<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 2000
REGISTRATION NO. 333-45086
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------
DOUBLETWIST, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3175560
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
DOUBLETWIST, INC.
1999 HARRISON STREET, SUITE 1100
OAKLAND, CA 94612
(510) 628-0100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
JOHN D. COUCH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DOUBLETWIST, INC.
1999 HARRISON STREET, SUITE 1100
OAKLAND, CA 94612
(510) 628-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
STEPHEN C. FERRUOLO, ESQ. BRUCE CZACHOR, ESQ.
HELLER EHRMAN WHITE & MCAULIFFE LLP SHEARMAN & STERLING
4250 EXECUTIVE SQUARE, 7TH FLOOR 1550 EL CAMINO REAL, SUITE 100
LA JOLLA, CA 92037 MENLO PARK, CA 94025
(858) 450-8400 (650) 330-2200
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common stock, $0.01 par
value..................... 5,750,000 $15.00 $86,250,000 $22,770
</TABLE>
(1) Includes 750,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Amount previously paid.
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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 AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 13, 2000
PROSPECTUS
5,000,000 SHARES
[COMPANY LOGO]
COMMON STOCK
------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
5,000,000 shares. No public market currently exists for our shares. We
anticipate that the initial public offering price will be between $13.00 and
$15.00 per share. We have applied to have our common stock quoted on the Nasdaq
National Market under the symbol "DBLT."
INVESTING IN OUR SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 7.
<TABLE>
<CAPTION>
Per
Share Total
--------- ---------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to DoubleTwist................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to an aggregate
of 750,000 additional shares of common stock to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 2000.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS
a division of National Financial
Services LLC
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Special Note Regarding Forward-Looking
Statements............................ 18
Use of Proceeds......................... 19
Dividend Policy......................... 19
Capitalization.......................... 20
Dilution................................ 21
Selected Consolidated Financial Data.... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 24
</TABLE>
<TABLE>
Business................................ 32
Management.............................. 47
<CAPTION>
PAGE
--------
<S> <C>
Related Party Transactions.............. 57
Principal Stockholders.................. 59
Description of Capital Stock............ 62
Shares Eligible for Future Sale......... 65
Underwriting............................ 67
Legal Matters........................... 70
Experts................................. 70
Where You Can Find Additional
Information........................... 70
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
------------------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE
BUYING SHARES IN THE OFFERING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY.
DOUBLETWIST, INC.
We are a leading provider of genomic information and bioinformatics tools to
the life sciences industry. Our mission is to empower life scientists by
simplifying and accelerating genomic research. Our customers include
pharmaceutical and biotechnology companies and research institutions, such as
Bristol-Myers Squibb Company, Merck & Co., Inc., Chiron Corporation, Genaissance
Pharmaceuticals, Inc., Affymetrix, Inc., Hitachi, Ltd., E.I. du Pont de Nemours
and Company, Monsanto Company, Grupo Estudios Multicentricos en Argentina (GEMA)
and R.W. Johnson Pharmaceutical Research Institute.
INDUSTRY BACKGROUND
Advances in understanding the role of genes in human health and new
technologies for interpreting genomic information are expected to improve
medical treatment by facilitating the development of drugs that target the
biological roots of disease. As a first step in determining the role of genes in
health and disease, several public and private organizations are engaged in
generating large amounts of genomic information by decoding the sequence of
nucleotides, chemical subunits of genetic material, in the genomes of a number
of organisms, including the human genome. One of the most prominent endeavors in
genomic research is the Human Genome Project, an international research effort
designed to determine the complete sequence of the human genome and discover all
human genes. The sequencing process and associated research have generated an
enormous amount of raw data. Identifying and predicting the function of genes
within this raw sequence data is critical to discovering potential new drugs and
developing technologies for identifying diseases and other conditions.
Bioinformatics, the application of information technology to the life
sciences industry, has become a crucial technology for managing and analyzing
genomic information and for accelerating the drug discovery process.
INDUSTRY CHALLENGES
The life sciences industry faces significant challenges before it can
capitalize on the enormous amounts of data generated by the Human Genome Project
and similar efforts. These challenges include:
- a rapidly growing amount of genomic information, which often contains
errors, is often unorganized, incomplete and poorly annotated, and has no
single point of access;
- difficulty integrating the growing amount of public data with proprietary
or licensed data in a secure environment; and
- scarce bioinformatics specialists and the lack of easy-to-use analysis
tools for the life scientist.
We believe there is a significant market need for an advanced,
cost-effective bioinformatics research environment that integrates multiple
sources of data, and which life scientists can securely access and easily use.
OUR SOLUTION
We provide a powerful, secure and comprehensive online research environment,
which includes genomic information and bioinformatics tools. We enable the life
scientist to perform sophisticated genomic analysis without requiring
bioinformatics expertise. Our research environment is accessible by subscription
through our secure Web site, and we also license components of our research
environment for use on a customer's internal computer network.
3
<PAGE>
OUR PRODUCTS
We currently offer the following products:
- DOUBLETWIST.COM. Launched in January 2000, DoubleTwist.com is our
powerful, secure and comprehensive online research environment that
integrates more than 25 disparate genomic databases and enables users to
analyze genomic information and store analysis results using Web-based
tools. Subscribers to DoubleTwist.com receive access to intelligent and
automated analysis tools, recommended products, resources and advanced,
interactive software for the visualization of their research results.
- PROPHECY. Launched in June 2000, Prophecy is our proprietary Annotated
Human Genome Database and associated software for data interpretation and
visualization, designed to be used on a customer's internal computer
network. Prophecy provides customers with an extensively annotated
database of human genomic DNA sequences that enables users to identify
genes, examine gene structure and predict gene function.
- GENEFOREST. Launched in August 2000, GeneForest is our proprietary
Annotated Human Gene Index and associated software for data interpretation
and visualization, designed to be used on a customer's internal computer
network. GeneForest contains a concise, annotated database of expressed
sequences that can be used to identify potential full-length genes and
their variants.
- CLUSTERING AND ALIGNMENT TOOLS (CAT). Launched in October 1998, CAT is our
proprietary software product for processing and analyzing large genetic
sequence databases. CAT is designed to enable customers to more rapidly
assemble gene fragments into full-length sequences and to identify gene
variants. CAT is used in the development of our gene index databases,
which are available through DoubleTwist.com and GeneForest.
Each of our products is designed to cost-effectively improve life science
research productivity and capability within pharmaceutical and biotechnology
companies and academic institutions.
OUR STRATEGY
Our goal is to provide the leading research environment for genomic
information and bioinformatics analysis. Key elements of our strategy include:
- creating a comprehensive research environment that empowers life
scientists by simplifying and accelerating genomic research;
- enhancing the functionality of our products by adding more tools and
resources;
- enhancing the value of our products by aggregating third-party data and
allowing for the integration of customer data;
- remaining a neutral source for genomic information and analysis by not
developing drugs or securing rights to drug targets;
- continuing to computationally generate proprietary genomic data; and
- rapidly building our customer base and expanding our product line into new
markets by expanding our sales and marketing efforts.
We have incurred substantial operating losses and used substantial cash to
support our operations in each year since our inception. As of June 30, 2000, we
had an accumulated deficit of $45.6 million. In the nine months ending
September 30, 2000, 72% of our revenues was derived from licensing fees. Our
business model is new and unproven, and we cannot be sure that it will be
successful or that we will ever be able to generate any profits.
4
<PAGE>
THE OFFERING
Unless otherwise indicated, the information in this prospectus assumes the
sale of our Series E convertible preferred stock in July 2000, a four-to-one
reverse stock split of our capital stock to be effected prior to the closing of
this offering, the conversion of each outstanding share of our preferred stock
into one share of our common stock upon the closing of this offering and no
exercise of the underwriters' over-allotment option.
<TABLE>
<S> <C>
Common stock offered by us................... 5,000,000 shares
Common stock to be outstanding after the
offering................................... 24,211,625 shares
Proposed Nasdaq National Market symbol....... DBLT
Use of proceeds.............................. To enhance our existing products and develop
new products, expand our sales and marketing
activities and for general corporate
purposes, including working capital,
technology enhancements and possible
acquisitions of, or investments in,
companies, technologies or assets that
complement our business.
</TABLE>
------------------------
The outstanding share information is based on 19,211,625 shares outstanding
as of September 30, 2000 and excludes the following:
- 3,172,163 shares of common stock issuable upon exercise of stock options
at a weighted average exercise price of $2.16 per share;
- 569,577 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $1.95 per share;
- 214,906 shares of common stock available for issuance under our 1996
Equity Incentive Plan;
- 1,000,000 shares of common stock available for issuance under our 2000
Stock Plan, subject to the effectiveness of the registration statement of
which this prospectus is a part; and
- 400,000 shares of common stock available for issuance under our 2000
Employee Stock Purchase Plan, subject to the effectiveness of the
registration statement of which this prospectus is a part.
------------------------
We were incorporated in California in January 1993 as Pangea Systems, Inc.
In December 1999, we changed our name to DoubleTwist, Inc. In June 2000, we
reincorporated in Delaware. Our principal executive offices are located at 1999
Harrison Street, Suite 1100, Oakland, California 94612, and our telephone number
at that location is (510) 628-0100. Our Web site is located at
WWW.DOUBLETWIST.COM. The information contained on our Web site is not part of
this prospectus.
DoubleTwist and DoubleTwist.com are our trademarks, and we have filed
trademark applications for Prophecy and GeneForest. Other trademarks,
servicemarks, and trade names appearing in this prospectus are the property of
their respective holders.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ ---------------------
1997 1998 1999 1999 2000
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................. $ 1,276 $ 4,252 $ 3,584 $ 1,870 $ 2,806
Total expenses............................. 9,515 12,505 15,156 6,020 17,177
Loss from operations....................... (8,239) (8,253) (11,572) (4,150) (14,371)
Net loss available to common
stockholders............................. (8,115) (8,781) (13,230) (4,897) (36,082)
Net loss per share available to common
stockholders, basic and diluted.......... $(37.40) $(13.61) $ (19.12) $ (7.16) $ (21.83)
Shares used in computing net loss per share
available to common stockholders, basic
and diluted.............................. 217 645 692 684 1,653
Pro forma net loss per share available to
common stockholders, basic and diluted
(unaudited).............................. $ (1.11) $ (1.03)
Shares used in computing pro forma net loss
per share available to common
stockholders, basic and diluted
(unaudited).............................. 10,332 15,967
</TABLE>
The pro forma balance sheet reflects the sale of 856,441 shares of our
Series E convertible preferred stock in July 2000 raising net proceeds of
$7,677,148 and the conversion of all of our preferred stock, including our
Series E convertible preferred stock, upon the closing of this offering. The pro
forma as adjusted balance sheet reflects the sale of 5,000,000 shares of common
stock offered by us at an assumed initial public offering price of $14.00 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities........ $21,813 $29,490 $ 93,090
Working capital............................................ 18,293 25,970 89,570
Total assets............................................... 38,402 46,079 109,679
Long-term obligations, net of current portion.............. 4,346 4,346 4,346
Redeemable convertible preferred stock..................... 66,371 -- --
Stockholders' equity (deficit)............................. (39,115) 34,933 98,533
</TABLE>
See Note 2 of Notes to Consolidated Financial Statements for a description
of the method that we used to compute our basic and diluted net loss per share
available to common stockholders and for a description of the method we used to
compute pro forma basic and diluted net loss per share available to common
stockholders.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS RISKY. YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISKS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS COULD BE
HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES TO DATE AND EXPECT TO INCUR LOSSES
IN THE FORESEEABLE FUTURE.
We have incurred substantial operating losses and used substantial cash to
support our operations in each year since our inception. We expect to incur
substantial additional operating losses for at least the next several years. Our
business has not generated sufficient cash flow to fund our operations without
resorting to external sources of capital. Our net losses available to common
stockholders were $8.1 million in 1997, $8.8 million in 1998 and $13.2 million
in 1999. As of June 30, 2000, we had an accumulated deficit of $45.6 million. We
expect to increase our operating expenses as we increase our sales and marketing
efforts, further develop our products and services, build infrastructure and
hire additional staff to support the continued expansion of our business and
commercialization of our products. As a result, we will continue to operate at a
loss unless we significantly increase our revenues. We cannot predict when, if
ever, we will operate profitably.
WE ONLY RECENTLY INTRODUCED DOUBLETWIST.COM, PROPHECY AND GENEFOREST, WHICH
MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
Although we started selling our bioinformatics software applications in
1997, we have only recently started to commercialize DoubleTwist.com, Prophecy
and GeneForest. We have generated revenues of only approximately $800,000 from
sales of these products through September 30, 2000. Because we changed our
business strategy in the second quarter of 1999 and have redirected
substantially all of our development and marketing resources to the
implementation of DoubleTwist.com, our historical financial information is of
limited value in projecting our future results. Therefore, it is difficult to
evaluate our business and prospects. Before investing, you should evaluate the
risks, expenses and problems frequently encountered by companies such as ours
that are in the early stages of product commercialization and are entering new
and rapidly changing markets.
OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE OR GENERATE MEANINGFUL REVENUES.
Market acceptance of our products will depend upon many factors, many of
which are not in our control. These factors include the following:
- continued growth in the bioinformatics industry;
- continued access to new data and databases;
- availability and price of competing products and technologies; and
- success of our sales efforts.
If we are not able to successfully commercialize our products, we will not
achieve meaningful revenues.
THE SALE OF OUR PRODUCTS AND SERVICES INVOLVES A LENGTHY SALES CYCLE, WHICH
COULD CAUSE DELAYS IN RECOGNIZING REVENUE OR THE FAILURE TO OBTAIN REVENUE.
In order to successfully sell our products and services we must first
convince customers that our products can improve their drug discovery and
development efforts. This sales cycle is typically lengthy due to the complexity
of our products and services and the effort that is required to educate a
prospective customer. The need to gain approval from a variety of constituencies
within a prospective customer, including research and development and key
management personnel, also lengthens the sales cycle. The sales cycle can be
lengthened when the prospective customer has already invested resources
7
<PAGE>
in implementing a bioinformatics solution in-house. The timing of our revenues
is difficult to forecast because of this lengthy sales cycle. We may expend
substantial funds and effort to negotiate these sales agreements with
prospective customers, but may be unable to conclude sales of our products and
services.
Our sales cycle has typically ranged from three to 12 months. The delay or
failure to complete sales in a particular quarter would reduce our revenues in
that quarter, as well as subsequent quarters over which revenues for the sale
would likely be recognized. If our sales cycle unexpectedly lengthens in general
or for one or more large orders from major pharmaceutical or biotechnology
companies, it would adversely affect the timing of our revenues and our revenue
growth. If we were to experience a delay on a large order, it could harm our
ability to meet our forecasts for a given quarter.
WE ARE DEPENDENT UPON ONE CUSTOMER FOR A LARGE PORTION OF OUR NET REVENUES, AND
THE LOSS OF THIS CUSTOMER COULD HARM OUR RESULTS OF OPERATIONS.
One of our customers, Hitachi, Ltd., is responsible for a significant
portion of our net revenues. Hitachi accounted for 36% of our net revenues for
the nine months ended September 30, 2000. Our agreements with Hitachi expire on
September 30, 2001, but are automatically renewed for successive one-year terms
unless terminated by either party upon at least 60 days' prior notice. If
Hitachi terminates either of the agreements or otherwise discontinues its
relationship with us, our business and results of operations could be materially
harmed and the price of our common stock could decline as a result.
IF WE ARE UNABLE TO SAFEGUARD THE INTEGRITY, SECURITY AND PRIVACY OF OUR DATA OR
OUR CUSTOMERS' DATA, OUR REVENUE COULD DECLINE, OUR BUSINESS COULD BE DISRUPTED,
AND WE MAY BE SUED.
We need to preserve and protect our data as well as our customers' data that
reside in our databases against loss, corruption and misappropriation caused by
system failures or unauthorized access. A party who is able to circumvent our
security measures could misappropriate or destroy proprietary information or
cause interruptions in our operations. We could be subject to liability claims
by customers for misuse of their data. These claims could result in costly
litigation. We may be required to make significant expenditures to protect
against systems failures or security breaches or to alleviate problems caused by
any failures or breaches. Any failure that causes the loss or corruption of, or
unauthorized access to, this data could reduce customer satisfaction, expose us
to liability and, if significant, could cause our revenue to decline.
OUR FINANCIAL RESULTS ARE SUBJECT TO FLUCTUATIONS THAT MAY MAKE IT DIFFICULT TO
FORECAST OUR FUTURE PERFORMANCE.
Our revenues and operating results may vary significantly from period to
period, making it difficult to formulate meaningful comparisons of our results
between periods. The limited history of DoubleTwist.com and the new and emerging
nature of the genomics Internet market may further contribute to the difficulty
of making meaningful period-to-period comparisons. Factors that may affect our
financial results in any period include the risks discussed under the following
captions:
- "We have incurred substantial operating losses to date and expect to incur
losses in the foreseeable future;"
- "We only recently introduced DoubleTwist.com, Prophecy and GeneForest,
which makes it difficult to evaluate our business;"
- "The sale of our products and services involves a lengthy sales cycle,
which could cause delays in recognizing revenue or the failure to obtain
revenue;"
- "Seasonal trends may cause our quarterly operating results to fluctuate,
which may adversely affect the market price of our common stock;"
8
<PAGE>
- "We may engage in future acquisitions or investments, which may harm our
operating results and disrupt our business;" and
- "Our revenues are derived primarily from, and are subject to, risks faced
by the pharmaceutical and biotechnology industries."
SEASONAL TRENDS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE, WHICH
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Our experience indicates that pharmaceutical and biotechnology companies
traditionally make large software purchases in the second and fourth quarters of
the year. We believe our quarterly operating results may be affected by this
purchasing pattern, particularly with respect to revenue recognition from the
licensing of our enterprise software products. If we do experience these trends,
investors may not be able to accurately predict our quarterly or annual
operating results. If we fail to meet expectations of investors, our stock price
could decline.
UNLESS INTERNET-BASED RESEARCH TOOLS ACHIEVE WIDESPREAD ACCEPTANCE, WE WILL HAVE
DIFFICULTY ACHIEVING REVENUE GROWTH.
In order for us to be successful, the Internet must continue to be adopted
as an important medium for conducting life science research. Because Internet
usage is continuing to evolve, it is difficult to estimate with any assurance
the rate of Internet acceptance by our customers, or the size and growth rate,
if any, of an Internet market for our products and services. If the use of
Internet-based research tools fails to expand, our Web site traffic and
resulting revenues could be materially reduced. Factors that could deter
existing or potential customers from using our Internet-based services may
include:
- implementation of competing products or services by our competitors,
particularly if offered for free or at a lower price than our products and
services, which could decrease demand for our products and services;
- lack of availability to customers of cost-effective, high-speed
Internet-access, which could prevent customers from being able to access
our products and services;
- inconsistent quality of service, which could deter customers from relying
on our products and services;
- inability of life sciences organizations to adequately develop the
technology and data processing infrastructure necessary for Internet-based
communications of genomic data and research, which could prevent customers
from being able to access our products and services;
- lack of access and ease of use, which could make it more difficult for
customers to use our products and services; and
- actual or perceived lack of security or confidentiality of information,
which could limit the use customers might make of our products and
services.
OUR INTERNET BUSINESS MODEL IS NOT PROVEN AND MAY NOT BE SUCCESSFUL.
Our Internet business model is based on the development of our
DoubleTwist.com service for the online purchase and sale of genomic and other
research analysis, information and products. Our model is new and unproven, and
we cannot be sure that it will be successful or that we can achieve or sustain
revenue growth or generate any profits. The success of this business model will
depend upon many factors, many of which are beyond our control, such as the
emergence of the Internet as a tool to facilitate research and commerce in our
industry. We cannot be sure that availability of our analysis and information
services over the Internet or our Web-enhanced products will achieve broad
acceptance within our target markets. Consequently, if our Internet business
model is not successful, our business will be harmed.
9
<PAGE>
COMPETITION IN OUR INDUSTRY IS INTENSE, AND THEREFORE, WE MAY LOSE SALES TO
COMPETITORS.
We anticipate competition from genomic data providers as well as from both
traditional and online bioinformatics software companies. A number of companies,
including Incyte Genomics, Inc. and Celera Genomics Group, focus on generating
biological intellectual property either to license such intellectual property or
for internal development efforts. Both of these companies also have recently
begun to provide online solutions for genomic research. The traditional
bioinformatics companies, which produce bioinformatics software either as an
enterprise solution or on a client/server basis, include LION Bioscience AG and
InforMax, Inc. Other bioinformatics companies, such as Compugen Ltd. and
eBioinformatics, offer online solutions. We also face competition from
development groups within companies that may offer customized bioinformatics
solutions.
Our success in competing with these companies will depend on our ability to:
- aggregate and integrate an increasingly large amount of genomic data and
other resources;
- continue to provide a comprehensive solution for genomic research;
- develop superior software research applications and tools; and
- maintain competitive pricing.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. As a result, any of the following could occur:
- our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements;
- our competitors could seriously impede our ability to sell additional
products and services on terms favorable to us;
- our competitors may be able to provide Internet-based services at a lower
cost than we can;
- our competitors may develop and market new technologies that render our
existing or future products and services obsolete, unmarketable or less
competitive; and
- our competitors may obtain patent protection or other intellectual
property rights that would limit our rights or our customers' ability to
use our products and services to commercialize their discoveries.
We may not be able to compete successfully against our current and future
competitors, and competitive pressures that we encounter may harm our business.
OUR COMPETITORS MAY ACQUIRE OR FORM EXCLUSIVE RELATIONSHIPS WITH OTHER GENOMICS
OR BIOINFORMATICS COMPANIES, WHICH COULD INCREASE THEIR PRODUCT OFFERINGS AND
DECREASE THE NUMBER OF OUR POTENTIAL COLLABORATORS.
Our current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with other genomics or
bioinformatics companies. By acquiring complementary technologies or companies,
our competitors may increase the ability of their products and services to
address the needs of our current and prospective customers. In addition, if
competitors form exclusive relationships with our current or potential
collaborators, we may not be able to continue our existing, or establish new,
collaborations or licensing arrangements necessary to commercialize our
products.
WE OBTAIN BIOINFORMATICS SOFTWARE AND CONTENT FOR DOUBLETWIST.COM FROM THIRD
PARTIES, THE LOSS OF WHICH COULD SERIOUSLY IMPAIR OUR BUSINESS.
We depend on third parties to provide us with genomic sequence databases and
bioinformatics software, both of which are important components of
DoubleTwist.com. We depend on public sources and third parties for genomic data,
and if these public sources or third parties discontinue providing
10
<PAGE>
access to their data, or if their data contains errors or defects that corrupt
our databases, the quality of our products could deteriorate. In addition, our
products incorporate software programs developed by academic institutions,
government-sponsored research organizations and commercial entities. If these
third parties cease providing support for their software programs or if we are
unable to acquire or develop replacement technologies from these third parties
or develop replacement technologies, either alone or with others, our business
could be harmed.
Many of our current license agreements may be terminated by the other party
under certain circumstances, including our breach of the agreement or upon 30 to
90 days' prior written notice, and we may not be able to maintain the
exclusivity of our exclusive licenses. In the event we are unable to obtain or
maintain licenses to technology necessary and advantageous to our business, we
may be required to expend significant time and resources to develop, license or
acquire alternate technologies. If we cannot acquire or develop necessary
technology on commercially reasonable terms, or at all, we may be prevented from
commercializing some of our products or may need to limit our operations.
WE MAY ENGAGE IN FUTURE ACQUISITIONS OR INVESTMENTS, WHICH MAY HARM OUR
OPERATING RESULTS AND DISRUPT OUR BUSINESS.
We may in the future make acquisitions or investments to acquire genomic
sequence databases or to otherwise broaden our product offerings and expand our
technology. We have not made any significant acquisitions or investments in the
past, and therefore our ability to complete acquisitions and investments is
unproven. If we fail to properly evaluate and successfully execute acquisitions
or investments, they may seriously harm our business.
To complete an acquisition, we must:
- properly evaluate the technology;
- analyze and error-correct acquired databases before integrating them into
our products;
- accurately forecast the financial impact of the transaction, including
accounting charges and transaction expenses;
- integrate and retain personnel;
- combine potentially different corporate cultures; and
- effectively integrate services and products and technology, sales,
marketing and support operations.
Failure of any of these efforts could significantly diminish the value of our
products and distract our management from our day-to-day operations and disrupt
our business. Because we have recently changed our business model and launched
new products, any such distractions or disruptions could impede the
implementation of our new business strategy and jeopardize our long-term
viability. In addition, if we conduct acquisitions using convertible debt or
equity securities, existing stockholders may be diluted, which could adversely
affect the market price of our common stock.
WE ARE GROWING RAPIDLY, AND IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE
COULD LIMIT OUR ABILITY TO INCREASE REVENUE AND ACHIEVE PROFITABILITY.
Our rapid growth over the past two years has placed, and will continue to
place, a considerable strain on our financial and managerial resources. We have
grown from 70 employees on January 1, 1999 to 172 employees on September 30,
2000. We plan to continue to expand our sales and marketing, administration and
technology organizations. In order to manage this growth effectively we will
need to improve our financial and managerial controls, as well as our reporting
systems and procedures. In addition, we will need to train and manage our
expanding work force. If we fail to manage our growth effectively, our ability
to increase revenue and achieve profitability could be harmed. We will also need
to allocate resources to support our expanding customer base. If we are unable
to support adequately our customers, our reputation and competitiveness could be
seriously damaged.
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ANY FAILURE OF OUR NETWORK COULD ADVERSELY IMPACT OUR ABILITY TO DELIVER
PRODUCTS AND SERVICES AND COULD LEAD TO SIGNIFICANT LOSSES, REDUCED CUSTOMER
SATISFACTION AND DAMAGE TO OUR REPUTATION.
The continuing and uninterrupted performance of our computer network and Web
servers is critical to our success. Any system failure that causes interruptions
or delays in our ability to provide our products and services to our customers
could reduce customer satisfaction and the attractiveness of our products and
services and could damage our reputation. We are particularly vulnerable to
network failures during periods of rapid growth, when the growing number of
users of our services can outpace our network capacity. In the past, we have
experienced minor system errors and interruptions, including Internet
disruptions, which we believe may occur periodically in the future. The
continued viability of our business requires us to support multiple users
concurrently and deliver fast response times with minimal network delays. We are
continuing to add system capacity, but we may not be able to adequately address
network capacity, especially if our customers have expanded rapidly. Any failure
to meet these capacity requirements could require additional capital
expenditures, result in lost business opportunities and damage our reputation
and competitiveness.
ANY FAILURES OF, OR CAPACITY CONSTRAINTS IN, OUR INTERNET APPLICATIONS OR
RELATED SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE RELY COULD ADVERSELY
AFFECT OUR BUSINESS.
Because our DoubleTwist.com customers access our services on the Internet,
we depend upon the continuous, reliable and secure operation of Internet servers
and related hardware and software. To the extent that our customers' access to
our products on the Internet is interrupted, by system failures or otherwise,
our business could suffer. Our communications hardware and other computer
hardware operations are located at the facilities of a hosting company in the
San Francisco Bay Area. Unexpected events such as earthquakes or other natural
disasters, power losses and vandalism could disrupt or damage these systems. In
addition, telecommunications failures, computer viruses, electronic break-ins or
other similar disruptive problems could adversely affect the operation of these
systems. Our insurance policies may not adequately compensate us for any losses
that may occur due to any damages or interruptions in these systems. We could be
required to make significant capital expenditures in the event of damage. We
also depend upon third parties to provide our customers with Web browsers and
Internet services necessary for access to our Web site. Any sustained disruption
in Internet access provided by third parties could adversely impact our
business.
IF ANY OF THE THIRD-PARTY TECHNOLOGIES WE LICENSE BECOME UNAVAILABLE TO US, WE
MAY NOT BE ABLE TO OPERATE OUR BUSINESS UNTIL EQUIVALENT TECHNOLOGY CAN BE
OBTAINED.
We are highly dependent on technologies we license from third parties, such
as Oracle Corp., BEA Systems, Inc., Art Technology Group and Sun
Microsystems, Inc. which comprise the infrastructure of DoubleTwist.com. Our
market is evolving, and we may need to license additional technologies to remain
competitive. However, we may not be able to license these technologies on
commercially reasonable terms or at all. Our inability to obtain any of these
licenses could delay the development of our services until equivalent technology
can be identified, licensed or developed and integrated into our products.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES
COULD USE OUR INTELLECTUAL PROPERTY WITHOUT OUR CONSENT, WHICH COULD HARM OUR
COMPETITIVE POSITION.
Our competitive position is in part dependent on our ability to develop and
maintain the proprietary aspects of our software technology. We seek to protect
the source code for our software, documentation and other written materials
under patent, trademark, trade secret and copyright laws.
Our policy is to file patent applications when we discover new software
inventions. We currently have four patent applications pending relating to our
proprietary technology, including patent applications on core technology for
some of our early software applications and on important aspects of the
technology and structure underlying DoubleTwist.com. We are also preparing to
file patent
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<PAGE>
applications on various other aspects of our business, including tools that can
be used to view research data, processing systems, and other important
attributes of DoubleTwist.com. We cannot assure you that any patents will result
from our patent applications, that any patents that may issue will protect our
intellectual property or that any issued patents will not be challenged by third
parties.
