<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2000
REGISTRATION NO. 333-34198
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
LARGE SCALE BIOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 2834 77-0154648
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3333 VACA VALLEY PARKWAY, SUITE 1000
VACAVILLE, CA 95688
(707) 446-5501
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT L. ERWIN
CHIEF EXECUTIVE OFFICER
LARGE SCALE BIOLOGY CORPORATION
3333 VACA VALLEY PARKWAY, SUITE 1000
VACAVILLE, CALIFORNIA 95688
(707) 446-5501
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
RONALD B. MOSKOVITZ, ESQ. GERALD S. TANENBAUM,
ELIZABETH H. LEFEVER, ESQ. ESQ.
L. CHRISTOPHER VEJNOSKA, ESQ. CAHILL GORDON & REINDEL
JULIE M. MCEVILLY, ESQ. 80 PINE STREET
BROBECK, PHLEGER & HARRISON LLP NEW YORK, NEW YORK
ONE MARKET 10005
SPEAR STREET TOWER (212) 701-3000
SAN FRANCISCO, CALIFORNIA 94105
(415) 442-0900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE REGISTRATION FEE(2)
----------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value
per share................. 4,105,500 $22.00 $90,321,000 $23,845
----------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 535,500 shares of common stock which the underwriters have the
option to purchase to cover over-allotments, if any.
(2) The registrant has previously paid $26,400.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information contained in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell and it is not
soliciting an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
Subject to Completion
Dated June , 2000
PROSPECTUS
[LOGO]
3,570,000 Shares
LARGE SCALE BIOLOGY CORPORATION
Common Stock
Large Scale Biology Corporation is selling all of the shares of common stock in
this offering. This is our initial public offering. We estimate that the initial
offering price will be between $20.00 and $22.00 per share.
We have applied to list our common stock on the Nasdaq National Market under the
symbol "LSBC."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE READ "RISK FACTORS"
BEGINNING ON PAGE 8.
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.
<TABLE>
--------------------------------------------
PROCEEDS TO LARGE
PRICE TO UNDERWRITING SCALE BIOLOGY
PUBLIC DISCOUNT CORPORATION
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<S> <C> <C> <C>
Per Share $ $ $
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Total $ $ $
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</TABLE>
We have granted the underwriters the right to purchase up to an additional
535,500 shares of common stock to cover over-allotments.
J.P. MORGAN & CO.
CHASE H&Q
WILLIAM BLAIR & COMPANY
, 2000
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................... 3
Risk Factors................................ 8
Cautionary Note on Forward-Looking
Statements................................ 17
About This Prospectus....................... 18
Use of Proceeds............................. 19
Dividend Policy............................. 19
Capitalization.............................. 20
Dilution.................................... 21
Selected Financial Data..................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 23
Business.................................... 29
Management.................................. 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Transactions and Relationships with Related
Parties................................... 48
Principal Stockholders...................... 50
Description of Capital Stock................ 53
Shares Available for Future Sale............ 56
United States Tax Consequences to Non-United
States Holders of Common Stock............ 58
Underwriting................................ 60
Legal Matters............................... 62
Change in Independent Auditors.............. 62
Experts..................................... 62
Additional Information...................... 63
Index to Financial Statements............... F-1
</TABLE>
Until , 2000, all dealers that effect transactions in the
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligations to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE> 4
PROSPECTUS SUMMARY
In this prospectus, "Large Scale Biology," "we," "us" and "our" refer to Large
Scale Biology Corporation, a Delaware corporation, its subsidiaries and its
California predecessor, and not to the underwriters. This summary highlights
information contained elsewhere in this prospectus. This summary does not
contain all of the information you should consider before buying shares of our
common stock. You should read this entire prospectus carefully.
LARGE SCALE BIOLOGY CORPORATION
Large Scale Biology uses its proprietary proteomics and functional genomics
technologies to develop products and establish commercial collaborations with
pharmaceutical, biotechnology, chemical and other life sciences companies. Our
patent portfolio supports our key proprietary technologies, ProGEx and GENEWARE,
which provide us with a broad range of commercial opportunities. We believe that
we can apply our proprietary technologies to enable the transformation of
proteomic and genomic information into multiple product opportunities such as
drug targets, therapeutics, diagnostics and the evaluation of drug effectiveness
and toxicity.
Proteomics is the study of proteins. All biological processes, including
diseases and responses to therapeutics, involve changes in proteins. Despite the
near complete sequencing of the human genome, scientists still do not fully
understand the function of proteins and genes. Our automated, high-throughput
ProGEx system provides a snapshot of the protein composition, or proteome, of
cells and tissues. We use our ProGEx system to rapidly identify changes in
proteins that are associated with diseases or with a therapeutic's effects. We
believe that proteomics will become crucial in discovering and developing
therapeutics, and in predicting, diagnosing and monitoring diseases. Our ProGEx
system provides information that is unavailable using genomics technologies
alone.
Functional genomics is the study of what genes do. Genes determine where, when
and how a living organism makes particular proteins. GENEWARE is our
proprietary, automated technology for rapidly inserting genes into host
organisms for novel gene discovery and gene function analysis. We also intend to
apply this technology to efficiently produce human therapeutic and other
commercially useful proteins.
We are using our proprietary technologies to help us identify the action of
drugs in living organisms, the causes and effects of diseases and to determine
how well drugs work for their intended uses. We intend to integrate our
information on gene function with our proteomic databases by correlating the
function of genes with proteomic information from normal and diseased cells and
tissues to identify drug targets and therapeutic proteins.
We are using our ProGEx system to develop our products which are:
- HUMAN PROTEIN INDEX, or HPI, database -- our database of the detailed
protein composition of all normal human tissues and cells, a protein
equivalent of the Human Genome Project
- MOLECULAR ANATOMY AND PATHOLOGY, or MAP, database -- our database that
describes the changes in protein composition associated with disease
- MOLECULAR EFFECTS OF DRUGS, or MED, database -- our database that
describes changes in protein composition associated with the
administration of therapeutics and other treatments
- Portfolio of marker proteins -- proteins significantly correlated with
disease or a therapeutic's effects, for use as drug targets, therapeutic
proteins or diagnostics
We are using our GENEWARE technology to:
- Identify unique genes
- Determine gene functions
- Manufacture therapeutic proteins, vaccines and other commercially useful
proteins
We believe that by building our portfolio of strategic collaborations, we will
generate revenue and establish a long-term economic interest in product
pipelines of selected collaborators. Since our inception, we have established
collaborations with pharmaceutical, biotechnology, chemical and other life
sciences companies as well as research institutions and government
3
<PAGE> 5
agencies. We generated $16.1 million of revenues in 1999 and $5.7 million in the
quarter ended March 31, 2000 from these arrangements. We currently have seven
ongoing research and technology development programs and collaborations.
We structure our current collaborations in a variety of ways. We obtain
immediate funding in the form of ongoing committed research and development
payments and technology access fees from our collaborators. We also share in the
long-term value of the products that we assist our collaborators in developing
through the retention of product rights and from royalty fees from the sale of
products developed by our technologies.
In September 1998, we entered into a three-year contract with The Dow Chemical
Company and its subsidiary Dow AgroSciences LLC, collectively referred to as
Dow, for their exclusive use of our GENEWARE technology for development of
functional genomics in selected agricultural and industrial chemical categories.
During this collaboration, we and Dow have identified commercially significant
genes for specific agricultural and industrial uses that will be developed and
marketed by Dow and its affiliates. We retain the right to use any of the
identified genes resulting from this collaboration for uses in other categories
not allocated to Dow. Dow can elect to continue this collaboration beyond
September 2001 by paying additional technology access fees. If Dow does not
elect to continue this collaboration, we can market to others access to our
technology for agricultural and industrial chemical purposes. Our revenues from
Dow were $14.2 million in 1999 and $5.0 million in the quarter ended March 31,
2000.
We file patent applications and trademarks to protect our intellectual property.
As of May 31, 2000, 20 issued and 59 pending U.S. patents and 12 issued and 44
pending foreign patents protect our proprietary technologies relating to
proteomics, genomics and bioprocessing.
STRATEGY
Our principal objective is to commercialize products and technologies as we
establish a leadership position in proteomics and functional genomics. We use
our proprietary technologies to identify, quantify and determine the function of
proteins in cells and tissues. In addition, our technology can be used to
determine gene functions as well as to cost-effectively produce proteins.
The key elements of our strategy include the following:
- Becoming the definitive source of information about human proteins
through our HPI database
- Identifying potential drug targets, therapeutic proteins and diagnostics
with our proteomics and functional genomics technologies
- Becoming the leading provider of protein information for protein biochips
and other diagnostic tools
- Clinically testing our first therapeutic product, our patient-specific
vaccine for the treatment of non-Hodgkins lymphoma, a product produced
using our GENEWARE technology
- Commercializing our protein production technology through the manufacture
of our own therapeutic proteins and proteins for our clients
CORPORATE INFORMATION
Large Scale Biology Corporation was incorporated in California in June 1987 as
Biosource Genetics Corporation. We will reincorporate in Delaware prior to the
completion of this offering. Our principal executive offices are located at 3333
Vaca Valley Parkway, Suite 1000, Vacaville, California 95688 and our telephone
number is (707) 446-5501. Our website address is www.lsbc.com. Information
contained in our website is not a prospectus and does not constitute a part of
this prospectus.
4
<PAGE> 6
THE OFFERING
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<S> <C>
COMMON STOCK OFFERED............................... 3,570,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS 15,477,444 shares
OFFERING.........................................
USE OF PROCEEDS.................................... 30% for research and development activities, 30%
for product development initiatives, 20% for
capital expenditures and 20% for working capital
and for other general corporate purposes. See "Use
of Proceeds" for more information regarding our
planned use of the proceeds from this offering.
PROPOSED NASDAQ NATIONAL MARKET SYMBOL............. "LSBC"
</TABLE>
The number of shares of our common stock outstanding after this offering is
based on the number of shares outstanding as of May 31, 2000, and excludes:
- 2,750,300 shares of common stock issuable on the exercise of stock
options outstanding at May 31, 2000 at a weighted average exercise price
of $8.12 per share
- 552,887 shares of common stock reserved for issuance under our stock
option plans at May 31, 2000 and
- 1,408,258 shares of common stock issuable on the exercise of warrants
outstanding at May 31, 2000 at a weighted average exercise price of
$12.33 per share
Except as stated in the financial statements or as specifically indicated in
this prospectus, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option
- assumes an initial public offering price of $21.00 per share, the
midpoint of the range shown on the cover of this prospectus
- reflects the conversion of all shares of our outstanding convertible
preferred stock into 5,627,645 shares of our common stock upon the
completion of this offering.
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<PAGE> 7
SUMMARY FINANCIAL DATA
You should read the following financial data in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements and the accompanying notes
thereto included elsewhere in this prospectus. We derived the consolidated
statement of operations data for the years ended December 31, 1997, 1998 and
1999 from our audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statement of operations data for the three
month periods ended March 31, 1999 and 2000 and the consolidated balance sheet
data as of March 31, 2000 are derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. The consolidated statement of
operations data for the year ended December 31, 1999 and for the three month
periods ended March 31, 1999 and 2000 and the consolidated balance sheet data as
of March 31, 2000 reflects our acquisition of Large Scale Proteomics on February
1, 1999.
We calculated the unaudited pro forma net loss per share on a pro forma basis to
reflect the conversion of all shares of our convertible preferred stock into
5,627,645 shares of our common stock upon completion of this offering. The
unaudited pro forma net loss per share does not reflect the non-cash
compensation expense associated with stock options that employees may exercise
upon completion of the offering. The non-cash compensation expense related to
these options, assuming no forfeitures, will be approximately $5.0 million based
on an assumed initial offering price of $21.00 per share.
The unaudited as adjusted balance sheet data gives effect to the conversion of
our convertible preferred stock and of our receipt of the estimated net proceeds
from the sale of 3,570,000 shares of common stock in this offering at an assumed
initial public offering price of $21.00 per share, after deducting the estimated
underwriting discounts and offering expenses we must pay. The unaudited as
adjusted balance sheet data also gives effect to the reclassification of our
warrant liability of $11.1 million as of March 31, 2000 to permanent equity upon
completion of this offering.
<TABLE>
<CAPTION>
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1997 1998(1) 1999(1) 1999 2000
---------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
In thousands, except share and per share data
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Revenues..................................... $ 2,108 $ 3,394 $ 16,090 $ 2,641 $ 5,743
Costs and expenses:
Development agreements..................... 1,735 2,565 7,988 1,671 2,062
Research and development................... 5,872 6,973 9,163 1,780 3,414
General, administrative and marketing...... 3,363 3,492 8,333 2,799 1,990
Purchased research and development......... -- -- 19,783 19,783 --
---------- ---------- ----------- ----------- -----------
Total costs and expenses........... 10,970 13,030 45,267 26,033 7,466
---------- ---------- ----------- ----------- -----------
Gain on litigation settlements............... 2,000 1,890 1,300 300 --
---------- ---------- ----------- ----------- -----------
Loss from operations......................... (6,862) (7,746) (27,877) (23,092) (1,723)
Total other income (expense)................. 293 (1,009) (5,203) 41 350
---------- ---------- ----------- ----------- -----------
Net loss before provision for income taxes... (6,569) (8,755) (33,080) (23,051) (1,373)
Provision for income taxes................... -- -- 190 -- --
---------- ---------- ----------- ----------- -----------
Net loss..................................... $ (6,569) $ (8,755) $ (33,270) $ (23,051) $ (1,373)
========== ========== =========== =========== ===========
Net loss per share -- basic and diluted...... $ (1.06) $ (1.40) $ (5.38) $ (3.73) $ (0.22)
========== ========== =========== =========== ===========
Weighted average shares outstanding -- basic
and diluted................................ 6,221,490 6,244,516 6,183,485 6,174,626 6,222,351
========== ========== =========== =========== ===========
Unaudited pro forma net loss per
share -- basic and diluted................. $ (2.88) $ (2.14) $ (0.12)
=========== =========== ===========
Pro forma weighted average shares
outstanding -- basic and diluted........... 11,553,650 10,758,049 11,849,996
=========== =========== ===========
</TABLE>
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(1) As restated, see Note 15 to the consolidated financial statements.
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<PAGE> 8
SUMMARY FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
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AS OF MARCH 31, 2000
----------------------------
ACTUAL AS ADJUSTED
------------- -----------
<S> <C> <C>
In thousands
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents................................... $ 3,679 $ 73,429
Marketable securities....................................... 6,272 6,272
Working capital (deficit)................................... (4,809) 64,941
Total assets................................................ 27,847 97,597
Long-term debt, net of current portion and warrant
liability................................................. 13,146 2,008
Convertible preferred stock................................. 38,713 --
Accumulated deficit......................................... (78,480) (78,480)
Total stockholders' equity (deficit)........................ (7,285) 73,603
</TABLE>
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider, along with other factors, the following risks, which make
investment in our common stock largely speculative. If any of the following
risks actually occurs, we may not be able to conduct our business as currently
planned and they may adversely affect our financial condition, results of
operations and stock trading prices. Please read the "Cautionary Note on
Forward-Looking Statements" which follows this section.
RISKS RELATED TO OUR BUSINESS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT, AND WE MAY NOT BE ABLE TO SUCCESSFULLY
DEVELOP AND COMMERCIALIZE OUR PRODUCTS AND TECHNOLOGIES
We are in an early stage of development as an operating company, and we are
subject to all the risks inherent in the development of a business enterprise,
including the need for substantial capital to support the development of our
products and technologies. We have had limited revenue from contract research
and development services and collaborations. We are still developing our three
primary database programs, HPI, MAP and MED, that we intend to commercialize. We
have marketed a limited number of our own technologies. We have not yet operated
our ProGEx system on the large scale we believe will be necessary to complete
our HPI database and other proteomics projects. In addition, we are still in the
process of integrating our proprietary protein databases with information on
gene function. If we are unable to manufacture and operate our ProGEx system on
a large scale or to integrate our protein databases with information on gene
function, we may not be able to achieve our objectives in the field of
proteomics.
Our other anticipated products, including a novel vaccine for the treatment of
non-Hodgkins lymphoma, most likely will require that we enter into new
collaborations before we can manufacture and market them, and are subject to the
governmental regulatory process. Because we are in new and developing fields,
and our research focuses on new and unproven technologies, our therapeutic
vaccines, drugs and proteins that we develop may not be effective in humans, or
may not meet regulatory requirements for safety and efficacy. In addition, even
if we successfully develop a product, there may not be a substantial commercial
market for that product.
WE ARE IN NEW AND DEVELOPING FIELDS AND THERE MAY NOT BE A MARKET FOR OUR
PRODUCTS AND TECHNOLOGIES
We focus our technologies on the new and developing fields of proteomics and
functional genomics. Our research is fundamentally unique and we cannot assure
the acceptance of its scientific merit, the benefits of products produced by it
or that the public will react favorably to it. Protein-based gene expression
products and technologies, including our plant-derived proteins and our ProGEx
system and GENEWARE technology, have limited commercial precedent. The
usefulness of the information and products generated by our proteomics and
functional genomics technologies is unproven, and our collaborators and
potential collaborators may determine that they are not useful or
cost-effective. In addition, we must develop these new products and technologies
in time to meet market demand, if any. If we fail to do so, it is likely that
other technologies and companies will predominate and we will not be able to
earn a sufficient return on our investment.
WE HAVE A HISTORY OF LOSSES AND CANNOT PREDICT WHEN WE WILL BECOME PROFITABLE,
IF AT ALL
We have had net losses in each year since our inception in 1987. We sustained a
net loss of approximately $33.3 million in 1999 and $1.4 million for the quarter
ended March 31, 2000 and had an accumulated deficit of approximately $78.5
million as of March 31, 2000. Net cash flow provided by operating activities was
positive in 1999 due principally to payments under the Dow agreement, but we
incurred substantial non-cash charges of $30.1 million in 1999 due principally
to a non-recurring expense associated with the acquisition of Large Scale
Proteomics. Milestone payments from the Dow agreement are expected to be
substantially lower in 2000, and we must enter into new collaborations, with
parties not yet identified, to make up for this decline in revenue.
Additionally, we expect to spend significant amounts to fund research and
development and to enhance our core technologies. As a result, we expect that
our operating expenses will increase significantly and we will need to generate
significant additional revenues from collaborations and the commercialization of
our products and technologies to achieve profitability. We expect to incur
substantial losses for the foreseeable future. If we are unable to enter into
new
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collaborations, control our operating expenses and successfully commercialize
our products and technologies, we may never become profitable.
WE MAY REQUIRE CAPITAL IN ADDITION TO THE PROCEEDS OF THIS OFFERING WHICH WE MAY
NOT BE ABLE TO RAISE
In order for us to remain competitive, we must continue to develop our databases
and improve our technologies, including our ProGEx system and GENEWARE
technology, improve our database software and develop or acquire new
technologies. We believe that the proceeds from this offering, together with
revenues from our collaborations, research and development grants and all other
sources will be sufficient to fund our operations for at least the next 24
months. However, changes in our business may occur that would consume available
capital resources significantly sooner than we expect. If our capital resources
are insufficient to meet future capital requirements and expenses, we will have
to raise additional funds, which will decrease the value of our common stock. We
may raise this capital through public or private financings or additional
collaborations, strategic partnerships or licensing arrangements. If additional
capital becomes necessary in the future, it would likely amount to at least tens
of millions of dollars. If we are unable to raise sufficient additional capital,
we will have to curtail or cease operations.
ALTERNATIVE METHODS MAY SUPERSEDE OUR TECHNOLOGIES OR MAKE THEM NON-COMPETITIVE
The genomics and proteomics businesses are intensely competitive. The genomics
and proteomics industries are characterized by extensive research efforts which
result in rapid technological progress. If our competitors succeed in developing
products or technologies that are more effective than ours or that render our
products or technologies obsolete or noncompetitive, our business will suffer.
Many universities, public agencies and established pharmaceutical,
biotechnology, chemical and other life sciences companies with substantially
greater resources then we have are developing and using technologies and are
actively engaging in the development of products similar to or competitive with
our products and technologies. Our competitors are using proteomics and genomics
technologies to identify potential drug targets, therapeutic proteins and
diagnostic marker proteins. In addition, our competitors have developed
databases containing gene sequence, gene expression, genetic variation or other
genomic information and are marketing or plan to market their data to
pharmaceutical, biotechnology, chemical and other life sciences companies. To
remain competitive, we must continue to invest in new and existing technologies,
expand our databases and improve our bioinformatics software, including
proprietary software used with our ProGEx system.
Our competitors may devise alternative methods to obtain proteomic and
functional genomic information more rapidly, more completely or with greater
accuracy than is achieved by using our ProGEx and GENEWARE systems. There has
been and continues to be substantial academic and commercial research effort
devoted to development of such alternative methods. If a successful replacement
method is developed, it could undermine the commercial basis for the products
and technologies we intend to provide.
WE MAY NOT BE ABLE TO ENTER INTO THE COLLABORATIONS NECESSARY TO FULLY DEVELOP
AND COMMERCIALIZE OUR PRODUCTS AND TECHNOLOGIES, AND WE WILL BE DEPENDENT ON OUR
COLLABORATORS IF WE DO
Although we intend to independently pursue some therapeutic product applications
into the development stage, we will develop and commercialize most of our
products only in collaboration with pharmaceutical, biotechnology, chemical and
other life sciences companies. Our success will depend in large part on our
ability to enter into future collaborations with other companies for the
research and development, pre-clinical and clinical testing and the regulatory
approval and commercialization of our products. Our reliance upon these
companies for these capabilities will reduce our control over such activities
and could make us dependent upon them.
To date, we have entered into only a limited number of collaborations.
Generally, the scope of these collaborations has been to demonstrate the
function of plant genes and the feasibility of using viral vectors to create
proteins in plants and to identify the identifying marker proteins for drug
development. Our agreements provide us with rights to participate in the
commercial development of products resulting from the use of our technologies.
We may be unable to obtain such rights in future collaborations. In addition,
unforeseen delays or complications could arise and result in the breach of our
contractual obligations with our collaborators and others, or render our
technologies unable to perform at the quality and capacity levels required for
success.
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THE NON-RENEWAL OR PREMATURE TERMINATION OF THE DOW AGREEMENT OR OUR OTHER
COLLABORATIONS COULD ADVERSELY AFFECT OUR REVENUES AND HARM OUR BUSINESS
In 1999 and for the quarter ended March 31, 2000, the Dow agreement accounted
for approximately 82% and 86% of our revenues, respectively. The Dow agreement
terminates on September 1, 2001. If Dow terminates this agreement before then,
we may be unable to quickly replace such a large customer with other sources of
revenue, which would decrease our net revenues and might make it difficult for
us to execute our business plan. In addition, if in the future our
collaborations are similarly limited to a small number of major relationships,
the loss of any future major collaborative agreement could reduce our revenue
and delay or terminate the potential development or commercialization of any of
our products or technologies.
CONFLICTS WITH OUR COLLABORATORS COULD HARM OUR BUSINESS
Conflicts with our collaborators could have a negative impact on our
relationships with them and impair our ability to enter into future
collaborations, either of which could adversely affect our business. Our
collaborators could develop competing products, preclude us from entering into
collaborations with their competitors or terminate their agreements with us
prematurely. Moreover, disagreements could arise with our collaborators over
rights to our intellectual property and our rights to share in any of the future
revenues from products or technologies resulting from use of our technologies,
or our activities in separate fields may conflict with other business plans of
our collaborators.
Dow owns or controls patent rights in the field of viral vectors covering the
infection of plants and the expression of foreign genes in plants, and has
informed us that it believes that some of our plant viral activities may fall
within the scope of these patents. If we are unable to resolve this matter, and
are found to have infringed upon these rights, we could lose these rights, and
our product development and research activities related to plant viruses may be
delayed or terminated. These kinds of disagreements could result in costly and
time-consuming litigation and divert our financial and managerial resources.
WE MUST ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PROVIDE SALES AND MARKETING
SERVICES, OR DEVELOP THESE CAPABILITIES ON OUR OWN, IF WE ARE TO SUCCESSFULLY
COMMERCIALIZE OUR PRODUCTS AND TECHNOLOGIES
We have no sales or marketing force. Although we plan to enter into sales and
marketing arrangements with third parties, we may not be able to enter into
these arrangements on favorable terms, if at all. If we cannot enter into these
arrangements, we must develop a sales and marketing force with sufficient
technical expertise to generate demand for our products and technologies. Our
inability to develop or contract for effective sales and marketing capabilities
would significantly impair our ability to develop and commercialize our
products.
IF OUR STRATEGIC DECISIONS DO NOT YIELD COMMERCIALLY VIABLE PRODUCTS, WE MAY NOT
ACHIEVE PROFITABILITY
While our technologies may be applicable to multiple products in numerous
industries, due to our limited financial and managerial resources we have made
strategic decisions to pursue specific products in specific industries. This
requires us to forego opportunities on other products and industries. We may not
successfully select technologies or those genes or proteins with the most
potential for commercial development, or we may not successfully commercialize
any product based on our technologies or on genes or proteins that we discover.
Our efforts may not produce viable commercial products and we may lose other,
more profitable opportunities.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANUFACTURE OUR PRODUCTS IN COMMERCIAL
QUANTITIES OR AT ACCEPTABLE COSTS
We have not yet commercially manufactured any products using our technologies,
including proteins manufactured with our GENEWARE technology. We have only
produced products on a small, test scale. The failure of our technologies to
provide safe, effective, useful or commercially viable approaches to the
discovery and development of drug targets and proteins which can be used as
therapeutic would significantly limit our business plan and future growth.
WE MAY NOT BE ABLE TO CREATE AND COMMERCIALIZE A COMBINED PROTEOME AND GENOMIC
SOURCE OF INFORMATION
We may not be able to successfully combine our proprietary protein data with
genomic information. Even if we are able to integrate information on gene
function with our proteomic databases, competing technologies may prove to be
more effective or
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efficient, which would limit or eliminate our revenue opportunities. If we do
not successfully create and commercialize a combined proteome and genome source
of information, it could reduce our revenues.
WE MAY BE UNABLE TO RECRUIT AND RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY
SCIENTIFIC PERSONNEL ON WHOM WE ARE DEPENDENT
The loss of one or more of our senior management and other key scientific
personnel could have a material adverse effect on our business and could inhibit
our research and development and commercialization efforts.
Although we have entered into employment agreements with some of our key
personnel, these employment agreements are for a limited period of time and not
all key personnel have employment agreements. There is currently a shortage of
skilled senior management in the biotechnology industry, which is likely to
continue and intensify. In addition, we face competition for research scientists
and technical staff from other companies, academic institutions, government
entities, nonprofit laboratories and other organizations. Failure to recruit and
retain senior management and scientific personnel on acceptable terms would
prevent us from achieving our business objectives.
CATASTROPHIC DAMAGE TO ANY OF OUR FACILITIES COULD IMPAIR OUR BUSINESS
Our biological material and proprietary instrumentation and databases are
currently located at one of three facilities. If a facility suffered
catastrophic damage from a disaster, such as a fire, flood, earthquake, power
loss or similar event, we might lose important, or even unique, materials,
machinery, equipment and databases. Loss of such material, machinery, equipment
and databases could delay or impair our operations and our research. The
insurance we maintain which covers fire but not flood or earthquakes and
generally covers the cost of replacement of facilities and equipment, may not be
adequate to cover our losses resulting from disasters or other business
interruptions. In addition, the potentially unique nature of our materials,
instrumentation, databases and research activities could make it difficult for
us to recover quickly from a disaster, if at all.
RISKS RELATED TO OUR INDUSTRY
IF COMPANIES IN THE PHARMACEUTICAL, BIOTECHNOLOGY, CHEMICAL AND LIFE SCIENCES
INDUSTRIES DO NOT SUCCEED OR THEIR DEMAND FOR OUR PRODUCTS AND TECHNOLOGIES
DECREASES, THEN OUR REVENUES COULD BE REDUCED
We expect to derive our revenues primarily from products and technologies
provided to the pharmaceutical, biotechnology, chemical and life sciences
industries. Accordingly, our success will depend directly on the success of the
companies in these industries and their demand for our products and
technologies. Our operating results may fluctuate substantially due to
reductions and delays in research and development expenditures by companies in
those industries, or their unwillingness or inability to use our products and
technologies. These reductions and delays may result from factors which are not
within our control, such as:
- Changes in economic conditions generally
- The extent to which companies in these industries conduct research and
development involving proteomics and functional genomics in-house or
through industry consortia
- The extent to which genomic information is or is not made publicly
available
- Consolidation within one or more of these industries
- Changes in the regulatory environment affecting these industries
- Pricing pressures
- Market-driven pressures on companies to consolidate and reduce costs
- Other factors affecting research and development spending in these
industries
IF COMPETITIVE PRODUCTS ARE BETTER THAN OUR PRODUCTS, THEN OUR BUSINESSES MAY
FAIL
The markets for protein development and production, including human and
veterinary therapeutics and vaccines like the ones we are developing, are highly
competitive. We believe that within the next year, virtually all of the genes in
the human genome
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will be identified. We face significant competition in our protein product
development and production efforts from entities using alternative, and in some
cases higher volume and larger scale, approaches for the same purpose.
