<PAGE>
Filed Pursuant To Rule 424(b)(4)
Registration No. 333- 32472
6,440,000 Shares
[LOGO OF GENOMICA]
Common Stock
$19.00 per share
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This is an initial public offering of common stock of Genomica Corporation.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "GNOM".
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Price to the public.......................... $19.00 $122,360,000
Underwriting discount........................ 1.33 8,565,200
Proceeds to Genomica......................... 17.67 113,794,800
</TABLE>
We have granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 966,000 additional
shares from us within 30 days following the date of this prospectus to cover
over-allotments.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
CIBC World Markets
Dain Rauscher Wessels
Prudential Vector Healthcare
a unit of Prudential Securities
The date of this Prospectus is September 28, 2000.
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[INSIDE COVER]
The inside cover art includes a gatefold entitled "Our Discovery Manager
Software Supports a Broad Range of Scientific Disciplines." There are
descriptions of six scientific disciplines including Clinical Genetics,
Epidemiology and Statistical Genetics (on the left page) and Human Genetics,
Molecular Biology and Pharmacogenomics (on the right page). Each description
consists of a white-filled box with a brown border inside of which is the name
of the discipline in capital letters and a one-line description of the
discipline. Overlaying the right side of each text box is a "print screen" of a
picture of a computer screen from Discovery Manager that is useful to a
researcher in the discipline.
The inside front cover is a block diagram that describes the various components
of our Discovery Manager product. At the top of the diagram are six rectangles,
one for each type of Discovery Manager user: Clinical Geneticist,
Epidemiologist, Statistical Geneticist, Human Geneticist, Molecular Biologist,
and Pharmacogenomics Researcher. Below these rectangles is a rectangle labeled
"Common User Interface." Below the Common User Interface rectangle are three
rectangles that correspond to the key tools of Discovery Manager: Sequence
Analysis Tools, Genetic Analysis Tools and Mapping Analysis Tools. Below the
rectangles that represent our tools there are two cylinders labeled Discovery
Manager Database and Reference Database. At the bottom of the page, there is a
caption entitled "Discovery Manager Software Infrastructure."
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TABLE OF CONTENTS
Page
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Prospectus Summary......................................................... 1
Risk Factors............................................................... 6
Forward-Looking Statements................................................. 14
Use of Proceeds............................................................ 15
Dividend Policy............................................................ 15
Conventions Which Apply to this Prospectus................................. 15
Capitalization............................................................. 16
Dilution................................................................... 17
Selected Financial Data.................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 19
Overview of Genomics....................................................... 25
Business................................................................... 27
Management................................................................. 36
Principal Stockholders..................................................... 43
Related-Party Transactions................................................. 45
Description of Capital Stock............................................... 47
Shares Eligible for Future Sale............................................ 50
Plan of Distribution....................................................... 51
Legal Matters.............................................................. 53
Experts.................................................................... 53
Where You Can Find More Information........................................ 53
Index to Financial Statements.............................................. F-1
</TABLE>
<PAGE>
Prospectus Summary
This summary highlights information contained in other parts of this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in the shares. You should read the
entire prospectus carefully.
Our Business
We are a provider of innovative software products and services that are
designed to enable pharmaceutical and biotechnology researchers to accelerate
the drug discovery and development process. We believe our first product,
Discovery Manager, offers the broadest set of software tools for genomics
researchers of any commercially available product. Our current customers
include leading genomics-based research organizations such as AstraZeneca,
GlaxoWellcome, Oxagen Limited, Warner-Lambert and the National Cancer
Institute, which together represent 86% of our revenue. Our revenue was
$781,000 for the year ended December 31, 1999, and our revenue was $766,000 for
the six months ended June 30, 2000. Our net losses were $7.6 million for the
year ended December 31, 1999, and our net loss was $28.4 million, including
non-cash equity related charges of $23.3 million, for the six months ended June
30, 2000.
Genomics is the study of genes and their relationship to disease. Drug
companies are increasingly focusing major research efforts on genomics to
develop new therapeutic drugs and diagnostic tests. Researchers are nearly
finished mapping the human genome, meaning that much of the preliminary work of
identifying human genes is completed. Researchers' next challenge is to
understand the functions of these genes. To do this, researchers must analyze
unprecedented volumes of genetic data, which has created the need for powerful
new software tools to manage and analyze the data. Discovery Manager merges
information technology and genomics, offering researchers software tools to
solve their data management and analysis challenges.
Our Opportunity
Bioinformatics is the application of computer technologies for the collection,
management and analysis of biological data. According to industry surveys,
spending on bioinformatics by pharmaceutical and biotechnology organizations is
expected to increase dramatically in 2001 to between $1 billion to $2 billion
from an estimated $400 million in 2000. This amount includes spending for both
internal bioinformatics departments and external products and services.
Challenges of Using Genomic Data
The key challenges of using genomic data in the drug discovery and development
process are:
.Unprecedented volumes of data. Public and private genomic databases now
contain tens of
billions of genetic sequence data points. New experiments or analyses
involving these data will rapidly expand the total data volume.
.Diversity of data sources. Many different types of scientists are performing
genomic research and data generation in thousands of different locations
throughout the world. These groups usually represent, classify and store
their data in different ways.
.Lack of broad genomic-specific tools. We believe many genomic researchers
currently rely on a patchwork of non-standard, non-integrated, non-
scientific and unsupported software tools.
.Short supply of bioinformaticists. We believe there is a limited supply of
individuals with training or experience in both the science of genomics and
the application of computer-based information technology relative to the
number of job opportunities in this field.
.Difficulty of data visualization/presentation. Visualization of large
quantities of highly interrelated genomic data presents significant
challenges.
.Data security concerns. Research organizations are concerned about access to
and the security of the data they produce and use.
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Discovery ManagerTM
Discovery Manager is our first bioinformatics product. It has been developed
over the past 15 years by our chief scientist in collaboration with some of the
leading researchers working in the field of genomics. The product is an
integrated suite of software tools and a database template for genomics
research. The database can be filled with genomic data from the user's own
research as well as publicly available and other sources. Our tools include
sophisticated scientific algorithms designed for easy use by genomic
researchers without the assistance of bioinformaticists. Discovery Manager
enables individual or collaborating researchers to access, store, manipulate,
analyze, annotate and integrate genomic data from a variety of sources. We
believe that Discovery Manager is the only commercially available product that
integrates human sequence, genetic map, genotype, phenotype and clinical
information.
Discovery Manager addresses the challenges of using genomic data in the drug
discovery and development process. It offers:
. Data standardization. We provide a standard representation of diverse types
and formats of genomic information.
. Data integration. Our product brings together in one database many
different types of information contained in both publicly available and
proprietary genomic databases.
. High scalability. We believe our product will be able to meet the growing
and increasingly complex, or scalability, needs of the largest
pharmaceutical and biotechnology companies in the world.
. Broad suite of data analysis tools. Our product's proprietary software
tools enable researchers to easily sort, manage and analyze genomic
information.
. Practical visualization tools. Our product provides a practical way to show
complex genomic information in simple-to-understand formats.
. Security. Our product provides security and access features to help ensure
the privacy of sensitive project data.
Our Strategic Alliances
We have a strategic alliance with Applied Biosystems to license certain
components of our software technology that will be designed to operate with
Applied Biosystems' genotyping instruments that are used in the gene discovery
and analysis process. By integrating our software technology with Applied
Biosystems' instruments, we believe each companies' customers will be able to
perform their gene research and data analysis more rapidly and effectively.
Separately, Applied Biosystems made an equity investment of $3 million in us.
We also have signed a letter of intent with Celera Genomics to enter into a
strategic alliance to develop a special "Celera Edition" of Discovery Manager
for use with the Celera Discovery System's Genome Reference Database. The
letter of intent contemplates our joint development of an integrated edition of
Discovery Manager with Celera's Discovery System. We anticipate that this
integrated product would enable Celera's customers to seamlessly navigate
between the Celera Edition of Discovery Manager and Celera's Discovery System
Genome Reference Database. There can be no assurance that the letter of intent
will lead to a binding agreement, or that the terms of a binding agreement
would be advantageous to us.
Our Strategy
Our objective is to provide pharmaceutical and biotechnology researchers with
the most scientifically adept bioinformatics tools and services for genetic
research and drug discovery and development. The key elements of our strategy
to achieve our objective include:
. expanding our product offerings through internal development and
acquisitions
. establishing product development and distribution alliances with companies
in the drug discovery and development market that have strong market
positions and technologies complementary to ours
. offering our customers the option to access our products via the Internet
without the need to install and maintain the software on their own
equipment; this approach is commonly called being an application service
provider, or ASP
. continuing our scientific leadership by deepening and expanding our
relationships with scientific leaders in the field of genomics
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. increasing our sales and marketing capacity
Although we believe that our bioinformatics tools and services are the most
scientifically adept products commercially available for pharmaceutical and
biotechnology researchers, we may face obstacles in implementing our strategy,
including competition from other organizations, such as internal bioinformatics
departments, and the failure of potential customers to adopt our tools. In
addition, to pursue our strategy we will continue to make significant
expenditures in excess of our revenue resulting in continued net losses for the
near term.
Other Information
We were incorporated in Delaware in September 1995. Our principal executive
offices are located at 1745 38th Street, Boulder, Colorado 80301. Our telephone
number is (720) 565-4500. Our website is located on the world wide web at
"genomica.com." Our website is not part of this prospectus.
GENOMICATM and Discovery ManagerTM are trademarks of Genomica Corporation. All
other product names, trade names and trademarks included in this prospectus are
the property of their respective owners.
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The Offering
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<S> <C>
Common stock offered............... 6,440,000 shares
Common stock to be outstanding
after the offering................ 22,429,363 shares
Use of proceeds.................... We intend to use the net proceeds from the
offering to continue development of
Discovery Manager and new products; expand
our sales and marketing activities; acquire
complementary technologies, products or
companies; repay capital lease obligations;
and for general corporate purposes.
Nasdaq National Market symbol...... GNOM
</TABLE>
In the table above, the number of shares of common stock to be outstanding
after the offering is based on the number of shares outstanding as of September
20, 2000.
The number of shares of common stock outstanding excludes:
. 2,059,619 shares of common stock issuable upon the exercise of options
outstanding as of September 20, 2000, at a weighted average exercise price
of $1.53 per share
. 340,386 shares of common stock issuable upon exercise of warrants
outstanding as of September 20, 2000, at a weighted average exercise price
of $2.11 per share
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Summary Financial Data
(in thousands, except per share data)
The pro forma balance sheet data reflects the receipt of the estimated net
proceeds from the sale of 900,000 shares of our Series D preferred stock to
Applied Biosystems at $3.34 per share (which will convert into 300,000 shares
of common stock upon the closing of this offering). The pro forma as adjusted
balance sheet data reflects the receipt of the net proceeds from the sale of
6,440,000 shares of our common stock at an initial public offering price of
$19.00 per share, after deducting the underwriting discounts and offering
expenses, and the repayment of capital lease obligations.
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<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue:
Software licenses and
services.................... $ -- $ 197 $ 622 $ 185 $ 739
Research grants.............. -- -- 159 29 27
------- ------- ------- ------- --------
Total revenue............... -- 197 781 214 766
------- ------- ------- ------- --------
Operating expenses:
Costs of revenue............. -- 141 447 154 195
Research and development..... 1,682 2,328 4,869 1,763 6,038
Selling and marketing........ 495 634 1,722 660 3,030
General and administrative... 579 884 1,723 293 5,236
------- ------- ------- ------- --------
Total operating expenses.... 2,756 3,987 8,761 2,870 14,499
------- ------- ------- ------- --------
Operating loss................ (2,756) (3,790) (7,980) (2,656) (13,733)
Interest income............... 37 90 419 185 375
Interest expense.............. (19) (55) (18) (10) (29)
------- ------- ------- ------- --------
Net loss...................... (2,738) (3,755) (7,579) (2,481) (13,387)
Deemed dividend related to
beneficial conversion feature
of preferred stock........... -- -- -- -- (15,009)
------- ------- ------- ------- --------
Net loss applicable to common
stockholders................. $(2,738) $(3,755) $(7,579) $(2,481) $(28,396)
======= ======= ======= ======= ========
Net loss per share, basic and
diluted...................... $ (2.80) $ (3.81) $ (7.13) $ (2.37) $ (22.13)
======= ======= ======= ======= ========
Weighted average common shares
outstanding, basic and
diluted...................... 977 986 1,062 1,046 1,283
Pro forma (unaudited):
Net loss per share, basic and
diluted..................... $ (0.68) $ (0.23) $(2.07)
======= ======= ========
Weighted average common
shares outstanding, basic
and diluted................. 11,121 10,702 13,738
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
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Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments. $14,010 $17,010 $129,171
Working capital................................... 12,787 15,787 128,072
Total assets...................................... 18,548 21,548 133,710
Capital lease obligations, long-term portion...... 210 210 --
Total stockholders' equity........................ 15,800 18,800 131,295
</TABLE>
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Risk Factors
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares.
We have a history of operating losses and an accumulated deficit, and we may
not succeed or become profitable.
We will need to generate significant revenue to achieve profitability and we
may be unable to do so. Even if we do achieve profitability, we may not be
able to sustain or increase profitability in the future. If we do not achieve
or sustain profitability, then we may be unable to continue our operations. We
have incurred operating losses every quarter since we began operations and we
have not generated enough revenue to cover the substantial amounts that we
have spent to develop and market our products and services. We had an
accumulated deficit of $16.2 million at December 31, 1999, and $44.6 million
at June 30, 2000.
In the first quarter of 2000, we incurred a noncash charge to earnings of
approximately $15.0 million as a result of the sale of our Series C preferred
stock. We will incur another $2.1 million noncash charge to earnings in
September 2000 as a result of the sale of our Series D preferred stock.
We expect to invest substantial financial and other resources to develop and
introduce new products and services and expand our sales and marketing
departments, strategic relationships and operating infrastructure. We expect
that our expenses will continue to increase.
We are likely to continue experiencing operating losses and negative cash flow
from operations for the foreseeable future.
We will incur significant charges to earnings as a result of recent stock
option grants. This will hamper our ability to become profitable.
As a result of recent option grants, we will incur significant non-cash
charges to earnings in future periods, which will hamper our ability to become
profitable. In the first six months of 2000 these charges were $8.3 million
and are expected to be approximately $6.6 million for the rest of 2000, $8.2
million for 2001, $4.6 million for 2002 and $3.1 million for future periods.
Our lack of profitability in any particular period and the amount of any net
loss, which will be exacerbated by these charges, could cause the market price
for our common stock to drop, perhaps significantly.
Our limited operating history makes evaluating our business difficult. This
also makes it difficult to forecast our future operating results.
We commenced operations in September 1995 and we did not begin generating
revenue from our product and services until June 1998. Also, we have only sold
our product to a limited number of customers to date. Our limited operating
history makes it difficult to evaluate our business and to forecast our future
operating results. As a result, you must consider the risks and uncertainties
inherent in the development of a new business enterprise.
The market for our products and services is evolving and uncertain, and if our
products and services do not achieve market acceptance, our business will be
harmed. Our future results of operations depend on whether the market accepts
Discovery Manager and new products and services that we intend to develop. As
is typical in new and evolving markets, demand and market acceptance for our
products and services are subject to a high level of uncertainty. Only a few
commercially available software products designed specifically for genomics-
based drug development and discovery exist and these are unproven.
Our software is designed to incorporate features that respond to the needs of
pharmaceutical and biotechnology researchers. To the extent we experience
delays or difficulties implementing features that these researchers request,
our ability to serve our customers may be adversely affected.
Market acceptance of our products and services will depend on a number of
factors, some of which are not in our control. The amount and timing of our
revenues and profitability will be negatively impacted if the market for our
products fails to develop or develops more slowly than we expect.
If we fail to successfully redevelop our product to use a different computer
programming language and database, our customer base will likely decline.
To maintain and increase our customer base, we are currently redeveloping our
product with a different programming language and database platform. We are
not sure if the redeveloped product will have the same performance level as
our current product. If we do not
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successfully redevelop this product, our customer base may decline. Any delays
in this redevelopment may result in postponement of future sales and erosion
of our competitive position. In addition, until our customers transition to
our redeveloped product, we will be required to devote resources to maintain
and support both our current product and redeveloped product, which could
consume both our personnel and other resources. If in the future our customers
demand a different programming language or database platform than the ones we
have chosen for the current redevelopment, we will incur substantial
additional costs in redeveloping our product and our operating results will be
harmed.
We expect to rely heavily on strategic relationships with larger companies to
help us achieve market acceptance for our products. If we are unable to
successfully develop these relationships, or if these companies do not perform
as expected, our ability to achieve profitability would be materially harmed.
Part of our business strategy is to work with larger, more established
companies that are suppliers to the drug discovery and development industry to
help create market awareness and acceptance of our products. We have limited
experience in developing strategic relationships of this type and have entered
into only two to date. If we are unsuccessful in developing strategic
relationships, or if parties with which we develop relationships do not
perform as expected, our products may not achieve broad market acceptance and
our ability to achieve profitability will be significantly harmed.
If we do not increase our brand and name recognition, our ability to sell our
products will be reduced and our business and operating results will suffer.
We have generated revenue from product licenses only since 1998 and currently
have only ten customers. Most of our target customers are large pharmaceutical
and biotechnology companies and other research organizations. We believe that
establishing and maintaining brand and name recognition is critical for
attracting and expanding this targeted customer base because we believe these
targeted customers generally prefer to do business with established brands and
companies. We also believe that the importance to us of name recognition and
reputation will increase as competition in our market increases. Promotion and
enhancement of our brand and name will depend on the effectiveness of our
marketing and advertising efforts and on our ability to continue providing
high-quality products and services. We may not be successful in either regard.
If we are not successful, our ability to generate revenue will be limited.
Our revenue and profits may decrease if we lose any of our major customers.
Historically, a small number of customers have accounted for a significant
portion of our revenue in any particular period. The loss of a major customer
could harm our business. For the six months ended June 30, 2000, five of our
customers accounted for 86% of our revenue. We anticipate that sales of our
product to a small number of customers will continue to account for a
significant portion of our total revenue. In addition, our license agreements
are short-term and may not be renewed by our customers.
We currently have only ten customers. If we do not increase the number of our
customers and increase sales to our existing customers, we will be unable to
increase our revenue significantly.
If we do not increase the number of product licenses sold to existing and new
customers, we will be unable to significantly increase our revenue. Our
primary target market is biotechnology and pharmaceutical organizations. Five
of our customers, AstraZeneca, GlaxoWellcome, Oxagen Limited, Warner-Lambert
and the National Cancer Institute, represent 86% of our revenue. A relatively
small number of customers will represent a significant percentage of our total
revenue for the foreseeable future.
Our customer contracts are cancellable with little notice and if we lose any
of these contracts, our revenues and marketing efforts with other customers
will be materially adversely affected.
The contracts with our customers are cancellable by them with little notice.
Our customers do not have any obligation to continue to use our current
product or to purchase additional services from us. Our strategy has been to
focus on potential customers who are considered market leaders in the drug
discovery and development industries. Consequently, we depend on our customers
not only for generating revenue but also for enhancing our marketing efforts
with other potential customers. The loss of any of these contracts would
adversely impact our revenue and operating results, and may affect our
marketing efforts with other customers.
If we are unable to expand our sales and marketing capabilities, we will be
unable to significantly increase our revenue.
We have limited experience in sales and marketing. We currently have only 11
people in our sales and
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marketing departments. If we are unable to increase our sales and marketing
personnel and efforts, both in the United States and in Western Europe, or
arrange with a third party to perform these services, we will be unable to
significantly increase our revenue. We are currently attempting to hire and
train additional personnel, but we cannot assure you that our sales force will
be sufficiently large or knowledgeable to meaningfully increase our sales and
customer base. Even if we are able to hire additional sales personnel in the
near future, their effectiveness will be limited until they gain sufficient
experience.
We are highly dependent on Dr. Thomas Marr, and the loss of his services could
affect our ability to be successful.
We are highly dependent on Dr. Thomas Marr, our founder, President and Chief
Scientist. Dr. Marr is important to developing information, tools and services
required for implementation of our business plan. Moreover, we believe Dr.
Marr's reputation and prominence in the genomics field provides us with a
competitive advantage. A significant component of our marketing strategy is to
capitalize on the reputation and contacts of Dr. Marr. If we lost Dr. Marr's
expertise, we would have difficulty replacing him and our product development
efforts and business opportunities could be adversely affected. Although we
have an employment agreement with Dr. Marr, he could leave us at anytime. In
addition, we do not have life insurance on Dr. Marr.
Our success depends on the continuing contribution of our other key personnel
who may leave us at any time and our ability to integrate new personnel,
including several key members of our management team.
Our future success depends to a significant extent on the continued service of
our key technical, sales and senior management personnel. In particular, the
loss of the services of Teresa W. Ayers, our chief executive officer, Kenneth
S. Rubin, our executive vice president of commercial development, Daniel R.
Hudspeth, our chief financial officer, Michael W. Cohn, our vice president of
engineering, Chuck W. Philipp, our vice president of marketing and Sean M.
Ryan, our vice president of sales, could harm our sales and operations.
Although we have an employment agreement with Ms. Ayers, she and any other of
our key personnel may leave us at any time. In addition, we do not have "key
person" life insurance policies on any of our employees.
Several key members of our management team have joined us within the last
year, including Ms. Ayers, Mr. Rubin, Mr. Hudspeth, Mr. Cohn, Mr. Philipp and
Mr. Ryan. If we cannot effectively integrate these employees into our
business, or if they cannot work together as a management team to implement
our business strategy, successfully achieving our revenue goals and
profitability will be difficult. If any of our management team left or were
seriously injured and unable to work, it could be costly and time consuming to
replace them.
If we cannot attract, retain, motivate and integrate additional skilled per-
sonnel, our ability to compete will be impaired.
We are a small company with only 80 employees. We believe many of our current
and potential competitors have more employees than we do. Our success depends
in large part on our ability to attract, retain and motivate highly qualified
management and scientific personnel. We face intense competition for qualified
personnel. If we are unable to continue to employ our key personnel or to
attract and retain qualified personnel in the future, our ability to
successfully execute our business plan will be jeopardized and our growth will
be inhibited.
In addition, the industry in which we compete has a high level of employee
mobility and aggressive recruiting of skilled personnel.
We face intense competition, including from internal bioinformatics
departments, and we may not have the resources required to successfully
compete.
We face significant competition from the internal bioinformatics departments
of our customers and other companies that are potential customers. Some of our
customers and potential customers have internally developed software to
organize and analyze genomic data. These companies may believe that their
software is adequate for their needs and that our product is unnecessary. In
addition, certain internal departments of a corporation may be resistant to
outsourcing software because it could reduce the departments' budgets.
We face competition from other organizations, as well, including:
. other bioinformatics companies
. specialized drug discovery software companies
. academic and scientific institutions
. public and private research organizations
Many of our customers and potential customers and other competitors have much
greater resources and name recognition than we do. Some of our third-party
competitors may offer discounts as a competitive tactic. Moreover, our
competitors may in the future offer broader product lines or technologies or
products that
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are more commercially attractive than our current or future products or that
may render our technologies or products obsolete.
If our customers and potential customers elect to continue to develop their own
bioinformatics software, or we are unable to compete successfully with our
third-party competitors, then we will be unable to meaningfully improve our
operating results and we may not be able to continue operating our business.
Our failure to manage planned growth could adversely affect our ability to
increase revenue and become profitable.
If we do not effectively manage our planned growth, our ability to
significantly increase revenue and become profitable will be limited. We need
to rapidly and significantly expand our operations. Our growth has strained and
will continue to strain our management, financial controls, operations systems,
personnel and other resources. If we do not manage our planned future growth
effectively, our efforts to increase our customer base and product and service
offerings may not be successful. In addition, our planned rapid growth could
adversely affect our ability to provide services and technical support in a
timely manner and in accordance with customer expectations. To manage growth of
our operations, we must:
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures
. hire, train and manage additional qualified personnel
. effectively manage multiple relationships with our customers, suppliers and
other third parties, including our collaborators
We may not be able to install management information and control systems in an
efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations.
If we are unable to obtain additional capital to fund our operations when
needed, our sales and marketing and product development efforts would be
adversely affected. This could cause our operating results to be materially
harmed.
The continued development of the Discovery Manager product and the expansion of
our sales, marketing and customer support personnel will require significant
additional capital. In addition, our efforts to develop other potential
products, including the possible acquisition of technologies, products or
companies, will require substantial additional capital. If we are unable to
obtain additional capital or are required to obtain it on terms less
satisfactory than what we desire, we may need to delay the development and
marketing of our products or take other actions that could adversely affect our
revenue growth and net income.
To date, our cash flow from operations has been insufficient to cover our
expenses and capital needs. Our estimated funding requirements do not reflect
any contingency amounts and may increase, perhaps substantially, if we are
unable to generate revenues in the amount and within the time frame we expect
or if we have unexpected cost increases.
We experience rapid technological change in our markets. If we do not modify
our products to incorporate new technologies, they may become obsolete and our
sales will suffer.