We enter into confidentiality agreements with our employees and consultants
to avoid disclosure of our confidential information and restrict access to our
source code. In addition, we enter into contractual arrangements with third
parties, such as non-disclosure and non-compete agreements, and invention
assignment agreements with our employees to further protect our proprietary
information. Despite these precautions, third parties could copy or otherwise
obtain and use our technology without authorization, or develop similar
technology independently. Furthermore, we cannot assure you that the protection
of our proprietary rights will be adequate or that our competitors will not
independently develop similar technology, duplicate our products and services or
design around any patents or other intellectual property we hold.
OUR OPERATING RESULTS COULD SUFFER IF WE ARE FORCED TO DEFEND AGAINST A
PROTRACTED INFRINGEMENT CLAIM OR PAY AN AWARD OF SIGNIFICANT DAMAGES TO A THIRD
PARTY.
There is a substantial risk of litigation regarding intellectual property
rights in our industry. We expect that our technologies may experience an
increase in third-party infringement claims as the number of our competitors
grows. We cannot be certain that third parties will not make a claim of
infringement against us relating to our technology. Any claims, whether with or
without merit, could:
- be time consuming and costly to defend;
- divert management's attention and resources;
- cause delays in delivering services;
- require the payment of monetary damages, which may be tripled if the
infringement is found to be willful;
- result in an injunction, which would prohibit us from offering a
particular service; or
- require us to enter into royalty or licensing agreements, which may not be
available on commercially reasonable terms, or at all.
A successful claim of technology infringement against us and our failure or
inability to license the infringed or similar technology could harm our
business.
WE MAY NOT BE ABLE TO SECURE NECESSARY FUNDING IN THE FUTURE.
We have had significant operating losses and negative cash flow from
operations since inception and expect this to continue for the foreseeable
future. We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements to maintain our existing level of operations for at least the next
12 months. We believe that our available cash resources plus the net proceeds of
this offering will be sufficient to fund our anticipated growth for at least the
next 12 months. However, we may need to raise additional funds in order to
expand rapidly, develop new products and services, enhance existing services,
respond to competitive pressures or acquire complementary products, businesses
or technologies. In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we have sufficient funds
for our operating plan. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage of ownership of our
current stockholders will be reduced, and such securities may have rights,
preferences or privileges senior to those of our current stockholders.
Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance our products and services or otherwise respond
to competitive pressures could be significantly limited.
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<PAGE>
WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM COULD IMPAIR OUR ABILITY TO
COMPETE.
We are highly dependent on John D. Couch, our President and Chief Executive
Officer, as well as the other principal members of our management and scientific
staff. The loss of services of any of these persons could seriously harm our
product development and commercialization efforts. In addition, research,
product development and commercialization will require additional skilled
personnel in areas such as chemistry, biology, bioinformatics and software
engineering. Our business is located in the San Francisco Bay Area, where demand
for personnel with these skills is extremely high and is likely to remain high.
As a result, competition for and retention of personnel, particularly for
employees with technical expertise, is intense and the turnover rate for these
people is high. If we are unable to attract, hire, train and retain a sufficient
number of qualified employees, our ability to conduct and expand our business
could be seriously reduced. The inability to retain and hire qualified personnel
could also hinder the planned expansion of our business.
WE DEPEND UPON HOLDERS OF NON-IMMIGRANT VISAS TO STAFF OUR PRODUCT DEVELOPMENT
TEAM, AND OUR ABILITY TO HIRE AND RETAIN THESE EMPLOYEES MAY BE IMPAIRED AS A
RESULT OF CHANGES IN U.S. IMMIGRATION LAW.
We recruit professionals for our product development group on an
international basis and, therefore, must comply with the immigration laws in the
relevant countries, particularly the United States. If we are unable to obtain
visas for our employees in sufficient quantities or in a timely manner, our
product development efforts could be hampered and our business could suffer. Any
changes in such laws making it more difficult to hire foreign nationals or
limiting our ability to retain existing foreign employees, could require us to
incur additional unexpected labor costs and expenses and could hamper product
enhancement and expansion efforts.
RISKS RELATED TO OUR INDUSTRY
OUR PRODUCTS AND SERVICES MAY BECOME SUBJECT TO GOVERNMENTAL REGULATION.
We are subject to regulations applicable to businesses generally. In
addition, we may be subject to regulation indirectly via regulation of our Web
site content providers, by governmental agencies that promulgate and enforce
laws and regulations generally applicable to chemicals, pharmaceuticals,
controlled substances, human and biological reagents, environmental impacts, as
well as U.S. and foreign export and import controls. Regulatory agencies
potentially involved include the Food and Drug Administration, the Environmental
Protection Agency, the Drug Enforcement Agency, the Department of Agriculture,
the Occupational Safety and Health Administration, the Department of Commerce,
the Department of the Interior, and various other federal, state and local
agencies and regulatory bodies.
We rely on our customers and collaborators to meet the various regulatory
and other legal requirements applicable to their role in our business. However,
we are unable to verify whether they do so, or whether they are in violation of
governmental requirements. We are not aware of any violations, investigations,
inquiries or allegations with regard to any such regulations by our customers or
collaborators. If our customers or collaborators are found to violate any of the
applicable regulations, we could be fined or exposed to civil or criminal
liability, and we could receive negative publicity. Any of these results could
have a negative impact on our business.
In addition, regulation of the activities of our customers by government
agencies in the United States and in foreign countries may have a significant
impact on our ability to sell our products and services because this regulation
may prevent or limit our customers' ability to produce and market their
products. We presently do not have any plans to develop pharmaceutical products
ourselves. However, we expect that our customers over the next few years will
come primarily from the pharmaceutical and biotechnology industries. A
significant factor in the production and marketing of pharmaceutical products by
those customers will be the impact of regulation by the FDA and other agencies
and institutions which regulate medicinal and food products.
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<PAGE>
Due to the increasing popularity and use of the Internet, it is possible
that laws and regulations may be adopted or interpreted in the United States and
abroad with particular applicability to the Internet. It is possible that
governments will enact legislation that may be applicable to us in areas such as
content, publishing, product distribution, network security, encryption and the
use of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and
retransmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, publishing,
taxation, defamation, personal privacy, product liability and environmental
protection, as well as the necessity for governmental permits, labeling,
certifications and the need to supply information to relevant parties, is
uncertain. Most of these laws were adopted before the widespread use and
commercialization of the Internet and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Any export
or import restrictions, new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase our cost of doing business or increase our legal exposure. Any of these
factors could have a negative affect on our business.
IF WE OR OUR CUSTOMERS ARE UNABLE TO DEVELOP OR COMMERCIALIZE NEW DRUGS,
THERAPIES OR OTHER PRODUCTS BASED ON OUR TECHNOLOGIES, OUR BUSINESS COULD SUFFER
EVEN IF OUR TECHNOLOGIES ARE EFFECTIVE AS RESEARCH TOOLS.
Even if our technologies perform their intended functions as research tools,
we or our customers may be unable to use the discoveries resulting from them to
produce new drugs, therapies, diagnostics or other life science products. There
is still a limited understanding of the roles of genes and proteins and their
involvement in diseases and other life processes. Few therapeutic products based
on genomic or proteomic discoveries have been developed and commercialized. To
date, no one has developed or commercialized any drug, therapeutic, diagnostic
or other life science products based on our technologies. To the extent we or
our customers are unable to capitalize on the products and services we provide,
our business could suffer or fail to develop.
OUR REVENUES ARE DERIVED PRIMARILY FROM, AND ARE SUBJECT TO, RISKS FACED BY THE
PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES.
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries. Accordingly, our success will depend directly upon
their demand for our products and services and the success of drugs derived from
genomics research. Our operating results may fluctuate substantially due to
reductions and delays in research and development expenditures by companies in
these industries. These reductions and delays may result from factors not within
our control, such as:
- changes in the regulatory environment affecting health care and health
care providers;
- pricing pressures and reimbursement policies;
- market-driven pressures on companies to consolidate and reduce costs; and
- changes in general economic conditions.
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<PAGE>
Consolidation within the pharmaceutical and biotechnology industries has
heightened the competition for the type of services we provide. If this
consolidation trend continues, it may result in fewer customers for our
services, price erosion and greater competition among us and our competitors.
Consolidation could also increase our dependence on obtaining larger
subscriptions from fewer customers.
RISKS RELATED TO OUR OFFERING
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY.
Prior to this offering, there has been no public market for shares of our
common stock. An active public trading market may not develop following
completion of this offering or, if developed, may not be sustained. The initial
public offering price of the shares of our common stock will be determined by
negotiation between us and representatives of the underwriters. The initial
public offering price will not necessarily reflect the market price of our
common stock following this offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
The market price for our common stock following this offering will be
affected by a number of factors, including:
- announcements of new products and services or product and service
enhancements by us or our competitors;
- announcements by governments with respect to policies regarding biomedical
research;
- actual or anticipated variations in our quarterly results of operations or
those of our competitors;
- changes in earnings estimates or recommendations by securities analysts
that may follow our stock;
- developments in our industry; and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
Stock prices for many companies in the biotechnology and emerging growth
sectors have experienced wide fluctuations that have often been unrelated to the
operating performance of such companies. Such factors and fluctuations, as well
as general economic, political and market conditions, may materially adversely
affect the market price of our common stock.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
Following this offering our directors, entities affiliated with our
directors, and our executive officers will beneficially own, in the aggregate
approximately 40.1% of our outstanding common stock. These stockholders as a
group will be able to substantially influence our management and affairs and, if
acting together, will be able to influence most matters requiring the approval
of our stockholders, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets and any other
significant corporate transaction. The concentration of ownership may also delay
or prevent a change of control of our company at a premium price if these
stockholders oppose it. See "Principal Stockholders" for details on the
ownership of our capital stock.
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MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN.
Management will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem these uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use a majority of the proceeds from this offering to enhance our
existing products and develop new products, to expand our sales and marketing
activities and for general corporate purposes, including working capital,
technology enhancements and possible acquisitions of, or investments in,
companies, technologies or assets that complement our business. Because of the
number and variability of factors that determine our use of the net proceeds
from this offering, these uses may vary substantially from our currently planned
uses. We may not be able to invest these funds effectively, which would
adversely affect our financial returns.
THERE IS A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Sales of a substantial number of 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 our otherwise disposing of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Lehman
Brothers Inc. The following table indicates approximately when the 19,211,625
shares of our common stock that are not being sold in the offering but which
were outstanding as of September 30, 2000 will be eligible for sale into the
public market:
<TABLE>
<CAPTION>
SHARES ELIGIBLE
DAYS AFTER THE EFFECTIVE DATE FOR SALE
----------------------------- ---------------
<S> <C>
18,355,184
180 days....................
856,441
Various dates thereafter....
</TABLE>
Additionally, of the 3,172,163 shares that may be issued upon the exercise
of options outstanding as of September 30, 2000, approximately 1,051,697 shares
will be vested and eligible for sale 180 days after the date of this prospectus.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The initial public offering price is substantially higher than the book
value per share of our common stock. You will, therefore, incur immediate
dilution of $9.88, based on an assumed initial public offering price of $14.00
per share, in the book value per share of our common stock from the price you
pay for our common stock. In addition, the number of shares available for
issuance under our stock option and employee stock purchase plans will
automatically increase without stockholder approval. You will incur additional
dilution upon the exercise of outstanding stock options and warrants. See
"Dilution" for a more detailed discussion of the dilution you will incur in this
offering.
PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS THAT MIGHT BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as Delaware law, could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our stockholders. We are
subject to the provisions of Delaware law which restrict certain business
combinations with interested stockholders, which may have the effect of
inhibiting a non-negotiated merger or other business combinations. See
"Description of Capital Stock."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and in other sections of this prospectus are
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks, uncertainties and other factors are described in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other sections of this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "forecasts," "predicts," "intends," "potential" or "continues" or
the negative of such terms or other comparable terminology.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of shares of our common
stock in this offering will be approximately $63.6 million, assuming an initial
public offering price of $14.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option, we estimate our net proceeds will be
approximately $73.4 million.
The principal purposes of this offering are to generate funds to enable us
to conduct our business, to create a public market for our common stock and to
facilitate our future access to the public capital markets. We plan to use the
net proceeds for the following purposes:
- enhancing our existing products and developing new products;
- expanding our sales and marketing activities; and
- general corporate purposes, including working capital, technology
enhancements and possible acquisitions of, or investments in, companies,
technologies or assets that complement our business.
We have no current agreements to make any acquisitions or investments.
We have not yet determined the amount of net proceeds to be used
specifically for any of the purposes described above. The amounts 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. Accordingly, our
management will have broad discretion in allocating the net proceeds of this
offering. We intend to invest the net proceeds in short-term investment-grade,
interest-bearing instruments until the proceeds are used for the purposes
described above.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, to support the development
of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, certain of our equipment loan agreements
generally prohibit us from paying dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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CAPITALIZATION
The following table sets forth our capitalization at June 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the sale of 856,441 shares of our
Series E convertible preferred stock in July 2000 raising net proceeds of
$7,677,148 and the conversion of each outstanding share of our preferred
stock, including the Series E convertible preferred stock, into one share
of our common stock upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale of 5,000,000 shares
of common stock offered by us at an assumed initial public offering price
of $14.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more detailed
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current portion............... $ 4,346 $ 4,346 $ 4,346
-------- -------- --------
Convertible preferred stock, $0.01 par value; 66,197,329
shares authorized, actual; none authorized, pro forma and
pro forma as adjusted; 15,969,651 shares issued and
outstanding, actual; none issued and outstanding, pro
forma and pro forma as adjusted........................... 66,371 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, none authorized, issued
or outstanding, actual and pro forma; 5,000,000 shares
authorized and none issued or outstanding, pro forma as
adjusted................................................ -- -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 2,096,267 shares issued and outstanding,
actual; 18,922,359 shares issued and outstanding, pro
forma; 23,922,359 shares issued and oustanding, pro
forma as adjusted 21 189 239
Additional paid-in capital................................ 28,341 102,221 165,771
Deferred stock-based compensation......................... (19,366) (19,366) (19,366)
Notes receivable from stockholders........................ (2,515) (2,515) (2,515)
Accumulated deficit....................................... (45,596) (45,596) (45,596)
-------- -------- --------
Total stockholders' equity (deficit)...................... (39,115) 34,933 98,533
-------- -------- --------
Total capitalization...................................... $ 31,602 $ 39,279 $102,879
======== ======== ========
</TABLE>
The above information excludes:
- 3,172,163 shares of common stock issuable upon exercise of options
outstanding at a weighted exercise price of $2.16 per share as of
September 30, 2000;
- 569,577 shares of common stock issuable upon exercise of warrants
outstanding at a weighted average exercise price of $1.95 per share as of
September 30, 2000;
- 214,906 shares of common stock available for issuance under our 1996
Equity Incentive Plan as of September 30, 2000;
- 1,000,000 shares of common stock available for issuance under our 2000
Stock Plan, subject to the effectiveness of the registration statement of
which this prospectus is a part; and
- 400,000 shares of common stock available for issuance under our 2000
Employee Stock Purchase Plan, subject to the effectiveness of the
registration statement of which this prospectus is a part.
20
<PAGE>
DILUTION
Our net tangible book value as of June 30, 2000, was $27.3 million or $1.51
per share of common stock after giving effect to the conversion of all
outstanding shares of preferred stock into shares of common stock in connection
with this offering. Our net tangible book value per share represents the amount
of total tangible assets less total liabilities, divided by the shares of common
stock outstanding as of June 30, 2000, assuming the conversion of all
outstanding shares of preferred stock.
After giving effect to the sale of 5,000,000 shares of common stock we are
offering hereby at an assumed initial public offering price of $14.00 per share
and after deducting estimated underwriting discounts and commissions and
offering expenses, our net tangible book value as of June 30, 2000, would have
been approximately $90.9 million or $3.94 per share. This represents an
immediate increase in net tangible book value of $2.43 per share to existing
stockholders and an immediate dilution of $10.06 per share to the investors
purchasing shares of common stock in this offering. The following table
illustrates this per share dilution.
Pro forma net tangible book value dilution per share represents the
incremental dilutive effect of the July 2000 issuance of 856,441 shares of
Series E convertible preferred stock at a price of $8.96 per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Net tangible book value per share as of June 30, 2000..... $ 1.51
Increase attributable to new investors.................... 2.43
------
Net tangible book value per share after the offering........ 3.94
------
Dilution per share to new investors......................... 10.06
Incremental dilution occurring upon issuance of Series E
convertible preferred stock............................... (0.18)
------
Pro forma dilution per share to new investors............... $ 9.88
======
</TABLE>
The following table shows, on a pro forma basis at June 30, 2000, after
giving effect to the issuance of 856,441 shares of Series E convertible
preferred stock in July 2000, the sale of 5,000,000 shares of common stock in
this offering at an assumed initial public offering price of $14.00 per share,
before estimated underwriting discounts and commissions and estimated offering
expenses payable by us, and the conversion of all outstanding shares of
preferred stock into shares of common stock, the total consideration paid to us
and the average price paid per share by existing stockholders and by new
investors purchasing common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing
stockholders...... 18,922,359 79% $ 75,299,331 52% $ 3.98
New investors....... 5,000,000 21 70,000,000 48 14.00
---------- ---- ------------ ----
Total............... 23,922,359 100% $145,299,331 100%
========== ==== ============ ====
</TABLE>
The tables and calculations above exclude the following shares:
- 3,172,163 shares of common stock issuable upon exercise of options
outstanding as of September 30, 2000 at a weighted exercise price of $2.16
per share;
- 569,577 shares of common stock issuable upon exercise of warrants
outstanding as of September 30, 2000 at a weighted average exercise price
of $1.95 per share;
21
<PAGE>
- 214,906 shares of common stock available for issuance under our 1996
Equity Incentive Plan as of September 30, 2000;
- 1,000,000 shares of common stock available for issuance under our 2000
Stock Plan, subject to the effectiveness of the registration statement of
which this prospectus is a part; and
- 400,000 shares of common stock available for issuance under our 2000
Employee Stock Purchase Plan, subject to the effectiveness of the
registration statement of which this prospectus is a part.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and the related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated 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 are derived
from the audited consolidated financial statements which are included elsewhere
in this prospectus. The consolidated statements of operations data for the years
ended December 31, 1995 and 1996, and the balance sheet data as of December 31,
1995, 1996 and 1997 are derived from our audited consolidated financial
statements not included in this prospectus. The statements of operations data
for the six months ended June 30, 1999 and 2000 and the balance sheet data as of
June 30, 2000 are derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. In the opinion of management, the
unaudited consolidated financial statements include all adjustments, consisting
principally of normal recurring adjustments necessary for a fair presentation of
our results of operations and financial position for these periods. Historical
results are not necessarily indicative of the results of operations to be
expected for future periods and the results of interim periods are not
necessarily indicative of the results for a full year. See Note 2 of Notes to
Consolidated Financial Statements for a description of the method that we used
to compute our basic and diluted net loss per share available to common
stockholders and for a description of the method we used to compute pro forma
basic and diluted net loss per share available to common stockholders and
Note 5 of Notes to Consolidated Financial Statements for an allocation of
stock-based compensation expense by functional area.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- ----------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
License fees................................. $ -- $ -- $ 506 $ 2,779 $ 2,289 $ 1,103 $ 2,315
Subscriptions................................ -- -- -- -- -- -- 151
Services and other........................... 755 1,474 770 1,473 1,295 767 340
------ ------- ------- ------- ----------- ------- -----------
Total revenues............................. 755 1,474 1,276 4,252 3,584 1,870 2,806
------ ------- ------- ------- ----------- ------- -----------
Cost of revenues:
License fees................................. -- -- 2 209 110 28 37
Subscriptions................................ -- -- -- -- -- -- 1,024
Services and others.......................... 208 687 368 1,254 943 584 239
------ ------- ------- ------- ----------- ------- -----------
Total cost of revenues..................... 208 687 370 1,463 1,053 612 1,300
------ ------- ------- ------- ----------- ------- -----------
Gross profit................................... 547 787 906 2,789 2,531 1,258 1,506
------ ------- ------- ------- ----------- ------- -----------
Operating expenses:
Product development.......................... 282 555 4,999 5,282 6,932 2,597 7,061
Sales and marketing.......................... 68 314 2,153 4,037 4,862 1,775 6,699
General and administrative................... 184 514 1,993 1,723 2,309 1,036 2,117
------ ------- ------- ------- ----------- ------- -----------
Total operating expenses................... 534 1,383 9,145 11,042 14,103 5,408 15,877
------ ------- ------- ------- ----------- ------- -----------
Income (loss) from operations.................. 13 (596) (8,239) (8,253) (11,572) (4,150) (14,371)
Interest income................................ -- -- 157 39 458 303 709
Interest expense............................... (6) (44) (33) (488) (367) (210) (2,759)
------ ------- ------- ------- ----------- ------- -----------
Net income (loss).............................. 7 (640) (8,115) (8,702) (11,481) (4,057) (16,421)
Accretion on Series C redeemable convertible
preferred stock.............................. -- -- -- (79) (1,749) (840) 1,488
Deemed dividend on preferred stock............. -- -- -- -- -- -- (21,149)
------ ------- ------- ------- ----------- ------- -----------
Net income (loss) available to common
stockholders................................. $ 7 $ (640) $(8,115) $(8,781) $ (13,230) $(4,897) $ (36,082)
====== ======= ======= ======= =========== ======= ===========
Net (loss) per share available to common
stockholders, basic and diluted.............. $ 0.01 $ (0.53) $(37.40) $(13.61) $ (19.12) $ (7.16) $ (21.83)
Shares used in computing net (loss) per share
available to common stockholders, basic and
diluted...................................... 1,188 1,201 217 645 692 684 1,653
Pro forma net loss per share available to
common stockholders, basic and diluted
(unaudited).................................. $ (1.11) $ (1.03)
Shares used in computing pro forma net loss per
share available to common stockholders, basic
and diluted (unaudited)...................... 10,332 15,967
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities... $ 54 $ 206 $ 1,986 $ 10,087 $ 1,089 $ 21,813
Working capital (deficit)............................. 54 (539) 1,288 7,449 (2,620) 18,293
Total assets.......................................... 261 453 4,203 13,786 7,261 38,402
Long-term obligations, net of current portion......... 264 1 1,102 1,255 1,324 4,346
Redeemable convertible preferred stock................ -- 355 10,471 25,022 30,746 66,371
Stockholders' deficit................................. (112) (732) (8,483) (16,837) (29,735) (39,115)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS,
INCLUDING THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leading provider of genomic information and bioinformatics tools to
the life sciences industry. Our primary product is DoubleTwist.com, a secure and
comprehensive online research environment that enables the life scientist to
perform sophisticated genomic analysis without requiring bioinformatics
expertise. Subscribers to DoubleTwist.com receive access to intelligent and
automated analysis tools and advanced, interactive software for the
visualization of their research results. We also license components of
DoubleTwist.com's underlying technology for use on a customer's internal
computer network. These products include Prophecy and GeneForest, each of which
includes one of our proprietary databases and associated data interpretation and
visualization tools, and our Clustering and Alignment Tools (CAT) software for
analyzing large sequence databases.
From our incorporation in January 1993 through December 1996, we developed
customized databases for biotechnology and pharmaceutical companies. In
January 1997, we released the first versions of our bioinformatics enterprise
applications. In 1997 and 1998, we released enhanced versions of these products,
as well as the first versions of additional products, including CAT. Since our
inception we have incurred substantial losses, and as of June 30, 2000 we had an
accumulated deficit of $45.6 million.
In the second quarter of 1999, we changed our business strategy and directed
substantially all of our development and marketing resources to the
implementation of DoubleTwist.com, which became publicly available in
January 2000. In the summer of 2000, we launched Prophecy and GeneForest. While
we are continuing to market and sell CAT, we discontinued marketing and sales
efforts for some of our other bioinformatics enterprise applications in the
third quarter of 1999. Because we have only recently launched DoubleTwist.com,
Prophecy and GeneForest, we have generated revenues of only approximately
$800,000 from sales of these products through September 30, 2000. As we focus
our sales and marketing efforts on DoubleTwist.com Prophecy and GeneForest, we
expect sales of subscriptions for these products to contribute an increasing
portion of our revenues in the future.
Our revenues are classified into three categories: license fees,
subscriptions and services and other revenues. Revenues from product licenses
such as CAT are generally recognized as license fees upon shipment to the
customer site. Subscriptions to DoubleTwist.com, Prophecy and GeneForest are
generally annual and are billed in advance. Revenues from DoubleTwist.com,
Prophecy and GeneForest are recognized monthly over the term of the
subscription. Services and other revenues include maintenance fees from support
contracts for our products, which are recognized ratably over the service period
(generally one year), professional services for installation and training of our
products, grant revenue, and revenues from the resale of third-party hardware
and software.
Cost of subscriptions is comprised of fees charged by the third-party data
center that hosts DoubleTwist.com, depreciation of equipment and costs related
to technical and support personnel necessary to run the DoubleTwist.com Web
site. Cost of license fees includes costs associated with product packaging,
documentation and bundled third-party software necessary to run our products.
Cost of services and other revenues consists primarily of the personnel costs
related to providing maintenance and other services, as well as costs from the
resale of third-party hardware and software.
24
<PAGE>
Operating expenses consist of all expenses related to the development,
marketing and sale of our products, including salaries and other payroll-related
expenses, equipment depreciation and administrative overhead. Interest income
(expense), net reflects income received on cash and cash equivalents and
interest expense on leases to secure equipment and software.
We account for stock-based employee compensation arrangements in accordance
with provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees" and Financial Accounting Standards
Board Interpretation No. 28 (FIN No. 28), "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" and comply with the
disclosure provisions of Statement of Financial Accounting Standards No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation."
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of our stock and the exercise
price. SFAS No. 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity investment. The pro forma disclosures of
the difference between compensation expense included in net loss and the related
cost measured by the fair value method are presented in Note 5 of the notes to
our financial statements.
We account for equity instruments issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." During 1999, we
recorded deferred stock-based compensation of approximately $5.5 million. For
the six months ended June 30, 1999 and 2000, we recorded deferred stock-based
compensation of approximately $0.9 million and $16.3 million. These amounts are
being amortized as charges to operations over the respective vesting periods of
the individual stock options, generally four years. We recorded amortization of
deferred stock-based compensation of approximately $0.3 million during the
fiscal year ended December 31, 1999. For the six months ended June 30, 1999 and
2000, we recorded amortization of deferred stock-based compensation of
approximately $10,000 and $2.1 million.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Total revenues increased $0.9 million, or 50%, to $2.8 million
for the six months ended June 30, 2000 from $1.9 million for the same period in
1999. License fees increased $1.2 million, or 110%, to $2.3 million for the six
months ended June 30, 2000 from $1.1 million for the same period in 1999. The
increase in license fees was due to an increase in sales of Clustering and
Alignment Tools (CAT) and included a large sale to our distributor, Hitachi,
Ltd., pursuant to an exclusive distribution agreement for CAT in the
Asia-Pacific region originally entered into in April 2000. Subscription revenues
increased to $0.2 million for the six months ended June 30, 2000 from zero for
the same period in 1999, due to the launch of the DoubleTwist.com Web site.
Services and other revenues decreased $0.5 million, or 56%, to $0.3 million for
the six months ended June 30, 2000 from $0.8 million for the same period in
1999. The decrease was due primarily to the completion in 1999 of a grant funded
by the National Institutes of Health. We expect subscription revenues to
increase as a percentage of our total revenue as we focus our sales and
marketing efforts on and continue to commercialize DoubleTwist.com, Prophecy and
GeneForest. For the six months ended June 30, 2000, Hitachi accounted for 53% of
our net revenues.
COST OF REVENUES. Cost of license fees increased 33%, to $37,000 for the
six months ended June 30, 2000 from $28,000 for the same period in 1999. Cost of
subscriptions increased to $1.0 million for the six months ended June 30, 2000
from zero for the same period in 1999, due to the launch of the DoubleTwist.com
Web site. Cost of services and other revenues decreased $0.4 million, or 59%, to
$0.2 million for the six months ended June 30, 2000 from $0.6 million for the
same period in 1999, due
25
<PAGE>
to the completion in 1999 of a grant funded by the National Institutes of
Health. Amortization of deferred stock-based compensation allocated to cost of
revenues was $51,000 for the six months ended June 30, 2000 as compared to zero
in the corresponding period in 1999. Gross profit increased $0.2 million, or
20%, to $1.5 million for the six months ended June 30, 2000 from $1.3 million
for the same period in 1999, due to the increase in license fees. Gross margin
decreased to 54% for the six months ended June 30, 2000 from 67% in the six
months ended June 30, 1999 due to the cost of launching and maintaining
DoubleTwist.com.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$4.5 million, or 172%, to $7.1 million for the six months ended June 30, 2000
from $2.6 million for the same period in 1999. The increase was due primarily to
an increase in headcount, equipment depreciation and third-party consulting
expenses related to the development of the DoubleTwist.com Web site. In
addition, amortization of deferred stock-based compensation allocated to product
development expenses increased to $433,000 for the six months ended June 30,
2000 from $9,000 for the six months ended June 30, 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$4.9 million, or 277%, to $6.7 million for the six months ended June 30, 2000
from $1.8 million for the same period in 1999, due primarily to additional
headcount in sales, marketing and customer support, as well as an increase in
marketing expenses related to the launch of the Web site. For the six months
ended June 30, 2000, we recorded amortization of deferred stock-based
compensation allocated to sales and marketing expenses of $1,046,000 as compared
to $1,500 in the six months ended June 30, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.1 million, or 104%, to $2.1 million for the six months ended
June 30, 2000 from $1.0 million for the same period in 1999. The increase was
due primarily to an increase in headcount, as well as amortization of deferred
stock-based compensation allocated to general and administrative expenses of
$618,000 for the six months ended June 30, 2000.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net decreased
$2.1 million to net interest expense of $2.1 million for the six months ended
June 30, 2000 from net interest income of $93,000 for the same period in 1999.