Competitors with substantially greater resources are actively developing
products similar to or competitive with our products and potential products. Our
competitors may succeed in developing products or obtaining regulatory approval
before we do or in developing products that are more effective than those we
develop or propose to develop. A large number of universities and other
not-for-profit institutions, many of which are funded by the U.S. and foreign
governments, are also conducting research to discover genes. Any one or more of
these entities may discover and establish a patent position in one or more of
the genes or proteins that we wish to study.
In addition, several pharmaceutical, biotechnology, chemical and other life
sciences companies engage in research and development in the use of unique gene
expression systems to produce therapeutic proteins. These competitors may
develop products earlier than we do, obtain regulatory approvals faster than we
can or develop products that are more effective than ours. At least one of our
major competitors is located in Europe, and our ability to use our patent rights
to prevent competition in the creation and use of proteomics-driven products and
technologies is more limited outside of the United States. New developments are
expected to continue, and discoveries by others may render our products and
technologies non-competitive, which could lead to the failure of our business.
THE U.S. GOVERNMENT MAY EXERCISE ITS RIGHTS TO LICENSE THE INVENTIONS WE DEVELOP
USING FEDERAL FUNDS
Our grants under U.S. government research and technology development programs
provide the U.S. government a non-exclusive, non-transferable license to use
inventions we develop using federal funds without making additional payments to
us. If the government exercises these rights, it could reduce our potential
market and adversely affect our revenues to the extent we would otherwise sell
products to the government. We do not anticipate that such sales would be
material in any event.
WE MAY NOT HAVE ACCESS TO SUFFICIENTLY COMPLETE, ACCURATE OR UNCONTAMINATED DATA
FROM OUTSIDE SOURCES, INCLUDING GENOME SEQUENCE DATA WHICH WOULD INCREASE OUR
COSTS AND COULD AFFECT OUR PRODUCT DEVELOPMENT EFFORTS
The efforts of the Human Genome Project and other private companies to create a
complete catalog of the human genome may fail or not be sufficiently complete to
enable us to fully integrate that data with our proprietary protein databases.
In addition, we obtain our data from other sources, including our academic
collaborators and our sources of cell and tissue samples. This data could
contain errors or other defects which could corrupt our databases or our data
sources may have acquired this information in a manner that violates various
applicable legal requirements.
WE AND OUR COLLABORATORS ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT
REGULATORY REQUIREMENTS, WHICH COULD INCREASE OUR OPERATING COSTS OR ADVERSELY
AFFECT OUR ABILITY TO OBTAIN GOVERNMENT APPROVAL OF OUR PRODUCTS
Regulatory requirements ultimately imposed on our products could limit our
ability to test, manufacture and commercialize our products. The process for
receiving regulatory approval is long and uncertain. In addition, we may not be
able to obtain the clearances and approvals necessary for the clinical testing,
field-testing, manufacturing or marketing of our products. Further, once a
manufacturer obtains regulatory approval, a marketed product and its
manufacturer are subject to continual review, and discovery of previously
unknown problems with a product or manufacturer may result in restrictions on
the product, manufacturer and manufacturing facility, including withdrawal of
the product from the market. Finally, in some countries, regulatory agencies
also set or approve the sale prices for drug products.
WE AND OUR COLLABORATORS MAY NOT OBTAIN FDA AND OTHER APPROVALS FOR OUR PRODUCTS
IN A TIMELY MANNER, OR AT ALL
Drugs and diagnostic products are subject to an extensive and uncertain
regulatory approval process by the FDA and comparable agencies in other
countries. The regulation of new products is extensive, and the required process
of laboratory testing and human studies is lengthy and expensive. The burden of
these regulations will fall on us to the extent we are developing proprietary
products on our own. If the products are the result of a collaborative effort,
these burdens may fall on our collaborators or we may share these burdens with
them. We may not obtain FDA approvals for those products in a timely manner, or
at all. We may encounter significant delays or excessive costs in our efforts to
secure necessary approvals or
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licenses. Even if we obtain FDA regulatory approvals, the FDA extensively
regulates manufacturing, labeling, marketing, promotion and advertising after
product approval. Moreover, several of our product development areas may involve
relatively new technology and have not been the subject of extensive product
testing in humans. The regulatory requirements governing these products and
related clinical procedures remain uncertain and the products themselves may be
subject to substantial review by foreign governmental regulatory authorities
that could prevent or delay approval in those countries. Regulatory requirements
ultimately imposed on our products could limit our ability to test, manufacture
and, ultimately, commercialize our products.
IF NEW RULES ISSUED BY THE USDA ADVERSELY AFFECT OUR COLLABORATORS' ABILITY TO
COMMERCIALIZE GENETICALLY MODIFIED PRODUCTS, THEN OUR ABILITY TO SELL OUR
PRODUCTS AND TECHNOLOGIES WILL BE SEVERELY IMPAIRED
We must comply with USDA regulations for outdoor releases of genetically
engineered organisms as well as other products designed for use on or with
agricultural products. Recently, the USDA released new regulations that prohibit
the inclusion of genetically modified ingredients in products labeled as
organic. The USDA regulations also prohibit the use of genetically modified
fibers in clothing labeled as organic. These new regulations ultimately could
make our products under development with our collaborators, including Dow,
unattractive to or too expensive for consumers, or could cause the government to
prohibit their sale or use. In addition, the USDA prohibits growing and
transporting genetically modified plants except pursuant to an exemption or
under special permits. We may use genetically modified plants as screening or
production hosts. Changes in USDA policy regarding the movement or field release
of genetically modified plant hosts could adversely affect our business by
increasing the cost of our products and technologies or decreasing consumer
demand for those products and technologies or causing the government to prohibit
their sale or use.
FUTURE LEGAL AND REGULATORY REQUIREMENTS MAY LIMIT OR DISCOURAGE THE USE OF OUR
GENETICALLY ENGINEERED ORGANISMS AND PRODUCTS, WHICH COULD REDUCE OUR REVENUES
We identify genes and determine their function, and we produce products from
genetically engineered organisms. The genetically engineered organisms we test
and produce and the products we make are subject to federal, state, local and
foreign governmental regulation. Regulatory agencies administering existing or
future regulations or legislation may not allow us or our collaborators to
produce and market our genetically engineered products in a timely manner or
under technically or commercially feasible conditions. In addition, regulatory
action or private litigation could result in expenses, delays or other
impediments to our product development programs or the commercialization of
resulting products.
The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as it applies to foods developed through traditional
plant breeding. However, genetically engineered food products will be subject to
pre-market review if these products raise safety questions or if the FDA
considers these products to be food additives. Our products and the products of
our collaborators that contain genes that we identify or determine to have a
particular function may be subject to lengthy FDA reviews and unfavorable FDA
determinations if they raise questions, if the FDA considers them to be food
additives or if the FDA changes its policy. Also, the FDA announced in a policy
statement that it will not require that genetically engineered agricultural
products be labeled as such, provided that these products are as safe and have
the same nutritional characteristics as conventionally developed products. The
FDA may reconsider or change its labeling policies, or local or state
authorities may enact labeling requirements. Any such labeling requirements
could reduce the demand for genetically-engineered products. In those products
where production must be performed outdoors, the USDA prohibits manufacturers
from growing and transporting genetically engineered plants except pursuant to
an exemption or under strict controls. If our future products are not exempted
by the USDA, it may be impossible to sell such products.
IF THERE IS NEGATIVE PUBLIC REACTION TO THE USE OF GENETICALLY ENGINEERED
PRODUCTS AND TECHNOLOGIES, THEN THE MARKET FOR OUR PRODUCTS AND TECHNOLOGIES
WILL BE ADVERSELY AFFECTED
The commercial success of some our products, if any, and of the products of some
of our collaborators, will depend in part on public acceptance of the use of
genetically engineered products including drugs, plants and plant products.
Claims that genetically engineered products are unsafe for consumption or pose a
danger to the environment may influence public attitudes. Negative public
reaction to genetically modified organisms and products could result in greater
government regulation of genetic research and resultant products, including
stricter labeling requirements, and could cause a decrease in the demand for our
products. The subject of genetically engineered organisms has received negative
publicity and aroused public debate in a number of countries, including the
United States and the countries of the European Community. The expressed
preferences
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of a significant portion of consumers, particularly in Europe, but also in the
United States, for non-genetically engineered food can substantially limit the
marketing of genetically engineered food crops. Ethical and other concerns about
our technologies, particularly the use of genes for commercial purposes and the
products resulting from this use, could lead to greater regulation and trade
restrictions on imports of genetically engineered products and adversely affect
the market acceptance of our products and technologies. Governmental authorities
could, for political or other reasons, limit the use of genetic processes or
prohibit the practice of our GENEWARE technology. Consequently, if this
regulation results in non-acceptance of food products derived from genetically
engineered food crops it could reduce or eliminate our expected financial return
from the Dow agreement in agricultural gene discovery and function, and our
ability to successfully collaborate with additional companies in the
agricultural industry.
WE MAY BE SUED FOR PRODUCT LIABILITY AND OUR PRODUCT LIABILITY INSURANCE MAY NOT
BE ADEQUATE
The testing, marketing and sale of each of our and our collaborators' products
will entail a risk of allegations of product liability, and we cannot guarantee
that third parties will not assert substantial product liability claims against
us. While we have limited product liability insurance to protect against product
liability risks, we cannot assure you that adequate insurance coverage will be
available at an acceptable cost, if at all, in the future or that a product
liability claim or product recall would not materially and adversely affect our
business. Inability to obtain sufficient insurance coverage at an acceptable
cost or otherwise to protect against potential product liability claims could
prevent or inhibit the commercialization of products the products we or our
collaborators develop. If we are sued for any injury allegedly caused by our or
our collaborators' products cause, our liability could exceed our total assets
and our ability to pay the liability.
IF WE USE HAZARDOUS MATERIALS IN OUR BUSINESS IN A MANNER THAT CAUSES INJURY OR
VIOLATES LAWS, WE MAY BE LIABLE FOR SUBSTANTIAL DAMAGES
Our research and development processes involve the use of hazardous materials,
including chemicals and radioactive and biological materials. Our operations
also produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages and criminal penalties in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials.
Further, it is possible that the materials we use could contaminate another
party's property. In addition, claimants may sue us for injury or contamination
that results from our use or the use by third parties of these materials, and
our liability may exceed our total assets and our ability to pay the liability.
In addition, compliance with environmental laws and regulations is expensive,
and current or future environmental regulations may impair our research and
development and production efforts.
Although we have general liability insurance, these policies contain exclusions
for insurance against claims arising from pollution from chemical or radioactive
materials. Our collaborators are working with these types of hazardous materials
in connection with our collaborations. In the event of a lawsuit or
investigation, we could be held responsible for any injury we or our
collaborators cause to persons or property by exposure to, or release of, any
hazardous materials.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR FINANCIAL
RETURNS ON OUR PRODUCTS
Our ability and that of our collaborators to commercialize therapeutics and
diagnostic products may depend in part on the extent to which government health
administration authorities, private health insurers and other organizations will
reimburse us for the cost of these products. These third parties are
increasingly challenging both the need for and the price of new medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved therapeutics and diagnostics, and adequate third party
reimbursement may not be available for any product to enable us to maintain
price levels sufficient to realize an appropriate return on our investment in
research and product development.
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RISKS RELATED TO OUR INTELLECTUAL PROPERTY
PATENT PROTECTION IN THE BIOTECHNOLOGY INDUSTRY IS UNCERTAIN WHICH MAY RESULT IN
A DECREASE IN THE VALUE OF OUR PRODUCTS AND TECHNOLOGIES
We are involved in overlapping and rapidly evolving areas of biotechnology,
pharmaceutical development and basic research involving viral vectors, plant
transgenics, proteomics, functional genomics and immunotherapy. Each of these
areas has been the subject of intense research and patenting activity throughout
the world by our commercial competitors, actual and potential collaborators,
academic institutions and government researchers. The U.S. Patent and Trademark
Office generally keeps patent applications secret until it issues a patent. We
cannot determine whether or not there are patents currently pending which, if
issued, would prevent us from practicing our core technologies, commercializing
them or developing commercially viable products based upon them.
The patent positions of biotechnology firms generally are highly uncertain and
involve complex legal and factual questions that will determine who has the
right to develop a particular product. No clear policy has emerged regarding the
breadth of claims covered in biotechnology patents in general and those relating
to gene sequences in particular. In addition, recently there has been public
debate questioning whether genomic sequence data should be patentable. The
biotechnology patent situation outside the United States is even more uncertain
and is currently undergoing review and revision in many countries. Changes in,
or different interpretations of, patent laws in the United States and other
countries might allow others to use our discoveries or to develop and
commercialize products and technologies similar to our products and technologies
without any compensation to us. Our potential collaborators or customers may
conclude that uncertainties about patent protection decrease the value of our
databases, products and services.
Throughout the world there are numerous issued patents, as well as published
European patent applications which may issue as patents, many of which relate to
our current operations, our anticipated future operations and the products we
are likely to develop. The scope of these patents is a matter of legal
interpretation and is subject to uncertainty. We have not obtained, nor do we
intend to obtain, opinions from our patent counsel that we have freedom to
conduct our commercial activities free of claims of patent infringement from
third parties. For example, we are aware of one company that has a broad
portfolio of patents which generically claim single chain antibodies and that,
in letters mailed to numerous companies including us, has asserted that any
company using or making such antibodies will require a patent license from them.
We are assessing these patents and have been informed that licenses are
available, but if these licenses are required, we may not be able to obtain them
on commercially reasonable terms.
OUR PATENT APPLICATIONS MAY NOT RESULT IN ISSUED PATENTS THAT ARE ENFORCEABLE
Our disclosures in our patent applications may not be sufficient to meet the
statutory requirements for patentability in all cases. As a result, we do not
know which of our patent applications will result in enforceable patents. Our
patent applications may not issue as patents, and any patents that are issued to
us may not provide commercially meaningful protection against competitors. Any
issued patent may not provide us with competitive advantages. Others may
challenge our patents or independently develop similar products which could
result in an interference proceeding in the U.S. Patent and Trademark Office.
Others may be able to design around our issued patents or develop products
similar to our products. In addition, others may discover uses for genes or
proteins other than those uses covered in our patents, and these other uses may
be separately patentable.
PUBLIC DISCLOSURE AND PATENTS RELATING TO GENES AND GENE SEQUENCES HELD BY
OTHERS MAY LIMIT OUR PROPRIETARY RIGHTS
The Human Genome Project and many companies and institutions have identified
genes and deposited those sequences in public databases and are continuing to do
so. These public disclosures might limit the scope of our claims or make
unpatentable subsequent patent applications on full-length gene sequences. We
are aware of issued patents and patent applications containing subject matter
such that we or our licensees or collaborators may require a license or rights
in order to research, develop or commercialize some of our products and
technologies. We may find that licenses relating to such subject matter will not
be available on acceptable terms, or at all.
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PATENT INFRINGEMENT OR ENFORCEMENT LITIGATION OR INTERFERENCE PROCEEDINGS COULD
BE COSTLY AND DISRUPT OUR BUSINESS AND MAY PREVENT US FROM COMMERCIALIZING OUR
PRODUCTS
The technology that we use to develop our products and key resources, and those
that we incorporate in our products and technologies, may be subject to claims
by third parties, including our collaborators, that they infringe the patents or
proprietary rights of others. We also may need to enforce our patent rights in
actions against others, which could be expensive. The risk of this occurring
will tend to increase as the proteomics, genomics and biotechnology industries
expand, more patents are issued and other companies attempt to discover genes
and proteins and engage in other proteomics, genomics and biotechnology-related
businesses.
With respect to identifying proteins uniquely associated with disease states or
as targets for drug therapy, we are aware that companies have published patent
applications relating to nucleic acids encoding specific proteins. For example,
Oxford GlycoSciences plc stated publicly that it has filed patent applications
claiming new utilities for known proteins and that it intends to file additional
applications as it expands its proteomics capacities. These applications may
have priority over ours or may force us to litigate the issue of priority in a
special proceeding known as an interference. If the U.S. Patent and Trademark
Office issues patents to these companies, their patents may limit our ability
and the ability of our collaborators to practice under any patents that may be
issued to us. Also, even if the U.S. Patent and Trademark office issues us a
patent, the scope of coverage or protection afforded to the patent may be
limited.
WE MAY NOT BE ABLE TO PROTECT OUR KNOW-HOW AND TRADE SECRETS
We generally control the disclosure and use of our know-how and trade secrets
using confidentiality agreements. It is possible, however, that:
- Some or all confidentiality agreements will not be honored
- Third parties will independently develop equivalent technology
- Disputes will arise with our consultants, collaborators or others
concerning the ownership of intellectual property
- Unauthorized disclosure of our know-how or trade secrets will occur
RISKS RELATED TO THIS OFFERING
THE PRICE OF OUR COMMON STOCK COULD BE EXTREMELY VOLATILE, AND YOU MAY NOT BE
ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE
Before this offering, our common stock was not traded on a public market. An
active trading market may not develop following completion of this offering, and
if it develops, may not be maintained. Negotiations between us and
representatives of the underwriters will determine the initial public offering
price. This price may not be indicative of prices that may prevail later in the
market. The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly life
science companies such as ours, have been highly volatile. In addition, broad
market and industry fluctuations that are not within our control may adversely
affect the trading price of our common stock. You may not be able to resell your
shares at or above the initial public offering price.
In addition, our quarterly operating results have fluctuated in the past and are
likely to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. In addition to the risks and uncertainties
described in this section, some of the factors that could cause our operating
results to fluctuate include:
- Expiration of contracts with collaborators or government research grants,
which may not be renewed or replaced
- The success rate of our discovery efforts leading to milestones and
royalties
- The timing and willingness of collaborators to commercialize products
which would result in royalties
- General and industry-specific economic conditions, which may affect our
and our collaborators' research and development expenditures
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. Our operating results in some quarters may
not meet expectations of stock market analysts and investors. In that case, our
stock price would probably decline.
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WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND
MAY NOT USE THEM EFFECTIVELY
As of the date of this prospectus, we cannot specify with certainty the amounts
we will spend on particular uses from the net proceeds we will receive from this
offering. Our management will have broad discretion in the application of the
net proceeds. Our management currently intends to use the net proceeds as
described in "Use of Proceeds." The failure by our management to apply these
funds effectively could have an adverse effect on our business.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION
The initial public offering price will be substantially higher than the pro
forma as adjusted net tangible book value per share of our common stock.
Investors purchasing common stock in this offering will incur immediate dilution
of $16.60 in net tangible book value per share of common stock, based on an
assumed public offering price of $21.00 per share, after deducting the estimated
underwriting discounts and offering expenses we must pay.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS ENABLES THEM TO COLLECTIVELY CONTROL ALL SIGNIFICANT
CORPORATE DECISIONS
Following this offering, our directors, our executive officers and entities
affiliated with our directors and our executive officers will beneficially own,
in the aggregate, approximately 41.5% of our outstanding common stock. These
stockholders as a group will be able to elect our directors and officers,
control our management and affairs and be able to control most matters requiring
the approval of our stockholders, including any merger, consolidation or sale of
all or substantially all of our assets and any other significant corporate
transaction. The concentration of ownership will also prevent a change of
control of our company at a premium price if these stockholders oppose it.
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
Provisions in our amended and restated charter and bylaws and applicable
provisions of the Delaware General Corporation Law may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors. These provisions may make it more difficult or expensive for a third
party to acquire a majority of our common stock or delay, prevent or deter a
merger, acquisition, tender offer or proxy contest, which may adversely affect
our stock price.
THERE IS A LARGE NUMBER OF SHARES OF OUR COMMON STOCK THAT MAY BE SOLD FOLLOWING
THIS OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of our common stock in the public market
following this offering could cause the market price of our common stock to
decline. Upon completion of this offering, we will have outstanding an aggregate
of 15,477,444 shares of common stock, assuming no exercise of outstanding
options or warrants. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, or the Securities Act, unless affiliates purchase these
shares. The remaining 11,907,444 shares of common stock existing stockholders
hold are restricted securities. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under the Securities Act. Upon the completion of this offering,
restricted shares will be available for sale in the public market, an
additional restricted shares held by some of our shareholders will be
available for sale in the public market upon the expiration of a 180-day lock-up
entered into by such shareholders and restricted shares held by our
officers and directors and related persons will be available for sale in the
public market upon the expiration of a 240-day lock-up entered into by such
persons. Of these restricted securities, shares have the right to
require us to register the shares for sale under the Securities Act six months
following the completion of this offering.
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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the
federal securities laws, which involve risks and uncertainties. These
forward-looking statements are not historical facts but rather are based on
current expectations, estimates and projections about our industry, beliefs and
assumptions. We use words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of these words and similar
expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors, some of which are beyond our control, are difficult to predict
and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus. You
should not place undue reliance on these forward-looking statements, which
reflect our management's view only as of the date of this prospectus. We
undertake no obligation to update these statements or publicly release the
result of any revision to the forward-looking statements that we may make to
reflect events or circumstances after the date of this prospectus or to reflect
the occurrence of unanticipated events.
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of its delivery or of any
sale of our common stock.
We own or have the right to various trademarks, service marks and trade names
used in our business. These include EXPRESSVECTOR(R), GENEWARE(R), HPI(TM),
HUMAN PROTEIN INDEX(TM), ISO-DALT(R), KEPLER(R), LARGE SCALE BIOLOGY(TM), LARGE
SCALE PROTEOMICS(TM), MAP(TM), MED(TM), MOLECULAR ANATOMY AND PATHOLOGY(TM),
MOLECULAR EFFECTS OF DRUGS(TM), PHARMACEUTICAL PROTEOMICS(TM), PCOS(R) AND
ProGEx(TM). This prospectus also includes trademarks, service marks and trade
names owned by other companies.
18
<PAGE> 20
USE OF PROCEEDS
We estimate our net proceeds from the sale of the 3,570,000 shares of our common
stock in this offering will be approximately $69.7 million, or $80.2 million if
the underwriters' overallotment option is exercised in full, at an assumed
initial public offering price of $21.00 per share, after deducting the estimated
underwriting discounts and offering expenses we must pay. We currently
anticipate that we will use the net proceeds as follows:
- 30% for research and development activities
- 30% for product development initiatives
- 20% for capital expenditures and
- 20% for working capital and other general corporate purposes
In addition, we may use a portion of the net proceeds from this offering to
acquire or invest in complementary businesses or to obtain the right to use
complementary technologies. We currently have no agreements or commitments
regarding any acquisition or investment, and we are not involved in any
negotiations with respect to any similar transaction. As of the date of this
prospectus, we can only estimate the amounts we plan to spend on any of the
particular uses listed above or the timing of such expenditures. As a result,
our management will have broad discretion to allocate the net proceeds from this
offering. The amounts actually expended for each of the purposes listed above
may vary significantly depending upon a number of factors, including the
progress of our sales and marketing programs, our capital spending requirements
and developments in biotechnology. Pending these uses, the net proceeds from
this offering will be invested in short-term, interest-bearing, investment grade
debt instruments.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion.
19
<PAGE> 21
CAPITALIZATION
The following table summarizes our cash and cash equivalents and marketable
securities and our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis giving effect to the conversion of all shares of our
outstanding convertible preferred stock into 5,627,645 shares of our
common stock upon the completion of this offering; and
- on a pro forma as adjusted basis to reflect the conversion of our
convertible preferred stock and the receipt of the estimated net proceeds
from the issuing and selling of 3,570,000 shares of common stock in this
offering at an assumed initial public offering price of $21.00 per share,
and after deducting the estimated underwriting discounts and offering
expenses we must pay. The pro forma as adjusted data also gives effect to
the reclassification of our warrant liability of $11.1 million as of
March 31, 2000 to permanent equity upon completion of this offering. The
pro forma as adjusted data does not include the non-cash compensation
expense associated with employee stock options to be recorded upon
completion of this offering. The non-cash compensation expense related to
these options, assuming no forfeitures and an offering price of $21.00
per share, will be approximately $5.0 million, and will be expensed in
the quarter in which this offering is completed.
The number of shares in the table below is based on the number of shares of
common stock outstanding as of March 31, 2000 and excludes:
- 2,758,355 shares of common stock issuable on the exercise of stock
options outstanding at March 31, 2000 at a weighted average exercise
price of $8.12 per share;
- 552,325 shares of common stock reserved for issuance under our stock
option plans at March 31, 2000; and
- 1,408,258 shares of common stock issuable on the exercise of warrants
outstanding at March 31, 2000 at a weighted average exercise price of
$12.33 per share.
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the accompanying notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
------------------------------------
MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
In thousands, except share data
Cash and cash equivalents and marketable securities......... $ 9,951 $ 9,951 $ 79,701
======== ========= ===========
Long-term debt and warrant liability, net of current
portion................................................... $ 13,146 $ 13,146 $ 2,008
======== ========= ===========
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized,
5,605,813 shares issued and outstanding, actual;
10,000,000 shares authorized and no shares issued and
outstanding, pro forma and pro forma as adjusted....... 38,713 -- --
Common stock; 20,000,000 shares authorized, 6,272,306
shares issued and outstanding, actual; 20,000,000
shares authorized, 11,899,951 shares issued and
outstanding, pro forma; and 20,000,000 shares
authorized, 15,469,951 shares issued and outstanding,
pro forma as adjusted.................................. 39,762 78,475 159,363
Shareholder notes receivable.............................. (116) (116) (116)
Deferred compensation..................................... (7,164) (7,164) (7,164)
Accumulated deficit....................................... (78,480) (78,480) (78,480)
-------- --------- -----------
Total stockholders' equity............................. (7,285) (7,285) 73,603
-------- --------- -----------
Total capitalization................................... $ 5,861 $ 5,861 $ 75,611
======== ========= ===========
</TABLE>
20
<PAGE> 22
DILUTION
If you invest in our common stock, your interest will be diluted to the extent
of the difference between the public offering price per share of our common
stock and the pro forma as adjusted net tangible book value per share of our
common stock after this offering. Our pro forma net tangible book value at March
31, 2000 was approximately ($12.8) million, or ($1.08) per share of common
stock. Pro forma net tangible book value per share represents total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding after giving effect to the conversion of all of our outstanding
convertible preferred stock into 5,627,645 shares of our common stock. After
giving effect to the issuance and sale of 3,570,000 shares of our common stock
in this offering at an assumed initial public offering price of $21.00 per
share, after deducting the estimated underwriting discounts and offering
expenses we will pay, and after giving effect to the reclassification of our
warrant liability into permanent equity, our pro forma as adjusted net tangible
book value at March 31, 2000, would have been $68.1 million, or $4.40 per share.
This represents an immediate increase in net tangible book value of $5.48 per
share to our existing stockholders and an immediate dilution of $16.60 per share
to our new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<CAPTION>
----------------
<S> <C> <C>
Assumed initial public offering price per share............. $21.00
Pro forma net tangible book value per share at March 31,
2000................................................... $(1.08)
Increase per share attributable to new investors.......... 5.48
------
Pro forma as adjusted net tangible book value per share
after the offering........................................ 4.40
------
Dilution per share to new investors......................... $16.60
======
</TABLE>
Upon completion of this offering, our warrant liability will be reclassified to
permanent equity. Had such reclassification occurred at March 31, 2000 our pro
forma net tangible book value would have been approximately ($1.7) million or
($0.14) per share of common stock.
The following table summarizes, at March 31, 2000, on a pro forma as adjusted
basis, the total number of shares of common stock outstanding and the total
consideration paid to us and the average price per share paid by our existing
stockholders and by new investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $21.00 per share, after
deducting the estimated underwriting discounts and offering expenses we must
pay:
<TABLE>
<CAPTION>
---------------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................... 11,899,951 76.9% $ 48,420,000 39.2% $ 4.07
New investors................................... 3,570,000 23.1 74,970,000 60.8% $21.00
---------- ----- ------------ -----
Totals.......................................... 15,469,951 100.0% $123,390,000 100.0% $ 7.98
========== ===== ============ =====
</TABLE>
The above computations are based on the number of shares of common stock
outstanding as of March 31, 2000 and exclude:
- 2,758,355 shares of common stock issuable on the exercise of stock
options outstanding at March 31, 2000 at a weighted average exercise
price of $8.12 per share;
- 552,325 shares of common stock reserved for issuance under our stock
option plans at March 31, 2000; and
- 1,408,258 shares of common stock issuable on the exercise of warrants
outstanding at March 31, 2000 at a weighted average exercise price of
$12.33 per share.
The exercise of these options or warrants could further dilute the interests of
new investors. For additional information regarding these shares, options and
warrants, see "Capitalization," "Management -- Benefit Plans," "Description of
Capital Stock" and Note 10 of Notes to Consolidated Financial Statements.
21
<PAGE> 23
SELECTED FINANCIAL DATA
You should read the following financial data in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements and the accompanying notes
included elsewhere in this prospectus. We derived the consolidated statement of
operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 from our
audited consolidated financial statements included elsewhere in this prospectus.
The consolidated statements of operations data for the three months ended March
31, 1999 and 2000 and the consolidated balance sheet data as of March 31, 2000
are derived from our unaudited consolidated financial statements included
elsewhere in this prospectus. We derived the statements of operations data for
the years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 from our audited consolidated financial
statements not included in this prospectus. The consolidated statement of
operations data for the year ended December 31, 1999 and the three months ended
March 31, 1999 and 2000 and the consolidated balance sheet data as of December
31, 1999 and March 31, 2000 reflects our acquisition of Large Scale Proteomics
on February 1, 1999.