We compete in a market that is subject to rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. To remain competitive, we must continue to expand
our databases, improve our software, and invest in new technologies in
anticipation of the needs of our customers. Our products could become obsolete
due to the introduction of products containing new technologies, changing
customer requirements or changing industry standards. This would have a
significant negative impact on our revenue generation.
The technological life cycles of our products are difficult to estimate. Our
future success will depend upon our ability to continue to enhance our current
products and to continue to develop and introduce new products that keep pace
with competitive and technological developments and customer demands. If we
fail to develop, market and deliver new products on a timely basis, we may lose
market share, perhaps significantly, and our ability to continue our business
could be seriously jeopardized.
Our business will suffer if our product contains defects or does not function
as intended, which would cause our revenues to decline.
Our business would suffer if our product malfunctions or our customers' access
to their information stored on our product is interrupted. In addition, our
product is complex and sophisticated and holds vast amounts of data. As a
result, our product and third-party software incorporated into our product
could contain erroneous data, design defects or software errors that could be
difficult to detect and correct. Software defects could be found in current or
future products. If we fail to
9
<PAGE>
maintain the quality and integrity of our product, we would fail to achieve
market acceptance.
If we are unable to maintain a product with adequate security safeguards, our
product would not achieve market acceptance and our business would suffer.
Researchers use our product to analyze proprietary data, sometimes in
disparate locations. Our product must have effective, reliable and secure
operations. If we fail to maintain an effective, reliable and secure product,
our customers' data may be compromised and our customers would lose confidence
in our product. Our revenues and ability to maintain or increase market share
would then suffer.
Our business depends on our topographer technology license from Cold Spring
Harbor Laboratory, the loss of which would jeopardize our business.
The Genome Topographer technology license from Cold Spring Harbor Laboratory
provides the intellectual property foundation for our Discovery Manager
product. A breach by us of any of the terms of, or other failure to maintain,
this license agreement could preclude future sales of Discovery Manager or
delay or prevent the introduction of new products. Ways in which we could
breach the license agreement include (1) uncured monetary breaches, (2) our
failure to comply with United States export laws regarding software exports,
(3) any breach of the confidentiality and proprietary information provisions
of the license agreement, (4) our filing of bankruptcy or the imposition of
receivership on our business, or (5) any impermissible assignment of the
license agreement by us.
If we were unable to continue using the Genome Topographer technology license
for any reason, we may not be able to continue our operations. Our ability to
identify and license or develop other equivalent technology is highly
uncertain and, even if we were successful in doing so, the cost and delays of
such a changeover in our base technology would likely cause material harm to
our business. Further, the Chang-Marr algorithm patent included in the Genome
Topographer technology may be challenged, invalidated or circumvented. This
could limit or prevent our ability to make, use or sell this algorithm in our
product.
Our product currently depends on components licensed from other third parties,
and the failure to maintain these licenses could result in the loss of access
to these components and could delay or suspend our commercialization efforts.
Discovery Manager incorporates technologies which are the subject of
proprietary rights of others. We have obtained licenses for some of these
technologies and may be required to obtain licenses for others. We may not be
able to obtain any necessary licenses for the proprietary technology of other
parties on commercially reasonable terms, or at all. In addition, one or more
third parties whose software or technologies are used in our product might
cease to make its software or other technologies available to us or to update
such software or technologies as appropriate. We may not be able to develop
alternative approaches if we are unable to obtain necessary licenses, or if
third-party software or technologies become unavailable to us or obsolete. We
cannot assure you that our current or future licenses will be adequate for the
operation of our business. The failure to obtain necessary licenses or
identify and implement alternative approaches could have a material adverse
effect on our business, financial condition and results of operations.
Our intellectual property protection may be inadequate, allowing others to use
our technology or similar technologies, reducing our ability to compete.
The steps taken by us to protect our proprietary technology may be inadequate
to prevent misappropriation of our technology by third parties or third
parties may develop similar technology independently. We rely on a combination
of trademark, copyright and trade secret laws, employee and third-party non-
disclosure agreements and other contracts to establish and protect our
technology and other intellectual property rights. However, these agreements
may be breached or terminated, and we may not have adequate remedies for any
breach. In addition, we currently have no patents or patent applications
pending, although we do have an exclusive license to one patent. A third party
could copy or otherwise obtain and use our products or technology without
authorization.
Our products could infringe on the intellectual property of others, which may
cause us to engage in costly litigation and, if we are not successful, could
cause us to pay substantial damages and prohibit us from selling our products.
Third parties may assert infringement or other intellectual property claims
against us based on their patents or other intellectual property claims. We
may have to pay substantial damages, possibly including treble damages, for
past infringement if it is ultimately determined that our products infringe a
third-party's patents. We would have to obtain a license to sell our product
if our product infringed another person's intellectual property. We might be
prohibited from selling our product before we obtain a license, which, if
available at all, may require us to pay substantial royalties. Even if
infringement claims against us are
10
<PAGE>
without merit, defending a lawsuit takes significant time, may be expensive
and may divert management attention from other business concerns.
Our employees may be bound by confidentiality and other nondisclosure
agreements regarding the trade secrets of their former employers. As a result,
our employees or we could be subject to allegations of trade secret violations
and other similar violations if claims are made that they breached these
agreements.
Our current and potential customers primarily consist of biotechnology and
pharmaceutical organizations, which face risks that could affect our ability
to license our products.
We currently derive a substantial portion of our revenue from product licenses
to biotechnology and pharmaceutical organizations. We expect that these
organizations will continue to be our primary source of revenue for the
foreseeable future. If the drug discovery, development and related industries
experience a downturn, our business will be harmed. Thus, our ability to
generate revenue is indirectly subject to risks and uncertainties that could
cause reductions and delays in research and development expenditures within
the drug discovery, development and related industries. These reductions and
delays may result from factors such as:
. market-driven pressures on companies to consolidate and reduce costs
. reduced revenue or profitablity of our current and potential customers
. the uncertainty of healthcare reform, including the continuing efforts of
governmental and third-party payors to contain or reduce the cost of health
care
. changes in regulations of the U.S. Food and Drug Administration or other
regulatory agencies
These factors are not within our control. In addition, consolidation in the
drug discovery and development industries will reduce the number of our
potential customers and, therefore, may adversely affect our future revenues.
We will not be able to sell our products if the use of genomic information to
develop drugs is not commercially successful.
The development of new drugs based on genomic information is unproven. Few
therapeutic products based on genomic discoveries have been developed and
commercialized. If our customers and potential customers are unable to develop
drugs based on genomic information in general and using our products or
services in particular, then demand for our products will diminish and our
ability to generate revenue and profitability would be significantly harmed.
If ethical and other concerns surrounding the use of genetic information
become widespread, the demand for our products could decrease.
Genetic testing and research has raised ethical issues regarding
confidentiality and the appropriate uses of the resulting information. For
these reasons, governmental authorities may limit or regulate the use of
genetic testing or prohibit testing for genetic predisposition to certain
conditions, particularly for those that have no known cure. Any such action by
governmental authorities could reduce the potential markets for our products,
which could seriously harm our ability to generate revenue.
Doing business outside of the United States involves numerous factors that
could negatively affect our financial results.
International operations involve numerous factors not typically present in
domestic operations. If any one or more of these factors adversely affects us
and we cannot effectively manage them, our business, operating results and
financial condition could be significantly harmed. These factors include:
. costs of operations in countries outside the United States
. licenses, tariffs and other trade barriers
. difficulties in staffing and managing remote operations
. potentially adverse tax consequences
. the burden of complying with multiple and complex laws, regulations and
treaties
. currency fluctuations
. political and economic instability
Our operating results may fluctuate, making it likely that, in some future
quarter or quarters, we will fail to meet analysts' estimates of operating
results or financial performance, causing our stock price to fall.
If revenue declines in a quarter, our earnings will decline because many of
our expenses are relatively fixed. In particular, research and development,
sales and marketing and general and administrative expenses are not affected
directly by variations in revenue. In some future quarter or quarters, our
operating results likely will be below the expectations of securities analysts
or investors. In this event, the market price of our common stock may fall
abruptly and significantly.
11
<PAGE>
We may fail to engage in strategic acquisitions, which could limit our future
growth.
One of our strategies for growth is to engage in selective strategic
acquisitions of key products, technologies or companies. Our ability to
conduct such acquisitions is limited by our ability to identify potential
acquisition candidates, obtain necessary financing and consummate the
acquisitions. In the event we are unable to identify and take advantage of
these opportunities, we may experience difficulties in growing our business.
In addition, pursuing acquisition opportunities could divert our management's
attention from our ongoing business operations and result in decreased
operating performance.
If we engage in acquisitions, we may experience significant costs and
difficulty assimilating the operations or personnel of the acquired companies,
which could threaten our future growth.
If we make any acquisitions, we could have difficulty assimilating the
operations, technologies and products acquired or integrating or retaining
personnel of acquired companies. In addition, acquisitions may involve
entering markets in which we have no or limited direct prior experience. The
occurrence of any one or more of these factors could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition, pursuing acquisition opportunities could divert our management's
attention from our ongoing business operations and result in decreased
operating performance. Moreover, our profitability may suffer because of
acquisition-related costs or amortization of acquired goodwill and other
intangible assets. Furthermore, we may have to incur debt or issue equity
securities in any future acquisitions. The issuance of equity securities would
dilute our existing stockholders.
If our management does not wisely apply the net proceeds from the offering,
our ability to grow our business will suffer.
Our management has broad discretion to allocate the net proceeds of the
offering. The timing and amount of our actual expenditures are subject to
change and will be based on many factors, including:
. success of our sales and marketing efforts
. progress in and scope of our product development activities
. progress in and scope of our strategic alliances
. competitive market developments
. acquisition opportunities
We will determine, in our sole discretion without the need for stockholder
approval, how to allocate these proceeds. If our management's allocation of
the net proceeds does not result in growth of our revenue and business
operations, our ability to become profitable will be jeopardized and the
market price for our common stock may decrease,and this decrease could be
significant.
Concentration of ownership among our existing executive officers, directors
and principal stockholders may prevent new investors from influencing
significant corporate decisions.
Following the offering, our executive officers, directors and principal
stockholders will beneficially own, in the aggregate, approximately 27% of our
outstanding common stock. These stockholders as a group will be able to
substantially influence our management and affairs. If acting together, they
would be able to influence most matters requiring the approval by 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 in control if opposed by these stockholders irrespective of
whether the proposed transaction is at a premium price or otherwise beneficial
to our stockholders as a whole.
No public market has existed for our shares and an active trading market may
not develop or be sustained.
Before the offering, there has been no public market for our common stock. You
may not be able to sell your shares quickly or at the initial offering price
if trading in our stock is not active. The initial public offering price has
been determined by negotiation between the representatives of the underwriters
and us and may not be indicative of future market prices.
Our stock price may be volatile and your investment in our stock could decline
in value.
The trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to various factors,
many of which are beyond our control, including:
. announcements of technological innovations or new commercial products by
our competitors or us
. developments concerning proprietary rights by our competitors or us
. developments concerning any development or marketing collaborations
12
<PAGE>
. publicity regarding actual or potential medical results relating to prod-
ucts under development by our competitors or us
. litigation
. economic and other external factors, including disasters or crises or
. period-to period fluctuations in financial results
In addition, the stock market and the market for technology companies in
particular have experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the performance of those companies.
During the recent drops in value of the Nasdaq National Market, companies with
ongoing losses like us were among the most vulnerable to sharp declines in
value. You may not be able to sell your common stock at a price at or above
the initial offering price.
If our stock price is volatile, we may become subject to securities litiga-
tion, which is expensive and could divert our resources.
Many companies with a volatile stock price have been subject to class-action
litigation brought by security holders. If the market value of our common
stock experiences adverse fluctuations, and we become involved in this type of
litigation, we could incur substantial legal costs and our management's
attention could be diverted, causing our business to suffer, regardless of the
outcome of the litigation.
The future sale of shares of our common stock may cause the market price of
our common stock to fall.
At September 20, 2000, 15,989,363 shares of common stock, representing 71% of
our common stock outstanding after the offering, were unregistered and
eligible for sale, subject to compliance with Rule 144 or Rule 701 under the
Securities Act.
While the holders of substantially all of these shares are subject to lock-up
agreements with the underwriters in the offering for 180 days after the
offering, CIBC World Markets Corp., in its sole discretion, may release any
portion or all of these shares from the lock-up restrictions. In addition,
sales of a substantial number of shares could occur at any time after the
expiration of the 180-day period.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the
market price of our common stock may fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at
a time and price that we deem appropriate.
New investors in our common stock will experience immediate and substantial
dilution.
The initial public offering price is substantially higher than the book value
per share of our common stock. Investors purchasing common stock in the
offering will incur immediate dilution of $13.17 in net tangible book value
per share of common stock, based on the initial public offering price of
$19.00 per share. Investors will incur additional dilution upon the exercise
of outstanding stock options and warrants.
Provisions of our charter documents and Delaware law may inhibit a takeover,
which could limit the price investors might be willing to pay in the future
for our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect
of delaying or preventing an acquisition, or merger in which we are not the
surviving company, or changes in our management. In addition, the provisions
of Section 203 of the Delaware General Corporation Law, to which we are
subject, could discourage acquisition or other changes in our control,
including those in which our stockholders might otherwise receive a premium
for their shares over then-current market prices, and otherwise limit the
price that investors might be willing to pay in the future for our common
stock.
13
<PAGE>
Forward-Looking Statements
Some of the information in this prospectus contains forward-looking statements
based on our current expectations, assumptions, estimates and projections about
us and our industry. These forward-looking statements include statements about
our plans, objectives, expectations and intentions and other statements
contained in this prospectus that are not historical facts. You can find these
statements under "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus.
We typically identify forward-looking statements by using terms such as "may,"
"will," "should," "could," "would," "expect," "intend," "plan," "anticipate,"
"believe," "seek," "estimate," "predict," "potential," "continue" and similar
words, although we express some forward-looking statements differently. You
should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
. failure to successfully market and sell our products
. failure to develop new products
. competition
. technological change
. general economic conditions
. variability of license and other revenue
. failure to satisfy performance obligations
. failure to successfully transition our Discovery Manager product to a new
technology base
. failure to enter into collaborative agreements
. changes in industry practice
You should also consider carefully the statements under "Risk Factors" and
other sections of this prospectus, which address additional factors that could
cause our actual results to differ from those set forth in the forward-looking
statements. These forward-looking statements speak only as of the date of this
prospectus and we caution potential investors not to place undue reliance on
these statements. We have no plans to update these forward-looking statements.
We use market data and industry forecasts throughout this prospectus, which we
have obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of such information is not
guaranteed. Similarly, we believe that the surveys and market research we or
others have performed are reliable, but we have not independently verified this
information.
14
<PAGE>
Use of Proceeds
We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $112.5 million. If the underwriters
exercise in full their option to purchase an additional 966,000 shares, the net
proceeds of the shares sold by us will be $129.6 million. "Net proceeds" are
what we expect to receive after paying the underwriting discount and other
expenses of the offering.
We expect to use our net proceeds from the offering as follows:
. $12 million to continue development of Discovery Manager and new products
. $9 million to expand our sales and marketing activities
. repayment of $333,000 of capital lease obligations
. $91.2 million to fund general corporate purposes, which may include
acquiring complementary technologies, products or companies
Our management has broad discretion as to the allocation of the net proceeds of
the offering. Although we intend to evaluate acquisition opportunities, we have
no current agreements or commitments with respect to any acquisition. The
timing and amount of our actual expenditures are subject to change and are
based on many factors, including:
. success of our sales and marketing efforts
. success of our acquisition efforts
. progress and scope of our product development activities
. progress and scope of our strategic alliances
Until we use the net proceeds of the offering, we will invest the funds in
short term, interest bearing, investment grade securities.
Dividend Policy
We have never paid any cash dividends on our capital stock. We anticipate that
we will retain any earnings to support operations and to finance the growth and
development of our business. Therefore, we do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, operating results, capital requirements,
covenants in our debt instruments, and such other factors as the board of
directors deems relevant.
Conventions Which Apply to this Prospectus
Unless otherwise stated, all information contained in this prospectus assumes:
. no exercise of the over-allotment option granted to the underwriters
. a one-for-three reverse stock split of our common stock
. the conversion of all outstanding shares of our preferred stock into shares
of common stock
15
<PAGE>
Capitalization
The following table shows:
. our capitalization on June 30, 2000
. our pro forma capitalization on June 30, 2000, assuming the receipt of the
estimated net proceeds from the sale of 900,000 shares of our Series D
preferred stock to Applied Biosystems at $3.34 per share (which will
convert into 300,000 shares of common stock upon the closing of this
offering)
. our pro forma as adjusted capitalization on June 30, 2000, assuming the
conversion of all outstanding preferred stock and the completion of the
offering at an initial public offering price of $19.00 per share and the
repayment of capital lease obligations
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(dollars in thousands)
(unaudited)
<S> <C> <C> <C>
Capital lease obligations........................ $ 333 $ 333 $ --
-------- -------- --------
Stockholders' equity:
Common stock, $0.001 par value, 65,000,000
shares authorized;
1,882,751 shares outstanding, actual and pro
forma; 50,000,000 shares authorized, 22,417,168
shares outstanding, pro forma as adjusted...... 2 2 23
Preferred stock, $0.001 par value, 47,938,178
shares authorized, actual; 48,838,178 shares
authorized pro forma and pro forma as adjusted:
Series A, 12,533,676 shares issued and
outstanding.................................. 7,504 7,504 --
Series B, 18,826,959 shares issued and
outstanding.................................. 12,369 12,369 --
Series C, 10,022,634 shares issued and
outstanding.................................. 15,009 15,009 --
Series D, 900,000 shares issued and
outstanding
pro forma ................................... -- 3,000 --
Treasury stock, at cost......................... (7) (7) (7)
Additional paid-in capital...................... 15,285 17,385 167,741
Options and warrants............................ 32,850 32,850 32,850
Deferred compensation........................... (22,599) (22,599) (22,599)
Accumulated deficit............................. (44,613) (46,713) (46,713)
-------- -------- --------
Total stockholders' equity................... 15,800 18,800 131,295
-------- -------- --------
Total capitalization....................... $ 16,133 $ 19,133 $131,295
======== ======== ========
</TABLE>
The number of shares of common stock in this table excludes:
. 2,003,340 shares of common stock issuable upon exercise of options
outstanding as of June 30, 2000
. 340,386 shares of common stock issuable upon exercise of warrants
outstanding as of June 30, 2000, 260,943 of which will expire if not
exercised prior to the closing of the offering
16
<PAGE>
Dilution
Our pro forma net tangible book value as of June 30, 2000 was $18.8 million, or
approximately $1.17 per share. "Pro forma net tangible book value" is total
assets minus the sum of liabilities and intangible assets. "Pro forma net
tangible book value per share" is pro forma net tangible book value divided by
the total number of shares outstanding after giving effect to the issuance of
the Series D preferred stock and the conversion of all outstanding shares of
preferred stock into common stock. Without taking into account any other
changes in the pro forma net tangible book value after June 30, 2000, other
than the sale of the shares offered hereby at an initial public offering price
of $19.00 per share, our pro forma net tangible book value as of June 30, 2000
would have been $131.3 million, or $5.83 per share. This pro forma net tangible
book value amount assumes that the proceeds to us, net of offering expenses and
underwriting discount, will be approximately $112.5 million.
The following table illustrates the pro forma increase in net tangible book
value of $4.66 per share and the dilution, which is the difference between the
offering price per share and pro forma net tangible book value per share, to
new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................... $19.00
Pro forma net tangible book value per share as of June
30, 2000................................................ $ 1.17
Increase in pro forma net tangible book value per share
attributable to the offering............................ 4.66
---------
Pro forma net tangible book value per share as of June 30,
2000 after giving effect to the offering.................. 5.83
------
Dilution per share to new investors in the offering........ $13.17
======
</TABLE>
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share, after deducting
underwriting discounts and offering expenses payable by us, at an initial
public offering price of $19.00 per share.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ -------------------- Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 15,977,168 71.3% $ 39,349,554 24.3% $ 2.46
New investors................ 6,440,000 28.7 122,360,000 75.7 19.00
---------- ----- ------------ -----
Total...................... 22,417,168 100.0% $161,709,554 100.0%
========== ===== ============ =====
</TABLE>
In the discussion and tables above, we assume the receipt of the estimated net
proceeds from the sale of 900,000 shares of our Series D preferred stock to
Applied Biosystems at $3.34 per share and no exercise of any stock options or
warrants to purchase our common stock. As of June 30, 2000, there were
outstanding options to purchase a total of 2,003,340 shares of common stock at
a weighted average exercise price of $1.15 per share. In addition there were
outstanding warrants to purchase a total of 340,386 shares of common stock, of
which 260,943 shares will expire if not exercised prior to the closing of the
offering. To the extent that holders of these options and warrants exercise
their outstanding options and warrants, new investors will be further diluted.
17
<PAGE>
Selected Financial Data
This section presents our selected historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.
We derived the statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999
from the audited financial statements in this prospectus. Those financial
statements were audited by Arthur Andersen llp, independent public accountants.
We derived the statement of operations data for the period from our inception
to December 31, 1995 and for the year ended December 31, 1996 and the balance
sheet data as of December 31, 1995, 1996 and 1997 from audited financial
statements that are not included in this prospectus. The selected financial
data presented below as of June 30, 2000 and for the six months ended June 30,
1999 and 2000 have been derived from our unaudited financial statements which
are included elsewhere in this prospectus and, in our opinion, reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of our financial position and results of operations. Operating
results for the six months ended June 30, 2000 are not necessarily indicative
of results that may be expected for any other interim period or for the year
ending December 31, 2000. Historical results are not necessarily indicative of
the results to be expected for any interim period or for the year as a whole.
<TABLE>
<CAPTION>
Period from Inception Six Months Ended
(September 5, Year Ended December 31, June 30,
1995) to December 31, ---------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
--------------------- ------- ------- ------- ------- ------- --------
(in thousands, except per share
amounts) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Software licenses and
services.............. $-- $ -- $ -- $ 197 $ 622 $ 185 $ 739
Research grants........ -- -- -- -- 159 29 27
---- ------- ------- ------- ------- ------- --------
Total revenue......... -- -- -- 197 781 214 766
---- ------- ------- ------- ------- ------- --------
Operating expenses:
Costs of revenue....... -- -- -- 141 447 154 195
Research and
development........... -- 1,533 1,682 2,328 4,869 1,763 6,038
Selling and marketing.. -- 383 495 634 1,722 660 3,030
General and
administrative........ 70 183 579 884 1,723 293 5,236
---- ------- ------- ------- ------- ------- --------
Total operating
expenses............. 70 2,099 2,756 3,987 8,761 2,870 14,499
---- ------- ------- ------- ------- ------- --------
Operating loss.......... (70) (2,099) (2,756) (3,790) (7,980) (2,656) (13,733)
Interest income......... -- 28 37 90 419 185 375
Interest expense........ -- (5) (19) (55) (18) (10) (29)
---- ------- ------- ------- ------- ------- --------
Net loss................ (70) (2,076) (2,738) (3,755) (7,579) (2,481) (13,387)
Deemed dividend related
to beneficial
conversion feature of
preferred stock........ -- -- -- -- -- -- (15,009)
---- ------- ------- ------- ------- ------- --------
Net loss applicable to
common
stockholders........... $(70) $(2,076) $(2,738) $(3,755) $(7,579) $(2,481) $(28,396)
==== ======= ======= ======= ======= ======= ========
Net loss per share,
basic and diluted...... $-- $ (2.67) $ (2.80) $ (3.81) $ (7.13) $ (2.37) $ (22.13)
==== ======= ======= ======= ======= ======= ========
Weighted average common
shares outstanding,
basic and diluted...... -- 779 977 986 1,062 1,046 1,283
Pro forma (unaudited):
Net loss per share,
basic and diluted..... $ (0.68) $ (0.23) $ (2.07)
======= ======= ========
Weighted average common shares outstanding, basic and diluted........ 11,121 10,702 13,738
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------- June 30,
1995 1996 1997 1998 1999 2000
---- ---- ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands) (unaudited)
Balance Sheet Data:
Cash, cash equivalents and short-
term investments................. $ 6 $355 $ 3,094 $5,223 $6,343 $ 14,010
Working capital................... (82) (264) 2,515 4,569 5,246 12,787
Total assets...................... 18 515 3,426 5,649 7,554 18,548
Notes payable and capital lease
obligations, long-term portion... -- -- 184 71 268 210
Total stockholders' equity........ (70) (143) 2,623 4,872 5,681 15,800
</TABLE>
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
You should read this discussion together with the financial statements and
other financial information included in this prospectus.