The increase was due primarily to noncash interest expense of $2.6 million
related to the beneficial conversion feature and the fair value of warrants
issued in connection with our bridge loan financing.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Total revenues in 1999 decreased $0.7 million, or 16%, to
$3.6 million from $4.3 million in 1998. License fees in 1999 decreased
$0.5 million, or 18%, to $2.3 million from $2.8 million in 1998. The decrease in
license fees was due to the discontinuation of sales efforts for some of our
bioinformatics software applications. Services and other revenues decreased
$0.2 million in 1999, or 12%, to $1.3 million from $1.5 million in 1998. The
decrease in services and other revenues was due to a management decision to
discontinue the resale of third-party hardware and software in May 1999. No
customer accounted for more than 10% of revenues in 1999.
COST OF REVENUES. Cost of license fees decreased $0.1 million in 1999, or
47%, to $0.1 million from $0.2 million in 1998. Cost of services and other
revenues decreased $0.3 million in 1999, or 25%, to $0.9 million from
$1.3 million in 1998. The decrease in cost of services and other revenues was
due to the discontinuance of the resale of third-party hardware and software.
Amortization of deferred stock-based compensation allocated to cost of revenues
was $7,000 in 1999. Gross profit decreased $0.3 million in 1999, or 9%, to
$2.5 million from $2.8 million in 1998. The decrease was due to the decrease in
license fees. Gross margin increased to 71% in 1999 from 66% in 1998 due to the
decrease
26
<PAGE>
in revenues from the resale of third-party hardware and software, which have a
lower gross margin than revenues from license fees or services.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$1.6 million in 1999, or 31%, to $6.9 million from $5.3 million in 1998. The
increase was due to third-party consulting expenses related to the development
of DoubleTwist.com, as well as increased equipment depreciation expenses. In
addition, amortization of deferred stock-based compensation allocated to product
development expenses was $106,000 in 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$0.9 million in 1999, or 20%, to $4.9 million from $4.0 million in 1998. The
increase was due to additional marketing expenses related to the launch of
DoubleTwist.com as well as amortization of deferred stock-based compensation
allocated to sales and marketing expenses of $153,000 in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.6 million in 1999, or 34%, to $2.3 million from $1.7 million in
1998. The increase was due primarily to strategic and other consulting expenses,
and expenses related to the Scientific Advisory Board. Amortization of deferred
stock-based compensation allocated to general and administrative expenses was
$23,000 in 1999.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net increased
$0.5 million in 1999, or 120%, to net interest income of $91,000 from net
interest expense of $0.4 million in 1998. The increase was primarily due to
interest income on increased cash balances from equity financings in
February 1999.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Total revenues in 1998 increased $3.0 million, or 233%, to
$4.3 million from $1.3 million in 1997. License fees in 1998 increased
$2.3 million, or 449%, to $2.8 million from $0.5 million in 1997. The increase
in license fees was due to an increase in sales of our bioinformatics software
applications. Services and other revenues increased $0.7 million in 1998, or
91%, to $1.5 million from $0.8 million in 1997. The increase was due to an
increase in maintenance and service revenues from the installation and support
of our products, an increase in the resale of third-party hardware and software
and a grant from the National Institutes of Health. For the year ended
December 31, 1998, three customers accounted for 13%, 12% and 11% of our net
revenues. For the year ended December 31, 1997, five customers accounted for
30%, 30%, 13%, 12% and 11% of our net revenues.
COST OF REVENUES. Cost of license fees increased $0.2 million in 1998, to
$0.2 million from $2,000 in 1997. The increase was due to the increase in
license fee and to an increase in third-party software bundled with our
products. Cost of services and other revenues increased $0.9 million in 1998, or
241%, to $1.3 million from $0.4 million in 1997, due to the increase in services
and other revenues. Gross profit increased $1.9 million in 1998, or 208%, to
$2.8 million from $0.9 million in 1997. Gross margin decreased to 66% in 1998
from 71% in 1997 due to the increase in revenues from the resale of third-party
hardware and software, which have a lower gross margin than revenues from
license fees or services.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$0.3 million in 1998, or 6%, to $5.3 million from $5.0 million in 1997 due
primarily to increased compensation expenses.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$1.8 million in 1998, or 88%, to $4.0 million from $2.2 million in 1997, due
primarily to additional headcount in sales, marketing, professional services and
customer support, as well as an increase in commission expenses.
27
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $0.3 million in 1998, or 14%, to $1.7 million from $2.0 million in
1997 due primarily to a reallocation of personnel.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net decreased
$0.5 million in 1998, or 461%, to net interest expense of $0.4 million from net
interest income of $0.1 million in 1997. The decrease was primarily due to a
lower average in cash balances during 1998 due to losses from operations and to
interest expense related to the issuance of warrants to investors and to a
financial institution.
INCOME TAXES
We incurred net losses during the past three years and consequently are not
subject to corporate income taxes. At December 31, 1999, we had federal net
operating loss carryforwards of approximately $27.9 million, state net operating
loss carryforwards of approximately $6.8 million, federal research and
development credits of approximately $0.6 million and state research and
development carryforwards of approximately $0.4 million. The net operating loss
and credit carryforwards will expire at various dates beginning in the year
2002. The utilization of net operating loss carryforwards to reduce future
income taxes will depend on our ability to generate sufficient taxable income
prior to the expiration of the net operating loss carryforwards. In addition,
the maximum annual use of the net operating loss carryforwards is limited in
certain situations where changes occur in our stock ownership.
LIQUIDITY AND CAPITAL RESOURCES
Since inception we have primarily funded our operations through private
placements of our preferred stock and convertible notes, through which we raised
aggregate net proceeds of $65.7 million through June 30, 2000. We have also
financed our operations through equipment loans and lease financings. As of
June 30, 2000, we had outstanding bank and other borrowings of $6.0 million and
additional availability under our bank facilities of $0.8 million. As of
June 30, 2000, we had cash and cash equivalents and short term investments of
$21.8 million. In July 2000, we received net proceeds of $7.7 million from the
private placement of our Series E preferred stock.
In April 1997, we obtained $2.0 million in equipment lease financing from
Comdisco Ventures. Amounts borrowed to purchase computer hardware and software
bear interest at 6.5% per year and are payable in 48 monthly installments. In
connection with this facility, we issued Comdisco a warrant to purchase 10,090
shares of our Series B convertible preferred stock at $6.442 per share. In
May 1998, we obtained $1.0 million in equipment lease financing from Comdisco
Ventures. This financing bears interest at 8.25% per year and is payable in
48 monthly installments. In connection with this facility, we issued Comdisco a
warrant to purchase 12,500 shares of our Series C convertible preferred stock at
$2.80 per share. These facilities are secured by the computer equipment
purchased with the loans and have no remaining available balance.
In August 1998, we entered into a $1.0 million equipment loan agreement with
Silicon Valley Bank, which became available to us in December 1998. This
financing bears interest at the bank's prime rate plus 0.5% per year and is
payable in 36 monthly installments. In connection with this facility, we issued
Silicon Valley Bank a warrant to purchase 12,500 shares of our common stock at
$6.442 per share. In November 1998, we issued Silicon Valley Bank a warrant to
purchase 3,703 shares of Series C preferred stock at a price of $2.80 per share
in connection with a bridge loan which was made by Silicon Valley Bank. In
February 2000, we obtained an additional $1.5 million equipment loan from
Silicon Valley Bank. Borrowings bear interest at the bank's prime rate plus 0.5%
per year and are payable in 36 monthly installments. In June 2000, we obtained
an additional $3.0 million equipment loan from Silicon Valley Bank. Borrowings
bear interest at the bank's prime rate plus 1.0% per year and are payable in
36 monthly installments. There is no remaining available balance under any of
these agreements. The agreements governing the terms of these loans contain
restrictions on the payment of
28
<PAGE>
dividends and financial covenants, including, but not limited to, tangible net
worth requirements and current and debt service ratios. We were not in
compliance with the financial covenants at December 31, 1999. We received the
necessary waivers from the financial institutions and are currently in
compliance with the covenants.
In April 2000, we entered into an agreement to loan $4.5 million to an
unrelated third party for the purchase of a building. The note bears interest at
10.5% per year with interest only payments due monthly and principal due in
2010. We will lease the building from the third party for a term of ten years
with two five-year options to extend the term. Future minimum lease payments
under the building lease are $293,140, $1,768,580, $1,827,360, $1,888,200,
$1,951,200 and $12,751,680 for the years ending December 31, 2000, 2001, 2002,
2003, 2004 and thereafter.
Net cash used in operating activities was $7.8 million, $7.8 million,
$7.9 million and $10.6 million in 1997, 1998, 1999 and for the six months ended
June 30, 2000. The decreases in cash were primarily attributable to operating
losses.
Net cash used in investing activities was $0.5 million, $0.2 million,
$3.4 million and $16.9 million in 1997, 1998, 1999 and for the six months ended
June 30, 2000. The increase in cash used in investing activities for the year
ended December 31, 1999, over the prior period was due to the acquisition of
equipment for DoubleTwist.com, the purchase of marketable securities and an
investment in restricted cash and notes receivable for the lease of a building.
We acquired an additional $1.5 million, $0.9 million and $0.3 million of
equipment in 1997, 1998 and 1999 under an equipment lease and presented these
funds as a noncash transaction in our financial statements. In April 2000, we
made a loan in the principal amount of $4.5 million for the purchase of a
building which we will be leasing from the purchaser commencing in October 2000.
The loan bears interest at 10.5% per year, payable monthly, and the principal is
payable in full in April 2010.
Net cash provided by financing activities was $10.1 million, $16.1 million,
$2.2 million and $41.1 million in 1997, 1998, 1999 and for the six months ended
June 30, 2000 and resulted primarily from $9.9 million in net proceeds from the
issuance of Series B convertible preferred stock in 1997, from $18.4 million in
net proceeds from the issuance of Series C convertible preferred stock and
convertible notes in 1998 and 1999, and from $37.0 million in net proceeds from
the issuance of Series D convertible preferred stock and convertible notes in
2000.
We believe that our available cash resources will be sufficient to meet our
liquidity needs to maintain our existing level of operations for at least the
next 12 months. We believe that our available cash resources plus the net
proceeds of this offering will be sufficient to fund our anticipated growth for
at least the next 12 months. Our future long-term capital needs will depend
significantly on the rate of growth of our business, the timing of expanded
service offerings and the success of these services once they are launched. Any
projections of future long-term cash needs and cash flows are subject to
substantial uncertainty. If the net proceeds of this offering, together with our
available funds and cash generated from operations, are insufficient to satisfy
our long-term liquidity requirements, we may seek to sell additional equity or
debt securities, obtain a line of credit or curtail expansion of our services.
If we issue additional securities to raise funds, those securities may have
rights, preferences or privileges senior to those of the rights of our common
stock and our stockholders may experience dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial
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<PAGE>
position and measure those instruments at fair value. In July of 1999, the FASB
issued Statement of Financial Standards No. 137, or SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which defers the effective date to all fiscal quarters
of fiscal years beginning after June 15, 2000. We have not yet evaluated the
effects of this change in our operations. We do not currently hold derivative
instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. In June 2000, the SEC
issued SAB 101B which delays the implementation of SAB 101 until no later than
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We
believe that our current revenue recognition policy is in compliance with
SAB 101.
In March 2000, the Emerging Issues Task Force reached a consensus on
Issue 00-2, ACCOUNTING FOR THE COSTS OF DEVELOPING A WEB SITE (EITF 00-2). In
general, EITF 00-2 states that the costs of developing a Web site should be
accounted for under provisions of Statement of Position (SOP) 98-1, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. We
are currently evaluating EITF 00-2 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. EITF 00-2 is effective for costs incurred after June 30, 2000.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--an interpretation of APB Opinion
No. 25 (FIN 44). This Interpretation clarified the definition of an employee for
purposes of applying Accounting Practice Board Opinion 25, Accounting for Stock
Issued to Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occurred after either December 15,
1998, or January 12, 2000. Management does not expect that FIN 44 will have a
material effect on the consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and notes payable. We do not use derivative
financial instruments in our investment portfolio, and our investment portfolio
consists of short-term investment-grade corporate securities. These securities
are highly liquid and generally mature within 12 months from our purchase date.
We primarily enter into notes payable agreements to support general corporate
purposes, including working capital requirements and capital expenditures.
We are subject to fluctuating interest rates that may impact, adversely or
otherwise, our results of operations or cash flows for our variable rate cash
equivalents, marketable securities and notes payable. The estimated fair value
of our cash equivalents and marketable securities approximates costs due to
their short maturities. The estimated fair value of our notes payable
approximates carrying value based on rates currently available for debt with
similar terms and remaining maturities.
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This table below presents principal amounts and related weighted average
interest rates by year for our cash and cash equivalents and notes payable:
<TABLE>
<CAPTION>
2000 2001 2002 TOTAL
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $1,089,315 $ -- $ -- $1,089,315
Weighted average interest rate................... 5.82% 5.82%
LIABILITIES
Variable rate debt (prime plus 0.5%)
Notes payable to bank.......................... $ 333,333 $333,333 $250,001 $ 916,667
</TABLE>
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BUSINESS
OVERVIEW
We are a leading provider of genomic information and bioinformatics tools to
the life sciences industry. Our mission is to empower life scientists by
simplifying and accelerating genomic research. Each of our products is designed
to cost-effectively improve life science research productivity and capability
within pharmaceutical and biotechnology companies and research institutions.
Our current products are:
DOUBLETWIST.COM. Our primary product is DoubleTwist.com, a powerful, secure
and comprehensive online research environment that enables the life scientist to
perform sophisticated genomic analysis without requiring bioinformatics
expertise. Subscribers to DoubleTwist.com receive access to intelligent and
automated analysis tools, recommended products, resources and advanced,
interactive software for the visualization of their research results. The
technology underlying DoubleTwist.com integrates more than 25 disparate genomic
databases. These databases include public databases, databases licensed from
third parties and our collaborators, and our proprietary databases, such as our
Annotated Human Genome Database and our Annotated Human Gene Index, which are
created by processing and annotating the public genomic data with our
proprietary software.
PROPHECY. Our proprietary Annotated Human Genome Database, a regularly
updated source of extensively annotated human genomic DNA sequences, is
available for use on a customer's internal computer network through a product
called Prophecy. Prophecy also includes software for data interpretation and
visualization.
GENEFOREST. Our proprietary Annotated Human Gene Index, a concise and
regularly updated database containing expressed sequences that can be used to
identify potential full-length genes and their variants, is available for use on
a customer's internal computer network through a product called GeneForest.
GeneForest also includes software for data interpretation and visualization.
CLUSTERING AND ALIGNMENT TOOLS (CAT). Our proprietary software product,
CAT, is used to process and analyze large sequence databases. CAT enables
customers to more rapidly assemble gene fragments into full-length gene
sequences and to identify gene variants. This product is available for use on a
customer's internal computer network.
Our customers include pharmaceutical and biotechnology companies and
research institutions, such as Bristol-Myers Squibb Company, Merck & Co., Inc.,
Chiron Corporation, Genaissance Pharmaceuticals, Inc., Affymetrix, Inc.,
Hitachi, Ltd., E.I. du Pont de Nemours and Company, Monsanto Company, Grupo
Estudios Multicentricos en Argentina (GEMA) and R.W. Johnson Pharmaceutical
Research Institute.
INDUSTRY BACKGROUND
THE ROLE OF GENES IN HUMAN HEALTH
All of the basic information required to build a living organism is encoded
in deoxyribonucleic acid, or DNA. DNA molecules are structured as two parallel
strands of nucleotides, specifically adenine, cytosine, guanine and thymine, in
the shape of a double helix. The specific sequence of these nucleotides
determines genetic identity, and the sum of the information is referred to as
the genome.
The human genome is made up of approximately 3.2 billion pairs of
nucleotides, which define approximately 100,000 genes. Genes are hereditary
segments of genomic DNA, each capable of specifying the synthesis of one or more
specific proteins. These proteins work together to define and regulate vital
cellular functions.
Proteins are created from DNA through processes called transcription and
translation. First, the parallel strands of the DNA molecule unwind forming a
template for the synthesis of ribonucleic acid,
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or RNA, in a process called transcription. The non-protein coding portions of
this RNA transcript are then removed, creating a messenger RNA molecule, or
mRNA, which includes only the information required to build a protein. The mRNA
molecule then becomes a template for protein synthesis in a process called
translation. Protein-coding DNA sequences only account for approximately five
percent of the total genomic DNA. The other 95 percent of non-coding genomic DNA
is sometimes referred to as junk DNA.
Variation in genes dictates differences in one's development, physiology and
disease susceptibility and progression. In fact, nearly every disease has a
genetic component. Individual genetic profiles also determine individual
responses to certain medications. Some diseases, such as cystic fibrosis, are
caused by a single gene mutation. Others, such as cancer, can be the result of
multiple mutated and interacting genes. The consequences of genetic variation
also can be external to the human genome. For example, different strains of the
HIV virus elicit different responses in different individuals.
Using the understanding of the role of genes to create drugs is a relatively
new phenomenon within the drug discovery industry. Historically, drugs were
derived either from natural products or by serendipity and were designed to
treat symptoms, generally without an understanding of the underlying genetic
components of the disease. Only in the last 20 years has genetic engineering
been used to create drugs. Examples of the first genetically engineered drugs
include erythropoietin, used to treat anemia, and insulin. Advances in
understanding the role of genes in human health and disease and new technologies
for interpreting genomic data are expected to improve medical treatment by
facilitating the development of drugs that target the biological roots of
disease.
SEQUENCING THE GENOME AND IDENTIFYING NEW DRUG TARGETS
Several public and private organizations are engaged in decoding the
sequence of nucleotides in the genomes of a number of organisms, including the
human genome. In a recent milestone, the Human Genome Project, an international
research effort designed to determine the complete sequence of the human genome
and discover all human genes, announced the completion of a "rough draft" of the
human genome sequence.
The sequencing process and associated research have generated an enormous
amount of raw data, which often contain errors, such as inaccuracies and
redundancies, and are often unorganized, incomplete and poorly annotated.
Further, much of these data are located in disparate databases with no single
point of access. It is expected that the amount of data will continue to grow
exponentially as technology improves and scientists build upon their existing
knowledge of the human genome.
The sequencing process is only a first step in applying genomic data to the
biomedical research process. A necessary next step is annotation, which involves
performing a range of analyses designed to locate genes and to predict the
function of their protein products in cellular processes and disease.
Identifying and predicting the function of genes within the raw sequence data
and performing experiments to confirm these hypotheses allows researchers to
identify biological targets. New drugs and diagnostic technologies are designed
to interact with these target molecules.
Identifying targets for drugs or diagnostics involves the following types of
data analysis:
- DNA SEQUENCE ANALYSIS involves identifying gene location, searching for
similarities across organisms, predicting the protein products of genes
and their structure, and identifying gene families.
- GENE EXPRESSION ANALYSIS involves analyzing whether a gene is active or
repressed in a particular disease state or tissue type. Common
technologies include the study of Expressed Sequence Tags, or ESTs, which
are fragments of expressed genes.
- GENETIC VARIATION STUDIES involve the study of gene variants such as
single nucleotide polymorphisms (SNPs)--single nucleotide variations in a
particular gene that can affect a person's susceptibility to disease or
response to various treatments.
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- PATHWAY STUDIES involve mapping how proteins and small molecules interact
in order to identify specific biological processes which may be associated
with disease.
- PROTEOMICS involves the study of proteins, including their structure,
function, expression and interactions with other proteins in order to
determine disease-related proteins or identify potential therapies.
Pharmaceutical and biotechnology companies are aggressively analyzing the
available genomic and proteomic data for new targets in order to build their
drug pipelines. According to the Pharmaceutical Research and Manufacturers of
America, the human genome contains approximately 3,000 to 10,000 biological
molecules of potential value as targets for drugs or diagnostics, whereas only
about 500 such molecules have been identified so far.
THE ROLE OF BIOINFORMATICS IN THE LIFE SCIENCES INDUSTRY
Bioinformatics is the application of information technology to the life
sciences industry, specifically the storage, management and analysis of genomic
and other biological data. Over the past few years, bioinformatics has become
increasingly crucial to the management and analysis of the sequence data
generated by the Human Genome Project and similar efforts. Advances in
computational processing and computer-aided data visualization have increased
the ability of bioinformatics tools to facilitate rapid interpretation and
analysis of genomic data.
Access to comprehensive data and the tools to manipulate and analyze these
data is critical to the process of converting genomic information into promising
biological targets and then successful drug candidates and diagnostic devices.
However, the life sciences industry faces significant analytical and data
management challenges before it can capitalize on the promise of genomics.
BIOINFORMATICS CHALLENGES FACING THE LIFE SCIENCES INDUSTRY
There is currently no comprehensive research environment that addresses the
full spectrum of an organization's needs for drug discovery research. As a
result, some pharmaceutical and large biotechnology companies have attempted to
implement bioinformatics software systems in-house, requiring significant
internal investments in computer hardware, software, personnel and maintenance.
These companies often establish dedicated, centralized departments, staffed by
bioinformaticists. However, these individuals, trained in computer science and
biology, are scarce and often do not have the resources both to update and
maintain the databases and to adequately serve the analysis needs of the life
scientist. As a result we believe that, as seen in other industries, there will
be a greater trend toward outsourcing bioinformatics.
Smaller biotechnology companies and academic institutions typically do not
have the resources to implement an adequate in-house bioinformatics software
system. As a result, they rely on less comprehensive publicly available tools,
such as those provided by the National Center for Biotechnology Information, for
their analyses.
In summary, the following are examples of current bioinformatics challenges
facing the life sciences industry:
- The amount of available genomic information is increasing exponentially,
and there is no single point of access to multiple sources of disparate
public and private data. Further, data provided through public sources
often contain errors and are often unorganized, incomplete and poorly
annotated.
- As the amount of publicly available data grows, organizations are faced
with the challenge of integrating public data with their proprietary or
licensed data in a secure environment.
- Individual life scientists typically do not have direct access to
sophisticated bioinformatics tools or the training to use many of the
currently available tools. In addition, even within large
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organizations, bioinformaticists are scarce and often are unavailable to
serve the needs of all of the organization's life scientists.
The explosion in available genomic data has brought about the need for an
advanced, cost-effective, bioinformatics research environment that integrates
multiple sources of data and that life scientists can securely access and easily
use.
THE DOUBLETWIST SOLUTION
We are a leading provider of genomic information and bioinformatics tools to
the life sciences industry. We provide a powerful, secure and comprehensive
online research environment that enables the life scientist to perform
sophisticated genomic analysis without requiring bioinformatics expertise.
DoubleTwist.com is available by subscription through our secure Web site, and we
also license components of the site's underlying technology, including Prophecy,
GeneForest and our Clustering and Alignment Tools (CAT), for use on a customer's
internal computer network.
Our mission is to empower life scientists by simplifying and accelerating
genomic research. To support this mission, we:
- AGGREGATE AND INTEGRATE PROPRIETARY, PUBLIC AND THIRD-PARTY DATA. Using
our internal bioinformatics expertise and computational capabilities, we
process and error-correct the public data in order to provide value-added,
target-enriched databases, which are offered as part of DoubleTwist.com,
Prophecy and GeneForest. By integrating our proprietary data with the
numerous public databases, as well as with other licensed third-party
databases, DoubleTwist.com provides life scientists with a single point of
access to more than 25 sources of genomic information. In addition, CAT
enables customers to integrate and analyze proprietary, public and
third-party data in a single application.
- PROVIDE A SECURE, ROBUST TECHNOLOGY INFRASTRUCTURE. Underlying
DoubleTwist.com is a highly secure and reliable infrastructure that can
scale as customers' demands increase. Our research environment has been
designed in such a way that components of the technology can be licensed
separately for use on a customer's internal computer network. The data
associated with these component products is provided in a format that can
be integrated with our customers' own data and software systems. Each of
these component products can be used with the others and with
DoubleTwist.com. The DoubleTwist.com software architecture ensures that
our product is reliable and able to scale to handle increasing
computational demands, and that our customers' data as well as their
online interactions are confidential.
- SIMPLIFY AND ACCELERATE GENOMIC ANALYSIS. By automating processes that
typically require bioinformatics expertise, our products simplify genomic
analysis and accelerate the drug discovery process. Through
DoubleTwist.com, we provide intelligent, automated programs, called
Research Agents, which conduct genomic analysis and continual database
monitoring on behalf of the user. These Research Agents have been designed
to save time and reduce the complexity of genomic analysis by automating
the activities that would otherwise be conducted by trained
bioinformaticists. In addition, our advanced software for data
interpretation and visualization facilitates the rapid interpretation of
analysis results by aggregating a large amount of data into one easily
comprehensible and interactive graphical view.
OUR STRATEGY
Our goal is to provide the leading research environment for genomic
information and bioinformatics analysis. Our mission is to empower life
scientists by simplifying and accelerating genomic research. Our strategy is to:
CREATE A COMPREHENSIVE WORK ENVIRONMENT THAT EMPOWERS LIFE SCIENTISTS. We
intend to create a comprehensive work environment for genomic research. As part
of this strategy, we will continue to:
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- simplify access to multiple sources of genomic data through a common user
interface;
- facilitate and automate genomic database searches;
- aid the rapid interpretation of results with interactive, graphical data
viewers;
- centralize project management with online data storage;
- provide continual updates using our automated data monitoring tools;
- link research results to scientific journal articles and other literature;
and
- streamline laboratory product ordering with a seamless link from research
to relevant goods and data.
ENHANCE THE FUNCTIONALITY OF OUR PRODUCTS BY ADDING MORE TOOLS AND
RESOURCES. We intend to continue to enhance our products by adding tools and
resources. We intend to continue to improve our computational methods, software
tools and user interface to further enhance our technology. In addition, we plan
to integrate new resources into DoubleTwist.com by expanding our relationships
with database and other technology providers.
ENHANCE THE VALUE OF OUR PRODUCTS BY AGGREGATING THIRD-PARTY DATA AND
ALLOWING FOR THE INTEGRATION OF CUSTOMER DATA. Our technology infrastructure
has been designed to allow for the integration of databases from third parties.
This provides a cost-effective way for us to regularly enhance the value of our
products. Using our bioinformatics expertise and computational processing
capabilities, we plan to continue to aggregate and annotate public and
proprietary genomic data as such data becomes available. In addition, we intend
to expand the capability of our products to integrate our customers' data.
REMAIN A NEUTRAL SOURCE FOR GENOMIC INFORMATION AND ANALYSIS. We believe
our neutrality provides us with a strategic advantage in attracting both
collaborators and customers from the pharmaceutical and biotechnology industries
since we do not compete with them in either the laboratory generation of
intellectual property or the development of drugs. We do not intend to develop
drugs or to secure rights to drug targets identified using our products. We are,
and intend to continue to be, a neutral showcase and channel for our
collaborators' data.
CONTINUE TO COMPUTATIONALLY GENERATE PROPRIETARY GENOMIC DATA. We intend to
use our bioinformatics expertise and computational processing capabilities to
continue to generate proprietary genomic information from publicly available
data. For example, we may use these capabilities to annotate data for additional
species important for biomedical research, such as the mouse, in order to
provide additional value-added annotated databases. Furthermore, since we are
not patenting this data, we intend to continue to provide a royalty-free source
of high-quality genomic information.
RAPIDLY BUILD OUR CUSTOMER BASE AND EXPAND OUR PRODUCT LINE INTO NEW
MARKETS. We intend to rapidly build our customer base by aggressively marketing
to the life sciences industry, through our direct sales force and traditional
marketing channels, and by leveraging our existing customer relationships, by
introducing customers to our other products and the benefits of upgraded
subscriptions. In addition, we intend to expand the use of free trial
subscriptions to DoubleTwist.com. In the future, we also intend to leverage our
software capabilities to address the needs of other large markets that require
genomic information, such as physicians and genetic counselors. We may pursue
these opportunities either on our own or through acquisitions or collaborations
that complement or extend our current product line.
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OUR PRODUCTS
Our products include DoubleTwist.com, Prophecy, GeneForest and our
Clustering and Alignment Tools (CAT).