We calculated the unaudited pro forma net loss per share on a pro forma basis to
reflect the conversion of all shares of our convertible preferred stock into
5,627,645 shares of our common stock upon completion of this offering. The
unaudited pro forma net loss per share does not reflect the non-cash
compensation expense associated with stock options that employees may exercise
upon completion of this offering. The non-cash compensation expense related to
these options, assuming no forfeitures, will be approximately $5.0 million based
upon an assumed initial offering price of $21.00 per share.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998(1) 1999(1)
In thousands, except share and per share data ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues... $ 836 $ 797 $ 2,108 $ 3,394 $ 16,090
Costs and expenses:
Development agreements... 757 300 1,735 2,565 7,988
Research and development... 5,750 8,395 5,872 6,973 9,163
General, administrative and marketing... 1,804 2,217 3,363 3,492 8,333
Purchased research and development... -- -- -- -- 19,783
---------- ---------- ---------- ---------- -----------
Total costs and expenses... 8,311 10,912 10,970 13,030 45,267
---------- ---------- ---------- ---------- -----------
Gain on litigation settlements... -- -- 2,000 1,890 1,300
---------- ---------- ---------- ---------- -----------
Loss from operations... (7,475) (10,115) (6,862) (7,746) (27,877)
Total other income (expense)... 151 879 293 (1,009) (5,203)
---------- ---------- ---------- ---------- -----------
Net loss before provision for income taxes... (7,324) (9,236) (6,569) (8,755) (33,080)
Provision for income taxes... -- -- -- -- 190
---------- ---------- ---------- ---------- -----------
Net loss... $ (7,324) $ (9,236) $ (6,569) $ (8,755) $ (33,270)
========== ========== ========== ========== ===========
Net loss per share -- basic and diluted... $ (1.22) $ (1.51) $ (1.06) $ (1.40) $ (5.38)
========== ========== ========== ========== ===========
Weighted average shares outstanding -- basic
and diluted... 6,012,758 6,120,288 6,221,490 6,244,516 6,183,485
========== ========== ========== ========== ===========
Unaudited pro forma net loss per share --
basic and diluted... $ (2.88)
===========
Pro forma weighted average shares
outstanding -- basic and diluted... 11,553,650
===========
<CAPTION>
--------------------------
THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 2000
In thousands, except share and per share data ----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues... $ 2,641 $ 5,743
Costs and expenses:
Development agreements... 1,671 2,062
Research and development... 1,780 3,414
General, administrative and marketing... 2,799 1,990
Purchased research and development... 19,783 --
----------- -----------
Total costs and expenses... 26,033 7,466
----------- -----------
Gain on litigation settlements... 300 --
----------- -----------
Loss from operations... (23,092) (1,723)
Total other income (expense)... 41 350
----------- -----------
Net loss before provision for income taxes... (23,051) (1,373)
Provision for income taxes... -- --
----------- -----------
Net loss... $ (23,051) $ (1,373)
=========== ===========
Net loss per share -- basic and diluted... $ (3.73) $ (0.22)
=========== ===========
Weighted average shares outstanding -- basic
and diluted... 6,174,626 6,222,351
=========== ===========
Unaudited pro forma net loss per share --
basic and diluted... $ (2.14) $ (0.12)
=========== ===========
Pro forma weighted average shares
outstanding -- basic and diluted... 10,758,049 11,849,996
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
AS OF DECEMBER 31, AS OF
-------------------------------------------------------- MARCH 31,
1995 1996 1997 1998(1) 1999(1) 2000
In thousands -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 3,864 $ 4,237 $ 2,708 $ 3,484 $ 6,975 $ 3,679
Marketable securities..................................... 15,138 5,261 -- 4,086 7,124 6,272
Working capital (deficit)................................. 19,518 10,039 1,385 2,514 (1,514) (4,809)
Total assets.............................................. 23,130 14,238 8,388 17,590 31,603 27,847
Long-term debt, net of current portion and warrant
liability............................................... -- -- 205 4,061 13,837 13,146
Convertible preferred stock............................... 8,531 8,531 8,894 15,848 38,713 38,713
Accumulated deficit....................................... (19,277) (28,513) (35,082) (43,837) (77,107) (78,480)
Total stockholders' equity (deficit)...................... 22,303 12,167 6,261 2,927 (6,862) (7,285)
</TABLE>
------------------
(1) As restated, see Note 15 to the consolidated financial statements.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis by our management of our
financial condition and results of operations in conjunction with our
consolidated financial statements and the accompanying notes included elsewhere
in this prospectus. This Management's Discussion and Analysis of Financial
Condition and Results of Operations and other parts of this prospectus contain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Our actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors."
OVERVIEW
Large Scale Biology uses its proprietary proteomics and functional genomics
technologies, to develop products and establish commercial collaborations with
pharmaceutical, biotechnology, chemical and other life sciences companies, to
enable the transformation of proteomic and genomic information into multiple
product opportunities, such as drug targets, therapeutics and diagnostics for
drug effectiveness and toxicity.
Before February 1999, we were primarily engaged in the development and
commercialization of genomics technologies. In February 1999, we acquired 92.5%
of the outstanding common stock of Large Scale Proteomics, a company primarily
engaged in the development of proteomics technologies. In March 2000, we
acquired the remaining 7.5% of Large Scale Proteomics' common stock. We used the
purchase method of accounting to record this acquisition.
We recognize revenues from our collaborative agreements, which typically provide
for research funding, technology access fees and milestone payments. We record
technology access fees and milestone payments as deferred revenue. We amortize
these fees and milestone payments ratably over the life of the related
collaborative agreement. We recognize research funding as we earn it.
In September 1998, we entered into a three-year collaboration and license
agreement with Dow. The Dow agreement provides funding for sponsored genomics
research, royalties when Dow sells products that result from this collaboration
and payments when we reach specific milestones. Revenues from the Dow agreement
represented 86%, 82% and 84% of our revenues during the three months ended March
31, 2000 and the years ended December 31, 1999 and 1998, respectively.
We have incurred significant losses in each year since our inception in 1987. As
of March 31, 2000, we had an accumulated deficit of $78.5 million. We expect
additional losses as we expand our research and development efforts, make
investments in strategic collaborations and enhance our technologies. After this
offering, we hope to start or expand clinical studies for some of our products
under development and internally funded research projects. The resulting
increase in expenses could delay our profitability and result in increased
annual net losses.
As a result of stock options granted in December 1999, we recorded deferred
compensation of $7.8 million. This amount will be amortized ratably over the
three year vesting period of the options. In addition, we granted options which
officers and key employees can exercise upon our initial public offering. As a
result, we will recognize non-cash compensation expense upon the closing of this
offering based on the difference between the exercise price of these options and
the initial public offering price of our common stock. The non-cash compensation
expense related to these option grants, assuming no forfeitures and an offering
price of $21.00 per share, will be approximately $5.0 million.
The Company has restated its 1998 and 1999 financial statements. See Note 15 to
the consolidated financial statements.
RESULTS OF OPERATIONS
Quarters Ended March 31, 2000 and 1999
Revenues. Revenues in the quarter ended March 31, 2000 were $5.7 million, an
increase of $3.1 million, or 117%, over the quarter ended March 31, 1999.
Revenues earned under the Dow agreement were $5.0 million in the quarter ended
March 31, 2000 and $2.5 million in the quarter ended March 31, 1999. This
increase in revenues from the Dow agreement were mostly attributable to
amortization of deferred revenue from milestone payments received after the
first quarter of 1999. Revenues from the operations of Large Scale Proteomics
were $787,000 in the quarter ended March 31, 2000 and $173,000 in the quarter
ended March 31, 1999. This increase in revenues was attributable to more revenue
activities during the quarter ended
23
<PAGE> 25
March 31, 2000. The quarter ended March 31, 2000 also included the results of
three months of Large Scale Proteomics versus two months in 1999 from the date
of acquisition.
Development agreement expenses. Development agreement expenses relate to
research activities incurred in connection with our collaborative agreements.
Development agreement expenses in the quarter ended March 31, 2000 were $2.1
million, an increase of $391,000 or 23%, over the quarter ended March 31, 1999.
The increase is primarily attributable to an increased level of research
activity under the Dow agreement. Research activities under the Dow agreement
accounted for $1.7 million in the quarter ended March 31, 2000 and $1.4 million
in the quarter ended March 31, 1999 of our development agreement expenses.
Research and development expenses. Research and development expenses in the
quarter ended March 31, 2000 were $3.4 million, an increase of $1.6 million, or
92%, over the quarter ended March 31, 1999. This increase was largely
attributable to the addition of research personnel and increases in research
funding paid to third persons. Also, the increase is attributable to expenses
only being included after the date of Large Scale Proteomics' acquisition,
February 1, 1999, resulting in three months of expenses for 2000 versus two
months of expenses for 1999.
General, administrative and marketing expenses. General, administrative and
marketing expenses in the quarter ended March 31, 2000 were $2.0 million, a
decrease of $809,000, or 29%, from the quarter ended March 31, 1999. The
decrease in the quarter ended March 31, 2000 was the result of a charge of $1.5
million during 1999 related to previously capitalized patent costs. Offsetting
this charge were increased general and administrative costs to support expanded
operations and expenses only being included after the date of Large Scale
Proteomics' acquisition, February 1, 1999, resulting in three months of expenses
for 2000 versus two months of expenses for 1999.
Purchased research and development expenses. Purchased research and development
expenses in the quarter ended March 31, 1999 were $19.8 million. This amount
represents a charge for in-process research and development acquired in
connection with our acquisition of Large Scale Proteomics. We did not have
purchased research and development expenses in the quarter ended March 31, 2000.
Other income and expenses. Total other income in the quarter ended March 31,
2000 was $350,000, an increase of $309,000 over the quarter ended March 31,
1999. The increase in the quarter ended March 31, 2000 was attributable to a
$242,000 warrant accretion gain applicable to the quarter ended March 31, 2000
and increased interest income.
Net loss. Net loss in the quarter ended March 31, 2000 was $1.4 million, a
decrease of $21.7 million from the quarter ended March 31, 1999. The decrease is
principally the result of a $19.8 million charge for purchased research and
development during the quarter ended March 31, 1999 and increased revenues
described above.
Years Ended December 31, 1999, 1998 and 1997
Revenues. Revenues in 1999 were $16.1 million, an increase of $12.7 million, or
374%, from 1998. Revenues in 1998 were $3.4 million, an increase of $1.3
million, or 61%, over 1997. Revenues earned under the Dow agreement were $14.2
million in 1999 and $2.9 million in 1998. The increase in 1999 revenues from the
Dow agreement reflects a full year of research activities as compared to four
months in 1998. The increase in 1999 revenues is also because of $1.8 million of
revenues from the operations of Large Scale Proteomics since February 1, 1999,
the effective date of its acquisition.
Development agreement expenses. Development agreement expenses in 1999 were $8.0
million, an increase of $5.4 million, or 211%, over 1998. Development agreement
expenses in 1998 were $2.6 million, an increase of $830,000, or 48%, over 1997.
Research activities under the Dow agreement accounted for $6.7 million in 1999
and $1.5 million in 1998 of our development agreement expenses. The increase in
development agreement expenses in 1999 from the Dow agreement reflects the
inclusion of a full year of research activities as compared to four months in
1998. Additionally, the operations of Large Scale Proteomics since February 1,
1999 accounts for $1.3 million of the increase in 1999. We expect that
development agreement expenses will increase if we are required to expand our
work force and facilities to meet commitments under any new collaborative
agreements.
Research and development expenses. Research and development expenses in 1999
were $9.2 million, an increase of $2.2 million, or 31%, over 1998. Research and
development expenses in 1998 were $7.0 million, an increase of $1.1 million, or
19%, over 1997. The inclusion of the operations of Large Scale Proteomics since
February 1, 1999 accounts for approximately $1.1 million of the increase in
1999. The addition of research personnel, increases in research funding paid to
third persons and new acquired or expanded research facilities in Vacaville,
California, Owensboro, Kentucky and Rockville,
24
<PAGE> 26
Maryland accounts for the remainder of the increase in 1999 and substantially
all of the increase in 1998. We anticipate that research and development
expenses will continue to increase as we make expenditures for clinical trials
to develop pharmaceutical products and internally fund research projects.
General, administrative and marketing expenses. General, administrative and
marketing expenses in 1999 were $8.3 million, an increase of $4.8 million, or
139%, over 1998. General, administrative and marketing expenses in 1998 were
$3.5 million, an increase of $129,000, or 4%, over 1997. The increase in 1999
was partially due to an increase in legal and regulatory fees of $1.2 million
related to patents for which the Company has not yet generated income from
operations and positive cash flows. The increase in 1999 also includes a $1.5
million charge for previously capitalized patent costs. This charge was the
result of our determination that a legal settlement with a patent licensee in
1999 indicated that certain patents and underlying technologies would have
limited or no ability to generate income from operations and future cash flows.
Additionally, the inclusion of operations of Large Scale Proteomics since
February 1, 1999 accounts for $2.0 million of the increase in 1999. We
anticipate that our legal and regulatory expenses related to our patents will
continue to increase as we file, prosecute and defend new and existing patents.
We also expect general, administrative and marketing expenses to increase as we
expand our infrastructure to accommodate our anticipated growth.
Purchased research and development expenses. Purchased research and development
expenses in 1999 were $19.8 million. This amount represents a charge for
in-process research and development acquired in connection with our acquisition
of Large Scale Proteomics. We did not have purchased research and development
expenses in 1998 or 1997.
Purchased research and development expenses represent the value of purchased
in-process research and development projects that had not reached technological
feasibility at the date of acquisition. We did not identify any alternative
future uses or markets for these projects because of their unique qualities. An
independent appraiser valued the purchased research and development using the
risk-adjusted cash flow approach, which includes an analysis of the projected
future cash flows that were expected from the progress made on each of the
in-process projects before the date of acquisition and the risks associated with
achieving such cash flows. We expensed the value allocated to purchased
in-process research and development at the date of acquisition. Projects already
commercialized at the date of the valuation were valued and recorded as core
technology.
We estimated future cash flows for in-process research and development by first
forecasting, on a project-by-project basis, total revenues expected from sales
of each in-process project. We do not anticipate revenues from the in-process
research and development projects until approximately one year into the
forecast. We deducted appropriate operating expenses, cash flow adjustments and
contributory asset returns from projected future revenues, and we made
adjustments to remove the value contributed by core technology. We did not
assume any anticipated expense reductions due to synergies between Large Scale
Proteomics and us. The analysis resulted in a forecast of net returns on each
in-process project. We then discounted these net returns to a present value at
discount rates that incorporate the project specific risks associated with each
purchased in-process research and development project. The project specific risk
factors considered included the complexity of the development effort, the
likelihood of achieving technological feasibility and the likelihood of market
acceptance. We believed the applied discount rate of 50% adequately accounts for
the additional risks associated with the in-process technologies over other
technologies existing at the acquisition date.
We based the forward looking data employed in the analysis of in-process
research and development on our estimate of future performance of our business.
We believe the assumptions used were reasonable. However, the assumptions we
used may be incomplete or inaccurate, and unanticipated events and circumstances
may occur, which could cause a material adverse effect on our financial
condition and results of operations. The forecasted results used in the analysis
for the in-process projects have not varied significantly from the actual
results achieved through December 31, 1999.
Purchased in-process research and development projects are briefly described
below, including the status of products within each project at the acquisition
date.
- Proteomics -- The proteomics technology applies sample preparation and
fractionation high-throughput, high-resolution two-dimensional gels, mass
spectrometry, databases and bioinformatics software to the discovery and
development of drugs, diagnostics and agricultural chemicals. The proteomics
technology was completed during the quarter ended March 31, 2000.
- Virus -- The virus detection technology allows for the rapid discovery of new
yet difficult to propagate viruses, addressing a wide range of suspected viral
diseases. We expect the virus detection technology to be completed in 2003. We
estimated that after March 31, 2000 we will need to spend approximately $10.0
million related to personnel and system prototype development in order to
complete development of virus technology by 2003.
25
<PAGE> 27
Other income and expenses. Total other net expenses in 1999 were $5.2 million,
an increase in expenses of $4.2 million over 1998. Total other expenses in 1998
were $1.0 million, as compared to income of $293,000 in 1997. The increase in
expenses in 1999 and 1998 is the result of changes in the fair value of a
warrant liability.
Provision for income tax. In 1999, although we had a net loss of $33.1 million
before provision for income taxes, we had taxable income for federal and state
income tax purposes which we offset by our use of federal and state net
operating loss carryforwards. As a result, we incurred alternative minimum taxes
of $190,000. Taxable income in 1999 was primarily because of taxable milestone
payments under the Dow agreement and the charge for in-process research and
development which was not deductible for tax purposes. We incurred taxable net
losses in 1998 and 1997 and, consequently, did not pay any federal or state
income taxes in those years. At December 31, 1999, we had net operating loss
carryforwards of approximately $32.7 million for federal tax purposes and $11.1
million for state tax purposes available to reduce future taxable income. Our
federal net operating loss carryforwards expire between 2009 through 2018 and
our state net operating loss carryforwards expire between 2002 through 2003. In
addition, at December 31, 1999, we had research and development credit
carryforwards and alternative minimum tax carryforwards of approximately $2.7
million available for federal tax purposes and $1.9 million for state tax
purposes. These federal carryforwards expire between 2003 through 2013 and these
state carryforwards do not expire. We have provided a 100% valuation allowance
against the related deferred tax assets as our ability to realize such tax
benefits is not assured. Our ability to use these carryforwards is subject to
significant limitations.
Net loss. Net loss in 1999 was $33.3 million, an increase of $24.5 million over
1998. Net loss in 1998 was $8.8 million, an increase of $2.2 million over 1997.
Annual net losses have fluctuated depending on revenues from our collaborative
agreements, research and development expenses and acquisition related charges.
LIQUIDITY AND CAPITAL RESOURCES
The increase in our annual need for funds reflects the expanding scope of our
research and development activities. Since our inception, we have funded our
operations primarily through payments from our collaborative agreements of $59.1
million, the sale of $48.4 million of our equity securities, other income of
$6.8 million and debt and warrant financing of $9.1 million.
At March 31, 2000, we had cash and cash equivalents of $3.7 million. Net cash
used in operating activities of $3.2 million in the quarter ended March 31, 2000
was principally due to $5.8 million paid to our suppliers and employees
partially offset by $2.0 million of research funding received under the Dow
agreement. Net cash provided by operating activities of $6.3 million for the
year ended December 31, 1999 was principally due to $16.6 million of milestone
payments and $7.8 million of research funding received under the Dow agreement
less $21.4 million paid to our suppliers and employees. Net cash provided by
operating activities of $547,000 for the year ended December 31, 1998 was
principally due to the $8.6 million technology access fee and $2.8 million of
research funding received under the Dow agreement less $11.6 million paid to our
suppliers and employees. Net cash used in operating activities of $4.3 million
for the year ended December 31, 1997 was principally due to $2.0 million
received under a litigation settlement and $2.1 million received from customers
offset by $8.8 million paid to our suppliers and employees. Maintenance of
positive net cash provided by operating activities will depend upon our entering
into new collaboration agreements and the level of internally funded research
and development activities.
Net cash used in investing activities of $20,000 in the quarter ended March 31,
2000 was principally due to $710,000 for purchases of property, plant and
equipment, $98,000 for increases in intangible and other assets and $74,000 for
the exercise of the Proteomics call option offset by $856,000 in matured
marketable securities, net of purchases. Net cash used in investing activities
of $8.4 million for the year ended December 31, 1999 included $5.1 million for
purchases of property, plant and equipment. Net cash used in investing
activities of $8.6 million for the year ended December 31, 1998 included $3.8
million for purchases of property, plant and equipment. We derived net cash from
investing activities of $3.1 million for the year ended December 31, 1997 from
$5.2 million in matured marketable securities, net of purchases, which was
partially offset by $1.7 million for purchases of property, plant and equipment.
We anticipate that our capital expenditures will increase in the future to meet
the demands from new collaboration agreements and research and development
efforts. We may use a portion of our cash to acquire or invest in complementary
businesses, products or technologies, or to obtain the right to use such
complementary technologies.
Net cash used in financing activities of $97,000 in the quarter ended March 31,
2000 was primarily the result of $380,000 of net principal payments on long-term
debt offset by $283,000 of proceeds from the exercise of common stock options.
Net cash provided by financing activities of $5.6 million for the year ended
December 31, 1999 included $3.4 million of milestone payments allocated to
warrants issued in connection with the net cash provided by the Dow agreement
and net proceeds of
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$2.2 million from loans related to our $5.0 million equipment financing
arrangement. Net cash provided by financing activities of $8.8 million for the
year ended December 31, 1998 included the issuance and sale of $7.0 million of
our convertible preferred stock, $1.4 million from the issuance of a warrant to
Dow and net proceeds of $312,000 from loans for equipment financing. Borrowings
under this equipment financing bear interest at the commercial bank prime
interest rate payable in monthly installments through October 2001. At December
31, 1999, $4.1 million was outstanding under this arrangement. Principal
payments on long-term debt resulted in our use of net cash in financing
activities of $330,000 for the year ended December 31, 1997.
In the future, our liquidity and capital resources will depend upon, among other
things, the level of our research and development activities, development,
clinical, regulatory and marketing expenses and funding from our collaborations.
We believe that cash flows from operations together with the anticipated net
proceeds of this offering will be adequate to fund our anticipated cash and
working capital requirements for at least the next 24 months. During or after
this period, if our operations do not generate sufficient cash to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for us beginning in the first quarter of the
fiscal year beginning January 1, 2001. The statement requires balance sheet
recognition of derivatives as assets or liabilities measured at fair value.
Accounting for gains and losses resulting from changes in the values of
derivatives is dependent on the use of the derivative and whether it qualifies
for hedge accounting. We do not believe that the adoption of SFAS No. 133 will
have a material impact on our financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB 101. SAB 101 provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. The company believes that it complies with the provisions of
SAB 101.
INFLATION
We believe that inflation has not had a material adverse impact on our business
or operating results during the periods presented.
DISCLOSURES ABOUT MARKET RISK
Interest rate risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio and debt obligations. Our exposures to interest rate
and other market risks at March 31, 2000 did not differ significantly from those
described below.
Investment portfolio
Our investments portfolio consists of cash, cash equivalents and short-term
marketable securities. Cash equivalents are highly liquid investments with
original maturities of three months or less and are stated at cost. We maintain
cash equivalents generally in money market accounts or with maturity dates of
less than 90 days. We do not believe our exposure to interest rate risk is
material for these balances, which totaled $7.0 million at December 31, 1999. We
classify our short-term marketable securities as held-to-maturity and,
consequently, we record them on the consolidated balance sheet at historical
cost. Short-term marketable securities totaled $7.1 million at December 31, 1999
and consisted of commercial paper.
We do not use derivative financial instruments in our short-term investment
portfolio, and we place our investments with high quality issuers and, by
policy, limit the amount of credit exposure to any one issuer.
If market interest rates were to change immediately and uniformly by 10% from
levels at December 31, 1999, the fair value of our cash equivalents and
short-term marketable securities would change by an insignificant amount.
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Debt obligations
Our debt obligations consist of notes payable maturing from 2000 to 2008. We
index substantially all of our debt to the commercial bank prime interest rate,
8.5% at December 31, 1999. If market interest rates were to change immediately
and uniformly by 10% from levels at December 31, 1999, our interest expense
would change by a similar percentage.
Foreign currency
We have operated primarily in the United States and all revenues to date reflect
amounts payable in U.S. dollars. We have not had any material exposure to
foreign currency rate fluctuations relating to revenues or expenses.
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BUSINESS
OVERVIEW
Large Scale Biology uses its proteomics and functional genomics technologies to
develop products and establish commercial collaborations with pharmaceutical,
biotechnology, chemical and other life sciences companies. Proteomics is the
study of proteins. All biological processes, including diseases and responses to
drugs, involve changes in proteins. Functional genomics is the study of where,
when, how and which proteins are made in a living organism.
We have developed fast, accurate technology for identifying both the specific
proteins and the amounts of those proteins produced by the cells or tissues of
virtually any organism. Our objective has been to identify the action of drugs
in living organisms, the causes and effects of diseases and to determine how
well drugs work for their intended uses.
We believe our key technologies are supported by our patent portfolio. Despite
the near complete sequencing of the human genome, the function of proteins and
genes is not fully understood. We believe that we can apply our technologies to
enable the transformation of information on proteins and gene function into
product opportunities, such as drug targets, therapeutics, diagnostics and the
evaluation of drug effectiveness and toxicity. A diagnostic is a test for
determining the presence and severity of disease.
ProGEx is our automated, high-throughput system which shows the protein
composition, or proteome, of cells and tissues. This automated system requires
little or no human attention during operation; high throughput means many units
may be processed on a routine basis. Protein composition is a listing of the
specific proteins present and their amounts. We use our ProGEx system to rapidly
identify and quantify changes in proteins that are caused by diseases or by the
use of particular drugs. We believe that proteomics will become very important
in discovering and developing therapeutics, and in predicting, diagnosing and
monitoring diseases. We believe that our ProGEx system provides information that
is currently unavailable using genomics technologies alone.
We are using our ProGEx system to develop our products which are:
- HUMAN PROTEIN INDEX, or HPI, database -- our database of the detailed
protein composition of all normal human tissues and cells
- MOLECULAR ANATOMY AND PATHOLOGY, or MAP, database -- our database that
describes the changes in protein composition associated with disease
- MOLECULAR EFFECTS OF DRUGS, or MED, database -- our database that
describes changes in protein composition associated with the
administration of therapeutics and other treatments
- Portfolio of marker proteins -- proteins significantly correlated with
disease or the use of a therapeutic, proteins which can be used as drug
targets, therapeutics or diagnostics
We have been developing new technologies using viruses as a means for
transferring genetic information into living host cells thereby causing those
cells to make new products that they would not normally make. Viruses which have
been modified for use in such transfers are called "viral vectors." Our
objective has been to perfect the viral genetic technology that we call our
GENEWARE(R) system so that it can be used to manufacture commercial products
such as pharmaceuticals.
GENEWARE is our automated technology for rapidly inserting genes into host
organisms for gene discovery and for analyzing the function of the inserted
gene. We also intend to apply this technology to efficiently produce human
therapeutics and other commercially useful proteins.
We are using our GENEWARE technology to:
- Identify gene sequences;
- Determine gene functions, and
- Manufacture therapeutic proteins, vaccines and other commercially useful
proteins.
We intend to continue to build our resources and use our knowledge of gene
function and our proteomic databases to correlate the function of genes with
information about normal and diseased cells and tissues and to identify drug
targets and proteins
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which can be used as drugs. We believe these resources will be useful, both by
us and by future collaborators, in product discovery, development and
production.
We believe that by building strategic collaborations with selected companies, we
will generate revenue and establish a long-term economic interest in products
developed by these collaborators using our technology. Since our inception, we
have collaborated with pharmaceutical, biotechnology, chemical and other life
sciences companies as well as research institutions and government agencies. We
generated $16.1 million in revenues in 1999 and $5.7 million in the quarter
ended March 31, 2000 from these arrangements. We currently have seven ongoing
research and technology development programs and collaborations.
Our current collaborations are structured in a variety of ways. In some cases we
obtain immediate funding in the form of ongoing committed research and
development payments and technology access fees from our collaborators following
research and development. We also try to share in the long-term value of the
products that we assist our collaborators in developing through the retention of
some product rights or from royalty fees from the sale of products developed
using our technologies.
In September 1998, we entered into a three-year contract with Dow for its use of
our GENEWARE technology to develop a functional genomics program in selected
agricultural and industrial chemical categories. During this collaboration, Dow
and we have identified commercially significant genes for specific agricultural
and industrial uses that may be marketed by Dow and its affiliates. We retain
the right to use any of the identified genes resulting from this collaboration
in other categories not allocated to Dow. Dow can elect to continue this
collaboration beyond September 2001 by paying additional technology access fees.
If Dow does not elect to continue this collaboration, we will be able to market
our technology to others for agricultural and industrial chemical purposes. Our
revenues from Dow in 1999 were $14.2 million and $5.0 million in the quarter
ended March 31, 2000.
GENEWARE and ProGEx are our proprietary technologies, which means that they are
protected by patents which we own or license and the laws of trade secrets. We
file patent and trademark applications to protect the intellectual property in
our technologies. As of May 31, 2000, our technologies are protected by 20
issued and 59 pending U.S. patents and 12 issued and 44 pending foreign patents
relating to proteomics, genomics and bioprocessing.
STRATEGY
Our principal objective is to commercialize products and technologies as we
establish a leadership position in proteomics and functional genomics. We use
our proprietary technologies to identify, quantify and determine the function of
proteins in cells and tissues. In addition, we use our proprietary technologies
to determine gene functions and produce proteins.
The key elements of our strategy include the following:
Become the definitive source of information about human proteins. We are
developing our HPI database. The rapid progress being made in sequencing the
entire human genome creates additional opportunities for us to integrate our
proprietary protein information with information on the function of human genes.
We intend to derive revenues from multiple sources using our HPI database. We
plan to offer value-added information to collaborators, based on the depth of
information and relational capabilities of our databases, and provide unique
content to database companies. We also intend to use our databases in our
internal research and development projects to identify new drug targets,
proteins which can be used as drugs and diagnostics.
