing these
projects was the potential development of competing technologies to facilitate
cost reduction in genetic assays before the Molecular Tool products would even
reach the market.
Because of the great uncertainty associated with these issues, and both the
uncertainty and remaining effort associated with development for these
products, the Molecular Tool development projects had not established
technological feasibility at the acquisition date. Further, these partially
completed products had no alternative future uses at the valuation date if the
contemplated programs were to fail, as the technology was highly specialized to
the targeted products.
The estimated values of all acquired intangible assets including the
acquired development projects were determined. Other identified intangibles
included patents, the assembled workforce (principally research and development
personnel), and the base technology of Molecular Tool associated with SNP-IT
and single nucleotide polymorphisms.
The value of the acquired in-process research and development projects was
determined by projecting expected completion costs for the development projects
as well as projected cash flows resulting from their commercialization.
Material net cash inflows are projected to be realized for the development
programs in 2002, except for the SNP-IT Chip, which was projected at 2003 to
2004. The risk adjusted discount rates applied to the projects' cash flows were
40% for each of the projects except for the SNP-IT Chips, for which the risk
adjusted discount rate was 45%. In the development of projected cash flows a
completion percentage of 60.0% was employed for each project in the calculation
of cash flows to be discounted. The resulting net cash flows implied by this
projection were discounted to present value using an appropriate risk adjusted
cost of capital. This rate was developed by including a risk premium above the
return associated with the valuation of the base technology of Molecular Tool,
and above the observed weighted average costs of capital for comparable
companies involved with the development and sale of similar technologies.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Molecular Tool as if the
acquisition had occurred as of January 1, 1997, after giving effect to certain
pro forma adjustments, including amortization of goodwill and other
intangibles, and increased interest
F-13
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
expense from the Company's note payable to GeneScreen, excluding the related
acquired in-process research and development charge of $2,352,838. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and Molecular Tool
constituted a single entity during this period or the results of operations
which may occur in the future.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------
Statement of Operations Data 1997 1998
---------------------------- ----------- -----------
(unaudited)
<S> <C> <C>
Revenues.......................................... $ 4,889,066 $ 3,348,941
Net loss allocable to common stockholders before
non-recurring charge............................. (11,296,644) (10,624,275)
Basic and diluted net loss per share allocable to
common stockholders, before non-recurring
charge........................................... $ (31.37) $ (15.82)
</TABLE>
(3) Acquisition of GeneScreen, Inc.
On December 30, 1999, the Company acquired all of the outstanding shares of
common and preferred stock of GeneScreen in exchange for consideration
consisting primarily of up to 4,000,000 shares of the Company's Series E with a
stated value of $4.50 per share. The note payable to GeneScreen related to the
purchase of the MT assets in the amount of $3,547,821 (see note 7) and certain
other liabilities totalling $421,000 were also cancelled. The acquisition has
been accounted for by the purchase method and, accordingly, the assets and
liabilities acquired have been recorded at their fair values. The Company has
included $28,360,000 as a beneficial conversion feature attributable to the
Series E in the purchase price which was recorded as an increase to additional
paid-in capital. The amount of the beneficial conversion feature was calculated
as the difference between the $11.75 per share fair value of the Company's
common stock on December 22, 1999, the commitment date, over the $4.50 per
share conversion price.
The net purchase price of $42,541,000, including acquisition costs of
approximately $150,000, was allocated as follows:
<TABLE>
<S> <C>
Cash............................................................ $ 1,064,000
Accounts receivable, net........................................ 2,103,000
Other assets.................................................... 721,000
Customer list................................................... 4,210,000
Base technology................................................. 5,580,000
Trademark/tradename............................................. 1,762,000
Other intangibles............................................... 586,000
Goodwill........................................................ 30,813,000
Current portion of long-term debt............................... (1,190,000)
Accounts payable and accrued expenses........................... (2,490,000)
Deferred revenue................................................ (193,000)
Long-term debt, less current portion............................ (425,000)
-----------
$42,541,000
===========
</TABLE>
As of December 31, 1999, none of the 4,000,000 shares had been issued. Of
these, shares with a value of $1 million based on the stated value of $4.50 per
share, allocated from the GeneScreen stockholders on a pro rata basis, will
remain in escrow for up to one year to satisfy any claims based upon any breach
of representations and warranties by the GeneScreen stockholders under the
merger agreement or claims based upon any liability of GeneScreen under ERISA
with respect to eligibility requirements under GeneScreen's 401(k) plan. The $1
million value of these shares has been included in the recorded purchase price;
payment of these shares in satisfaction of claims would result in a reduction
of goodwill. Also, 518,534 of the 4,000,000
F-14
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
shares, when issued, will give the holders the rights to force the Company to
repurchase these shares after certain dates falling within one year from the
acquisition date. These repurchase rights expire upon the closing of an initial
public offering of the Company's common stock with gross proceeds of at least
$25 million. Additionally, the Company estimates that approximately $400,000
will be paid in lieu of issuing Series E shares to satisfy certain regulatory
requirements and to eliminate fractional shares. This equates to approximately
88,889 shares of Series E, which are not expected to be issued. At December 31,
1999, 3,911,111 estimated shares remain to be issued which is recorded as
Series E manditorily redeemable convertible preferred stock to be issued in the
consolidated balance sheet. The total value at the date of acquisition of the
Series E to be issued, including the beneficial conversion feature, was
$45,960,000.
The results of operations of GeneScreen since its acquisition by the Company
on December 30, 1999 through December 31, 1999 have not been included in the
Company's 1999 consolidated statement of operations as they are not material to
those results of operations. The acquisition of GeneScreen is reflected in the
accompanying consolidated balance sheet as of December 31, 1999.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and GeneScreen as if the
acquisition had occurred as of January 1, 1999, after giving effect to certain
pro forma adjustments, including amortization of goodwill and other
intangibles, decreased interest expense from the cancellation of the Company's
note payable to GeneScreen and elimination of transaction-related costs
incurred by GeneScreen prior to the acquisition. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and GeneScreen constituted a single entity during
this period or the results of operations which may occur in the future.
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------
(unaudited)
<S> <C>
Revenues........................................................ $ 15,539,620
============
Net loss........................................................ $(31,823,808)
============
Net loss allocable to common stockholders....................... $(76,377,808)
============
Basic and diluted net loss per share allocable to common
stockholders................................................... $ (100.62)
============
</TABLE>
(4) Accounts Receivable and Credit Risks
Accounts receivable are comprised of the following at December 31, 1999:
<TABLE>
<S> <C>
Billed trade receivables....................................... $ 1,489,324
Unbilled trade receivables..................................... 831,705
------------
2,321,029
Less allowance for doubtful accounts........................... 218,466
------------
Accounts receivable, net....................................... $ 2,102,563
============
</TABLE>
Accounts receivable is primarily composed of amounts owed by government
agencies. The Company performs periodic credit evaluations of its customer's
financial condition and generally does not require a deposit from government
agencies or private institutions. The Company believes private pay accounts for
paternity testing represent the most significant credit risk and generally
requires a deposit for all or a portion of the services to be rendered. Credit
losses have consistently been within management's estimates.
F-15
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(5) Equipment and Leasehold Improvements
Equipment and leasehold improvements are comprised of the following at
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Laboratory equipment................................ $1,155,216 $ 4,886,052
Computers........................................... 485,201 721,604
Furniture and fixtures.............................. 229,219 918,378
Leasehold improvements.............................. 299,154 4,271,657
---------- -----------
2,168,790 10,797,691
Less accumulated depreciation....................... (432,136) (1,323,275)
---------- -----------
$1,736,654 $ 9,474,416
========== ===========
</TABLE>
(6) Other Intangibles
Other intangibles are comprised of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Base technology..................................... $3,635,000 $ 9,215,000
Customer list....................................... -- 4,210,000
Trademark/tradename................................. -- 1,762,000
Patents............................................. 1,100,000 1,100,000
Other............................................... 240,000 827,000
---------- -----------
4,975,000 17,114,000
Less accumulated amortization....................... (134,410) (595,243)
---------- -----------
$4,840,590 $16,518,757
========== ===========
</TABLE>
(7) Debt
On September 11, 1998, the Company entered into a subordinated convertible
term note in the amount of $3,547,821 in connection with the MT acquisition.
The note bears interest at 6% per annum and all principal and accrued interest
was to be due September 11, 2008. On December 30, 1999, the note was cancelled
in connection with the acquisition of GeneScreen, the holder of the note (see
note 3).
In December 1998, the Company entered into a $6,000,000 equipment line of
credit which is secured by the purchased equipment. The funding commitment
terminated in December 1999. All borrowings under the facility are to be
repaid in monthly principal installments plus interest over 48 months from the
date of funding with the final 15% of the original principal amount due in a
balloon payment at the end of loan term. At December 31, 1998 and 1999, $0 and
$4,648,606, respectively, were outstanding under the facility and annual
interest rates on the four draws range from 10.55% to 11.66%. In connection
with this arrangement, 20,894 warrants to purchase common stock were granted
at the time of the borrowings with exercise prices which ranged from $4.50 to
$12.25 per share. The fair value of these warrants of $76,000, as determined
using a Black-Scholes option pricing model, was recorded as debt issuance
costs and is being amortized over the term of the debt.
GeneScreen had outstanding borrowings under a revolving credit agreement of
$1,000,000 at December 31, 1999. On January 20, 2000, the Company repaid the
balance and cancelled the credit facility. The note was collateralized by
$400,000 of pledged cash and cash equivalents on deposit at the financial
institution until the loan was repaid.
F-16
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Long-term debt is comprised of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Equipment line of credit secured by purchased
equipment........................................... $ -- $4,648,606
Note payable to former employee, due in 16 quarterly
installments of $27,932, commencing January 1, 1999,
and one lump-sum payment of $51,013, due January 1,
1999, net of unamortized discount of $23,030........ -- 312,154
Note payable to employee, due in 12 quarterly
installments of $25,514, commencing January 1, 2000,
net of unamortized discount of $21,037.............. -- 285,131
Convertible note payable to GeneScreen, cancelled in
1999................................................ 3,547,821 --
Other................................................ -- 17,696
---------- ----------
3,547,821 5,263,587
Less current portion................................. -- 1,141,230
---------- ----------
Long-term debt, less current portion................. $3,547,821 $4,122,357
========== ==========
</TABLE>
The scheduled maturities of long-term debt outstanding as of December 31,
1999 are summarized as follows:
<TABLE>
<S> <C>
2000.............................................................. $1,141,230
2001.............................................................. 1,240,582
2002.............................................................. 1,371,354
2003.............................................................. 1,510,421
----------
$5,263,587
==========
</TABLE>
(8) Accrued Liabilities
Accrued liabilities is comprised of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Employee compensation................................ $ 397,066 $1,358,776
Professional fees related to acquisition of
GeneScreen by Orchid................................ -- 679,570
Other professional fees.............................. 98,468 404,107
Employee relocation.................................. 342,901 72,177
Royalties on licensed technology..................... -- 906,107
Other................................................ 170,101 1,456,420
---------- ----------
$1,008,536 $4,877,157
========== ==========
</TABLE>
(9) Income Taxes
No Federal or state taxes are payable as of December 31, 1998 and 1999. As
of December 31, 1999, the Company has approximately $40,000,000 of Federal and
$44,000,000 of state net operating loss ("NOL") carryforwards available to
offset future taxable income. The Federal and state NOL carryforwards will
begin expiring in 2003 if not utilized.