<TABLE>
<CAPTION>
PRODUCT KEY FEATURES
<S> <C>
DOUBLETWIST.COM Online research environment that provides
LAUNCHED JANUARY 2000 access to multiple sources of genomic
data, automated analysis and advanced
data visualization tools.
PROPHECY Extensively annotated database of human
LAUNCHED JUNE 2000 genomic DNA sequences and software for
data interpretation and visualization.
GENEFOREST Concise, annotated database of novel
LAUNCHED AUGUST 2000 expressed gene transcripts (mRNAs and
ESTs) and their variants and software for
data interpretation and visualization.
CLUSTERING AND ALIGNMENT TOOLS (CAT) Software for processing and analyzing
LAUNCHED OCTOBER 1998 large genetic sequence databases.
</TABLE>
License fees for CAT and our other enterprise software products accounted
for 40%, 65%, 64% and 72% of our total revenues in 1997, 1998, 1999 and the nine
months ending September 30, 2000. DoubleTwist.com, Prophecy and GeneForest,
launched in 2000, generated aggregate revenues of approximately $800,000 through
September 30, 2000. In addition, in 1997, a one-time contract accounted for 39%
of our total revenues and, in 1999, maintenance fees accounted for 16% of our
total revenues.
DOUBLETWIST.COM
Our primary product is DoubleTwist.com, a powerful, secure and comprehensive
online research environment that enables the life scientist to perform
sophisticated genomic analysis without requiring bioinformatics expertise. By
providing a powerful, automated and easy-to-use Web-based computer application,
DoubleTwist.com simplifies and accelerates the drug discovery process. The key
benefits of DoubleTwist.com include:
- IMPROVED RESEARCHER PRODUCTIVITY. By creating a single source for genomic
data through the integration of disparate public and proprietary
databases, DoubleTwist.com allows life scientists to quickly and
efficiently access many databases simultaneously. In addition, our
Research Agents monitor changes or additions to databases, avoiding the
need for scientists to conduct repetitive searches across multiple
databases and cross-reference data and literature in order to stay
up-to-date.
- EXPANDED ANALYSIS CAPABILITIES FOR LIFE SCIENTISTS. Our Research Agents
automate processes traditionally performed by a bioinformaticist using
complex computer programs. DoubleTwist.com enables individual life
scientists to perform advanced genomic analyses without specialized
training in bioinformatics.
- REDUCED COST OF GENOMIC RESEARCH. We host advanced genomics research
applications supported by powerful bioinformatics hardware and software,
eliminating the need for our
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customers to make large investments in internal bioinformatics systems and
specialized personnel. Our Web-based business model allows smaller
biotechnology companies and academic institutions, which traditionally
have not had access to advanced bioinformatics capabilities, to more
rapidly and cost-effectively gain access to sophisticated genomic analysis
resources.
DoubleTwist.com is sold as an annual per user subscription at one of three
pricing levels: Bronze, Silver or Gold. Subscriptions are based on the number of
sequence analyses and the degree of access to Research Agents, research
resources and data. Additional sequence analyses and research resources can be
purchased on an a-la-carte basis. The Bronze subscription provides complimentary
access to a limited number of DNA and protein sequence analysis Research Agents,
and allows users to analyze and store up to 10 sequences on our secure server.
The Silver subscription allows additional sequence analysis and storage, and
offers users access to additional functionality and data, including Expressed
Sequence Tag, or EST analysis for constructing full-length gene sequences from
expressed gene fragments (ESTs). The Gold subscription provides users with our
highest level of sequence analysis and storage, and offers users access to our
Annotated Human Genome Database and other databases and analysis tools. All
subscriptions allow users to access resources including laboratory protocols and
protein pathway databases, our desktop sequence analysis applications and
educational courses.
DOUBLETWIST.COM DATABASES. The databases underlying DoubleTwist.com include
continually updated public and licensed databases, literature databases,
DoubleTwist-generated proprietary databases (computationally derived from public
data) and collaborator databases. These databases contain data on protein
interactions, novel genes, patents and other relevant information.
<TABLE>
<CAPTION>
SELECTED DATABASES UNDERLYING DOUBLETWIST.COM
<S> <C>
PUBLIC AND LICENSED DATABASES DOUBLETWIST'S PROPRIETARY DATABASES
Blocks+ Annotated Human Gene Index
DbEST Annotated Human Genome Database
GenBank Arabidopsis Gene Index
GenPept Drosophila Gene Index
Medline Mouse Gene Index
PDB
PFAM COLLABORATOR DATABASES
PRINTS AlphaGene proprietary gene inventory
PRODOM Derwent GENSEQ patent database
Swiss-Prot HighWire Press literature database
TrEMBL ProNet Online (Myriad Genetics, Inc.)
Unigene
</TABLE>
DOUBLETWIST.COM RESEARCH TOOLS. Research tools are at the core of the
DoubleTwist.com product. These tools include our automated Research Agents
(Profile and Monitor Agents), as well as software applications for sequence
analysis, data interpretation and visualization. Profile Agents perform a
comprehensive, one-time search based on a query or request from the user, and
Monitor Agents continually search the databases underlying DoubleTwist.com and
notify the user of any additions or changes.
To conduct an analysis, the user submits a sequence or set of sequences and
selects one or more Research Agents. When a Research Agent has completed its
analysis, it sends an email notifying the user that a new report has been placed
in the user's online password-protected project folder.
These DoubleTwist.com research tools enable life scientists to:
- discover new genes and gene function;
- identify new members of a gene family;
- analyze the gene structure of human genomic DNA;
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- compare DNA and protein sequences; and
- identify protein function.
<TABLE>
<CAPTION>
RESEARCH TOOL DESCRIPTION
<S> <C>
Profile Agents Automated programs for comprehensive DNA and protein
sequence analysis
Monitor Agents Automated programs for on-going database monitoring and
notification of relevant updates
Genomic Viewer Interactive data interpretation and visualization tool that
integrates the results of multiple scientific analyses
enabling users to examine gene structure
Cluster Viewer Interactive data interpretation and visualization tool that
enables users to examine computationally generated
full-length sequences and their variants
TwistTools Desktop sequence analysis tools
</TABLE>
DOUBLETWIST.COM RESOURCES. In addition to research tools, we provide a
number of resources on DoubleTwist.com that help support life science research.
These include educational services, and searchable sources of additional
information on biological protocols, protein interactions and pathways.
<TABLE>
<CAPTION>
RESOURCE DESCRIPTION
<S> <C>
TwistEd Bioinformatics educational tutorials
ProNet Online Database and visualization tools exclusively licensed from
Myriad Genetics, Inc. for analyzing protein-protein
interactions
Protocol Online Searchable site for molecular and cell biology protocols and
discussion groups
EcoCyc Online encyclopedia of E. COLI metabolic pathways
</TABLE>
DOUBLETWIST.COM E-COMMERCE. DoubleTwist.com provides scientists with a way
to identify relevant laboratory supplies and genomic data that are associated
with the research they are conducting on our site. Through our collaborations
with life science suppliers and e-commerce platform providers, including
Chemdex, an operating company of Ventro Corporation, scientists will be able to
click-through to purchase from these suppliers, making the purchasing process
both easier and more efficient. Currently, scientists can purchase products from
AlphaGene, Inc., CLONTECH Laboratories, Inc. and Invitrogen Corporation. We are
in the process of integrating product databases from additional suppliers.
DOUBLETWIST.COM CONTENT. Our Web-based product model also allows us to
provide an up-to-date source of news and other information that is of interest
to life scientists. As part of this ancillary service, we have established an
in-house editorial team that provides original features, research methods
reviews and commentary. In addition, we license content from such organizations
as ScreamingMedia.com, Inc., an aggregator of news sources, Oncology.com, a
source of news and information on cancer research, and Stockpoint, Inc., a
provider of online investment analysis tools and financial information.
PROPHECY
Prophecy consists of our regularly updated Annotated Human Genome Database
and its associated data interpretation and visualization tools. Prophecy
provides customers with an extensively annotated source of human genomic DNA
sequences that facilitates target discovery by enabling users to identify
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novel genes, examine gene structure and predict gene function. This product is
designed for customers who wish to analyze gene structure and function within
the context of the whole genome, and who wish to access this data and
functionality on a customer's internal computer network.
The key benefits of Prophecy include:
- INCREASED UNDERSTANDING OF THE HUMAN GENOME. The proprietary analytical
methodology used to process the public genomic data produces annotation
that allows life scientists to more quickly understand gene structure and
function. Obtaining a comprehensive view of the human genome. allows users
to identify other genes that may be functionally related to the gene of
interest and to study the regions that regulate the expression of these
genes.
- RAPID INTERPRETATION OF RESEARCH RESULTS. Prophecy includes our Genomic
Viewer, which integrates the result of various annotation methodologies
into a single, interactive application. Thus, the tool facilitates rapid,
interactive discovery and pattern recognition through graphical
representation of genomic sequences and related information.
- ABILITY TO PERFORM CONCEPT-BASED QUERIES. Prophecy provides a text-based
search tool that allows for concept-based queries, enabling scientists to
mine the database for genes associated with specific disease states, gene
or protein families, sequence or chromosome positions or other types of
annotation.
Prophecy is currently sold as an annual per site subscription with regular
data updates. If desired by the customer, subscriptions to Prophecy can be
bundled with subscriptions to DoubleTwist.com, allowing users to access the most
up-to-date information, automated analysis and database monitoring through the
Web site's Research Agents.
GENEFOREST
GeneForest consists of our regularly updated Annotated Human Gene Index
database and its associated data interpretation and visualization tools.
GeneForest provides customers with a compendium of genes computationally derived
and annotated from public domain EST and mRNA sequences. This product is
designed for customers wishing to analyze only expressed sequences that code for
protein products, in contrast to Prophecy which provides comprehensive
information on gene structure. These data can be used to identify potential
full-length genes and their variants, to predict protein function and family
associations, and to investigate gene expression patterns. The product is
designed for customers wishing to access this data and functionality on their
internal computer network.
A key benefit of GeneForest is that its underlying Annotated Human Gene
Index compresses the public domain EST and mRNA sequences into a more concise,
accurate and annotated database. Further, we provide data interpretation and
visualization tools to facilitate the graphical interpretation and validation of
computationally derived, full-length consensus sequences.
GeneForest is currently sold as an annual per site subscription with regular
data updates. If desired by the customer, subscriptions to GeneForest can be
bundled with subscriptions to DoubleTwist.com, allowing users to access the most
up-to-date information, automated analysis and database monitoring through the
Web site's Research Agents.
CLUSTERING AND ALIGNMENT TOOLS (CAT)
Our proprietary Clustering and Alignment Tools (CAT) have been used by more
than 25 organizations to more rapidly assemble gene fragments into full-length
genes and to identify gene variants, enabling users to more effectively analyze
public and in-house genomic data.
A key benefit of these tools is their ability to integrate multiple data
sources and data types into a single application, meeting a significant
infrastructure challenge for companies generating their own
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data as well as subscribing to third-party sequence databases. Our Cluster
Viewer allows users to examine sequence detail from clusters of similar
sequences to the nucleotide level. As a result, users can visualize genetic
sequence variations.
The CAT product is sold as a software license. In addition, we use these
tools to assist in creating our gene index databases, which are available
through DoubleTwist.com and GeneForest.
SALES AND MARKETING
We are marketing our products to the global life sciences industry. We
expect to expand our sales and marketing organization and activities and to
drive market awareness and sales in the following ways:
- ESTABLISH BROAD-BASED USAGE OF DOUBLETWIST.COM. To raise awareness among
life scientists of DoubleTwist.com and its benefits, we have launched a
marketing campaign using traditional and online media, such as journal
advertising, trade show exhibits, seminars, direct mail and email. As part
of our marketing strategy we have made certain features of the site
available to potential subscribers free of charge. In this way, we expect
to generate demand for DoubleTwist.com among life scientists who may
encourage their employers to purchase upgraded subscriptions to the
product.
- LICENSE COMPONENTS OF DOUBLETWIST.COM. We license Prophecy, GeneForest and
Clustering and Alignment Tools (CAT) for use on customer's internal
computer network. These products include links to DoubleTwist.com,
introducing customers to the benefits of our comprehensive online research
environment. In this way, we expect to generate demand for DoubleTwist.com
among pharmaceutical and biotechnology customers using Prophecy,
GeneForest and CAT.
- LEVERAGE RELATIONSHIPS WITH EXISTING CUSTOMERS. We intend to leverage our
relationships with pharmaceutical and large biotechnology companies that
have previously purchased our enterprise software products, such as CAT,
to further drive subscriptions for DoubleTwist.com and its component
products.
In October 2000, we entered into an exclusive agreement with Hitachi, Ltd.
for distribution and marketing of our DoubleTwist.com, Prophecy and GeneForest
products to the Asia-Pacific market. The agreement expires on September 30, 2001
but is automatically renewed for successive one-year terms unless terminated by
either party upon at least 60 days prior notice. In October 2000, we also
entered into an exclusive agreement with Hitachi, Ltd. for marketing and
distribution of CAT to the Asia-Pacific region. The agreement, which superseded
a similar agreement entered into in April 2000, expires on September 30, 2001
but is automatically renewed for successive one-year terms unless terminated by
either party upon at least 60 days prior notice.
Our sales team is divided into academic and commercial sales units,
including direct and telephone sales associates across North America and Europe.
These sales teams rely on our marketing communications efforts as well as our
internal usage tracking systems to identify, develop and close leads. As of
September 30, 2000, our worldwide sales and marketing group had 54 employees
located in the United States and Europe. We expect to expand our sales and
marketing group as we continue to commercialize our products.
Of total revenues in 1997, 70% and 30% were derived from customers located
in the United States and Europe. Of total revenues in 1998, 96% and 4% were
derived from customers located in the United States and China. Of total revenues
in 1999, 100% were derived from customers located in the United States. Of total
revenues in the nine months ended September 30, 2000, 60% and 40% were derived
from the United States and Japan.
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COLLABORATIVE RELATIONSHIPS
We have established collaborative relationships as a means of integrating
additional features and content into DoubleTwist.com. Our emphasis on software
technology and neutrality gives us an advantage in attracting content
collaborators, since we do not compete with them in either the laboratory
generation of intellectual property or in the development of drugs. Rather, we
act as a showcase and a channel for our collaborators by integrating their
products into our software system. Our collaborative relationships include the
following scientific database and content, research tools and e-commerce
collaborators:
OUR SCIENTIFIC DATABASE AND CONTENT COLLABORATORS:
- AlphaGene, Inc., for its proprietary gene inventory;
- Derwent Information Ltd., for its GENSEQ patent database;
- EraGen Biosciences, Inc., for its Master Catalog database of gene family
trees;
- Highwire Press, for its full-text journal articles;
- Myriad Genetics, Inc., for its ProNet Online database of protein-protein
interactions;
- Oncology.com, for news and information on cancer research;
- Popular Proteins, LLP, for its protein network data; and
- Proteome, Inc., for its model organism databases.
OUR RESEARCH TOOLS COLLABORATORS:
- BioTools Incorporated, for its GeneTool and PepTool desktop sequence
analysis software;
- Molecular Simulations Inc., for its tools for analyzing protein structure;
and
- University of Pennsylvania, for its BioWidgets toolkit.
OUR E-COMMERCE COLLABORATORS:
- Chemdex, an operating company of Ventro Corporation, for its e-commerce
infrastructure and fulfillment system;
- CLONTECH Laboratories, Inc., for its clones and arrays;
- Incyte Genomics, Inc., for its cDNA clones, DNA arrays, and purification
and screening kits; and
- Invitrogen Corporation, for its GeneStorm clones and DNA sequences.
We have several models for generating revenue from our collaborators, which
include:
- INTELLECTUAL PROPERTY MARKET MAKER. We identify potential sales of our
collaborators' intellectual property for a customer.
- DATA "PAY PER VIEW." Customer pays for one-time view of a segment of our
collaborators' content, as related to a specific research report arising
from a DoubleTwist.com Research Agent.
- PHYSICAL PRODUCT PURCHASE. Customer buys products, which have been
identified by DoubleTwist.com Research Agents as relevant to the
customer's research.
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In each of these relationships we receive a percentage of the resulting
revenue from our collaborators. The agreements with our collaborators generally
have a term of one year and generally are non-exclusive.
CUSTOMERS
The following is a list of customers that have purchased at least $100,000
worth of our products since January 1, 1998:
- Affymetrix, Inc.
- ARIAD Pharmaceuticals, Inc.
- Berlex Laboratories, Inc.,
a subsidiary of Schering AG, Germany
- Biogen, Inc.
- Bristol-Myers Squibb Company
- Chiron Corporation
- Chinese Human Genome Center
- Dow Agro Sciences
- E. I. du Pont de Nemours and Company
- Eli Lilly and Company
- EOS Biotechnology, Inc.
- Exonhit
- Genaissance Pharmaceuticals, Inc.
- Genetics Institute, a subsidiary of
American Home Products Corporation
- Genome Therapeutics Corp.
- Grupo Estudios Multicentricos en Argentina
- Hitachi, Ltd.
- Isis Pharmaceuticals, Inc.
- Lexicon Genetics Incorporated
- Merck & Co., Inc.
- Metabolex, Inc.
- Millenium Pharmaceuticals, Inc.
- Monsanto Company, a subsidiary of
Pharmacia Corporation
- Ontogeny, Inc.
- Rigel Pharmaceuticals, Inc.
- RW Johnson Pharmaceutical Research
Institute, a division of Johnson & Johnson
- SUGEN, Inc., a subsidiary of
Pharmacia Corporation
- Vertex Pharmaceuticals Incorporated
- Yamanouchi Pharmaceutical Co., Ltd.
Our customers also include individual life scientists from several leading
academic and research institutions, including Harvard Medical School, University
of California at San Francisco and Cedars-Sinai Medical Center.
In addition, researchers at many of the leading research and academic
institutions have Bronze subscriptions to DoubleTwist.com. We introduce
scientists to DoubleTwist.com by offering a complimentary Bronze account with
limited access to features of the site. Our goal is to upgrade Bronze accounts
to paid Silver or Gold subscriptions that offer higher levels of functionality.
CUSTOMER SERVICE AND SUPPORT
We believe a high level of customer support is a distinguishing element in
selling both subscription services and software products to the life sciences
industry. Our key customer support functions include:
- CUSTOMER EDUCATION AND TRAINING. Developing and delivering both internal
and external education, training programs and materials. Training is
provided either onsite or online.
- TECHNICAL SUPPORT. Providing technical knowledge and solutions for
customers via phone, email and online services. Online support is provided
24 hours a day, seven days a week using sophisticated online support
tools. Email and phone support is provided 12 hours a day, five days a
week.
As of September 30, 2000, our customer support team consisted of 17 persons,
14 of whom hold Ph.D.s or Masters degrees. We expect to expand our customer
service staff as we continue to commercialize our products.
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TECHNOLOGY AND SECURITY
Underlying DoubleTwist.com is a highly secure, reliable, and scalable
technology infrastructure, which has been designed to leverage our substantial
investment in hardware and software. We have built a scalable genomic data
processing center based on our bioinformatics expertise and computational
capabilities. This includes a distributed processing center that allows for
high-speed, parallel processing of large amounts of genomic data.
DoubleTwist.com provides a secure Web site to ensure that our customers'
data as well as their online interactions are confidential. We provide our users
and strategic collaborators with multiple safeguards, such as a multi-tiered
architecture that isolates and protects information behind public facing
servers, while multiple security firewalls protect servers hosting our
customers' and collaborators' data. All user research data transmissions are
secured by a 128-bit Secure Socket Layer. Access to our site is monitored using
intrusion and audit tracking software, and we have in place internal company
restrictions on the ability to access customer and collaborator data. The site
is hosted and monitored at a facility that provides physical security,
electronic security services and back-up power generation. We have not had any
material breaches in the security of our Web site.
We seek to provide a reliable system with minimal downtime. To provide this
level of service, we have designed DoubleTwist.com with redundant storage and
processing systems to ensure the availability of all key components. We have
designed DoubleTwist.com's infrastructure to be scalable as the number of our
subscribers grows. We use distributed processing technology that can load
balance demand across multiple processors. Our component-based architecture will
support future enhancements and the addition of new features such as new
research areas, third-party services or integration of new data.
We spent $5.0 million, $5.7 million and $7.4 million on research and
development in 1997, 1998 and 1999.
COMPETITION
We face competition from genomic data providers as well as from both
traditional and online bioinformatics software companies. A number of companies
focus on generating biological intellectual property, including Incyte
Genomics, Inc. and Celera Genomics Group, either to license or for internal
development efforts. Both of these companies also have recently begun to provide
online solutions for genomic research. The traditional bioinformatics companies,
which produce bioinformatics software either as enterprise software or on a
client/server basis, include LION Bioscience AG and InforMax, Inc. Other
bioinformatics companies, such as Compugen Ltd. and eBioinformatics, Inc., offer
online solutions. We also face competition from development groups within
companies that may offer customized bioinformatic solutions.
Our success in competing with these companies will depend on our ability to:
- aggregate and integrate an increasingly large amount of genomic data and
other resources;
- continue to provide a comprehensive solution for genomic research;
- develop superior software research applications and tools; and
- maintain competitive pricing.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. As a result, any of the following could occur:
- our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements;
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- competition could seriously impede our ability to sell additional products
and services on terms favorable to us;
- our competitors may be able to provide Internet-based services at a lower
cost than we can;
- our current and potential competitors may develop and market new
technologies that render our existing or future products and services
obsolete, unmarketable or less competitive; and
- our competitors may obtain patent protection or other intellectual
property rights that would limit our rights or our customer's ability to
use our products and services to commercialize their discoveries.
We may not be able to compete successfully against our current and future
competitors, and competitive pressures that we encounter may harm our business.
INTELLECTUAL PROPERTY
Our competitive position is in part dependent on our ability to develop and
maintain the proprietary aspects of our software technology. We seek to protect
the source code for our software, documentation and other written materials
under patent, trademark, trade secret and copyright laws.
Our policy is to file patent applications when we discover new software
inventions. We currently have four patent applications pending relating to our
proprietary technology, including patent applications on core technology for
some of our early software applications and on important aspects of the
technology and structure underlying DoubleTwist.com. We are also preparing to
file patent applications on various other aspects of our business, including
tools that can be used to view research data, processing systems, and other
important attributes of DoubleTwist.com.
We do not file patents on the sequence information in our proprietary
databases, including potential novel genes. Our strategy is to remain a neutral
service provider, which includes providing customers with a royalty-free source
of genomic data. We believe this neutrality significantly enhances our ability
to attract both customers and database partners because we do not compete with
them on either the generation of intellectual property or in drug discovery.
We have registered the trademark, DoubleTwist, and we own the domain name
DoubleTwist.com. We have filed trademark applications for Prophecy and
GeneForest.
We enter into confidentiality agreements with our employees and consultants
to avoid disclosure of our confidential information and restrict access to our
source code. In addition, we enter into contractual arrangements with third
parties, such as non-disclosure and non-compete agreements, and invention
assignment agreements with our employees to further protect our proprietary
information.
We have entered into license agreements to acquire technology and data which
are included in our current products. These licenses have terms of varying
lengths and include both exclusive and non-exclusive rights. We cannot assure
you that the other parties to these license agreements will honor the terms of
the agreements or that we will be able to renew these licenses at the ends of
their respective terms. If the licenses are terminated or not renewed, we might
have to remove or replace the technology or data currently included in our
products.
GOVERNMENTAL REGULATION
We are subject to regulations applicable to businesses generally. In
addition, we may be subject to regulation indirectly via regulation of our Web
site content providers, by governmental agencies that promulgate and enforce
laws and regulations generally applicable to chemicals, pharmaceuticals,
controlled substances, human and biological reagents, environmental impacts, as
well as U.S. and foreign export and import controls. Regulatory agencies
potentially involved include the Food and Drug
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Administration, the Environmental Protection Agency, the Drug Enforcement
Agency, the Department of Agriculture, the Occupational Safety and Health
Administration, the Department of Commerce, the Department of the Interior, and
various other federal, state and local agencies and regulatory bodies.
We rely on our customers and collaborators to meet the various regulatory
and other legal requirements applicable to their role in our business. However,
we are unable to verify whether they do so, or whether they are in violation of
governmental requirements. We are not aware of any violations, investigations,
inquiries or allegations with regard to any such regulations by our customers or
collaborators. If our customers or collaborators are found to violate any of the
applicable regulations, we could be fined or exposed to civil or criminal
liability, and we could receive negative publicity. Any of these results could
have a negative impact on our business.
In addition, regulation of the activities of our customers by government
agencies in the United States and in foreign countries may have a significant
impact on our ability to sell our products and services because this regulation
may prevent or limit our customers' ability to produce and market their
products. We presently do not have any plans to develop pharmaceutical products
ourselves. However, we expect that our customers over the next few years will
come primarily from the pharmaceutical and biotechnology industries. A
significant factor in the production and marketing of pharmaceutical products by
those customers will be the impact of regulation by the FDA and other agencies
and institutions which regulate medicinal and food products.
Due to the increasing popularity and use of the Internet, it is possible
that laws and regulations may be adopted or interpreted in the United States and
abroad with particular applicability to the Internet. It is possible that
governments will enact legislation that may be applicable to us in areas such as
content, publishing, product distribution, network security, encryption and the
use of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and
retransmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, publishing,
taxation, defamation, personal privacy, product liability and environmental
protection, as well as the necessity for governmental permits, labeling,
certifications and the need to supply information to relevant parties, is
uncertain. Most of these laws were adopted before the widespread use and
commercialization of the Internet and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Any export
or import restrictions, new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase our cost of doing business or increase our legal exposure. Any of these
factors could have a negative affect on our business.
EMPLOYEES
As of September 30, 2000, we employed 172 persons, of whom 38 hold Ph.D. or
M.D. degrees and 54 hold other advanced degrees. Seventy-six employees were
engaged in research and development, five in business development, 54 in sales
and marketing, 17 in customer support, and 20 in finance, legal and other
administrative functions. Our success will depend in large part upon our ability
to attract and retain skilled employees. We face competition in this regard from
other companies, research and academic institutions, government entities and
other organizations. None of our employees is represented by a labor union, and
we believe our employee relations are good.
FACILITIES
We currently lease approximately 20,000 square feet of office space for our
corporate offices and development facilities in a building located in Oakland,
California. The lease expires in November 2000. In April 2000, we entered into
an agreement to lease a 63,000 square foot building for our corporate offices
and development facilities in Oakland, California. The lease commences in
October 2000 and has a term of ten years with two five-year options to renew. We
currently lease approximately 5,000 square feet of office space in Philadelphia,
Pennsylvania, which is used for development and sales.
We also lease a sales office in Munich, Germany, and we expect to lease
other sales offices in Europe as required.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, as of September 30, 2000, certain
information concerning our executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
John D. Couch............................. 53 President, Chief Executive Officer and
Chairman of the Board
Robert F. Williamson...................... 34 Chief Operating Officer
H. Ward Wolff............................. 52 Chief Financial Officer
Stephen H. Sanders........................ 36 Vice President of Worldwide Sales
Gregory C. Thayer......................... 49 General Counsel, Vice President of
Corporate Development and Secretary
Fred E. Cohen(1).......................... 44 Director
Samuel D. Colella(2)...................... 60 Director
Ansbert Gadicke(1)(2)..................... 42 Director
A. Grant Heidrich, III.................... 47 Director
Thomas A. Penn(1)(2)...................... 54 Director
Dexster L. Smith.......................... 33 Director
</TABLE>
------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
JOHN D. COUCH has served as chairman of our board of directors since
February 2000, as our president since May 1998, as a member of our board of
directors since October 1997 and as our chief executive officer since
September 1997. From May to September 1997, Mr. Couch was a consultant to
DoubleTwist. Prior to consulting for DoubleTwist, Mr. Couch served from January
1997 to May 1997 as an executive-in-residence for the Mayfield Fund. From
January 1995 to January 1997, Mr. Couch was an independent management
consultant, providing strategic planning, management and technology advice to
various companies. Prior to that, Mr. Couch held several positions at Apple
Computer, Inc., including vice president and general manager of personal office
systems and vice president of software. Prior to Apple, Mr. Couch served as
section manager in the General Systems Division of Hewlett-Packard Company.
Mr. Couch received both his B.A. in Computer Science and his M.S. in Electrical
Engineering and Computer Science from the University of California at Berkeley.
ROBERT F. WILLIAMSON has served as our chief operating officer since
December 1999, having joined us as senior vice president of marketing, business
development and e-commerce in July 1999. From 1991 to July 1999, Mr. Williamson
worked with Boston Consulting Group, Inc., a leading global management
consulting firm, where he was elected partner in May 1998. During his tenure
with Boston Consulting Group, Mr. Williamson led the firm's west coast health
care practice, co-led the west coast e-commerce practice, and was a senior
member of the firm's global high tech practice. Prior to that, Mr. Williamson
founded and ran several small businesses and worked as a research assistant for
the Federal Reserve Board of Governors. He received a B.A. in Economics from
Pomona College and an M.B.A. from Stanford Graduate School of Business.