Identify potential drug targets, therapeutic proteins and diagnostics. We plan
to integrate our proprietary technologies to identify potential drug targets,
proteins which can be used as therapeutics and diagnostics. We use our GENEWARE
technology to discover and determine the function of plant genes, and we are now
expanding these capabilities for use in human and animal systems. We intend to
commercialize these technologies with collaborators as well as apply them to our
internal research and development projects.
Become the leading provider of protein information for protein biochips and
other diagnostic tools. We can identify proteins, known as markers, that
correlate with diseases or a therapeutic's effects. Our short-term strategy is
to license these marker proteins individually to collaborators interested in
using them as drug targets or as diagnostic tools. Our long-term strategy is to
provide protein information for protein biochips, miniature devices that are
capable of simultaneously measuring hundreds or thousands of marker proteins. We
believe that biochips and other diagnostics will enable the measurement of
critical health and drug-related conditions quickly and affordably. We plan to
collaborate with one or more technology companies that can develop and
commercialize protein biochips and other diagnostic tools.
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Clinically test our first therapeutic product. We plan to conduct clinical
trials to ascertain the safety and efficacy of our patient-specific vaccine for
the treatment of non-Hodgkins lymphoma. We intend to establish a collaboration
for the further development and commercialization of this vaccine once efficacy
endpoints are established.
Commercialize our protein production technology. Our protein production
technology, based on our GENEWARE technology, allows the rapid and efficient
production of proteins that can be used as drugs. We intend to manufacture our
own proteins and will seek to manufacture proteins for our clients. Part of the
value of proteins discovered using our proteomics technology will be obtained by
manufacturing these proteins ourselves for the treatment of diseases. We have
successfully produced a number of our own candidate therapeutic proteins,
including a patient-specific vaccine for the treatment for non-Hodgkins lymphoma
and alpha-galactosidase, which may be a treatment for Fabry's disease.
BACKGROUND
All living things are made up of one or more cells. Although scientists still
have much to learn about how cells actually function, we do know that all cells
have several basic components. Inside each plant and animal cell is a nucleus,
which contains deoxyribonucleic acid, or DNA, that makes up the genetic code.
Genes are composed of DNA, and when a gene is turned on, or expressed, the
genetic code is copied and converted into a cell component called messenger
ribonucleic acid, or mRNA. This messenger carries the genetic code to a specific
part of the cell outside the nucleus where proteins are made. Beyond carrying
the genetic code for a protein, mRNA is not thought to be functional. Scientists
expect to know the complete genetic code for humans, the human genome, within
the next year.
The proteins that are produced from the genetic code are the essential
components of cells. Changes in protein structure, quantity and location occur
in all diseases, including those that are due to genetic defects. Therefore, we
believe that proteomics will become crucial in discovering and developing drugs
that treat disease, and in predicting, diagnosing and monitoring diseases.
Proteins can also serve as therapeutics themselves, a well-known example of
which is insulin.
We believe that biotechnology is moving from the era of gene discovery into an
era focused on identifying the functions of the proteins these genes produce.
Determining function involves the discovery of the role or relationship that a
gene or a protein has with a particular biological process, and the consequences
of modulating its activity. Gene function cannot necessarily be inferred from
DNA sequence or mRNA levels, nor reliably derived from comparison to other genes
of known function. Discovering gene functions requires the integration of gene
sequence, protein function and an understanding of how proteins interact with
each other. We believe our key technologies, ProGEx and GENEWARE, address these
needs.
OUR TECHNOLOGY AND ITS ADVANTAGES
ProGEx System -- Our Proteomics Technology
We have designed and assembled a series of robotic components in an automated,
modular and scaleable system, which we call our ProGEx system. Our
high-throughput and high resolution ProGEx system produces a quantitative and
qualitative analysis of the proteome of cells or tissues in a highly
reproducible manner. In addition, our ProGEx system determines the relative
amounts of each protein present and obtains information regarding the location
of the protein in cells and tissues.
We believe the automated nature of our ProGEx system removes the variability
inherent in more traditional, manually operated proteomics systems. This allows
us to achieve highly reproducible results which are crucial when comparing data
over time from the numerous types of drug treatments and disease tissues in our
databases. The high degree of resolution obtainable using our ProGEx system
enables us to separate individual proteins out of complex mixtures, which is
critical for the identification of marker proteins that may be useful as drug
targets or diagnostics. Traditional methods are generally incapable of
separating and identifying the low abundance proteins we are able to detect and
characterize with our ProGEx system.
Our ProGEx system is based on the integration of a series of methods that begins
with our proprietary sample preparation and separation process followed by the
use of our proprietary two-dimensional gels, mass spectrometry and sophisticated
software for storing and analyzing biological data. ProGEx gels separate the
proteins in complex mixtures, such as those obtained from cell or tissue
samples. This is achieved using a two-step protein separation technique.
Proteins are separated first along one dimension according to their composition
and then along a second dimension according to their size. This results in a
rectangular map on which individual proteins appear as small spots. The size of
each spot in a ProGEx gel indicates the relative amount of that protein present
in the sample.
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We then use mass spectometry to identify the proteins separated by our ProGEx
gels. Mass spectrometry is a physical measurement technique that measures the
masses or molecular sizes of proteins and fragments of proteins. We use our
proprietary, high-throughput, robotic system to selectively remove protein spots
from ProGEx gels and to fragment the proteins. The mass of each protein fragment
is measured by mass spectrometry. This data can then be used to identify the
protein. We also use mass spectrometry to characterize unknown proteins.
Our ProGEx system generates large amounts of data which must be effectively
organized into databases to allow for its efficient use. Bioinformatics is the
use of computer software to store and analyze biological data. Our KEPLER
bioinformatics software allows us to analyze and integrate this data into our
database. Our proprietary data-mining software tools allow us to query and
interpret all information within our databases.
GENEWARE Technology -- Our Genomics and Manufacturing Technology
We use our GENEWARE technology to insert genes rapidly and temporarily into host
organisms for gene discovery, gene function analysis and protein production. Our
GENEWARE viral vectors carry a gene sequence of interest into a cell of a host
organism. The gene sequence is converted into mRNA outside the nucleus of the
cell and then into protein. Our GENEWARE technology does not use the traditional
methods of inserting a gene into the genome of the host organism. To discover
gene function, we insert a gene into the cell, causing changes which we analyze.
Our GENEWARE technology allows us to turn on or turn off protein production from
unknown gene sequences, thereby enabling us to determine the function and
potential commercial use of those genes and proteins.
Our GENEWARE technology also allows us to manufacture therapeutic proteins,
peptides and other molecules. We believe our GENEWARE technology offers
significant time and cost advantages over traditional genetic engineering
systems because it does not require alteration of the genome of the host
organism. We are completing a pharmaceutical manufacturing facility in
Owensboro, Kentucky for the custom production of protein products using GENEWARE
technology.
Since 1991, we have conducted USDA-approved field trials to demonstrate that our
GENEWARE technology is environmentally safe. We believe our GENEWARE technology
is environmentally safe because the virus and the genes we insert cannot be
incorporated into the plant genome and thus cannot be transmitted to the next
generation of the plant in the seed or pollen. Our GENEWARE viruses eventually
lose the foreign gene that has been inserted and the virus then reverts to a
weakened version of the naturally occurring virus.
COMMERCIAL OPPORTUNITIES
ProGEx applications
Expansion of our proteomics databases. We are using our ProGEx system to expand
our HPI, MAP and MED databases. In order to mine the extensive information,
consisting of millions of protein measurements, contained in the databases, we
have developed a unique proteomic database architecture and advanced
bioinformatics software tools, which allow us to correlate information from all
three of our databases. We intend to derive revenue by providing our unique
database content to database companies and identifying novel drug targets,
therapeutic proteins and diagnostic marker proteins for use by us and our
collaborators.
Identification of disease-specific marker proteins for use as drug targets and
diagnostics. We use our ProGEx system to obtain information about proteomes from
thousands of cell and tissue samples in a matter of weeks. This process takes
significantly longer using other methods. With our ProGEx system we can produce
a picture of the proteomes from normal and diseased cell and tissue samples that
we can compare to identify marker proteins associated with disease. These marker
proteins are potential drug targets or diagnostics. This is a critical step in
the drug discovery and development process and is a difficult and
labor-intensive task to perform using traditional methods. We also intend to
correlate our proteomic information with genomic information on gene function to
identify drug targets and therapeutic proteins. We expect to derive value from
marker proteins by licensing them as potential drug targets or as diagnostic
tools to numerous collaborators, as well as developing protein therapeutics
ourselves. In addition, our long-term strategy is to provide protein information
for protein biochips.
Monitoring and predicting specific drug effects. We use our ProGEx system to
obtain a picture of the proteome from a patient, laboratory animal, cell or
tissue sample before and after treatment with a specific drug to identify the
effects of that drug on the proteome. The binding of a specific drug to its
protein target typically affects the abundance or properties of numerous
proteins in a cell or tissue sample. These changes in protein levels and
properties generally correlate with the therapeutic
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action and toxic side-effects, if any, of the specific drug. We believe that
understanding these changes will allow us to predict the therapeutic and toxic
effects of specific drug candidates. We intend to form collaborations with
pharmaceutical and biotechnology companies to use our technology to monitor and
predict the effects of drug candidates in development.
Toxicology. Using our ProGEx system, we and our collaborators identify changes
that correlate with the toxic side-effects of some drugs. For example, in
collaboration with Novartis AG, we examined the kidney damage caused by the
immunosuppressant drug Cyclosporine A. Cyclosporine A is widely used to prevent
the rejection of transplanted kidneys and hearts. We identified a protein
playing a critical role in the damage. The identity of the protein provided a
critical link in understanding what causes kidney damage during cyclosporine
treatment, and whether the damage could be reduced by altering the drug's
structure. Using this general approach, we can rapidly identify and potentially
understand toxicological mechanisms associated with existing drugs and drugs in
development. We believe that our ProGEx system may significantly reduce the
costs and time associated with this traditional bottleneck in the drug
development process.
GENEWARE applications
We use our GENEWARE technology to discover the function of genes and for the
production of proteins. We have built a database of information about gene
function, initially in plants, and are applying this technology to other
organisms. Some of the commercial applications of our GENEWARE technology
include:
Identifying the function of human genes. We are developing GENEWARE technology
that is capable of delivering target genes into human and other mammalian cell
cultures. We examine the specific structural biochemical and physiological
effects of expressing or inactivating genes in mammalian cells. We intend to
integrate our genomic information on gene function with our proteomic databases
by correlating the function of genes with proteomic information from normal and
diseased cells and tissues to identify drug targets and therapeutic proteins.
Identifying the function of plant genes. We have established a method using our
GENEWARE technology for the rapid, simultaneous screening of entire plant
genomes of major commercial crops in significantly less time than can be done
using traditional technologies. We are able to routinely screen 400 unique genes
per day and identify their functions in plants based on focused, high-throughput
robotic tests. We are currently commercializing this capability in collaboration
with Dow, and expect to form other collaborations in forestry and horticulture.
Producing proteins on a large scale. We have developed technology for the
large-scale recovery and purification of protein products produced in plants. We
use our GENEWARE technology to insert a gene into a plant so that the plant
produces the protein of interest. We harvest the plants and put them through a
series of industrial processes to rapidly separate and purify the protein
product. We have successfully produced and purified a number of potential
protein therapeutic products including a patient-specific vaccine against
non-Hodgkin's lymphoma and alpha-galactosidase, which may be a treatment for
Fabry's disease.
COLLABORATIONS
Our collaboration strategy is to develop multiple commercialization
opportunities with pharmaceutical, biotechnology, chemical and other life
sciences companies relating to proteomics and functional genomics. We structure
our current collaborations in a variety of ways. We obtain immediate funding in
the form of ongoing committed research and development payments and, in some
cases, technology access fees, from our collaborators. We also seek to share in
the long-term value of the products that we assist our collaborators in
developing through the retention of certain products rights and from royalty
fees from the sale of products developed using our technologies.
Several large pharmaceutical companies including Glaxo Wellcome PLC, Procter &
Gamble Co. and Novartis AG have collaborated with us on specific proteomics
projects in pharmaceutical research and development. Biotechnology companies,
such as Genentech, Inc., have also conducted research with us. We also have had
research programs with numerous government agencies. We currently have seven
ongoing research and technology development programs, no one of which, other
than the Dow collaboration described below, is believed to be material to our
business.
We established a three-year collaboration with Dow in September 1998 for its
exclusive use of our GENEWARE technology for functional genomics in selected
agricultural and industrial chemical categories. We and Dow have identified
commercially significant genes for specific agricultural and industrial uses
that will be marketed by Dow and its affiliates. We retain the right to use any
of the identified genes resulting from this collaboration for uses in other
categories not allocated to Dow. Dow can
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elect to continue this collaboration beyond September 2001 by paying additional
technology access fees. If Dow does not elect to continue this collaboration, we
will be able to market to others access to our technology for agricultural and
industrial chemical purposes. During this collaboration, we have developed our
plant gene discovery and function process utilizing our proprietary
technologies. In this collaboration we are entitled to receive committed
research and development funding, milestone payments upon completion of
milestones, annual technology access fees and royalties from products Dow and
its affiliates commercialize from the collaboration. Revenues recognized
pursuant to this collaboration were $2.9 million in 1998 and $14.2 million in
1999 and $5.0 million in the quarter ended March 31, 2000. Additional milestone
payments of $5.0 million could be recognized in 2000 and 2001 if we are
successful in our research efforts. Dow can terminate this collaboration at any
time on 90 days notice.
INTELLECTUAL PROPERTY
We continually seek patent protection for our proteomic, genomic and
biomanufacturing technologies. As of May 31, 2000, we had 20 issued and 59
pending U.S. patents. Our issued U.S. patents expire between 2006 and 2018. As
of the same date, foreign patents corresponding to many of the U.S. patents and
patent applications have been filed and/or issued in one or more other
countries, resulting in a total of 12 issued and 44 pending foreign patents.
These issued patents in various technological areas which we believe are
valuable to our business are summarized in the following table:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
NO. U.S. U.S. PATENT NO. FOREIGN FOREIGN PATENT
TECHNOLOGY AREA PATENTS DURATION PATENTS DURATION
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proteomic analytical 8 2006 - 2017 0 --
equipment and
processes and
generation of proteomic
databases
---------------------------------------------------------------------------------------------------------------
Methods for 3 2018 0 --
purification of viruses
and proteins
---------------------------------------------------------------------------------------------------------------
Plant and animal viral 9 2011 - 2016 12 2009 - 2016
systems for gene
expression
---------------------------------------------------------------------------------------------------------------
</TABLE>
These patents give us the right to exclude others from practicing or selling
products, technologies or services associated with the methods claimed, and from
making, using or selling the equipment which are the subject of the claims of
these patents.
A registered trademark gives the owner the right to exclude others from using
identical or confusingly similar marks within the same channels of commerce. We
own the following registered trademarks:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
------------- -------
<S> <C>
BIOSOURCE GENEWARE Israel
BIOSOURCE GENETICS GENEWARE South Korea
BIOSOURCE TECHNOLOGIES GENEWARE Mexico
EXPRESSVECTOR GENEWARE New Zealand
GENEWARE
ISO-DALT
KEPLER
PCOS
</TABLE>
We also rely upon copyright protection, trade secrets, know-how, continuing
technological innovation and licensing from others to protect our intellectual
property. Our success will depend, in part, on our ability to obtain patent
protection for our products and processes, to preserve our copyrights and trade
secrets, to operate without infringing the proprietary rights of third parties
and to acquire licenses, if needed, to support or enhance our intellectual
property portfolio.
34
<PAGE> 36
Dow, through its wholly-owned subsidiary, Mycogen Corporation, owns or controls
patent rights in the field of viral vectors covering the infection of plants and
the expression of foreign genes in plants. Dow has informed us that it believes
some of our plant viral activities may fall within the scope of its patents. We
have informed Dow that we believe none of Dow's patent rights cover our plant
viral activities. Dow has expressed the desire to license these patents to us
and we are in discussions with Dow regarding such a license or the possibility
of cross-licensing the parties' respective intellectual property. We believe our
business relations with Dow remain positive.
EMPLOYEES
As of May 31, 2000, we had 119 full-time employees, 92 of whom comprise the
research staff and are engaged in research, development and scale-up activities.
The remainder work in general and administrative areas. Thirty-five employees
hold Ph.D. degrees. We consider relations with our employees to be good, and
none of the employees is covered by a collective bargaining agreement.
COMPETITION
The genomics and proteomics businesses are intensely competitive. Extensive
research efforts characterize the genomics and proteomics industries, resulting
in rapid technological progress. Many universities, public agencies and
established pharmaceutical, biotechnology, chemical and other life sciences
companies with substantially greater resources are developing and using
technologies and are actively engaging in the development of products similar to
or competitive with our products and technologies. In addition, other companies
are engaged in development programs directed to the production of therapeutic
proteins or peptides in plants.
The markets for protein development and production, including human and
veterinary vaccines like the ones we are developing, also are highly
competitive. Competitors with substantially greater resources are actively
developing products similar to or competitive with our products. Several
pharmaceutical, biotechnology, chemical and other life sciences companies engage
in research and development in the use of novel gene expression systems to
produce therapeutic proteins. Other companies are developing and marketing
therapeutics for non-Hodgkins lymphoma.
In the field of functional genomics, we face competition from many biotechnology
companies. In the field of proteomics, we face competition from a small number
of companies using similar methods to investigate protein expression. The
maturation of the genomics industry, associated with the completion of the human
genome sequence, is likely to cause successful genomics companies with greater
resources than ours to look to proteomics as an opportunity for continued
growth.
We and others compete in the newly emerging fields of functional genomics and
proteomics on the basis of technological innovations which offer time and cost
advantages for the accomplishment of specific tasks, many of which were not
previously practical. We believe our proprietary ProGEx system and GENEWARE
technology, and our significant patent portfolio, will allow us to compete
effectively in these fields. However, we expect new developments to continue,
and discoveries by others may render our potential products and technologies
non-competitive.
FACILITIES
Our principal research and development facilities and corporate headquarters are
located in Vacaville, California. The approximately 40,000 square-foot leased
facility includes administrative offices, a genetic engineering laboratory, a
plant discovery and function laboratory and a bioinformatics software
laboratory. Our bioprocessing laboratory at this same facility is physically
designed for conversion to current good manufacturing practices and good
laboratory practices operating standards, and provides us with the capability to
conduct research, process development and scale-up from bench through pilot
scale within the same facility. Pilot scale is a stage before full scale
production when smaller amounts are made to demonstrate that production methods
work. We also own a facility of approximately 22,000 square feet in Owensboro,
Kentucky for extraction and downstream bioprocessing. The Owensboro facility's
pilot plant is currently in operation. Our subsidiary, Large Scale Proteomics,
leases approximately 7,500 square feet of laboratory and office facilities in
Rockville, Maryland. We incurred rental expenses for our Vacaville facility of
$353,000 in 1997, $476,000 in 1998 and $531,000 in 1999 and for our Rockville
facility of $128,000 in 1999.
35
<PAGE> 37
LEGAL PROCEEDINGS
On March 18, 1998 we filed an opposition against the grant of a European patent
filed by Axis Genetics, Ltd. or Axis. The Axis patent is now owned by Dow. The
European Patent Office Opposition Division conducted oral proceedings on April
11, 2000 to determine the patentability of the claimed invention. The European
Patent Office issued a decision accepting a new set of claims that limit the
patent to a beta barrel virus system rather than the broader set of claims
originally patented by Axis. The narrower claims now cover only a beta barrel
virus system that we neither use nor plan to use in Europe. Dow relinquished its
right to appeal the decision of the European Patent Office Opposition Division.
The U.S. patents corresponding to this European patent do not cover our present
or planned activities in the United States.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products
Any pharmaceutical products which we or our collaborators develop, produce or
market will be subject to extensive regulation by United States and foreign
governmental authorities. In the United States, new drugs are subject to
regulation under the Federal Food, Drug and Cosmetic Act and biological products
are subject to regulation both under certain provisions of that Act and under
the Public Health Services Act. The FDA regulates, among other things, the
development, testing, manufacturing, safety, efficacy, record keeping, labeling,
storage, approval, advertising, promotion, sale and distribution of new
biologics and drugs. The process of obtaining FDA approval has historically been
costly and time-consuming.
The standard process the FDA requires before a pharmaceutical agent may be
marketed in the United States includes:
- preclinical studies;
- submission to the FDA of an Investigational New Drug application, or IND,
which must become effective before human clinical trials may commence;
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug or biologic in our intended application;
- for drugs, submission of a New Drug Application, or NDA, or a Biologic
License Application, or BLA, with the FDA; and
- FDA approval of the NDA or BLA prior to any commercial sale or shipment
of the drug.
In addition to obtaining FDA approval for each product, the FDA must inspect and
approve each drug manufacturing establishment. The FDA and other federal, state
and local agencies must inspect all manufacturing establishments which must
comply with current good manufacturing processes requirements.
The preclinical studies can take several years to complete, and there is no
guarantee that an IND based on those studies will become effective to even
permit clinical testing to begin. Once clinical trials are initiated, they
generally take two to five years, but may take longer, to complete. After
completion of clinical trials of a new drug or biologic product, FDA marketing
approval of the NDA or BLA must be obtained. This process requires substantial
time and effort and there is no assurance that the FDA will accept the NDA or
BLA for filing and, even if filed, that the FDA will grant approval. In the
past, it has taken the FDA two to five years on average to approve the NDA or
BLA; if questions arise, approval can take more than five years.
In addition to regulatory approvals that a drug manufacturer must obtain in the
United States, a drug product is also subject to regulatory approval in other
countries in which it is marketed, although the requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. No action can be taken to market any drug
product in a country until the regulatory authorities in that country approve an
appropriate application. FDA approval does not assure approval by other
regulatory authorities. The current approval process varies from country to
country, and the time spent in gaining approval varies from that required for
FDA approval. In some countries, regulatory authorities also set or approve the
sale prices of drug products. The pricing review period often begins after
market approval is granted. Even if a foreign regulatory authority approves a
drug product, it may not approve satisfactory prices for the product.
Regulation of Genetically-Modified Food Products
The FDA extensively regulates manufacturing, labeling, distributing, marketing,
promotion and advertising after product approval. The FDA has announced that it
will apply the same regulatory standards to foods developed through genetic
modification as applied to foods developed through traditional agricultural
methods. Genetically modified food products
36
<PAGE> 38
therefore could be subject to FDA pre-market review, and products we are
developing with our collaborators, such as Dow, may become subject to lengthy
FDA reviews. If the FDA concludes that these products are food additives, or
raise safety questions, it may not approve them in a timely manner, or at all.
Any failure to obtain, or a significant delay in obtaining, such approvals would
adversely affect our ability or the ability of our collaborators to market
products successfully, reducing or eliminating product revenues or royalties to
us. In addition, these products may be subject to substantial review by foreign
governmental regulatory authorities that could prevent or delay approval in
those countries.
Regulation by USDA
We must comply with USDA regulations for outdoor releases of genetically
engineered organisms as well as other products designed for use on or with
agricultural products. Recently, the USDA released new rules that prohibit the
inclusion of genetically modified ingredients in products labeled as organic.
The USDA rules also prohibit the use of genetically modified fibers in clothing
labeled as organic. These new rules could adversely affect products under
development with our collaborators, including Dow. In addition, the USDA
prohibits us from growing and transporting genetically modified plants except
where this activity falls under an exemption, or under special permits. We may
use genetically modified plants as screening or production hosts. Changes in
USDA policy regarding the movement or field release of genetically modified
plant hosts could adversely affect our business.
Other Regulations
In addition to the foregoing, our business is and will be subject to regulation
under various state and federal environmental laws, including the Occupational
Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substances Control Act. These and other laws govern our use handling and
disposal of various biological, chemical and radioactive substances we use, and
the wastes we generate by our operations. We believe that we are in material
compliance with applicable environmental laws and that our continued compliance
with these laws will not have a material adverse effect on our business. We
cannot predict, however, whether state or federal regulators and agencies will
impose new regulatory restrictions on the production, handling and marketing of
biotechnology products or whether existing laws and regulations will not
adversely affect us in the future.
37
<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SCIENTIFIC ADVISORS
Our executive officers, directors and scientific advisors and their ages as of
May 31, 2000 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
NAME AGE POSITION
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Robert L. Erwin(2)(3)(4)........................ 46 Chairman of the Board, Chief Executive Officer
and Director
David R. McGee, Ph.D. .......................... 50 Senior Vice President, Chief Operating Officer
and Assistant Secretary
Laurence K. Grill, Ph.D. ....................... 50 Senior Vice President, Research and Development
John S. Rakitan................................. 55 Senior Vice President, General Counsel and
Secretary
R. Barry Holtz, Ph.D. .......................... 53 Senior Vice President, Bioprocess Development
Daniel Tuse, Ph.D. ............................. 48 Vice President, Pharmaceutical Development
Michael D. Centron.............................. 44 Treasurer and Controller
N. Leigh Anderson, Ph.D. ....................... 50 Director
Marvyn Carton(1)................................ 82 Director
Bernard I. Grosser, M.D.(2)..................... 71 Director
Charles A. Hayes(1)(4).......................... 65 Director
Sol Levine(3)................................... 71 Director
John W. Maki(3)(4).............................. 39 Director
John J. O'Malley................................ 53 Director
James P. TenBroek(1)(2)......................... 39 Director
Robert J. Walden................................ 44 Director
Jacobo Zaidenweber, M.D. ....................... 70 Director
SCIENTIFIC ADVISORS
Ronald W. Davis, Ph.D. ......................... 58 Scientific Advisor
Edgar G. Engleman, M.D. ........................ 54 Scientific Advisor
Michael E. Selsted, M.D., Ph.D. ................ 49 Scientific Advisor
T. Michael Wilson, Ph.D. ....................... 49 Scientific Advisor
</TABLE>
---------------
(1) Member of audit committee
(2) Member of the compensation committee
(3) Member of the executive committee
(4) Member of the nominating committee
Robert L. Erwin co-founded Large Scale Biology in 1987 and has been Chairman of
the Board and Chief Executive Officer since 1992. From 1988 to 1992, Mr. Erwin
served as our President and Chief Executive Officer. As a co-founder of Sungene
Technologies Corporation, he served as Vice President of Research and Product
Development from 1981 through 1986. Mr. Erwin is the former chairman of the
State of California Breast Cancer Research Council and currently serves on the
University of California president's Engineering Advisory Council. He is
Chairman of the Supervisory Board of Icon Genetics, AG. Mr. Erwin has served on
the Biotechnology Industry Advisory Board for Iowa State University. Mr. Erwin
received his M.S. degree in genetics from Louisiana State University.
David R. McGee, Ph.D., co-founded Large Scale Biology and has served as Vice
President since 1987, Assistant Secretary since 1991 and as Senior Vice
President and Chief Operating Officer since 1997. Before joining us, from 1983
to 1987, Dr. McGee was Vice President of Operations at Sungene Technologies
Corporation. Dr. McGee received his Ph.D. in genetics from Louisiana State
University and served as a faculty instructor of zoology and genetics at
Louisiana State University.
38
<PAGE> 40
Laurence K. Grill, Ph.D., co-founded Large Scale Biology and has served as Large
Scale Biology's Vice President, Research and Development since 1987 and as
Senior Vice President since 1999. Dr. Grill was employed as the Manager of Plant
Molecular Biology for Sandoz Crop Protection Corporation from 1984 to 1987 and
Senior Research Scientist in the Department of Molecular Biology at Zoecon
Research Institute from 1980 to 1984. He received his Ph.D. in plant pathology
from the University of California at Riverside.
John S. Rakitan joined Large Scale Biology in 1987 as the controller. He served
as treasurer from 1988 to 1990. Mr. Rakitan was appointed Vice President,
General Counsel and Assistant Secretary in 1988, Secretary in 1991 and Senior
Vice President in 1999. Before joining us, Mr. Rakitan was an attorney in
private practice. Mr. Rakitan received his J.D. degree from the University of
Notre Dame.
R. Barry Holtz, Ph.D., joined Large Scale Biology in 1989 as a Vice President of
Bioprocess Development. Dr. Holtz has served as Large Scale Biology's Vice
President, Bioprocess Development since 1989, and as Senior Vice President since
1999. From 1981 to 1989, Dr. Holtz was President of Holtz Bioengineering, Inc.
Dr. Holtz received his Ph.D. in biochemistry from Pennsylvania State University
and served as Assistant Professor in the Department of Food Science and
Nutrition at Ohio State University.
Daniel Tuse, Ph.D., joined Large Scale Biology as Vice President, Pharmaceutical
Development in 1995. Before joining Large Scale Biology, Dr. Tuse was Assistant
Director of the Life Sciences Division of SRI International. Dr. Tuse received
his Ph.D. in Microbiology from the University of California, Davis.
Michael D. Centron joined Large Scale Biology as the controller in 1988. He has
served as Large Scale Biology's treasurer since 1991. Before joining us, Mr.
Centron was Audit Supervisor for Varian Associates from 1985 through 1988. Mr.
Centron also worked for Arthur Young and Co., currently Ernst & Young. Mr.
Centron is a certified public accountant and received his B.S. in economics from
the Wharton School at University of Pennsylvania and his M.B.A. degree from the
University of California at Berkeley.