Overview
We are a provider of innovative software products and services that are
designed to enable pharmaceutical and biotechnology researchers to accelerate
the drug discovery and development process. We believe our first product,
Discovery Manager, offers the broadest set of software tools for genomics
researchers of any commercially available product. Our current customers
include leading genomics-based research organizations such as AstraZeneca,
GlaxoWellcome, Warner-Lambert and the National Cancer Institute. We have a
strategic alliance with Applied Biosystems to develop software products to be
used with its industry-leading systems for drug discovery. Separately, Applied
Biosystems made a $3 million equity investment in us. We also have signed a
letter of intent with Celera Genomics to enter into a strategic alliance to
develop a special "Celera Edition" of Discovery Manager for use with the Celera
Discovery System's Genome Reference Database.
We have sold our product to customers directly since June 1998. We derive
revenue primarily from granting licenses to our Discovery Manager product to
pharmaceutical and biotechnology research organizations. Our software license
agreements are typically one to three years in length, and include support and
maintenance. The price for each agreement depends upon the number of users
licensed by our customers, the duration of the agreement and which of our
product components and services the customer purchases. The prices which our
customers have agreed to pay us for our Discovery Manager range from $25,000 to
$400,000 per year. We typically invoice our customers on an annual basis at the
commencement of the software license agreement and on each anniversary date. We
record deferred revenue at the time of our invoice and we recognize the
associated revenue ratably over the related period.
We have incurred losses since our inception. As of June 30, 2000, we had an
accumulated deficit of $44.6 million. These losses and this accumulated deficit
resulted from the significant costs incurred in the development of our
technology platform and the establishment of relationships with our customers.
We intend to invest heavily in research and development, selling and marketing
and our computer and administrative infrastructure. In addition, as a result of
recent option grants below their deemed fair market value, we will incur
approximately $22.6 million in additional charges to earnings in future
periods. We recorded a one-time noncash charge of approximately $15.0 million
in the quarter ending March 31, 2000 for the difference between the deemed fair
value of our common stock for financial reporting purposes and the price at
which our Series C preferred stock was sold. We will record a one-time noncash
charge of approximately $2.1 million in the quarter ending September 30, 2000
for the difference between the deemed fair value of our common stock for
financial reporting purposes and the price at which our Series D preferred
stock was sold.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 2000.
Total revenue. Total revenue increased to $766,000 from $214,000 for the same
period of 1999, an increase of $552,000. Of this increase, $544,000 was from
licensing our software to an increased number of pharmaceutical and
biotechnology organizations. We recognized $11,000 of revenue from consulting
services in the first six months of 2000; no such revenue was recognized in the
same period of 1999. Grant revenues of $27,000 were recognized for the six-
month period in 2000 compared to $29,000 for the same period in 1999.
Costs of revenue. Costs of revenue increased to $195,000 from $154,000 for the
same period of 1999, an increase of $41,000. The increase is due to additional
customer service and support costs, software royalty payments for third-party
software licenses and costs associated with research grants. Our research
grants pay us for our direct costs of performing specified research projects
and a portion of our other operating expenses. We expect our costs of revenue
to increase in absolute dollars but decrease as a percent of revenue as we
spread customer service and support and maintenance costs over a larger revenue
base. Because we recognize our revenue ratably over the life of our license
agreements, our revenue may grow more slowly than our costs for a period of
time, as we continue building infrastructure to support our customers.
Research and development. Research and development expenses increased to $6.0
million in the first six months of 2000 compared to $1.8 million for the same
period of 1999, an increase of $4.2 million. The increase is related to
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non-cash compensation expense of $2.6 million from options for common stock
issued with exercise prices below the deemed market value of common stock used
for financial reporting purposes. There was an insignificant amount of
non-cash compensation expense in the same period of 1999. The remainder of the
increase is primarily related to salaries and other personnel costs in 2000
associated with our engaging additional software developers.
Selling and marketing. Selling and marketing expenses increased to $3.0
million compared to $660,000 for the same period of 1999, an increase of $2.4
million. The increase is primarily due to non-cash compensation expense of
$1.7 million from options for common stock issued with exercise prices below
the deemed market value of common stock used for financial reporting purposes.
Additional salaries, consulting, other personnel costs and travel comprise
$533,000 of the change and represented the majority of the remaining increase
in costs due to the expansion of our selling and marketing team.
General and administrative. General and administrative expenses increased to
$5.2 million compared to $293,000 in the same period of 1999, an increase of
$4.9 million. The increase was due primarily to non-cash compensation expense
of approximately $4.0 million during the six months ended June 30, 2000 from
options issued with exercise prices below the deemed market value of the
common stock for financial reporting purposes. There was only $28,000 of
deferred compensation expense for the comparable period of 1999. The remaining
increase is primarily attributable to salaries and other personnel costs
associated with additions to our management team and administrative staff.
Stock-based compensation. Deferred compensation for options granted is the
difference between the exercise price and the deemed fair value for financial
reporting purposes of our common stock on the date the options were granted.
In connection with the grant of stock options to employees at exercise prices
of $0.75 and $4.50 per share, we recorded additional deferred stock
compensation of $25.5 million for the six months ended June 30, 2000.
Deferred compensation is included as a component of stockholder's equity and
is being amortized in accordance with FASB Interpretation No. 28 over the
vesting periods of the related options, which are generally four or five
years. Amortization of deferred stock compensation totaled $8.3 million for
the six months ended June 30, 2000. We will recognize additional compensation
expense of $6.6 million for the remainder of 2000, $8.2 million in 2001, $4.6
million in 2002, $2.3 million in 2003, $769,000 in 2004, and $49,000 in 2005.
On March 13, 2000, we issued 10,022,634 shares of our Series C preferred stock
for $15.0 million, which will convert into shares of common stock upon the
closing of this offering. We recorded a one-time charge to earnings applicable
to common stockholders of $15.0 million on March 13, 2000 for the beneficial
conversion feature associated with the sale of our Series C preferred stock at
a price below the deemed fair value of our common stock for financial
reporting purposes.
Interest income. Interest income increased to $375,000 for the six months
ended June 30, 2000 compared to $185,000 for the same period in 1999, an
increase of $190,000. The increase was primarily due to our higher average
cash and investment balances during the period in 2000 from the proceeds of
the Series C preferred stock.
Interest expense. Interest expense increased to $29,000 compared to $10,000
for the same period of 1999. The increase is due to higher average outstanding
debt related to capital leases for equipment.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenue. Total revenue increased to $781,000 in 1999 from $197,000 in
1998, an increase of $584,000. Of this increase, $425,000 was from licensing
our software to an increased number of pharmaceutical and biotechnology
organizations. We also recognized revenue from research grants of $159,000 in
1999; no such revenue was recognized in 1998.
Costs of revenue. Costs of revenue increased to $447,000 in 1999 from $141,000
in 1998, an increase of $306,000. This increase was due to approximately
$90,000 from additional customer service and support costs, $57,000 from
software royalty payments for third-party software licenses and $159,000 from
costs associated with research grants.
Research and development. Research and development expenses increased to $4.9
million in 1999 from $2.3 million in 1998, an increase of $2.5 million. The
increase was primarily related to an increase in salaries and other personnel
costs in 1999 related to engaging additional software developers. We also
incurred non-cash compensation expense
of $846,000 in 1999 from options for common stock issued with exercise prices
below the deemed market value of
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the common stock for financial reporting purposes, as discussed below. We
expect research and development expenses will continue to increase for the
foreseeable future as we expand our product offerings.
Selling and marketing. Selling and marketing expenses increased to $1.7 million
in 1999 from $634,000 in 1998, an increase of $1.1 million. The increase was
due primarily to $514,000 from salaries, $165,000 from travel and $161,000 from
other personnel costs related to expanding our selling and marketing team. We
also increased our product marketing expenses to enhance the visibility of our
product. We incurred non-cash compensation expense of $85,000 in 1999 for
options for common stock issued with exercise prices below the deemed market
value of the common stock for financial reporting purposes, as discussed below.
We expect selling and marketing expenses will continue to increase for the
foreseeable future.
General and administrative. General and administrative expenses increased to
$1.7 million in 1999 from $884,000 in 1998, an increase of $839,000. The
increase was due primarily to additions to our management team. We incurred
non-cash compensation expense of $738,000 in 1999 from options for common stock
issued with exercise prices below the deemed market value of the common stock
for financial reporting purposes, as discussed below. We expect general and
administrative expenses to increase for the foreseeable future.
Stock-based compensation. Deferred compensation for options granted is the
difference between the exercise price and the deemed fair value for financial
reporting purposes of our common stock on the date the options were granted. In
connection with the grant of stock options to employees, we recorded deferred
stock compensation of $7.4 million during the year ended December 31, 1999, of
which $1.7 million was expensed in 1999.
Interest income. Interest income increased to $419,000 in 1999 from $90,000 in
1998, an increase of $329,000. The increase was primarily due to our higher
average cash and investment balances during 1999 as a result of a private
placement of equity securities in February 1999 and December 1998.
Interest expense. Interest expense decreased to $18,000 in 1999 from $55,000 in
1998, a decrease of $37,000. The decrease was due primarily to lower average
debt outstanding during 1999 following the conversion of a note payable to
equity in 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenue. Total revenue was $197,000 in 1998. We added our first two
customers in 1998 and had no customers in 1997.
Costs of revenue. Costs of revenue were $141,000 in 1998. These costs were
associated with customer service and support expenses.
Research and development. Research and development expenses increased to $2.3
million in 1998 from $1.7 million in 1997, an increase of $646,000. The
increase was due primarily to an increase in salaries and other personnel costs
in 1998 related to hiring additional software developers.
Selling and marketing. Selling and marketing expenses increased to $634,000 in
1998 from $495,000 in 1997, an increase of $138,000. The increase was due
primarily to $65,000 from an increase in salaries and other personnel costs,
and $37,000 from travel related to expanding our selling and marketing team. We
also increased our product marketing expenses to enhance the visibility of our
product.
General and administrative. General and administrative expenses increased to
$884,000 in 1998 from $579,000 in 1997, an increase of $305,000. The increase
was due primarily to additions to our management team.
Interest income. Interest income increased to $90,000 in 1998 from $37,000 in
1997, an increase of $53,000. The increase was primarily due to our higher cash
and investment balances during 1998 as a result of a private placement of
equity securities in 1998.
Interest expense. Interest expense increased to $55,000 in 1998 from $20,000 in
1997, an increase of $35,000. The increase was due primarily to higher average
debt outstanding during 1998.
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Liquidity and Capital Resources
We have financed our operations primarily from the net proceeds generated from
the issuance of preferred stock. We have received total net proceeds of
approximately $38.1 million from sales of:
. 12,533,676 shares of our Series A convertible preferred stock in March 1996
and February, June and October 1997, including conversions of convertible
notes payable, raising net proceeds of $7.5 million
. 18,826,959 shares of our Series B convertible preferred stock in December
1998 and February 1999, including conversions of convertible notes payable,
raising net proceeds of $12.6 million
. 10,022,634 shares of our Series C convertible preferred stock in March
2000, raising net proceeds of $15.0 million
. 900,000 shares of our Series D convertible preferred stock in September
2000, raising net proceeds of $3.0 million
As of June 30, 2000, we had cash, cash equivalents and short-term investments
of approximately $14.0 million, up from the $6.3 million of cash, cash
equivalents and short-term investments at December 31, 1999. This increase
reflects the $15.0 million in net proceeds from our Series C preferred stock
offering closed March 13, 2000, offset by cash used to fund our operations for
the six months ended June 30, 2000.
During the six months ended June 30, 2000, we used cash of approximately $5.3
million to fund our net losses of $13.4 million, adjusted for non-cash charges
for depreciation and deferred compensation amortization totaling $8.5 million,
and $3.2 million for changes in various operating assets and liabilities.
Our investing activities for the six months ended June 30, 2000 used cash of
$10.9 million, and consisted of $9.2 million in net purchases and maturities of
short-term investments and $1.7 million in purchases of property and equipment
used in our business. We expect to make additional investments in our
infrastructure to support and expand operations during the remainder of 2000.
Our financing activities for the six months ended June 30, 2000 generated $14.8
million comprised primarily of $15.0 million in net proceeds from our Series C
preferred stock and $246,000 from the exercise of stock options offset by
$431,000 of deferred financing costs.
In 1999, we used cash of approximately $5.1 million in operating activities to
fund our net losses of $7.6 million, offset by non-cash charges for
depreciation and deferred compensation amortization totalling $1.9 million and
increases in deferred revenue of $706,000. We used approximately $3.5 million
of cash for operations in 1998 and $2.4 million in 1997.
Our investing activities used cash of approximately $3.1 million in 1999,
compared to a provision of cash of $2.3 million in 1998 and cash used of $2.7
million in 1997. Our investing activities consisted primarily of purchases and
sales of short-term investments depending on our cash balances, and purchases
of property and equipment to be used in our business. We expect to continue to
make investments in our infrastructure, including the purchase of property and
equipment to support our operations. As discussed below, we have also acquired
property through the use of capital leases.
Our financing activities in 1999 generated $6.5 million of cash, primarily from
the net proceeds of sales of preferred stock. Our financing activities in 1998
generated $5.8 million in cash, primarily from the net proceeds of sales of
preferred stock and the issuance of convertible notes payable, which were
subsequently converted into preferred stock. Our financing activities in 1997
generated $5.4 million of cash, primarily from the net proceeds of sales of
preferred stock and $400,000 of borrowings under a bank loan. This loan was
repaid in monthly installments through September 1999. In December 1998, we
entered into a master lease agreement under which we could borrow $1.0 million
through December 1999. This facility is treated as a capital lease. We borrowed
$97,000 under this lease in 1998 and $354,000 in 1999. Our borrowings under
this lease have stated interest rates ranging from 8.4% to 15.3% and were used
to acquire computer equipment and office furniture. We repaid $70,000 of these
borrowings during 1999, and $398,000 remains outstanding at December 31, 1999
under this lease. We intend to repay outstanding borrowings under this lease
out of proceeds of the offering.
We expect our cash requirements to continue to increase significantly for the
rest of 2000 as we continue our research and development efforts, hire
additional personnel, grow our administrative support activities and expand our
facilities. The amount and timing of cash requirements will depend on market
acceptance of our products and the
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resources we devote to researching and developing, marketing, selling and
supporting our products. We may also acquire complementary businesses or
products, although we have no commitment to do so.
We believe that our cash, cash equivalents and short-term investments,
including the proceeds of the March 2000 sale of Series C preferred stock, the
proceeds of the September 2000 sale of Series D preferred stock and the net
proceeds from this offering are sufficient to fund our operations for at least
24 months. Without the net proceeds of this offering, we believe our capital
resources will be sufficient to fund our operations through at least December
31, 2000.
Our future capital requirements will depend on many factors, including the
following:
. success of our selling and marketing efforts
. success of our acquisition efforts
. progress and scope of our product development activities
. progress and scope of our strategic alliances
Future capital requirements will also depend on the extent to which we acquire
or invest in businesses, products and technologies. If we should require
additional financing due to unanticipated developments, additional financing
may not be available when needed or, if available, we may not be able to obtain
this financing on terms favorable to us or to our stockholders. Insufficient
funds may require us to delay, scale back or eliminate some or all of our
research and development programs, or may adversely affect our ability to
operate as a going concern. If additional funds are raised by issuing equity
securities, substantial dilution to existing stockholders may result.
Income Taxes
As of December 31, 1999 we had a net operating loss carryforward of
approximately $11.3 million for federal income tax reporting purposes, which
begins to expire in 2010. We have established a valuation allowance against the
entire amount of our deferred tax asset because our management has not been
able to conclude that it is more likely than not that we will be able to
realize the deferred tax asset, due primarily to our history of operating
losses.
Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximize the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the then-
prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money
market funds, government and non-government debt securities. The average
duration of all of our investments in 1999 was less than one year. Due to the
short-term nature of these investments, we believe we have no material exposure
to interest rates arising from our investments. Therefore, no quantitative
tabular disclosure is included in the prospectus.
The Year 2000
Computer systems and software must accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many software and
computer systems that accepted only two digit entries needed to be upgraded in
order to accept dates beginning January 1, 2000. We did not experience any
date-related problems with our software. In addition, we have not been made
aware of, nor have we experienced, date-related problems with any third-party
software. We do not believe that we will incur material costs in the future
because of date-related problems.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities", or SFAS No. 133. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to
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those instruments as well as other hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133--an amendment of FASB Statement No.
133", or SFAS No. 137. SFAS No. 137 delays the effective date of SFAS No. 133
to fiscal quarters and fiscal years beginning after June 15, 2000. The Company
does not typically enter into arrangements that would fall under the scope of
SFAS No. 133 and thus, management believes that SFAS No. 133 will not
significantly affect its financial condition and results of operations.
In December 1999, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin No. 101, "Revenue Recognition", or SAB 101. SAB 101
provides the SEC Staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. We have implemented the
guidance in SAB 101 for all periods presented.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, or FIN No. 44. FIN No. 44 clarifies the application of APB No. 25
for certain issues related to equity-based instruments issued to employees. FIN
No. 44 is effective on July 1, 2000, except for certain transactions, and will
be applied on a prospective basis. The implementation of FIN No. 44 did not
have a significant impact on our results of operations and financial position.
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Overview of Genomics
Introduction
The number of currently known disease targets limits the development of new
drugs. Disease targets are molecules in the body that can be affected by a drug
to cause a desired biological reaction. Pharmaceutical and biotechnology
organizations are increasingly turning to genomics to improve the productivity
of the drug discovery and development process. The study of the human genome is
revealing new disease targets and providing pharmaceutical and biotechnology
organizations with better information regarding these targets. Industry
analysts expect genomics to lead to a medical revolution in identifying and
treating disease based on growing evidence that genes play a significant role
in most major diseases.
Genomics
The complete set of instructions for making an organism is called its genome.
The human genome governs all cellular functions, which, in turn, determine all
human physiology, such as metabolism, susceptibility to disease and reactions
to drugs. Genomics is broadly defined as the study of an organism's genes,
including their location, structure, sequence, regulation, function and
relationship to disease.
The human genome is organized into 23 pairs of chromosomes, which include the X
and Y chromosomes that determine sex. These chromosomes are comprised of
strands of DNA molecules that consist of long chains of chemical sub-units,
called nucleotides. There are four types of nucleotides--adenine, cytosine,
guanine, and thymine, often abbreviated with their first letters A, C, G, and
T. DNA molecules consist of two long chains of nucleotides bound together by
the pairing of the nucleotides. Each nucleotide is also referred to as a base,
and pairs of bases bound to each other are called base pairs. Approximately 3.2
billion nucleotide base pairs make up the entire human genome.
Some sequences of nucleotides, called genes, carry the specific information
necessary to construct proteins that regulate most aspects of human life. Genes
may contain from several dozen to millions of nucleotides. Scientific evidence
to date indicates that there are approximately 100,000 genes in the human
genome, although some researchers estimate the number to be as high as 140,000.
Genetic Study Methods
Methods of analysis in the field of genomics generate vast amounts of data and
create the need for bioinformatic software to manage and analyze this data. The
four major categories of analysis in genomics are:
. DNA Sequencing. DNA sequencing is the process of determining the linear
order of nucleotide bases in a strand of DNA and is performed with a
laboratory instrument called a DNA sequencer.
. Genotyping. Genotyping is the process of analyzing locations within a
genome where variations in the sequence of nucleotides within a gene, or
genetic polymorphisms, are known to exist. Differences in a genotype, or
the sequence of nucleotides in a gene, can determine specific physical
characteristics, such as eye color, or functions, such as ability to
produce insulin. Genetic polymorphisms play a role in an individual's
susceptibility to disease and response to drugs. One type of polymorphism
is a variation in a single nucleotide base, commonly referred to as a
single nucleotide polymorphism, or SNP. SNPs are the most common type of
genetic variation. There are an estimated three to ten million SNPs in the
human genome. While only a small fraction of human SNPs have been
identified to date, we expect this number to increase dramatically during
the next few years. The SNP Consortium is a group of drug companies and
public entities who are working together to discover 300,000 SNPs and
contribute their findings to public databases. As more and more SNPs are
identified, a new market is emerging for looking at SNPs of individuals for
diagnostic and therapeutic purposes, called SNP genotyping. Merely
identifying a SNP does not indicate whether or how it may relate to human
health. To relate SNPs to disease or drug response, SNPs must be measured
in hundreds or thousands of people and correlated with clinical data
describing the physical or mental health of those individuals.
. Gene Expression Analysis. Gene expression analysis involves measuring the
extent to which specific genes are expressed within a cell. Gene expression
is the process by which a gene's coded information is translated into the
production of proteins within a cell. While all cells contain the full set
of DNA, different cells express different
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sets of genes depending on cell type and environmental conditions. Certain
diseases also arise from the over or under expression of genes. Researchers
use differential gene expression analysis, the comparison of genes expressed
in healthy versus diseased samples, to identify specific genes involved in a
particular disease process. Researchers can also measure changes in
expression of certain genes when they add drug candidates to cells. As
researchers identify more genes, we expect the market for expression
analysis technologies to grow significantly.
. Phenotyping. Phenotyping is the determination of the traits of an individu-
al. A phenotype is the physical and measurable trait related to an under-
lying gene. For example, a gene is responsible for determining eye color,
but the actual eye color is a phenotype.
We believe that these methods of analysis discussed above have the greatest
need for bioinformatic software to manage and analyze this data.
Proteomics
Proteins are large complex molecules that control and mediate most cellular
activities. Proteins are created based upon the information provided by genes.
Each set of three nucleotides in a gene codes for a specific amino acid. Amino
acids are the basic building blocks that make up proteins. Success in drug
discovery is often a function of the amount known about the structure and
function of a particular protein.
A very important goal for biology and pharmaceutical research and development
is to establish a direct correlation between the sequence information of the
human genome and the sequence information in proteins. This field is generally
referred to as proteomics. Proteomics seeks to determine what proteins are
being made where, in what amount and under what conditions. By integrating gene
and protein information, researchers are able to trace amino acid sequences
back to corresponding gene sequences. That, in turn, enables them to take data
on proteins present in samples and link it to the gene expression data,
providing a new level of detail on how genes actually regulate proteins in
cells.
Proteomics research involves the large-scale separation, identification and
characterization of proteins. While gene expression data provides important
information regarding the underlying proteins, it cannot predict all changes
that occur to a protein. Although the proteomics market is relatively new, it
is expected to be one of the fastest growing life science disciplines.
Pharmacogenomics
Pharmacogenomics is a rapidly evolving field of identifying genetic variations
that may affect an individual's response to a specific drug. We expect that
this research will lead to a more personalized approach to medicine that will
allow drugs and dosages to be tailored for individual patients based upon their
genetic information. In addition, pharmacogenomics may enable more successful
clinical trials by improving the process of patient selection and "rescuing"
drugs that have failed previous drug trials by identifying more appropriate
populations for using the drug. Candidates for rescued drugs include those
where particular sub-populations have reacted adversely to these drugs or where
a drug has worked in a particular subpopulation but not in the broader group
initially studied.
We expect that genomic information will be used to develop genetic
characterization tests to identify the genetic make-up of individuals. These
tests will contribute to a more personalized approach to medicine. For example,
many types of cancer have similar symptoms. The ability to deliver an effective
treatment for a particular patient depends on understanding what kind of cancer
the patient has. Genetic characterization tests may help the physician select
the most effective drug with the fewest side effects. We believe that this
approach should benefit patients with more customized care, reduced illness
length, and better treatment results.
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Business
Overview
We are a provider of innovative software products and services that are
designed to enable pharmaceutical and biotechnology researchers to accelerate
the drug discovery and development process. Discovery Manager, our first
product, is used for genomics research, including genetic research, gene
discovery and pharmacogenomics. This product allows researchers to turn the
vast volumes of gene, SNP, protein and patient data from diverse sources into
information useful for drug discovery. We license Discovery Manager to leading
genomics-based research organizations, including AstraZeneca, GlaxoWellcome,
Warner-Lambert and the National Cancer Institute. We have a strategic alliance
with Applied Biosystems to develop software products to be used with its
industry-leading systems for drug discovery. Separately, we have received an
equity investment of $3 million from Applied Biosystems. We also have signed a
letter of intent with Celera Genomics to enter into a strategic alliance to
develop a special "Celera Edition" of Discovery Manager for use with the Celera
Discovery System's Genome Reference Database.
The Bioinformatics Market Opportunity
The market for software products to facilitate the drug discovery process is
large and rapidly growing. Genetic Engineering News projects the bioinformatics
market to be in the range of between $1 billion to $2 billion in the year 2001.
We believe that this number includes spending by research organizations for
both internal and external bioinformatics services. Additional industry sources
expect that research and development spending for bioinformatics technology
will grow to over $2 billion by 2004.
Challenges of Using Genomic Data
Pharmaceutical and biotechnology researchers are increasingly turning to
genomics to improve the efficiency of the drug discovery process. These
researchers need bioinformatics tools to effectively manage the large
quantities and complexities of data being generated by genomics research.
Bioinformatics is the application of computer technologies to collect, manage,
analyze and link biological data. The key challenges of using genomic data in
the drug discovery and development process are:
. Unprecedented volumes of data. Improvements in genetic research
methodologies and related tools are producing unprecedented quantities of
genetic data, creating massive data management problems for organizations
conducting genomics research. These problems are accelerating as leading
research organizations near completion of sequencing the human genome.