H. WARD WOLFF has served as our chief financial officer since April 1998.
Prior to joining DoubleTwist, he served from July 1996 to March 1998 as senior
vice president of finance and administration and chief financial officer of
Premenos Technology Corp., a provider of electronic commerce software and
services, and from 1992 to June 1996 as vice president of finance and
administration and chief financial officer of Premenos. Prior to that, he served
as an executive director of Russell Reynolds Associates, Inc., an international
management recruiting firm, and held a number
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of positions with Price Waterhouse as a certified public accountant, including
senior audit manager. Mr. Wolff received a B.A. in Economics from the University
of California at Berkeley and an M.B.A. from Harvard University.
STEPHEN H. SANDERS has served as our vice president of worldwide sales since
February 2000, having joined us as vice president of sales in August 1999. Prior
to joining DoubleTwist, he served as executive vice president with the Mega
Systems division of Safeguard Scientifics, Inc. from August 1998 to June 1999.
From May 1996 to July 1998, Mr. Sanders served as vice president of sales with
Azron, Inc., a provider of health care information solutions. From 1993 to May
1996, Mr. Sanders was a regional sales manager for Biosym Technologies, Inc. and
Molecular Simulations, Inc., two providers of molecular modeling and simulations
software which merged in August 1995. He has also held senior sales and
marketing positions with Enviro Track, Inc. and Chevron Chemical Company LLC.
Mr. Sanders holds a B.A. in Political Economics from the University of
Washington.
GREGORY C. THAYER has served as our secretary since March 2000 and as our
general counsel and vice president of corporate development since
December 1998. Prior to serving as general counsel, Mr. Thayer served as our
director of science and technology from August 1998 and joined us as chief
patent counsel in March 1997. From December 1993 to March 1997, Mr. Thayer was
the director of intellectual property and licensing at Somatix Therapy
Corporation, a biotechnology company. Mr. Thayer received a B.A. in Biology from
Reed College, an M.Phil. from Columbia University and a J.D. from University of
California, Hastings College of the Law.
FRED E. COHEN, M.D., D. PHIL. has served as a director of DoubleTwist since
February 1997. Dr. Cohen has been a professor of pharmacology and medicine at
the University of California, San Francisco since 1988. Dr. Cohen is an advisory
editor of the Journal of Molecular Biology, and he serves on the editorial
boards of several other scientific journals, including Molecular Medicine and
the Journal of Computational Biology. Dr. Cohen serves as a consultant to Chiron
Corporation and Iconix Pharmaceuticals, Inc. Dr. Cohen received a B.S. in
Molecular Biophysics and Biochemistry from Yale University, a Ph.D. in Molecular
Biophysics from Oxford University as a Rhodes Scholar and an M.D. from Stanford
University. Dr. Cohen is also a member of our scientific advisory board.
SAMUEL D. COLELLA has served as a director of DoubleTwist since
February 1997. From 1984 to the present, Mr. Colella has been a general partner
of Institutional Venture Partners, a venture capital firm. Prior to joining
Institutional Venture Partners, Mr. Colella served as president of Spectra-
Physics, Inc. Mr. Colella serves as a director of Onyx Pharmaceuticals, Inc.,
Symyx Technologies, Inc. and various private companies. Mr. Colella received a
B.S. in Business and Engineering from the University of Pittsburgh and an M.B.A.
from Stanford University.
ANSBERT S. GADICKE, M.D. has served as a director of DoubleTwist since
February 2000. In 1992, Dr. Gadicke founded MPM Capital, a venture capital firm,
where he is currently a managing partner. He serves as a director of BioMarin
Pharmaceutical Inc. and various private companies. He is also a member of the
Harvard Medical School Advisory Council. He received a B.A. and an M.D. from the
J.W. Goethe University in Frankfurt, Germany.
A. GRANT HEIDRICH, III has served as a director of DoubleTwist since
February 1997. From 1982 to the present, Mr. Heidrich has been a general partner
or managing member of several venture capital funds associated with the Mayfield
Fund. He serves as a director of Millennium Pharmaceuticals, Inc. and is
chairman of the board of directors of Tularik Inc. Mr. Heidrich received a B.A.
in Human Biology from Stanford University and an M.B.A. from Columbia
University.
THOMAS A. PENN has served as a director of DoubleTwist since December 1998.
Mr. Penn is a partner at Boston Millennia Partners, a Boston based venture
capital firm that he joined in June 1998. From March 1994 to March 1998, Mr.
Penn served as the president and chief executive officer of
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Tektagen, Inc., a contract services organization that provides product
development services and support to the biotechnology and pharmaceutical
industries. Mr. Penn is a member of the board of directors of Deltagen, Inc. and
various private companies. Mr. Penn holds B.S. degrees from the Massachusetts
Institute of Technology in Metallurgy and Materials Science and in Industrial
Management, an M.B.A. from Stanford University and a J.D. from the University of
Pennsylvania.
DEXSTER L. SMITH co-founded DoubleTwist and has served as one of our
directors since January 1993. From January 1993 to November 1998, Mr. Smith
served in various management positions with DoubleTwist. Mr. Smith currently
provides consulting services to us. In February 1999, Mr. Smith co-founded
DigiScents, Inc., a developer of digital scent technology, where he currently
serves as president. Mr. Smith is also a member of the board of directors or the
advisory board of several private companies. Mr. Smith received a B.S. in
Industrial Engineering from Stanford University. Mr. Smith is also a member of
our scientific advisory board.
SCIENTIFIC ADVISORY BOARD
We have established a select group of scientists and physicians to advise us
on scientific matters in the areas of research and development relevant to our
business. Our scientific advisors are:
BARRY H. HONIG, PH.D. serves as chairman of our scientific advisory board.
Dr. Honig is a professor of biochemistry and molecular biophysics at Columbia
University. Dr. Honig is an associate editor of the Journal of Molecular Biology
and serves on the editorial board of several other scientific journals. In June
2000, Dr. Honig was appointed by the Howard Hughes Medical Institute as a Howard
Hughes Medical Institute Investigator. He received a B.S. in Chemistry from the
Polytechnic Institute of Brooklyn and a Ph.D. from the Weizmann Institute of
Science.
FRED E. COHEN, M.D., D. PHIL.--see "Executive Officers and Directors."
DOUGLAS L. BRUTLAG, PH.D. has served as our acting chief scientific officer
since May 1999. Dr. Brutlag is presently director of the Bioinformatics Resource
at Stanford University and has been a professor of biochemistry at Stanford
since 1974. He received a B.S. in Biology from the California Institute of
Technology and a Ph.D. in Biochemistry from Stanford University.
THERESA GAASTERLAND, PH.D. is an assistant professor and head of laboratory
at the Laboratory of Computational Genomics at Rockefeller University.
Dr. Gaasterland received a B.S. in Computer Science from Duke University, and a
Ph.D. in Computer Science from the University of Maryland.
JOEL L. BELLENSON is a co-founder of DoubleTwist and DigiScents, Inc.
Mr. Bellenson received a B.S. in Biology from Stanford University.
DEXSTER L. SMITH--see "Executive Officers and Directors."
BOARD COMPOSITION
Our bylaws currently authorize a board consisting of eight directors. Our
amended and restated bylaws that become effective upon the completion of this
offering provide that our board will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. The
Class I directors, Messrs. Penn and Smith, will stand for reelection at the 2001
annual meeting of stockholders. The Class II directors, Messrs. Gadicke and
Heidrich will stand for reelection at the 2002 annual meeting of stockholders.
The Class III directors, Messrs. Couch, Cohen and Colella will stand for
reelection at the 2003 annual meeting of stockholders. Any additional directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This staggered classification
of the board of directors may have the effect of delaying or preventing changes
in control or management. There are no family relationships among any of our
directors, officers or key employees.
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Our compensation committee consists of Messrs. Colella, Gadicke and Penn.
Mr. Colella serves as the chairman of the compensation committee. The
compensation committee makes recommendations regarding our various incentive
compensation and benefit plans and determines salaries for our executive
officers and incentive compensation for our employees and consultants.
Our audit committee consists of Messrs. Cohen, Gadicke and Penn. Mr. Penn
serves as the chairman of the audit committee. The audit committee makes
recommendations to the board of directors regarding the selection of our
independent auditors, reviews the results and scope of the audit and other
services provided by our independent auditors and reviews and evaluates our
control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is or was, at any time
since our formation, one of our officers or employees. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of our
board of directors or compensation committee.
DIRECTOR COMPENSATION
With the exception of Dr. Cohen, who receives $10,000 per year for his
service as a director, we do not currently provide cash compensation to our
directors, although we do reimburse our directors for out-of-pocket expenses
incurred in connection with their activities as directors, including attendance
at meetings of our board of directors or its committees. Our directors are
generally eligible to participate in our 2000 Stock Plan and, if a director is
an employee of DoubleTwist, to participate in our 2000 Employee Stock Purchase
Plan. Directors who are not employees will also receive periodic stock option
grants under our 2000 Stock Plan. See "Director Option Program." Our 2000 Stock
Plan and 2000 Employee Stock Purchase Plan go into effect upon the effectiveness
of the registration statement, of which this prospectus is a part. See "2000
Stock Plan" and "2000 Employee Stock Purchase Plan."
In February 1999, we granted Dr. Cohen a stock option to purchase 15,000
shares of common stock under our 1996 Equity Incentive Plan. This option has an
exercise price of $0.80 per share and vests in equal monthly installments over
four years.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during the year
ended December 31, 1999 to our chief executive officer and to our other
executive officers who earned more than $100,000 during our last fiscal year.
Mr. Williamson joined us in July 1999, and salary information for him is for a
partial year. This prospectus refers to these executives as the "Named Executive
Officers."
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
John D. Couch............................................... $200,000 $ -- 225,000
President and Chief Executive Officer
Robert F. Williamson........................................ $ 88,636 $36,250 250,000
Chief Operating Officer
H. Ward Wolff............................................... $167,500 $ -- 125,000
Chief Financial Officer
Gregory C. Thayer........................................... $140,000 $ 7,500 42,500
General Counsel, Vice President of Corporate Development
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended December 31, 1999.
All of these options were awarded under our 1996 Equity Incentive Plan. Unless
stated otherwise, options granted under that plan generally vest over four years
from the date of grant. Percent of total options granted in 1999 is based on an
aggregate of 1,865,403 options granted in the year ended December 31, 1999 to
our employees, directors and consultants, including the Named Executive
Officers. Options were granted at an exercise price equal to the fair market
value per share of common stock on the grant date as determined by our board,
based upon the purchase price paid by investors for shares of our preferred
stock, taking into account the liquidation preferences and other rights,
privileges and preferences associated with such stock.
The potential realizable value amounts in the last two columns of the
following table are calculated based on an assumed initial public offering price
of $14.00 per share and represent hypothetical gains that could be achieved for
the respective options if exercised and sold at the end of the option term. The
assumed 5% and 10% annual rates of stock price appreciation from the date of
grant to the end of the option term are provided in accordance with the rules of
the Securities and Exchange Commission and do not represent our estimate or
projection of the future common stock price. Actual gains, if any, on stock
option exercises are dependent on the future performance of our common stock,
overall market conditions and the option holder's continued employment through
the vesting period. This table does not take into account any actual
appreciation in the price of the common stock from the date of grant to the
present.
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<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------------- AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF STOCK PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS EXERCISE FOR OPTION TERM
OPTIONS GRANTED IN PRICE EXPIRATION --------------------------
NAME GRANTED 1999 ($/SHARE) DATE 5%($) 10%($)
---- ------------ ------------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
John D. Couch............... 75,000(1) 4.0% $0.80 12/15/2009 1,650,339 2,663,430
150,000(1) 8.0 0.80 2/11/2009 3,300,679 5,326,859
Robert F. Williamson........ 62,500(1) 3.4 0.80 12/15/2009 1,375,283 2,219,525
187,500(2) 10.1 0.80 6/23/2009 4,125,848 6,658,574
H. Ward Wolff............... 25,000(1) 1.3 0.80 12/15/2009 550,113 887,810
100,000(1) 5.4 0.80 2/11/2009 2,200,452 3,551,239
Gregory C. Thayer........... 25,000(1) 1.3 0.80 6/23/2009 550,113 887,810
17,500(1) 0.9 0.80 2/11/2009 385,079 621,467
</TABLE>
------------------------
(1) Options vest as to 1/48 of the shares monthly for 48 months.
(2) Options vest as to 1/8 of the shares six months after the effective date of
the grant and 1/48 of the shares monthly thereafter for the next 42 months.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
None of the Named Executive Officers exercised options during the year ended
December 31, 1999. The following table sets forth the number and value of
securities underlying unexercised options held at December 31, 1999. There was
no public trading market for our common stock as of December 31, 1999.
Accordingly, these values have been calculated on the basis of an assumed
initial public offering price of $14.00 per share, less the per share exercise
price, multiplied by the number of shares issued upon exercise of the option.
All options were granted under our 1996 Equity Incentive Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31,1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John D. Couch................................. 177,082 297,918 $2,317,483 $3,892,517
Robert F. Williamson.......................... -- 250,000 -- 3,300,000
H. Ward Wolff................................. 52,083 147,917 687,496 1,952,504
Gregory C. Thayer............................. 13,227 46,566 172,597 610,619
</TABLE>
1996 EQUITY INCENTIVE PLAN
Our 1996 Equity Incentive Plan was adopted by our board of directors and
initially approved by our stockholders on August 19, 1996. Our 1996 Equity
Incentive Plan provides for the grant of incentive stock options at fair market
value, which may provide for preferential tax treatment, to our employees, and
for the grant of nonstatutory stock options, stock purchase rights, stock
appreciation rights and stock bonuses to our employees, directors and
consultants.
We have reserved an aggregate of 5,197,500 shares of our common stock for
issuance under this plan. As of September 30, 2000, 1,810,431 shares had been
issued pursuant to the exercise of options and stock purchase rights and options
to purchase 3,172,163 shares of common stock were outstanding. In addition,
214,906 shares were available for future grant. We will not grant any additional
stock options under our 1996 Equity Incentive Plan after the effective date of
our registration statement. Any shares remaining for issuance under our 1996
Equity Incentive Plan as of the effective date of our
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<PAGE>
registration statement and any shares returned to our 1996 Equity Incentive Plan
shall be reserved for issuance under our 2000 Stock Plan. See "2000 Stock Plan."
The 1996 Equity Incentive Plan provides that in the event that we merge or
consolidate, dissolve or liquidate or sell all our assets, any or all
outstanding awards may be assumed, converted or replaced by the successor
corporation or equivalent awards or other consideration may be substituted by
the successor corporation. If the successor corporation refuses to assume or
substitute any options, such options will terminate at the time and on the
conditions as determined by our board of directors.
2000 STOCK PLAN
Our 2000 Stock Plan was adopted by our board of directors on April 20, 2000
and approved by our stockholders on October 11, 2000, subject to the
effectiveness of the registration statement of which this prospectus is a part.
This plan provides for the grant of incentive stock options at fair market value
to our employees and nonstatutory stock options and stock purchase rights to our
employees, directors and consultants.
A total of 1,000,000 shares of our common stock are reserved for issuance
pursuant to our 2000 Stock Plan, plus any shares remaining under the 1996 Equity
Incentive Plan as of the effective date of the registration statement and any
shares returned to the 1996 Equity Incentive Plan. The number of shares reserved
for issuance under our 2000 Stock Plan will increase annually on the first day
of our fiscal year beginning in 2001 by an amount equal to the lesser of 5% of
the outstanding shares of our common stock on the first day of the year,
1,500,000 shares or such lesser amount as our board of directors may determine.
No options have yet been issued pursuant to the 2000 Stock Plan.
Our board of directors or a committee of our board administers the 2000
Stock Plan. The committee may consist of two or more outside directors to
satisfy certain tax and securities requirements. The administrator has the power
to determine the terms of the options or stock purchase rights granted,
including the number of shares subject to each option or stock purchase right,
the exercisability of the options or stock purchase rights and the form of
consideration payable upon exercise. The administrator determines the exercise
price of options granted under our 2000 Stock Plan, but with respect to
incentive stock options, the exercise price must generally be no less than the
fair market value of our common stock on the date of grant. Additionally, the
term of an incentive stock option may not exceed ten years.
No optionee may be granted options to purchase more than 1,500,000 shares in
any fiscal year, except that in connection with his or her initial service, an
optionee may be granted additional options to purchase up to 3,000,000 shares of
our common stock. After termination as one of our employees, directors or
consultants, the optionee may exercise his or her option for the period of time
stated in the option agreement. If termination is due to death or disability,
the option will generally remain exercisable for 12 months following such
termination. In all other cases, the option will generally remain exercisable
for three months after termination. However, an option may never be exercised
later than the expiration of its term.
Unless the administrator determines otherwise, stock purchased pursuant to
stock purchase rights under our 2000 Stock Plan will be subject to a repurchase
option that we may exercise upon the voluntary or involuntary termination of the
purchaser's service with us for any reason, including death or disability. The
purchase price for shares we repurchase will generally be the original price
paid by the purchaser. The administrator determines the rate at which our
repurchase option will lapse.
Our 2000 Stock Plan generally does not allow for the transfer of options or
stock purchase rights, and only the optionee may exercise an option or stock
purchase right during his or her lifetime.
Our 2000 Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute for each
53
<PAGE>
option or stock purchase right. If the outstanding options or stock purchase
rights are not assumed or substituted for, they become fully vested and
exercisable.
Our 2000 Stock Plan will automatically terminate in 2010, unless we
terminate it sooner. In addition, our board of directors has the authority to
amend, suspend or terminate the 2000 Stock Plan provided it does not adversely
affect any option previously granted under our 2000 Stock Plan.
DIRECTOR OPTION PROGRAM
The director option program is part of our 2000 Stock Plan and provides for
the periodic grant of nonstatutory stock options to our non-employee directors.
All grants of options to our non-employee directors under the director
option program are automatic. We will grant to each individual who is a
non-employee director on the effective date of the registration statement, or
who later becomes a non-employee director, an option to purchase 15,000 shares.
These options will be fully exercisable on the date of grant.
Each non-employee director shall automatically be granted an option to
purchase 5,000 shares on each annual meeting of our stockholders occurring after
the end of our fiscal year 2000, if immediately after such meeting, he or she
shall continue to serve on the board and has been a director for at least six
months prior to the meeting. The shares subject to the annual options become
fully vested on the first anniversary of the date of grant, provided the
individual remains an outside director on such dates.
All options granted under our director option program have a term of ten
years and an exercise price equal to fair market value on the date of grant.
After termination as a non-employee director, an optionee may exercise an option
during the period set forth in his or her option agreement. If termination is
due to death or disability, the option will remain exercisable for 12 months. In
all other cases, the option will remain exercisable for a period of three
months. However, an option may never be exercised later than the expiration of
its term.
A non-employee director may not transfer options granted under our director
option program other than by will or the laws of descent and distribution. Only
the non-employee director may exercise the option during his or her lifetime.
In the event of a change of control, all of the outstanding options granted
pursuant to the director option program become fully vested and exercisable.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
on April 20, 2000 and approved by our stockholders on October 11, 2000, subject
to the effectiveness of the registration statment of which this prospectus is a
part. A total of 400,000 shares of our common stock will be made available for
sale under our 2000 Employee Stock Purchase Plan. In addition, our 2000 Employee
Stock Purchase Plan provides for annual increases in the number of shares
available for issuance under the 2000 Employee Stock Purchase Plan on the first
day of our fiscal year beginning in 2001 in an amount equal to the lesser of 3%
of the outstanding shares of our common stock on the first day of the calendar
year, 300,000 shares, or such other lesser amount as may be determined by our
board of directors. Our board of directors or a committee of our board
administers the 2000 Employee Stock Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the 2000
Employee Stock Purchase Plan and determine eligibility. All of our employees are
eligible to participate if they are customarily employed by us or any
participating subsidiary for at least
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<PAGE>
20 hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the plan if:
- immediately after the grant the employee would own stock possessing 5% or
more of the total combined voting power or value of all classes of our
capital stock; or
- the employee's right to purchase stock under all of our employee stock
purchase plans accrues at a rate that exceeds $25,000 worth of stock for
each calendar year.
Our 2000 Employee Stock Purchase Plan is intended to qualify for
preferential tax treatment and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four six-month purchase periods.
The offering periods generally start on the first trading day on or after
January 1 and July 1 of each year, except for the first such offering period
which will commence on the first trading day on or after the effective date of
the registration statement of which this prospectus is a part and will end on
the last trading day on or before June 30, 2002.
The 2000 Employee Stock Purchase Plan permits participants to purchase
common stock through payroll deductions of up to 15% of their eligible
compensation which includes a participant's base straight time gross earnings
and commissions but excluding all other compensation paid to our employees. A
participant may purchase no more than 10,000 shares during any six-month
purchase period.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each six-month purchase period. The
price is 85% of the lower of the fair market value of our common stock on the
first trading day of an offering period or on the last trading date of a
purchase period, whichever is lower, unless otherwise adjusted by our board of
directors. If the fair market value at the end of a purchase period is less than
the fair market value at the beginning of the offering period, participants will
be withdrawn from the current offering period following their purchase of shares
on the purchase date and will be automatically re-enrolled in the next offering
period. Participants may end their participation at any time during an offering
period and will be paid their payroll deductions to date. Eligibility under the
2000 Employee Stock Purchase Plan generally ends automatically when a
participant no longer qualifies as an employee under the plan.
A participant may not transfer rights granted under our 2000 Employee Stock
Purchase Plan other than by will, the laws of descent and distribution or as
otherwise provided under this plan.
In the event of our merger with or into another corporation or a sale of all
or substantially all of our assets, a successor corporation will assume or
substitute for each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the purchase periods then in
progress will be shortened by setting a new exercise date and any offering
periods then in progress will end on the new exercise date.
Our 2000 Employee Stock Purchase Plan will terminate in 2010. However, our
board of directors has the authority to amend or terminate our 2000 Employee
Stock Purchase Plan, except that, subject to certain exceptions described in the
plan, no such action may adversely affect any outstanding rights to purchase
stock under our 2000 Employee Stock Purchase Plan.
CHANGE OF CONTROL AND RETENTION PLAN AND EMPLOYMENT ARRANGEMENTS
Our 2000 Stock Plan provides that, upon a change of control, each
outstanding option and award will generally become fully vested unless the
surviving corporation assumes the option or replaces it with a comparable
option.
Our 1997 Change of Control and Retention Plan provides that, upon a change
of control, each outstanding option and award granted under the 1996 Equity
Incentive Plan will generally become fully vested unless the surviving
corporation assumes the option or replaces it with a comparable option. In
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<PAGE>
addition, our 1997 Change of Control and Retention Plan provides that, upon a
change of control, the vesting and exercisability of each option granted under
our 1996 Equity Incentive Plan to an officer at the vice-president level or
higher or any non-employee director will be automatically accelerated as to 50%
of the unvested shares subject to these options. Our 1997 Change of Control and
Retention Plan also provides that upon any involuntary or constructive
termination of such officer or non-employee director within 12 months after a
change of control, the vesting and exercisability of each option granted under
our 1996 Equity Incentive Plan to such person will be automatically accelerated
as to 50% of the unvested shares subject to these options as of the termination
date.
We have also entered into letter agreements with Messrs. Couch, Williamson
and Wolff that contain provisions substantially similar to those in our 1997
Change and Control and Retention Plan. In addition, our agreement with Mr.
Williamson provides for a severance payment equal to six months' annual base
salary, and our agreement with Mr. Wolff provides for a severance payment equal
to four months' base salary in the event of their involuntary or constructive
termination without cause within 12 months after a change in control.
INDEMNIFICATION
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for: (1) breach of their duty of loyalty to the corporation or its
stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) unlawful payments of
dividends or unlawful stock repurchases or redemptions or (4) any transaction
from which the director derived an improper personal benefit. This limitation of
liability does not apply to liabilities arising under the federal or state
securities laws and does not affect the availability of equitable remedies such
as injunctive relief or rescission.
Our amended and restated certificate of incorporation and bylaws provide
that we will indemnify our directors and officers, and may indemnify our other
employees and agents, to the fullest extent permitted by law. We believe that
indemnification under our certificate of incorporation and bylaws covers at
least negligence and gross negligence on the part of indemnified parties. Our
amended and restated bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether the bylaws permit such
indemnification.
We intend to enter into agreements to indemnify our directors and officers,
in addition to the indemnification provided for in our amended and restated
bylaws. These agreements, among other things, will indemnify our directors and
officers for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in the right of DoubleTwist arising out of services
as one of our directors or officers or such person's services to any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified directors and officers.
There is no pending litigation or proceeding involving any of our directors
or officers in which indemnification is required or permitted, and we are not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
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<PAGE>
RELATED PARTY TRANSACTIONS
PURCHASES OF STOCK
Since January 1, 1999, we have issued shares of our preferred stock and
warrants to purchase our preferred stock to investors in private placements. We
sold 6,994,897 shares of our Series C preferred stock, at a per share price of
$2.80, over the period from December 1998 through February 1999. We sold
6,146,600 shares of our Series D preferred stock at a per share price of $6.02,
and warrants to purchase 41,526 shares of our Series D preferred stock, at a per
share exercise price of $6.02 in February 2000. We sold 856,441 shares of our
Series E preferred stock at a per share price of $8.964 in July 2000. The
following entities affiliated with directors or which are holders of more than
five percent of our voting securities purchased preferred stock and warrants to
purchase preferred stock in these financings in the amounts set forth below. We
believe that we sold these shares and warrants at their fair market value and
that the terms of these transactions were no less favorable than we could have
obtained from unaffiliated parties.
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------
PREFERRED STOCKHOLDER SERIES C SERIES D SERIES E
--------------------- --------- --------- ---------
<S> <C> <C> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Institutional Venture Partners(1)(8)...................... 678,214 521,986 --
Mayfield Fund(2)(8)....................................... 678,213 499,085 --
Boston Millennia Partners(3)(8)........................... 1,464,285 421,649 --
MPM Capital LP(4)......................................... -- 1,661,129 --
A. Grant Heidrich, III, Trustee of Property Trust UDT 5 31
84(5)................................................... -- 22,899 --
OTHER 5% STOCKHOLDERS
Kleiner Perkins Caufield & Byers(6)(8).................... 452,141 212,831 --
MDS Capital Corp.(7)(8)................................... 1,785,713 340,423 --
T. Rowe Price Associates, Inc.(9)......................... -- 996,677 --
</TABLE>
------------------------
(1) Includes shares held by Institutional Venture Partners VII, L.P.,
Institutional Venture Management VII, L.P., and IVP Founders Fund I. Samuel
D. Colella, a member of our board of directors, is a general partner of
Institutional Venture Partners.
(2) Includes shares held by Mayfield VIII, A California Limited Partnership,
Mayfield Associates Fund III, A California Limited Partnership and The Gene
Trust. A. Grant Heidrich, III, a member of our board of directors, is a
general partner or managing member of several venture funds associated with
the Mayfield Fund.
(3) Includes shares held by Boston Millennia Partners Limited Partnership and
Boston Millennia Associates I Partnership. Thomas A. Penn, a member of our
board of directors, is a partner at Boston Millennia Partners.
(4) Includes shares held by BB BioVentures, L.P., MPM BioVentures Parallel Fund,
L.P. and MPM Asset Management Investors 2000A, LLC. Ansbert S. Gadicke,
M.D., a member of our board of directors, is the founder and managing
partner of MPM Capital LP.
(5) A. Grant Heidrich, III, a member of our board of directors, is the trustee
of this trust.
(6) Includes shares held by Kleiner Perkins Caufield & Byers VIII, L.P., KPCB
VIII Founders Fund, L.P., KPCB Life Sciences Zaibatsu Fund II and KPCB Java
Fund, L.P.
(7) Includes shares held by MDS Life Sciences Technology Fund, L.P., MDS Life
Sciences Technology Fund USA, L.P., MDS Life Sciences Technology Barbados
Investment Trust and The Health Care and Biotechnology Venture Fund.
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<PAGE>
(8) Includes warrants issued in conjunction with a bridge loan to the Series D
preferred stock financing.
(9) Includes shares held by T. Rowe Price New Horizons Fund, Inc., T. Rowe Price
Health Sciences Fund, Inc. and Green Line Health Sciences Fund, Inc.
INVESTORS' RIGHTS AGREEMENT
The preferred stockholders described above have entered into an agreement
with us, pursuant to which these and other preferred stockholders will have
registration rights with respect to their shares of common stock following this
offering. See "Description of Capital Stock--Registration Rights." This
agreement also provides that some of our Series C preferred stockholders may
have the right to purchase shares in this offering. See "Description of Capital
Stock--Right of First Offer." Upon the completion of this offering, all shares
of our outstanding preferred stock will be automatically converted into an equal
number of shares of common stock.
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with our directors and
executive officers. See "Management--Indemnification."
ACCELERATION OF VESTING
In March 2000, we granted acceleration of vesting to a former officer in
connection with his separation. In addition, certain of our officers and
non-employee directors will be entitled to accelerated vesting in connection
with a change of control. See "Management--Change of Control and Retention
Plan."
INDEBTEDNESS OF MANAGEMENT
In April 2000, we received promissory notes due and payable on April 11,
2005 from our executive officers in connection with their exercise of stock
options in the aggregate amount of $2,381,250 with an interest rate of 6.71%.