The Tax Reform Act of 1986 ("the Act") provides for a limitation on the
annual use of NOL carryforwards (following certain ownership changes, as
defined by the Act) which could significantly limit the
F-17
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Company's ability to utilize these carryforwards. The Company may have
experienced various ownership changes, as defined by the Act, as a result of
past financings and may experience others in connection with future financings,
including the offering contemplated herein. Accordingly, the Company's ability
to utilize the aforementioned carryforwards may be limited. The Company has not
yet determined whether or not ownership changes, as defined by the Act, have
occurred. Additionally, because U.S. tax laws limit the time during which these
carryforwards may be applied against future taxes, the Company may not be able
to take full advantage of these attributes for Federal income tax purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1999 are presented below:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 6,120,000 $ 16,285,000
Other.............................................. 204,000 1,201,000
----------- ------------
Total gross deferred tax assets.................. 6,324,000 17,486,000
Less valuation allowance........................... (6,289,000) (17,450,000)
----------- ------------
Net deferred tax assets.......................... 35,000 36,000
Deferred tax liabilities:
Depreciation on equipment.......................... 35,000 36,000
----------- ------------
Net deferred taxes............................... $ -- $ --
=========== ============
</TABLE>
At December 31, 1999, a valuation allowance of $17,450,000 has been
recognized to fully offset the net deferred tax assets as realization of these
assets is uncertain. The net change in the valuation allowance for the years
ended December 31, 1998 and 1999 were increases of $1,878,500 and $11,161,000,
respectively, related primarily to additional net operating losses incurred by
the Company.
(10) Segment Information
The Company operates in two segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
business are as follows: (i) the Company prior to the acquisition of GeneScreen
("Orchid"), which performs SNP scoring analysis and markets related equipment
and consumables; and (ii) GeneScreen, which performs DNA laboratory analysis
for paternity, transplantation and forensic testing.
The Company evaluates performance of and allocates resources to the
segments. The accounting policies of the segments are substantially the same as
those described in the summary of significant accounting policies, as discussed
in note 1.
Prior to the acquisition of GeneScreen on December 30, 1999, the Company was
operated and managed as one business. Segment assets as of December 31, 1999
for Orchid and GeneScreen amounted to approximately $52,145,000 and
$42,541,000, respectively. No other segment information is presented as the
1999 activity is that of Orchid only.
One related party, SmithKline Beecham, accounted for 100%, 99% and 0% of
total revenue for 1997, 1998 and 1999, respectively, under the terms of the
August 1995 Development and License Agreement (see note 11).
F-18
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(11) Agreements
In August 1995, the Company entered into an Investment Agreement and a
Development and License Agreement with Sarnoff and SmithKline Beecham ("SB"),
which were amended in 1997 and 1998 (as amended, the "Agreements").
Under the Agreements, Sarnoff granted to the Company a perpetual, royalty-
free, exclusive, worldwide license for certain technology. In addition, Sarnoff
agreed to provide, for standard fees paid by third-parties, contract research
services necessary under the Agreements to the Company. In consideration for
the license, the Company issued 670,000 shares of Series A convertible
preferred stock ("Series A") to Sarnoff. No value was ascribed to the license
or the stock as the Company was controlled by Sarnoff at the time and because
the license had a carrying value of $0 on Sarnoff's books. In 1997, 1998 and
1999, Sarnoff provided contract research services of $9,121,641, $2,056,953 and
$930,677, respectively. The Company's office was also located in the Sarnoff
facility until 1998 and Sarnoff provides certain administrative support, for
which the Company paid Sarnoff; expenses related to these items totalled
$114,636, $251,449 and $63,519 in 1997, 1998 and 1999, respectively. Certain
administrative costs were allocated from Sarnoff based on either a usage
percentage of actual costs or an approximation of market rates in the case of
rent. Management believes these allocation methods are reasonable. A total of
$381,033 and $63,519 is recorded as due to related party in the accompanying
balance sheets at December 31, 1998 and 1999, respectively, related to these
items.
The Company and Sarnoff also issued to SB a license to technology which may
result from this research, subject to certain potential future payments from SB
to allow SB to retain exclusivity. The Company also agreed to sell products
developed under the contract to SB at prices to be determined per the
Agreements. SB also granted to Orchid certain non-exclusive licenses (the
"Licenses") which Orchid may require in conducting research or producing
products developed under the contract.
In accordance with the Agreements, in October 1995, SB purchased 41,667
shares of Series B convertible preferred stock ("Series B") for $800,000. SB
also agreed to provide research and development funding of up to approximately
$16 million for the design and testing of a product for certain applications
and is required to make further payments of up to $8 million upon the
achievement of certain technical milestones. The Company met its first
milestone in 1996 and received a milestone payment of $1.5 million and issued
26,973 shares of Series B to SB. The Company allocated $517,882 of this amount
to the Series B shares, which was the fair value at the time of issuance and
recorded the remaining $982,118 of this milestone payment as contract revenue.
The Company paid $350,000 of this amount to Sarnoff as a milestone payment. In
1997, SB advanced a portion of the second milestone payment. This advance
totaled $1,320,000 and was recorded as a milestone advance at December 31,
1997. In 1998, the Company and SB entered into an agreement acknowledging that
a portion of the second milestone had been accomplished and therefore, a
portion of the second milestone payment equal to the $1,320,000 milestone
advance was therefore earned and non-refundable. No further performance
obligations remained related to this acknowledged portion of the milestone.
They also agreed that SB would receive 35,200 shares of Series B, the number of
shares proportionate to the milestone fee earned. Those shares were issued in
1999. The Company allocated $211,200 of this amount to the Series B shares,
which was the fair value at the time of the agreement and recorded the
remaining $1,108,800 of this milestone payment as contract revenue. Any future
milestone payments are subject to reduction for cost overruns funded by SB or
delays in the timing of the performance of the milestones and the Company is
obligated to pay Sarnoff 10% of any future milestone payments received. Any
payments to Sarnoff will be capitalized to the extent that the technology has
reached technological feasibility or has alternative uses; otherwise the
payments will be expensed to research and development. The Company is required
to issue a total of up to 96,533 additional shares of Series B for no
additional consideration upon the payment by SB to the Company of these
F-19
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
remaining milestones. During 1997, 1998 and 1999 the Company recognized
contract revenue from SB of $3,763,000, $2,747,800 and $0 in the accompanying
consolidated statements of operations.
In December 1997, in consideration for an amendment of the Agreements, the
Company issued to SB an additional 75,000 shares of common stock and warrants
to purchase 275,000 shares of common stock at an exercise price of $11.10 per
share. The deemed fair value of the shares of common stock was $168,750, which
was recorded as research and development expense in the accompanying 1997
consolidated statement of operations. No value was ascribed to the warrants
based on the fair value as determined using a Black-Scholes option pricing
model. Warrants to purchase 138,000 shares of common stock became exercisable
immediately with the 137,000 remaining warrants vesting upon the payment of the
next milestone payment to the Company. All of these warrants expire in December
2002. Also, the Company is obligated to issue up to an additional 20,000 shares
of common stock to SB upon the exercise of certain options to acquire
additional licenses for technology under the License and Option Agreement
discussed below. As of December 31, 1998 and 1999, the Company is obligated to
issue 5,000 and 10,000 shares (including the 5,000 shares from 1998) of common
stock, respectively, to SB related to the option fields exercised by the
Company in 1998 and 1999, respectively. The fair value of these 5,000 shares of
common stock in 1998 and 1999 was $17,500 and $58,750, respectively, and has
been recorded as research and development expense in the accompanying
consolidated statements of operations. Common stock to be issued has been
recorded in the amounts of $17,500 and $76,250 at December 31, 1998 and 1999,
respectively. These 10,000 shares were issued in February 2000.
Pursuant to a December 1997 amendment to the Development and License
Agreement, the Company committed to fund $3.5 million of research within the
scope of the original Agreements and $3.0 million outside of the original
scope. Accordingly, as the Company was obligated to incur these costs in
fulfilling the terms of the Agreements without any increase in corresponding
contract revenue, this obligation was recorded as research and development
expense during 1997. The Company fulfilled its obligation and incurred these
costs during 1998.
In December 1997, the Company entered into a License and Option Agreement
("Option Agreement") with Sarnoff under which the Company has options to obtain
exclusive licenses for the use of certain technology in four designated areas:
genomics, certain high throughput screening, analysis and synthesis and cell-
based assays. In addition, the Company obtained non-exclusive and exclusive
licenses in a certain field. In consideration of the licenses obtained under
the Option Agreement, the Company issued to Sarnoff 82,500 shares of common
stock, with a fair value of $185,626 and 167,500 shares of Series A, with a
fair value of $1,289,750, of which both amounts were recorded as research and
development expense in the accompanying 1997 consolidated statement of
operations. The options expire one per year over a four year period with
certain extension provisions as defined in the Option Agreement. Concurrent
with the exercise of each option, the Company is obligated to issue 33,300
shares of common stock and 66,700 shares of Series A to Sarnoff and to fund
research to be performed by Sarnoff at an amount as defined in the contract,
but no less than a total of $5.5 million over 4 years. In both December 1998
and 1999, the Company exercised one of its options under the Option Agreement.
In consideration for the options, the Company issued to Sarnoff 33,300 shares
of common stock in each of 1998 and 1999, with a fair value of $114,885 in 1998
and $391,275 in 1999, and 66,700 shares of Series A in each of 1998 and 1999,
with a fair value of $400,200 in 1998 and $783,725 in 1999, which amounts were
recorded as research and development expense in the accompanying 1998 and 1999
consolidated statements of operations. All of the amounts noted above which
were paid as consideration for licensed technology have been recorded as
research and development expense as the technology licensed has not reached
technological feasibility and has no alternative uses.