Public sequence databases are growing exponentially. Some of these
databases are expected to reach over 10 billion bases of sequence data and
more than 6 million records by the end of 2000. Experiments or analyses
involving these data can rapidly expand the total data volume. The use of
SNPs in drug research illustrates the effect of experiments on data volume.
The SNP Consortium has announced its intention to identify a set of
approximately 300,000 SNPs by April 2001. Identifying all of these SNPs in
a group of 1,000 patients would generate over 300,000,000 individual SNP
scores. Similarly, a single pharmacogenomics experiment could entail
analysis of approximately 100,000 different sites in a patient's DNA, so
that a 1,000 patient study would generate approximately 100,000,000 data
points.
. Diversity of data sources. Genomic research and data generation is being
performed in thousands of different locations throughout the world. Genomic
projects generally involve a diverse group of scientists, such as
clinicians, geneticists and biologists, each working on their own type of
data. Furthermore, these projects often involve multiple organizations
working together. These groups often represent, classify and store their
data in different ways.
. Lack of broad genomic-specific tools. Many organizations currently collect,
store, and analyze their genomic data using a patchwork of public domain,
free or low-fee software, off-the-shelf, non-scientific desktop
applications such as spreadsheets and internally developed bioinformatics
tools. This can result in researchers using a variety of non-standard, non-
integrated, non-scientific and unsupported software tools. Many genomic
researchers also rely on time-consuming and error-prone manual approaches
to handle their bioinformatics needs.
. Short supply of bioinformaticists. Genomic-based research is heavily
dependent on sophisticated computer applications that are typically created
and maintained by bioinformaticists. The supply of individuals with
training or experience in both genomics and the development of computer-
based information technology is limited.
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. Difficulty of data visualization/presentation. Researchers need to
visualize the large quantities of complex genomic data and their
relationships to perform analyses and derive meaningful results.
Visualization of large quantities of highly interrelated data is a
challenging software problem.
. Data security concerns. Research organizations are concerned about access
to and the security of the data they produce and use. Security issues are
compounded when multiple organizations are collaborating on a project. A
security breach could compromise or even ruin an entire drug discovery
effort, potentially resulting in the loss of substantial profits.
Bioinformatics tools must provide security features that reliably ensure
the desired type and level of security required by each research
organization.
Our Solution
We offer proprietary bioinformatics solutions designed to address the
challenges of using genomic data in the drug discovery and development process.
Our solutions offer:
. Data standardization. We provide a standard representation of diverse types
and formats of genomic information, including both publicly available and
proprietary genomic data. Our process of standardization allows our
customers to compare and cross-analyze information from varied sets of
genomic data. This can result in significant savings in time and fewer user
errors.
. Data integration. Our product brings together in one database information
contained in many publicly available and proprietary genomic data sets. Our
products also integrate different types of genomic data from research
sources such as pharmacogenomic, high-throughput genotyping, SNP and
sequence data.
. High scalability. Our product has been designed to handle massive data sets
and large numbers of users. We believe our product will be able to meet the
needs of the largest pharmaceutical and biotechnology companies in the
world.
. Broad suite of data analysis tools. Our product's proprietary software
tools enable researchers such as clinicians, epidemiologists, geneticists
and molecular biologists to easily sort and analyze genomic information.
. Practical visualization tools. Our product provides a practical way to show
complex genomic information in simple-to-understand formats such as tables,
graphs, charts and reports.
. Security. Our product includes state-of-the-art redundancy, back-up and
encryption systems to ensure minimal exposure to systems failure or
unauthorized access. We employ rigorous electronic security measures to
protect our customers' data and to restrict unauthorized access to such
data from non-approved users both within and outside client organizations.
. Professional services. We support our product by offering our customers
product integration services, scientific consulting services and technical
consulting services.
Our Strategy
Our objective is to provide pharmaceutical and biotechnology researchers with
the most scientifically adept bioinformatics tools and services for drug
discovery and development. The key elements of our strategy to achieve our
objective include:
. Expand our product offerings. We intend to significantly extend our product
offerings to include modules in other areas of drug discovery and
development such as gene and protein expression analysis and protein
function prediction. In addition to developing products internally and in
collaboration with our strategic partners, we plan to selectively acquire
complementary businesses and products.
. Establish significant industry collaborations. We intend to establish
product development and distribution alliances with companies in the drug
discovery and development market that have strong market positions and
technologies complementary to ours, including companies that manufacture
devices to generate genomic data, provide genomic data content or have
developed other scientific software development tools. We believe that
these collaborations will provide us with access to broader markets and
accelerated market penetration. We plan to add, in collaboration with some
of these companies, new modules or features to our products that work with
their technology and hardware. As part of this strategy, we also intend to
offer reduced functionality versions of most of our products. We expect
that these entry-level products will sell for a lower price, but in greater
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quantities, than the enterprise-level versions of our products. These entry-
level products should provide the opportunity for future upgrade sales to
enterprise-level products.
. Implement application service provider strategy. We intend to offer our
customers the option to access our products via the Internet without the
need to install and maintain the software on their own equipment. This
approach, commonly called being an application service provider, or ASP,
should broaden and accelerate the adoption of our products by lowering
initial capital investment, minimizing implementation time and effort,
providing convenient scalability, offering affordable payment options and
reducing the information technology burden for our customers.
. Continue scientific leadership. We believe our close interaction with
commercial and academic scientific leaders has been a major factor in
establishing Discovery Manager as one of the most comprehensive and
scientifically advanced bioinformatics products available to the genomics
industry. We intend to advance our scientific leadership by deepening and
expanding our relationships with scientific leaders in the field of
genomics. We rely on these relationships to stay abreast of cutting edge
developments in the field and to identify and address new customer needs.
. Increase sales and marketing capacity. We intend to expand our direct sales
force to sell our enterprise-level product in the United States and major
international markets. We also intend to pursue a multifaceted marketing
strategy to increase Genomica brand awareness and to substantially increase
our number of qualified customer leads. One of the key goals of our sales
personnel is to increase the number of users of our product at existing
customers.
Strategic Alliances
We have entered into a strategic alliance with Applied Biosystems to license
certain components of our software technology that will be designed to operate
with Applied Biosystems' genotyping instruments that are used in the gene
discovery and analysis process. By integrating our software technology with
Applied Biosystems' instruments, we believe each companies' customers will be
able to perform their gene research and data analysis more rapidly and
effectively. Separately, Applied Biosystems made a $3 million equity
investment in us.
We also have signed a letter of intent with Celera Genomics to enter into a
strategic alliance to develop a special "Celera Edition" of Discovery Manager
for use with the Celera Discovery System's Genome Reference Database. The
letter of intent contemplates our joint development of an edition of Discovery
Manager integrated with Celera's Discovery System. We anticipate that this
integrated product would enable Celera's customers to seamlessly navigate
between the Celera Edition of Discovery Manager and Celera's Discovery System
Genome Reference Database.
Discovery Manager(TM)
Discovery Manager is our core bioinformatics product. It is an integrated
suite of software tools and a database template for genomics research. The
database can be filled with genomic data from the user's own research as well
as publicly available and other sources. Our tools include sophisticated
scientific algorithms designed for easy use by genomic researchers without the
assistance of bioinformaticists. Discovery Manager enables individual or
collaborating researchers to access, store, manipulate, analyze, annotate and
integrate genomic data from a variety of sources. We believe that Discovery
Manager is the only commercially available product that integrates human
sequence, genetic map, genotype, phenotype and clinical information.
Supported disciplines. We developed Discovery Manager to be used by
researchers in a broad range of disciplines including:
. Clinical genetics. Clinical geneticists identify patients and collect their
medical data. Discovery Manager allows these researchers to store and view
patient information in a simple graphical format, which can show the
medical and genetic data of each patient as well as parent and sibling
genetic relationships among family members, called pedigrees.
. Epidemiology. Epidemiologists study the genetic and environmental causes
for disease. Discovery Manager helps these researchers analyze and
determine how a genetic trait or environmental factor is distributed among
people in a population.
. Statistical genetics. Statistical geneticists identify the regions of DNA
that determine a particular trait. Discovery Manager helps these
researchers group individuals together and test various hypotheses
regarding the portion of DNA to which a trait is linked.
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. Human genetics. Human geneticists identify the location of genes using a
variety of sophisticated analytical approaches. Discovery Manager helps
these researchers study the specific genes of each family member.
. Molecular biology. Molecular biologists determine the function of genes.
Discovery Manager helps these researchers organize and analyze genetic map
and sequence data to isolate genes and determine their function.
. Pharmacogenomics. Pharmacogenomics researchers determine the genetic basis
for why a drug works for some people but not others. Discovery Manager
helps these researchers examine the genetic variations of a group of
patients with similar drug responses.
Key tools. Discovery Manager provides three key tool sets that are used by
different types of researchers to facilitate the interpretation of data
relevant to the drug discovery and development process:
. Sequence analysis tools. Sequence analysis is the examination of a specific
DNA sequence to understand the structure and function of the sequence.
Discovery Manager provides tools for finding genes in human DNA sequences
and comparing two or more sequences for similarity.
. Genetic analysis tools. Genetic analysis is the isolation and analysis of
DNA variations in families and unrelated populations. Discovery Manager
provides tools to integrate, manipulate, edit and analyze genetic data.
. Map analysis tools. Map analysis is the construction and comparison of maps
containing different representations of genetic information. Discovery
Manager provides tools that support the graphical viewing, manipulation and
comparison of maps that are created using well-known algorithms.
Discovery Manager database. A key component of Discovery Manager is a central
repository of genomic data compiled from many sources:
. Legacy data. Data that researchers previously have accumulated on various
systems and in various formats.
. New data. Results from experiments performed using Discovery Manager.
. Reference Database. Our proprietary Reference Database, described below, is
comprised of 13 publicly available genomic databases from major
international genome research centers. Each of these public databases has
completed the peer review, quality control process of the National
Institutes of Health. In addition, we standardize and quality check this
data before including it in the Reference Database.
. Other public data. If a customer wishes to incorporate data from sources
other than those in the Reference Database, the customer can convert it
into a common format and import it into Discovery Manager. Customers can
also access the National Center for Biotechnology Information and other
websites of interest directly from Discovery Manager. Researchers use
information from these websites to annotate their database.
Reference Database. We offer our proprietary database, the Reference Database,
as an option to licensees of Discovery Manager. Our Reference Database
compiles into one database and in one common format all of the information
from 13 publicly available databases. Researchers no longer need to access the
individual remote databases. As a result, they are able to easily and
uniformly query these distinct databases, resulting in significant time
savings and reduced risk of user errors.
Common user interface. Discovery Manager addresses many important aspects of
genomics research from a common user interface. This interface permits
researchers to access, use and compare data from a single database. With
simple point-and-click operations, researchers can map, compare, query and
graphically display data in formats commonly used in the industry. Using
annotation tools, researchers may enrich data with additional information,
such as experiment details, literature references and direct links to websites
of interest. The common user interface also enables many different types of
researchers to use the same data and system to do their part of the analysis.
Security. Because of the potential value of proprietary genomic information,
security is important to our customers. Discovery Manager provides security
and access features that enable system administrators to assign user accounts
and passwords, provide users with access to authorized projects and allow
management to review the work progress within the genomic project while
insuring the privacy of sensitive project data.
We regularly upgrade Discovery Manager to keep pace with the latest advances
in algorithms, tools and technology. Customer input plays a key role in the
definition of these upgrades. We also regularly upgrade the contents of the
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Reference Database to include newly available information. We intend to expand
the Reference Database to include other public databases and additional
databases of non-human data. We also intend to develop new products to expand
into other areas of drug discovery and development and new technologies.
Technology
We designed Discovery Manager to support the unique needs of drug discovery
and development researchers. We selected technologies to handle very large and
complex data sets and provide users with simple-to-use data visualization
technology. Because researchers most often work in teams, our products
securely operate in a network environment designed to allow collaboration
among hundreds of researchers. We believe that Discovery Manager offers the
broadest set of software tools for genomics research of any commercially
available product.
Our software uses "object-oriented" technology as a simple way of modeling
biological data and their relationships, such as patients and their associated
DNA sequences. An object is a combination of related data, such as patient
name, age and height. We invested 40 person-years to create a collection of
over 400 objects to represent the core biological entities that are part of
drug discovery and development. A key benefit of our use of object-oriented
technology is that once the core biological objects have been defined, it
becomes easier to add new features to keep pace with advances in genomic
science.
Current architecture. The current software structure, or architecture, of
Discovery Manager is divided into two key operating components, referred to as
a client and a server. The client is the easy-to-use graphical interface that
operates on a standard desktop computer used by the researcher. The server
consists of the scientific applications and databases that operate on a
powerful computer that provides processing services to all the clients.
The Discovery Manager client component was developed using a commercially
available programming language known as VisualWorks for Smalltalk. The server
component was developed using a commercially available database management
system known as GemStone/S.
Next-generation architecture. We are currently developing the next generation
of Discovery Manager to be Internet compatible. The new architecture will have
three key operating components, referred to as a client, an application server
and a database server. We expect the new client component to continue to
provide a set of visualization tools to simplify organizing, querying and
analyzing complex genomic information. The client will allow users to interact
with Discovery Manager through a standard Java-based web browser, such as
Netscape Navigator or Microsoft Explorer. The application server component
will consist of scientific applications developed using Java technology. The
database server component will consist of Oracle Corporation's Oracle 8i
relational database management system.
We are transitioning to this new technology architecture primarily because we
believe drug discovery and development companies have selected the Oracle
database technology as a standard operating environment for their genomic
research and because many customers have expressed an interest in moving to
Internet-compatible applications. We believe that our new technology choices
of Java for application and advanced user interface programming, Hypertext
Markup Language (HTML) for programming web browser interfaces, and Oracle as
the database for storing all of the genomic data, will meet customer
requirements and provide a stable foundation for the foreseeable future. We
are scheduled to deliver our first of several products on the new architecture
in 2000 and we are scheduled to complete the development of this new
technology architecture in 2001. We expect to incur additional costs of
approximately $9.0 million to complete software programming, testing and
debugging of the new technology architecture.We will transition all existing
customers to the redeveloped product at no additional cost to them.
Research and Development
As of September 20, 2000, we had 50 employees working in research and
development, of which 13 were working on the development of the current
Discovery Manager product and 37 were working on the redeveloped product. We
intend to transfer all development resources to developing the redeveloped
product once all customers have transitioned to the new Discovery Manager
product. Our research and development expenses were $2.3 million in 1998 and
$4.9 million in 1999. For the six months ended June 30, 2000, our research and
development expenses were $6.0 million. We expect that research and
development expenses will continue to increase.
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Consulting and Scientific Services
We currently offer limited consulting services that are included in the price
of Discovery Manager. We offer a full range of consulting services on a fee-
for-service basis in conjunction with Discovery Manager, including the
following:
. Product integration. Helping customers integrate the Discovery Manager
product suite into their bioinformatics departments and scientific
workflow.
. Technical consulting. Providing custom programming, technical guidance and
tools development for bioinformatics needs.
. Scientific consulting. Helping customers with their genomics research.
Examples of this service include designing scientific experiments, formulas
and algorithms.
We intend to expand our research and development and customer service personnel
if demand for these services increase.
Customers
We license our products and provide services to pharmaceutical and
biotechnology companies and academic institutions in the United States and
Western Europe. The following is a list of our current customers:
AstraZeneca PLC
Biognosis U.S. Inc.
Clingenix
GlaxoWellcome Inc.
National Cancer Institute
National Institutes of Health
Oxagen Limited
Orchid Biosciences, Inc.
University of Oxford Wellcome Trust Centre for Human Genetics
Warner-Lambert Company
We licensed our first products in 1998 utilizing a small direct sales force of
two account managers, no field scientists and limited marketing expenses. We
only began building our sales and marketing organization in the second half of
1999 by hiring additional account managers and increasing our marketing
expenses. As a result of our small direct sales force during 1999, we were
limited in our ability to identify potential customers and to perform the
necessary steps required to obtain new customers.
We believe potential customers who decline to purchase our products may believe
that their own internal bioinformatics departments can develop software
applications to meet their needs, may prefer running software applications on a
relational database management system, or state that their research efforts
have not yet advanced to the stage of utilizing the scientific applications
that our Discovery Manager offers.
As pharmacogenomics expands, we believe our products will play a key role in
both genetic analysis and clinical trial data gathering and processing. We also
expect to increase sales to contract research organizations and healthcare
providers. We intend to target agricultural biotechnology companies involved in
genomic research.
For the six months ended June 30, 2000, the customers listed above accounted
for all of our software license revenue. Of this amount, AstraZeneca accounted
for 32% of our total revenue, GlaxoWellcome accounted for 20% of our total
revenue, and each of Oxagen and Warner-Lambert accounted for 16% of our
revenue. We expect that these four customers will continue to account for a
high percentage of our total revenue for the immediate future.
Sales and Marketing
Direct Sales
We sell our enterprise-level product and services in North America and Western
Europe through a direct sales force to pharmaceutical and biotechnology
companies and academic institutions. Our direct sales force is divided into
three regions: U.S. East Coast, U.S. West Coast and Western Europe, based in
the United Kingdom. We combine an account
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manager with a field scientist, who together demonstrate the business and
scientific value of our product to our potential customers. As of September 20,
2000, we had seven individuals in our sales department, including two sales
directors, four account managers and our vice president of sales. We are
currently recruiting additional sales people.
Indirect Sales
We intend to augment our direct sales effort with indirect sales channels
established through collaborations. Indirect sales channels are expected to
give us access to sales forces that are much larger than our own. Through these
sales forces, we believe we can increase and accelerate our market penetration.
We believe the following types of indirect sales channels are viable for our
products:
. Distributors outside core territories. In markets where there are
insufficient sales opportunities to justify a direct presence, or barriers
to entry in the markets are high, we may establish distributor
relationships.
. Strategic industry collaborations. We have recently entered into a product
development and reseller agreement with Applied Biosystems to aid our
indirect sales efforts. We also intend to establish product development and
distribution alliances with other companies in the drug discovery and
development market that have strong market positions and technologies
complementary to ours. We also plan to add, in collaboration with some of
these companies, new modules or features to our products that work with
their technology and hardware.
. Consultants and systems integrators. We intend to establish a services
partnership program with consultants and systems integrators who provide
professional services to our targeted customer base. We believe consultants
and systems integrators are in a strong position to recommend our solutions
to their services customers.
Marketing
To support our sales force, our marketing team is focused on creating a
consistent, targeted message that increases awareness of our brand name and
solutions. We intend to expand our use of marketing programs such as print and
online advertising, direct mail and conference exhibits.
As a part of our marketing efforts, we provide our product and other support to
some of the following leading genomics research institutions at no cost to
them. We believe these institutions set the trends of how genomics research
will be conducted in the future. In addition, we believe that our relationship
with these institutions will result in graduates being trained users of
Discovery Manager and, therefore, potential customers. The following
institutions currently use Discovery Manager:
. Johns Hopkins University
. Princeton University
. University of Colorado
. University of Oxford Wellcome Trust Centre for Human Genetics
Competition
We face competition from other bioinformatics companies and specialized drug
discovery software companies. We believe that additional specialized software
companies will be formed to pursue this market opportunity. Competition could
also result from non-commercial software developed by academic institutions and
software developed by companies who sell access to proprietary genomic data.
Some of our competitors, including academic institutions and large genomics or
pharmaceutical companies, have substantially greater financial, marketing,
sales and support resources than we do. We also face competition from
pharmaceutical companies' own bioinformatics departments.
There are many companies describing bioinformatics as part of their strategy,
but a much smaller number who currently offer bioinformatics products or
databases commercially. Most of our commercial competitors offer sequence
analysis software products, which represents only a portion of the
functionality of our product. We believe that no other company has a
bioinformatics product for genomics that matches the functionality of Discovery
Manager.
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The market for software products and services to support the drug discovery
process is new and rapidly changing, and we believe it will become highly
competitive. We believe that the principal competitive factors affecting the
markets for our software and services include:
. breadth of functionality
. technological and scientific excellence
. timeliness of product introductions
. responsiveness to customer requirements
. customer relationships
. ease of use
We believe we compete favorably with respect to each of these factors due to
the ability of a wide variety of researchers to use Discovery Manager, the
input of leading genomics researchers in the development of Discovery Manager
and the frequent upgrades of our product.
Intellectual Property
We are the exclusive, worldwide licensee of the Genome Topographer technology
owned by Cold Spring Harbor Laboratory. Genome Topographer was co-developed by
our founder, President and Chief Scientist, Dr. Thomas G. Marr at Cold Spring
Harbor Laboratory under work supported, in part, by grants from the Department
of Energy and the National Institutes of Health. Genome Topographer is a
general purpose computer system useful for studying complex, genetic diseases
and serves as the intellectual property foundation of Discovery Manager. The
Genome Topographer technology includes the patented Chang/Marr algorithm, which
incorporates, either in hardware or software form, an algorithm for analyzing
genetic data. Our license with Cold Spring Harbor Laboratory grants us
exclusive, worldwide rights to the Chang/Marr Patent, as well as the exclusive
right to commercialize the complete set of Genome Topographer technology. Our
Discovery Manager product incorporates this licensed technology.
Failure to maintain the license agreement with Cold Spring Harbor Laboratory
could preclude future sales of Discovery Manager or delay or prevent the
introduction of new products. Even if we could identify and license or develop
non-infringing equivalent technology, which is far from certain, the cost and
delays of such a changeover in our base technology would likely cause material
harm to our business.
We cannot assure you that the Chang/Marr algorithm patent owned by Cold Spring
Harbor Laboratory will not be challenged, invalidated or circumvented or that
the rights created thereunder will provide a competitive advantage. In
addition, our competitors may apply for and obtain patents covering
technologies that are more effective than our technologies. This could render
our technologies or products obsolete or uncompetitive or prevent, limit or
interfere with our ability to make, use or sell our product either in the
United States or in international markets.
Our current product incorporates additional technologies that are the subject
of proprietary rights of others. We have obtained licenses for certain of these
technologies and may be required to obtain licenses for others. If needed, we
may not be able to obtain licenses for technology patented by others on
commercially reasonable terms, or at all. We also may not be able to develop
alternative approaches if we are unable to obtain necessary licenses. We cannot
assure you that our current and future licenses will be adequate for the
operation of our business. The failure to obtain necessary licenses or identify
and implement alternative approaches could have a material adverse effect on
our business, financial condition and results of operations.
We believe the source code for our proprietary software is protected both as a
trade secret and copyright work in the United States. However, effective
copyright and trade secret protection may not be available in every other
country in which our products are distributed.
Our policy is to enter into confidentiality agreements with our employees,
consultants and vendors, and we generally control access to and distribution of
our software, documentation and other proprietary information. Despite these
precautions, a third party might be able to copy or otherwise obtain and use
our products or technology without authorization. The steps taken by us to
protect our proprietary technology might be inadequate to prevent
misappropriation of our technology by third parties. In addition, third parties
might be able to develop similar technology independently. Either of these
events could significantly harm our business, operating results and financial
condition.
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Employees
As of September 20, 2000, we had 81 full-time employees, including 50 employees
primarily engaged in research and development, 12 in sales and marketing, eight
in scientific services and 11 in administration. None of our employees is
currently represented under collective bargaining agreements and we consider
our relations with our employees to be good.
Facilities
We lease a facility which provides us 38,000 square feet for our operations in
Boulder, Colorado. This facility serves as our headquarters and as the base for
our research and development and marketing and product support operations. We
believe that our current facilities will be adequate to support our operations
through 2001. In the event that additional space is needed, we believe that
additional or substitute space will be available on commercially reasonable
terms.
Legal Proceedings
We are not currently involved in any legal proceedings.
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Management
Executive Officers and Directors
The following table sets forth, as of September 20, 2000, certain information
concerning our executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Teresa W. Ayers ........ 47 Chief Executive Officer and Director
Thomas G. Marr, Ph.D.... 48 President, Chief Scientist and Director
Kenneth S. Rubin........ 35 Executive Vice President of Commercial Development
Daniel R. Hudspeth...... 37 Chief Financial Officer, Vice President of Finance, Treasurer
and Secretary
Michael W. Cohn......... 38 Vice President of Engineering
Chuck W. Philipp........ 39 Vice President of Marketing
Sean M. Ryan ........... 38 Vice President of Sales
James L. Rathmann....... 48 Chairman of the Board
Marvin H. Caruthers,
Ph.D................... 59 Director
Ralph E. Christoffersen,
Ph.D................... 62 Director
Arnold J. Levine, Ph.D.. 60 Director
Robert T. Nelsen........ 37 Director
</TABLE>
Teresa W. Ayers has served as our Chief Executive Officer since 1999 and as a
member of our board of directors since 1999. From 1997 to 1999, Ms. Ayers
served as the President, Chief Executive Officer and director of BioStar, Inc.,
a point-of-care diagnostics company. From 1995 until 1997, Ms. Ayers served as
BioStar's President and Chief Operating Officer and, from 1992 until 1995, as
BioStar's Vice President of Finance. Ms. Ayers received a B.B.A. from the
University of Georgia.