These promissory notes represent $900,000 in principal amount from Mr. Couch,
$750,000 in principal amount from Mr. Williamson, $375,000 in principal amount
from Mr. Wolff, and $356,250 in principal amount from Mr. Sanders. In
February 2000, we received a promissory note in the principal amount of $112,500
with an interest rate of 6.497% from Fred E. Cohen, a member of our board of
directors, in connection with his purchase of common stock. No other executive
officer or director or immediate family members of any executive officer or
director has been indebted to us in an amount greater than $60,000 since the
beginning of our last fiscal year.
CONSULTING AGREEMENT
In February 2000, we entered into a consulting agreement with Dexster Smith,
a member of our board of directors, under which we agreed to pay Mr. Smith
$10,000 per month for consulting services for a term of one year.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 30, 2000 by the following
individuals or groups:
- each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
- each of our Named Executive Officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o DoubleTwist, Inc., 1999 Harrison Street, Suite 1100, Oakland, California
94612. Except as otherwise noted, and subject to applicable community property
laws, the persons named in this table have sole voting or investing power with
respect to all of the shares of common stock held by them.
This table lists applicable percentage ownership based on 19,211,625 shares
of common stock outstanding as of September 30, 2000, as adjusted to reflect the
conversion of all outstanding shares of preferred stock which will be effected
upon the closing of this offering and also lists applicable percentage ownership
based on 24,211,625 shares of common stock outstanding after completion of this
offering. Options and warrants to purchase shares of our common stock that are
exercisable presently or within 60 days of September 30, 2000 are deemed to be
beneficially owned by the persons holding these options or warrants for the
purpose of computing percentage ownership of that person, but are not treated as
outstanding for the purpose of computing any other person's ownership
percentage.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NUMBER OF OWNED SUBJECT TO
SHARES REPURCHASE AS OF PERCENT BENEFICIALLY OWNED
BENEFICIALLY SEPTEMBER 30, --------------------------------
BENEFICIAL OWNER OWNED 2000(1) BEFORE OFFERING AFTER OFFERING
---------------- ------------ ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Institutional Venture Partners(2)............. 2,154,703 -- 11.2% 8.9%
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Mayfield Fund(3).............................. 2,117,053 -- 11.0 8.7
2800 Sand Hill Road
Menlo Park, CA 94025
MDS Capital Corp.(4).......................... 2,126,136 -- 11.2 8.8
100 International Blvd.
Toronto, Ontario
Canada, M9W 6J6
Boston Millennia Partners(5).................. 1,885,934 -- 9.8 7.8
30 Rowes Wharf, Suite 330
Boston, MA 02110
MPM Capital LP(6)............................. 1,661,129 -- 8.6 6.9
One Cambridge Center, 9th Floor
Cambridge, MA 02142
Kleiner Perkins Caufield & Byers(7)........... 1,307,885 -- 6.8 5.4
2750 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NUMBER OF OWNED SUBJECT TO
SHARES REPURCHASE AS OF PERCENT BENEFICIALLY OWNED
BENEFICIALLY SEPTEMBER 30, --------------------------------
BENEFICIAL OWNER OWNED 2000(1) BEFORE OFFERING AFTER OFFERING
---------------- ------------ ---------------- --------------- --------------
<S> <C> <C> <C> <C>
T. Rowe Price Associates, Inc.(8)............. 996,677 -- 5.2 4.1
100 East Pratt Street
Baltimore, MD 21202
John D. Couch(9).............................. 584,374 300,000 3.0 2.4
Robert F. Williamson(10)...................... 325,520 250,000 1.7 1.3
H. Ward Wolff(11)............................. 222,395 125,000 1.2 *
Gregory C. Thayer(12)......................... 67,758 37,500 * *
Fred E. Cohen(13)............................. 66,562 40,312 * *
Samuel D. Colella(2).......................... 2,154,703 -- 11.2 8.9
A. Grant Heidrich(14)......................... 2,139,952 -- 11.1 8.8
Thomas A. Penn(5)............................. 1,885,934 -- 9.8 7.8
Dexster L. Smith(15).......................... 461,134 7,500 2.4 1.9
Ansbert Gadicke, M.D.(6)...................... 1,661,129 -- 8.6 6.9
Directors and Executive Officers as a group
(11 persons)(16)............................ 9,713,601 879,062 50.6% 40.1%
</TABLE>
--------------------------
* Indicates beneficial ownership of less than one percent.
(1) Represents shares received upon exercise of stock options which were
exercisable as of the grant date but which are subject to our right of
repurchase. Our right of repurchase expires as to 1/4 of the shares one
year after the effective date of the grant and 1/48 of the shares monthly
thereafter for the next 36 months.
(2) Includes shares held of record by Institutional Venture Partners VII, L.P.,
Institutional Venture Management VII, L.P. and Institutional Venture
Partners Founders Fund I. Also includes warrants to purchase an aggregate
of 94,089 shares of common stock. Mr. Colella, a member of our board of
directors, is a general partner of Institutional Venture Partners and
disclaims beneficial ownership of these shares, except to the extent of his
proportionate pecuniary interest.
(3) Includes shares held of record by Mayfield VIII, A California Limited
Partnership, Mayfield Associates Fund III, A California Limited Partnership
and The Gene Trust. Also includes warrants to purchase an aggregate of
94,089 shares of common stock.
(4) Includes shares held of record by MDS Life Sciences Technology Fund Limited
Partnership, MDS Life Sciences Technology Fund USA, L.P., MDS Life Sciences
Technology Barbados Investment Trust and The Health Care and Biotechnology
Venture Fund. Also includes a warrant to purchase 7,765 shares of common
stock.
(5) Includes shares held of record by Boston Millennia Partners Limited
Partnership and Boston Millennia Associates I Partnership. Also includes a
warrant to purchase 6,367 shares of common stock. Mr. Penn, a member of our
board of directors, is a partner of Boston Millennia Partners and disclaims
beneficial ownership of these shares, except to the extent of his
proportionate pecuniary interest.
(6) Includes shares held of record by BB BioVentures, L.P., MPM BioVentures
Parallel Fund, L.P. and MPM Asset Management Investors 2000A, LLC.
Dr. Gadicke, a member of our board of directors, is the founder and
managing partner of MPM Capital and disclaims beneficial ownership of these
shares, except to the extent of his proportionate pecuniary interest.
60
<PAGE>
(7) Includes shares held of record by Kleiner Perkins Caufield & Byers VIII,
L.P., KPCB VIII Founders Fund, L.P., KPCB Life Sciences Zaibatsu Fund II
and KPCB Java Fund, L.P. Also includes warrants to purchase an aggregate of
63,226 shares of common stock.
(8) Includes shares held of record by T. Rowe Price New Horizons Fund, Inc., T.
Rowe Price Health Sciences Fund, Inc. and Green Line Health Sciences
Fund, Inc.
(9) Includes 107,812 shares of common stock issuable upon exercise of stock
options.
(10) Includes 43,875 shares of common stock issuable upon exercise of stock
options.
(11) Includes 34,375 shares of common stock issuable upon exercise of stock
options.
(12) Includes 47,917 shares of common stock issuable upon exercise of stock
options.
(13) Includes 2,500 shares of common stock issuable upon exercise of stock
options.
(14) Includes shares held of record by Mayfield VIII, A California Limited
Partnership, Mayfield Associates Fund III, A California Limited
Partnership, The Gene Trust and A. Grant Heidrich, III, Trustee of
Property Trust UDT 5 31 84. Also includes warrants to purchase an
aggregate of 94,089 shares of common stock. Mr. Heidrich, a member of our
board of directors, is a general partner or managing member of several
venture funds associated with the Mayfield Fund and disclaims beneficial
ownership of the shares held by Mayfield VIII, A California Limited
Partnership, Mayfield Associates Fund III, A California Limited
Partnership and The Gene Trust, except to the extent of his proportionate
pecuniary interest.
(15) Includes 7,500 shares of common stock issuable upon exercise of stock
options.
(16) Includes an aggregate of 463,915 shares of common stock issuable upon the
exercise of stock options and warrants.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will amend our certificate of
incorporation to change our authorized capital stock to 100,000,000 shares of
common stock, $0.01 par value per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share. The following description of our capital stock
discloses the material terms of our capital stock but does not purport to be
complete. We encourage you to refer to our amended and restated certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and applicable provisions of
Delaware law for a more detailed description.
COMMON STOCK
As of September 30, 2000, there were 19,211,625 shares of common stock
outstanding held of record by approximately 194 stockholders. There will be
24,211,625 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options,
after giving effect to the sale of common stock in the offering and the
conversion of our outstanding preferred stock.
Each holder of our common stock is entitled to one vote for each share held
of record on all matters to be voted upon by the stockholders.
Subject to preferences to which holders of preferred stock issued after the
sale of the common stock offered hereby may be entitled, holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by our board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding up, holders of common
stock will be entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock.
Holders of common stock have no preemptive or conversion rights or other
subscription rights, and there are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
the shares of common stock offered by us in this offering, when issued and paid
for will be, fully paid and nonassessable. The rights, preferences and
privileges of the holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock, which our board of directors may designate in the future.
PREFERRED STOCK
Until the completion of this offering, our certificate of incorporation
provides for five series of preferred stock. Upon the closing of this offering,
each share of our outstanding preferred stock will automatically convert into
one quarter of a share of common stock. After the closing, our board of
directors will be authorized, subject to any limitations prescribed by law,
without stockholder approval, from time to time to issue up to an aggregate of
5,000,000 shares of preferred stock, in one or more series, each series to have
such rights and preferences, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by the board of directors. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. Our board of directors has no present plans to issue any shares of
preferred stock.
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<PAGE>
WARRANTS
As of September 30, 2000, warrants were outstanding to purchase an aggregate
of 501,758 shares of common stock: (i) warrants to purchase 232,141 shares of
common stock have an exercise price of $2.00 per share and expire in
December 2002; (ii) warrants to purchase 32,117 and 225,000 shares of common
stock have an exercise price of $0.80 per share and expire in October 2007 and
December 2003; and (iii) warrants to purchase 12,500 shares of common stock have
an exercise price of $6.442 per share and expire in August 2003. In addition, as
of September 30, 2000, warrants were outstanding to purchase an aggregate of
67,819 shares of convertible preferred stock. Warrants to purchase an aggregate
of 10,090 shares of Series B preferred stock were issued in April 1997 to an
equipment lessor. These warrants have an exercise price of $6.442 per share and
expire in April 2004 or three years after the effective date of our initial
public offering, whichever is later. Warrants to purchase an aggregate of 16,203
shares of Series C preferred stock were issued in November 1998 and
December 1998 to an equipment lessor and commercial lender. These warrants have
an exercise price of $2.80 per share and expire in November 2003 and
December 2005, or three years after the effective date of our initial public
offering, whichever is later. Warrants to purchase an aggregate of 41,526 shares
of Series D preferred stock were issued to various investors in a February 2000
private placement. These warrants have an exercise price of $6.02 per share and
expire in January 2003. The exercise prices of all of the warrants listed are
subject to adjustment for stock splits, combinations and dividends. This
description of the warrants reflects our four-to-one reverse stock split to be
effected prior to the completion of this offering.
REGISTRATION RIGHTS
After this offering, holders of 15,695,206 shares of common stock and 10,090
shares of common stock issuable upon exercise of outstanding warrants or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the terms
of an agreement between us and the holders of these securities. Beginning
180 days following the date of this prospectus, holders of at least 20% of these
securities may require, on no more than two occasions, that we use our best
efforts to register these securities for public resale. Additionally, upon the
request of any holders of a lesser number of shares, we are obligated to
register these holders' shares if the outstanding registrable securities they
hold have an anticipated public offering price of at least $15,000,000. Also,
holders of these securities may require, no more than twice during any
twelve-month period, that we register their shares for public resale on
Form S-3 or similar short-form registration if the value of the securities to be
registered is at least $1,000,000. Furthermore, in the event we elect to
register any of our shares of common stock for purposes of effecting any public
offering, the holders of registrable securities are entitled to include their
shares of common stock in that registration, but we may reduce the number of
shares proposed to be registered in view of market conditions. These piggy-back
registration rights are not applicable to this offering. We will bear all
expenses in connection with any registration, other than underwriting discounts
and commissions. All registration rights will terminate five years following the
consummation of this offering.
RIGHT OF FIRST OFFER
We are party to an agreement with our preferred stockholders which provides
that the holders of our Series C preferred stock may have a right to purchase up
to an aggregate of $10.0 million of our shares in this offering.
EFFECT OF CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS AND THE DELAWARE ANTI-TAKEOVER STATUTE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS. Certain
provisions of our amended and restated certificate of incorporation and bylaws
that become effective upon completion of this
63
<PAGE>
offering may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
us. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of our common stock. Certain of these
provisions allow us to issue preferred stock without any vote or further action
by the stockholders, require advance notification of stockholder proposals and
nominations of candidates for election as directors, eliminate the ability of
our stockholders to act by written consent and do not provide for cumulative
voting in the election of directors. Our amended and restated bylaws provide for
the division of the board of directors into three classes, with each class
serving three-year terms. In addition, our amended and restated bylaws provide
that special meetings of the stockholders may be called only by the board of
directors and that the authorized number of directors may be changed only by
resolution of the board of directors. These provisions may make it more
difficult for stockholders to take certain corporate actions and could have the
effect of delaying or preventing a change in control of us.
DELAWARE ANTI-TAKEOVER STATUTE. We are subject to Section 203 of the
Delaware General Corporation Law. This law prohibits a Delaware corporation from
engaging in any "business combination" with any "interested stockholder," unless
any of the following conditions are met. The law will not apply if:
- prior to the date of the transaction, our board of directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by our directors and officers and by
employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
- on or subsequent to the date of the transaction, the business combination
is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving us and the interested stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of our
assets involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by us of any of our stock to the interested
stockholder; and
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as an entity or
person beneficially owning 15% or more of our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computer Share
Investor Resources.
LISTING
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "DBLT."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 24,211,625 shares of common
stock outstanding assuming no exercise of the over-allotment option and no
exercise of outstanding options and warrants. Of these shares, the 5,000,000
shares sold in this offering will be freely tradable without restriction under
the Securities Act, unless purchased by our "affiliates," as that term is
defined in Rule 144 under the Securities Act. The remaining 19,211,625 shares of
common stock held by existing stockholders were issued and sold by us in
reliance on exemptions from the registration requirements of the Securities Act
and are restricted securities. All of these remaining shares will be subject to
180-day lock-up agreements and may not be sold in the public market prior to the
expiration of the lock-up agreements without the prior written consent of Lehman
Brothers Inc. Lehman Brothers Inc., in its sole discretion, may release the
shares subject to the lock-up agreements in whole or in part at anytime with or
without notice. When determining whether or not to release shares from the
lock-up agreements, Lehman Brothers Inc. will consider, among other factors, the
stockholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Upon
expiration of the lock-up agreements, 5,511,570 shares will become eligible for
sale pursuant to Rule 144(k), 11,126,349 shares will become eligible for sale
under Rule 144 and 1,717,265 shares will become eligible for sale under
Rule 701.
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701 will be as follows:
<TABLE>
<CAPTION>
SHARES
DAYS AFTER DATE OF THIS PROSPECTUS ELIGIBLE FOR SALE
---------------------------------- -----------------
<S> <C> <C>
180 days........................ 18,355,184
Various dates thereafter........ 856,441
</TABLE>
We intend to file a registration statement on Form S-8 under the Securities
Act after the effective date of this offering to register the shares of our
common stock that are subject to outstanding options or reserved for issuance
under our 1996 Equity Incentive Plan, 2000 Stock Plan and 2000 Employee Stock
Purchase Plan. Shares registered under the registration statement on Form S-8
will generally be available for sale in the open market immediately after the
180-day lock-up agreements expire.
RULE 144
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- one percent (1%) of the then outstanding shares of our common stock
(approximately 242,116 shares immediately after this offering); or
- the average weekly trading volume during the four calendar weeks preceding
the filing of a Form 144 with respect to the sale.
Affiliates of DoubleTwist must always sell pursuant to Rule 144, even after
the applicable holding periods have been satisfied. Sales under Rule 144 are
also subject to requirements with respect to manner of sale, notice and
availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person (or persons whose shares are aggregated) who is
not deemed to have been our affiliate at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at least
two years is entitled to sell such shares without regard to the volume
limitation, manner of sale, notice and public information requirements of
Rule 144.
65
<PAGE>
RULE 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144, but without compliance
with certain restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares 90 days after the effective date of this offering without
complying with the holding period and notice requirements of Rule 144 and that
non-affiliates may sell their Rule 701 shares 90 days after the effective date
of this offering without complying with the holding period, public information,
volume limitation or notice provisions of Rule 144. However, holders of shares
that are otherwise saleable under Rule 701 are subject to the 180-day lock-up
agreements described above.
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<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters for
whom Lehman Brothers Inc., Dain Rauscher Incorporated, Thomas Weisel Partners
LLC and Fidelity Capital Markets, a division of National Financial Services LLC,
are acting as representatives, has agreed to purchase from us the respective
number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Lehman Brothers Inc.........................................
Dain Rauscher Incorporated..................................
Thomas Weisel Partners LLC..................................
Fidelity Capital Markets, a division of National Financial
Services LLC..............................................
------
Total.....................................................
======
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. The conditions contained in the
underwriting agreement include the requirement that:
- the representations and warranties made by us to the underwriters are
true;
- that there is no material change in the financial markets; and
- we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a selling
concession of $ per share. The underwriters may also allow to dealers, and
such dealers may reallow, a selling concession not in excess of $ per share
to certain other dealers. After completion of this offering, the representatives
may change the offering price and other selling terms at various times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to thirty days after the date of this prospectus,
permits the underwriters to purchase a maximum of 750,000 additional shares of
our common stock to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the underwriters
will purchase shares from us, the total price to the public will be $ , and
the total proceeds to us will be $ . The underwriters have severally
agreed that, to the extent the over-allotment option is exercised, each of the
underwriters will purchase a number of additional shares proportionate to its
initial amount reflected in the above table.
The following table summarizes the compensation we will pay. The
underwriting discount is equal to the public offering price per share of common
stock less the amount paid by the underwriters to us per share of common stock.
The underwriting discounts and commissions will be determined based on our
negotiations with the underwriters at the time the initial public offering price
of our common stock
67
<PAGE>
is determined. We do not expect the underwriting discounts and commissions per
share of our common stock to exceed 7% of the initial public offering price per
share of our common stock.
<TABLE>
<CAPTION>
PAID BY US
----------------------------------
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
OPTION OPTION
-------------- -----------------
<S> <C> <C>
Per Share........................................ $ $
Total............................................ $ $
</TABLE>
We estimate that the total expenses of this offering, excluding the
underwriters discount, will be approximately $ .
We and each of our directors and executive officers, and substantially all
of the other holders of our common stock and securities convertible into or
exercisable or exchangeable for common stock issued prior to this offering, have
agreed, pursuant to certain "lock-up" agreements with the underwriters, that we
and they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible into or exercisable or exchangeable for common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Lehman Brothers Inc. Lehman Brothers Inc., in its sole
discretion, may release the shares subject to the lock-up agreements in whole or
in part at any time with or without notice. However, Lehman Brothers Inc. has no
current plan to do so.
At our request, the underwriters have reserved for sale at the initial
public offering price up to 250,000 shares of our common stock for our officers,
directors, employees, customers, collaborative partners, friends and related
persons. The number of shares of our common stock available for sale to the
general public will be reduced to the extent these persons purchase these
reserved shares. The underwriters will offer any shares not so purchased by
these persons to the general public on the same basis as the other shares in
this initial public offering.
Prior to this offering, there has been no public market for our common
stock. Consequently, the offering price for our common stock will be determined
by negotiations between us and the underwriters and will not necessarily be
related to our asset value, net worth or other established criteria of value.
The factors to be considered in these negotiations, in addition to prevailing
market conditions, will include the history of and prospects for the industry in
which we compete, an assessment of our management, our prospects, our capital
structure and certain other factors as are deemed relevant.
The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover short positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in an
amount not greater than the underwriters' option to purchase additional shares
from the issuer in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase to the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.
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<PAGE>
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, and to contribute to payments that the
underwriters may be required to make for these liabilities.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
We have applied to have our stock approved for quotation on the Nasdaq
National Market under the symbol "DBLT."
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker/dealer in December 1998. Since
December 1998, Thomas Weisel Partners has acted as a lead or co-manager on
numerous public offerings of equity securities. Thomas Weisel Partners does not
have any material relationship with us or any of our officers, directors or
other controlling persons, except with respect to its contractual relationship
with us under the underwriting agreement entered into in connection with this
offering.
Fidelity Capital Markets, a division of National Financial Services LLC, is
acting as an underwriter of this offering and will be facilitating electronic
distribution through the Internet.
69
<PAGE>
LEGAL MATTERS
The validity of the common stock being offered by DoubleTwist will be passed
upon for DoubleTwist by Heller Ehrman White & McAuliffe LLP, La Jolla,
California, which has acted as our counsel in connection with this offering.
Patricia M. Thayer, a partner in the law firm of Heller Ehrman White & McAuliffe
LLP, is the wife of Gregory C. Thayer, the general counsel, vice president of
corporate development and secretary of DoubleTwist. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Shearman & Sterling, Menlo Park, California.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999, included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto. For
more information about us and the common stock we are offering, you should
review the registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete. In each instance, reference is made to the copy of such contract or
document filed as an exhibit to the registration statement, and each such
statement is qualified in all respects by such reference. Copies of the
registration statement, including exhibits and schedules thereto, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., or obtained at prescribed rates from the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Securities and Exchange Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
Upon completion of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the Securities
and Exchange Commission.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and quarterly
reports for the first three fiscal quarters of each fiscal year containing
unaudited financial information. Our telephone number is (510) 628-0100.
70
<PAGE>
DOUBLETWIST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders'
Deficit................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DoubleTwist, Inc.
The stock split described in Note 9 to the consolidated financial statements
has not been consummated at the date of our opinion. When it has been
consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' deficit and
of cash flows present fairly, in all material respects, the financial
position of DoubleTwist, Inc. and its subsidiary at December 31, 1998 and
1999 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above."