F-20
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
In addition, the Company is obligated to issue an additional 50,000 shares
of common stock to Sarnoff at the end of each year during the term of the
research for each option exercised. Accordingly, the Company issued 50,000
shares of common stock in 1999 to Sarnoff related to the option exercised in
December 1998. The fair value of this stock was $587,500, which was recorded as
research and development expense in the accompanying 1999 consolidated
statement of operations. The Company is also required to make royalty payments
as set forth in the Option Agreement on future net sales of products and
services derived from these licenses, if any.
On March 27, 1998, the Company entered into a license agreement with
Motorola, Inc. ("Motorola"). In 1999, Motorola exercised an option to acquire a
license under this agreement, effective January 1, 2000, by making a $100,000
payment. This amount has been recorded as deferred revenue at December 31, 1999
and will be recognized over the estimated term of the license. The Company also
issued an option to Motorola to purchase up to $5,000,000 of common stock at a
per share price of the lesser of $33.30 or 110% of the average closing price of
the common stock for the ten days following an initial public offering. No
value was ascribed to the option based on the fair value as determined using a
Black-Scholes option pricing model. The option expired unexercised on December
15, 1999.
On November 11, 1998, the Company entered into a Collaboration Agreement
with Motorola to jointly perform certain research and development activities.
Motorola intended to invest cash or in-kind payments of at least $5 million
over a 30 month period in these activities. Total cash payments of at least
$1.7 million were to be made to the Company for services in support of the
collaboration. Motorola made a payment to the Company in 1998 of $250,000,
which was recorded as deferred revenue as of December 31, 1998 and which was
recognized as revenue in 1999. On October 25, 1999, this agreement was
terminated. In 1999, Motorola made additional payments under this agreement
aggregating $505,000, of which the Company recognized $245,000 as revenue and
$260,000 is recorded as a liability at December 31, 1999 as it relates to work
which will not be performed given the termination of the agreement. The Company
has also recorded approximately $333,000 as contract revenue-unrelated party in
1999 and as a termination fee receivable at December 31, 1999 and will be
reimbursed for certain shutdown costs not to exceed $178,000. The Company does
not expect that shutdown costs will exceed $178,000.
On April 1, 1998, the Company entered into a license agreement with Dynal
A.S. whereby the Company issued 90,090 shares of common stock for an exclusive
license. The fair value of the stock, $247,748, has been recorded as research
and development expense in the accompanying 1998 consolidated statement of
operations.
In February 1999, the Company and Cytomics, A.S. ("Cytomics") entered into a
Collaborative Research and License Agreement whereby Cytomics will perform
research on the Company's behalf with the Company's financial support and
granted to the Company a non-exclusive, royalty-free, worldwide license for
certain technology. Prior to executing the agreement in February 1999, the
Company made payments to Cytomics of $345,000, for which services were
performed and which was recorded as research and development expense in 1998.
The agreement was terminated, effective June 30, 1999. The Company recorded
research and development expense of $110,000 in 1999.
In September 1998, the Company entered into a Cooperative Agreement with the
National Institute of Standards and Technology ("NIST") to perform certain
research and development. The total amount expected to be provided to the
Company over the three year period of January 1, 1999 through December 31, 2001
is $1,954,000; however no obligation exists for the federal government to
provide any portion of the 2001 funding. Funding in 1999 amounted to $690,000
which was recorded as grant revenue and $602,000 in funding for 2000 has been
approved. The anticipated funding for the year 2001 is $662,000. The award in
1999 was
F-21
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
conditional upon the Company's funding of indirect costs aggregating $319,000
in 1999 which was incurred by the Company. To receive full funding in 2000 and
2001, the Company's funding of indirect costs must aggregate $309,000 and
$385,000 in 2000 and 2001, respectively.
On December 31, 1998, the Company entered into a Collaborative Development
and Marketing Agreement with Advanced Bioanalytical Services, Inc. ("ABS")
under which Orchid obtained a license. The Company paid ABS a non-refundable
$100,000 payment upon signing the agreement, which was recorded as research and
development expenses in 1998. In 1999, the Company made payments aggregating
$225,000 to ABS, all of which was recorded as research and development.
In October 1999, the Company entered in a one year license and supply
agreement with a licensee to provide an instrument, consumables and related
support for automated SNP scoring analysis. As consideration for access to
certain technology and an instrument of the Company, the licensee paid
$500,000, which is refundable on a pro-rata basis upon certain events. The
licensee is obligated to purchase a minimum order of consumables and may elect
to purchase the instrument from the Company. The Company is required to provide
technical support. The licensee may terminate the contract, in which case the
Company would be entitled to a termination fee of $100,000 and to bill the
remaining minimum amount of consumables to the licensee. As of December 31,
1999, the Company has recognized approximately $104,000 of the license fee and
deferred the remaining $396,000. The remaining deferred license fee will be
recognized on a straight-line basis over the remaining term of the agreement.
On November 5, 1999, the Company entered into a collaboration agreement with
Affymetrix, Inc. ("Affymetrix"), for the Company to develop, manufacture, and
for both parties to market and sell specific products. Each party is
responsible for costs associated with their respective development
responsibilities. The Company agreed to collaborate on the development of three
types of kits, designated under our agreement as Generic Kits, Standard Kits
and Custom Kits. The Company is responsible for all development costs
associated with the development of Generic Kits and Custom Kits and the
optimization of the SNP-IT primer-extension tests to be used on the Affymetrix
GeneChip system. The Company and Affymetrix will share costs associated with
the development of Standard Kits. Affymetrix will market and distribute all
Generic and Standard Kits developed under the agreement, and we will market and
distribute all Custom Kits. Affymetrix has agreed to purchase, and we have
agreed to manufacture and supply, all of Affymetrix's requirements of Generic
and Standard Kits at agreed upon prices. The agreement is for an initial term
of five years and is renewable for additional one-year terms by mutual
agreement.
(12) Stock Incentive Plan
During 1995 the Company established the 1995 Stock Incentive Plan (the
"Plan"), which provides for the granting of restricted common stock or
incentive and nonqualified stock options to directors, employees and
consultants. An aggregate of 1,500,000 shares of the Company's common stock is
authorized to be issued under the Plan. The options are exercisable generally
for a period of ten years after the date of grant and generally vest over a
four-year period. The Plan provides that in the event of a change in control in
the beneficial ownership of the Company, as defined, all options may at the
discretion of the compensation committee become fully vested and exercisable
immediately prior to the change in control. The plan also specifies other terms
such as eligibility and annual limits.
F-22
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
Exercise
price
Shares per share
--------- ----------
<S> <C> <C>
Balance at December 31, 1996.......................... 10,292 $ .001
Granted............................................. 211,730 .01--.10
Exercised........................................... (4,117) .001
---------
Balance at December 31, 1997.......................... 217,905 .001--.10
Granted............................................. 418,038 .75--1.25
Exercised........................................... (1,582) 1.25
---------
Balance at December 31, 1998.......................... 634,361 .001--1.25
Granted............................................. 957,529 1.25
Exercised........................................... (35,399) .001--1.25
Cancelled........................................... (93,480) .001--1.25
---------
Balance at December 31, 1999.......................... 1,463,011 .001--1.25
=========
</TABLE>
At December 31, 1999, the Plan had the following options outstanding and
exercisable by price range, as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------- ------------------------
Range Weighted average Weighted average Number Weighted average
of exercise Number remaining exercise price of exercise price
prices of shares contractual life per share shares per share
- ----------- --------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$.001-.10 165,980 7.7 years $.01 95,269 $.01
.75 202,350 8.2 years .75 89,618 .75
1.25 1,094,681 9.6 years 1.25 102,553 1.25
--------- --------- ---- ------- ----
1,463,011 9.2 years 1.04 287,440 .68
========= ========= ==== ======= ====
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option
plan. In 1997, 1998 and 1999, certain employees of the Company were granted
options to acquire 170,130, 322,575 and 870,329 shares of common stock,
respectively. The weighted average fair values of common stock for the years
ended December 31, 1997, 1998 and 1999 were $1.26, $2.95 and $5.58 per share,
respectively. The difference between the respective exercise prices at the
grant dates and the fair value of the common stock on the dates of grant, as
determined by the Board of Directors, has been recorded as deferred
compensation ($291,700, $308,488 and $6,994,552 for 1997, 1998 and 1999,
respectively) which is being amortized on a straight-line basis to expense over
the respective vesting periods.
F-23
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Had the Company determined compensation cost for options based on the
minimum value method at the measurement date for its stock options under SFAS
No. 123, the Company's net loss allocable to common stockholders and net loss
per share allocable to common stockholders would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss allocable to common
stockholders:
As reported..................... $(9,927,760) $(11,479,479) $(72,774,291)
=========== ============ ============
Pro forma under SFAS No. 123.... $(9,932,266) $(11,484,871) $(72,974,593)
=========== ============ ============
Basic and diluted net loss per
share allocable to common
stockholders:
As reported..................... $ (27.57) $ (17.09) $ (95.87)
=========== ============ ============
Pro forma under SFAS No. 123.... $ (27.58) $ (17.10) $ (96.14)
=========== ============ ============
</TABLE>
In 1997, 1998 and 1999, the Company granted options to certain non-employees
to purchase 41,600, 95,463 and 87,200 shares of common stock, respectively.
Such options vest over a three or four year period based upon future service
requirements. The Company recorded deferred compensation of $22,862, $129,812
and $1,085,284 for 1997, 1998 and 1999, respectively, based on the fair value
at the grant date as determined using a Black-Scholes option pricing model.
Such deferred compensation is being amortized to expense using the methodology
prescribed in FASB Interpretation No. 28 over the respective vesting periods.
In accordance with EITF Issue 96-18, the amount of compensation expense to be
recorded in future periods related to the 1998 and 1999 grants is subject to
change each reporting period based upon changes in the fair value of the
Company's common stock, estimated volatility and risk free interest rate until
the non-employee completes performance under the option agreement. Additional
deferred compensation in the amount of $857,235 was recorded in 1999 related to
the remeasurement of the 1998 grants. 146,316 options subject to this treatment
remain unvested at December 31, 1999.
The per share weighted-average minimum value of the stock options granted to
employees during 1997, 1998 and 1999 was $1.71, $2.15 and $8.71 per share,
respectively, on the date of grant. The per share weighted-average fair value
of stock options granted to non-employees during 1997, 1998 and 1999 was $.79,
$2.39 and $7.34 per share, respectively, on the date of grant. Such values were
determined using the minimum value method for employees and the Black Scholes
option-pricing model for non-employees with the following weighted-average
assumptions: expected dividend yield 0%; risk free interest rate of 6.5% for
1997, 5.0% for 1998 and 5.0% for 1999; volatility is not applicable for
employees as the Company is private and 60% in 1997, 70% in 1998 and 1999 for
non-employees; and an expected option life of 7 years for employees and 10
years for non-employees.