Thomas G. Marr, Ph.D. has served as our President and Chief Scientist and a
member of our board of directors since our inception. From 1997 to 1998, Dr.
Marr served as our Chief Executive Officer. From 1989 to 1997, Dr. Marr held
various positions at Cold Spring Harbor Laboratory. From 1989 to 1994, Dr. Marr
was a Senior Staff Investigator. From 1994 to 1997, Dr. Marr was a Senior
Scientist, head of the Structural Biology and Computational Section at the Cold
Spring Harbor Laboratory/National Cancer Institute-Cancer Center and head of
the Computational Molecular Biology and Genetics Department. Prior to 1989, Dr.
Marr was a Staff Scientist at Los Alamos National Laboratory. Dr. Marr has been
involved in the development of bioinformatics technology used in the Human
Genome Project since 1985, and has served on many peer review, policy and
standards committees related to the project. Dr. Marr received a Ph.D. in
Biology from New Mexico State University.
Kenneth S. Rubin has served as our Executive Vice President of Commercial
Development since January 2000. In addition, Mr. Rubin has served as a
consultant to us since 1997. From 1997 until 2000, Mr. Rubin served as the
Chief Operating Officer of Secant Technologies, Inc., a software products
company. From 1995 until 1997, Mr. Rubin served as the Director of Business
Development for IBM Corporation's North America Object Technology Practice. Mr.
Rubin received an M.S. in Computer Science from Stanford University.
Daniel R. Hudspeth has served as our Chief Financial Officer, Vice President of
Finance, Treasurer and Secretary since April 1999. From 1997 to 1999, Mr.
Hudspeth served as the Chief Financial Officer, Vice President of Finance,
Treasurer and Secretary of Communications Systems International, Inc., a
publicly-traded telecommunications company. From 1995 to 1997, Mr. Hudspeth
served as the Chief Financial Officer, Vice President of Finance, Treasurer and
Secretary of Wireless Telecom, Inc., a software developer and distributor of
wireless data telecommunications products. During 1995, Mr. Hudspeth served as
Vice President and Corporate Controller of CWE, Inc., a publicly-traded
computer retail company. Mr. Hudspeth has a BS/BA in Accounting from Colorado
State University. Mr. Hudspeth is a certified public accountant.
Michael W. Cohn has served as our Vice President of Engineering since September
2000. From 1998 to 2000, Mr. Cohn served as a Vice President of Product
Development for McKessonHBOC, a publicly-traded software development and drug
distribution company. From 1994 to 1998, Mr. Cohn served in a variety of
positions, including
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Vice President of Software Development for Access Health, a publicly-traded
healthcare software and services company that was acquired by McKessonHBOC.
From 1990 to 1994, Mr. Cohn served as the Vice President of Engineering for
Telephone Response Technologies, a software products company. Mr. Cohn received
an M.S. in Computer Science from the University of Idaho and an M.A. in
Economics from Claremont Graduate School.
Chuck W. Philipp has served as our Vice President of Marketing since May 2000.
From 1990 to 2000, Mr. Philipp served in a variety of management and executive-
level positions, including Vice President of Sales and Marketing at Colorado
MEDtech, an engineering and manufacturing services company for the healthcare
and biotechnology industries. From 1985 to 1990, Mr. Philipp served as an
Engineering Manager at Abbott Laboratories, Diagnostic Division. Mr. Philipp
received a B.S. in Computer Science from Texas A&M University.
Sean M. Ryan has served as our Vice President of Sales since August 2000. From
1986 to 2000, Mr. Ryan served in a variety of management and executive-level
positions at Idexx Laboratories, a diagnostic products company. Most recently
Mr. Ryan served as the Vice President-Worldwide Sales for Companion Animal
Group. Mr. Ryan received a B.S. in Biology from St. Lawrence University.
James L. Rathmann has served as the Chairman of our board of directors since
our inception and served as our Chief Executive Officer from inception to 1997.
Mr. Rathmann founded Falcon Technology Partners, L.P. in 1993, and is the
president of Falcon Technology Management Corporation and the general partner
of Falcon Technology Partners, L.P. Mr. Rathmann also serves on the board of
directors of Ciphergen Biosystems, Inc., a biological research systems company.
Mr. Rathmann received an M.S. in Computer Science from the University of
Wisconsin.
Marvin H. Caruthers, Ph.D. has served as a member of our board of directors
since 1997. From 1992 to 1995, Dr. Caruthers was the chairman of the Department
of Chemistry and Biochemistry at the University of Colorado. He has been a
professor at the University of Colorado since 1979. Dr. Caruthers is a director
of OXiGENE, Inc. and Array Biopharma, both of which are biotechnology
companies. Dr. Caruthers received a Ph.D. from Northwestern University.
Ralph E. Christoffersen, Ph.D. has served as a member of our board of directors
since 1997. Dr. Christoffersen has served as Chief Executive Officer, President
and a director of Ribozyme Pharmaceuticals, Inc. since 1992. Dr. Christoffersen
and Ribozyme Pharmaceuticals are defendants in a lawsuit alleging violations of
certain federal securities laws based upon an allegedly misleading announcement
made by Ribozyme in November 1999. From 1989 to 1992, Dr. Christoffersen was
Senior Vice President and Director of U.S. Research at SmithKline Beecham
Pharmaceuticals, a pharmaceutical company. From 1983 to 1989, he held senior
management positions in research at The Upjohn Company, a pharmaceutical
company. Prior to joining The Upjohn Company, Dr. Christoffersen served as a
Professor of Chemistry and Vice Chancellor for Academic Affairs at the
University of Kansas and as President of Colorado State University. He received
his Ph.D. in Physical Chemistry from Indiana University.
Arnold J. Levine, Ph.D. has served as a member of our board of directors since
1997. Dr. Levine is a cancer biologist and is President of Rockefeller
University. Previously, Dr. Levine was the Harry C. Wiess Professor of the Life
Sciences at Princeton University, where he founded Princeton's molecular
biology department during a 12-year tenure that saw the department grow to
include two research laboratories and 35 faculty members. Prior to his work at
Princeton, Dr. Levine was chairman at SUNY/Stony Brook School of Medicine. Dr.
Levine is also a director of PE Corporation and Baxter International, Inc.
Robert T. Nelsen has served as a member of our board of directors since 1997.
Since 1994, Mr. Nelsen has served as a senior principal of various venture
capital funds associated with ARCH Venture Partners, including ARCH Venture
Fund II, L.P., ARCH Venture Fund III, L.P. and ARCH Venture Fund IV, L.P. From
1987 to 1994, Mr. Nelsen was Senior Manager at ARCH Development Corporation, a
company affiliated with the University of Chicago, where he was responsible for
new company formation. He holds an M.B.A. from the University of Chicago.
Scientific Advisory Board
We benefit from consultation with prominent scientists active in fields related
to our technology. Each of the individuals serving on our scientific advisory
board has significant expertise in both the computational and biological
aspects of genomics and each has been involved in the Human Genome Project
since its inception.
Aravinda Chakravarti, Ph.D. is Professor of Genetics in the School of Medicine
at Case Western Reserve University. Dr. Chakravarti is a leading quantitative
geneticist, well known for his contributions in determining the multigenic
cause of congenital human birth defects.
37
<PAGE>
Uta Francke, M.D. is an Investigator at the Howard Hughes Medical Institute and
Professor of Genetics and Pediatrics at the Stanford University School of
Medicine. Dr. Francke is the current president of the American Society of Human
Genetics.
William R. Pearson, Ph.D. is Professor of Biochemistry at the University of
Virginia. Dr. Pearson created the FASTA package of sequence comparison
programs. FASTA is a worldwide standard for performing sequence comparison
searches.
Gary D. Stormo, Ph.D. is Professor of Molecular Biology at Washington
University Human Genome Center. Dr. Stormo's research has been in pattern
recognition algorithms for the identification of regulatory sequences in DNA
and for pathway analysis.
Board Composition
Upon the closing of the offering, in accordance with the terms of our restated
certificate of incorporation, the terms of office of the board of directors
will be divided into three classes:
. Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2001
. Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2002
. Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2003
Each class of directors will be determined by resolution of our board of
directors prior to the closing of the offering. At each annual meeting of
stockholders beginning with the 2001 annual meeting, the successors to
directors whose terms expire will be elected to serve from the time of election
and qualification until the third annual meeting following election and until
their successors have been elected.
Committees of the Board of Directors
Our audit committee consists of Dr. Caruthers, Dr. Christoffersen and Mr.
Nelsen. The audit committee reviews the selection of independent auditors, the
results and scope of the audit and other services provided by our independent
auditors and evaluates our internal accounting procedures.
Our compensation committee consists of Dr. Caruthers, and Messrs. Nelsen and
Rathmann. The compensation committee reviews and approves compensation and
benefits for our executive officers. The compensation committee also
administers our compensation and stock plans and makes recommendations to the
board of directors regarding such matters.
Director Compensation
Dr. Christoffersen, an outside director, receives $1,000 for each board meeting
attended. Other than Dr. Christoffersen, no other directors receive
compensation for their services as directors. We reimburse our outside
directors, upon request, for reasonable out-of-pocket expenses incurred in
attending board and committee meetings. In addition, all directors are eligible
to participate in our 2000 Equity Incentive Plan.
Compensation Committee Interlocks and Insider Participation
During 1999, Messrs. Caruthers, Nelsen and Rathmann served as members of our
compensation committee. None of our executive officers serves as a member of
the board of directors or compensation committee of any other entity that has
one or more executive officers serving as a member of our board of directors or
compensation committee.
38
<PAGE>
Executive Compensation
Summary Compensation Table (1)(2)
The following table sets forth all compensation awarded to, earned by or paid
to our chief executive officer and our four highest paid executive officers for
services rendered in all capacities to us during 1999. We refer to these
executive officers as our "named executive officers" in other parts of this
prospectus.
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
--------------- ---------------------
Name and Principal Securities Underlying All Other
Position Salary Bonus Options Compensation
------------------ -------- ------ --------------------- ------------
<S> <C> <C> <C> <C>
Teresa W. Ayers(1),
Chief Executive Officer. $102,015 $ -- 366,699 $ --
Thomas G. Marr,
President and Chief
Scientist............... 225,000 -- 66,699 4,050(2)
Daniel R. Hudspeth(1),
Vice President of
Finance and Chief
Financial Officer....... 94,673 -- 33,366 19,423(2)
James E. Clemens,
Former Vice President of
Engineering............. 162,415 60,000 33 --
Susan E. Strong,
Former Vice President of
Sales and Marketing..... 164,968 -- 8,366 --
</TABLE>
------------------
(1) We hired Ms. Ayers in July 1999 and Mr. Hudspeth in April 1999.
(2) Reimbursement of moving expenses.
1999 Option Grants
The following table sets forth information regarding options granted to each of
our named executive officers during 1999.
The options in this table were granted under our 2000 Equity Incentive Plan,
have 10-year terms, will terminate before their expiration dates if the
optionee leaves his or her employment with us, and unless otherwise noted, vest
over a period of four years. We have not granted any stock appreciation rights.
The percentages shown below of options granted is based on an aggregate of
697,397 options we granted in 1999.
<TABLE>
<CAPTION>
Potential Realizable Value at
Number of Percent of Assumed Annual Rates of
Securities Total Options Exercise Stock Price Appreciation for
Underlying Granted to Price Option Term
Options Employees in (Per ------------------------------
Name Granted 1999 Share) Expiration Date 5% 10%
---- ---------- ------------- -------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Teresa W. Ayers......... 366,666(1) 52.6% $0.18 6/21/09 $ 11,281,945 $ 18,003,706
33(2) * 0.18 12/1/09 1,015 1,620
Thomas G. Marr.......... 66,666(2) 9.6% 0.18 6/21/09 2,051,246 3,273,374
33(2) * 0.18 12/1/09 1,015 1,620
Daniel R. Hudspeth...... 33,333(3) 4.8% 0.18 4/5/09 1,025,623 1,636,687
33(2) * 0.18 12/1/09 1,015 1,620
James E. Clemens........ 33(2) * 0.18 12/1/09 1,015 1,620
Susan E. Strong......... 8,333(4) 1.2% 0.18 4/15/09 256,398 409,160
33(2) * 0.18 12/7/09 1,015 1,620
</TABLE>
------------------
* Less than 1%.
(1) 25% of the options vest on June 21,2000. The remaining 75% vest in 36 equal
monthly installments thereafter.
(2) 100% vested on the grant date.
(3) 25% of the options vest on April 6, 2000. The remaining 75% vest in 36
equal monthly installments thereafter.
(4) 25% of the options vest on December 8, 1999. The remaining 75% vest in 36
equal monthly installments thereafter.
39
<PAGE>
The potential realizable value represents amounts, net of exercise price before
taxes, that may be realized upon exercise of the options immediately prior to
the expiration of their terms assuming appreciation of 5% and 10% over the
option term. Assuming 5% and 10% annual appreciation, these values are
calculated based on rules promulgated by the Securities and Exchange Commission
and the initial public offering price of $19.00 per share and do not reflect
our estimate of future stock price growth. The actual value realized may be
greater or less than the potential realizable value set forth in the table.
1999 Option Values
The following table sets forth information concerning the number and value of
exercisable and unexercisable options held by each of the named executive
officers as of December 31, 1999. The value of unexercised, in-the-money
options at December 31, 1999 represents an amount equal to the difference
between the initial public offering price of $19.00 per share and the option
exercise price, multiplied by the number of unexercised, in-the-money options.
An option is in-the-money if the fair market value of the underlying shares
exceeds the exercise price of the options.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Shares Options at December 31, 1999 December 31, 1999
Acquired on Value -------------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Teresa W. Ayers......... -- -- 33 366,666 $ 621 $6,900,654
Thomas G. Marr.......... -- -- 122,254 27,778 2,300,820 522,782
Daniel R. Hudspeth...... -- -- 33 33,333 621 627,327
James E. Clemens........ -- -- 16,351 25,348 307,726 477,049
Susan E. Strong......... -- -- 2,116 -- 39,823 --
</TABLE>
Employee Benefit Plans
401(k) Plan
Our employees are eligible to participate in our 401(k) Plan. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the lesser of 15% of eligible compensation or the statutorily prescribed annual
limit, which is $10,500 in 2000. Employees may contribute this amount on a pre-
tax basis to the 401(k) Plan. Employees direct the investment of the assets of
the 401(k) Plan in up to seven different investment funds. The 401(k) Plan is
intended to qualify under Section 401 of the Internal Revenue Code so that
contributions by employees to the 401(k) Plan, and income earned on plan
contributions are not taxable to employees until withdrawn. An employee becomes
eligible for the matching contribution only if he or she makes a pretax
contribution. We may make discretionary matching contributions to the 401(k)
Plan. Additionally, we may make annual discretionary profit sharing
contributions in amounts to be determined annually by the board of directors.
Since the 401(k) Plan's inception, we have made no matching or profit sharing
contributions.
2000 Equity Incentive Plan
Our 2000 Equity Incentive Plan was originally adopted as the 1996 Stock Option
Plan and its amendment and restatement was adopted by our board of directors on
March 13, 2000. We expect to submit the plan for approval to our stockholders
prior to the closing of the offering. There is currently an aggregate of
5,000,000 shares of common stock authorized for issuance under the plan. The
plan will terminate on March 13, 2010 unless sooner terminated by the board of
directors or committee. As of September 20, 2000 options to purchase 2,059,619
shares at a weighted average price of $1.53 per share were outstanding, and
1,958,682 shares remained available for future stock awards under our plan.
Awards issued under our plan prior to its amendment and restatement as the 2000
Equity Incentive Plan will be governed by the terms of the plan and applicable
option agreements in effect prior to such amendment and restatement. Prior to
the amendment and restatement, the plan provided only for grants of stock
options and not for other types of awards.
The plan provides for the grant of incentive stock options, as defined under
the Code, and nonstatutory stock options, restricted stock purchase awards and
stock bonuses. Our employees are eligible to receive incentive stock options
under our plan and our employees, directors and consultants are eligible to
receive nonstatutory stock options, restricted stock purchase awards and stock
bonuses. Our board or a committee appointed by the board administers the
40
<PAGE>
plan, which determines recipients and types of awards to be granted, including
the exercise price, number of shares and the exercisability thereof. The plan
also permits our board of directors to allow the early exercise of option
grants. Shares issued under such option grants carry restrictions which lapse
over the vesting period of the original option grant.
The terms of options granted under the plan may not exceed ten years. The
board, or committee, determines the exercise price of options granted under the
plan. The exercise price for incentive stock options cannot be less than 100%
of the fair market value of the common stock on the date of the option grant.
The exercise price for nonstatutory stock options cannot be less than 85% of
the fair market value of the common stock on the date of the option grant.
Options granted under the plan typically vest over four years. Generally, the
optionee may not transfer a stock option other than by will or the laws of
descent or distribution unless the optionee holds a nonstatutory stock option
that provides for transfer in the stock option agreement. However, an optionee
may designate a beneficiary who may exercise the option following the
optionee's death. An optionee whose service relationship with us ceases for any
reason may exercise vested options for the term provided in the option
agreement, which is generally one month.
No incentive stock option may be granted to any person who, at the time of the
grant, owns or is deemed to own stock possessing more than 10% of our total
combined voting power unless the option exercise price is at least 110% of the
fair market value of the stock subject to the option on the date of grant and
the term of the option does not exceed five years from the date of grant. In
addition, the aggregate fair market value, determined at the time of grant, of
the shares of common stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year may not
exceed $100,000.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised revert and become available for the grant of
awards under the stock plan. The board or committee may reprice outstanding
options or offer optionees the opportunity to replace outstanding options with
new options for the same or a different number of shares.
The board or committee determines the terms of restricted stock purchase awards
granted under the plan. Under restricted stock purchase awards, we have an
option to repurchase unvested shares upon termination of service. The price of
a restricted stock purchase award cannot be less than 85% of the fair market
value of the stock subject to the award on the date of grant. Our board or
committee may award stock bonuses in consideration of past services without a
purchase payment. Restricted stock purchase awards under the plan are generally
non-transferable, although the applicable award agreement may permit some
transfers. Transfers other than by will or the laws of descent and distribution
are restricted so long as the stock remains subject to the agreement.
Upon a merger, consolidation, reorganization, stock dividend, stock split or
other change in corporate structure affecting the number of issued shares of
our common stock, our board or committee may make proportionate adjustments to
the outstanding stock awards, including the class, number of shares and price
per share of options granted under the plan.
Our plan provides that if we dissolve, liquidate or sell substantially all of
our assets, outstanding stock awards will terminate immediately prior to that
event. In addition, upon our merger with or into another corporation or a sale
of substantially all of our assets, each option or right shall be assumed or an
equivalent option or right will be substituted by the successor corporation. If
the outstanding options or awards are not assumed or substituted, the vesting
of options or awards will be accelerated.
Employment Agreements
Teresa W. Ayers
On March 15, 2000, we entered into an employment agreement with Teresa W.
Ayers, our Chief Executive Officer. The agreement provides for an annual base
salary of $225,000, which will be reviewed at least annually and increased at
the discretion of the board of directors or compensation committee. Ms. Ayers
was previously granted options to purchase 700,033 shares of our common stock,
subject to the terms and conditions set forth in the stock option agreements
attached to her employment agreement.
Either of us can terminate Ms. Ayers' employment at any time. However, if we
terminate Ms. Ayers' employment without just cause or if she resigns for good
reason, she will be entitled to receive all or part of her annual salary
41
<PAGE>
depending on how long after the effective date of the employment agreement the
termination or resignation occurs. Upon termination of her employment for any
reason, and at our discretion, Ms. Ayers agreed to enter into a consulting
arrangement with us for a period of up to one year.
Ms. Ayers' employment agreement contains a covenant not to compete which
prohibits her, during her employment and for one year after the termination of
employment with us, from engaging in any activities in competition with us,
from accepting employment or establishing a business relationship with our
competitors, other than those in which she is a passive investor. In addition,
Ms. Ayers' employment agreement contains a non-solicitation provision which
prohibits, during her employment and for one year after the termination of
employment with us, from hiring or soliciting any of our employees or
soliciting our clients, investors, independent contractors and other third
parties to negatively alter their relationship with us.
Thomas G. Marr Ph.D.
On March 15, 2000, we entered into an employment agreement with Thomas G. Marr
Ph.D., our President and Chief Scientist. The agreement provides for an annual
base salary of $225,000, which will be reviewed at least annually and increased
at the discretion of the board of directors or compensation committee. Dr. Marr
previously purchased 360,000 shares of the Company's stock for $1,080 pursuant
to the stock acquisition agreement attached to his employment agreement. In
addition, Dr. Marr was previously granted options to purchase 483,366 shares of
our common stock, subject to the terms and conditions set forth in the stock
option agreements attached to his employment agreement.
Either of us can terminate Dr. Marr's employment at any time. However, if we
terminate Dr. Marr's employment without just cause or if he resigns for good
reason, he will be entitled to receive all or part of his annual salary
depending on how long after the effective date of the employment agreement the
termination or resignation occurs. Upon termination of his employment for any
reason, and at our discretion, Dr. Marr agreed to enter into a consulting
arrangement with us for a period of up to one year.
Dr. Marr's employment agreement contains a covenant not to compete which
prohibits him, during his employment and for one year after the termination of
employment with us, from engaging in any activities in competition with us,
from accepting employment or establishing a business relationship with our
competitors, other than those in which he is a passive investor. In addition,
Dr. Marr's employment agreement contains a non-solicitation provision which
prohibits, during his employment and for one year after the termination of
employment with us, from hiring or soliciting any of our employees or
soliciting our clients, investors, independent contractors or other third
parties to negatively alter their relationship with us.
42
<PAGE>
Principal Stockholders
The following table sets forth information with respect to beneficial ownership
of our common stock as of September 20, 2000 for:
. each person or group of affiliated persons known to us to beneficially own
more than five percent of our common stock
. each of our directors
. each of our named executive officers and
. all of our current directors and executive officers as a group
Beneficial ownership is determined according to the rules of the Securities and
Exchange Commission and generally means that a person has beneficial ownership
of a security if he or she possesses sole or shared voting or investment power
over that security, and includes options and warrants that are currently
exercisable or exercisable within 60 days. Each director, officer or 5% or more
stockholder, as the case may be, has furnished us with information with respect
to beneficial ownership. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, based on the information
each of them has given to us, have sole investment and voting power with
respect to their shares, except where community property laws may apply.
This table lists applicable percentage ownership based on 15,989,363 shares of
common stock outstanding as of September 20, 2000 including shares of preferred
stock on an as-converted basis, and excluding shares issuable under warrants
which expire upon the closing of the offering and also lists applicable
percentage ownership based on 22,429,363 shares of common stock outstanding
after completion of the offering. Options and warrants to purchase shares of
our common stock that are exercisable within 60 days of September 20, 2000, are
deemed to be beneficially owned by the persons holding these options and
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. Shares underlying options and warrants that are deemed
beneficially owned are listed in this table separately in the column labeled
"Shares Subject to Options and Warrants." These shares are included in the
number of shares listed in the column labeled "Total Number."
Unless otherwise indicated, the address of each person or entity named below is
c/o Genomica Corporation, 1745 38th Street, Boulder, CO 80301.
<TABLE>
<CAPTION>
Shares Beneficially Owned
---------------------------------------------
Shares Subject to Percent Percent
Total Options and Before After
Name of Beneficial Owner Number Warrants Offering Offering
------------------------ --------- ----------------- -------- --------
<S> <C> <C> <C> <C>
The Kaufmann Fund, Inc. (1)...... 3,989,272 -- 24.9% 17.8%
Falcon Technology Partners,
L.P. (2)........................ 3,035,987 66,673 18.9 13.5
INVESCO Global Health Sciences
Fund (3)........................ 2,599,597 25,173 16.2 11.6
ARCH Venture Fund III, L.P. (4).. 1,727,180 16,493 10.8 7.7
Boulder Ventures Limited (5)..... 1,025,805 1,736 6.4 4.6
Teresa W. Ayers.................. 455,587 88,921 2.8 2.0
Thomas G. Marr................... 598,920 88,921 3.7 2.7
Daniel R. Hudspeth............... 166,699 33 1.0 *
James E. Clemens ................ 74,724 33 * *
Susan E. Strong.................. 31,977 -- * *
Marvin H. Caruthers (6).......... 117,348 868 * *
Ralph E. Christoffersen.......... 15,416 15,416 * *
Arnold J. Levine................. 15,416 15,416 * *
Robert T. Nelsen (7)............. 1,727,180 16,493 10.8 7.7
James L. Rathmann (8)............ 3,075,987 66,673 19.2 13.7
All current directors and
executive officers as a group
(12 persons) (9)................ 6,198,386 292,741 38.1 27.3
</TABLE>
------------------
* Represents beneficial ownership of less than 1%.
(1) The address of The Kaufmann Fund, Inc. is 140 East 45th Street, 43rd
Floor, New York, New York 10017.
43
<PAGE>
(2) The address of Falcon Technology Partners, L.P. is 600 Dorset Road, Devon,
Pennsylvania 19333.