N. Leigh Anderson, Ph.D., has been a director of Large Scale Biology since
September 1999. Dr. Anderson has served as President and Chief Executive Officer
of Large Scale Proteomics Corporation since he co-founded it in 1985. Dr.
Anderson obtained his B.A. in Physics with honors from Yale and a Ph.D. in
Molecular Biology from Cambridge University (England).
Marvyn Carton was a director of Large Scale Biology from 1988 to 1990 and
currently has been a member of the board of directors since October 1998 when he
rejoined the board of directors. Mr. Carton was an Executive Vice President and
Director with the investment-banking firm of Allen & Company until his
retirement in 1992. Mr. Carton received his B.A. from Brown University and his
M.B.A. from New York University.
Bernard I. Grosser, M.D., has been a director of Large Scale Biology since 1996.
Dr. Grosser has served as a Professor and as the Chairman, Department of
Psychiatry, University of Utah School of Medicine since 1995. He also serves as
a director of Human Pheromone Sciences, Inc. Dr. Grosser received his B.A. from
the University of Massachusetts, his M.S. in Zoology from the University of
Michigan and his M.D. from Case Western Reserve University.
Charles A. Hayes has been a director of Large Scale Biology since 1990. Mr.
Hayes is Chairman and Chief Executive Officer of Guilford Mills in Greensboro,
North Carolina. Mr. Hayes has served as a director of U.S. Trust, North
Carolina, and is a director of Piedmont Associated Industries and the Knitted
Textile Association.
Sol Levine has been a director of Large Scale Biology since 1992. Mr. Levine is
a director of Wesley Jessen VisionCare, Inc. Mr. Levine is a member of
Technology Directors II, LLC and Technology Directors II BST, LLC. Mr. Levine is
the former President of Revlon, Inc.
John W. Maki has been a director of Large Scale Biology since May 1997. In
November 1999, Mr. Maki became a Managing Director of Audax Management Company
New Jersey LLC, a division of Audax Group LLC. From 1998 through 1999 Mr. Maki
was a Managing Director of Technology Directors, Inc. and also served as a
Managing Director of Technology Directors II LLC from 1997 through 1998. He was
a Principal at Bain Capital, Inc. from 1993 to 1997. Mr. Maki is also a member
of the Supervisory Board of Icon Genetics, AG, a board member of Therascope, AG,
and a director of Wesley Jessen VisionCare, Inc. and is a member of Technology
Directors II, LLC and Technology Directors II BST, LLC. Mr. Maki received his
B.A. in economics from Harvard College.
39
<PAGE> 41
John J. O'Malley has been a director of Large Scale Biology since May 1997. In
November 1999, Mr. O'Malley became a Managing Director of Audax Management LLC,
a division of Audax Group LLC. From April through November 1999, Mr. O'Malley
served as Managing Director of Technology Directors, Inc. From 1994 to 1999 he
was Executive Vice President of Bain Capital, Inc. He is a director of Wesley
Jessen VisionCare, Inc. and is a member of Technology Directors II, LLC and
Technology Directors II BST, LLC. Mr. O'Malley received his A.B. in Economics
from Middlebury College and his M.B.A. from the Wharton School of the University
of Pennsylvania.
James P. TenBroek has been a director of Large Scale Biology since May 1997. Mr.
TenBroek has been a Managing Director with Wind Point Partners III, LP since
1997, Wind Point Partners IV, LP since 1998 and was an investment professional
with Golder, Thoma, Cressey, Rauner, Inc. from 1994 to September, 1997. Mr.
TenBroek is the managing member of Technology Directors BST II, LLC and a member
of Technology Directors II, LLC. Mr. TenBroek received his A.B. in Engineering
from Dartmouth College, his M.S. in electrical engineering from Cornell
University and his MBA from Harvard Business School.
Robert J. Walden has been a director of Large Scale Biology since May 1999. Mr.
Walden has served as Vice President, Finance, at Large Scale Proteomics
Corporation since 1997. Mr. Walden previously served as Vice President of
Finance and Administration at Osiris Therapeutics, Inc. and as Chief Financial
Officer at the American Type Culture Collection. Mr. Walden received his degree
in Finance from the University of Maryland.
Jacobo Zaidenweber, M.D., has been a director of Large Scale Biology since 1987.
Dr. Zaidenweber is Chairman of the Board of American Textiles Corporation. He
has served as the Coordinator for the Private Sector for the North American Free
Trade Agreement in the Section of Textiles and Tariffs. He is the former
President of the Coordinating Committee of the United States-Mexico Chamber of
Commerce. Dr. Zaidenweber received his medical degree from the University of
Mexico.
SCIENTIFIC ADVISORS
We have consulting arrangements with scientists who serve as our advisors. We
chose our advisors for their expertise in fields that are important to the
research and development of our products. We generally compensate our scientific
advisors for their services with a combination of cash payments and stock
options. We are supporting research projects in the laboratories of some of our
scientific advisors and we intend to continue to support these and similar
projects. We also compensate some of the scientific advisors participating in
these collaborations.
Our scientific advisors presently include the following persons:
Ronald W. Davis, Ph.D., is a professor in the Department of Biochemistry at
Stanford University School of Medicine. He acts as a scientific advisor in the
field of functional genomics.
Edgar G. Engleman, M.D., is a professor of Pathology and Medicine at the
Stanford University Medical School Blood Center. He acts as a scientific advisor
in the field of medicine.
Michael E. Selsted, Ph.D., M.D., is a professor of Pathology, College of
Medicine, University of California, Irvine, Pathology and Infectious Disease.
Dr. Selsted acts as an advisor in the field of host defense mechanisms and
molecular biology.
T. Michael A. Wilson, Ph.D., is Chief Executive Officer of Horticultural
Research International, a government institute in Wellesbourne, United Kingdom.
Formerly he was a professor at Rutgers University. Dr. Wilson acts as an advisor
in the field of virology.
We also retain other consultants and business and technical advisors that we
believe have the potential to strengthen our competitive position.
BOARD OF DIRECTORS
Our bylaws currently provide for a board of directors consisting of eleven
directors. Each director is elected for a period of one year at our annual
meeting of stockholders and serves until the next annual meeting or until his or
her successor is duly elected and qualified. The executive officers serve at the
discretion of the board of directors.
Board Committees
We have established an audit committee composed of independent directors that
reviews and supervises our financial controls, including the selection of our
auditors, reviews our books and accounts, meets with our officers regarding our
financial controls,
40
<PAGE> 42
acts upon recommendations of our auditors and takes further actions as the audit
committee deems necessary to complete an audit of our books and accounts, as
well as other matters that may come before it or as directed by the board. The
audit committee currently consists of three directors: Messrs. Carton, Hayes and
TenBroek.
We have established an executive committee to act on an interim basis between
meetings of the full Board of Directors with all of the authority and power of
the full Board of Directors in the management of our business and affairs,
except as otherwise limited by our by-laws. The Executive Committee currently
consists of three directors: Messrs. Erwin, Levine and Maki.
We have established a nominating committee to recommend to the Board of
Directors individuals for appointment or election as directors of the company.
The nominating committee currently consists of three directors: Messrs. Erwin,
Hayes and Maki.
We have also established a compensation committee that reviews and approves the
compensation and benefits for our executive officers, administers our stock
plans and performs other duties as may from time to time be determined by the
board. The compensation committee currently consists of three directors: Messrs.
Erwin, Grosser and TenBroek.
Director Compensation
We do not pay cash compensation to directors who are not our employees but they
do receive stock options and reimbursement of out-of-pocket travel expenses for
attendance at meetings of the board of directors. In 1999, we granted options to
purchase 15,000 shares at an exercise price of $11.25 per share to Messrs.
Carton, Hayes, Levine, Maki, O'Malley, TenBroek and Drs. Grosser and
Zaidenweber. In 1989, we granted Mr. Carton options to purchase 10,000 shares at
an exercise price of $3.50 per share, and in 1995, we granted Mr. Hayes options
to purchase 9,000 shares at an exercise price of $12.62 per share. Additionally,
in 1995, we granted Mr. Levine options to purchase 25,000 shares at $12.62 per
share and in 1992-93 granted him 125,000 options at $3.50 per share. Directors
who are also our employees do not receive additional compensation for serving as
directors.
COMPENSATION COMMITTEE INTERLOCKS
None of our compensation committee members is an employee of or ever was an
employee of Large Scale Biology, other than Mr. Erwin, our Chairman of the Board
and Chief Executive Officer. Mr. TenBroek, who serves on our compensation
committee, is affiliated with two of our significant stockholders. See
"Transactions and Relationships with Related Parties." None of our executive
officers serves on the board of directors or compensation committee of any other
company that has one or more executive officers serving as a member of our board
or our compensation committee.
EXECUTIVE OFFICERS
The board of directors appoints our executive officers who serve at the
discretion of our board. There are no family relationships among any of our
directors or executive officers.
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<PAGE> 43
EXECUTIVE COMPENSATION
Summary Compensation Table
The annual and long-term compensation of our chief executive officer and our
four other most highly compensated executive officers in 1999 was as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
FISCAL ------------------------------- ----------------------
YEAR SECURITIES
NAME AND PRINCIPAL POSITION ENDED SALARY($) BONUS($) OTHER($) UNDERLYING OPTIONS(#)
--------------------------- ------ --------- -------- -------- ----------------------
<S> <C> <C> <C> <C> <C>
Robert L. Erwin.................................... 1999 184,000 12,000 -- 100,000
Chairman of the Board and Chief Executive Officer
N. Leigh Anderson, Ph.D............................ 1999 174,000 12,000 29,000(2) 50,000
President and Chief Executive Officer, Large
Scale Proteomics
Laurence K. Grill, Ph.D............................ 1999 147,000 12,000 -- 50,000
Senior Vice President, Research
R. Barry Holtz, Ph.D............................... 1999 147,000 12,000 -- 50,000
Senior Vice President, Bioprocess Development
David R. McGee, Ph.D............................... 1999 165,000 12,000 -- 50,000
Senior Vice President and Chief Operating Officer
</TABLE>
---------------
(1) Excludes other compensation in the form of perquisites and other personal
benefits that constitute the lesser of $50,000 or 10% of the total annual
salary or bonus in 1999.
(2) Represents payments of deferred compensation accrued prior to our
acquisition of Large Scale Proteomics.
Option Grants in Fiscal 1999
The following table outlines information regarding stock options granted to our
chief executive officer and our four other most highly compensated executive
officers in 1999. Amounts in the following table under potential realizable
value represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. For purposes of this
analysis, the SEC mandates the use of the 5% and 10% assumed annual rates of
compounded stock price appreciation and these rates do not represent an estimate
or projection of our future common stock prices. The amounts under potential
realizable value represent assumed rates of appreciation in the value of our
common stock from the assumed offering price of $21.00 per share. Actual gains,
if any, on stock options exercises will depend on future performance of our
common stock and overall stock market conditions. We may not achieve the amounts
reflected in the following table.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
INDIVIDUAL GRANTS
-------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE
SHARES OF VALUE AT ASSUMED ANNUAL
COMMON PERCENT OF RATES OF STOCK PRICE
STOCK TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME GRANTED 1999 PRICE ($) DATE 5%($) 10%($)
---- ----------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Erwin.................. 100,000 6.3% 11.25 12/30/09 2,296,000 4,322,000
N. Leigh Anderson, Ph.D.......... 50,000 3.2% 11.25 12/30/09 1,148,000 2,161,000
Laurence K. Grill, Ph.D.......... 50,000 3.2% 11.25 12/30/09 1,148,000 2,161,000
R. Barry Holtz, Ph.D............. 50,000 3.2% 11.25 12/30/09 1,148,000 2,161,000
David R. McGee, Ph.D............. 50,000 3.2% 11.25 12/30/09 1,148,000 2,161,000
</TABLE>
In 1999, we granted options to purchase an aggregate of 1,585,375 shares to
employees, directors and consultants under our 1990, 1992 and 1999 stock option
plans at an exercise price determined in good faith by our Board of Directors
based on our board's estimate of fair value at which we could sell our stock to
third parties.
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<PAGE> 44
Aggregated Option Exercises in 1999 and Fiscal Year End Option Values
The following table outlines information regarding option exercises in 1999 and
the value of options at December 31, 1999 for our chief executive officer and
our four other most highly compensated executive officers. The value of
unexercised "in-the-money" options at December 31, 1999 is based on the assumed
offering price of $21.00 per share.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AND WARRANTS AT IN-THE-MONEY OPTIONS AT
COMMON STOCK DECEMBER 31, 1999 DECEMBER 31, 1999($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Erwin................... -- -- -- 100,000 -- 975,000
N. Leigh Anderson, Ph.D. ......... -- -- -- 50,000 -- 488,000
Laurence K. Grill, Ph.D. ......... 2,000 13,000 13,000 50,000 228,000 488,000
R. Barry Holtz, Ph.D. ............ 6,744 47,000 15,000 50,000 263,000 488,000
David R. McGee, Ph.D. ............ -- -- 15,000 50,000 263,000 488,000
</TABLE>
BENEFIT PLANS
2000 Stock Incentive Plan
Introduction. Our 2000 stock incentive plan is intended to serve as the
successor program to our 1999 stock option plan. Our Board will adopt and our
stockholders will approve the 2000 plan before the completion of this offering.
The 2000 plan will become effective when the underwriting agreement for this
offering is signed. At that time, we will transfer all outstanding options under
our 1999 plan, including options granted under our 1988, 1990 and 1992 stock
plans which were incorporated into our 1999 stock option plan, to the 2000 plan,
and we will not make any further option grants under the prior plan. The
transferred options will continue to be governed by their existing terms, unless
our compensation committee decides to extend one or more features of the 2000
plan to those options. Except as otherwise noted below, the transferred options
have substantially the same terms as will be in effect for grants made under the
discretionary option grant program of our 2000 plan.
Share Reserve. shares of our common stock have been authorized
for issuance under the 2000 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1999 plan plus an additional
increase of shares. The share reserve under our 2000 plan will
automatically increase on the first trading day in January each calendar year
from 2001 through 2005, by an amount equal to 3% of the total number of shares
of our common stock outstanding on the last trading day of December in the prior
year, but in no event will this annual increase exceed shares. In
addition, we will not grant any participant in our 2000 plan stock options or
direct stock issuances for more than 1,000,000 shares of common stock per
calendar year.
Programs. Our 2000 plan has five separate programs:
- the discretionary option grant program, under which we may grant eligible
individuals in our employ options to purchase shares of our common stock
at an exercise price not less than the fair market value of those shares
on the grant date;
- the stock issuance program, under which we may issue eligible individuals
shares of our common stock directly through the purchase of such shares
at a price not less than their fair market value at the time of issuance
or as a bonus tied to the attainment of performance milestones or the
completion of a specified period of service;
- the salary investment option grant program, under which we may give our
executive officers and other highly compensated employees the opportunity
to apply a portion of their base salary to the acquisition of special
below market stock option grants;
- the automatic option grant program, under which we will automatically
make option grants at periodic intervals to eligible non-employee board
members to purchase shares of common stock at an exercise price equal to
the fair market value of those shares on the grant date; and
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<PAGE> 45
- the director fee option grant program, under which we may give our
non-employee board members the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 2000 plan include
our officers and other employees, our board members and any consultants that we
hire.
Administration. Our compensation committee will administer the discretionary
option grant and stock issuance programs. This committee will determine which
eligible individuals are to receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a nonstatutory stock option under
the federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. The compensation committee will also have the authority to select
the executive officers and other highly compensated employees who may
participate in the salary investment option grant program if that program is put
into effect for one or more calendar years.
Plan Features. Our 2000 plan will include the following features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee. In addition, the plan
administrator may provide financial assistance to one or more optionees
in the exercise of their outstanding options or the purchase of their
unvested shares by allowing such individuals to deliver a full-recourse,
interest-bearing promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1999 plan, in return for the grant of new
options for the same or a different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election to
surrender their outstanding options for a payment from us equal to the
fair market value of the shares subject to the surrendered options less
the exercise price payable for those shares. We may make the payment in
cash or in shares of our common stock. None of the options under our
1988, 1990, 1992 and 1999 plans have any stock appreciation rights.
Change in Control. The 2000 plan will include the following change in control
provisions that may result in the accelerated vesting of outstanding option
grants and stock issuances:
- If we are acquired by merger or asset sale, each outstanding option under
the discretionary option grant program that is not to be assumed by the
successor corporation will immediately become exercisable for all the
option shares, and all outstanding unvested shares will immediately vest,
except to the extent our repurchase rights with respect to those shares
are to be assigned to the successor corporation;
- The compensation committee will have complete discretion to grant one or
more options that will become exercisable for all the option shares if
those options are assumed in the acquisition but the optionee's service
with us or the acquiring entity is subsequently terminated. The vesting
of any outstanding shares under our 2000 plan may be accelerated upon
similar terms and conditions.
- The compensation committee will also have the authority to grant options
which will immediately vest if we are acquired, whether or not those
options are assumed by the successor corporation.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will vest in connection with a successful tender offer for more than
fifty percent of our outstanding voting stock or a change in the majority
of our board through one or more contested elections. Such accelerated
vesting may occur either at the time of such transaction or upon the
subsequent termination of the individual's service.
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<PAGE> 46
- The options currently outstanding under our 1988, 1990, 1992 and 1999
plans will immediately vest if we are acquired by a merger or asset sale
and the acquiring company does not assume those options. Some of those
options also contain an additional vesting acceleration feature that will
result in the immediate vesting of all or part of those options upon an
involuntary termination of the optionee's employment within 18 months
following an acquisition in which those options are assumed.
Salary Investment Option Grant Program. If the compensation committee decides to
put this program into effect for one or more calendar years, each executive
officer or other highly compensated employee selected for participation in the
program may elect to reduce his or her base salary for the calendar year by an
amount not less than $10,000 nor more than $50,000. Each selected individual who
makes such an election will automatically be granted, on the first trading day
in January of the calendar year for which his or her salary reduction is to be
in effect, an option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option will
have an exercise price per share equal to one-third of the fair market value of
the option shares on the grant date. As a result, the option will be structured
so that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the amount by which the
optionee's salary is reduced under the program. The option will become
exercisable in a series of 12 equal monthly installments during the calendar
year for which the salary reduction is to be in effect.
Automatic Option Grant Program. Each individual who first becomes a non-employee
board member at any time after the effective date of this offering will receive
an option grant for 10,000 shares of common stock on the date such individual
joins the board. In addition, on the date of each annual stockholders' meeting
held after the effective date of this offering, each non-employee board member
who is to continue to serve as a non-employee board member, including each of
our current non-employee board members, will automatically be granted an option
to purchase 2,500 shares of common stock, provided such individual has served on
the board for at least six months.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option that are not vested at the time of
the optionee's cessation of board service. The shares subject to each initial
10,000-share automatic option grant will vest in a series of four successive
annual installments upon the optionee's completion of each year of board service
over the four year period measured from the grant date. The shares subject to
each annual 2,500-share automatic option grant will vest upon the optionee's
completion of one year of board service measured from the grant date. However,
the shares will immediately vest in full upon specified changes in control or
ownership or upon the optionee's death or disability while a board member.
Director Fee Option Grant Program. If this program is put into effect in the
future, then each non-employee board member may elect to apply all or a portion
of any cash retainer fee for the year to the acquisition of a below-market
option grant. The option grant will automatically be made on the first trading
day in January in the year for which the retainer fee would otherwise be payable
in cash. The option will have an exercise price per share equal to one-third of
the fair market value of the option shares on the grant date, and the number of
shares subject to the option will be determined by dividing the amount of the
retainer fee applied to the program by two-thirds of the fair market value per
share of our common stock on the grant date. As a result, the option will be
structured so that the fair market value of the option shares on the grant date
less the exercise price payable for those shares will be equal to the portion of
the retainer fee applied to that option. The option will become exercisable in a
series of 12 equal monthly installments during the calendar year for which the
retainer fee election is in effect. However, the option will become immediately
exercisable for all the option shares upon the death or disability of the
optionee while serving as a board member.
Additional Program Features. Our 2000 plan will also have the following
features:
- Outstanding options under the salary investment, automatic option grant
and director fee option grant programs will immediately vest if we are
acquired by a merger or asset sale or if there is a successful tender
offer for more than 50% of our outstanding voting stock or a change in
the majority of our board through one or more contested elections.
- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
45
<PAGE> 47
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share based
on the highest price per share of our common stock paid in that tender
offer.
- The board may amend or modify the 2000 plan at any time, subject to any
required stockholder approval. The 2000 plan will terminate no later than
2010.
Employee Stock Purchase Plan
Our Board of Directors will adopt and our stockholders will approve our employee
stock purchase plan before the completion of this offering. The plan will become
effective immediately upon the signing of the underwriting agreement for this
offering. The plan is designed to allow our eligible employees and the eligible
employees of our participating subsidiaries to purchase shares of common stock,
at semi-annual intervals, with their accumulated payroll deductions.
We have 500,000 shares of our common stock that we will initially reserve for
issuance under the plan. The reserve will automatically increase on the first
trading day in January of each calendar year, beginning in calendar year 2001,
by an amount equal to 1% of the total number of shares of our common stock
outstanding on the last trading day of the immediately preceding calendar year.
The annual increase will never exceed shares.
The plan will have a series of successive overlapping offering periods, with a
new offering period beginning on the first business day of May and November each
year. Each offering period will continue for a period of 24 months, unless
otherwise determined by our compensation committee. However, the initial
offering period will start on the date the underwriting agreement for this
offering is signed and will end on the last business day of April 2002. The next
offering period will start on the first business day of November 2000 and end on
the last business day of October 2002.
Employees scheduled to work more than 20 hours per week for more than five
calendar months per year may participate in the plan and may join an offering
period on the start date of that period. Employees may participate in only one
offering period at any time.
A participant may contribute up to 15% of his or her cash earnings through
payroll deductions, and the accumulated deductions will be applied to the
purchase of shares on each semi-annual purchase date. Semi-annual purchase dates
will occur on the last business day of April and October each year, with the
first purchase to occur on the last business day of October 2000. The purchase
price per share on each semi-annual purchase date will be equal to 85% of the
fair market value per share on the start date of the offering period or, if
lower, 85% of the fair market value per share on the semi-annual purchase date.
However, a participant may not purchase more than 2,500 shares on any purchase
date, and not more than 125,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.
If the fair market value per share of our common stock on any purchase date is
less than the fair market value per share on the start date of the 24-month
offering period, then that offering period will automatically terminate, and all
participants in the terminated offering period will automatically be transferred
to the new offering period commencing immediately thereafter.
Should we be acquired by merger or sale of substantially all of our assets or
more than 50% of our voting securities, then all outstanding purchase rights
will automatically be exercised immediately before the effective date of the
acquisition. The purchase price in effect for each participant will be equal to
85% of the market value per share on the start date of the offering period in
which the participant is enrolled at the time the acquisition occurs or, if
lower, 85% of the fair market value per share immediately before the
acquisition.
The following provisions will also be in effect under the plan:
- The plan will terminate no later than the last business day of April
2010.
- The board may at any time amend, suspend or discontinue the plan.
However, some amendments may require stockholder approval.
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<PAGE> 48
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND
CHANGE IN CONTROL ARRANGEMENTS
We have entered into employee agreements as part of the acquisition of our
subsidiary, Large Scale Proteomics, with two of the founders of that company:
Dr. N. Leigh Anderson, who is one of our directors, and Dr. Norman Anderson, who
is the Chief Scientist of Large Scale Proteomics and Dr. N. Leigh Anderson's
father. The agreements provide for base salaries of $185,000 and participation
in employee benefits provided to other salaried employees. Each agreement
provides for non-competition with Large Scale Proteomics over the five-year term
of the agreement. If Dr. N. Leigh Anderson's employment is terminated without
cause or on other specific conditions, he would have a license for
non-competitive applications of the technology of Large Scale Proteomics owned
before our acquisition of Large Scale Proteomics. In lieu of a similar license
to use Large Scale Proteomics pre-existing technology, Dr. Norman Anderson
received a cash settlement of $20,833 per month payable over two years.
We have also entered into a License and Consulting Agreement with Dr. Norman
Anderson covering biochip technology developed by Dr. Norman Anderson. The
agreement provides for a $4,000 per month consulting fee over two years and
license fee of $6,667 per month over five years. The license is a worldwide,
exclusive, non-royalty bearing license to biochip technology.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation eliminates to the maximum extent allowed by the
Delaware General Corporation Law, directors' personal liability to us or our
stockholders for monetary damages for breaches of fiduciary duties. Our
certificate of incorporation does not, however, eliminate or limit the personal
liability of a director for the following:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we shall indemnify our directors and executive officers
to the fullest extent permitted under the Delaware General Corporation Law and
may indemnify our other officers, employees and other agents as set forth in the
Delaware General Corporation Law. In addition, we have entered into an
indemnification agreement with each of our directors and executive officers. The
indemnification agreements contain provisions that require us, among other
things, to indemnify our directors and executive officers against liabilities,
other than liabilities arising from intentional or knowing and culpable
violations of law, that may arise by reason of their status or service as our as
directors or executive officers of Large Scale Biology or other entities to
which they provide service at our request and to advance expenses they may incur
as a result of any proceeding against them as to which they could be
indemnified. We believe that these bylaw provisions and indemnification
agreements are necessary to attract and retain qualified directors and officers.
Before the consummation of this offering, we will obtain an insurance policy
covering directors and officers for claims they may have to pay or for which we
are required to indemnify them.
At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted, and we are not aware of any threatened litigation or proceeding
that may result in a claim for indemnification.
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<PAGE> 49
TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES
SALES OF SECURITIES
In January 1999, in connection with the acquisition of our subsidiary, Large
Scale Proteomics, we issued 2,287,634 shares of our Series G convertible
preferred stock in exchange for 92.5% of the outstanding shares of Large Scale
Proteomics' capital stock. In March 2000, we purchased the remaining 7.5% of its
capital stock for aggregate purchase price of approximately $74,000. The Series
G convertible preferred stock agreement contains a put option which gives Series
G convertible preferred stockholders the option to require Large Scale Biology
to purchase their shares at a price of $10 per share upon the occurrence of
specified events. This option terminates on the date of the final prospectus for
this offering. Before our purchase of Large Scale Proteomics, Drs. N. Leigh
Anderson and Norman Anderson owned 43% of the equity securities of that company.
Dr. N. Leigh Anderson received 830,965 shares and Dr. Norman Anderson received
224,290 shares of our Series G convertible preferred stock.
In March and April 1998, we issued and sold 1,000,000 shares of our Series F
convertible preferred stock at a price of $7.00 per share which is convertible
into the number of shares of our common stock listed below upon completion of
this offering to a group of private investors that included the following
directors, executive officers and 5% stockholders:
<TABLE>
<CAPTION>
----------------------------------------------
SHARES OF SERIES F SHARES OF
PURCHASER CONVERTIBLE PREFERRED STOCK COMMON STOCK(2)
--------- --------------------------- ---------------
<S> <C> <C>
Marvyn Carton................................. 37,857 37,857
Technology Directors II BST, LLC(1)........... 759,404 759,404
</TABLE>
-------------------------
(1) Four of our directors, Sol Levine, John W. Maki, John J. O'Malley and James
P. TenBroek, are members of Technology Directors II BST, LLC.
(2) On an as converted basis.
Pursuant to a purchase agreement dated May 14, 1997, Technology Directors II,
LLC, a greater than 5% stockholder, purchased all 2,536,260 shares of our common
stock held by a third-party investor from the investor at a price as agreed by
the parties.
Holders of shares of our preferred stock and our common stock issued or issuable
upon conversion and some holders of our common stock are entitled to
registration rights. See "Description of Capital Stock -- Registration Rights."
AGREEMENT WITH DOW
In September 1998, we entered into a three year collaboration and license
agreement with Dow. The Dow agreement provides funding for sponsored genomics
research, royalties upon sales by Dow of products that result from this
collaboration and payments when specific milestones are reached. In connection
with the Dow agreement, we issued to Dow a warrant to purchase up to 1,232,061
shares of our common stock at an exercise price of $10.00 per share, subject to
increases over time to up to $15.21 per share. As of May 31, 2000, 1,232,061
shares of common stock were issuable under the warrant at $13.23 a share. The
warrant exercise price increases to $15.21 on September 1, 2000. The warrant
expires upon the earlier of August 31, 2003 or two years after termination of
the Dow agreement. The revenues we recognized under the Dow agreement in 1998
were $2.9 million and in 1999 were $14.2 million.
AGREEMENTS WITH OFFICERS AND DIRECTORS
We have entered into employment arrangements with our executive officers. See
"Management -- Employment Contracts, Termination of Employment Arrangements and
Change in Control Arrangements."
We have granted options and issued common stock to our executive officers and
directors. See "Management -- Board of Directors -- Director Compensation,"
"-- Benefit Plans" and "Principal Stockholders."
We have entered into an indemnification agreement with each of our executive
officers and directors. See "Management -- Limitation of Liability and
Indemnification."
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<PAGE> 50
We have entered into non-competition and confidentiality agreements with one of
our directors, Dr. N. Leigh Anderson, and with Dr. Norman Anderson, who is the
Chief Scientist of Large Scale Proteomics and Dr. N. Leigh Anderson's father.
In 1998 we entered into a consulting and business development arrangement with
Technology Directors, Inc., an affiliate of Technology Directors II, LLC and
Technology Directors II BST, LLC, which each own more than 5% of our stock.