(13) Mandatorily Redeemable Convertible Preferred Stock, Convertible Preferred
Stock and Common Stock
On December 24, 1997, the Company completed the sale of 1,101,801 shares of
Series C mandatorily redeemable convertible preferred stock ("Series C"),
through a private placement for $11.10 per share. The Company received cash
proceeds of $9,230,000 in 1997 and recorded a stock subscription receivable of
$3,000,000 at December 31, 1997, which was subsequently received in January
1998. On March 27, 1998, the Company completed the sale of 1,378,375 shares of
Series C, through a private placement, for $11.10 per share.
F-24
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
In May and June 1999, the Company issued an aggregate of $7,590,000 of
convertible subordinated term notes and warrants to purchase 381,500 shares of
the Company's common stock. The notes were to be convertible into Series E at
$6 per share, subject to adjustment, at any time at the option of the holder or
automatically upon the closing of a private placement financing with proceeds
of at least $24 million. The note bore interest at prime plus 2%. In December
1999, the principal plus accrued interest of approximately $436,000 were
automatically converted into 1,783,509 shares of Series E at a conversion price
of $4.50, the price per share in the Series E financing, in accordance with the
original conversion terms, with this combined amount being recorded as Series
E. Based upon the issuance price per share of the Series E and the conversion
not occurring until December 1999, 382,410 additional warrants are to be issued
related to these convertible subordinated term notes. All warrants have an
exercise price of $1.25 per share and are exercisable for five years. The fair
value of the originally issued and additional warrants, using a Black Scholes
option pricing model, was approximately $5,232,000 and was recorded as interest
expense in 1999 and an increase in additional paid-in capital.
In November 1999, Affymetrix paid the Company $2,250,000 in consideration
for a convertible promissory note. The note bears interest at the prime rate
plus 2%. In December 1999, on closing of the sale of Series E, the principal
and accrued interest in the amount of $2,276,537 should have automatically
converted into Series E. As the Series E was not issued, the amount is shown as
Series E to be issued at December 31, 1999. In a separate agreement, Affymetrix
granted the Company two put options to sell, under certain circumstances,
$250,000 of common stock of the Company at $9.00 per share for each put as a
means of providing additional equity financing to the Company. Neither put was
exercisable at issuance. In December 1999, the triggering event for one of the
puts occurred, however, the Company has not exercised its option as of December
31, 1999. These put options expire in December 2001. If these puts are
exercised, the proceeds will be recorded in stockholders' equity.
In December 1999, the Company completed the sale of 6,151,457 shares of the
Series E, through a private placement for aggregate net proceeds of
$31,008,818. In connection with this sale, the Company will issue five year
warrants to purchase 86,334 shares of common stock at an exercise price of
$6.00 per share. The Company recorded $753,000 of additional paid-in capital
based on the fair value of these warrants as determined using a Black-Scholes
option pricing model.
The Company has reflected $44,554,000 as a beneficial conversion feature in
the net loss allocable to common stockholders for the Series E mandatorily
redeemable preferred stock issued or issuable in exchange for cash in
accordance with EITF Issue 98-5.
The Series A and Series B are not entitled to any dividends. The Series C,
Series D and Series E shall be entitled to receive dividends if and when
declared by the Board of Directors. No dividends were declared in 1997, 1998 or
1999.
On or after December 2002 and 2004, at the request of holders of not less
than 66-2/3 percent of the then outstanding shares of Series C and Series E,
respectively, the Company is required to redeem the outstanding shares of
Series C and Series E of those requesting stockholders at $11.10 and $4.50 per
share, respectively, in three equal annual installments plus any accrued but
unpaid dividends.
The holders of Series A, Series B, Series C, and Series D are entitled to
vote that number of shares of common stock into which each respective share of
preferred stock held by such holder could be converted. Each share of Series A,
Series B, Series C, Series D and Series E is convertible into one share of
common stock, subject to adjustment, (i) at the option of the holder at any
time (prior to any redemption as noted above for the Series C and Series E) or,
(ii) automatically at the closing of a registration statement under the
F-25
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Securities Act of 1933 for the sale of the Company's common stock with a gross
offering price of at least $15 million for the Series A, Series B and Series D
and for the Series C and Series E both a gross offering price of at least $25
million and a per share price of at least $15, subject to adjustment.
Upon liquidation, dissolution or winding up of the Company, the holders of
Series B, Series C and Series E are entitled to liquidation preferences over
all other types of capital stock as follows: $19.20 per share and the Licenses
for the Series B, $11.10 per share plus an amount equal to any declared but
unpaid dividends for the Series C and $4.50 per share plus an amount equal to
any declared but unpaid dividends for the Series E. The Series A stockholder is
entitled to the license originally granted (if Sarnoff continues to own all
Series A), or its fair value in cash as consideration for the Series A shares.
The holders of Series D are entitled to a liquidation preference of $12.25 per
share plus an amount equal to any declared but unpaid dividends, after payment
in full of all amounts required to be distributed to the holders of Series A,
Series B, Series C and Series E. After these liquidation payments, holders of
the common stock and Series C and Series E would share ratably in the remaining
assets of the Company.
In 1997, the Company issued 109,333 shares of restricted common stock to an
executive officer of the Company. The shares vested over a two year period. The
deemed value of this stock was $131,766 which was recorded as deferred
compensation and was amortized to expense over the vesting period.
In 1997 and 1998, the Company issued warrants to purchase 60,000 and 25,000
shares of common stock at $11.10 and $12.25 per share, respectively, to an
executive officer of the Company. The warrants vest based upon specific
performance criteria, which were met for 70,000 warrants by December 31, 1999.
(14) Employee Benefit Plan
Effective January 1, 1999, the Company sponsors a defined contribution
401(k) savings plan (the 401(k) Plan) covering all employees of the Company.
Participants can contribute up to 15% of their pretax annual compensation to
the 401(k) Plan, subject to certain limitations. The Company matches 50% of the
participant's contribution, up to 4% of compensation. For 1999, the Company's
contributions amounted to $119,452 in accordance with the terms of the Plan.
(15) Commitments and Contingencies
The Company leases office and laboratory facilities under noncancellable
operating lease arrangements. Future minimum rental commitments required by
such leases as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 988,000
2001.............................................................. 938,000
2002.............................................................. 783,000
2003.............................................................. 695,000
2004.............................................................. 726,000
2005 and thereafter............................................... 2,904,000
----------
$7,034,000
==========
</TABLE>
Rental expense aggregated $32,518 in 1997, $276,615 in 1998 and $925,979 in
1999.
F-26
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Legal Matters
The Company is not a party to any material legal proceeding. The Company is
engaged in discussions with Motorola in an attempt to resolve certain areas of
disagreement that have arisen under the existing collaboration in the area of
microfluidics. The primary issue of disagreement between the parties relates to
whether, under the terms of the agreement with Motorola, Motorola has a right
to obtain a license to the Company's SNP-IT technology for use with Motorola's
microfluidic chips. While the Company believes that, under the terms of the
agreement, Motorola has no rights to its SNP-IT technology, there can be no
assurance that an agreement can be reached with Motorola on this issue or that
the Company would prevail if this dispute were to develop into arbitration or
litigation. Nonetheless, the Company believes that, even if it fails to
successfully resolve this issue or to prevail in any such arbitration or
litigation, it would only be obligated to grant Motorola a non-exclusive
license to use its SNP-IT technology with their microfluidic chips on terms no
less favorable than those offered to other licensees. The Company does not
believe that such a result is likely to have a material adverse affect on the
Company's business, financial condition and operating results.
Self-Insurance Reserve
GeneScreen is self-insured for the risk of loss relating to certain
litigation claims that might arise from GeneScreen's testing results. However,
due to provisions in certain service contracts, GeneScreen is insured for
claims arising from testing performed under the Texas, Ohio and Arizona
contracts. Insurance coverage began in 1995 for testing under the Texas
contract, in 1997 for testing under the Ohio and Arizona contracts and all
other contracts in August 1998. Management estimates future litigation costs
based on historical litigation experience. The accrued litigation reserve for
the self-insured risk at December 31, 1999 was $191,000.
(16) Subsequent Events
Employment agreements
Effective January 2000, we entered into three year employment agreements
with two executives of the Company. In certain cases, the Company may be
obligated to pay the executives salary and benefits for up to eighteen months
after leaving the Company.
Change in Authorized Shares
In January 2000, the Company amended its Certificate of Incorporation to
change the authorized number of shares as follows: Common stock to 30,000,000
shares and Series E convertible preferred stock to 19,000,000 shares.
Sale of Convertible Preferred Stock
In January 2000, the Company completed the sale of 5,971,903 shares of
Series E for gross proceeds of $29,573,564. The issuance of these securities
will result in a $29,573,564 beneficial conversion feature which will increase
net loss per share allocable to common stockholders in the first quarter of
2000. The fair value of the Company's common stock on the commitment date was
$11.75; however, the amount of the beneficial conversion feature was limited to
the amount of gross proceeds received from the issuance of the Series E. The
Company also issued 1,040,341 shares of Series E related to the conversion of
the Affymetrix convertible promissory note (see note 13) and for cash received
by December 31, 1999 for which shares were not issued, and which was included
in Series E to be issued at December 31, 1999.
F-27
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Stock Option Grants
In January and on February 2, 2000, the Company granted 36,500, 679,400,
40,750 and 40,750 stock options under the 2000 Employee, Director and
Consultant Stock Plan at exercise prices of $1.25, $6, $12 and at the per share
price of the offering contemplated herein, respectively, for which a
compensation charge of approximately $4.2 million will be recognized over the
respective vesting periods of the options. Some of these amounts result from
grants to consultants which are subject to remeasurement at the end of each
reporting period based upon the changes in the fair value of the common stock
until the consultant completes performance under the option agreement. In
addition, the Company issued 855,000 performance based stock options at
exercise prices of $6.00 for which compensation expense will be measured, at
the time the performance criteria is met.
Initial Public Offering
On February 11, 2000, the Board of Directors authorized the filing of a
registration statement with the SEC for the sale of shares of common stock. If
the offering is consummated under the terms presently anticipated, all shares
of Series A, B, and E stock outstanding as of the closing date of the Offering
will automatically convert into shares of common stock on a one-for-one basis.
The 2,480,176 shares outstanding of Series C will convert into 4,833,356 shares
of common stock. No dividends will be payable on any of the Series A, B, C, or
E.