(3) The address of INVESCO Global Health Sciences Fund is 7800 East Union
Avenue, Mail Stop 1100, Denver, Colorado 80237.
(4) The address of ARCH Venture Fund III, L.P. is 8725 West Higgins Road,
Suite 290, Chicago, Illinois 60631.
(5) Consists of 301,731 shares held by Boulder Ventures, L.P., 629,944 shares
held by Boulder Ventures II, L.P. and 94,130 shares held by Boulder
Ventures II (Annex), L.P. The address of each entity is 1941 Pearl Street,
Suite 200, Boulder, Colorado 80302.
(6) Consists solely of shares held by The Caruthers Family, L.L.C., of which
Dr. Caruthers is the Manager.
(7) Consists solely of shares held by ARCH Venture Fund III, L.P., of whose
General Partner Mr. Nelsen is the Managing Director. See Note 4 above. Mr.
Nelsen disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest herein.
(8) Includes shares held by Falcon Technology Partners, L.P., of which Mr.
Rathmann is the General Partner. See Note 2 above.
(9) Includes 208,707 shares of common stock issuable upon exercise of stock
options and 84,034 shares of common stock issuable upon exercise of
preferred stock warrants. Also, see Notes 6 through 8 above.
44
<PAGE>
Related-Party Transactions
Financings
The following persons or entities purchased securities in the amounts set
forth, on an as-converted to common stock basis, in the chart below. We sold
shares of our common stock between March 1996 and April 2000. We sold shares
of our Series A preferred stock between March 1996 and October 1997. We sold
shares of our Series B preferred stock between December 1998 and February
1999. We sold shares of our Series C preferred stock in March 2000.
<TABLE>
<CAPTION>
Series A Series B Series C
Purchaser Common Stock Financing Financing Financing Warrants
--------- ------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Principal Stockholders
The Kaufmann Fund, Inc.. -- -- 3,240,740 748,532 --
Falcon Technology
Partners, L.P.......... -- 1,660,100 864,770 444,444 66,673
INVESCO Global Health
Sciences Fund.......... -- 830,025 633,288 1,111,111 25,173
ARCH Venture Fund III,
L.P.................... -- 691,687 574,556 444,444 16,493
Entities affiliated with
Boulder Ventures
Limited ............... -- 276,675 486,283 261,111 1,736
Caruthers Family L.L.C.. -- 69,169 36,200 11,111 868
Executive Officers
Teresa W. Ayers......... 366,666 -- -- -- --
Thomas G. Marr.......... 509,999 -- -- -- --
James E. Clemens........ 108,332 -- -- -- --
Susan E. Strong......... 31,977 -- -- -- --
Daniel R. Hudspeth...... 166,666 -- -- -- --
James L. Rathmann....... 40,000 -- -- -- --
Kenneth S. Rubin........ 21,664 -- -- -- --
Other Transaction
Information
Price per share......... $0.003-$0.75 $ 1.80 $ 2.16 $ 4.50 $1.81-$2.16
</TABLE>
Investor Rights Agreement
We have entered into a Second Amended and Restated Investors' Rights Agreement
with the purchasers of our common and preferred stock pursuant to which these
and other stockholders will have registration rights with respect to their
shares of common stock following this offering. For a description of these
registration rights, see "Description of Capital Stock--Registration Rights."
Employment Agreements
We have entered into employment agreements with certain of our executive
officers. See "Management--Employment Agreements."
Options Grants
On January 27, 2000, we granted options to purchase shares of our common stock
to the following executive officers:
. 333,333 to Teresa W. Ayers, our Chief Executive Officer
. 333,333 to Thomas G. Marr, Ph.D., our President and Chief Scientist
. 416,666 to Kenneth S. Rubin, our Executive Vice President of Commercial
Development
. 175,000 to Daniel R. Hudspeth, our Chief Financial Officer, Vice President
of Finance, Treasurer and Secretary and
. 141,666 to James E. Clemens, our former Vice President of Engineering
45
<PAGE>
The exercise price for each of these option grants is $0.75 per share and each
of these options vest over a period of four to five years.
On May 30, 2000, we granted an option to purchase 66,666 shares of our common
stock at an exercise price of $4.50 per share to Chuck W. Philipp, our Vice
President of Marketing. The option vests over a period of four years.
On August 1, 2000, we granted an option to purchase 200,000 shares of our
common stock at an exercise price of $4.50 per share to Sean M. Ryan, our Vice
President of Sales. The option vests over a period of four years.
On September 18, 2000, we granted an option to purchase 66,666 shares of our
common stock at an exercise price of $10.02 per share to Michael W. Cohn, our
Vice President of Engineering. The option vests over a period of four years.
Indemnification
We have entered into, or prior to the offering will enter into, indemnity
agreements with our directors and executive officers for the indemnification
and advance payment of expenses to these persons to the fullest extent
permitted by law. See "Description of Capital Stock--Limitation of Liability
and Indemnification."
We believe that each of the transactions described above was carried out on
terms that were no less favorable to us than those that would have been
obtained from unaffiliated third parties. Any future transactions between us
and any of our directors, officers or principal stockholders will be on terms
no less favorable to us than could be obtained from unaffiliated third parties
and will be approved by a majority of the independent and disinterested members
of the board of directors.
46
<PAGE>
Description of Capital Stock
In accordance with our restated certificate of incorporation, which will become
effective upon the closing of the offering, we may issue up to 50,000,000
shares of common stock, par value $0.001 per share, and 5,000,000 shares of
preferred stock, par value $0.001 per share. As of September 20, 2000, there
were 1,894,946 shares of common stock outstanding, and 42,283,269 shares of
preferred stock outstanding.
We qualify the description by referring to the provision of applicable law and
to our restated certificate of incorporation and our amended and restated
bylaws, which will become effective upon the closing the offering, filed as
exhibits to the registration statement of which this prospectus is a part.
Common Stock
As of September 20, 2000, and assuming conversion of all outstanding preferred
stock into common stock upon the closing of the offering, there were
outstanding 15,989,363 shares of common stock held of record by 77
stockholders. Each share of common stock entitles the holder to one vote on all
matters submitted to a vote of stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common
stock are entitled to receive ratably the dividends, if any, declared from time
to time by the board of directors out of legally available funds. In the event
of our liquidation, dissolution or winding up, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, conversion, subscription or other
rights. There are no redemption or sinking fund provisions applicable to the
common stock.
Preferred Stock
As of September 20, 2000, assuming the closing of the offering, all outstanding
shares of preferred stock would have been converted into 14,094,417 shares of
common stock. See Note 5 to financial statements for a description of the
currently outstanding preferred stock. Following the conversion, our restated
certificate of incorporation will be amended and restated to delete all
references to such shares of preferred stock. The restated certificate of
incorporation gives the board of directors the authority, without further
action by stockholders, to issue up to five million shares of preferred stock
in one or more series and to fix the rights, preferences, privileges,
qualifications and restrictions granted to or imposed upon such preferred
stock, including dividend rights, conversion rights, voting rights, rights and
terms of redemption, liquidation preference and sinking fund terms, any or all
of which may be greater than the rights of the common stock. The issuance of
preferred stock could:
. adversely affect the voting power of holders of common stock and reduce the
likelihood that such holders will receive dividend payments and payments
upon liquidation
. decrease the market price of our common stock
. delay, deter or prevent a change in our control
We have no present plans to issue any shares of preferred stock.
Warrants
In connection with the private placement of our Series A preferred stock, we
issued a warrant to purchase 124,502 shares of Series A preferred stock at an
exercise price of $0.60 per share, which will become exercisable for 41,500
shares of common stock upon the closing of the offering, to Falcon Technology
Partners, L.P. which expires upon the closing of this initial public offering,
and a warrant to purchase 30,000 shares of Series A preferred stock at an
exercise price of $0.60 per share, which will become exercisable for 10,000
shares of common stock upon the closing of the offering, issued to Silicon
Valley Bank, which expires on September 9, 2004.
We have outstanding warrants to purchase an aggregate of 208,331 shares of
Series B preferred stock at an exercise price of $0.72 per share, which will
become exercisable for 69,443 shares of common stock upon the closing of the
offering, issued to certain principal stockholders, which expire on December
16, 2003.
We have outstanding warrants to purchase an aggregate of 219,443 shares of
common stock at an exercise price of $2.16 per share issued to Punk, Ziegel &
Company L.P., which expire on the closing of this initial public offering.
47
<PAGE>
The exercise price of each of our outstanding warrants is subject to customary
adjustments for stock splits, stock dividends or subdivisions. Additionally,
the warrants are subject to customary adjustments upon a sale of all or
substantially all of our assets or upon our reorganization, reclassification,
consolidation or merger. The exercise prices of the warrants are also subject
to adjustment in the event of our subsequent issuance of common stock at a
price per share less than their respective exercise prices. None of our
warrants confer upon the holder any voting or any other rights of our
stockholders, and the shares issuable upon exercise of the warrants carry
registration rights. See "Description of Capital Stock--Registration Rights."
Registration Rights
Under agreements between us and some of our investors, investors holding
15,530,349 shares of our common stock, shares of our common stock issued or
issuable upon conversion of our outstanding preferred stock and upon exercise
of outstanding warrants to purchase preferred and common stock have
registration rights pertaining to the securities they hold. After December 11,
2000, we may be required to prepare and file a registration statement under the
Securities Act if requested to do so by the holders of at least a majority of
the registrable securities, so long as the aggregate offering price is at least
$15,000,000 and the shares to be registered constitute at least 20% of the
outstanding shares of the Company's common stock. We are required to use our
best efforts to effect such registration. We are not obligated to effect more
than one such registration. If we propose to register any of our securities
under the Securities Act for our own account or the account of any of our
stockholders other than these holders of registrable securities, the holders of
registrable securities are entitled to include registrable securities in the
registration, subject to the underwriters' right to limit the number of shares
included. The holders of registrable securities also may require us to file
additional registration statements on Form S-3 if requested to do so by the
holders of at least 25% of the registrable securities. We are not obligated to
effect more than three of such registrations on Form S-3.
We are required to bear all costs incurred in connection with any such
registrations. The foregoing registration rights could result in substantial
future expenses for us and adversely affect any future public offerings of our
equity securities.
Anti-Takeover Provisions
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales or other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years, did own,
15% or more of the corporation's voting stock. The statute could have the
effect of delaying, deferring or preventing a change in our control.
Certificate of Incorporation and Bylaw Provisions
Our certificate of incorporation, which will become effective shortly following
the closing of the offering, provides that our board of directors will be
divided into three classes of directors, with each class serving a staggered
three-year term. The classification system of electing directors may tend to
discourage a third-party from making a tender offer or otherwise attempting to
obtain control of us and may maintain the composition of our current board of
directors, as the classification of the board of directors generally increases
the difficulty of replacing a majority of directors. Our certificate of
incorporation provides that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing. In addition,
our bylaws provide that special meetings of our stockholders may be called only
by the chairman of the board, our chief executive officer, or by the board of
directors pursuant to a resolution adopted by a majority of the total number of
authorized directors.
Our certificate of incorporation also specifies that the authorized number of
directors may be changed only by resolution of the board of directors and does
not include a provision for cumulative voting for directors. Under
48
<PAGE>
cumulative voting, a minority stockholder holding a sufficient percentage of a
class of shares may be able to ensure the election of one or more directors.
These and other provisions contained in our certificate of incorporation and
bylaws could delay or discourage certain types of transactions involving an
actual or potential change in our control or change in our management,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current prices, and may limit the ability of
stockholders to remove current management or approve transactions that
stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
Limitation of Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. In addition, our bylaws require us to
indemnify our directors and officers, and allow us to indemnify our other
employees and agents, the fullest extent permitted by law.
We have entered into, or prior to the offering will enter into, indemnity
agreements with our directors and executive officers for the indemnification
and advancement of expenses to these persons. We also intend to enter into
these agreements with our future directors and executive officers. We believe
that these provisions and agreements are necessary to attract and retain
qualified directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, executive officer, employee or agent where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, executive officers or persons controlling our company
pursuant to the foregoing provisions, we have been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Transfer Agent and Registrar
We have appointed Computershare Trust Company, Inc. to serve as the transfer
agent and registrar for the common stock.
Listing
Our common stock has been approved for listing on the Nasdaq National Market
under the trading symbol "GNOM".
49
<PAGE>
Shares Eligible for Future Sale
When the offering is completed, we will have a total of 22,435,684 shares of
common stock outstanding. The 6,440,000 shares offered by this prospectus will
be freely tradeable unless they are purchased by our "affiliates," as defined
in Rule 144 under the Securities Act of 1933. Shares purchased by affiliates
may generally only be sold pursuant to an effective registration statement
under the Securities Act or in compliance with Rule 144. The remaining
15,995,684 shares are "restricted," which means they were originally sold in
offerings that were not subject to a registration statement filed with the
Securities and Exchange Commission. These restricted shares may be resold only
through registration under the Securities Act or under an available exemption
from registration, such as provided through Rule 144.
Rule 144
Generally, Rule 144 as currently in effect provides that, beginning 90 days
after the first date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
. one percent of the number of shares of common stock then outstanding, which
based on the shares currently outstanding, will equal approximately 224,357
shares or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of the
notice on Form 144 with respect to the sale
Rule 144 provides limitation as the manner of sales and imposes requirements
as to notice and the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, may sell his or her shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted,
including by a lock-up agreement, a person who has been a non-affiliate for at
least two years may sell his or her shares in the open market.
One hundred eighty days after the date of this prospectus, 14,806,704 shares
of our common stock will be eligible for sale under Rule 144, including
2,465,292 shares under Rule 144(k), and 888,980 will be eligible for sale
under Rule 701. The remaining shares will be eligible for sale within 180 days
thereafter.
Rule 701
Rule 701 permits any of our employees, officers, directors or consultants who
purchased their shares under a compensatory stock or option plan or other
written agreement prior to the effective date of this offering to sell such
shares under Rule 144 without complying with the holding period, public
information, volume limitation or notice requirement of Rule 144. Holders of
Rule 701 shares may not sell their Rule 701 shares until 90 days after the
date of this prospectus. However, substantially all shares of our common stock
issued under Rule 701 are subject to the lock-up agreements described below.
Registration Rights
The holders of 15,189,963 shares of common stock and of warrants exercisable
into 340,386 shares of the common stock will be entitled to certain rights
with respect to the registration of these shares under the Securities Act.
After these shares are registered, they will be freely tradable.
Lock-Up Agreements
All of our stockholders have entered into lock-up agreements with us
prohibiting them from offering, selling, pledging or otherwise disposing of
their shares for a period of 180 days after the date of this prospectus. In
addition, our directors, officers and other stockholders who together own
15,923,627 shares of common stock have agreed to similar lock-up agreements
with the underwriters prohibiting them from offering, selling, pledging or
otherwise disposing of these shares for the same 180-day period. This
generally means that the stockholders cannot sell these shares during the 180
days following the date of this prospectus unless permitted by the
underwriters.
50
<PAGE>
Plan of Distribution
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., Dain Rauscher Incorporated and Prudential
Securities Incorporated are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
CIBC WORLD MARKETS CORP..................................... 2,907,500
Prudential Securities Incorporated.......................... 1,453,750
Dain Rauscher Incorporated.................................. 1,453,750
CHASE SECURITIES, INC....................................... 75,000
Deutsche Bank Securities Inc................................ 75,000
SG Cowen Securities Corporation............................. 75,000
The Chapman Company......................................... 40,000
Dominick & Dominick LLC..................................... 40,000
Fahnestock & Co. Inc........................................ 40,000
J.J.B. Hilliard, W.L. Lyons, Inc............................ 40,000
Josephthal & Co. Inc........................................ 40,000
Legg Mason Wood Walker, Incorporated........................ 40,000
Oscar Gruss & Son Incorporated.............................. 40,000
Punk, Ziegel & Company, L.P................................. 40,000
Sanders Morris Harris....................................... 40,000
Tucker Anthony Incorporated................................. 40,000
---------
Total..................................................... 6,440,000
=========
</TABLE>
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 shares should be ready for delivery to investors on or about October 4,
2000 against payment in immediately available funds. 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
other securities dealers at such price less a concession of $0.26 per share.
The underwriters may also allow, and such dealers may reallow, a concession not
in excess of $0.10 per share to other dealers. After the shares are released
for sale to the public, the representatives may generally change the offering
price and other selling terms, but no change in price shall change the amount
of proceeds we will receive, as set forth on the cover page of this prospectus.
We have granted the underwriters an over-allotment option. This option, which
is exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 966,000 additional shares from us to
cover over-allotments. If the underwriters exercise all or part of this option,
they will purchase shares covered by the option at the initial public offering
price that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will
be $140.7 million and the net proceeds to us will be $129.6 million. The
underwriters have severally agreed that, to the extent the over-allotment
option is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
In connection with the offering, the underwriters may make short sales of our
common stock and may purchase our stock on the open market to cover positions
covered 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
51
<PAGE>
made in an amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering. The underwriters may close out any
covered short position by either exercising their over-allotment option or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. "Naked" short sales are sales in excess of the over-allotment
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 shares in the open market after pricing that could adversely
affect investors who purchase in the offering. 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 our common
stock or preventing or retarding a decline in the market price or our common
stock. As a result, the price of our common stock may be higher than the price
that might otherwise exist in the open market.
The following table provides information regarding the amount of the discount
to be paid to the underwriters by us.
<TABLE>
<CAPTION>
Total without Total with Full
Exercise of Over- Exercise of Over-
Per Share Allotment Option Allotment Option
--------- ----------------- -----------------
<S> <C> <C> <C>
Genomica....................... $1.33 $8,565,200 $9,849,980
</TABLE>
We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $1,300,000.
We have agreed to indemnify the underwriters against certain civil and other
liabilities relating to this offering as specified in the underwriting
agreement, including liabilities under the Securities Act of 1933.
We, our officers and directors and some other stockholders have agreed to a
180-day "lock-up" with respect to 15,923,627 shares of common stock and other
Genomica securities that they beneficially own, including securities that are
convertible into shares of common stock and securities that are exchangeable or
exercisable for shares of common stock. This means that, subject to certain
exceptions, for a period of 180 days following the date of this prospectus, we
and such persons may not offer, sell, pledge or otherwise dispose of these
Genomica securities without the prior written consent of CIBC World Markets
Corp.
Because of its affiliation with an NASD member who is participating in the
offering, 288,887 of the shares of common stock owned by Punk, Ziegel & Company
L.P. (which includes 219,443 shares to be issued immediately prior to the
closing of the offering pursuant to common stock warrants held by Punk, Ziegel
& Company L.P.), are subject to a 90-day "lock-up" under which this stockholder
has agreed not to sell its common stock for ninety (90) days following the
effective date of the offering except as otherwise permitted by the National
Association of Securities Dealers, Inc. Conduct Rule 2710(c)(7)(C).
In addition, because of its affiliation with an NASD member who is
participating in the offering, 66,726 of the shares of common stock owned by
Punk, Ziegel & Company L.P. have been deemed by the National Association of
Securities Dealers, Inc. to be underwriting compensation and will be restricted
from sale, transfer, assignment or hypothecation for a period of one year from
the date of this offering, except as otherwise permitted by the National
Association of Securities Dealers, Inc. Conduct Rule 2710(c)(7)(A).
The representatives have informed us that they do not expect discretionary
sales by the underwriters to exceed five percent of the shares offered by this
prospectus.
The underwriters have reserved for sale up to 300,000 shares for employees,
directors and other persons associated with us. These reserved shares will be
sold at the initial public offering price that appears on the cover page of
this prospectus. We will allocate these reserved shares among prospective
recipients who, after receipt of a preliminary prospectus and no later than
four days prior to the effective date of this offering, submit to CIBC World
Markets an indication of interest form specifying the number of shares
requested and supplying other required information. At the effective time of
this offering, CIBC World Markets will inform prospective recipients of the
offering price and the number of shares they may purchase and give the
recipients the opportunity to purchase any portion of such shares or withdraw
their indication of interest. The number of shares available for sale to the
general public in the
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<PAGE>
offering will be reduced to the extent reserved shares are purchased by such
persons. The underwriters will offer to the general public, on the same terms
as other shares offered by this prospectus, any reserved shares that are not
purchased by such persons.
There is no established trading market for the shares. The offering price for
the shares has been determined by us and the representatives, based on the
following factors:
. estimates of our business potential and earnings prospects
. an assessment of our management
. consideration of the above factors in relation to market valuations of
companies in related businesses
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. The underwriters may, however, engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments, short sales and syndicate covering transactions, as
described above.
. Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might discourage resales of the shares and cause
the price of the shares to be higher than the price that might otherwise
prevail in the open market.
Neither we nor the underwriters makes any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued
without notice at any time.
One of the representatives, Prudential Securities Incorporated, facilitates
the making of new issues online through its PrudentialSecurities.com division.
Clients of Prudential AdvisorSM may view offering terms and a prospectus
online and place orders through their financial advisors. Other than the
prospectus in electronic format, the information on the Prudential Securities
Incorporated website is not part of this prospectus or the registration
statement of which this prospectus forms a part and has not been approved or
endorsed by us or any underwriter in such capacity and should not be relied on
by prospective investors.
Legal Matters
Certain legal matters with respect to the legality of the issuance of the
shares of common stock offered by this prospectus will be passed upon for us
by Cooley Godward llp, Boulder, Colorado. An investment partnership affiliated
with Cooley Godward llp owns 85,484 shares of our preferred stock, which will
convert into 28,494 shares of our common stock upon the completion of this
offering. Certain legal matters will be passed upon for the underwriters by
McDermott, Will & Emery.
Experts
The audited financial statements included in this prospectus and elsewhere in
this registration statement to the extent and for the periods indicated in
their reports have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
Where You Can Find More Information
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission in connection with the offering. In addition, upon
completion of the offering, we will be required to file annual, quarterly and
current reports, proxy statements and other information with the Securities
and Exchange Commission. You may read and
53
<PAGE>
copy the registration statement or any other documents filed by us at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the Public Reference
Room. Our Securities and Exchange Commission filings are also available to the
public at the Securities and Exchange Commission's site on the world wide web
at "sec.gov."
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of Genomica, you
should refer to the exhibits that are a part of the registration statement for
a copy of the contract or document.
After the offering, we expect to provide annual reports to our stockholders
that include financial information examined and reported on by our independent
auditors.
54
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genomica Corporation:
We have audited the accompanying balance sheets of Genomica Corporation (a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Genomica Corporation as of
December 31, 1998 and 1999, and the results of its operations and its 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.
/s/ Arthur Andersen llp
Denver, Colorado,
March 13, 2000 (except
with respect to the
reverse stock split
discussed in Note 2, as
to which the date is
September 25, 2000).