Under the agreement, Technology Directors, Inc. is entitled to receive a fee of
up to approximately $800,000 depending on payments made in connection with the
Dow agreement. At the time of the agreement, two of our directors, Messrs. Maki
and O'Malley, were managing directors of Technology Directors, Inc. and Messrs.
Levine, Maki, O'Malley and TenBroek are members of the affiliated entities,
Technology Directors II, LLC and Technology Directors II BST, LLC. Under this
agreement, we paid $285,000 in 1999 and $219,000 in 1998. Further, in 1998 we
entered into a consulting agreement with Technology Directors, Inc. for
consulting services to be provided by Mr. Maki, one of our directors, and, in
1999, the agreement was expanded to include Mr. O'Malley, another of our
directors, under this agreement. Technology Directors, Inc. received an
additional $333,000 in 1999 and $83,000 in 1998, as well as expense
reimbursements of $26,000 in 1999.
In March 1997, we entered into a research and development program with Wesley
Jessen Corporation for development of unique anti-infective products for
ophthalmic applications. Three of our directors, Messrs. Maki, O'Malley, and
Levine, are directors of Wesley Jessen Corporation. In connection with this
program, we received payments of $525,000 in 1997 and $125,000 in 1998.
In 1999, we entered into a license agreement with Icon Genetics, AG, and the
International Institute of Cell Biology, National Academy of Sciences of
Ukraine. Robert L. Erwin, our Chief Executive Officer and Chairman of the Board,
serves as Chairman of the Supervisory Board of Icon Genetics. Mr. John Maki, one
of our directors, is a member of the Supervisory Board and a principal
shareholder of Icon Genetics AG. The license provides us an exclusive,
worldwide, fully paid-up license to specified technology for a license fee
payable in eight quarterly installments of $37,500. An additional $200,000 is
payable upon achievement of specified milestones. We were also granted a
worldwide, non-exclusive license to additional technology, subject to a 2%
royalty on net sales of products developed with such technology. Under the
agreement, we paid $213,000 in 1999 to Icon Genetics and the International
Institute of Cell Biology.
We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, if any, between us and our
officers, directors and principal stockholders and their affiliates and any
transactions between us and any entity with which our officers, directors or
five percent stockholders are affiliated will be approved by a majority of the
board of directors, including a majority of the independent and disinterested
outside directors of the board of directors and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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<PAGE> 51
PRINCIPAL STOCKHOLDERS
The beneficial ownership of our common stock as of May 31, 2000, by the
following individuals or groups is as follows:
- Each person or entity who is known by us to own beneficially greater than
5% of our outstanding stock
- Our chief executive officer and our four other most highly compensated
executive officers
- Each of our directors and
- All directors and executive officers as a group.
Each stockholder's percentage ownership in the following table is based on
11,907,444 shares of common stock outstanding as of May 31, 2000, as adjusted to
assume the conversion of all outstanding shares of our convertible preferred
stock into our common stock. For purposes of calculating each stockholder's
percentage ownership, any shares of common stock as to which the stockholder has
sole or shared voting power and any options or warrants exercisable within 60
days after May 31, 2000 held by a stockholder listed in the table below are
treated as outstanding shares.
Unless otherwise indicated, the principal address of each of the stockholders
below is c/o Large Scale Biology Corporation, 3333 Vaca Valley Parkway, Suite
1000, Vacaville, California 95688. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table below have
sole voting and investment power in all shares of common stock held by them.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF SHARES BENEFICIALLY OWNED
NAME AND ADDRESS OF NUMBER OF SHARES ---------------------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED PRIOR TO THIS OFFERING AFTER THIS OFFERING
------------------- ------------------ ---------------------- -------------------
<S> <C> <C> <C>
The Dow Chemical Company(1)........................ 1,232,061(1) 10.3 8.0
2030 Dow Center
Midland, MI 48674
Technology Directors II, LLC(2).................... 2,536,260 21.3 16.4
460 Bloomfield Ave., Ste. 200
Montclair, NJ 07042
Technology Directors II BST, LLC(3)................ 759,404 6.4 4.9
460 Bloomfield Ave., Ste. 200
Montclair, NJ 07042
N. Leigh Anderson, Ph.D.(4)........................ 833,465 7.0 5.4
9620 Medical Center Drive
Rockville, MD 20850
Robert L. Erwin(5)................................. 418,592 3.5 2.7
Marvyn Carton(6)................................... 132,921 1.1 *
Bernard I. Grosser, M.D.(7)........................ 73,530 * *
Charles Hayes(8)................................... 68,039 * *
Sol Levine(9)...................................... 252,715 2.1 1.6
John W. Maki(10)................................... 3,298,164 27.7 21.3
John J. O'Malley(11)............................... 3,298,164 27.7 21.3
Kevin Ryan(12)..................................... 3,581,222 29.5 22.8
James P. TenBroek(13).............................. 770,904 6.5 5.0
Robert J. Walden(14)............................... 108,864 * *
Jacobo Zaidenweber, M.D.(15)....................... 466,251 3.9 3.0
Laurence K. Grill, Ph.D.(16)....................... 199,520 1.7 1.3
R. Barry Holtz, Ph.D.(17).......................... 31,413 * *
David R. McGee, Ph.D.(18).......................... 203,500 1.7 1.3
Directors and officers as a group (17 persons)..... 6,426,113 54.0 41.5
</TABLE>
---------------
* Less than one percent.
(1) At May 31, 2000, in connection with the Dow agreement, The Dow Chemical
Company beneficially owned a warrant to purchase 1,232,061 shares of our
common stock. This warrant expires on the earlier of August 31, 2003 or two
years after the termination of the Dow agreement.
(2) Mr. Kevin Ryan and Directors Maki and O'Malley share voting and dispositive
power with respect to Technology Directors II, LLC.
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<PAGE> 52
(3) Mr. Kevin Ryan and Directors Maki, O'Malley and TenBroek share voting and
dispositive power with respect to Technology Directors II BST, LLC.
(4) Includes 664,772 shares of Series G convertible preferred stock owned by
Dr. Anderson, 166,193 shares of Series G convertible preferred stock owned
by Dr. Anderson's wife and beneficially owned by Dr. Anderson, and shares
which we will issue upon exercise of an option to purchase 2,500 shares of
common stock.
(5) Includes 413,067 shares of common stock, 2,857 shares of Series C
convertible preferred stock convertible into 3,025 shares of common stock,
and shares which we will issue upon exercise of an option to purchase 2,500
shares of common stock.
(6) Includes 65,000 shares of common stock, 20,000 shares of Series B
convertible preferred stock, 7,143 shares of Series C convertible preferred
stock convertible into 7,564 shares of common stock and 37,857 shares of
Series F convertible preferred stock, and shares which we will issue upon
exercise of an option to purchase 2,500 shares of common stock.
(7) Includes 15,000 shares of common stock, 16,791 shares of Series B
convertible preferred stock, 22,829 shares of Series C convertible
preferred stock convertible into 24,175 shares of common stock and 15,000
shares of Series D convertible preferred stock convertible into 15,064
shares of common stock, and shares which can be issued on exercise of an
option to purchase 2,500 shares of common stock.
(8) Includes 15,000 shares of common stock, 25,000 shares of Series C
convertible preferred stock convertible into 26,475 shares of common stock,
15,000 shares of Series D convertible preferred stock convertible into
15,064 shares of common stock, and shares which we will issue upon exercise
of an option to purchase 11,500 shares of common stock.
(9) Includes 50,000 shares of common stock, 50,000 shares of Series D
convertible preferred stock convertible into 50,215 shares of common stock,
and shares which we will issue upon exercise of options to purchase 152,500
shares of common stock. Mr. Levine has a non-voting interest as a member of
Technology Directors II, LLC and Technology Directors II BST, LLC. Mr.
Levine's holdings do not include any shares of common stock held of record
by Technology Directors II, LLC or shares of Series F convertible preferred
stock held of record by Technology Directors II BST LLC.
(10) Includes 2,536,260 shares of common stock held of record by Technology
Directors II, LLC, and 759,404 shares of Series F convertible preferred
stock held of record by Technology Directors II BST, LLC, all or a portion
of which are beneficially owned by Mr. Maki as a result of his shared power
to vote and/or dispose of the shares of our common stock and Series F
convertible preferred stock held of record respectively by Technology
Directors II, LLC and Technology Directors II BST, LLC. Mr. Maki disclaims
beneficial ownership of all of the shares, except to the extent of his
pecuniary interest in Technology Directors II, LLC and Technology Directors
II BST, LLC. Also includes shares which we will issue upon exercise of an
option to purchase 2,500 shares of common stock.
(11) Includes 2,536,260 shares of common stock held of record by Technology
Directors II, LLC, and 759,404 shares of Series F convertible preferred
stock held of record by Technology Directors II BST, LLC, all or a portion
of which are beneficially owned by Mr. O'Malley as a result of his shared
power to vote and/or dispose of the shares of our common stock and Series F
convertible preferred stock held of record respectively by Technology
Directors II, LLC and Technology Directors II BST, LLC. Mr. O'Malley
disclaims beneficial ownership of all of the shares, except to the extent
of his pecuniary interest in Technology Directors II, LLC and Technology
Directors II BST, LLC. Also includes shares which we will issue upon
exercise of an option to purchase 2,500 shares of common stock.
(12) Includes 41,400 shares of common stock, 4,158 shares of Series F
convertible preferred stock and 2,536,260 shares of common stock held of
record by Technology Directors II, LLC, and 759,404 shares of Series F
convertible preferred stock held of record by Technology Directors II, BST
LLC, all or a portion of which are beneficially owned by Mr. Ryan as a
result of his shared power to vote and/or dispose of the shares of our
common stock and Series F convertible preferred stock held of record
respectively by Technology Directors II, LLC and Technology Directors II
BST, LLC. Mr. Ryan disclaims beneficial ownership of all of the shares,
except to the extent of his pecuniary interest in Technology Directors II,
LLC and Technology Directors II BST, LLC, and shares which we will issue
upon exercise of an option to purchase 240,000 shares of common stock.
(13) Includes 759,404 shares of Series F convertible preferred stock held of
record by Technology Directors II, BST LLC all or a portion of which are
beneficially owned by Mr. TenBroek as a result of his shared power to vote
and/or dispose of the shares of our Series F convertible preferred stock
held of record by Technology Directors II, BST LLC. Mr. TenBroek
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<PAGE> 53
disclaims beneficial ownership of all of these shares, except to the extent
of his pecuniary interests in Technology Directors II BST, LLC. Mr.
TenBroek has a non-voting interest in Technology Directors II, LLC. Mr.
TenBroek's holdings do not include any shares of common stock held of
record by Technology Directors II, LLC. Also includes 4,340 shares of
common stock held in an individual retirement account for the benefit of
Mr. TenBroek and 4,660 shares of common stock held in an individual
retirement account for the benefit of Mr. TenBroek's wife, where Mr.
TenBroek is a beneficial owner, and shares which we will issue upon
exercise of an option to purchase 2,500 shares of common stock.
(14) Includes 106,364 shares of Series G convertible preferred stock, and shares
issuable upon exercise of an option to purchase 2,500 shares of common
stock.
(15) Includes 110,525 shares of common stock, 150,794 shares of Series A
convertible preferred stock, 75,751 shares of Series B convertible
preferred stock, 62,225 shares of Series C convertible preferred stock
convertible into 65,896 shares of common stock, 60,525 shares of Series D
convertible preferred stock convertible into 60,785 shares of common stock,
held in the names of Dr. Zaidenweber, the estate of Dr. Zaidenweber's wife
and Toreador, S.A., a corporation which Dr. Zaidenweber controls and shares
which we will issue upon exercise of an option to purchase 2,500 shares of
common stock.
(16) Includes 186,520 shares of common stock, and shares which we will issue
upon the exercise of options to purchase 13,000 shares of common stock.
(17) Includes 13,913 shares of common stock and shares which we will issue upon
the exercise of options to purchase 17,500 shares of common stock.
(18) Includes 186,000 shares of common stock and shares which we will issue upon
the exercise of an option to purchase 17,500 shares of common stock.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this offering, we will be authorized to issue 25,000,000
shares of common stock, no par value, and 10,000,000 shares of undesignated
preferred stock, no par value, after giving effect to the amendment of our
certificate of incorporation to delete references to the existing convertible
preferred stock following conversion of that stock. The following description of
capital stock includes the provisions in the certificate of incorporation to be
filed before the closing of this offering. After the completion of this
offering, and assuming no exercise of the underwriters' over-allotment option,
an aggregate of 15,477,444 shares of common stock will be issued and
outstanding, and no shares of convertible preferred stock will be issued and
outstanding.
The following description of our capital stock is subject to and qualified by
our certificate of incorporation and bylaws, which are included as exhibits to
the registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably those dividends, if any,
as may be declared from time to time by the board of directors out of funds
legally available for dividends. See "Dividend Policy." If we are liquidated,
dissolved or wound up, the holders of our common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. Our common
stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be outstanding upon completion of this offering will
be fully paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of our
authorized but unissued shares of preferred stock with any dividend, redemption,
conversion and exchange provisions as may be provided in the particular series.
Any series of preferred stock may possess voting, dividend, liquidation and
redemption rights superior to those of the common stock. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. Issuance of a new series of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of entrenching our board of directors and making
it more difficult for a third-party to acquire, or discourage a third-party from
acquiring, a majority of our outstanding voting stock. We have no present plans
to issue any shares of or designate any series of preferred stock.
WARRANTS
At May 31, 2000, there was a warrant outstanding to purchase a total of
1,232,061 shares of our common stock at an exercise price of $13.23 per share.
The warrant exercise price may increase up to $15.21 on September 1, 2000. The
warrant expires on the earlier of August 31, 2003 or two years after the
termination of the Dow agreement. The warrant contains antidilutive provisions
providing for adjustments of the exercise price and the number of shares of
common stock underlying the warrants upon the occurrence of any sale of shares
below the warrant price, recapitalization, reclassification, stock dividend,
stock split, stock combination or similar transaction. The shares of common
stock which we will issue upon exercise of the warrants carry registration
rights, as discussed below. The warrant has a net exercise provision under which
the holder may, in lieu of payment of the exercise price in cash, surrender the
warrant and receive a net amount of shares based on the fair market value of our
common stock at the time of exercise of the warrant after deduction of the total
exercise price.
At May 31, 2000 there were additional warrants outstanding to purchase a total
of 29,322 shares of our common stock and shares of our Series E convertible
preferred stock which will convert into 146,875 shares of our common stock upon
the closing of this offering.
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REGISTRATION RIGHTS
After this offering, the holders of an aggregate of approximately
shares of our common stock and warrants to purchase an aggregate of
shares of our common stock will be entitled to rights with respect to the
registration of the shares under the Securities Act. These rights are provided
under the terms of agreements between us and the holders of these securities. If
we propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders exercising
registration rights, these holders are entitled to notice of the registration
and are entitled to include shares of common stock in the registration. The
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering subject to the registration to limit the number of
shares included in the registration. Holders of these rights may also require us
to file a registration statement under the Securities Act at our expense at any
time six months after the closing of this offering regarding their shares of
common stock, and we must use our best efforts to effect the registration,
subject to conditions and limitations. In addition, stockholders with
registration rights may require us to file additional registration statements on
Form S-3, subject to conditions and limitations. Upon registration, these shares
will be freely tradeable in the public market without restriction.
COMPLIANCE WITH CALIFORNIA LAW
We are currently subject to Section 2115 of the California General Corporation
Law. Section 2115 provides that, regardless of a company's legal domicile,
certain specific provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of record
by persons having addresses in California and the majority of the company's
operations occur in California. For example, while we are subject to Section
2115, stockholders may cumulate votes in electing directors. This means that
each stockholder may vote the number of votes equal to the number of candidates
multiplied by the number of votes to which the stockholder's shares are normally
entitled in favor of one candidate. This potentially allows minority
stockholders to elect members to our board of directors. When we are no longer
subject to Section 2115, cumulative voting will not be allowed and a holder of
50% or more of our voting stock will be able to control the election of all
directors. In addition to this difference, Section 2115 has the following
additional effects:
- Enables removal of directors with or without cause with majority
stockholder approval
- Places limitations on the distribution of dividends
- Extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of shares
and
- Provides for information rights and required filings in the event we
effect a sale of assets or complete a merger
We anticipate that our common stock will be qualified for trading as a national
market security on the Nasdaq National Market and that we will have at least 800
stockholders of record by the record date for our 2000 annual meeting of
stockholders. If these two conditions occur, then we will not be subject to
Section 2115 as of the record date for our 2000 annual meeting of stockholders.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Our certificate of incorporation authorizes our board to establish one or more
series of undesignated preferred stock, the terms of which can be determined by
our board at the time of issuance. See "-- Preferred Stock." Our certificate of
incorporation also provides that all stockholder action occur at a duly called
meeting of stockholders and not by written consent. In addition, our certificate
of incorporation and bylaws do not permit our stockholders to call a special
meeting of stockholders. Only our Chief Executive Officer, President, Chairman
of the Board or a majority of the board of directors are permitted to call a
special meeting of stockholders. Our bylaws require that stockholders give
advance notice to our secretary of any nominations for director or other
business to be brought by stockholders at any stockholders' meeting, and that
the chairman of the board has the authority to adjourn any meeting called by the
stockholders. Our bylaws also require a supermajority vote of members of the
board of directors and/or stockholders to amend certain specified bylaw
provisions. These provisions of our restated certificate of incorporation and
our bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the company. These provisions also may have the
effect of preventing changes in the management of the company. See "Risk
Factors -- Provisions of our charter documents and Delaware law may inhibit a
takeover, which could adversely affect our stock price."
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We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
- before that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- after the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by:
-- persons who are directors and also officers; and
-- employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
- on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66.66% of the outstanding voting stock that
is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to limited exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is Equiserve L.P. Its
telephone number is (781) 575-2469.
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SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock and could impair our
future ability to raise capital through the sale of our equity securities.
Upon the completion of this offering we will have 15,477,444 shares of common
stock outstanding assuming the issuance of 3,570,000 shares of common stock
offered hereby, excluding:
- 2,750,300 shares of common stock issuable upon the exercise of stock
options outstanding at May 31, 2000 at a weighted average exercise price
of $8.12 per share
- 552,887 shares of common stock reserved for issuance under our stock
option plans at May 31, 2000, and
- 1,408,258 shares of common stock issuable upon the exercise of warrants
outstanding at May 31, 2000 at a weighted average exercise price of
$12.33 per share.
Of the outstanding shares, all of the shares sold in this offering will be
freely tradable, except that any shares purchased by our "affiliates," as that
term is defined in Rule 144 promulgated under the Securities Act, may only be
sold in compliance with the limitations described below. The remaining
shares of common stock are "restricted securities" as defined under
Rule 144. Restricted shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act, which rules are summarized below. Our
executive officers, directors and certain stockholders have agreed pursuant to
"lock-up" agreements that, for a period of 180 or 240 days after the date of
this prospectus, they will not sell any shares without the prior written consent
of J.P. Morgan Securities Inc. Subject to the lock-up agreements described below
and the provisions of Rules 144, 144(k) and 701, additional shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
NUMBER OF
SHARES DATE
--------- ------------------------------------------------------------
<S> <C>
After the date of this prospectus, freely tradable shares
sold in this offering and shares saleable under Rule 144(k)
that are not subject to the 180-day or the 240-day lock-ups
described below.
After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
144 (subject to volume limitations) or Rule 144(k)
After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
701 (subject to repurchase by us)
After 240 days from the date of this prospectus, a 240-day
lock-up entered into by each of our officers and directors
and some related persons is released and these shares are
saleable under Rule 144 (subject to volume limitations),
Rule 144(k) or Rule 701 (subject to repurchase by us)
After 240 days from the date of this prospectus, restricted
securities that are held for less than one year and are not
yet saleable under Rule 144
</TABLE>
RULE 144
In general, under Rule 144 as currently in effect, a person, or group of persons
whose shares are required to be aggregated, including any of our affiliates, who
has beneficially owned shares for at least one year, including the holding
period of any prior owner who is not an affiliate, is entitled to sell within
any three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of one percent of the
then-outstanding shares of our common stock, which will be approximately 154,714
shares immediately after this offering, or the average weekly trading volume in
our common stock during the four calendar weeks preceding the date on which
notice of such sale is filed, subject to some restrictions. In addition, a
person who is not an affiliate at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner who is not an affiliate,
would be entitled to sell these shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from one
of our affiliates, a person's holding period for the purpose of effecting a sale
under Rule 144 would commence on the date of transfer from the affiliate.
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RULE 701
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144, but without compliance with some of the restrictions of Rule 144,
including the holding period requirement, of Rule 144. Any employee, officer or
director or consultant to Large Scale Biology who purchased shares pursuant to a
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding requirements of Rule
144. Rule 701 further provides that non-affiliates may sell their Rule 701
shares in reliance without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144.
Stock Options
As of May 31, 2000, options to purchase a total of 2,750,300 shares of common
stock were outstanding, approximately 41% which were currently exercisable. We
intend to file a Form S-8 registration statement under the Securities Act to
register all shares of common stock issuable under our 2000 stock incentive plan
and our employee stock purchase plan. Accordingly, shares of common stock
underlying these options will be eligible for sale in the public markets,
subject to vesting restrictions or the lock-up agreements described below. See
"Management -- Benefit Plans."
Lock-up Agreements
Each of our officers and directors and shareholders related to them have agreed,
subject to limited exceptions, not to sell, without the prior written consent of
J.P. Morgan Securities Inc., or otherwise dispose of any shares of our common
stock, or securities substantially similar to our common stock, or options to
acquire shares of our common stock or take any action to do any of the foregoing
during the 240-day period following the date of this prospectus. The executive
officers, directors and related shareholders subject to the 240-day lock-up own
an aggregate of shares. Additionally, we and other shareholders owning
an aggregate of shares have agreed to a substantially similar
restriction for 180 days after the date of this prospectus, excluding issuances
of options and common stock by us under employee stock option plans existing on
the date of this prospectus. J.P. Morgan Securities Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to the 180-day lock-up agreements. See "Underwriting."
Registration Rights
After the closing of this offering, the holders of an aggregate of approximately
shares of our common stock and warrants to purchase an aggregate of
shares of our common stock will be entitled to rights regarding the
registration of the shares under the Securities Act. These rights are provided
under the terms of agreements between us and the holders of these securities. If
we propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders exercising
registration rights, these holders are entitled to notice of the registration
and are entitled to include shares of common stock in the registration. The
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering subject to the registration to limit the number of
shares included in the registration. Holders of these rights may also require us
to file a registration statement under the Securities Act at our expense at any
time six months after the closing of this offering with respect to their shares
of common stock, and we are required to use our best efforts to effect the
registration, subject to conditions and limitations. In addition, stockholders
with registration rights may require us to file additional registration
statements on Form S-3, subject to conditions and limitations. Upon
registration, these shares will be freely tradeable in the public market without
restriction.
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UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
common stock applicable to Non-United States Holders of this common stock. For
the purpose of this discussion, a Non-United States Holder is any holder that
for U.S. federal income tax purposes is not a U.S. person. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant in light of a Non-United States Holder's particular facts and
circumstances, such as being a U.S. expatriate or a pass-through entity, and
does not address any tax consequences arising under the laws of any state, local
or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based
on current provisions of the Internal Revenue Code of 1986, as amended, and
administrative and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly with retroactive
effect. Large Scale Biology has not and will not seek a ruling from the Internal
Revenue Service regarding the U.S. federal income and estate tax consequences
described below, and as a result, we cannot guarantee that the Internal Revenue
Service will not disagree with or challenge any of the conclusions addressed in
this discussion. For purposes of this discussion, the term U.S. person means:
- a citizen or resident of the United States;
- a corporation or other entity created or organized in the United States
or under the laws of the United States or any political subdivision
thereof;
- an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
DIVIDENDS
If Large Scale Biology pays a dividend, any dividend paid to a Non-United States
Holder of common stock generally will be subject to U.S. withholding tax either
at a rate of 30% of the gross amount of the dividend or such lower rate as may
be specified by an applicable tax treaty. Dividends received by a Non-United
States Holder that are effectively connected with a U.S. trade or business
conducted by the Non-United States Holder are exempt from such withholding tax.
However, those effectively connected dividends, net of some deductions and
credits, are taxed at the same graduated rates applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a U.S.
trade or business of the corporate Non-United States Holder may also be subject
to a branch profits tax at a rate of 30% or such lower rate as may be specified
by an applicable tax treaty.
A Non-United States Holder of common stock that is eligible for a reduced rate
of withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to U.S. federal income
tax on any gain realized upon the sale or other disposition of his common stock
unless:
- the gain is effectively connected with a U.S. trade or business of the
Non-United States Holder (which gain, in the case of a corporate
Non-United States Holder, must also be taken into account for branch
profits tax purposes);
- the Non-United States Holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the sale
or disposition occurs and some other conditions are met; or
- Large Scale Biology is or has been a "United States real property holding
corporation" for U.S. federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the holder's
holding period for its common stock. Large Scale Biology has determined
that it is not and does not believe that it will become a "United States
real property holding corporation" for U.S. federal income tax purposes.
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<PAGE> 60
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, Large Scale Biology must report annually to the Internal Revenue
Service the amount of dividends paid, the name and address of the recipient, and
the amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or other agreements, the Internal Revenue Service may
make its reports available to tax authorities in the recipient's country of
resident.
Dividends paid to a Non-United States Holder at an address within the U.S. may
be subject to backup withholding at a rate of 31% if the Non-United States
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and other information to the payer.
Backup withholding will generally not apply to dividends paid to Non-United
States Holders at an address outside the U.S. on or before December 31, 2000
unless the payer has knowledge that the payee is a United States person. Under
recently finalized Treasury Regulations regarding withholding and information
reporting, payment of dividends to Non-United States Holders at an address
outside the U.S. after December 31, 2000 may be subject to backup withholding at
a rate of 31% unless such Non-United States Holder satisfies various
certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of common stock outside the U.S. to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income is from the conduct of
a U.S. trade or business
unless the broker has documentary evidence in its files of the holders' non-U.S.
status and some other conditions are met, or the holder otherwise establishes an
exemption. Neither backup withholding nor information reporting generally will
apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States Holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on an
investment in the common stock. Those final Treasury Regulations are generally
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns common stock at the time of his
death or had made specified lifetime transfers of an interest in common stock
will be required to include the value of that common stock in such holder's
gross estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF COMMON STOCK BY
NON-UNITED STATES HOLDERS. INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF
COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
59
<PAGE> 61
UNDERWRITING
We and the underwriters named below have entered into an underwriting agreement
covering the common stock to be offered in this offering. J.P. Morgan Securities
Inc., Chase Securities Inc. and William Blair & Company, L.L.C. are acting as
representatives of the underwriters. Each underwriter has agreed to purchase the
number of shares of common stock set forth opposite its name in the following
table.
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
----------------
<S> <C>
UNDERWRITERS
J.P. Morgan Securities Inc. ................................
Chase Securities Inc. ......................................
William Blair & Company, L.L.C. ............................
---------
Total............................................. 3,570,000
=========
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
shares presented in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if these shares are delivered to and accepted
by them. The underwriters will initially offer to sell shares to the public at
the initial public offering price shown on the cover page of this prospectus.
The underwriters may sell shares to securities dealers at a discount of up to
$ per share from the initial public offering price. Any of these securities
dealers may resell shares to other brokers or dealers at a discount of up to
$ per share from the initial public offering price. After the initial public
offering, the underwriters may vary the public offering price and other selling
terms.
If the underwriters sell more shares than the total number shown in the table
above, the underwriters have the option to buy up to an additional
shares of common stock from us to cover these sales. They may exercise this
option during the 30-day period from the date of this prospectus. If any shares
are purchased with this option, the underwriters will purchase shares in
approximately the same proportion as shown in the table above.
The following table shows the per share and total underwriting discounts that we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total............................................. $ $
</TABLE>
The underwriters may purchase and sell shares of common stock in the open market
in connection with this offering. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
slowing a decline in the market price of the common stock while this offering is
in progress. The underwriters may also impose a penalty bid, which means that an
underwriter must repay to the other underwriters a portion of the underwriting
discount received by it. An underwriter may be subject to a penalty bid if the
representatives of the underwriters, while engaging in stabilizing or short
covering transactions, repurchase shares sold by or for the account of that
underwriter. These activities may stabilize, maintain or
60
<PAGE> 62
otherwise affect the market price of the common stock. As a result, the price of
the common stock may be higher than the price that otherwise might exist in the
open market. If the underwriters commence these activities, they may discontinue
them at any time. The underwriters may carry out these transactions on the
Nasdaq National Market, in the over-the-counter market or otherwise.
We estimate that the total expenses of this offering we must pay, excluding
underwriting discounts, will be $ .
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
Each of our executive officers and directors and shareholders related to them
have agreed with the underwriters that, subject to limited exceptions, during
the period beginning from the date of this prospectus and continuing to and
including the date 240 days after the date of this prospectus, none of us will,
directly or indirectly, offer, sell, offer to sell, contract to sell or
otherwise dispose of any shares of common stock or any securities which are
substantially similar to the common stock, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, common stock or any such substantially similar securities or
enter into any swap, option, future, forward or other agreement that transfers,
in whole or in part, the economic consequence of ownership of common stock or
any securities substantially similar to the common stock. The executive
officers, directors and related shareholders subject to the 240-day lock-up own
an aggregate of shares. Additionally, we and other shareholders owning
an aggregate of shares have agreed to a substantially similar
restriction for 180 days after the date of this prospectus, excluding issuances
of options and common stock by us under employee stock option plans existing on
the date of this prospectus. J.P. Morgan Securities Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the 180-day lock-up agreements.