Change in Authorized Shares
On February 11, 2000, the Board of Directors approved filing a restated
certificate of incorporation effective upon the closing of the offering
contemplated herein which would increase the authorized shares of common stock
to 50,000,000 shares, all existing preferred stock designations will be revoked
and 5,000,000 shares of preferred stock will be authorized. The Board of
Directors will have the authority, without any further stockholder approval to
determine the price, privileges and other terms of the shares.
2000 Employee, Director and Consultant Stock Incentive Plan
On February 11, 2000 and March 17, 2000, the Board of Directors and
stockholders approved, respectively, the 2000 Employee, Director and Consultant
Stock Incentive Plan for the issuance of common stock, incentive stock options
and non-qualified stock options to employees, directors and consultants. The
Board of Directors also authorized the granting of up to a total of 1,500,000
options under this plan and 3,500,000 under the 1995 Stock Incentive Plan.
ABS Termination
Effective February 15, 2000, the Collaborative Development and Marketing
Agreement with ABS was terminated, with Orchid paying ABS $75,000 in full and
final settlement of all amounts owed under this agreement.
NEN Agreement
On February 21, 2000, we entered into an Agreement with NEN Life Science
Products, Inc. pursuant to which NEN has agreed to supply us with terminators
for use in our SNPkits. In consideration of NEN's agreement to supply us with
terminators, we issued 125,000 shares of our common stock and have agreed to
pay NEN a certain percentage of net sales revenue based on the number of
SNPkits we sell which contain terminators, plus a percentage of net sales
revenue with respect to each SNPkit sold. The 125,000 shares had a fair value
of $1,500,000 on the date of the agreement. As the products being supplied are
used in Orchid's
F-28
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
current products and may be used in future products, the Company will defer and
amortize the fair value of the common stock over the estimated four year term
of the agreement on a straight-line basis. We are required to purchase
quantities of products with an approximate minimum value during each annual
period from the effective date as follows: first year $330,000, second year
$700,000, third year $990,000 and fourth year $1,320,000. Either party can
terminate the agreement any time after four years from the commencement date,
without cause, upon 90 days written notice.
Grant of Stock Options
On March 31, 2000, the Company granted 289,660 stock options under the Plan
at exercise prices of $12 per share for which a compensation charge of
approximately $800,000 will be recognized over the respective vesting periods
of the options. Some of these amounts result from grants to consultants which
are subject to remeasurement at the end of each reporting period based upon the
changes in the fair value of the common stock until the consultant completes
performance under the option agreement.
Sarnoff Agreement
On April 4, 2000, we entered into a binding letter of intent with Sarnoff to
terminate our Option Agreement. Under the terms of the agreement, in lieu of
future cash payment and stock issuance obligations, the Company will make a
payment to them of approximately $3 million and issue 250,000 shares of common
stock and five-year warrants to purchase 75,000 shares of common stock at the
initial public offering price. Previously on February 2, 2000, the Company
issued 100,000 shares of common stock to Sarnoff as an advance on the issuances
which would be owed for the two option fields in December 2000 under the Option
Agreement. As this licensed technology has not reached technological
feasibility and has no alternative uses, the cash payment and the fair value of
the equity securities will be charged to research and development expense.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GeneScreen, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of GeneScreen,
Inc. and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GeneScreen,
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 19, 1999
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GeneScreen, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of GeneScreen,
Inc. and subsidiaries as of December 29, 1999, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
the period from January 1, 1999 to December 29, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GeneScreen,
Inc. and subsidiaries as of December 29, 1999, and the results of their
operations and their cash flows for the period from January 1, 1999 to December
29, 1999 in conformity with generally accepted accounting principles.
KPMG LLP
Princeton, New Jersey
January 21, 2000
F-31
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and December 29, 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash .............................................. $ 1,873,302 $ 538,411
Restricted cash.................................... -- 400,000
Accounts receivable, net........................... 2,940,560 2,228,554
Laboratory materials and supplies.................. 413,792 304,938
Escrow receivable.................................. 380,000 --
Prepaid expenses and other current assets.......... 196,203 156,108
----------- -----------
Total current assets............................. 5,803,857 3,628,011
Property and equipment, net.......................... 574,637 382,563
Note receivable...................................... 3,547,821 3,547,821
Other assets......................................... 111,297 47,920
----------- -----------
Total assets..................................... $10,037,612 $ 7,606,315
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable--bank................................. $ 1,130,000 $ 1,000,000
Current portion of long-term debt.................. 1,309,714 190,352
Accounts payable................................... 1,307,540 541,226
Accrued liabilities................................ 1,197,382 1,949,135
Deferred revenue................................... 207,154 193,046
----------- -----------
Total current liabilities........................ 5,151,790 3,873,759
Long-term debt, less current portion................. 328,819 424,628
Deferred gain on sale of Molecular Tool.............. 3,927,821 3,570,646
----------- -----------
Total liabilities................................ 9,408,430 7,869,033
Stockholders' equity (deficit):
Convertible preferred stock, Series A, $.05 par
value; 350,000 shares authorized, issued and
outstanding (liquidation preference of $1,423,443
at December 29, 1999)............................. 17,500 17,500
Convertible preferred stock, Series B, $.05 par
value; 700,000 shares authorized; 691,723 shares
issued and outstanding (liquidation preference of
$2,964,630 at December 29, 1999).................. 34,586 34,586
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,620,493 and 2,804,239 shares issued
and outstanding at December 31, 1998 and December
29, 1999, respectively............................ 26,205 28,042
Additional paid-in capital......................... 7,695,716 8,896,451
Treasury stock--53 common shares, at cost.......... (22) (22)
Notes receivable--stockholders..................... (36,563) --
Accumulated deficit................................ (7,108,240) (9,239,275)
----------- -----------
Total stockholders' equity (deficit)............. 629,182 (262,718)
Commitments and contingencies........................
----------- -----------
Total liabilities and stockholders' equity
(deficit)....................................... $10,037,612 $ 7,606,315
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1998 and period
from January 1, 1999 to December 29, 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenue:
Laboratory testing.................................. $15,399,991 $13,746,615
----------- -----------
Operating expenses:
Cost of laboratory testing.......................... 12,190,514 10,054,681
General and administrative.......................... 4,953,158 5,922,537
Research and development............................ 84,843 97,909
----------- -----------
Total operating expenses.......................... 17,228,515 16,075,127
----------- -----------
Operating loss.................................... (1,828,524) (2,328,512)
Other expense:
Interest expense.................................... (208,858) (159,698)
----------- -----------
Loss from continuing operations................... (2,037,382) (2,488,210)
----------- -----------
Discontinued operations:
Loss on discontinued operations of Molecular Tool... (939,864) --
Gain on sale of Molecular Tool, net of tax.......... 2,277,476 357,175
----------- -----------
Total discontinued operations..................... 1,337,612 357,175
----------- -----------
Net loss.......................................... $ (699,770) $(2,131,035)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Year ended December 31, 1998 and period
from January 1, 1999 to December 29, 1999
<TABLE>
<CAPTION>
Convertible preferred stock
-------------------------------
Series A Series B Common stock
--------------- --------------- -----------------
Number Number Number Additional Notes
of of of paid-in Treasury receivable - Accumulated
shares Amount shares Amount shares Amount capital stock stockholders deficit Total
------- ------- ------- ------- --------- ------- ---------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1997............ 350,000 $17,500 691,723 $34,586 2,619,497 $26,195 7,695,409 (22) (85,317) (6,408,470) 1,279,881
Exercise of
common stock
options......... -- -- -- -- 996 10 307 -- -- -- 317
Cancellation of
note receivable
from
stockholder..... -- -- -- -- -- -- -- -- 48,754 -- 48,754
Net loss........ -- -- -- -- -- -- -- -- -- (699,770) (699,770)
------- ------- ------- ------- --------- ------- --------- --- ------- ---------- ----------
Balance,
December 31,
1998............ 350,000 $17,500 691,723 $34,586 2,620,493 $26,205 7,695,716 (22) (36,563) (7,108,240) 629,182
Exercise of
common stock
options......... -- -- -- -- 136,736 1,367 40,839 -- -- -- 42,206
Cancellation of
note receivable
from
stockholder..... -- -- -- -- -- -- -- -- 36,563 -- 36,563
Common stock
issued in
exchange for
consulting
services........ -- -- -- -- 47,010 470 195,562 -- -- -- 196,032
Net loss........ -- -- -- -- -- -- -- -- -- (2,131,035) (2,131,035)
Accelerated
vesting and
cashless
exercise of
common stock
options......... -- -- -- -- -- -- 964,334 -- -- -- 964,334
------- ------- ------- ------- --------- ------- --------- --- ------- ---------- ----------
Balance,
December 29,
1999............ 350,000 $17,500 691,723 $34,586 2,804,239 $28,042 8,896,451 (22) -- (9,239,275) (262,718)
======= ======= ======= ======= ========= ======= ========= === ======= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and period
from January 1, 1999 to December 29, 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (699,770) $(2,131,035)
Adjustments to reconcile net loss to net cash
provided by
(used in) in operating activities:
Gain on sale of Molecular Tool................... (2,277,476) (357,175)
Depreciation and amortization.................... 465,622 384,309
Non-cash employee compensation................... 510,959 327,750
Common stock issued in exchange for consulting
services........................................ -- 196,032
Non-cash compensation on accelerated vesting and
cashless exercise of common stock options....... -- 964,334
Loss on disposal of property and equipment....... -- 59,566
Changes in assets and liabilities:
Accounts receivable............................ (1,055,400) 712,006
Laboratory materials and supplies.............. (79,162) 108,854
Prepaid expenses and other current assets...... 63,481 56,864
Accounts payable............................... 102,954 (766,314)
Accrued liabilities............................ 595,848 751,753
Deferred revenue............................... 51,810 (14,108)
Discontinued operations items, net............. 756,969 --
----------- -----------
Net cash provided by (used in) operating
activities.................................. (1,564,165) 292,836
----------- -----------
Cash flows from investing activities:
Additions to property and equipment................ (107,632) (188,424)
Increase in restricted cash........................ -- (400,000)
Proceeds from sale of Molecular Tool............... 2,506,807 357,175
Advances to Molecular Tool......................... (277,819) --
----------- -----------
Net cash provided by investing activities.... 2,121,356 (231,249)
----------- -----------
Cash flows from financing activities:
Borrowings (net payments) under line of credit..... 130,000 (130,000)
Borrowings from stockholders....................... 863,526 --
Borrowings from Lifecodes.......................... 300,000 --
Payments on long-term obligations.................. -- (1,308,684)
Exercise of common stock options................... 317 42,206
----------- -----------
Net cash provided by (used in) financing
activities.................................. 1,293,843 (1,396,478)
----------- -----------
Net increase (decrease) in cash...................... 1,851,034 (1,334,891)
Cash at beginning of year............................ 22,268 1,873,302
----------- -----------
Cash at end of year.................................. $ 1,873,302 $ 538,411
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest......................................... $ 112,389 $ 314,164
Income taxes..................................... 38,821 245,000
=========== ===========
Supplemental disclosure of non-cash financing activi-
ties:
Notes payable issued and notes receivable cancelled
in exchange
for employee severance and settlement agreements.. $ 510,959 $ 327,750
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and December 29, 1999
(1) Summary of Significant Accounting Policies
Organization and Business Activities
GeneScreen, Inc. ("GeneScreen" or the "Company") operates genetic testing
laboratories in Dallas, Texas; Dayton, Ohio (acquired in 1992); and Sacramento,
California (acquired in 1994). GeneScreen performs paternity testing, forensic
identification testing to assist in criminal investigations and medical genetic
testing using technologies developed at the University of Texas Southwestern
Medical Center and other medical research facilities. GeneScreen's primary
sources of revenue represent paternity testing under contracts with several
state government agencies and genetic testing under grants from the National
Marrow Donor Program.