F-2
<PAGE>
GENOMICA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, Pro Forma
------------------------- ----------- June 30,
1998 1999 2000 2000
----------- ------------ ----------- -----------
(unaudited)
ASSETS
------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents............. $ 5,222,549 $ 3,518,570 $ 2,052,140
Short-term investments... -- 2,824,763 11,957,930
Accounts receivable-
trade................... -- 360,000 965,179
Prepaid expenses and
other................... 53,151 148,037 348,828
----------- ------------ -----------
Total current assets.... 5,275,700 6,851,370 15,324,077
----------- ------------ -----------
Property and Equipment,
net...................... 349,394 673,479 2,137,380
Deferred Financing Costs.. -- -- 431,045
Deposits.................. -- -- 625,000
Other Assets.............. 24,309 28,786 30,243
----------- ------------ -----------
Total assets............ $ 5,649,403 $ 7,553,635 $18,547,745
=========== ============ ===========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable......... $ 229,615 $ 318,206 $ 706,911
Accrued compensation and
employee benefits....... 93,593 289,538 419,373
Current portion of note
payable................. 166,667 -- --
Current portion of
capital lease
obligations............. 44,435 130,142 123,530
Deferred revenue......... 123,333 829,601 1,126,093
Other accrued expenses... 49,046 37,429 161,293
----------- ------------ -----------
Total current
liabilities............ 706,689 1,604,916 2,537,200
----------- ------------ -----------
Long-Term Debt:
Capital lease
obligations, net of
current portion......... 70,556 268,157 209,961
----------- ------------ -----------
Total liabilities....... 777,245 1,873,073 2,747,161
----------- ------------ -----------
Commitments and
Contingencies
Stockholders' Equity:
Convertible preferred
stock, $.001 par value,
26,785,400, 37,688,178
and 47,938,178 shares
authorized,
respectively:
Series A, 12,533,676
shares issued and
outstanding actual, 0
pro forma (liquidation
value--$7,550,209).... 7,504,266 7,504,266 7,504,266 --
Series B, 8,757,516,
18,826,959 and
18,826,959 shares
issued and
outstanding,
respectively actual, 0
pro forma (liquidation
value--$6,305,411 and
$13,555,410,
respectively)......... 5,898,515 12,369,208 12,369,208 --
Series C, 10,022,634
shares issued and
outstanding actual, 0
pro forma (liquidation
value--$15,033,952)... -- -- 15,008,815 --
Common stock, $.001 par
value, 34,000,000,
44,000,000 and
65,000,000 shares
authorized, 1,105,859,
1,140,073 and 1,980,320
shares issued and
1,045,095, 1,079,309 and
1,882,751 shares
outstanding,
respectively, actual;
15,774,737 shares issued
and 15,677,168 shares
outstanding, pro forma.. 1,106 1,140 1,980 15,774
Treasury stock, at cost.. (182) (182) (6,807) (6,807)
Additional paid-in
capital................. 25,103 31,228 15,285,449 50,153,944
Options and warrants..... 82,298 7,764,767 32,850,016 32,850,016
Deferred compensation.... -- (5,772,446) (22,599,320) (22,599,320)
Accumulated deficit...... (8,638,948) (16,217,419) (44,613,023) (44,613,023)
----------- ------------ ----------- -----------
Total stockholders'
equity................. 4,872,158 5,680,562 15,800,584 $15,800,584
----------- ------------ ----------- ===========
Total liabilities and
stockholders' equity... $ 5,649,403 $ 7,553,635 $18,547,745
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
GENOMICA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
For The Years Ended December 31, June 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses and
services.............. $ -- $ 196,892 $ 622,230 $ 184,722 $ 739,708
Research grants........ -- -- 159,100 28,875 26,733
----------- ----------- ----------- ----------- ------------
Total revenue........ -- 196,892 781,330 213,597 766,441
----------- ----------- ----------- ----------- ------------
Operating Expenses:
Costs of revenue....... -- 141,490 447,057 154,295 195,303
Research and
development........... 1,681,868 2,327,569 4,868,577 1,762,441 6,037,849
Selling and marketing.. 495,068 633,551 1,722,141 659,980 3,029,907
General and
administrative........ 578,952 884,267 1,723,364 292,846 5,236,066
----------- ----------- ----------- ----------- ------------
Total operating
expenses............ 2,755,888 3,986,877 8,761,139 2,869,562 14,499,125
----------- ----------- ----------- ----------- ------------
Operating loss...... (2,755,888) (3,789,985) (7,979,809) (2,655,965) (13,732,684)
Interest Income......... 37,219 90,325 419,279 184,562 375,362
Interest Expense........ (19,581) (55,214) (17,941) (9,789) (29,467)
----------- ----------- ----------- ----------- ------------
Net Loss................ (2,738,250) (3,754,874) (7,578,471) (2,481,192) (13,386,789)
Deemed Dividend Related
to Beneficial
Conversion Feature of
Preferred Stock........ -- -- -- -- (15,008,815)
----------- ----------- ----------- ----------- ------------
Net Loss Applicable to
Common Stockholders.... $(2,738,250) $(3,754,874) $(7,578,471) $(2,481,192) $(28,395,604)
=========== =========== =========== =========== ============
Net Loss Per Share,
basic and diluted...... $ (2.80) $ (3.81) $ (7.13) $ (2.37) $ (22.13)
=========== =========== =========== =========== ============
Weighted Average Common
Shares Outstanding,
basic and diluted...... 976,532 986,015 1,062,392 1,045,613 1,283,321
=========== =========== =========== =========== ============
Pro Forma Net Loss Per
Share (Unaudited--
Note 2):
Net loss per share,
basic and diluted.... $ (0.68) $ (0.23) $ (2.07)
=========== =========== ============
Weighted average
common shares
outstanding, basic
and diluted.......... 11,120,510 10,701,761 13,737,720
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
GENOMICA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Preferred Stock
--------------------------------------------------------------------
Series A Series B Series C Common Stock Treasury Stock
--------------------- ---------------------- ---------------------- ---------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ----------- ---------- ----------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1996............ 3,320,400 $2,000,209 -- $ -- -- $ -- 976,532 $ 977 (60,764) $ (182)
Sale of Series A
preferred stock
in February,
June and October
1997 for cash of
$0.6024 per
share, net of
offering costs
of $45,943...... 8,383,256 5,004,057 -- -- -- -- -- -- -- --
Conversion of
notes payable in
March 1997 at
$0.6024 per
share........... 830,020 500,000 -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------- --------- ------ ------- -------
Balances,
December 31,
1997............ 12,533,676 7,504,266 -- -- -- -- 976,532 977 (60,764) (182)
Sale of Series B
preferred stock
in December 1998
for cash of
$0.72 per share,
net of offering
costs of
$332,264........ -- -- 7,347,927 4,958,243 -- -- -- -- -- --
Issuance of
warrants to
purchase common
stock........... -- -- -- -- -- -- -- -- -- --
Conversion of
notes payable in
December 1998 at
$0.72 per share. -- -- 1,409,589 940,272 -- -- -- -- -- --
Issuance of
common stock
upon exercise of
options......... -- -- -- -- -- -- 129,327 129 -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------- --------- ------ ------- -------
Balances,
December 31,
1998............ 12,533,676 7,504,266 8,757,516 5,898,515 -- -- 1,105,859 1,106 (60,764) (182)
Sale of Series B
preferred stock
in February 1999
for cash of
$0.72 per share,
net of offering
costs of
$538,180........ -- -- 10,069,443 6,711,819 -- -- -- -- -- --
Issuance of
warrants to
purchase common
stock........... -- -- -- (241,126) -- -- -- -- -- --
Issuance of
common stock
upon exercise of
options......... -- -- -- -- -- -- 34,214 34 -- --
Deferred
compensation.... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------- --------- ------ ------- -------
Balances,
December 31,
1999............ 12,533,676 7,504,266 18,826,959 12,369,208 -- -- 1,140,073 1,140 (60,764) (182)
Purchase of
treasury stock
(unaudited)..... -- -- -- -- -- -- -- -- (36,805) (6,625)
Issuance of
common stock
upon exercise of
options
(unaudited)..... -- -- -- -- -- -- 840,247 840 -- --
Deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- --
Deferred
compensation
adjustment for
terminated
employees
(unaudited)..... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- --
Sale of Series C
preferred stock
in March 2000
for cash of
$1.50 per share,
net of offering
costs of $25,137
(unaudited)..... -- -- -- -- 10,022,634 -- -- -- -- --
Deemed dividend
related to
beneficial
conversion
feature of
preferred stock
(unaudited)..... -- -- -- -- -- 15,008,815 -- -- -- --
Net loss
applicable to
common
stockholders
(unaudited)..... -- -- -- -- -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------- --------- ------ ------- -------
Balances, June
30, 2000
(unaudited)..... 12,533,676 $7,504,266 18,826,959 $12,369,208 10,022,634 $15,008,815 1,980,320 $1,980 (97,569) $(6,807)
========== ========== ========== =========== ========== =========== ========= ====== ======= =======
<CAPTION>
Additional Options Deferred Accumu-
Paid-In and Compen- lated
Capital Warrants sation Deficit Total
----------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances,
December 31,
1996............ $ 1,953 $ -- $ -- $ (2,145,824) $ (142,867)
Sale of Series A
preferred stock
in February,
June and October
1997 for cash of
$0.6024 per
share, net of
offering costs
of $45,943...... -- -- -- -- 5,004,057
Conversion of
notes payable in
March 1997 at
$0.6024 per
share........... -- -- -- -- 500,000
Net loss........ -- -- -- (2,738,250) (2,738,250)
----------- ------------ ------------- ------------- ------------
Balances,
December 31,
1997............ 1,953 -- -- (4,884,074) 2,622,940
Sale of Series B
preferred stock
in December 1998
for cash of
$0.72 per share,
net of offering
costs of
$332,264........ -- -- -- -- 4,958,243
Issuance of
warrants to
purchase common
stock........... -- 82,298 -- -- 82,298
Conversion of
notes payable in
December 1998 at
$0.72 per share. -- -- -- -- 940,272
Issuance of
common stock
upon exercise of
options......... 23,150 -- -- -- 23,279
Net loss........ -- -- -- (3,754,874) (3,754,874)
----------- ------------ ------------- ------------- ------------
Balances,
December 31,
1998............ 25,103 82,298 -- (8,638,948) 4,872,158
Sale of Series B
preferred stock
in February 1999
for cash of
$0.72 per share,
net of offering
costs of
$538,180........ -- -- -- -- 6,711,819
Issuance of
warrants to
purchase common
stock........... -- 241,126 -- -- --
Issuance of
common stock
upon exercise of
options......... 6,125 -- -- -- 6,159
Deferred
compensation.... -- 7,441,343 (7,441,343) -- --
Amortization of
deferred
compensation.... -- -- 1,668,897 -- 1,668,897
Net loss........ -- -- -- (7,578,471) (7,578,471)
----------- ------------ ------------- ------------- ------------
Balances,
December 31,
1999............ 31,228 7,764,767 (5,772,446) (16,217,419) 5,680,562
Purchase of
treasury stock
(unaudited)..... -- -- -- -- (6,625)
Issuance of
common stock
upon exercise of
options
(unaudited)..... 245,406 -- -- -- 246,246
Deferred
compensation
(unaudited)..... -- 25,523,760 (25,523,760) -- --
Deferred
compensation
adjustment for
terminated
employees
(unaudited)..... -- (438,511) 438,511 -- --
Amortization of
deferred
compensation
(unaudited)..... -- -- 8,258,375 -- 8,258,375
Sale of Series C
preferred stock
in March 2000
for cash of
$1.50 per share,
net of offering
costs of $25,137
(unaudited)..... 15,008,815 -- -- -- 15,008,815
Deemed dividend
related to
beneficial
conversion
feature of
preferred stock
(unaudited)..... -- -- -- -- 15,008,815
Net loss
applicable to
common
stockholders
(unaudited)..... -- -- -- (28,395,604) (28,395,604)
----------- ------------ ------------- ------------- ------------
Balances, June
30, 2000
(unaudited)..... $15,285,449 $32,850,016 $(22,599,320) $(44,613,023) $15,800,584
=========== ============ ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
GENOMICA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Six Months
For The Years Ended December 31, Ended June 30,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(2,738,250) $(3,754,874) $ (7,578,471) $(2,481,192) $(13,386,789)
Adjustments to
reconcile net loss to
net cash used in
operating activities--
Depreciation.......... 69,422 176,926 253,016 114,022 283,102
Amortization of
discount on
convertible debt..... -- 7,666 -- -- --
Amortization of
discount on short-
term investments..... -- -- 38,053 -- --
Preferred stock issued
for accrued interest
on convertible debt.. -- 14,904 -- -- --
Amortization of
deferred
compensation......... -- -- 1,668,897 63,159 8,258,375
Change in deposits.... -- -- -- -- (625,000)
Change in other
assets............... -- (4,174) (4,477) -- (1,457)
Changes in operating
assets and
liabilities--
Accounts receivable.. -- -- (360,000) (531,500) (605,179)
Prepaid expenses and
other assets........ 2,168 (13,953) (94,886) (20,766) (200,791)
Accounts payable..... 47,682 83,848 88,591 (78,212) 388,705
Accrued compensation
and employee
benefits............ 93,825 (8,841) 195,945 39,304 129,835
Deferred revenue..... -- 123,333 706,268 449,278 296,492
Other accrued
expenses............ 107,379 (109,652) (11,617) (10,193) 123,864
----------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities......... (2,417,774) (3,484,817) (5,098,681) (2,456,100) (5,338,843)
----------- ----------- ------------ ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Redemptions of short-
term investments...... -- 2,462,412 16,480,000 -- 10,593,985
Purchases of short-term
investments........... (2,462,412) -- (19,342,816) -- (19,727,152)
Purchases of property
and equipment......... (209,071) (157,095) (223,480) (95,698) (1,747,003)
----------- ----------- ------------ ----------- ------------
Net cash provided by
(used in) investing
activities......... (2,671,483) 2,305,317 (3,086,296) (95,698) (10,880,170)
----------- ----------- ------------ ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments on capital
leases................ (4,683) (11,239) (70,313) (17,650) (64,808)
Proceeds from issuance
of loan............... 400,000 -- -- -- --
Principal payments on
loan.................. (33,333) (200,000) (166,667) (100,000) --
Proceeds from issuance
of convertible debt
and warrants.......... -- 1,000,000 -- -- --
Proceeds from issuance
of preferred stock.... 5,050,000 5,290,507 7,249,999 7,249,999 15,033,952
Costs related to
issuance of preferred
stock................. (45,943) (332,264) (538,180) (538,180) (25,137)
Deferred financing
costs................. -- -- -- -- (431,045)
Proceeds from exercise
of common stock
options............... -- 23,279 6,159 2,020 246,246
Purchase of treasury
stock................. -- -- -- -- (6,625)
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing
activities......... 5,366,041 5,770,283 6,480,998 6,596,189 14,752,583
----------- ----------- ------------ ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 276,784 4,590,783 (1,703,979) 4,044,391 (1,466,430)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 354,982 631,766 5,222,549 5,222,549 3,518,570
----------- ----------- ------------ ----------- ------------
CASH AND CASH
EQUIVALENTS,
END OF PERIOD......... $ 631,766 $ 5,222,549 $ 3,518,570 $ 9,266,940 $ 2,052,140
=========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
GENOMICA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended For The Six Months
December 31, Ended June 30,
------------------------ --------------------
1997 1998 1999 1999 2000
------- ------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest......... $19,581 $32,644 $ 17,941 $ 9,789 $ 29,469
======= ======= ======== ======== ===========
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITIES:
Capital lease obligations
incurred to acquire equipment. $33,716 $97,197 $353,621 $ -- $ --
======= ======= ======== ======== ===========
Warrants issued for offering
costs......................... $ -- $ -- $241,126 $241,126 $ --
======= ======= ======== ======== ===========
Deemed dividend related to
beneficial conversion feature
of preferred stock............ $ -- $ -- $ -- $ -- $15,008,815
======= ======= ======== ======== ===========
</TABLE>
--------
As discussed in Note 4, in 1997, the Company converted a $500,000 note payable
to a stockholder into shares of Series A Preferred Stock.
As discussed in Note 4, in 1998, the Company converted $925,368 of debt, net of
unamortized discount of $74,632, plus accrued interest of $14,904 into
1,409,589 shares of Series B Preferred Stock.
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Including Information Related to Unaudited Periods)
1. Organization and Business:
Genomica Corporation (the "Company"), a Delaware corporation, is a provider of
software products and services that enable pharmaceutical and biotechnology
researchers to accelerate the drug discovery and development process. The
Company's first product, Discovery Manager, offers a broad set of software
tools for genomic researchers.
The Company was incorporated in September 1995 and began operations shortly
thereafter. Since its inception, the Company has incurred significant losses.
Although the Company anticipates that funds from product licenses, working
capital at December 31, 1999 and the proceeds of its March 2000 private
placement (Note 11) will be sufficient to fund its operations through at least
December 31, 2000, additional financing may be needed after that date by the
Company to fund its operations, continue the commercial development of its
products and develop its sales and marketing infrastructure. The Company may
also seek additional capital in 2000 to accelerate these efforts. There is no
guarantee that such financing will be available when needed upon terms
acceptable to the Company. Operations of the Company are subject to certain
risks and uncertainties including, among others, uncertainty of product
development, inexperience in marketing or selling its product, technological
uncertainty, competition and dependence on key personnel.
2. Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk are primarily cash and cash equivalents, accounts receivable and
investments in high-grade corporate bonds and commercial paper. The Company
maintains its cash balances in the form of bank demand deposits and money
market accounts with financial institutions that management believes are
creditworthy. Accounts receivable are typically unsecured and are concentrated
in the pharmaceutical industry. Accordingly, the Company may be exposed to
credit risk generally associated with pharmaceutical and biotechnology
companies. Two customers (Note 8) accounted for all of the Company's trade
accounts receivable as of December 31, 1999. The Company has no significant
financial instruments with off-balance sheet risk of accounting loss, such as
foreign exchange contracts, option contracts or other foreign currency hedging
arrangements.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments and trade receivables and payables. The carrying values
of the cash equivalents, short-term investments, trade receivables and payables
approximate their fair values.
F-8
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
Investments in Marketable Securities
The Company's investments in corporate debt securities are classified as held-
to-maturity and are stated at amortized cost. The investments had the following
values at December 31, 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized/ Accrued Unrealized Unrealized
Accreted Cost Interest Holding Gains Holding Losses Fair Value
------------- -------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Corporate debt
securities, maturing
within one year....... $2,824,763 $51,599 $(51,599) $-- $2,824,763
========== ======= ======== ==== ==========
</TABLE>
During the first quarter of 2000, the Company sold one of its debt securities
originally classified as held-to-maturity. The Company realized a loss of $465
on the sale of this $405,000 debt security. The Company sold this security to
purchase a Certificate of Deposit in order to secure a letter of credit.
Due to the sale of this security, the Company has concluded that they no longer
have the intent to hold their debt securities to maturity, and thus will now
account for their investments in debt securities as available-for-sale.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment is indicated when the carrying amount of the asset
is greater than amounts recoverable from future undiscounted cash flows.
Revenue Recognition
The Company generates revenue from the license and related maintenance of its
proprietary software products. The Company recognizes revenue when there is
persuasive evidence of an arrangement, delivery has occurred, collection is
probable, and the fee is fixed or determinable. If an acceptance period exists,
license revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. The Company generally bundles its license
fees and subsequent maintenance, consisting of software updates, content
updates and support. The Company has concluded that there is no basis to
allocate the total license and maintenance fees charged in its software
arrangements to these various elements of the arrangement as the Company
currently does not offer the license fee and maintenance for sale separately.
Accordingly, revenue is generally deferred and recognized ratably over the term
of the arrangement. Certain software arrangements include other elements, such
as services and training. If present, such elements are unbundled based on
vendor-specific objective evidence of their fair value and the related revenue
is recognized when those elements are delivered.
The Company believes its current revenue recognition policies and practices are
consistent with the provisions of Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9, which were
issued by the American Institute of Certified Public Accountants.
Implementation guidelines for these standards, as well as potential new
standards, could lead to unanticipated changes in the Company's current revenue
recognition policies. Such changes could affect the timing of the Company's
future revenue and results of operations.
Research and Development and Software Development Costs
Research and development costs are charged to expense as incurred and consist
of salaries and other direct costs. Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
The Company's software is deemed to be technologically feasible at the point a
working model of the software product is developed. Through December 31, 1999,
for products developed by the Company, the period since attainment of
technological feasibility has been brief and qualifying costs were not
significant, and, accordingly, the Company has not capitalized any qualifying
software development costs in the accompanying financial statements.
F-9
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
Income Taxes
The current provision for income taxes represents actual or estimated amounts
payable on tax return filings each year. Deferred tax assets and liabilities
are recorded for the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in the
accompanying balance sheets, and for operating loss and tax credit
carryforwards. The change in deferred tax assets and liabilities for the period
measures the deferred tax provision or benefit for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are
reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been reduced by a valuation
allowance to the extent it is more likely than not that some or all of the
deferred tax assets will not be realized.
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB No. 25"), and related interpretations. The Company
adopted the disclosure-only requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"),
which allows entities to continue to apply the provision of APB No. 25 for
transactions with employees and provide pro forma disclosures for employee
stock grants made as if the fair value-based method of accounting in SFAS No.
123 had been applied to these transactions. Any deferred stock compensation
calculated according to APB No. 25 is amortized over the vesting period of the
individual options, generally four or five years, in accordance with Financial
Accounting Standards Board ("FASB") Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option and Awards Plans."
The Company applies the provisions of SFAS No. 123 and related interpretations
to stock-based compensation to non-employees.
Reverse Stock Split
On March 13, 2000, the Company's Board of Directors authorized a one for three
reverse stock split of its common stock to be effective immediately prior to
the closing of the Company's initial public offering. All common share amounts,
equivalent common share amounts and per share amounts have been adjusted
retroactively to reflect the reverse stock split.
Net Earnings or Loss Per Share
The Company presents basic and diluted earnings or loss per share in accordance
with Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting
basic and diluted earnings per share. Under this statement, basic earnings or
loss per share is computed by dividing the net earnings or loss by the weighted
average number of shares of common stock outstanding. Diluted earnings or loss
per share is determined by dividing the net earnings or loss by the sum of (1)
the weighted average number of common shares outstanding, (2) if not anti-
dilutive, the number of shares of convertible preferred stock as if converted
upon issuance, and (3) if not anti-dilutive, the effect of outstanding stock
options and warrants determined utilizing the treasury stock method.
For all periods presented, the effects of the convertible preferred stock and
stock options were excluded from the calculation of diluted loss per share
since the result would have been anti-dilutive. The dilutive effect of common
stock options and warrants, without regard to the treasury stock method, that
are excluded from the calculation of diluted loss per share because their
effect is anti-dilutive totaled 413,410 in 1997, 655,027 in 1998 and 1,414,111
in 1999.
Pro Forma Stockholders' Equity (Unaudited)
Effective upon the closing of the Company's planned initial public offering,
the outstanding shares of Series Preferred (as defined below) will
automatically convert into 13,794,417 shares of common stock. The pro forma
F-10
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
effects of these transactions are unaudited and have been reflected in the
accompanying unaudited pro forma balance sheet at June 30, 2000.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share for the year ended December 31, 1999 and for the
six months ended June 30, 1999 and 2000 is computed using the net loss and
weighted average number of common shares outstanding, including the pro forma
effects of the assumed conversion of the Company's Series A, B and C
convertible preferred stock into shares of the Company's common stock as if
such conversion occurred on January 1, 1999, or at date of original issuance,
if later. The resulting pro forma adjustment includes an increase in the
weighted average shares used to compute basic and diluted net loss per share of
10,058,118, 9,656,148 and 12,454,399 shares for the year ended December 31,
1999 and the six months ended June 30, 1999 and 2000, respectively. The pro
forma effects of these transactions are unaudited.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income includes all changes in equity during a period
from non-owner sources. During each of the three years ended December 31, 1999
and for the cumulative period from inception, the Company has not had any
transactions that are required to be reported as adjustments to determine
comprehensive income (loss).
During the six months ended June 30, 2000, the Company began accounting for its
short-term investments as available-for-sale investments. Such securities are
marked to fair market value with adjustments comprising a component of other
comprehensive income. The difference between the fair market value and the
carrying amount of the Company's short-term investments was immaterial at June
30, 2000 and accordingly there is no material difference between comprehensive
loss and net loss applicable to common stockholders through June 30, 2000.
Reportable Segments
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of and Enterprise and Related Information," establishes standards for the
reporting of information about operating segments. Since its inception, the
Company has conducted its operations in one operating segment.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). The Statement establishes accounting and reporting standards for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of SFAS Statement No. 133--an amendment of FASB Statement No.
133" ("SFAS No. 137"). SFAS No. 137 delays the effective date of SFAS No. 133
to fiscal quarters and fiscal years beginning after June 15, 2000. Since
inception, the Company has not entered into arrangements that would fall under
the scope of SFAS No. 133 and thus, management believes that SFAS No. 133 will
not significantly affect its financial condition and results of operations.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
provides the SEC Staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. The guidance in SAB 101 has
been implemented by the Company for all periods presented.
F-11
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44"). FIN No. 44 clarifies the application of APB No.
25 for certain issues related to equity-based instruments issued to employees.
FIN No. 44 is effective on July 1, 2000, except for certain transactions, and
will be applied on a prospective basis. The implementation of FIN No. 44 did
not have a significant impact on the Company's results of operations and
financial position.
Interim Results (Unaudited)
The accompanying consolidated balance sheet as of June 30, 2000, the
consolidated statements of operations and cash flows for the six months ended
June 30, 1999 and 2000, and the consolidated statement of stockholders' equity
for the six months ended June 30, 2000 are unaudited. In the opinion of
management, the statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of the
interim periods. Operating results for the six months ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
3. Property and Equipment:
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
--------- ----------
<S> <C> <C>
Computer and office equipment......................... $ 540,201 $ 953,361
Furniture and fixtures................................ 18,379 123,218
Software.............................................. 4,792 63,894
Leasehold improvements................................ 47,657 47,657
--------- ----------
611,029 1,188,130
Less--Accumulated depreciation........................ (261,635) (514,651)
--------- ----------
$ 349,394 $ 673,479
========= ==========
</TABLE>
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method based on estimated useful lives ranging from three to five
years. Maintenance and repairs are expensed as incurred. Depreciation expense
was $69,422, $176,926 and $253,016 for the years ended December 31, 1997, 1998
and 1999, respectively.
4. Debt:
Convertible Notes Payable
In December 1996, the Company issued a $500,000 convertible promissory note
with an interest rate of 5.8% to Falcon Technology Partners. In conjunction
with the sale of the Series A Preferred Stock on February 28, 1997, the note
was converted in March 1997 into 830,020 shares of Series A Preferred Stock and
accrued interest of $6,753 was paid in full.
In October 1998, the Company issued $1,000,000 of debt securities with an
interest rate of 8% to various investors. The notes included warrants to
purchase 208,331 shares of Series B Preferred Stock at $0.72 per share. These
warrants were valued at $82,298 using the Black-Scholes option pricing model.
The warrants are considered to be an issuance of equity and the Company has
attributed a portion of the proceeds from the debt offering to the fair value
of the warrants and recorded an initial discount to the carrying value of the
related debt in the amount of $82,298. The discount was amortized using the
effective interest-rate method over the two-year term of the note.