San Jose, California
March 24, 2000, except as to Note 9,
which is as of October , 2000
F-2
<PAGE>
DOUBLETWIST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 10,087,007 $ 1,089,315 $ 14,689,612
Marketable securities................................. -- -- 7,123,840
Accounts receivable................................... 1,596,499 776,756 2,200,337
Prepaid expenses and other current assets............. 111,262 440,226 1,080,739
------------- ------------- -------------
Total current assets.............................. 11,794,768 2,306,297 25,094,528
Restricted cash......................................... -- -- 900,000
Property and equipment, net............................. 1,898,799 4,198,356 7,266,391
Other assets............................................ 91,994 756,298 641,200
Long-term notes receivable.............................. -- -- 4,500,000
------------- ------------- -------------
Total assets...................................... $ 13,785,561 $ 7,260,951 $ 38,402,119
============= ============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable, current portion........................ $ 1,922,453 $ 333,333 $ 859,469
Capital lease obligations, current portion............ 590,913 671,128 755,768
Accounts payable...................................... 300,034 2,070,332 1,534,716
Accrued and other current liabilities................. 1,065,182 1,433,220 1,580,316
Deferred revenue...................................... 467,603 418,216 2,070,842
------------- ------------- -------------
Total current liabilities......................... 4,346,185 4,926,229 6,801,111
Notes payable, net of current portion................... -- 583,334 3,985,194
Capital lease obligations, net of current portion....... 1,254,699 741,032 360,398
------------- ------------- -------------
Total liabilities................................. 5,600,884 6,250,595 11,146,703
------------- ------------- -------------
Commitments and contingency (Note 6)
Redeemable convertible preferred stock: $0.01 par value;
37,352,886, 39,552,886 and 66,197,329 shares
authorized at December 31, 1998 and 1999 and June 30,
2000 (unaudited), respectively; 8,273,000, 9,823,000
and 15,970,000 shares issued and outstanding at
December 31, 1998 and 1999 and June 30, 2000
(unaudited), respectively; none issued and outstanding
pro forma (unaudited) (aggregate liquidation
preference $58,963,024 at December 31, 1999 and
$94,364,530 at June 30, 2000 (unaudited))............. 25,021,639 30,745,662 66,370,524 $ --
------------- ------------- ------------- -------------
Stockholders' (deficit) equity:
Common stock: $0.01 par value; Authorized: 100,000,000
shares; Issued and outstanding: 695,000, 754,000 and
2,096,000 shares issued and outstanding at December
31, 1998 and 1999 and June 30, 2000 (unaudited),
respectively; 18,066,000 shares outstanding pro
forma (unaudited)................................... 6,952 7,535 20,963 180,660
Additional paid-in capital............................ 885,087 4,719,165 28,341,567 94,552,394
Deferred stock-based compensation..................... -- (5,247,466) (19,366,286) (19,366,286)
Notes receivable from stockholders.................... (34,500) (39,500) (2,515,250) (2,515,250)
Accumulated deficit................................... (17,694,501) (29,175,040) (45,596,102) (45,596,102)
------------- ------------- ------------- -------------
Total stockholders' (deficit) equity.............. (16,836,962) (29,735,306) (39,115,108) $ 27,255,416
------------- ------------- ------------- =============
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit..... $ 13,785,561 $ 7,260,951 $ 38,402,119
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DOUBLETWIST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ----------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees................................ $ 506,240 $ 2,779,195 $ 2,289,372 $ 1,103,456 $ 2,315,459
Subscriptions............................... -- -- -- -- 151,210
Services and other.......................... 769,498 1,472,826 1,294,532 766,657 339,795
----------- ----------- ------------ ------------ -------------
Total revenues.......................... 1,275,738 4,252,021 3,583,904 1,870,113 2,806,464
----------- ----------- ------------ ------------ -------------
Cost of revenues (Note 5):
License fees................................ 1,886 208,585 109,653 28,060 37,428
Subscriptions............................... -- -- -- -- 1,023,728
Services and other.......................... 367,732 1,253,995 943,312 583,875 238,569
----------- ----------- ------------ ------------ -------------
Total cost of revenues.................. 369,618 1,462,580 1,052,965 611,935 1,299,725
----------- ----------- ------------ ------------ -------------
Gross profit.................................. 906,120 2,789,441 2,530,939 1,258,178 1,506,739
----------- ----------- ------------ ------------ -------------
Operating expenses (Note 5):
Product development......................... 4,998,944 5,282,566 6,932,020 2,596,723 7,060,713
Sales and marketing......................... 2,153,375 4,036,945 4,861,531 1,774,844 6,699,495
General and administrative.................. 1,993,381 1,723,221 2,309,085 1,036,006 2,117,358
----------- ----------- ------------ ------------ -------------
Total operating expenses................ 9,145,700 11,042,732 14,102,636 5,407,573 15,877,566
----------- ----------- ------------ ------------ -------------
Operating loss................................ (8,239,580) (8,253,291) (11,571,697) (4,149,395) (14,370,827)
Interest income............................... 157,484 39,572 457,919 302,837 709,440
Interest expense.............................. (33,364) (488,033) (366,761) (210,177) (2,759,675)
----------- ----------- ------------ ------------ -------------
Net loss...................................... (8,115,460) (8,701,752) (11,480,539) (4,056,735) (16,421,062)
----------- ----------- ------------ ------------ -------------
Accretion on Series C redeemable convertible
preferred stock............................. -- (79,270) (1,749,556) (840,664) 1,488,114
Deemed dividend on preferred stock............ -- -- -- -- (21,148,633)
----------- ----------- ------------ ------------ -------------
Net loss available to common stockholders..... $(8,115,460) $(8,781,022) $(13,230,095) $ (4,897,399) $ (36,081,581)
=========== =========== ============ ============ =============
Net loss per share available to common
stockholders, basic and diluted............. $ (37.40) $ (13.61) $ (19.12) $ (7.16) $ (21.83)
=========== =========== ============ ============ =============
Shares used in computing net loss per
share available to common stockholders,
basic and diluted........................... 217,000 645,000 692,000 684,000 1,653,000
Pro forma net loss per share available to
common stockholders, basic and diluted
(unaudited)................................. $ (1.11) $ (1.03)
============ =============
Shares used in computing pro forma net loss
per share available to common stockholders,
basic and diluted (unaudited)............... 10,332,000 15,967,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DOUBLETWIST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE TOTAL
---------------------- PAID-IN STOCK-BASED FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT DEFICIT
----------- -------- ----------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996....................... 1,213,000 $ 12,125 $ 132,875 $ -- $ -- $ (877,289) $ (732,289)
Issuance of common stock..... 6,000 63 19,937 -- -- -- 20,000
Conversion of common stock to
Series A1 redeemable
convertible
preferred stock............ (1,219,000) (12,188) (152,812) -- -- -- (165,000)
Issuance of warrants for
licenses................... -- -- 22,870 -- -- -- 22,870
Issuance of common stock
pursuant
to exercise of stock
options.................... 30,000 299 23,601 -- -- -- 23,900
Issuance of common stock..... 578,000 5,783 456,831 -- -- -- 462,614
Issuance of restricted common
stock
pursuant to exercise of
stock
options for notes
receivable................. 43,000 431 34,069 -- (34,500) -- --
Net loss..................... -- -- -- -- -- (8,115,460) (8,115,460)
----------- -------- ----------- ------------ ----------- ------------ ------------
Balances at December 31,
1997....................... 651,000 6,513 537,371 -- (34,500) (8,992,749) (8,483,365)
Issuance of common stock
pursuant
to exercise of stock
options.................... 44,000 439 34,727 -- -- -- 35,166
Issuance of warrants in
conjunction
with issuance of Series C
redeemable convertible
preferred
stock and various
financings................. -- -- 392,259 -- -- -- 392,259
Accretion on Series C
redeemable convertible
preferred stock............ -- -- (79,270) -- -- -- (79,270)
Net loss..................... -- -- -- -- -- (8,701,752) (8,701,752)
----------- -------- ----------- ------------ ----------- ------------ ------------
Balances at December 31,
1998....................... 695,000 6,952 885,087 -- (34,500) (17,694,501) (16,836,962)
Issuance of common stock
pursuant
to exercise of stock
options.................... 52,000 520 41,593 -- -- -- 42,113
Issuance of restricted common
stock
pursuant to exercise of
stock
options for note
receivable................. 7,000 63 4,937 -- (5,000) -- --
Deferred stock-based
compensation............... -- -- 5,537,104 (5,537,104) -- -- --
Amortization of deferred
stock-based compensation... -- -- -- 289,638 -- -- 289,638
Accretion on Series C
redeemable convertible
preferred stock............ -- -- (1,749,556) -- -- -- (1,749,556)
Net loss..................... -- -- -- -- -- (11,480,539) (11,480,539)
----------- -------- ----------- ------------ ----------- ------------ ------------
Balances at December 31,
1999....................... 754,000 7,535 4,719,165 (5,247,466) (39,500) (29,175,040) (29,735,306)
Issuance of common stock
pursuant
to exercise of stock
options.................... 511,000 5,115 517,509 -- -- -- 522,624
Issuance of common stock
pursuant
to exercise of stock
options for
notes receivable........... 831,000 8,313 2,485,437 -- (2,493,750) -- --
Repayment of notes receivable
from
stockholders............... -- -- -- -- 18,000 -- 18,000
Deferred stock-based
compensation............... -- -- 16,266,843 (16,266,843) -- -- --
Amortization of deferred
stock-based compensation... -- -- -- 2,148,023 -- -- 2,148,023
Charge for accelerated
vesting of
employee stock options..... -- -- 382,500 -- -- -- 382,500
Issuance of convertible
subordinated promissory
notes with beneficial
conversion feature......... -- -- 2,481,999 -- -- -- 2,481,999
Issuance of preferred stock
with
beneficial conversion
feature.................... -- -- 21,148,633 -- -- -- 21,148,633
Deemed dividend on preferred
stock...................... -- -- (21,148,633) -- -- -- (21,148,633)
Accretion on Series C
redeemable convertible
preferred stock............ -- -- 1,488,114 -- -- -- 1,488,114
Net loss..................... -- -- -- -- -- (16,421,062) (16,421,062)
----------- -------- ----------- ------------ ----------- ------------ ------------
Balances at June 30, 2000
(unaudited)................ 2,096,000 $ 20,963 $28,341,567 $(19,366,286) $(2,515,250) $(45,596,102) $(39,115,108)
=========== ======== =========== ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DOUBLETWIST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(8,115,460) $(8,701,752) $(11,480,539) $ (4,056,735) $ (16,421,062)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 414,521 871,782 1,322,096 542,210 1,285,956
Charges related to the issuance of warrants and
redeemable convertible preferred
stock.......................................... 32,870 51,734 -- -- --
Amortization of debt discount.................... -- 256,508 77,547 38,773 145,824
Conversion of accrued interest to
redeemable convertible preferred stock......... -- 64,000 -- -- 13,973
Amortization of deferred stock-based compensation
and accelerated vesting of stock options....... -- -- 289,638 10,397 2,530,523
Noncash interest expense on convertible notes.... -- -- -- -- 2,481,999
Changes in current assets and liabilities:
Accounts receivable............................ (262,285) (1,251,998) 819,743 1,210,973 (1,423,581)
Prepaid expenses and other current assets...... (69,206) (40,556) (328,964) (173,773) (640,513)
Other assets................................... (65,176) 11,443 (664,304) 50,000 115,098
Accounts payable............................... 229,929 (117,528) 1,770,298 143,567 (535,616)
Accrued and other current liabilities.......... (24,193) 771,232 368,038 (333,842) 147,096
Deferred revenue............................... 66,022 321,399 (49,387) (66,997) 1,652,626
Other long-term liabilities.................... 3,000 (3,000) -- -- --
----------- ----------- ------------ ------------- -------------
Net cash used in operating activities........ (7,789,978) (7,766,736) (7,875,834) (2,635,427) (10,647,677)
----------- ----------- ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (530,122) (206,334) (3,355,835) (524,320) (4,353,991)
Purchase of marketable securities.................... -- -- -- -- (7,123,840)
Issuance of notes receivable......................... -- -- -- -- (4,500,000)
Increase in restricted cash.......................... -- -- -- -- (900,000)
----------- ----------- ------------ ------------- -------------
Net cash used in investing activities........ (530,122) (206,334) (3,355,835) (524,320) (16,877,831)
----------- ----------- ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible
preferred
stock and warrants, net............................ 9,940,721 10,413,868 3,974,467 3,974,467 31,953,179
Proceeds from issuance of common stock, net.......... 506,514 35,166 42,113 11,669 522,624
Proceeds from issuance of notes payable.............. -- 6,000,000 1,000,000 567,910 9,107,233
Proceeds from repayment of notes receivable from
stockholders....................................... -- -- -- -- 18,000
Principal payments on notes payable.................. (229,935) -- (2,083,333) (1,000,000) (179,237)
Principal payments on capital leases................. (116,940) (375,030) (699,270) (294,402) (295,994)
----------- ----------- ------------ ------------- -------------
Net cash provided by financing activities.... 10,100,360 16,074,004 2,233,977 3,259,644 41,125,805
----------- ----------- ------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents... 1,780,260 8,100,934 (8,997,692) 99,897 13,600,297
Cash and cash equivalents, beginning of period......... 205,813 1,986,073 10,087,007 10,087,007 1,089,315
----------- ----------- ------------ ------------- -------------
Cash and cash equivalents, end of period............... $ 1,986,073 $10,087,007 $ 1,089,315 $ 10,186,904 $ 14,689,612
=========== =========== ============ ============= =============
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest............................... $ 33,363 $ 231,525 $ 252,065 $ 131,957 $ 117,878
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of property and equipment under capital
leases............................................. $ 1,457,130 $ 866,464 $ 265,818 $ 265,818 $ --
Conversion of common stock to Series A1 redeemable
convertible preferred stock........................ 165,000 -- -- -- --
Issuance of restricted common stock for notes
receivable
from stockholders.................................. 34,500 -- 5,000 5,000 2,493,750
Conversion of notes payable to Series C redeemable
convertible preferred stock........................ -- 4,000,000 -- -- --
Conversion of notes payable to Series D redeemable
convertible preferred stock........................ -- -- -- -- 5,000,000
Issuance of warrants in conjunction with issuance of
Series C
redeemable convertible preferred stock and various
financing.......................................... -- 430,160 -- -- --
Issuance of Series C redeemable convertible preferred
stock
to placement agent for services rendered........... -- -- 340,000 340,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
DoubleTwist, Inc. (the "Company"), formerly Pangea Systems, Inc., was formed
in 1991 and incorporated in the State of California in 1993. The Company is a
leading provider of genomic information and bioinformatics analysis
technologies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM RESULTS
The accompanying interim consolidated financial statements and the related
notes as of June 30, 2000 and for the six months ended June 30, 1999 and 2000
are unaudited. The unaudited interim consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, reflect all adjustments, consisting principally of
normal recurring adjustments, necessary to present fairly the Company's
consolidated financial position as of June 30, 2000 and their results of
operations and cash flows for the six months ended June 30, 1999 and 2000. The
financial data and other information disclosed in these notes to consolidated
financial statements related to these periods are unaudited. The results for the
six months ended June 30, 2000 are not necessarily indicative of the results to
be expected for the year ending December 31, 2000.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding will automatically convert into
15,970,000 shares of common stock. Unaudited pro forma stockholders' equity, as
adjusted for the assumed conversion of the preferred stock, is set forth on the
balance sheet.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Amounts reported for cash and cash equivalents, accounts receivable and
accounts payable approximate fair value primarily due to their short-term
maturities. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of its debt obligations approximate
fair value.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
Restricted cash consists of a certificate of deposit held with a financial
institution as a security deposit for a building lease (Note 9).
F-7
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Securities" and are carried at cost which
approximates fair value. Realized gains and losses on sales of all such
securities are reported in earnings and computed using the specific
identification cost method. There were no realized or unrealized gains or losses
for all periods presented.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
Property and equipment under capital leases are amortized on a straight line
basis over the shorter of their estimated useful lives or the terms of the
leases. Upon retirement or sale, the cost and related accumulated depreciation
are removed from the balance sheet and the resulting gain or loss is reflected
in operations. Maintenance and repairs are charged to operations as incurred.
SOFTWARE DEVELOPMENT COSTS
Costs related to the conceptual formulation and design of software products
are expensed as product development while costs incurred subsequent to
establishing technological feasibility of software products are capitalized, if
material, until the general release of the product. Generally, technological
feasibility is established when the software module performs its primary
functions as described in its original specifications, contains convenience
features required for it to be useable in a production environment and is
completely documented. During the years ended December 31, 1997, 1998 and 1999,
the amounts of costs incurred subsequent to establishing technological
feasibility were not material.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for indicators of possible
impairment by comparison of the carrying amounts to future net undiscounted cash
flows expected to be generated by such assets when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Should an impairment exist, the impairment loss would be measured based on the
excess carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. The Company has not identified any such
impairment losses to date.
INCOME TAXES
Income taxes are recorded under the liability method, under which deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
F-8
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues from the license of software products under
software license agreements and from the delivery of professional services and
maintenance services in accordance with Statement of Position ("SOP") 97-2,
SOFTWARE REVENUE RECOGNITION, and SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION TO CERTAIN TRANSACTIONS. When contracts contain multiple
elements, and vendor-specific objective evidence exists for all undelivered
elements, the Company accounts for the delivered elements in accordance with the
"Residual Method" prescribed by SOP 98-9. License revenues are recognized when
persuasive evidence of an arrangement exists, the fee is fixed or determinable,
collectibility is probable and delivery and customer acceptance, if required
under the terms of the contract, have occurred. The Company generally does not
grant rights of return. In instances where vendor obligations remain, revenues
are deferred until the obligation has been satisfied. Service revenues consist
of implementation and training services and maintenance. Implementation and
training revenues are recognized as the services are performed. Maintenance
contracts include the right to unspecified upgrades on a when-and-if available
basis, and ongoing support. Maintenance revenues are recognized ratably over the
term of the maintenance contract, which is generally twelve months.
Subscription revenue consists of revenue recognized from the license of
proprietary databases and from contracts for access to the Company's online
tools and data sets. In accordance with SOP 97-2, the Company defers revenue
from the licensing of databases, as the Company has a contractual obligation to
deliver specified upgrades on a when-and-if available basis during the license
term. Subscription revenue is generally billed annually and recognized ratably
over the term of the contract, generally twelve months.
Research and development grant agreements provide for periodic payments in
support of the Company's research activities. Grant revenue is recognized as
earned based on actual cost incurred. Reimbursements from grants are recorded as
service and other revenues. For the years ended December 31, 1997, 1998 and
1999, the Company was reimbursed for product development costs of $0, $463,073
and $458,801 from the Department of Health and Human Services.
Other revenue also includes sales of workstations, servers and third-party
software for use with the Company's products. The Company has reseller
arrangements with vendors and bears the risk of loss on the products. Revenues
are recognized upon shipment of the third-party product from the Company.
PRODUCT DEVELOPMENT COSTS
Product development costs are expensed as incurred. Costs incurred in the
design, creation and maintenance of content, graphics and user interface of the
Company's web site are expensed as incurred in accordance with SOP 98-1. Costs
incurred in the development of application and infrastructure of the web site
are capitalized and amortized over the useful life of the web site. Costs
required to be capitalized under SOP 98-1 have been insignificant to date and
were expensed.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the years ended December 31, 1997, 1998 and 1999 was $97,526,
$602,632 and $1,222,901, respectively.
F-9
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CERTAIN RISKS AND UNCERTAINTIES
The Company's operating results are significantly dependent on the Company's
ability to market and develop its products. The life cycles of the Company's
products are difficult to estimate due in part to the effect of future product
enhancements and competition. The inability of the Company to successfully
develop and market its products as a result of competition or other factors
would have a material adverse affect on the Company's business, financial
condition and results of operations.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited in demand and money market
accounts at three financial institutions. At times, such deposits may be in
excess of insured limits. The Company has not experienced any losses on its
deposits of cash and cash equivalents. The Company's accounts receivable are
derived from revenue earned from customers primarily located in the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition and requires no collateral from its customers.
At December 31, 1998, amounts due from three customers represented 43%, 25%,
and 11% of gross accounts receivable. At December 31, 1999, amounts due from
four customers represented 31%, 23%, 16% and 14% of gross accounts receivable.
For the year ended December 31, 1997, five customers accounted for 30%, 30%,
13%, 12% and 11% of the Company's net revenues. For the year ended December 31,
1998, three customers accounted for 13%, 12%, and 11% of the Company's net
revenues. No customer accounted for more than 10% of revenues in 1999.
SEGMENTS
The Company operates in one segment, using one measurement of profitability
to manage its business. All long-lived assets are maintained in the United
States. Export sales to England represented approximately 30% of net revenues
for fiscal 1997. In subsequent fiscal years, export sales were less than 5% of
net revenues.
COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock options, warrants and
other convertible securities. Potentially dilutive securities have been excluded
from the diluted EPS calculations as they have an antidilutive effect due to the
Company's net losses.
Pro forma net loss per share available to common stockholders for the year
ended December 31, 1999 and the six months ended June 30, 2000 was computed
using the weighted average number of shares of common stock outstanding,
including the pro forma effects of the automatic conversion of all of the
Company's preferred stock into shares of the Company's common stock as if such
conversion occurred on January 1, 1999, or at the date of original issuance, if
later.
F-10
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
A reconciliation of shares used in the calculations is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................... $(8,115,460) $(8,701,752) $(11,480,539) $(4,056,735) $(16,421,062)
----------- ----------- ------------ ----------- ------------
Accretion on Series C
redeemable convertible
preferred stock.......... -- (79,270) (1,749,556) (840,664) 1,488,114
Deemed dividend on
preferred stock.......... -- -- -- -- (21,148,633)
----------- ----------- ------------ ----------- ------------
Net loss available to
common
stockholders............. $(8,115,460) $(8,781,022) $(13,230,095) $(4,897,399) $(36,081,581)
=========== =========== ============ =========== ============
Denominator:
Weighted average common
shares outstanding....... 236,000 674,000 713,000 705,000 1,993,000
Weighted average unvested
common shares subject to
repurchase............... (19,000) (29,000) (21,000) (21,000) (340,000)
----------- ----------- ------------ ----------- ------------
Denominator for basic and
diluted calculations..... 217,000 645,000 692,000 684,000 1,653,000
=========== =========== ============ =========== ============
Net loss per share
available
to common stockholders,
basic and diluted........ $ (37.40) $ (13.61) $ (19.12) $ (7.16) $ (21.83)
=========== =========== ============ =========== ============
Shares used to compute net
loss per share available to
common stockholders........ 692,000 1,653,000
Adjustment to reflect
weighted-average effect
of assumed conversion of
preferred stock
(unaudited)................ 9,640,000 14,314,000
------------ ------------
Shares used to compute pro
forma net loss per share
available to common
stockholders, basic and
diluted (unaudited)........ 10,332,000 15,967,000
============ ============
Pro forma net loss per share
available to common
stockholders, basic and
diluted (unaudited)........ $ (1.11) $ (1.03)
============ ============
</TABLE>
F-11
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share available to common stockholders as
their effect is antidilutive:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Antidilutive securities:
Convertible preferred stock...... 2,828,000 8,273,000 9,823,000 9,823,000 15,970,000
Options to purchase common
stock.......................... 773,000 925,000 2,319,000 1,811,000 3,155,000
Common stock subject to
repurchase..................... 34,000 23,000 18,000 24,000 840,000
Warrants......................... 42,000 528,000 528,000 528,000 570,000
---------- ---------- ---------- ---------- ----------
3,677,000 9,749,000 12,688,000 12,186,000 20,535,000
========== ========== ========== ========== ==========
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price. SFAS No. 123 defines a "fair value" based method of accounting
for an employee stock option or similar equity instruments. The pro forma
disclosures of the difference between compensation expense included in net loss
and the related cost measured by the fair value method are presented in Note 5.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Task Force Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS
133") which is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In July 1999, the FASB issued Statement of Financial
Standards No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 ("SFAS
137") which defers the effective date to all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet evaluated the effects of
this change on its operations. The Company does not currently hold derivative
instruments or engage in hedging activities.
F-12
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION, which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. In June 2000,
the SEC issued SAB 101B which delays the implementation of SAB 101 until no
later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company believes that its current revenue recognition
policy is in compliance with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION NO.
25 ("FIN 44"). This Interpretation clarifies the definition of an employee for
the purposes of applying Accounting Practice Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company believes that FIN 44 will
not have a material effect on the financial position or results of operation of
the Company.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue
00-2, ACCOUNTING FOR THE COSTS OF DEVELOPING A WEB SITE ("EITF 00-2"). In
general, EITF 00-2 states that the costs of developing a web site should be
accounted for under provisions of Statement of Position (SOP) 98-1, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. The
Company is currently evaluating EITF 00-2 and does not believe that the
pronouncement will have a significant impact on its financial position, results
of operations or cash flows. EITF 00-2 is effective for costs incurred after
June 30, 2000.
3. BALANCE SHEET COMPONENTS:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accounts receivable................................ $ 1,547,537 $ 759,831
Unbilled receivables............................... 48,962 16,925
----------- -----------
$ 1,596,499 $ 776,756
=========== ===========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Computer hardware.................................. $ 2,362,840 $ 5,401,032
Computer software.................................. 396,292 909,132
Furniture and fixtures............................. 517,704 588,325
----------- -----------
3,276,836 6,898,489
----------- -----------
Less: Accumulated depreciation and amortization.... (1,378,037) (2,700,133)
----------- -----------
$ 1,898,799 $ 4,198,356
=========== ===========
</TABLE>
F-13
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS: (CONTINUED)
At December 31, 1998 and 1999, property and equipment included assets
acquired under capital leases of $2,433,486 and $2,699,305, respectively.
Related accumulated amortization totaled $1,001,832 and $1,976,633 respectively.
Depreciation and amortization expense for the years ended December 31, 1997,
1998 and 1999 was $414,521, $871,782 and $1,322,096, respectively.
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued payroll and benefits......................... $ 644,404 $ 500,866
Accrued professional fees............................ 175,976 643,668
Other................................................ 244,802 288,686
---------- ----------
$1,065,182 $1,433,220
========== ==========
</TABLE>
4. DEBT:
Throughout 1998, the Company issued $4,000,000 in convertible subordinated
notes payable to certain preferred and common shareholders. The principal amount
of the notes payable, together with interest at 6% per annum, was due and
payable upon demand or automatically converted into a new series of preferred
stock upon the closing of a minimum of $2,000,000 of a new series of preferred
stock. In December 1998, the principal amount of the notes payable plus accrued
interest of $64,000 converted into 1,452,000 shares of Series C redeemable
convertible preferred stock.
In August 1998, the Company entered into a loan and security agreement with
a commercial bank, which provided for a $1,000,000 equipment line of credit.
Borrowings under the equipment line of credit ($0 in 1998 and $1,000,000 in
1999) plus accrued interest are due in monthly installments commencing October
1999 through September 2002. As of December 31, 1999, the Company does not have
the ability to borrow additional amounts under this equipment line of credit. In
connection with the loan and security agreement, the Company entered into a
$2,000,000 bridge loan bearing interest at the bank's prime rate plus 0.5% per
annum (9% at December 31, 1999). In November 1998, the bridge loan was converted
into a term loan with interest accruing at 8.25% per annum and principal
payments due in twelve equal monthly installments. The outstanding balance under
the term loan was paid in full during 1999.
The loan and security agreement contains restrictions on the payment of
dividends and financial covenants, including but not limited to, tangible net
worth requirements and current and debt service ratios. At December 31, 1999,
the Company was not in compliance with the financial covenants; however,
management received the necessary waivers through February 29, 2000 at which
date the Company was in compliance with the financial covenants.
Maturities of debt outstanding for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000........................................................ $333,333
2001........................................................ 333,333
2002........................................................ 250,001
--------
$916,667
========
</TABLE>
F-14
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY:
RECAPITALIZATION
In January 1997, the Company's Articles of Incorporation were amended and
the 1,219,000 shares of common stock outstanding were converted into Series A1
redeemable convertible preferred stock on a one-for-one basis.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1997, the Company issued 5,000 shares of Series A redeemable
convertible preferred stock at $6.00 per share for gross proceeds of $30,000.
In February 1997, the Company issued 1,157,000 shares of Series B redeemable
convertible preferred stock at $6.442 per share for gross proceeds of
$7,450,405.
In connection with the issuance of Series B redeemable convertible preferred
stock in February 1997, the Company issued warrants to investors for cash at
$0.01 per warrant the right to purchase 385,000 shares of Series B redeemable
convertible preferred stock at $6.442 per share. During 1997, all of the
warrants were exercised.
In December 1998, the Company issued 3,975,000 shares of Series C redeemable
convertible preferred stock at $2.80 per share for gross proceeds of $11,130,006
and 18,000 shares of Series C redeemable convertible preferred stock for
services rendered. In February 1999, the Company issued 1,429,000 shares of
Series C redeemable convertible preferred stock at $2.80 per share for gross
proceeds of $4,000,000 and 121,000 shares of Series C redeemable convertible
preferred stock to the placement agent for services rendered.
During 1998, the Company issued $4,000,000 in convertible subordinated notes
payable to certain preferred and common stockholders (Note 4). In December 1998,
the principal amounts of the notes payable plus accrued interest of $64,000
converted into 1,452,000 shares of Series C redeemable convertible preferred
stock at $2.80 per share.
Redeemable convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Series A: 256,834 shares authorized, 64,000 shares
issued and outstanding at December 31, 1998 and
1999, (liquidation preference $385,250).......... $ 385,250 $ 385,250
Series A1: 4,887,500 shares authorized, 1,222,000
shares issued and outstanding at December 31,
1998 and 1999, (liquidation preference
$7,871,319)...................................... 175,000 175,000
Series B: 6,208,552 shares authorized; 1,542,000
shares issued and outstanding at December 31,
1998 and 1999 (liquidation preference
$9,933,873)...................................... 9,910,721 9,910,721
Series C: 26,000,000 and 28,200,000 shares
authorized at December 31, 1998 and 1999,
respectively; 5,445,000 and 6,995,000 shares
issued and outstanding at December 31, 1998 and
1999, respectively (liquidation preference
$40,772,582)..................................... 14,550,668 20,274,691
----------- -----------
$25,021,639 $30,745,662
=========== ===========
</TABLE>
F-15
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY:
(CONTINUED)
Under the Company's Articles of Incorporation, the Company's redeemable
convertible preferred shares are issuable in series.
DIVIDENDS
The holders of shares of Series C are entitled to receive, when and if
declared by the Board of Directors, cumulative dividends out of any assets
legally available therefore, prior and in preference to any declaration or
payment of any dividend on the Series A, A1, B and common shares at the rate of
$0.224 per share, per annum. After dividends to Series C stockholders have been
paid, the Series B and Series A stockholders are entitled to receive
non-cumulative dividends over Series A1 and common stockholders at the rate of
$0.64 and $0.60, respectively. No dividends have been declared to date.
LIQUIDATION
In the event of any liquidation, change in control, dissolution or winding
up of the Company, the order of liquidation preference will be as follows: each
of the Series C, Series B, Series A and Series A1 stockholders, respectively,
will receive its full liquidation preference amount including any declared but
unpaid dividends thereon prior to any payment to a junior class. The liquidation
value of the Series C is $2.80 per share, plus any dividends accrued but unpaid
thereon. The liquidation value of the Series B, Series A and Series A1 is
$6.442, $6.00 and $6.442 per share, respectively, plus any declared but unpaid
dividends thereon. Should there be any assets after providing for the full
liquidation preference of the Series C, Series B, Series A and Series A1
stockholders, the remaining assets of the corporation are to be distributed pro
rata among the holders of the Company's common stock. However, if such
liquidation, change in control, dissolution or winding up occurs within four
years from the date on which the first share of Series C redeemable convertible
preferred stock was issued by the Company, then the holders of the Series C are
entitled to receive prior and in preference liquidation to any distribution of
any of the assets or surplus fund to the holders of Series B, Series A,
Series A1 or common stock at an amount equal to $5.60 per share.
CONVERSION
Each share of redeemable convertible preferred stock can be converted at the
option of the holder to a share of common subject to adjustment for certain
equity related events, or automatically converts upon the earlier of (i) the
Company's initial registered public offering in which the aggregate offering
price equals or exceeds $20 million and the public offering price per share
equals or exceeds $9.80 per share or (ii) the date on which the holders of a
majority of the then outstanding shares of redeemable convertible preferred
stock have voted or consented in writing to such conversion. The conversion
price is equal to the original issue price of $2.80, $6.442, $6.00 and $6.442
for Series C, Series B, Series A and Series A1, respectively, as of December 31,
1999.
VOTING
The holders of Series C, Series B, Series A, and Series A1 are entitled to
the number of votes equal to the number of full shares of common stock into
which each share of redeemable convertible preferred stock can be converted and
shall have the same voting rights and powers equal to the voting rights and
powers of the Company's common shares.
F-16
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY:
(CONTINUED)
REDEMPTION
In the event that the holders of at least eighty percent of the then
outstanding shares of Series C give written notice at any time after the fifth
anniversary from the first issuance of Series C, the Company is required to
redeem Series C at the redemption price of the greater of $2.80 per share plus
any accrued but unpaid dividends up to the redemption date or the fair market
value of Series C determined by the Company's Board of Directors. Series A, A1
and B are not redeemable.
ELECTION OF DIRECTORS
The holders of Series C, Series B and Series A1, voting as a separate class,
are entitled to elect two members of the Company's Board of Directors. The
remaining directors are elected by all common and redeemable convertible
preferred stockholders voting as a single class.
STOCK OPTIONS
In August 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Plan"). The Company had reserved 437,500 common shares for issuance under the
Plan. At December 31, 1999, the total number of common shares reserved under the
Plan was 3,197,500. Under the plan, restricted stock, stock bonuses and options
to purchase common stock may be granted to employees, officers, directors,
consultants and advisors of the Company. Under the Plan, incentive options may
be granted at prices not less than fair market value at the date of grant or
110% of the fair market value if the optionee, immediately prior to the grant,
owns shares representing 10% or more of the voting power or value of all
securities. Nonstatutory options may be granted at prices not less than 85% of
fair market value at the date of grant as determined by the Board of Directors.
Options granted under the Plan generally become exercisable ratably over a four
year period and generally expire from five to ten years from the date of grant.
F-17
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY:
(CONTINUED)
Stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE SHARES EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
Balances, December 31, 1996................. 193,000 241,000 $3.20
Additional shares reserved................ 590,000 -- --
Options granted........................... (869,000) 869,000 0.80
Options canceled.......................... 264,000 (264,000) 3.00
Options exercised......................... (73,000) 0.80
---------- ----------
Balances, December 31, 1997................. 178,000 773,000 0.80
Additional shares reserved................ 1,170,000 -- --
Options granted........................... (490,000) 490,000 1.12
Options canceled.......................... 294,000 (294,000) 0.96
Options exercised......................... -- (44,000) 0.80
---------- ----------
Balances, December 31, 1998................. 1,152,000 925,000 0.88
Additional shares reserved................ 1,000,000 -- --
Options granted........................... (1,866,000) 1,866,000 0.80
Options canceled.......................... 413,000 (413,000) 0.84
Options exercised......................... -- (59,000) 0.80
---------- ----------
Balances, December 31, 1999................. 699,000 2,319,000 0.84
---------- ----------
Additional shares reserved................ 2,000,000 -- --
Options granted........................... (2,307,000) 2,307,000 3.00
Options canceled.......................... 129,000 (129,000) 1.32
Options exercised......................... -- (1,342,000) 2.24
---------- ----------
Balances, June 30, 2000 (unaudited)......... 521,000 3,155,000 $0.60
========== ==========
</TABLE>
During 1997, 1999 and the six months ended June 30, 2000, options to
purchase 43,000, 6,000 and 831,000 shares, respectively, of common stock subject
to repurchase by the Company had been exercised in exchange for full recourse
promissory notes of $34,500, $5,000 and $2,493,750, respectively. These notes
bear interest at rates of 6.00% to 6.71% and become due in 2001, 2009 and 2005,
respectively. The Company's right of repurchase expires on a ratable basis over
periods of up to four years and as of June 30, 2000, 840,000 shares were subject
to repurchase. The related shares are pledged as collateral for the notes.