On September 11, 1998, the Company sold the assets of its Molecular Tool
("MTool") division to Orchid BioSciences, Inc. ("Orchid") (see Note 2). Prior
to this sale, MTool performed research and development activities for third
parties under contract and for its own account and developed and patented a
proprietary technology called SNP-IT primer-extension technology ("SNP-IT") for
the analysis of DNA.
GeneScreen was acquired by Orchid on December 30, 1999 (see Note 11).
Consolidated Financial Statements
The consolidated financial statements include the accounts of GeneScreen and
its wholly owned subsidiaries. Significant intercompany balances and
transactions are eliminated in consolidation.
Use of Estimates
Financial statement preparation requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Laboratory Materials and Supplies
Laboratory materials and supplies are stated at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation on equipment is
calculated on the straight-line method over the estimated useful lives of the
assets, which range from two to seven years. Leasehold improvements are
amortized straight line over the shorter of the lease term or estimated useful
life of the asset.
Financial Instruments
Financial instruments consist of cash, accounts and notes receivable,
payables and notes payable, the carrying value of which approximate their fair
values due to their short maturities or current interest rates.
Revenue Recognition
Revenue is recognized on an accrual basis at the time test results are
reported. Deferred revenue represents the unearned portion of payments received
in advance of tests being completed. Unbilled receivables represent revenue
which has been earned on completed tests which have not been billed to the
customer.
F-36
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
Research and Development and Advertising
Costs incurred for research and product development and advertising are
expensed as incurred. The results of operations for the MTool research and
development facility sold during 1998 are reported as discontinued operations
(see note 2). Advertising costs totalled $131,237 and $47,262 in 1998 and 1999,
respectively.
Stock-based Compensation
The Company accounts for its stock-based compensation to employees in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, deferred compensation is recorded on the date of
issuance or grant as the excess of the fair value of the underlying stock over
the purchase or exercise price. Any deferred compensation is amortized over the
respective vesting periods of the equity instruments, if any. The Company has
adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
which permits entities to provide pro forma net income (loss) disclosures for
stock-based compensation as if the minimum value method defined in SFAS No. 123
had been applied. As required by SFAS No. 123, transactions with non-employees
in which goods or services are the consideration received for the issuance of
equity instruments are accounted for under the fair value based method.
Income Taxes
The Company accounts for income taxes in accordance with the asset and
liability method prescribed by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using tax rates in effect for
the years in which the differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits which are not expected to be realized. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews
long-lived assets, certain identifiable intangibles and goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the
undiscounted future net cash flows expected to be generated by the asset. 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
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to dispose.
Reclassifications
Certain reclassifications have been made in the 1998 consolidated financial
statements to conform to the 1999 presentation.
(2) Discontinued Operations of Molecular Tool, Inc.
In May 1998, the Board of Directors approved a plan to sell the MTool
assets, except that the Company retained certain rights to the SNP-IT
technology of MTool to permit the Company to continue implementation of the
SNP-IT testing processes.
F-37
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
In September 1998, the MTool assets were acquired by Orchid. GeneScreen
received $2,806,807 in cash and $3,547,821 in a subordinated convertible note
receivable, and $380,000 was placed in escrow.
The escrow was to be released to GeneScreen by Orchid upon approval by
certain Federal regulatory agencies of Orchid as a valid recipient of
outstanding MTool grant funds and totaled $380,000 and $0 at December 31, 1998
and December 29, 1999. The note receivable of $3,547,821, bears interest at 6%
annually, and is due on September 11, 2008. As part of this agreement,
GeneScreen retained a lien on the existing MTool patents until settlement of
this note has occurred. This note was cancelled in the acquisition of
GeneScreen by Orchid (see note 11).
This sale resulted in a gain for the Company of $6,205,297. Of this amount,
$3,927,821, which is equal to the convertible note receivable plus the escrow,
was deferred at December 31, 1998, until the respective settlements of these
items occur. The convertible note receivable was cancelled as part of the
acquisition by Orchid (see note 11) and the escrow funds of $380,000 were
received in 1999 and $357,175 was recorded as a gain, net of tax.
The accompanying consolidated financial statements include the Company's
investment in MTool on the equity basis and MTool's operations as discontinued
operations. The Company's investment, on the equity basis, in the net assets of
MTool at the time of the sale on September 11, 1998 was determined as follows:
<TABLE>
<S> <C>
Current assets.................................................... $ 156,858
Property and equipment............................................ 69,402
Intangible assets................................................. 399,919
Liabilities (reduced by $1,335 in cash)........................... (396,848)
---------
Basis in MTool assets............................................. $ 229,331
=========
</TABLE>
Revenue and expenses for the MTool research and development facility for the
period from January 1, 1998 to September 11, 1998, are as follows:
<TABLE>
<S> <C>
Research and development revenue................................ $ 567,989
Operating expenses:
Cost of revenue............................................... 666,174
General and administrative.................................... 490,539
Patent legal fees............................................. 218,572
Depreciation and amortization................................. 199,421
----------
Total operating expenses...................................... 1,574,706
Other income.................................................... 66,853
----------
Net loss...................................................... $ (939,864)
==========
</TABLE>
Interest expense was not allocated to these discontinued operations.
F-38
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
(3) Accounts Receivable and Credit Risks
Accounts receivable at December 31, 1998 and December 29, 1999, consist of
the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Billed trade receivables.............................. $2,130,827 $1,615,315
Unbilled trade receivables............................ 914,926 831,705
---------- ----------
3,045,753 2,447,020
Less allowance for doubtful accounts.................. 105,193 218,466
---------- ----------
Accounts receivable, net............................ $2,940,560 $2,228,554
========== ==========
</TABLE>
GeneScreen's accounts receivable are primarily composed of amounts owed by
government agencies. GeneScreen performs periodic credit evaluations of its
customers' financial condition and generally does not require a deposit from
government agencies or private institutions. GeneScreen believes private pay
accounts for paternity testing represent the most significant credit risk and
generally requires a deposit for all or a portion of the services to be
rendered. Credit losses have consistently been within management's estimates.
(4) Property and Equipment
Property and equipment at December 31, 1998 and December 29, 1999 consist of
the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Laboratory and office equipment....................... $1,972,554 $1,950,268
Leasehold improvements................................ 151,955 151,955
---------- ----------
2,124,509 2,102,223
Less accumulated depreciation and amortization........ 1,549,872 1,719,660
---------- ----------
$ 574,637 $ 382,563
========== ==========
</TABLE>
(5) Credit Facility and Debt
On November 30, 1999, the Company amended its revolving credit agreement.
Borrowings are available under this agreement for up to $1,000,000. The note
bears interest at prime plus 2% (10.5% at December 29, 1999) payable monthly,
and is collateralized by $400,000 of pledged cash and cash equivalents on
deposit at the financial institution until the loan is repaid. The note is also
secured by the tangible and intangible assets of the Company. The Company had
outstanding borrowings under its revolving credit agreement of $1,130,000 and
$1,000,000 at December 31, 1998 and December 29, 1999, respectively. On January
20, 2000, the $1,000,000 was repaid.
F-39
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
Long-term debt at December 31, 1998 and December 29, 1999, consist of the
following:
<TABLE>
<CAPTION>
1998 1999
--------- --------
<S> <C> <C>
Note payable to former employee, due in 16 quarterly
installments of $27,932, commencing January 1, 1999,
and one lump-sum payment of $51,013, due January 1,
1999, net of unamortized discount of $39,583 and
$23,030 at December 31, 1998 and December 29, 1999,
respectively.......................................... $ 458,342 $312,154
Note payable to employee, due in 12 quarterly
installments of $25,514, commencing January 1, 2000,
net of unamortized discount of $21,037 at December 29,
1999.................................................. -- 285,131
Note payable to stockholders due April 30, 1999,
bearing interest at 18%............................... 863,526 --
Note payable to Lifecodes Corporation, due February 28,
1999, bearing interest at prime rate.................. 300,000 --
Other.................................................. 16,665 17,695
--------- --------
1,638,533 614,980
Less current portion................................... 1,309,714 190,352
--------- --------
Long-term debt, less current portion................. $ 328,819 $424,628
========= ========
</TABLE>
(6) Accrued Liabilities
Accrued liabilities at December 31, 1998 and December 29, 1999 consist of
the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Employee compensation................................. $ 239,597 $ 42,913
Professional fees for transaction with Orchid......... -- 529,375
Self-insurance reserve................................ 125,211 191,000
Royalties on licensed technology...................... 114,769 906,107
State income taxes payable............................ 300,000 30,226
Other................................................. 417,805 249,514
---------- ----------
$1,197,382 $1,949,135
========== ==========
</TABLE>
(7) Income Taxes
As of December 29, 1999, the Company has approximately $5,074,000 of Federal
and $2,261,000 of state net operating loss ("NOL") carryforwards available to
offset future taxable income. The Federal and state NOL carryforwards will
begin expiring in 2003 and 2002, respectively, if not utilized.
The Tax Reform Act of 1986 ("the Act") provides for a limitation on the
annual use of NOL carryforwards (following certain ownership changes, as
defined by the Act) which could significantly limit the Company's ability to
utilize these carryforwards. The Company has experienced various ownership
changes, as defined by the Act, as a result of past financings and the
acquisition by Orchid (see note 11). Accordingly, the Company's ability to
utilize the aforementioned carryforwards may be limited. Additionally, because
U.S. tax laws limit the time during which these carryforwards may be applied
against future taxes, the Company may not be able to take full advantage of
these attributes for Federal income tax purposes.