In conjunction with the sale of the Series B Preferred Stock on December 16,
1998, the net amount of the notes of $925,368 and accrued interest of $14,904
were converted into 1,409,589 shares of Series B Preferred Stock.
F-12
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
Loan Agreement
On September 17, 1997, the Company entered into a Bridge Loan and Security
Agreement ("Loan Agreement") with a bank. Under the terms of the Loan
Agreement, the outstanding advances of $400,000 were converted into a term loan
("Term Loan") on October 9, 1997. The principal and interest on the Term Loan
was due in monthly installments through October 9, 1999. Interest accrued at a
rate equal to the bank's prime rate plus 1.5% (9.25% at December 31, 1998), and
the Loan Agreement was collateralized by assets of the Company. On October 9,
1999, the Term Loan and all interest was paid in full.
Capital Lease Obligations
The Company has entered into four capital lease obligations with imputed
interest rates ranging from 8.4% to 15.3%. These leases are collateralized by
the leased assets which have a net book value of $378,753 and $111,930 at
December 31, 1999 and 1998, respectively.
At December 31, 1999, future payments under capital lease obligations are as
follows:
<TABLE>
<S> <C>
2000.............................................................. $ 178,735
2001.............................................................. 168,120
2002.............................................................. 142,181
---------
489,036
Less--amount related to interest.................................. (90,737)
---------
398,299
Less--current portion............................................. (130,142)
---------
$ 268,157
=========
</TABLE>
5. Stockholders' Equity:
Authorized Shares
In December 1998, the Company increased the number of authorized shares of
common and preferred stock to 34,000,000 and 26,785,400, respectively. In
February 1999, the Company increased the number of authorized shares of common
stock and preferred stock to 44,000,000 and 37,688,178, respectively. On March
13, 2000, the Company increased the number of authorized shares of common stock
and preferred stock to 65,000,000 and 47,938,179 shares, respectively.
Series A, B and C Convertible Preferred Stock
The Company is authorized to issue preferred stock in various series with
rights and privileges as determined by the Board of Directors.
Liquidation Preference
In the event of liquidation, holders of Series A, B and C Preferred Stock would
be entitled to receive in preference to any holders of the Company's common
stock an amount equal to the greater of (i) $0.6024 per share, $0.72 per share
and $1.50 per share, respectively, plus all accrued or other declared but
unpaid dividends or (ii) such an amount per share as would have been payable
had all shares of Series A, B and C Preferred Stock been converted to the
Company's common stock immediately prior to such liquidation, provided that a
license agreement with a related party of the Company may not be distributed to
the Series A Preferred Stock (Note 7). Remaining assets, if any, would be
distributed to common stockholders.
F-13
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
Conversion Rights
Each share of Series A, B and C Preferred Stock is initially convertible into
one share of common stock. The conversion rate will adjust to 0.3333 shares of
common stock per share of preferred held to reflect the common stock split to
be completed when the Company effects a one-for-three reverse stock split
immediately prior to the closing of the Company's initial public offering. Each
share of Series A, B and C Preferred Stock will be automatically converted into
common stock upon the closing of a $15,000,000, firmly underwritten public
offering of at least $2.50 per share.
Voting Rights
Each holder of Series A, B and C Preferred Stock is entitled to the number of
votes equal to the number of shares of the Company's common stock into which
such shares of Series A, B and C Preferred Stock could be converted. The
holders of Series A Preferred Stock are entitled to elect four out of the six
members of the Board of Directors.
Dividend Rights
The holders of the Series A, B and C Preferred Stock are not entitled to
receive dividends, except as declared, and at such amounts per share as may be
specified by the Board of Directors. No dividends are to be paid on any common
stock unless a dividend is paid with respect to all outstanding shares of
Series A, B and C Preferred Stock in an amount equal to or greater than the
aggregate amount of such dividends for all shares of common stock into which
the Series A, B and C Preferred Stock could then be converted into. As of
December 31, 1999, the Company had not declared or paid any dividends.
Stock Option Plan
In May 1996, the Company established the 1996 Stock-Based Incentive
Compensation Plan (the "Plan") under which incentive and nonqualified stock
options may be granted to employees, directors and independent contractors. As
amended, an aggregate of 1,666,667 shares of common stock are reserved for
issuance under the Plan. The exercise price per share of each option granted
will not be less than 110% of the fair market value of the stock in the case of
incentive stock options granted to persons owning 10% or more of the voting
power of the Company, as defined, and otherwise shall not be less than 100% of
the fair market value of the stock. Options generally vest over a four or five-
year term. The exercise period is not more than five years from the date of
grant in the case of incentive stock options granted to persons owning 10% or
more of the voting power of the Company and otherwise not more than ten years.
During the year ended December 31, 1999, in connection with the grant of
certain stock options to employees, the Company recorded deferred stock-based
compensation of $7,441,343, representing the difference between the exercise
price and the deemed fair value (for financial reporting purposes) of the
Company's common stock on the date these stock options were granted. Deferred
compensation is included as a component of stockholders' equity and is being
amortized in accordance with FASB Interpretation No. 28 over the vesting
periods of the related options, which is generally four or five years. Stock
compensation expense recognized for the year ended December 31, 1999, and
remaining compensation expense to be recognized is as follows:
<TABLE>
<CAPTION>
Deferred Stock Expense Deferred Stock Expense Unamortized Deferred Stock Expense To Be Recognized
Recognized During The Recognized During The During the Periods Ending December 31,
Year Ended Six Months Ended ------------------------------------------------------------
December 31, 1999 June 30, 2000 2000 2001 2002 2003 2004 2005
---------------------- ---------------------- ---------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Research and
development.... $ 846,131 $2,562,388
Selling and
marketing...... 85,114 1,668,970
General and
administrative. 737,652 4,027,017
---------- ----------
$1,668,897 $8,258,375 $6,638,204 $8,174,624 $4,639,570 $2,328,617 $769,253 $49,052
========== ========== ========== ========== ========== ========== ======== =======
</TABLE>
F-14
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
Restricted Stock
In 1998, the Company issued 112,067 shares of restricted common stock under the
Plan. The holders of such shares of restricted common stock, generally
executives of the Company, have entered into Restricted Stock Purchase
Agreements under which the Company has the right to repurchase unvested common
shares at the original issuance price upon termination of these individuals'
business relationships with the Company. Restrictions on these common shares
lapse over periods ranging from nineteen months to four years, and such lapsing
is subject to acceleration under certain conditions. At December 31, 1998 and
1999, restrictions had lapsed with regard to 39,951 and 105,707 of these
shares, respectively.
Pro Forma Disclosures
SFAS No. 123 defines a fair value-based method of accounting for stock-based
compensation plans. An entity may continue to measure compensation cost for
options granted to employees using the intrinsic value-based method prescribed
by APB No. 25, provided that pro forma disclosures are made of net income or
loss, assuming the fair value-based method of SFAS No. 123 had been applied.
The Company has elected to account for its stock-based employee compensation
plans under APB No. 25; accordingly, for purposes of the pro forma disclosures
presented below, the Company has computed the fair values of all options
granted during 1997, 1998 and 1999 using the Black-Scholes pricing model and
the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.55% 5.23% 5.61%
Expected lives.................................... 5 years 5 years 4 years
Expected volatility............................... 0.001% 0.001% 0.001%
Expected dividend yield........................... 0% 0% 0%
</TABLE>
Cumulative compensation cost recognized in pro forma net income or loss with
respect to options that are forfeited prior to vesting is adjusted as a
reduction of pro forma compensation expense in the period of forfeiture.
The total fair value of options granted to employees was computed to be
$19,366, $15,885 and $7,541,587 for the years ended December 31, 1997, 1998 and
1999, respectively. Pro forma stock-based compensation, net of the amounts
recorded for amortization of deferred compensation and the effect of
forfeitures, was $6,718, $12,192 and $26,068 for the years ended December 31,
1997, 1998 and 1999, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net loss would have been reported
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported......................... $(2,738,250) $(3,754,874) $(7,578,471)
=========== =========== ===========
Pro forma........................... $(2,744,968) $(3,767,066) $(7,604,539)
=========== =========== ===========
Net loss per share:
As reported......................... $ (2.80) $ (3.81) $ (7.13)
=========== =========== ===========
Pro forma........................... $ (2.81) $ (3.82) $ (7.16)
=========== =========== ===========
</TABLE>
F-15
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
A summary of all employee options activity under the Plan for the years ended
December 31, 1997, 1998 and 1999 and for the six months ended June 30, 2000 is
as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996................... 55,000 $0.18
Granted.......................................... 307,575 $0.18
Forfeited........................................ (73,998) $0.18
---------
Outstanding at December 31, 1997................... 288,577 $0.18
Granted.......................................... 283,099 $0.18
Forfeited........................................ (13,248) $0.18
Exercised........................................ (112,400) $0.18
---------
Outstanding at December 31, 1998................... 446,028 $0.18
Granted.......................................... 697,397 $0.18
Forfeited........................................ (105,487) $0.18
Exercised........................................ (34,214) $0.18
---------
Outstanding at December 31, 1999................... 1,003,724 $0.18
Granted (unaudited).............................. 1,809,000 $1.32
Forfeited (unaudited)............................ (39,137) $2.02
Exercised (unaudited)............................ (814,413) $0.29
---------
Outstanding at June 30, 2000 (unaudited)........... 1,959,174 $1.15
========= =====
</TABLE>
As of December 31, 1997, 1998 and 1999, 50,459, 106,465 and 261,991 of the
above options were exercisable, respectively, with weighted average exercise
prices of $0.18, $0.18 and $0.18, respectively. As of June 30, 1999 and 2000,
148,946 and 156,096 of the above options were exercisable, respectively, with
weighted average exercise prices of $0.18 and $0.40, respectively.
The following table summarizes the weighted average exercise prices of options
granted during the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000.
The table includes options for common stock whose exercise price was less than
the fair market value, for financial reporting purposes, of the underlying
common stock at the date of grant and equal to the fair market value at the
date of grant:
<TABLE>
<CAPTION>
Six months ended
Years Ended December 31, June 30,
-------------------------- -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
EXERCISE PRICE:
Less than fair market
value --
Number of options............ -- -- 697,397 121,500 1,809,000
======== ======== ======== ======== ==========
Weighted average exercise
price....................... $ -- $ -- $ 0.18 $ 0.18 $ 1.32
======== ======== ======== ======== ==========
Weighted average fair value.. $ -- $ -- $ 10.81 $ 2.16 $ 14.43
======== ======== ======== ======== ==========
Equal to fair market value--
Number of options............ 307,575 283,099 -- -- --
======== ======== ======== ======== ==========
Weighted average exercise
price....................... $ 0.18 $ 0.18 $ -- $ -- $ --
======== ======== ======== ======== ==========
Weighted average fair value.. $ 0.06 $ 0.06 $ -- $ -- $ --
======== ======== ======== ======== ==========
</TABLE>
F-16
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
The following table summarizes information about employee stock options
outstanding and exercisable under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Number of Weighted Number
Options Average Weighted Exercisable Weighted
Outstanding at Remaining Average at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1999 Life in Years Price 1999 Price
-------- -------------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.18 1,003,724 8.84 $0.18 261,991 $0.18
The following table summarizes information about employee stock options
outstanding and exercisable under the Plan at June 30, 2000 (unaudited):
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Number of Weighted
Options Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Exercise June 30, Contractual Exercise at June 30, Exercise
Price 2000 Life in Years Price 2000 Price
-------- -------------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.18 333,508 8.29 $0.18 95,832 $0.18
$0.75 1,365,333 9.58 $0.75 60,264 $0.75
$4.50 260,333 9.80 $4.50 -- $4.50
</TABLE>
Options Issued to Non-Employees
SFAS No. 123 and related interpretations require that all transactions with
non-employees in which goods or services are the consideration received for the
issuance of equity instruments be accounted for based on the fair value of the
consideration received or the equity instruments issued, whichever is more
reliably measurable. The Company has computed the fair value of all options
granted to non-employees during 1997 and 1998, using the Black-Scholes pricing
model. No expense has been recognized related to these options as their fair
value was determined to be nominal. No options were issued to non-employees in
1999 or for the period ended June 30, 2000.
A summary of all non-employee option activity for the years ended December 31,
1997, 1998 and 1999 and for the six months ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996.................... 40,000 $0.18
Granted........................................... 34,999 $0.18
Forfeited......................................... (1,666) $0.18
-------
Outstanding at December 31, 1997.................... 73,333 $0.18
Granted........................................... 32,000 $0.18
Forfeited......................................... (18,406) $0.18
Exercised......................................... (16,927) $0.18
-------
Outstanding at December 31, 1998 and 1999........... 70,000 $0.18
Exercised (unaudited)............................. (25,834) $0.18
-------
Outstanding at June 30, 2000 (unaudited)............ 44,166 $0.18
======= =====
</TABLE>
F-17
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
The following table summarizes information about non-employee stock options
outstanding and exercisable under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Number of Weighted Number
Options Average Weighted Exercisable Weighted
Outstanding Remaining Average at Average
at December 31, Contractual Exercise December 31, Exercise
Exercise Price 1999 Life in Years Price 1999 Price
-------------- --------------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.18 70,000 7.06 $0.18 70,000 $0.18
The following table summarizes information about non-employee stock options
outstanding and exercisable under the Plan at June 30, 2000 (unaudited):
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Number of Weighted
Options Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at June 30, Contractual Exercise at June 30, Exercise
Exercise Price 2000 Life in Years Price 2000 Price
-------------- --------------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.18 44,166 5.96 $0.18 44,166 $0.18
</TABLE>
Stock Warrants
In November 1996, the Company entered into a warrant agreement with a related
party to purchase 124,502 shares of the Company's Series A Preferred Stock for
an exercise price of $0.6024 per share. The warrant expires on the earlier of
the closing of an initial public offering of the Company's common stock or
November 30, 2001. No value has been attributed to this warrant as its value
was determined to be nominal.
In September 1997, the Company entered into a warrant agreement with a bank to
purchase the Company's Series A Preferred Stock. On October 9, 1997, under the
terms of the warrant agreement, the Company issued a warrant to the bank to
purchase 30,000 shares of the Company's Series A Preferred Stock for an
exercise price of $0.6024 per share. The warrant expires on September 9, 2004.
No value has been attributed to this warrant as its value was determined to be
nominal.
In October 1998, in connection with the issuance of convertible debt (see Note
4), the Company entered into warrant agreements to purchase a total of 208,331
shares of the Company's Series B Preferred Stock for an exercise price of $0.72
per share. The warrants expire on December 16, 2003. The Company determined the
fair value of the warrants to be $82,298 using the Black-Scholes option pricing
model using the following assumptions:
<TABLE>
<S> <C>
Exercise price....................................................... $0.72
Fair market value of Series B Preferred Stock on grant date.......... $0.72
Option life.......................................................... 5 years
Volatility rate...................................................... 60%
Risk free rate of return............................................. 4.18%
Dividend rate........................................................ 0%
</TABLE>
The fair value of these warrants have been included as a discount to the
related debt.
In December 1998, the Company entered into a warrant agreement with the Series
B placement agent to purchase 18,055 shares of the Company's common stock for
an exercise price of $2.16 per share. The warrants expire on the earlier of the
closing of an initial public offering of the Company's common stock or December
16, 2003. No deduction from the Series B proceeds was recorded related to these
warrants as their value was determined to be nominal.
In February 1999, the Company entered into a warrant agreement with the Series
B placement agent to purchase 201,388 shares of the Company's common stock for
an exercise price of $2.16 per share. The warrants expire on the
F-18
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
earlier of the closing of an initial public offering of the Company's common
stock or February 11, 2004. The Company has determined the fair value of the
warrants to be $241,126 using the Black-Scholes option pricing model using the
following assumptions:
<TABLE>
<S> <C>
Exercise price....................................................... $2.16
Fair market value of common stock on grant date...................... $0.72
Option life.......................................................... 5 years
Volatility rate...................................................... 60%
Risk free rate of return............................................. 4.66%
Dividend rate........................................................ 0%
</TABLE>
The fair value of these warrants have been included as additional offering
costs of the Series B Preferred Stock.
6. Income Taxes:
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Current--
Federal............................. $ -- $ -- $ --
State............................... -- -- --
---------- ----------- -----------
Total current provision........... -- -- --
---------- ----------- -----------
Deferred--
Federal............................. (984,000) (1,313,000) (2,025,000)
State............................... (95,000) (127,000) (197,000)
Valuation allowance................. 1,079,000 1,440,000 2,222,000
---------- ----------- -----------
Total deferred provision
(benefit)........................ -- -- --
---------- ----------- -----------
Total provision................... $ -- $ -- $ --
========== =========== ===========
</TABLE>
The statutory federal income tax rate was 34% for the years ended December 31,
1997, 1998 and 1999.
Differences between the income tax expense reported in the statements of
operations and the amount computed by applying the statutory federal income tax
rate to earnings before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Benefit at statutory rate............. $ (931,000) $(1,276,000) $(2,577,000)
Increase (decrease) due to--
State income taxes.................. (90,000) (124,000) (250,000)
Nondeductible expenses.............. 2,000 4,000 7,000
Nondeductible stock-based
compensation....................... -- -- 623,000
Research and development tax credit
and other.......................... (60,000) (44,000) (25,000)
Valuation allowance................. 1,079,000 1,440,000 2,222,000
---------- ----------- -----------
Income tax provision.................. $ -- $ -- $ --
========== =========== ===========
</TABLE>
F-19
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
Components of net deferred tax assets (liabilities) as of December 31, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Current--
Accounts receivable............................... $ -- $ (134,000)
Prepaid expenses.................................. (7,000) (45,000)
Accounts payable and accrued liabilities.......... 139,000 241,000
Deferred revenue.................................. 46,000 309,000
Non-current--
Depreciation...................................... 16,000 30,000
Capitalized research and development costs for tax
purposes......................................... 916,000 797,000
Net operating losses.............................. 2,108,000 4,217,000
Tax credits....................................... 105,000 130,000
---------- ----------
Total net deferred tax assets....................... 3,323,000 5,545,000
Valuation allowance................................. (3,323,000) (5,545,000)
---------- ----------
Net deferred tax assets........................... $ -- $ --
========== ==========
</TABLE>
For income tax reporting purposes, the Company has approximately $11,306,000 of
net operating loss carryforwards that expire at various dates through 2019. The
Tax Reform Act of 1986 contains provisions that may limit the net operating
loss carryforwards available to be used in any given year in the event of a
significant change in ownership interests. The Company also has available
income tax credits of approximately $130,000, expiring at various dates through
2019. Realization of net operating loss and tax credit carryforwards is
dependent on generating sufficient taxable income prior to their expiration
dates.
During 1997, 1998 and 1999, the Company increased its valuation allowance by
$1,079,000, $1,440,000 and $2,222,000, respectively, due mainly to uncertainty
relating to the realizability of the Company's net operating loss carryforwards
and income tax credits. The amount of the deferred tax assets considered
realizable could be adjusted in the near term if future taxable income
materializes.
7. Commitment and Contingencies:
Operating Leases
The Company leases administrative offices, research facilities and certain
equipment under noncancelable operating lease agreements. Rent expense under
these leases was $227,982 and $247,368 for the years ended December 31, 1998
and 1999, respectively. The following is a schedule of future minimum lease
payments for the years ending December 31:
<TABLE>
<S> <C>
2000.............................................................. $ 389,159
2001.............................................................. 392,221
2002.............................................................. 403,449
2003.............................................................. 415,013
2004.............................................................. 423,077
Thereafter........................................................ 102,984
----------
$2,125,903
==========
</TABLE>
Cold Springs Harbor License Agreement
The Company is the exclusive licensee of a technology owned by Cold Springs
Harbor Laboratory with regard to a specific patent. This license gives the
Company the exclusive right to commercialize the related technology. This
technology is incorporated into the Company's Discovery Manager product.
Accordingly, the Company's business could be materially harmed if the Company
loses or is unable to maintain this license agreement. Cold Springs Harbor
Laboratory is a related party through its ownership of shares of the Company's
common stock.
F-20
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
Licensing Agreement
In April 1996, the Company entered into a licensing and remarketing agreement
with a third-party software company ("licensor"). The Company is fully licensed
to use the licensor's software and documentation. The Company can sublicense
the use of the licensor's software to its worldwide customers. Under the terms
of the two-year sublicense agreement, the Company is required to pay royalties
to the licensor based on product sales. During the years ended December 31,
1998 and 1999, the Company paid approximately $1,800 and $57,130, respectively,
under the licensing agreement. No royalties were paid during 1997 under this
agreement.
8. Major Customers:
The Company did not generate any revenue for the year ended December 31, 1997.
The Company's revenue from customers in excess of 10% of net revenue for the
years ended December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------ -----
<S> <C> <C>
Customer A...................................................... 55.0% 41.0%
Customer B...................................................... 45.0% 26.0%
------ -----
100.0% 67.0%
====== =====
</TABLE>
The Company's net accounts receivable-trade as of December 31, 1998 and 1999
are concentrated with the following major customers as follows:
<TABLE>
<CAPTION>
1998 1999
---- ------
<S> <C> <C>
Customer B....................................................... --% 11.0%
Customer C....................................................... --% 89.0%
--- ------
--% 100.0%
=== ======
</TABLE>
9. Geographic Information:
The Company's operations and all assets are based in the United States. The
Company sells its products to both domestic and foreign customers. The Company
did not generate any revenue for the year ended December 31, 1997. The
Company's revenue by geographic area for the years ended December 31, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
United States.............................................. $ 88,887 $530,310
Europe..................................................... 108,005 251,020
-------- --------
$196,892 $781,330
======== ========
</TABLE>
10. Employee Benefit Plan:
401(k) and Profit Sharing Plan
Effective January 1, 1998, the Company implemented a defined contribution plan
under Section 401(k) of the Internal Revenue Code ("IRC"). Under the plan,
eligible employees may contribute up to 15% of their compensation, subject to
limitations under the IRC. The Company may make discretionary matching
contributions to the plan upon Board approval. No contributions to the plan
have been made by the Company to date.
11. Subsequent Events:
On March 13, 2000, the Company issued 10,022,634 shares of Series C Convertible
Preferred Stock ($0.001 par value) at $1.50 per share in a private placement
offering to accredited investors, resulting in proceeds of approximately
$15,000,000. As part of this transaction, the Certificate of Incorporation was
amended to increase the authorized shares to 112,938,178, of which 47,938,178
are designated as preferred stock and 65,000,000 are
F-21
<PAGE>
GENOMICA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Information Related to Unaudited Periods)
designated as common stock. Each share of Series C Convertible Preferred Stock
is initially convertible into one share of common stock. However, the
conversion rate will adjust to 0.3333 shares of common stock for each share of
preferred stock held when the Company effects a one-for-three reverse stock
split of its common stock immediately prior to the closing of the Company's
initial public offering. The issuance of the Series C Convertible Preferred
Stock resulted in a beneficial conversion feature of approximately $15,000,000,
calculated in accordance with Emerging Issues Task Force No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features." The beneficial
conversion feature was reflected as a preferred dividend in the Statement of
Operations during the first quarter of 2000.
Unaudited
Subsequent to December 31, 1999 and through June 30, 2000, the Company granted
options to purchase 1,809,000 shares of common stock to employees and directors
at exercise prices ranging from $0.75 to $4.50 per share. In connection with
the stock option grants, the Company will recognize compensation expense over
the related vesting periods of $25,523,760 relating to these grants for the
difference between the exercise price and the deemed fair market value for
financial reporting purposes.
On September 5, 2000, the Company issued 900,000 shares of Series D Convertible
Preferred Stock ($0.001 par value) at $3.34 per share, to an accredited
investor, resulting in net proceeds of approximately $3,000,000. As part of
this transaction, the Certificate of Incorporation was amended to increase the
authorized preferred shares to 48,838,178. Each share of Series D Convertible
Preferred Stock is initially convertible into one share of common stock.
However, the conversion rate will adjust to 0.3333 shares of common stock for
each share of preferred stock held when the Company effects a one-for-three
reverse stock split of its common stock immediately prior to the closing of the
Company's initial public offering. The issuance of the Series D Convertible
Preferred Stock resulted in a beneficial conversion feature of approximately
$2,100,000, calculated in accordance with Emerging Issues Task Force No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features."
The beneficial conversion feature will be reflected as a preferred dividend in
the Statement of Operations during the third quarter of 2000.
F-22
<PAGE>
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[LOGO OF GENOMICA]
Genomica Corporation
6,440,000 Shares
Common Stock
--------------
PROSPECTUS
--------------
September 28, 2000
CIBC World Markets
Dain Rauscher Wessels
Prudential Vector Healthcare
a unit of Prudential Securities
-----------------------------------------------------------------
You should rely only on the information contained in this
prospectus. No dealer, salesperson or other person is
authorized to give information that is not contained in
this prospectus. This prospectus is not an offer to sell
nor is it seeking an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus is correct only
as of the date of this prospectus, regardless of the time
of the delivery of this prospectus or any sale of these
securities.
Until October 23, 2000 (25 days after the commencement of
the offering), all dealers that effect transactions in
these securities, whether or not participating in the
offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a
prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