At our request, the underwriters have reserved shares of common stock for sale
to our directors, officers, employees, consultants and family members of the
foregoing. We expect these persons to purchase no more than percent of the
common stock offered in this offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares.
We have applied to list our common stock listed on the Nasdaq National Market
under the symbol "LSBC."
It is expected that delivery of the shares will be made to investors on or about
, 2000.
One or more of the underwriters may facilitate the marketing of this offering
online directly or through one of its affiliates. In those cases, prospective
investors may view offering terms and a prospectus online and, depending upon
the particular underwriter, place orders online or though their financial
advisors.
There has been no public market for the common stock prior to this offering. We
and the underwriters will negotiate the initial offering price. In determining
the price, we and the underwriters expect to consider a number of factors in
addition to prevailing market conditions, including:
- the history of and prospects for our industry and for biotechnology
companies generally;
- an assessment of our management;
- our present operations;
- our historical results of operations;
- the trend of our revenues and earnings; and
- our earnings prospects.
We and the underwriters will consider these and other relevant factors in
relation to the price of similar securities of generally comparable companies.
Neither we nor the underwriters can assure investors that an active trading
market will develop for the common stock, or that the common stock will trade in
the public market at or above the initial offering price.
From time to time in the ordinary course of their respective businesses, some of
the underwriters and their affiliates have engaged and may in the future engage
in commercial banking and/or investment banking transactions with us and our
affiliates.
61
<PAGE> 63
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by Brobeck,
Phleger & Harrison LLP, San Francisco, California. Legal matters in connection
with the offering will be passed on for the underwriters by Cahill Gordon &
Reindel, New York, New York.
CHANGE IN INDEPENDENT AUDITORS
Effective December 1999, Deloitte & Touche LLP was engaged as our independent
auditors and PricewaterhouseCoopers LLP was dismissed as our independent
auditors. The decision to change auditors was approved by our Board of
Directors. The former independent auditors' report on the Company's financial
statements as of and for the years ended December 31, 1997 and 1998 did not
contain an adverse opinion, a disclaimer of opinion or any qualifications or
modifications related to uncertainty, limitation of audit scope or application
of accounting principles. PricewaterhouseCoopers LLP has not reported on any
financial statements or information related to the Company included in this
prospectus.
In the period from January 1, 1997 through the date at which Deloitte & Touche
LLP was engaged as our independent auditors, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused them to reference the subject matter of the disagreement
in any of their reports.
Deloitte & Touche LLP audited the financial statements for the years ended
December 31, 1997 and 1998 included in this prospectus. Before December 1999, we
had not consulted with Deloitte & Touche LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our financial
statements.
EXPERTS
The consolidated financial statements of Large Scale Biology Corporation,
formerly Biosource Technologies, Inc., and its subsidiaries as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999 included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report (which expresses an unqualified
opinion and includes an explanatory paragraph relating to the restatement
described in Note 15) appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Large Scale Proteomics, formerly Large Scale Biology
Corporation, as of October 31, 1998 and 1997 and for the years then ended
included in this prospectus and elsewhere in this registration statement have
been audited by PricewaterhouseCoopers LLP, independent accountants, and are
included in reliance upon the report of such firm, given on their authority as
experts in auditing and accounting.
Those portions of the Prospectus and Registration Statement as they relate to
intellectual property other than with respect to the field of proteomics and
single chain antibodies in the material under the captions "Risk
Factors -- Conflicts with Our Collaborators Could Harm Our Business," "Risk
Factors -- Risks Related to our Intellectual Property," "Business --
Intellectual Property" and "Business -- Legal Proceedings" have been reviewed
and approved by Howrey Simon Arnold & White LLP, our patent counsel, as experts
on such matters, and are included in this prospectus in reliance upon that
review and approval.
62
<PAGE> 64
ADDITIONAL INFORMATION
We have filed with the SEC, Washington, D.C. 20549, under the Securities Act a
registration statement on Form S-1 relating to the common stock offered. This
prospectus does not contain all of the information set forth in the registration
statement and its exhibits and schedules. For further information regarding us
and the shares we are offering pursuant to this prospectus, you should refer to
the registration statement and its exhibits and schedules. Statements contained
in this prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete, and you should refer to the
copy of that contract or other document filed as an exhibit to the registration
statement. You may read or obtain a copy of the registration statement at the
commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the public reference room
by calling the commission at 1-800-SEC-0330. The commission maintains a web site
that contains reports, proxy information statements and other information
regarding registrants that file electronically with the commission. The address
of this web site is http://www.sec.gov.
We intend to furnish holders of our common stock with annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish other reports as we may determine or as may be
required by law.
63
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
----
PAGE
----
<S> <C>
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.):
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998
(Restated) and 1999 (Restated) and March 31, 2000
(Unaudited)............................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 (Restated) and 1999 (Restated) and
the Three Months Ended March 31, 1999 (Unaudited) and 2000
(Unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999 and the Three
Months Ended March 31, 2000 (Unaudited)................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 and Three Months Ended
March 31, 1999 (Unaudited) and 2000 (Unaudited)........... F-6
Notes to Consolidated Financial Statements.................. F-7
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION):
Report of Independent Accountants........................... F-25
Balance Sheets as of October 31, 1998 and 1997.............. F-26
Statements of Operations and Accumulated Deficit for the
Years Ended October 31, 1998 and 1997..................... F-27
Statements of Cash Flows for the Years Ended October 31,
1998 and 1997............................................. F-28
Notes to Financial Statements............................... F-29
LARGE SCALE PROTEOMICS:
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
Unaudited Statements of Operations and Accumulated Deficit
for the Three Months Ended January 31, 1998 and 1999...... F-34
Unaudited Statements of Cash Flows for the Three Months
Ended January, 31, 1998 and 1999.......................... F-35
Notes to Unaudited Financial Statements..................... F-36
</TABLE>
F-1
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Large Scale Biology Corporation
We have audited the accompanying consolidated balance sheets of Large Scale
Biology Corporation (formerly Biosource Technologies, Inc.) and its subsidiaries
(collectively the "Company") as of December 31, 1998 and 1999, and the related
consolidated 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 of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Large Scale Biology Corporation and
its subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 15, the accompanying 1998 and 1999 consolidated financial
statements have been restated.
/s/ Deloitte & Touche LLP
Sacramento, California
April 3, 2000
(June 26, 2000
as to Note 15)
F-2
<PAGE> 67
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------------
DECEMBER 31, MARCH 31,
1998(1) 1999(1) 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,484,000 $ 6,975,000 $ 3,679,000
Marketable securities..................................... 4,086,000 7,124,000 6,272,000
Accounts receivable, net of allowance of $1,200,000 in
1998................................................... 50,000 141,000 319,000
Prepaid expenses and other current assets................. 712,000 976,000 1,385,000
------------ ------------ ------------
Total current assets.............................. 8,332,000 15,216,000 11,655,000
Property, plant and equipment, net.......................... 5,762,000 9,504,000 9,408,000
Intangible assets, net...................................... 2,375,000 3,684,000 5,383,000
Other assets................................................ 1,121,000 3,199,000 1,401,000
------------ ------------ ------------
Total assets...................................... $ 17,590,000 $ 31,603,000 $ 27,847,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 911,000 $ 1,419,000 $ 1,330,000
Accrued expenses.......................................... 577,000 1,255,000 1,610,000
Current portion of long-term debt......................... 580,000 2,184,000 2,266,000
Deferred revenue and customer advances.................... 3,750,000 11,872,000 11,258,000
------------ ------------ ------------
Total current liabilities......................... 5,818,000 16,730,000 16,464,000
Long-term debt.............................................. 1,445,000 2,457,000 2,008,000
Long-term deferred revenue.................................. 4,784,000 7,898,000 5,522,000
Warrant liability........................................... 2,616,000 11,380,000 11,138,000
------------ ------------ ------------
Total liabilities................................. 14,663,000 38,465,000 35,132,000
Commitments (Note 9)
Stockholders' equity (deficit):
Convertible preferred stock, no par value; 10,000,000
shares authorized; 3,319,806, 5,605,813 and 5,605,813
shares issued and outstanding; liquidation preference
of $16,060,000, $38,925,000 and 38,925,000 in 1998,
1999 and 2000, respectively............................ 15,848,000 38,713,000 38,713,000
Common stock, no par value; 20,000,000 shares authorized;
6,151,533, 6,200,456 and 6,272,306 shares issued and
outstanding in 1998, 1999 and 2000, respectively....... 30,966,000 39,469,000 39,762,000
Stockholder notes receivable.............................. (32,000) (112,000) (116,000)
Deferred compensation..................................... (18,000) (7,825,000) (7,164,000)
Accumulated deficit....................................... (43,837,000) (77,107,000) (78,480,000)
------------ ------------ ------------
Total stockholders' equity (deficit).............. 2,927,000 (6,862,000) (7,285,000)
------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 17,590,000 $ 31,603,000 $ 27,847,000
============ ============ ============
</TABLE>
(1) As restated, see Note 15.
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 68
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1997 1998(1) 1999(1) 1999 2000
----------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 2,108,000 $ 3,394,000 $ 16,090,000 $ 2,641,000 $ 5,743,000
Costs and expenses:
Development agreements................. 1,735,000 2,565,000 7,988,000 1,671,000 2,062,000
Research and development............... 5,872,000 6,973,000 9,163,000 1,780,000 3,414,000
General, administrative and
marketing............................ 3,363,000 3,492,000 8,333,000 2,799,000 1,990,000
Purchased research and development..... -- -- 19,783,000 19,783,000 --
----------- ----------- ------------ ------------ -----------
Total costs and expenses........ 10,970,000 13,030,000 45,267,000 26,033,000 7,466,000
----------- ----------- ------------ ------------ -----------
Gain on litigation settlements........... 2,000,000 1,890,000 1,300,000 300,000 --
----------- ----------- ------------ ------------ -----------
Loss from operations..................... (6,862,000) (7,746,000) (27,877,000) (23,092,000) (1,723,000)
----------- ----------- ------------ ------------ -----------
Other income (expense):
Interest income........................ 366,000 275,000 452,000 87,000 201,000
Interest expense....................... (73,000) (60,000) (302,000) (46,000) (93,000)
Change in fair value of warrant........ -- (1,224,000) (5,353,000) -- 242,000
----------- ----------- ------------ ------------ -----------
Total other income (expense).... 293,000 (1,009,000) (5,203,000) 41,000 350,000
----------- ----------- ------------ ------------ -----------
Net loss before provision for income
taxes.................................. (6,569,000) (8,755,000) (33,080,000) (23,051,000) (1,373,000)
Provision for income taxes............... -- -- 190,000 -- --
----------- ----------- ------------ ------------ -----------
Net loss................................. $(6,569,000) $(8,755,000) $(33,270,000) $(23,051,000) $(1,373,000)
=========== =========== ============ ============ ===========
Net loss per share -- basic and
diluted................................ $ (1.06) $ (1.40) $ (5.38) $ (3.73) $ (0.22)
=========== =========== ============ ============ ===========
Weighted average shares
outstanding -- basic and diluted....... 6,221,490 6,244,516 6,183,485 6,174,626 6,222,351
=========== =========== ============ ============ ===========
Unaudited pro forma net loss per
share -- basic and diluted............. $ (2.88) $ (2.14) $ (0.12)
============ ============ ===========
Pro forma weighted average shares
outstanding -- basic and diluted....... 11,553,650 10,758,049 11,849,996
============ ============ ===========
</TABLE>
(1) As restated, see Note 15.
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 69
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
NUMBER OF SHARES AMOUNT
----------------------- --------------------------------------------------------
CONVERTIBLE CONVERTIBLE STOCKHOLDERS'
PREFERRED COMMON PREFERRED COMMON NOTES DEFERRED
STOCK STOCK STOCK STOCK RECEIVABLE COMPENSATION
----------- --------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996......... 2,323,608 6,181,617 $ 8,531,000 $32,149,000 $ -- $ --
Exercise of warrants.............. 14,000 28,000
Redemption of securities.......... (1)
Conversion of Series C convertible
preferred stock into common
stock........................... (2,857) 3,011 (20,000) 20,000
Issuance of Series E convertible
preferred stock warrants for
services........................ 383,000
Exercise of stock options......... 81,749 163,000
Issuance of common stock for
services........................ 9,510 89,000
Issuance of common stock for note
receivable...................... 3,000 10,000 (10,000)
Net loss..........................
--------- --------- ----------- ----------- --------- ------------
Balances, December 31, 1997......... 2,320,751 6,292,886 8,894,000 32,459,000 (10,000) --
Issuance of Series F convertible
preferred stock................. 1,000,000 6,961,000
Common stock cancelled (as
restated see Note 15)........... (270,000) (1,890,000)
Conversion of Series C convertible
preferred stock into common
stock........................... (945) 1,000 (7,000) 7,000
Exercise of stock options......... 102,594 167,000
Issuance of common stock options
for services.................... 97,000 (97,000)
Issuance of common stock for
services........................ 10,353 81,000
Issuance of common stock for note
receivable...................... 14,700 22,000 (22,000)
Accretion of options issued to
consultants..................... 23,000 (23,000)
Amortization of deferred
compensation.................... 102,000
Net loss (as restated see Note
15).............................
--------- --------- ----------- ----------- --------- ------------
Balances, December 31, 1998 (as
restated see Note 15)............. 3,319,806 6,151,533 15,848,000 30,966,000 (32,000) (18,000)
Issuance of Series G convertible
preferred stock................. 2,287,634 22,876,000
Issuance of common stock options
in connection with business
combination..................... 394,000
Conversion of Series C convertible
preferred stock into common
stock........................... (1,627) 1,722 (11,000) 11,000
Exercise of stock options......... 19,052 49,000
Issuance of common stock for
services........................ 3,149 31,000
Issuance of common stock for note
receivable...................... 25,000 82,000 (82,000)
Issuance of common stock options
for services.................... 37,000 (37,000)
Deferred stock compensation....... 7,809,000 (7,809,000)
Amortization of deferred
compensation.................... 129,000
Payment on notes receivable....... 2,000
Accretion of options issued to
consultants 90,000 (90,000)
Net loss (as restated see Note
15).............................
--------- --------- ----------- ----------- --------- ------------
Balances, December 31, 1999 (as
restated see Note 15)............. 5,605,813 6,200,456 $38,713,000 $39,469,000 $(112,000) $(7,825,000)
Exercise of stock options
(unaudited)....................... 70,850 283,000
Issuance of common stock for note
receivable (unaudited)............ 1,000 10,000 (10,000)
Amortization of deferred
compensation (unaudited).......... 661,000
Payment on notes receivable
(unaudited)....................... 6,000
Net loss (unaudited)................
--------- --------- ----------- ----------- --------- ------------
Balance, March 31, 2000
(unaudited)....................... 5,605,813 6,272,306 $38,713,000 $39,762,000 $(116,000) $(7,164,000)
========= ========= =========== =========== ========= ============
<CAPTION>
-------------------------------
AMOUNT
------------
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ ----------------
<S> <C> <C>
Balances, December 31, 1996......... $(28,513,000) $ 12,167,000
Exercise of warrants.............. 28,000
Redemption of securities.......... --
Conversion of Series C convertible
preferred stock into common
stock........................... --
Issuance of Series E convertible
preferred stock warrants for
services........................ 383,000
Exercise of stock options......... 163,000
Issuance of common stock for
services........................ 89,000
Issuance of common stock for note
receivable...................... --
Net loss.......................... (6,569,000) (6,569,000)
------------ ------------
Balances, December 31, 1997......... (35,082,000) 6,261,000
Issuance of Series F convertible
preferred stock................. 6,961,000
Common stock cancelled (as
restated see Note 15)........... (1,890,000)
Conversion of Series C convertible
preferred stock into common
stock........................... --
Exercise of stock options......... 167,000
Issuance of common stock options
for services.................... --
Issuance of common stock for
services........................ 81,000
Issuance of common stock for note
receivable...................... --
Accretion of options issued to
consultants..................... --
Amortization of deferred
compensation.................... 102,000
Net loss (as restated see Note
15)............................. (8,755,000) (8,755,000)
------------ ------------
Balances, December 31, 1998 (as
restated see Note 15)............. (43,837,000) 2,927,000
Issuance of Series G convertible
preferred stock................. 22,876,000
Issuance of common stock options
in connection with business
combination..................... 394,000
Conversion of Series C convertible
preferred stock into common
stock........................... --
Exercise of stock options......... 49,000
Issuance of common stock for
services........................ 31,000
Issuance of common stock for note
receivable...................... --
Issuance of common stock options
for services....................
Deferred stock compensation....... --
Amortization of deferred
compensation.................... 129,000
Payment on notes receivable....... 2,000
Accretion of options issued to
consultants
Net loss (as restated see Note
15)............................. (33,270,000) (33,270,000)
------------ ------------
Balances, December 31, 1999 (as
restated see Note 15)............. $(77,107,000) (6,862,000)
Exercise of stock options
(unaudited)....................... 283,000
Issuance of common stock for note
receivable (unaudited)............
Amortization of deferred
compensation (unaudited).......... 661,000
Payment on notes receivable
(unaudited)....................... 6,000
Net loss (unaudited)................ (1,373,000) (1,373,000)
------------ ------------
Balance, March 31, 2000
(unaudited)....................... $(78,480,000) $ (7,285,000)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 70
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ---------------------------
1997 1998(1) 1999(1) 1999 2000
----------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers...................... $ 2,104,000 $11,949,000 $26,264,000 $ 1,294,000 $ 2,571,000
Cash received from litigation settlements......... 2,000,000 -- 1,300,000 300,000 --
Cash paid to suppliers and employees.............. (8,825,000) (11,564,000) (21,401,000) (4,892,000) (5,846,000)
Interest received................................. 471,000 216,000 400,000 147,000 186,000
Interest paid..................................... (72,000) (54,000) (265,000) (33,000) (90,000)
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) operating
activities................................ (4,322,000) 547,000 6,298,000 (3,184,000) (3,179,000)
----------- ----------- ----------- ------------ -----------
Cash flows from investing activities:
Purchase of marketable securities................. (3,049,000) (4,027,000) (7,019,000) -- (4,034,000)
Proceeds from matured marketable securities....... 8,282,000 -- 4,027,000 4,027,000 4,890,000
Capital expenditures.............................. (1,722,000) (3,811,000) (5,061,000) (1,157,000) (710,000)
Net cash acquired in business combination......... -- -- 21,000 21,000 --
Capitalized acquisition costs..................... -- -- (53,000) (53,000) --
Increase in intangible and other assets........... (388,000) (765,000) (361,000) (77,000) (98,000)
Employee Loan Repayment........................... -- 6,000
Exercise of call option........................... -- (74,000)
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) investing
activities................................ 3,123,000 (8,603,000) (8,446,000) 2,761,000 (20,000)
----------- ----------- ----------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock............ 191,000 167,000 49,000 -- 283,000
Proceeds from issuance of convertible preferred
stock........................................... -- 6,961,000 -- -- --
Proceeds from issuance of common stock warrant.... -- 1,392,000 3,411,000 -- --
Proceeds from issuance of long-term debt.......... 100,000 1,834,000 3,687,000 1,054,000 120,000
Change in restricted cash......................... (100,000) (839,000) (391,000) (301,000) (14,000)
Principal payments on long-term debt.............. (521,000) (683,000) (1,117,000) (132,000) (486,000)
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) financing
activities................................ (330,000) 8,832,000 5,639,000 621,000 (97,000)
----------- ----------- ----------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents....................................... (1,529,000) 776,000 3,491,000 198,000 (3,296,000)
Cash and cash equivalents at beginning of period.... 4,237,000 2,708,000 3,484,000 3,484,000 6,975,000
----------- ----------- ----------- ------------ -----------
Cash and cash equivalents at end of period.......... $ 2,708,000 $ 3,484,000 $ 6,975,000 $ 3,682,000 $ 3,679,000
=========== =========== =========== ============ ===========
Reconciliation of net loss to net cash provided by
(used in) operating activities
Net loss............................................ $(6,569,000) $(8,755,000) $(33,270,000) $(23,051,000) $(1,373,000)
----------- ----------- ----------- ------------ -----------
Depreciation of property, plant and equipment..... 556,000 686,000 2,204,000 373,000 806,000
Amortization of intangible and other assets....... 211,000 194,000 1,119,000 181,000 285,000
Charge-off of capitalized patent costs............ 83,000 -- 1,517,000 1,517,000 --
Non-cash gain on litigation settlements........... -- (1,890,000) -- -- --
Accrued interest and amortized discount on
marketable securities........................... 27,000 (59,000) (45,000) 61,000 (5,000)
Issuance of common stock for services............. 89,000 81,000 31,000 1,000 --
Issuance of convertible preferred stock warrant
for services.................................... 383,000 -- -- -- --
Purchased research and development................ -- -- 19,783,000 19,783,000 --
Exchange of equipment for services................ 59,000 -- -- -- --
Amortization of deferred stock compensation....... 102,000 129,000 13,000 661,000
Change in fair value of warrants.................. -- 1,224,000 5,353,000 -- (242,000)
Changes in assets and liabilities:
Accounts receivable............................. 665,000 31,000 54,000 111,000 (178,000)
Prepaid expenses and other current assets....... 56,000 (194,000) (357,000) (775,000) (408,000)
Accounts payable................................ 252,000 317,000 528,000 (174,000) (89,000)
Accrued expenses................................ (134,000) 276,000 (554,000) 9,000 354,000
Deferred revenue and customer advances.......... -- 8,534,000 9,806,000 (1,233,000) (2,990,000)
----------- ----------- ----------- ------------ -----------
Total adjustments........................... 2,247,000 9,302,000 39,568,000 19,867,000 (1,806,000)
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) operating
activities........................................ $(4,322,000) $ 547,000 $ 6,298,000 $ (3,184,000) $(3,179,000)
=========== =========== =========== ============ ===========
</TABLE>
(1) As restated, see Note 15.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 71
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Large Scale Biology Corporation (formerly Biosource Technologies, Inc.) and its
subsidiaries (collectively the "Company") applies its proprietary and functional
genomics technologies to develop products and establish commercial
collaborations with pharmaceutical and other life science companies.
The Company is a California Corporation which was founded in 1987 to develop the
GENEWARE(R) system, a viral-based gene expression technology in plants, that
enables the discovery, development and production of new biopharmaceuticals and
gene-based agricultural products. The Company's proprietary systems are
supported by patents, patent applications and exclusive technology licenses.
In February 1999, the Company acquired majority control of Large Scale
Proteomics Corporation ("Proteomics"; formerly Large Scale Biology) and its
automated, high throughput ProGEX system which provides a snapshot of the
protein composition, or proteome, of cells and tissues, and is being used to
rapidly identify changes in proteins that are associated with diseases or with a
therapeutic effect.
The Company maintains its headquarters and research facility in Vacaville,
California, a processing facility in Owensboro, Kentucky and an additional
research facility in Rockville, Maryland.
Basis of Consolidation -- The accompanying consolidated financial statements for
1999 and the three months ended March 31, 2000 include the accounts of Large
Scale Biology and its subsidiaries; including Proteomics which was 92.5% owned
by the Company during 1999 (see Note 2). All significant intercompany balances
and transactions have been eliminated. The financial statements for 1997 and
1998 include only the accounts of Large Scale Biology Corporation.
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported revenue and expenses during the period. Actual
results could differ from those estimates.
Interim Financial Information -- The Company's consolidated financial statements
as of March 31, 2000 and for the three months ended March 31, 1999 and 2000 are
unaudited and, in the opinion of management, contain all adjustments that are of
a normal and recurring nature necessary to present fairly the financial position
at such date and results of operations for such periods then ended.
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.
Marketable Securities -- The Company classifies all of its marketable securities
at December 31, 1998 and 1999 as held-to-maturity. They consist of commercial
paper maturing within one year. The amortized cost of marketable securities at
December 31, 1998 and 1999 approximates fair value. There were no significant
holding gains or losses for any of the periods shown.
Concentrations of Credit Risk -- Revenues from three customers represented 20%,
13% and 13%, respectively, of total revenues during 1997. Revenues from one
customer represented 84%, 82% and 86% of total revenues during 1998, 1999 and
the three months ended March 31, 2000 respectively. The Company's financial
instruments that are exposed to concentrations of credit risk consist primarily
of cash and cash equivalents, marketable securities and accounts receivable.
Cash is deposited primarily with one financial institution. Cash equivalents and
marketable securities consist of high credit quality instruments and management
regularly monitors their composition and maturities. Substantially all of the
Company's accounts receivable are derived from revenue earned from customers
located within the United States. Management monitors the amount of credit
F-7
<PAGE> 72
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
exposure related to accounts receivable on an ongoing basis and, generally,
requires no collateral from its customers. The Company maintains allowances for
probable losses, including $1,200,000 recorded at December 31, 1998 related to a
receivable in connection with a license and supply agreement (see Note 3).
The following is a summary of the Company's allowance for accounts receivable:
<TABLE>
<CAPTION>
-----------------------------------------------------------
ADDITIONS
----------------------- BALANCE AT
BALANCE AT BEGINNING CHARGED TO END IF
OF PERIOD OPERATIONS DEDUCTIONS PERIOD
-------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997....................... $ 0 $1,200,000 -- $1,200,000
Year Ended December 31, 1998....................... $1,200,000 -- -- $1,200,000
Year Ended December 31, 1999....................... $1,200,000 -- $1,200,000 $ 0
Three Months Ended March 31, 2000.................. $ 0 -- -- $ 0
</TABLE>
Property, Plant and Equipment -- Property, plant and equipment are stated at
cost. Depreciation of machinery and equipment and leasehold improvements is
computed using the straight-line method over the estimated useful lives of the
assets, which ranges from 3 to 10 years, or the lease term, whichever is
shorter. The weighted average estimated life of machinery and equipment at
December 31, 1999 was approximately five years. Building depreciation is
computed using the straight-line method over the estimated useful life of 30
years.
Software -- In 1999 the Company adopted Statement of Position 98-1, Accounting
for Costs of Computer Software Developed or Obtained for Internal Use ("SOP
98-1"). This statement requires capitalization of certain costs incurred in the
development of internal-use software. Costs related to the development of
software in connection with its development agreements are treated as
development agreement expense and are expensed over the life of the agreement.
Costs related to software used for internal research and development activities
are expensed as incurred. The adoption of SOP 98-1 did not have a material
effect on the financial statements of the Company.
Intangible Assets -- The Company's policies with respect to intangible assets
are as follows:
- Patents -- The legal costs of filing patent applications are capitalized if
they relate to commercially viable technologies. Commercially viable
technologies are those technologies where the Company has demonstrated its
ability to generate income from operations and positive cash flows. Legal
costs associated with patents not yet proven to be commercially viable are
expensed. Once patents are issued, those costs are amortized over the shorter
of the statutory or estimated economic life, which generally ranges from 5 to
17 years.
- Purchased Technology -- The Company pays license fees and reimburses patent
legal costs to individuals, universities and other companies under various
licensing agreements. These agreements provide the Company with exclusive
licenses or rights to the specified technologies. These costs have been
capitalized and are amortized over the shorter of the license term or the
estimated economic life, which ranges from 4 to 5 years.
- Core Technology and Assembled Work Force -- Core technology and assembled work
force represents intangible assets related to the Company's acquisition of
Proteomics (see Note 2). The core technology and assembled workforce are being
amortized over 4 and 5 years, respectively.
- Goodwill -- Goodwill represents the excess of the fair value of the
consideration given over the estimated fair value of the assets and liability
received when the Company acquired the remaining 7.5% interest of Proteomics
(see Note 2). The Company is amortizing the goodwill over three years.
F-8
<PAGE> 73
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Long-Lived Assets -- The Company accounts for the impairment of long-lived
assets in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. As required by
the statement, the Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets or intangibles may not be recoverable. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
The Company periodically reevaluates the original assumptions and rationale
utilized in the establishment of the carrying value and estimated useful lives
of the long-lived assets. The criteria used for these evaluations include
management's estimate of the asset's continuing ability to generate income from
operations and positive cash flows in future periods as well as the strategic
significance of any intangible asset in the Company's business objectives.
As a result of its evaluation in 1999, intangible assets totaling $1,517,000
were charged to general and administrative expense during the three months
ending March 31, 1999. The charge was the result of the Company's determination
that the legal settlement in 1999 (see Note 3) related to an agreement that
expired on December 31, 1998, indicated that certain patents and the underlying
technology would have limited or no future commercial value.
Revenue Recognition -- Revenues are derived from development agreements
consisting of research funding, technology access fees, milestone payments and
government grants. Research funding revenue is recognized as services are
performed and expenses are incurred. Revenue from technology access fees is
recognized ratably over the life of the development agreement. Revenue related
to milestone payments is recognized ratably from the date of completion of the
specified milestone over the remaining life of the development agreement. Grant
revenue is recognized as expenses are incurred and billed, except that revenue
received for equipment purchases is deferred and recognized as revenue as the
related equipment is depreciated.