F-18
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY:
(CONTINUED)
The Company has adopted the disclosure only provisions of SFAS 123. Had
compensation expense for options granted been determined based on the fair value
at the grant date, as prescribed by SFAS 123, the Company's net loss per share
available to common stockholders would be as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported......................... $(8,115,460) $(8,781,022) $(13,230,095)
=========== =========== ============
Pro forma........................... $(8,150,860) $(8,835,668) $(13,346,799)
=========== =========== ============
Basic and diluted net loss per share:
As reported......................... $ (37.40) $ (13.61) $ (19.12)
=========== =========== ============
Pro forma........................... $ (37.56) $ (13.70) $ (19.29)
=========== =========== ============
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made each
year. The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions used for grants:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................... 6.22% 5.15% 5.55%
Expected life..................................... 5 years 5 years 5 years
Expected dividends................................ -- -- --
</TABLE>
Based on the above assumptions, the weighted average minimum values per
share of options granted were approximately $0.06, $0.08 and $0.07 for the years
ended December 31, 1997, 1998 and 1999, respectively.
Options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
-------------------------------------- EXERCISABLE
WEIGHTED AVERAGE ----------------------------
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISABLE EXERCISE PRICE
-------- ----------- ------------------------ ----------- --------------
<S> <C> <C> <C> <C>
$0.80 2,257,000 9.10 481,000 $0.80
$2.00 62,000 8.57 21,000 $2.00
--------- ---------
2,319,000 9.09 502,000 $0.84
--------- =========
</TABLE>
WARRANTS
In April 1997, in connection with a financing arrangement, the Company
issued 10,000 warrants to purchase shares of Series B redeemable convertible
preferred stock at $6.442 per share. The fair value of these warrants were
determined to be immaterial. In October 1997, for licenses, the Company issued
32,000 warrants to purchase shares of common stock at $0.80 per share. The fair
value of these warrants of $22,870 was expensed during the year ended
December 31, 1997.
F-19
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY:
(CONTINUED)
During 1998, in connection with various financing arrangements (Notes 4 and
6), the Company issued 232,000 warrants to purchase common stock at $2.00 per
share, 13,000 warrants to purchase common stock at $6.442 per share and 16,000
warrants to purchase share of Series C redeemable convertible preferred stock at
$2.80 per share. The fair value of these warrants to purchase common stock and
Series C redeemable convertible preferred stock of $296,154 and $37,901,
respectively, have been recorded as a discount on the debt and accreted as
interest expense over the life of the debt. During the years ended December 31,
1998 and 1999, a total of $265,508 and $77,547, respectively, was charged to
interest expense.
During 1998, in connection with the issuance of Series C redeemable
convertible preferred stock, the Company issued warrants to the placement agent
for the purchase of 225,000 shares of Series C common stock at $0.80 per share.
The fair value of these warrants of $96,105 was netted against the proceeds.
The Company calculated the fair value of each warrant issued on the date of
issuance using the Black-Scholes pricing method with the following assumptions:
dividend yield at 0%, expected term of the warrants between four to ten years;
risk free interest rate between 4.31% to 5.37% and volatility of 67%.
The Company has reserved redeemable convertible preferred stock and common
stock as of December 31, 1999 for the following exercisable warrants:
<TABLE>
<CAPTION>
PROCEEDS
EXERCISE UPON
SHARES NUMBER OF SHARES PRICE PER SHARE EXERCISE EXERCISE PERIOD
------ ---------------- --------------- -------- ----------------------
<S> <C> <C> <C> <C>
Series B............. 10,000 $ 6.442 $ 65,000 through April 2004
Series C............. 16,000 2.80 45,371 through December 2005
Common stock......... 257,000 0.80 205,694 through October 2007
Common stock......... 232,000 2.00 464,286 through December 2002
Common stock......... 13,000 6.442 80,525 through August 2003
--------- --------
528,000 $860,876
========= ========
</TABLE>
Unless exercised, warrants to purchase 32,000 shares of common stock at
$0.80 per share expire upon the effectiveness of an initial public offering.
DEFERRED STOCK-BASED COMPENSATION
During the period from January 1999 through June 30, 2000, the Company
recorded $21,803,947 of deferred stock-based compensation in accordance with
APB 25, SFAS 123 and Emerging Issues Task Force 96-18, related to stock options
granted to consultants and employees. For options granted to consultants, the
Company determined the fair value of the options using the Black-Scholes option
pricing model with the following assumptions: expected lives of five years;
weighted average risk-free rate between 4.8% and 6.6%; expected dividend yield
of zero percent; volatility of 67% and fair values of common stock between $0.80
and $11.70 per share. Stock-based compensation expense is being recognized on a
straight-line basis for employees and in accordance with FIN 28, an accelerated
amortization method, for consultants, over the vesting periods of the related
options, generally four years. The Company recognized stock-based compensation
expense of $0, $0, $289,638 and $2,148,023
F-20
<PAGE>
DOUBLETWIST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY:
(CONTINUED)
for the years ended December 31, 1997, 1998 and 1999 and the six months ended
June 30, 2000, respectively.
The allocation of stock-based compensation expense by functional area is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED -------------------------
DECEMBER 31, 1999 1999 2000
----------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cost of revenue:
License fees....................... $ -- $ -- $ --
Subscriptions...................... -- -- 26,121
Services and other................. 7,224 -- 24,876
Product development.................. 106,472 8,897 433,257
Sales and marketing.................. 153,223 1,500 1,046,200
General and administrative........... 22,719 -- 617,569
-------- ---------- ----------
Total stock-based
compensation................. $289,638 $ 10,397 $2,148,023
======== ========== ==========
</TABLE>
6. COMMITMENTS AND CONTINGENCY:
COMMITMENTS
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through June 2003. Rent expense
for the years ended December 31, 1997, 1998 and 1999 was $367,980, $453,337 and
$449,457, respectively. The Company recognizes rent expense on a straight-line
basis over the lease period, and has accrued for rent expense incurred but not
paid.
Future minimum lease payments under noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDED DECEMBER 31, LEASES LEASES
------------------------ ---------- ----------
<S> <C> <C>
2000................................................. $ 750,221 $ 883,800
2001................................................. 609,542 528,988
2002................................................. 145,240 29,714
2003................................................. 24,018 --
---------- ----------
Total minimum lease payments......................... 1,529,021 $1,442,502
==========
Less: Amount representing interest................... 116,861
----------
Present value of capital lease obligations........... 1,412,160
Less: Current portion................................ 671,128
----------
Long-term portion of capital lease
obligations.................................. $ 741,032
==========
</TABLE>
CONTINGENCY
The Company is involved in routine legal and administrative proceedings that
arise from the normal conduct of business. Management believes that the ultimate
disposition of these matters will not have a material adverse effect on the
consolidated financial results or condition of the Company.
F-21
<PAGE>
DOUBLETWIST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES:
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1998 and December 31, 1999 as the Company incurred net
operating losses.
Temporary differences which gave rise to significant portions of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net operating losses.............................. $ 5,936,000 $ 9,882,000
Research and development credits.................. 577,000 838,000
Accruals, reserves and allowances................. 259,000 4,000
Capitalized research and development costs........ 543,000 828,000
----------- ------------
7,315,000 11,552,000
Valuation allowance............................... (7,315,000) (11,552,000)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
Due to uncertainty of realizing the benefits of the deferred tax assets, the
Company has provided a full valuation allowance against its net deferred tax
assets. The valuation allowance has increased by $3,663,000 and $4,237,000
during 1998 and 1999, respectively.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $27,894,000 and $6,814,000 for Federal and California purposes,
respectively, available to reduce future taxable income, if any. These
carryforwards expire beginning in the years 2012 and 2002 for Federal and
California purposes, respectively, if not utilized beforehand.
At December 31, 1999, the Company had research and development credit
carryforwards of approximately $599,000 and $363,000 for Federal and California
income tax purposes, respectively. The research and development carryforwards
expire beginning in the year 2012.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. An ownership change did occur in 1997. In the event the
Company has future changes in ownership, utilization of the carryforwards could
be further restricted.
8. EMPLOYEE BENEFIT PLAN:
In May 1996, the Company adopted an employee benefit plan (the "Plan") which
is qualified under Section 401(k) of the Internal Revenue Code of 1986. Eligible
employees may make voluntary contributions to the Plan of up to 20% of their
annual compensation, not to exceed the statutory amount, and the Company may
make matching contributions. The Company made no contributions in 1997, 1998 or
1999.
9. SUBSEQUENT EVENTS:
CONVERTIBLE SUBORDINATED PROMISSORY NOTES
In January 2000, the Company issued $5,000,000 in convertible subordinated
promissory notes to certain preferred and common stockholders. The principal
amount of the notes, together with interest
F-22
<PAGE>
DOUBLETWIST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS: (CONTINUED)
at 6% per annum, is due and payable upon demand after August 31, 2000 or
automatically converts into the securities issued in the next private equity
financing consisting of gross proceeds of at least $4,000,000 at the purchase
price paid for the securities. The difference between the conversion price and
the fair market value per share of the common stock on the transaction date,
$9.00, resulted in a beneficial conversion feature of $2,481,999 which has been
recorded as a charge to interest expense in the June 30, 2000 interim financial
statements. In connection with the notes, the Company issued 42,000 warrants to
purchase Series D redeemable convertible preferred stock at $6.02 per share. The
relative fair value of the warrants, totaling $145,824 was recorded as a
discount on the notes to be accreted as interest expense over the life of the
notes. Upon exercise of such warrants, the Company may incur an additional
beneficial conversion feature based on the difference between the exercise price
and the fair market value of common stock on the date of exercise. In February
2000, the principal amount of the notes plus accrued interest of $13,973
converted into 833,000 shares of Series D redeemable convertible preferred
stock.
SERIES D CONVERTIBLE PREFERRED STOCK
In February 2000, the Company issued 5,314,000 shares of Series D preferred
stock ("Series D") at $6.02 per share resulting in gross proceeds of
$31,988,636. The difference between the conversion price and the fair market
value per share of the common stock on the transaction date, $10.00, resulted in
a beneficial conversion feature of $21,148,633 which has been reflected as a
preferred stock dividend in the June 30, 2000 consolidated interim financial
statements. Each share of Series D has voting rights equal to the number of
shares of common stock into which such share is convertible. Holders of
Series D are entitled to receive annual dividends of $0.602 per share, when and
if declared by the Board of Directors, on a pari passu basis with the holders of
Series B and Series C preferred stock, and prior to the Series A and Series A1
preferred stock and to the common stock. The Series D is convertible at any time
into common stock at a one-for-one exchange ratio. Such conversion is automatic
upon the effective date of an initial public offering of at least $15.0 million
provided the public offering price is at least $12.00 per share. In the event of
any liquidation, change in control, dissolution or winding up of the Company,
the holders of Series D are entitled to receive an amount equal to $6.02 per
share, plus any declared but unpaid dividends. In conjunction with the Series D
convertible preferred stock financing, the articles of incorporation of the
Company were amended to rescind the redemption rights related to the Series C
convertible preferred stock and change the liquidation rights to be equal to
$2.80 per share plus any declared but unpaid dividends. As a result, the
accretion recorded on Series C convertible preferred stock related to cumulative
dividends was reversed in February 2000.
SERIES E CONVERTIBLE PREFERRED STOCK
In July 2000, the Company issued 856,000 shares of Series E preferred stock
("Series E") at $8.964 per share resulting in gross cash proceeds of $7,677,148.
The difference between the conversion price and the fair market value per share
of the common stock on the transaction date, $11.70, resulted in a beneficial
conversion feature of approximately $2,343,000 which will be reflected as a
preferred stock dividend in the September 30, 2000 consolidated interim
financial statements. Each share of Series E has voting rights equal to the
number of shares of common stock into which such share is convertible. Holders
of Series E are entitled to receive annual dividends of $0.8964 per share, when
and if declared by the Board of Directors, on a pari passu basis with the
holders of Series B, Series C and Series D
F-23
<PAGE>
DOUBLETWIST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS: (CONTINUED)
preferred stock, and prior to the Series A and Series A1 preferred stock and to
the common stock. The Series E is convertible at any time into common stock at a
one-for-one exchange ratio. Such conversion is automatic upon the effective date
of an initial public offering of at least $15.0 million provided the public
offering price is at least $12.00 per share. In the event of any liquidation,
change in control, dissolution or winding up of the Company, the holders of
Series E are entitled to receive an amount equal to $8.964 per share, plus any
declared but unpaid dividends.
REINCORPORATION
In June 2000, the Company reincorporated in the State of Delaware. Following
the reincorporation, the Company will be authorized to issue 100,000,000 shares
of $0.01 par value common stock and 66,197,329 shares of $0.01 par value
preferred stock.
NOTES PAYABLE
In February 2000, the Company amended its loan and security agreement to
provide for an additional $1,500,000 equipment line of credit. Borrowings under
the equipment line of credit bear interest at the bank's prime rate plus 0.5%
per annum. In June 2000, the Company modified its loan and security agreement to
provide for an additional $3,000,000 equipment line of credit. Borrowings under
the additional equipment line of credit bear interest at the bank's prime rate
plus 1.0% per annum. Borrowings under the equipment lines of credit plus accrued
interest are payable in monthly installments commencing June 2000 through
December 2003. As of July 31, 2000, the Company does not have the ability to
borrow additional amounts under the equipment lines of credit.
Maturities of debt outstanding under the equipment lines of credit for the
six months ended December 31, 2000 and for the years ended December 31, 2001,
2002 and 2003 are $250,000, $1,500,000, $1,500,000 and $1,208,333, respectively.
BUILDING LEASE
In April 2000, the Company entered into an agreement with a Limited
Liability Corporation ("LLC") to loan the LLC $4,500,000 for the purchase of a
building. The note bears interest at 10.5% per annum with interest only payments
due monthly and principal due in 2010. The note can be prepaid at any time
without penalty. The Company will lease the building, to be accounted for as an
operating lease, from the LLC for a term of ten years with two five-year options
to extend the term of the lease. In connection with the lease, the Company is
required to maintain a certificate of deposit for $900,000 as a security
deposit. Future minimum lease payments under the building lease are $293,140,
$1,768,580, $1,827,360, $1,888,200, $1,951,200 and $12,751,680 for the years
ending December 31, 2000, 2001, 2002, 2003, 2004 and thereafter.
COLLABORATION AGREEMENT
In May 2000, the Company entered into a collaboration agreement with Ventro
Corporation to offer certain products through the Company's web site. The
Company will receive a commission on all products sold. Furthermore, Ventro will
receive a commission if it sells any of the Company's products through its
technology platform. In addition, Ventro invested $5,000,000 in the Company's
Series E convertible preferred stock financing at terms no less favorable than
those extended to other investors.
F-24
<PAGE>
DOUBLETWIST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS: (CONTINUED)
STOCK SPLIT
In August 2000, the Board of Directors approved a reverse 4 for 1 stock
split. All preferred stock data, common stock data and common stock option plan
information in this report has been restated retroactively to reflect the split.
Stockholder approval of the reverse stock split was obtained in October 11,
2000.
INITIAL PUBLIC OFFERING
In August 2000, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all the
redeemable convertible preferred stock outstanding will automatically convert
into shares of common stock. Unaudited pro forma stockholders' equity, as
adjusted for the assumed conversion of the preferred stock, is set forth on the
balance sheet.
GERMAN SUBSIDIARY
In March 2000, the Company incorporated DoubleTwist GmbH, a wholly-owned
subsidiary in Germany. DoubleTwist GmbH's principal activity is sales and sales
support in the German market. All intercompany transactions have been eliminated
in the interim consolidated financial statements.
RELATED PARTY TRANSACTION
In February 2000, the Company entered into a one-year agreement with a
member of the Board of Directors to provide certain consulting services for a
monthly fee of $10,000.
2000 STOCK PLAN
The 2000 Stock Plan was adopted by the Board of Directors on April 20, 2000
subject to stockholder approval and the effectiveness of a registration
statement. This plan provides for the grant of incentive stock options to
employees and nonstatutory stock options and stock purchase rights to employees,
directors and consultants. A total of 1,000,000 shares of common stock are
reserved for issuance pursuant to the 2000 Stock Plan, plus any shares remaining
under the 1996 Equity Incentive Plan as of the effective date of a registration
statement and any shares returned to the 1996 Equity Incentive Plan.
DIRECTOR OPTION PROGRAM
The Director Option Program is part of the 2000 Stock Plan and provides for
the periodic grant of nonstatutory stock options to non-employee directors. All
grants of options to non-employee directors under the Director Program are
automatic. The Company will grant to each individual who is a non-employee
director on the effective date of a registration statement or who becomes a
non-employee director thereafter, an option to purchase 15,000 shares on the
later of the effective date of a registration statement or the date which such
person becomes a non-employee director. These options will be fully exercisable
on the date of grant. In addition, non-employee directors receive annual grants
of options to purchase 5,000 shares beginning in fiscal 2001. These options vest
on the first anniversary of the date of grant.
F-25
<PAGE>
DOUBLETWIST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS: (CONTINUED)
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by the Board of Directors
on April 20, 2000 subject to stockholder approval and the effectiveness of a
registration statement. A total of 400,000 shares of common stock will be made
available for sale under the 2000 Employee Stock Purchase Plan. In addition, the
2000 Employee Stock Purchase Plan provides for annual increases in the number of
shares available for issuance under the 2000 Employee Stock Purchase Plan on the
first day of the fiscal year beginning in 2001 in an amount equal to the lesser
of 3% of the outstanding shares of common stock on the first day of the calendar
year, 300,000 shares, or such other lesser amount as may be determined by our
board of directors.
The 2000 Employee Stock Purchase Plan is intended to qualify for
preferential tax treatment and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four six-month purchase periods.
The offering periods generally start on the first trading day on or after
January 1 and July 1 of each year, except for the first such offering period
which will commence on the first trading day on or after the effective date of a
registration statement and will end on the last trading day on or before
June 30, 2002.
The 2000 Employee Stock Purchase Plan permits participants to purchase
common stock through payroll deductions of up to 15% of their eligible
compensation which includes a participant's base straight time gross earnings
and commissions but excluding all other compensation paid to our employees. A
participant may purchase no more than 10,000 shares during any six-month
purchase period.
F-26
<PAGE>
5,000,000 SHARES
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
, 2000
---------------------
LEHMAN BROTHERS
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL SERVICES LLC
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
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses payable by DoubleTwist
in connection with the registration of the common stock hereunder. All of the
amounts shown are estimates except for the SEC registration fee, NASD filing fee
and the Nasdaq National Market listing fees.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC Registration Fee........................................ $ 22,770
NASD Filing Fee............................................. 9,125
Nasdaq National Market Listing Fee.......................... 95,000
Printing and Engraving Expenses............................. 200,000
Legal Fees and Expenses..................................... 450,000
Accounting Fees and Expenses................................ 650,000
Transfer Agent and Registrar Fees and Expenses.............. 15,000
Miscellaneous Expenses...................................... 58,105
----------
Total................................................... $1,500,000
==========
</TABLE>
------------------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. Our amended and restated certificate of
incorporation and amended and restated bylaws provide that we will indemnify our
directors and officers and that we may indemnify our employees and agents, to
the full extent permitted by Delaware General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. In addition, we intend to enter into separate indemnification agreements
with our directors and officers which would require us, among other things, to
indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature). The indemnification provisions in our amended and restated
certificate of incorporation and amended and restated bylaws and the
indemnification agreement to be entered into between us and our directors and
officers may be sufficiently broad to permit indemnification of our officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act. We also intend to maintain director and officer
liability insurance, if available on reasonable terms, to insure our directors
and officers against the cost of defense, settlement or payment of a judgment
under certain circumstances. In addition, the underwriting agreement filed as
Exhibit 1.1 to this Registration Statement provides for indemnification by the
underwriters of the Company and our officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Through September 30, 2000, we have issued and sold the following
unregistered securities. The share numbers below assume a four-to-one
reverse stock split to be effected prior to the closing of this offering:
(1) Since October 1997, we have issued and sold an aggregate of
2,174,478 shares of common stock to officers, directors and scientific
advisory board members at a price of $0.80 to $5.00 per share and to
individuals exercising options under our 1996 Equity Incentive Plan.
(2) In October 1997, we sold 578,264 shares of common stock at a price of
$0.80 per share to three accredited investors for an aggregate purchase
price of approximately $460,000.
(3) Since our inception, we have granted options to purchase
5,948,850 shares of common stock to employees, directors and consultants
under our 1996 Equity Incentive Plan at exercise prices ranging from
$0.80 to $7.00 per share. Of the 5,948,850 shares granted, 3,172,163
remain outstanding, 1,810,431 shares of common stock have been purchased
pursuant to exercises of stock options and 966,062 have been canceled and
returned to our 1996 Equity Incentive Plan.
(4) In February 1999, we exchanged options to purchase an aggregate of
27,125 shares of common stock at an exercise price of $0.80 per share for
options to purchase the same number of shares at an exercise price of
$2.00 per share.
(5) From October 1997 to February 1999, we issued warrants to purchase an
aggregate of 501,758 shares of common stock at exercise prices of $0.80
to $6.442 to three accredited investors, two research institutions, one
investment bank and one financial institution.
(6) In October 1997, we sold 385,508 shares of Series B preferred stock to
three accredited investors upon the exercise of warrants at a price of
$6.442 per share for an aggregate purchase price of approximately
$2,480,000.
(7) During 1998, we issued convertible subordinated promissory notes to
three accredited investors in the aggregate principal amount of
$4,000,000. The principal amount, together with accrued interest, was
converted into 1,451,425 shares of Series C preferred stock in December
1998.
(8) In December 1998 and February 1999, we sold an aggregate of
5,543,472 shares of Series C preferred stock at a price of $2.80 per
share to 12 accredited investors for an aggregate purchase price of
approximately $15,520,000.
(9) From November 1998 to December 1998, we issued warrants to purchase an
aggregate of 16,203 shares of Series C preferred stock at an exercise
price of $2.80 to one equipment lessor and one financial institution.
(10)In January 2000, we issued convertible subordinated promissory notes to
eight accredited investors in the aggregate principal amount of
$5,000,000. The principal amount, together with accrued interest, was
converted into 832,885 shares of Series D preferred stock in February
2000.
(11) In February 2000, we sold an aggregate of 5,313,727 shares of Series D
preferred stock at a price of $6.02 per share to 14 accredited investors
for an aggregate purchase price of approximately $31,990,000.
(12) In February 2000, we issued warrants to purchase an aggregate of
41,526 shares of Series D preferred stock at an exercise price of
$6.02 per share to eight accredited investors.
II-2
<PAGE>
(13) In July 2000, we sold an aggregate of 856,441 shares of Series E
preferred stock at a price of $8.464 per share to three accredited
investors for an aggregate purchase price of approximately $7,250,000.
The sales and issuances of securities in the transactions described above
were made without general solicitation or general advertising and were deemed to
be exempt from registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act, Regulation D promulgated thereunder or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving any public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with DoubleTwist, to
information about us.
(b) There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation, as in
effect upon filing of the registration statement
3.2 Certificate of Amendment to Amended and Restated Certificate
of Incorporation to be filed prior to completion of this
offering.
3.3 Amended and Restated Certificate of Incorporation to be
filed upon completion of the offering
3.4** Bylaws of the registrant as currently in effect
3.5 Amended and Restated Bylaws of the registrant to be in
effect upon completion of the offering
4.1 Specimen certificate for common stock
5.1* Opinion of Heller Ehrman White & McAuliffe LLP
10.1** Amended and Restated Investors' Rights Agreement dated
July 6, 2000
10.2** 1996 Equity Incentive Plan
10.3** 2000 Stock Plan
10.4** 2000 Employee Stock Purchase Plan
10.5** Change of Control and Retention Plan
10.6** Form of Director and Executive Officer Indemnification
Agreement
10.7** Letter Agreement dated September 25, 1997 with John D. Couch
10.8** Letter Agreement dated July 16, 1999 with Robert F.
Williamson
10.9** Letter Agreement dated March 27, 1998 with H. Ward Wolff
10.10** Consultant's Agreement by and between DoubleTwist, Inc. and
Dexster Smith, dated as of February 18, 2000.
10.11** Office Lease by and between Lake Merritt Plaza, a California
General Partnership, and Pangea Systems, Inc., dated as of
March 21, 1997
10.12** Office Lease by and between 3201 Associates, LP and Pangea
Systems, Inc., dated as of June 2, 1997
10.13** Office Lease by and between First Broadway 20th, LLC and
DoubleTwist, Inc., dated as of April 12, 2000
10.14** Distribution and Value-Added Reseller Agreement dated as of
March 24, 2000 by and between DoubleTwist, Inc. and
Hitachi, Ltd.
10.15+ Distribution Agreement by and between DoubleTwist, Inc. and
Hitachi, Ltd., dated September 29, 2000.
10.16+ CAT Distribution and Value-Added Reseller Agreement by and
between DoubleTwist, Inc. and Hitachi, Ltd. dated
September 29, 2000.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2* Consent of Heller Ehrman White & McAuliffe LLP (included in
Exhibit 5.1)
24.1** Power of Attorney
27.1 Financial Data Schedule
</TABLE>
------------------------
* To be filed by amendment.
II-4
<PAGE>
** Previously filed.
+ Confidential treatment has been requested for portions of this exhibit.
(b) Financial Statement Schedules:
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification by DoubleTwist for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of DoubleTwist, we have 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
DoubleTwist of expenses incurred or paid by a director, officer or controlling
person of DoubleTwist in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
DoubleTwist is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
We hereby undertake:
(a) 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.
(b) that, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by DoubleTwist pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(c) that, 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, as amended,
DoubleTwist has duly caused this Amendment No.1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Oakland, State of California, on the 13th day of
October, 2000.
<TABLE>
<S> <C>
DOUBLETWIST, INC.
By: /s/ JOHN D. COUCH
--------------------------------------------
John D. Couch
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No.1 to Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President, Chief Executive Officer
/s/ JOHN D. COUCH and Chairman of the Board of
--------------------------------- Directors (principal executive October 13, 2000
John D. Couch officer)
/s/ H. WARD WOLFF
--------------------------------- Chief Financial Officer (principal October 13, 2000
H. Ward Wolff financial and accounting officer)
*
--------------------------------- Director October 13, 2000
Fred E. Cohen
*
--------------------------------- Director October 13, 2000
Samuel D. Colella
*
--------------------------------- Director October 13, 2000
Ansbert Gadicke
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*
--------------------------------- Director October 13, 2000
A. Grant Heidrich, III
*
--------------------------------- Director October 13, 2000
Thomas A. Penn
*
--------------------------------- Director October 13, 2000
Dexster L. Smith
/s/ JOHN D. COUCH
---------------------------------
* John D. Couch
(Attorney-in-Fact)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation, as in
effect upon filing of the registration statement
3.2 Certificate of Amendment to Amended and Restated Certificate
of Incorporation to be filed prior to completion of this
offering.
3.3 Amended and Restated Certificate of Incorporation to be
filed upon completion of the offering
3.4** Bylaws of the registrant as currently in effect
3.5 Amended and Restated Bylaws of the registrant to be in
effect upon completion of the offering
4.1 Specimen certificate for common stock
5.1* Opinion of Heller Ehrman White & McAuliffe LLP
10.1** Amended and Restated Investors' Rights Agreement dated
July 6, 2000
10.2** 1996 Equity Incentive Plan
10.3** 2000 Stock Plan
10.4** 2000 Employee Stock Purchase Plan
10.5** Change of Control and Retention Plan
10.6** Form of Director and Executive Officer Indemnification
Agreement
10.7** Letter Agreement dated September 25, 1997 with John D. Couch
10.8** Letter Agreement dated July 16, 1999 with Robert F.
Williamson
10.9** Letter Agreement dated March 27, 1998 with H. Ward Wolff
10.10** Consultant's Agreement by and between DoubleTwist, Inc. and
Dexster Smith, dated as of February 18, 2000.
10.11** Office Lease by and between Lake Merritt Plaza, a California
General Partnership, and Pangea Systems, Inc., dated as of
March 21, 1997
10.12** Office Lease by and between 3201 Associates, LP and Pangea
Systems, Inc., dated as of June 2, 1997
10.13** Office Lease by and between First Broadway 20th, LLC and
DoubleTwist, Inc., dated as of April 12, 2000
10.14** Distribution and Value-Added Reseller Agreement dated as of
March 24, 2000 by and between DoubleTwist, Inc. and
Hitachi, Ltd.
10.15+ Distribution Agreement by and between DoubleTwist, Inc. and
Hitachi, Ltd., dated September 29, 2000.
10.16+ CAT Distribution and Value-Added Reseller Agreement by and
between DoubleTwist, Inc. and Hitachi, Ltd. dated
September 29, 2000.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2* Consent of Heller Ehrman White & McAuliffe LLP (included in
Exhibit 5.1)
24.1** Power of Attorney
27.1 Financial Data Schedule
</TABLE>
------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested for portions of this exhibit.