F-40
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities, consist of the following
at December 31, 1998 and December 29, 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Current:
Allowances and accruals, not currently
deductible.................................... $ 190,884 $ 165,862
Less valuation allowance....................... (190,884) (165,862)
----------- -----------
$ -- $ --
=========== ===========
Long-term:
Net operating loss carryforward................ 899,251 2,033,358
Depreciation and amortization, not currently
deductible.................................... 384,967 164,254
Allowances and accruals, not currently
deductible.................................... 10,888 199,511
Deferred gain on sale of MTool, currently
taxable....................................... 847,695 434,353
Other.......................................... (29,093) (13,991)
----------- -----------
2,113,708 2,817,485
Less valuation allowance....................... (2,113,708) (2,817,485)
----------- -----------
Net deferred taxes........................... $ -- $ --
=========== ===========
</TABLE>
At December 29, 1999, a valuation of allowance of $2,983,347 has been
recognized to fully offset the deferred tax assets as it is more likely than
not that these assets will not be realized. The change in the valuation
allowance in 1998 and 1999 were increases of $504,253 and $678,755,
respectively, related primarily to additional net operating losses incurred by
the Company.
(8) Stockholders' Equity (Deficit)
Preferred Stock
The Company is authorized to issue a total of 5,000,000 shares of various
series of preferred stock. The Series A and Series B preferred stocks are
convertible into common stock on a 1-for-1 basis, subject to adjustment for
dilution, are entitled to vote with common stock on the basis of common shares
into which they are convertible, and provide for noncumulative annual dividends
at rates of $.20 and $.26 per share, respectively, when and if declared.
The Series A and Series B preferred stocks may be redeemed in whole or in
part, at the Company's option, at any time beginning after March 31, 1999 and
January 31, 2003, respectively. The per share redemption price for Series A is
$2.50 plus approximately $.20 for each year outstanding since February 1992.
The per share redemption price for Series B is $3.28 plus approximately $.02
for each month outstanding since February 1996. For both series, the
liquidation value is computed in the same manner as the redemption price. The
Series A and Series B preferred stocks have a liquidation preference over
common stock.
All shares of the Series A and Series B preferred stocks will automatically
convert to common stock upon the sale of the Company's common stock in a public
offering, subject to certain offering criteria. At December 29, 1999, the
Company has reserved approximately 1,050,000 shares of common stock for
issuance upon conversion of all preferred stock (see note 11).
F-41
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
Common Stock
During 1999, a member of GeneScreen's Board of Directors provided
consulting services to the Company in exchange for total consideration of
$289,277, consisting of $93,245 in cash and 47,010 shares of common stock
valued at $196,032.
Notes Receivable from Stockholders
Warrants to purchase 50,000 shares of common stock at $2.50 per share were
exercised by two employees in 1996 in exchange for notes receivables totaling
$125,000, which were shown as a reduction of stockholders' equity. During
1997, the Company received payments of $39,683. In 1998, $48,754 was canceled
pursuant to the severance agreement with one of the employees. During 1999,
the remaining outstanding balance of $36,563 was cancelled pursuant to the
settlement agreement with the other employee (see note 10).
(9) Stock Option Plan
Under the Stock Option Plan (the "Plan"), options to purchase up to 686,667
shares of common stock may be granted to certain key employees and officers of
the Company. Options are exercisable immediately and expire no later than ten
years from the date of grant. The Board may determine the individuals to whom
and the time at which options shall be granted and the number of shares of
common stock covered by each option. The exercise price per share will be
determined by the Board but may not be less than 85% of the fair value of the
common stock on the date of grant. Common stock issued related to the options
is subject to repurchase by GeneScreen upon termination of employment. The
percentage of stock eligible for repurchase will decrease ratably over a
period varying from three to five years from the date of grant. Options for
stock no longer eligible for repurchase are considered fully vested (see note
11).
The following is a summary of the Plan's activity for the periods shown:
<TABLE>
<CAPTION>
Weighted average
exercise price
Number of shares per share
-------------------- -----------------
1998 1999 1998 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period........................... 577,677 511,079 $ .45 $ .41
Granted......................... 40,000 172,500 .80 .80
Exercised....................... (996) (136,736) .32 .31
Terminated...................... (105,602) (22,396) .79 .59
--------- ---------
Options outstanding, end of
period........................... 511,079 524,447 .41 .55
========= =========
</TABLE>
The following table summarizes information for options outstanding and
vested at December 29, 1999:
<TABLE>
<CAPTION>
Options outstanding Options vested
---------------------------------------- ------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number of contractual exercise Number of exercise
prices shares life price shares price
-------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$.12 167,747 1.7 $.12 167,747 $.12
.25 20,000 2.5 .25 20,000 .25
.50 14,600 4.0 .50 14,600 .50
.80 322,100 7.9 .80 107,075 .80
------- -------
524,447 5.6 .55 309,422 .38
======= =======
</TABLE>
F-42
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
Immediately prior to Orchid's acquisition of the Company, all unvested stock
options were subject to accelerated vesting and all outstanding options were
exercised (on a cashless basis) for shares of GeneScreen common stock,
resulting in compensation expense of $964,334, which is reflected in the
consolidated statements of operations for 1999.
The Company applies the provisions of APB No. 25 and related interpretations
in accounting for its stock option plan. No compensation cost has been
recognized for its stock option plan, since the fair market value of the common
stock at the date of grant was not in excess of the option exercise price. Had
compensation cost for the Company's stock option plan been determined based on
the minimum value of the options at the grant dates consistent with the method
prescribed by SFAS No. 123, the Company's pro forma net loss would have been
$702,693 and $2,170,710 in 1998 and 1999, respectively.
In the pro forma calculations, the weighted average minimum value of options
granted in 1998 and 1999 was estimated at $.21 and $.23, respectively. The
minimum value of each option grant is estimated on the date of grant using the
minimum value method with the following weighted average assumptions used for
grants in 1998 and 1999: risk free interest rate of 5.1% and 5.6% in 1998 and
1999, respectively; expected lives of six years; no dividend yield; and no
expected volatility (because the Company's stock is not publicly traded).
(10) Commitments and Contingencies
Leases
The Company leases its facilities under noncancellable operating leases with
options to renew. Future minimum rental payments as of December 29, 1999, are
as follows:
<TABLE>
<S> <C>
2000................................................................ $292,527
2001................................................................ 242,984
2002................................................................ 87,861
--------
$623,372
========
</TABLE>
Rent expense in 1998 and 1999 was $295,258 and $322,270, respectively.
Self-Insurance Reserve
The Company is self-insured for the risk of loss relating to certain
litigation claims that might arise from the Company's testing results. However,
due to provisions in certain service contracts, the Company is insured for
claims arising from testing performed under the Texas, Ohio and Arizona
contracts. Insurance coverage began in 1995 for testing under the Texas
contract, in 1997 for testing under the Ohio and Arizona contracts and all
other contracts in August 1998. Management estimates future litigation costs
based on historical litigation experience. The accrued litigation reserve for
the self-insured risk at December 31, 1998 and December 29, 1999 was $125,211
and $191,000, respectively.
Employment Contracts
Under a 1992 employment contract, the Company was contingently liable to one
individual through December 31, 2001, for minimum payments in the event of
involuntary termination or death of this individual. In 1999, the Company
agreed to a settlement agreement with the employee with a net cost of $327,750,
which
F-43
<PAGE>
GENESCREEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and December 29, 1999
includes cancellation of a note receivable from the employee for $36,563 plus
accrued interest of $6,056 (see note 8). The settlement is payable in quarterly
installments over three years, the total of which has been recorded at a
discounted amount of $285,131 plus interest of $21,037 (see note 5).
Until 1998, the Company was contingently liable to another employee under
similar contract conditions. This employee retired effective December 31, 1998,
and the Company agreed to a total severance cost of $550,542, which is payable
as follows: cancellation of a note receivable due from the employee for $48,754
plus accrued interest of $3,863 (see note 8) and payment of the balance of his
contract in quarterly installments over four years, the total of which has been
recorded at a discounted amount of $458,342 plus interest of $39,583 (see note
5).
(11) Acquisition of GeneScreen by Orchid
On December 30, 1999, Orchid acquired all of the outstanding shares of
common and preferred stock of GeneScreen in exchange for consideration
consisting primarily of 4,000,000 shares of Orchid Series E convertible
preferred stock ("Series E") (see note 9) with a stated value of $4.50 per
share. The Company estimates that approximately $400,000 will be paid in lieu
of issuing Series E shares to satisfy certain regulatory requirements and
eliminate fractional shares. This equates to approximately 88,889 shares of
Series E, which are not expected to be issued. Also, as part of the
acquisition, the note receivable from Orchid of $3,547,821 was cancelled.
GeneScreen incurred costs totaling $902,490 for fees to outside advisors
related to this transaction which are included in general and administrative
expenses in the 1999 consolidated statements of operations. Amounts included in
the accompanying consolidated financial statements are stated on a historical
cost basis and do not reflect any fair value adjustments which might result
from the application of purchase accounting as a result of the acquisition of
the Company by Orchid.
F-44
<PAGE>
[Inside back cover contains a description of our strategy including our goals
of rapid commercialization, sustained competitive advantage, market extension
and proprietary SNP Value Creation.
Right-hand side of page contains photographs of the following: our SNPstream
instrument, our SNPstream kit, a patient with a health care provider, capsules,
a graphic illustration of our proposed MegaSNPatron facility, and our Orchid
logo.
Text on left-hand side of page:
Title: Orchid's strategy
Top caption: Orchid's SNP-IT(TM) technology is designed to reveal valuable
associations between medically important attributes and SNPs in raw genetic
samples. We believe an understanding of these associations may lead to
improvements in pharmaceuticals and diagnostics.
Bottom caption: Orchid BioSciences intends to lead the development and
commercialization of genetic diversity technologies to address unmet medical
and industrial needs.]
<PAGE>
[logo of ORCHID BIOSCIENCES]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the estimated underwriting discounts
and commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 31,574
NASD filing fee............................................... 12,460
Nasdaq National Market listing fee............................ 26,625
Blue Sky fees and expenses.................................... 10,000
Transfer Agent and Registrar fees............................. 10,000
Accounting fees and expenses.................................. 325,000
Legal fees and expenses....................................... 400,000
Printing and mailing expenses................................. 300,000
Miscellaneous................................................. 6,000
----------
Total....................................................... $1,121,659
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
II-1
<PAGE>
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive,
and provides that in the event that the Delaware General Corporation Law is
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the fullest extent permitted by such
law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, in any criminal proceeding, if such
person had no reasonable cause to believe his conduct was unlawful; provided
that, in the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the corporation unless and only
to the extent that the adjudicating court determines that such indemnification
is proper under the circumstances.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1 hereto.
Item 15. Recent Sales of Unregistered Securities
Set forth in chronological order is information regarding shares of common
stock issued, options granted and warrants granted by the Registrant in the
three years preceding the filing of this Registration Statement. Further
included is the consideration, if any, received by the Registrant for such
shares and options and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration was claimed.
A. Certain Stock Option Grants
The Registrant from time to time has granted stock options to employees and
consultants in reliance upon exemption from registration pursuant to either (1)
Section 4(2) of the Securities Act of 1933 or (2) Rule 701 promulgated under
the Securities Act of 1933. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
April 1, 1997 to March 31, 1998............................. 301,030 $ .30
April 1, 1998 to March 31, 1999, May-Aug 98 $.75/share...... 364,088 $1.12
April 1, 1999 to March 31, 2000............................. 1,736,579 $3.96
</TABLE>
B. Issuances of capital stock
1. In December 1997, we entered into a License and Option Agreement with
Sarnoff Corporation, a five percent beneficial stockholder, under which we
received a license under certain technology to research, develop and sell
products and services in the field of combinatorial chemistry and in vitro
diagnostics and options to obtain exclusive licenses for the use of technology
in four designated areas of microfluidics. In consideration of grant of those
licenses, we issued Sarnoff 82,500 shares of our common stock and 167,500
shares of our Series A convertible preferred stock. Concurrent with the
exercise of each option, we are obligated to issue Sarnoff 33,300 shares of our
common stock and 66,700 shares of our Series A convertible preferred stock and
to fund research to be performed by Sarnoff in an amount as defined in the
agreement, but no less than $5.5 million in the aggregate. We exercised one
option in each of December 1998 and 1999. In consideration of the exercise of
each option, we issued Sarnoff 33,300 shares of our common stock and 66,700
shares of our Series A convertible preferred stock in 1998 and in 1999. In
connection with this agreement we also issued SmithKline Beecham an aggregate
of 75,000 shares of our common stock.
II-2
<PAGE>
2. From December 23, 1997 through March 27, 1998, we sold approximately
2,480,176 shares of our Series C convertible preferred stock in a private
placement to sixteen accredited investors for an aggregate purchase price of
$27,500,000.
3. On April 1, 1998, in partial consideration of the execution of a License
Agreement with Dynal A.S., we issued 90,090 shares of our common stock to
Dynal.
4. On December 31, 1999, in connection with the achievement of a milestone
under the Development and License Agreement August 1995, with SmithKline
Beecham, we issued SmithKline Beecham an aggregate of 35,200 shares of our
Series B convertible preferred stock.
5. On December 10, 1998, in connection with the exercise of options under
our License and Option Agreement with Sarnoff Corporation, we issued Sarnoff an
aggregate of 33,300 shares of our common stock and 66,700 shares of our Series
A convertible preferred stock. In connection with the exercise of one of the
options under this agreement, we also issued SmithKline Beecham an aggregate of
5,000 shares of our common stock.
6. In June 1999, we consummated a bridge financing in which we issued
subordinated convertible term notes in the aggregate principal amount of
$7,590,000 and warrants to purchase 381,500 shares of our common stock to
twelve accredited investors. The aggregate principal amount of these notes, and
all accrued interest thereon, automatically converted into 1,916,849 shares of
our Series E convertible preferred stock in December 1999.
7. On November 5, 1999, we consummated a bridge financing in which we issued
a senior convertible promissory note in the original principal amount of
$2,250,000 to Affymetrix, Inc. The aggregate principal amount of this note, and
all accrued interest thereon, was automatically converted into 505,897 shares
of our Series E convertible preferred stock in January 2000. In connection with
the closing of this bridge financing, Affymetrix granted us two put options to
require Affymetrix to purchase an aggregate of approximately 55,555 shares of
common stock at a purchase price of $9.00 per share. The put options are
exercisable by us upon the occurrence of certain triggering events and expire,
if not exercised, on the second anniversary of their issuance.
8. On December 10, 1999, in connection with the exercise of certain options
under our License and Option Agreement with Sarnoff Corporation, we issued
Sarnoff an aggregate of 83,300 shares of our common stock and 66,700 shares of
our Series A convertible preferred stock. In connection with the agreement, we
also issued SmithKline Beecham an aggregate of 5,000 shares of our Series B
convertible preferred stock.
9. On December 22, 1999, in connection with the consummation of the Series E
private placement and pursuant to the terms of the June 1999 bridge financing,
we issued the investors in the bridge financing additional warrants to purchase
382,410 shares of our common stock.
10. From December 22, 1999 through January 27, 2000, we sold an aggregate of
19,000,000 shares of our Series E convertible preferred stock in a private
placement to 147 investors at an aggregate purchase price of $85,500,000.
11. On February 2, 2000, we issued Sarnoff Corporation an aggregate of
100,000 shares of our common stock as an advance of shares to be owed in the
future under the License and Option Agreement with Sarnoff.
12. On March 31, 2000, in partial consideration of the execution of our
Agreement for the License and Supply of Terminators with NEN Life Science
Products, Inc., we issued NEN and its affiliate an aggregate of 125,000 shares
of our common stock.
The issuances of securities described in Part A were deemed to be exempt
from registration under the Securities Act by virtue of Rule 701 promulgated
thereunder as transactions pursuant to a written employee compensatory benefit
plan approved by the registrant's board of directors.
II-3
<PAGE>
The issuances of securities described in Items 1 through 9 of Part B were
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2), Regulation D or Regulation S promulgated thereunder. The
recipients represented their intention to acquire the securities for investment
purposes only and not with a view to the distribution thereof. Appropriate
legends are affixed to the stock certificates issued in such transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
* 1 Form of Underwriting Agreement
#3.1 Certificate of Incorporation of the Registrant
3.2 Restated Certificate of Incorporation of the Registrant, to be
effective upon the closing of this offering
#3.3 Bylaws of the Registrant
3.4 Amended and Restated Bylaws of the Registrant, to be effective
upon the closing of this offering
* 4.1 Specimen certificate for shares of common stock
5 Form of opinion of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo,
P.C.
#10.1 1995 Stock Incentive Plan, as amended, including form of stock
option certificate for incentive and non-statutory stock options
10.2 2000 Employee, Director, Consultant Stock Plan, including form of
stock option agreement for non-statutory and incentive stock
options
10.3 Executive Benefit Program, including Executive Deferred
Compensation Plan Executive and Severance Plan
#10.4 Lease Agreement between College Road Associates, Limited
Partnership and the Registrant, dated March 6, 1998
#+10.5 Collaboration Agreement, by and between the Registrant and
Affymetrix, Inc., dated
November 5, 1999, as amended by Amendment No. 1 dated November 12,
1999
#+10.6 License and Option Agreement, dated December 10, 1997, between
Sarnoff Corporation and the Registrant
10.7 Employment Agreement, effective as of January 1, 2000, by and
between the Registrant and Dale R. Pfost, Ph.D.
10.8 Employment Agreement, effective as of January 1, 2000 by and
between the Registrant and Donald R. Marvin
+10.9 Agreement for the License and Supply of Terminators, dated
February 16, 2000 between the Registrant and NEN Life Science
Products, Inc.
#21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C.
(included in Exhibit 5)
24 Power of Attorney (see page II-6)
27 Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment
+ Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Act, filed on
February 18, 2000 and on April 7, 2000
# Previously filed
II-4
<PAGE>
(b) Financial Statement Schedules
All schedules are omitted because they are not required, are not
applicable or the information is included in financial statements or
notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Amended and Restated
Certificate of Incorporation of the Registrant and the laws of the State of
Delaware, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Princeton, New Jersey, on this 10th
day of April, 2000.
Orchid BioSciences, Inc.
/s/ Dale R. Pfost
By:__________________________________
Dale R. Pfost,
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dale R. Pfost, Ph.D. President, Chief Executive April 10, 2000
______________________________________ Officer and Director
Dale R. Pfost, Ph.D. (principal executive
officer)
/s/ Donald R. Marvin Senior Vice President, April 10, 2000
______________________________________ Chief Operating Officer
Donald R. Marvin and Chief Financial
Officer (principal
financial and accounting
officer)
* Director April 10, 2000
______________________________________
Sidney M. Hecht, Ph.D.
* Director April 10, 2000
______________________________________
Samuel D. Isaly
* Director April 10, 2000
______________________________________
Jeremy M. Levin, D.Phil., MB.BChir.
* Director April 10, 2000
______________________________________
Anne M. VanLent
* Director April 10, 2000
______________________________________
Robert M. Tien, M.D., M.P.H.
Director
______________________________________
Ernest Mario, Ph.D.
Director
______________________________________
George Poste, DVM, Ph.D.
</TABLE>
* By executing his name hereto on April 10, 2000, Dale R. Pfost is signing
this document on behalf of the persons indicated above pursuant to powers of
attorney duly executed by such persons and filed with the Securities and
Exchange Commission.
/s/ Dale R. Pfost, Ph.D.
By: _____________________________
Dale R. Pfost, Ph.D.
Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
* 1 Form of Underwriting Agreement
#3.1 Certificate of Incorporation of the Registrant
3.2 Restated Certificate of Incorporation of the Registrant, to be
effective upon the closing of this offering
#3.3 Bylaws of the Registrant
3.4 Amended and Restated Bylaws of the Registrant, to be effective
upon the closing of this offering
* 4.1 Specimen certificate for shares of common stock
5 Form of Opinion of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo,
P.C.
#10.1 1995 Stock Incentive Plan, as amended, including form of stock
option certificate for incentive and non-statutory stock options
10.2 2000 Employee, Director, Consultant Stock Plan, including form of
stock option agreement for non-statutory and incentive stock
options
10.3 Executive Benefit Program, including Executive Deferred
Compensation Plan Executive and Severance Plan
#10.4 Lease Agreement between College Road Associates, Limited
Partnership and the Registrant, dated March 6, 1998
#+10.5 Collaboration Agreement, by and between the Registrant and
Affymetrix, Inc., dated
November 5, 1999, as amended by Amendment No. 1 dated November 12,
1999
#+10.6 License and Option Agreement, dated December 10, 1997, between
Sarnoff Corporation and the Registrant
10.7 Employment Agreement, effective as of January 1, 2000, by and
between the Registrant and Dale R. Pfost, Ph.D.
10.8 Employment Agreement, effective as of January 1, 2000 by and
between the Registrant and Donald R. Marvin
+10.9 Agreement for the License and Supply of Terminators, dated
February 16, 2000 between the Registrant and NEN Life Science
Products, Inc.
#21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C.
(included in Exhibit 5)
24 Power of Attorney (see page II-6)
27 Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment
+ Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Act, filed on
February 18, 2000 and on April 7, 2000
# Previously filed