Comprehensive Income -- Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, requires that all items recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other annual
financial statements. There were no items of other comprehensive income (loss)
and therefore comprehensive loss was the same as net loss for all periods
presented.
Research and Development -- Research and development costs that are related to
customer funded development agreements are expensed as incurred and recorded as
cost of development agreements. Research and development costs not related to
customer funded development agreements are expensed as incurred and reported as
research and development expense.
Stock-Based Compensation -- The Company accounts for stock-based awards using
the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. As such, compensation is recorded on the
date of issuance or grant as the excess of the current estimated fair value of
the underlying stock over the purchase or exercise price. Any deferred
compensation is amortized over the respective vesting periods of the equity
instruments, if any. The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," which permits nonpublic entities to
provide pro forma net loss and net loss per share disclosure for stock-based
compensation as if the minimum value method defined in SFAS No. 123 had been
applied. As required by SFAS No. 123, transactions with nonemployees, in which
goods or services are the consideration received for the issuance of equity
instruments, are accounted for under the fair value basis in accordance with
SFAS No. 123.
Income Taxes -- The Company accounts for income taxes under the asset and
liability approach where deferred income tax assets and liabilities reflect the
future tax consequences, based on enacted tax laws, of the temporary differences
between financial and tax reporting at the balance sheet date.
F-9
<PAGE> 74
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Segment Reporting -- As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has determined that it operates in one reportable segment.
Fair value of Financial Instruments -- The carrying amount of cash and cash
equivalent, marketable securities, accounts receivable and accounts payable
approximate fair value because of the short-term nature of these instruments.
The fair value of debt instruments is based upon current interest rates for debt
instruments with comparable maturities and characteristics and approximates the
carrying amount.
Historical Net Loss Per Share -- Basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares and any dilutive effect of potential common shares outstanding during the
period. Potentially dilutive securities weighted average number of shares
(3,288,965 in 1997, 3,823,207 in 1998, 8,368,537 in 1999 and 5,389,396 for the
three months ended March 31, 1999 and 8,539,797 for the three months ended March
31, 2000) composed of incremental common shares issuable upon the exercise of
stock options and warrants, and common shares issuable on conversion of
convertible preferred stock, were excluded from historical diluted loss per
share because of their anti-dilutive effect.
Pro Forma Net Loss Per Share (Unaudited) -- Pro forma net loss per share has
been computed as described above and also includes common shares arising from
convertible preferred stock that will automatically convert upon the closing of
the initial public offering contemplated by this prospectus.
Recently Issued Accounting Standards -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities and is effective for
the Company beginning the first quarter of fiscal year beginning January 1,
2001. The statement requires balance sheet recognition of derivatives as assets
or liabilities measured at fair value. Accounting for gains and losses resulting
from changes in the values of derivatives is dependent on the use of the
derivative and whether it qualifies for hedge accounting. The Company does not
believe that the adoption of SFAS No. 133 will have a material impact on its
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. The Company
believes that it complies with the provisions of SAB 101.
Reclassifications -- Certain 1997 and 1998 amounts have been reclassified in
order to conform to the 1999 presentation.
2. ACQUISITION OF LARGE SCALE PROTEOMICS
During February 1999, Large Scale Biology Corporation acquired approximately
92.5% of the outstanding common stock of Proteomics in exchange for 2,287,634
shares of the Company's Series G convertible preferred stock valued at
$22,876,000 and options to purchase 40,375 shares of the Company's common stock
valued at $394,000. This acquisition was accounted for by the purchase method.
The operating results of Proteomics are included in the consolidated statement
of operations of the Company effective February 1, 1999. As part of the
acquisition, the Company acquired the option to purchase the remaining 7.5% of
common stock of Proteomics (see Note 6). In March 2000 the Company exercised its
option and acquired the remaining 7.5% of the outstanding common stock of
Proteomics for $74,000.
F-10
<PAGE> 75
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
The purchase price of the acquisition was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. In-process research and development of $19,783,000 and core
technology of $2,312,000 was recorded. The purchase price of the Company's 92.5%
interest in Proteomics approximated the fair value of the assets and liabilities
acquired. In conjunction with its acquisition of the remaining 7.5% of
Proteomics the Company recorded goodwill of $1,656,000 representing the excess
of the carrying value of the option and cash paid over the estimated fair value
of the assets received and liabilities assumed. The Company is amortizing the
goodwill over three years.
Purchased research and development expense represents the value of purchased
in-process research and development projects that had not reached technological
feasibility at the date of acquisition. These projects relate to the development
of Proteomics and Virus technologies. Proteomics technology can only be used for
the large-scale, quantitative analysis and identification of proteins from
biological samples. There is no other known use of this technology for
performing analysis on other components of samples of biological origin (i.e.
DNA, carbohydrates, lipids, etc.). Similarly, the Virus technology is expected
to only be capable of separating virus size particles -- a size thought to be
unique to viruses. No alternative future uses or markets were identified for
these projects because of their unique qualities.
The purchased research and development was valued by an independent appraiser
using the risk-adjusted cash flow approach, which includes an analysis of the
projected future cash flows that were expected to result from the progress made
on each of the in-process projects prior to the date of acquisition and the
risks associated with achieving such cash flows. The value allocated to
purchased in-process research and development was expensed at the date of
acquisition. Projects which had already been commercialized at the date of the
valuation were valued and recorded as core technology.
Future cash flows for in-process research and development were estimated by
first forecasting, on a project-by-project basis, total revenues expected to
result from sales of each in-process project. Revenues were not anticipated from
the in-process research and development projects until approximately one year
into the forecast. Appropriate operating expenses, cash flow adjustments and
contributory asset returns were deducted from projected future revenues, and
adjustments were made to remove the value contributed by core technology. No
anticipated expense reductions due to synergies between Large Scale Proteomics
and Large Scale Biology Corporation were assumed. The analysis resulted in a
forecast of net returns on each in-process project. These net returns were then
discounted to a present value at discount rates that incorporate the project
specific risks associated with each purchased in-process research and
development project. The project specific risk factors considered included the
complexity of the development effort, the likelihood of achieving technological
feasibility and the likelihood of market acceptance. The applied discount rate
of 50% was believed to adequately account for the additional risks associated
with the in-process technologies over other technologies existing at the
acquisition date.
The forward looking data employed in the analysis of in-process research and
development were based upon management's estimate of future performance of its
business. Management believes the assumptions used were reasonable. However, the
assumptions we used may be incomplete or inaccurate, and unanticipated events
and circumstances may occur, which could cause a material adverse effect on our
financial condition and results of operations. The forecasted results used in
the analysis for the in-process projects have not varied significantly from the
actual results achieved through December 31, 1999.
A brief description of purchased in-process research development projects is set
forth below, including the status of products within each project at the
acquisition date:
- Proteomics -- The proteomics technology applies sample preparation and
fractionation high throughput, high resolution two-dimensional gels, mass
spectrometry, databases and bioinformatics software to the discovery and
development of drugs, diagnostics and agricultural chemicals. The
proteomics technology was completed during the three months ended March
31, 2000.
F-11
<PAGE> 76
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
- Virus -- The virus detection technology allows for the rapid discovery of
new yet difficult to propagate viruses, addressing a wide range of
suspected viral diseases. Virus detection technology was expected to be
completed in 2003. The Company estimates after March 31, 2000 it will
need to spend approximately $10.0 million related to personnel and system
prototype development in order to complete development of the Virus
technology by 2003.
The following unaudited pro forma information gives effect to the acquisition of
Proteomics as if the acquisition had occurred on January 1, 1998 and 1999.
<TABLE>
<CAPTION>
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues.................................................... $ 4,947,000 $ 17,441,000
Net loss.................................................... $(29,384,000) $(33,248,000)
Net loss per share -- basic and diluted..................... $ (4.71) $ (5.38)
</TABLE>
These unaudited pro forma results have been prepared by the management of the
Company for comparative purposes only. They do not purport to be indicative of
the results of operations that actually would have resulted had the combination
occurred on the date indicated and may not be indicative of future results of
operations.
3. LITIGATION SETTLEMENTS
The Company reached a settlement with Advanced Polymer Systems, Inc. ("APS")
related to a License and Supply Agreement between APS and the Company that
expired on December 31, 1998. Under the settlement agreement, the Company
received two payments totaling $1,300,000 in cash during 1999.
In July 1998, the Company received 270,000 shares of its common stock from a
stockholder as settlement of a legal dispute. The Company recorded a $1,890,000
gain on litigation settlement based on the estimated fair value of the shares at
the date of the settlement. The Company subsequently cancelled all 270,000
shares received.
During May 1997, the Company received $2,000,000 in settlement of a lawsuit for
damages based on the loss of potential future revenue.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
---------------------------
1998 1999
------------ -----------
<S> <C> <C>
Machinery and equipment..................................... $ 6,511,000 $11,340,000
Leasehold improvements...................................... 481,000 1,437,000
Building.................................................... 1,482,000 1,485,000
Construction in progress.................................... 43,000 120,000
Land........................................................ 90,000 373,000
------------ -----------
8,607,000 14,755,000
Accumulated depreciation.................................... (2,845,000) (5,251,000)
------------ -----------
$ 5,762,000 $ 9,504,000
============ ===========
</TABLE>
F-12
<PAGE> 77
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
5. INTANGIBLE ASSETS
Intangible assets at December 31 consist of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000
----------------- ----------------- --------------
<S> <C> <C> <C>
Patents..................................... $2,019,000 $1,023,000 $ 1,122,000
Purchased technology........................ 1,024,000 900,000 900,000
Core technology and assembled work force.... -- 2,569,000 2,774,000
Goodwill.................................... -- -- 1,656,000
---------- ---------- -----------
3,043,000 4,492,000 6,452,000
Accumulated amortization.................... (668,000) (808,000) (1,069,000)
---------- ---------- -----------
$2,375,000 $3,684,000 $ 5,383,000
========== ========== ===========
</TABLE>
Capitalized patent costs at December 31, 1999 include $261,000 that relates to
issued or allowed patents for which amortization has begun. The remaining
amounts relate to pending patents, amortization of which will begin when the
patents are issued or allowed.
6. OTHER ASSETS
<TABLE>
<CAPTION>
--------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000
----------------- ----------------- --------------
<S> <C> <C> <C>
Call option................................. $ -- $1,787,000 $ --
Restricted cash and deposits................ 954,000 1,345,000 1,359,000
Other....................................... 167,000 67,000 42,000
---------- ---------- -----------
$1,121,000 $3,199,000 $ 1,401,000
========== ========== ===========
</TABLE>
The call option represents the fair value of an option to acquire the 7.5%
minority interest shares of Proteomics for $74,000 with an expiration date of
December 31, 2001 (see Note 2.). The Company obtained the call option as part of
the acquisition of Proteomics. The fair value of the call option was calculated
using the Black-Scholes option pricing model with the following assumptions:
volatility of 60%; risk-free interest rate of 5.1%; expected life of 2.9 years;
and no expected dividend yield.
Restricted cash and deposits primarily consist of certificates of deposit, which
are being held as security for notes payable (see Note 7).
F-13
<PAGE> 78
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
7. LONG-TERM DEBT
A summary of the Company's notes payable for December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
A $5,000,000 equipment financing arrangement entered into on
November 30, 1998 which bears interest at the commercial
bank prime interest rate (8.50% at December 31, 1999)
payable in monthly installments through October 2001 and
is secured by the financed equipment and a certificate of
deposit (see Note 6) in an amount equal to 30% of the
quarterly projected outstanding loan amount............... $1,318,000 $ 4,086,000
A $500,000 note payable which bears interest at 5% and is
payable through August 2008 in monthly installments of
$5,000. The note is secured by the Owensboro processing
facility and certain equipment............................ 487,000 447,000
A $100,000 note payable which bears interest based on the
commercial bank prime interest rate less 4% with a minimum
rate of 4% (4.0% at December 31, 1999) and is payable
through September 2007 in monthly installments of $1,000.
The promissory note is secured by an irrevocable letter of
credit.................................................... 90,000 81,000
A $750,000 note payable which bears interest of 8.25% until
May 2001 with interest only payments until May 2000 and
principal and interest payments through May 2005. The note
is secured by the Owensboro processing facility and
certain equipment......................................... -- 5,000
8.25% promissory note payable in 24 monthly installments of
$58,000 through February 1999............................. 115,000 --
Other....................................................... 15,000 22,000
---------- -----------
Total notes payable............................... 2,025,000 4,641,000
Less current portion.............................. (580,000) (2,184,000)
---------- -----------
Total long-term notes payable..................... $1,445,000 $ 2,457,000
========== ===========
</TABLE>
Future principal payments under long-term debt are:
<TABLE>
<S> <C>
2000........................................................ $2,184,000
2001........................................................ 2,033,000
2002........................................................ 59,000
2003........................................................ 59,000
2004........................................................ 62,000
Thereafter.................................................. 244,000
----------
Total principal payments.......................... $4,641,000
==========
</TABLE>
8. DOW CONTRACT
The Company entered into a Collaboration and License Agreement (the "Agreement")
with The Dow Chemical Company and its subsidiary Dow AgroSciences LLC
(collectively "Dow") on September 1, 1998. The Agreement provides funding for
sponsored genomics research, royalties upon product sales and payments when
certain milestones are achieved. The Company is entitled to all funding received
regardless of the results of the research. Accordingly, no obligation to repay
or repurchase technology has been recorded. Revenues from Dow represented 84%,
82%, 83% and 86% of total revenues during the years ended December 31, 1998 and
1999 and the three months ended March 31, 1999 and 2000, respectively. The
contract is for three years and is renewable annually after three years if
mutually agreed to by Dow and the Company.
F-14
<PAGE> 79
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Technology Access Fees
During 1998, the Company received cash of $10,000,000 in exchange for access to
the Company's technologies and a warrant granted to Dow (the "Dow Warrant") to
purchase 1,232,061 shares of the Company's common stock subject to certain
vesting provisions (see Note 10). Using the Black-Scholes option-pricing model,
the Company determined that the fair value of the warrant was $1,392,000 on the
issuance date and such amount was recorded as warrant liability. The technology
access fee of $8,608,000 was recorded as deferred revenue and is being
recognized ratably over the remaining period during which the Company will be
performing research and development activities under the Agreement. Technology
access fees of $956,000 and $2,868,000 were recognized as revenue during 1998
and 1999. Deferred revenue related to technology access fees was $7,652,000,
$4,784,000 and $4,067,000 at December 31, 1998 and 1999 and March 31, 2000
respectively.
Milestone Payments
The Company received $20,000,000 during 1999 for meeting certain milestones
specified in the Agreement. These amounts, less the fair value of Dow Warrant
shares vesting during 1999 (see Note 10), were recorded as deferred revenue and
are being recognized ratably over the remaining period during which the Company
will be performing research and development activities under the Agreement.
Using the Black-Scholes option pricing model, the Company determined that the
fair value of the warrants vesting in connection with the milestone payments in
1999 was $3,411,000 and such amount was recorded as warrant liability. Revenue
of $2,802,000 was recognized related to milestone payments received in 1999.
Deferred revenue related to milestone payments was $13,787,000 and $11,720,000
at December 31, 1999 and March 31, 2000 respectively.
The Company may be eligible for additional payments of up to $5,000,000 in each
of the second and third years of the contract if certain milestones are met.
Research Funding
Dow will reimburse the Company up to $12,000,000 per contract year for certain
research expenses specified in the agreement. Revenue related to research
performed under the Agreement was $1,896,000 and $8,563,000 in 1998 and 1999,
respectively.
Amounts paid by Dow to the Company in excess of incurred expenses covered by the
agreement are recorded as customer advances of $882,000 and $106,000 at December
31, 1998 and 1999, respectively.
9. COMMITMENTS
The Company leases facilities under operating leases and incurred facility
rental expenses of $353,000, $476,000 and $659,000 during 1997, 1998 and 1999,
respectively. Additionally, the Company has entered into research sponsorship
agreements with major universities, government institutions and other companies.
These agreements provide for research funding by the Company for specific
projects of interest to the Company. Expenses under these and other agreements
with various consultants totaled $2,555,000, $3,145,000 and $4,127,000 during
1997, 1998 and 1999, respectively. Future non-cancelable minimum payments under
operating leases and research and consulting agreements are:
<TABLE>
<CAPTION>
-----------------------
RESEARCH
AND
OPERATING CONSULTING
LEASES AGREEMENTS
--------- ----------
<S> <C> <C>
2000........................................................ $541,000 $2,703,000
2001........................................................ -- 545,000
-------- ----------
$541,000 $3,248,000
======== ==========
</TABLE>
F-15
<PAGE> 80
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
In addition to the future non-cancelable minimum payments disclosed above,
certain of the research and consulting agreements contain provisions for
additional aggregate payments of $3,964,000 if the agreements are not cancelled.
The Company has also entered into license agreements with major universities
that provide for royalties upon product sales and minimum annual royalty
amounts. These arrangements remain in effect until there are no longer any
related unexpired patents or upon termination by the Company. Each arrangement
is cancelable by the Company, generally upon ninety days notice, without
significant liability to the Company. Royalty payments were $0, $78,000 and
$207,000 during 1997, 1998 and 1999, respectively. The Company's non-cancelable
obligation related to royalty agreements at December 31, 1999 was $39,000.
The Company has committed to spend $942,000 as of December 31, 1999 principally
for the construction of certain facilities at its Owensboro processing facility.
10. STOCKHOLDERS' EQUITY
Common stock
In July 1998, the Company cancelled 270,000 shares of its common stock received
as settlement of a lawsuit (see Note 3).
Convertible Preferred Stock
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
CONVERTIBLE COMMON ANNUAL PER
PREFERRED SHARES PER SHARE SHARE
SHARES CONVERSION RESERVED FOR DIVIDEND LIQUIDATION
OUTSTANDING RATE CONVERSION RATE VALUE
----------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Series A............................. 666,667 1.0000 666,667 $0.12 $ 1.50
Series B............................. 878,003 1.0000 878,003 $0.24 $ 3.00
Series C............................. 338,336 1.0590 358,297 $0.56 $ 7.00
Series D............................. 435,173 1.0043 437,044 $0.56 $ 7.00
Series E............................. -- 1.0000 100,000 $0.32 $ 4.00
Series E............................. -- 1.0000 46,875 $0.96 $12.62
Series F............................. 1,000,000 1.0000 1,000,000 $0.56 $ 7.00
Series G............................. 2,287,634 1.0000 2,287,634 $0.80 $10.00
--------- ---------
5,605,813 5,774,520
========= =========
</TABLE>
Significant terms of the outstanding convertible preferred stock are as follows:
- Each share of convertible preferred stock is convertible into shares of
common stock at the ratio in the above table (subject to adjustment for
events of dilution), at the option of the stockholder. Unless
automatically converted, holders of Series G convertible preferred stock
may not convert their shares until two years after their issuance date.
Each series of convertible preferred stock will be automatically
converted into common stock upon the voluntary conversion of 66.7% of all
outstanding shares of convertible preferred stock, or upon effectiveness
of a registration statement under the Securities Act of 1933 meeting
certain criteria.
- Holders of Series A, Series B, Series C, Series D, and Series F
convertible preferred stock have the right to vote on an
"as-if-converted" basis with the holders of common stock. Holders of
Series G convertible preferred stock are entitled to the number of votes
equal to 3/4 of the number of shares of common stock into which such
shares could be
F-16
<PAGE> 81
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
converted. Certain actions of the Company require majority approval by
the holders of the Series A convertible preferred stock.
- Series E convertible preferred stock have not been issued and are
reserved for issuance upon the exercise of certain warrants (see
"warrants" below).
- Dividends on the shares of convertible preferred stock are noncumulative.
At December 31, 1999 dividends on convertible preferred stock have not
been declared or paid.
- In the event of liquidation, dissolution or winding up of the Company,
convertible preferred shareholders are entitled to receive their
liquidation preference, plus any declared and unpaid dividends with
respect to such shares prior to any distributions to other stockholders.
Dividend and liquidation amounts which are less than the convertible
preferred stock dividend or liquidation preferences are payable ratably
among the stockholders of convertible preferred stock in proportion to
the respective dividend rates or liquidation values. Upon completion of
the distribution, the holders of the common stock will receive all
remaining assets of the corporation.
Put Option
Under the terms of its acquisition of Proteomics, the Company granted holders of
the Series G convertible preferred stock the right, but not the obligation, to
require that the Company repurchase all 2,287,634 shares of Series G convertible
preferred stock at $10 per share in the event the Company either (1) sells 50%
or more of its shares of Proteomics common stock or (2) sells substantially all
of the assets of Proteomics to a non-affiliated third party. The put options
expire in February 2002 or upon an initial public offering meeting certain
criteria. As the Company controls the conditions under which the put option
would become exercisable the Series G convertible preferred stock has been
recorded in equity. Should the Company cause the put option to become effective
it would reclassify the Series G convertible preferred stock as temporary
equity.
Warrants
The Company has reserved 1,232,061 shares of common stock for issuance upon the
exercise of a warrant granted on September 1, 1998 to Dow in conjunction with
the Agreement. The warrant consisted of two tranches, one for 410,687 shares of
common stock and one for 821,374 shares of common stock. The first tranche was
immediately exercisable and expires upon the earlier of August 31, 2003 or two
years after the termination of the Agreement. The second tranche was initially
exercisable through February 28, 1999 after which it terminated, but was
effectively regranted and becomes exercisable when and if the Company receives
certain milestone payments under the Agreement (see Note 8). During 1999, the
Company received the milestone payments and as a result, all 1,232,061 shares of
common stock were exercisable under the warrant at December 31, 1999. Under the
terms of the Agreement, the warrant was initially exercisable at $10.00 a share
through February 28, 1999; thereafter $11.50 a share through August 31, 1999;
thereafter $13.23 a share through August 31, 2000; thereafter $15.21. If the
warrant is exercised and the Company has not effected an initial public offering
of its common stock by December 31, 2008, the Company must arrange a private
sale of the related common stock or repurchase the related common stock at its
fair market value as determined by a nationally recognized investment bank.
The fair value of this warrant was determined to be $1,392,000 on the date of
grant using the Black-Sholes option-pricing model with the following
assumptions: expected volatility of 60%; risk-free interest rates of 5.0%;
expected life of 5 years for the first tranche and six months for the second
tranche; and no dividend yield. The fair market value of the second tranche was
determined to be $3,411,000 on the dates of the effective regranting during 1999
using the Black-Sholes option-pricing model. The following assumptions were used
to revalue the second tranche during 1999: expected volatility of 60%, risk-free
interest rates from 5.2% to 5.5%; expected life of 4.2 to 4.5 years; and no
expected dividend yield.
F-17
<PAGE> 82
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
During the years ended December 31, 1998 and 1999 the Company recognized expense
of $1,224,000 and $5,353,000, respectively, related to changes in the fair value
of the warrant. Due to the put feature the warrant is reported as a liability.
Upon an initial public offering, the put feature expires and the warrant
liability will be reclassified to permanent equity. The following assumptions
were used at December 31, 1998 and 1999 to determine the fair value of the
warrant: expected volatility of 60%, risk-free interest rates from 4.6% to 6.4%;
expected life of 4.7 years and 0.2 years during 1998 and 3.7 years during 1999,
and no expected dividend yield.
The Company granted warrants to purchase 146,875 shares of Series E convertible
preferred stock during 1997. A warrant to purchase 46,875 shares of Series E
convertible preferred stock was granted to an employee. This warrant is
exercisable at $12.62 per share, expires on May 20, 2001 and is fully
exercisable.
A warrant to purchase 100,000 shares of Series E convertible preferred stock was
granted to a marketing consultant. This warrant is exercisable at $4.00 per
share, expires on February 20, 2002 and is exercisable upon a public offering of
common stock priced in excess of $9.00 per share with gross proceeds exceeding
$15,000,000, or upon the voluntary conversion of 66.7% of all outstanding shares
of convertible preferred stock. The granting of this warrant resulted in the
Company recording non-cash expense of $383,000 pursuant to SFAS No. 123. The
fair value of this warrant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of 60%; risk-free interest rate of 5.7%; expected life of 4.1 years;
and no dividend yield. The Company has reserved 146,875 shares of Series E
convertible preferred stock for issuance upon the exercise of these warrants and
146,875 shares of common stock for issuance upon the subsequent conversion of
the Series E convertible preferred stock.
The Company has also reserved 29,322 shares of common stock for issuance upon
the exercise of a warrant granted during 1988. This warrant is currently
exercisable to purchase common stock at $2.39 per share, and expires five years
after an initial public offering of common stock.
Stock Plans
The Company has adopted the 1988, 1990, 1992 and 1999 Stock Plans (the
"Plans"). Under the terms of the Plans, the Company's employees, officers,
directors and consultants may be granted options to purchase, or allowed to
immediately purchase, shares of the Company's common stock. The terms of options
or exercise price are determined by the Board of Directors. Stock options
granted under the Plans are exercisable over a ten-year period from the grant
date and have a vesting period ranging from immediate vesting to four years.
Options granted under the Plans may be either incentive stock options or
nonqualified stock options. Incentive stock options may be granted only to
Company employees (including officers and directors who are also employees).
Nonqualified stock options may be granted to Company employees, directors and
consultants. Incentive and nonqualified stock options granted under the Plans
may be granted at exercise prices no less than 100% and 85%, respectively, of
the estimated fair value of the company's common stock on the date of grant.
However, an option granted to a 10% shareholder under the Plans shall be granted
at an exercise price not less than 110% of the estimated fair value of the
Company's common stock on the date of the grant.
The Company has authorized 3,900,000 shares of common stock for issuance under
the Plans. There were 552,325 shares of common stock available for grant at
December 31, 1999. The Plans include a net exercise provision whereby shares of
the Company's stock which have been owned for more than one year can be
exchanged at fair market value to pay for the exercise of stock options.
Employees exchanged 2,530, 3,075 and 5,062 shares of common stock to exercise
options under the net exercise provision during 1997, 1998 and 1999,
respectively.
F-18
<PAGE> 83
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Outstanding options are summarized as follows:
<TABLE>
<CAPTION>
---------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding, December 31, 1996.............................. 1,695,679 $ 3.91
Granted................................................... 100,000 7.00
Exercised................................................. (87,279) 2.35
Forfeited................................................. (264,800) 3.19
---------
Outstanding, December 31, 1997.............................. 1,443,600 4.35
Granted................................................... 131,000 7.34
Exercised................................................. (120,369) 1.82
Forfeited................................................. (15,000) 12.62
---------
Outstanding, December 31, 1998.............................. 1,439,231 4.75
Granted................................................... 1,585,375 10.43
Exercised................................................. (49,114) 3.71
Forfeited................................................. (145,287) 3.33
---------
Outstanding, December 31, 1999.............................. 2,830,205 $ 8.02
=========
Options exercisable:
December 31, 1997......................................... 1,311,260 $ 3.82
December 31, 1998......................................... 1,251,944 $ 4.23
December 31, 1999......................................... 1,161,811 $ 4.59
</TABLE>
The activity in the table above includes options granted to consultants during
1998 and 1999 of 16,000 shares and 5,000 shares, respectively. There were no
options granted to consultants in 1997. The number of options outstanding at
December 31, 1999 includes 627,525 options to consultants.
The weighted-average fair value of options granted was $2.92 in 1997, $2.55 in
1998 and 10.69 in 1999.
During the quarter ended March 31, 2000, 71,850 options were exercised. There
were no options granted or forfeited during the quarter ended March 31, 2000.
The following table summarizes information about stock options outstanding and
exercisable under the Plans at December 31, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------------------
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
--------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.40......................................... 40,375 8.3 years $ 0.40 23,955 $ 0.40
$ 2.00 to $ 3.50............................... 799,330 2.1 years $ 3.08 799,330 $ 3.08
$ 4.50 to $ 7.00............................... 295,500 6.8 years $ 6.28 210,711 $ 5.99
$10.00 to $12.62............................... 1,695,000 9.7 years $10.84 127,815 $12.52
--------- ---------
2,830,205 7.2 years $ 8.02 1,161,811 $ 4.59
========= =========
</TABLE>
F-19
<PAGE> 84
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
The fair value of each option granted to employees was estimated on the date of
grant using the minimum value method with the following weighted-average
assumptions used for grants made during 1997, 1998 and 1999: risk-free interest
rates of 6.1%, 5.6% and 6.5%, respectively; expected life of nine, six and six
years, respectively; and no expected dividend yield.
Pro Forma Net Loss
If compensation cost for the Company's stock-based compensation plans and the
warrant granted to an employee had been determined based on the fair value at
the grant dates consistent with a method prescribed by SFAS No. 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
-------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported............................................... $(6,569,000) $ (8,755,000) $(33,270,000)
Pro forma................................................. $(6,909,000) $ (8,970,000) $(33,746,000)
Loss per common share:
As reported:
Basic and diluted...................................... $ (1.06) $ (1.40) $ (5.38)
Pro forma:
Basic and diluted...................................... $ (1.11) $ (1.44) $ (5.46)
</TABLE>
Stock Compensation
The Company issued 1,030,000 options to employees, officers and directors on
December 31, 1999. These options are exercisable at between $10.00 and $11.25
per share, have a 10 year life and vest in quarterly installments over 3 years.
Deferred compensation in the amount of $7,809,000 was recorded as the difference
between the exercise price and the estimated fair value of the common stock as
of December 31, 1999. During the three months ended March 31, 2000 the Company
recognized $661,000 of expense related to the amortization of deferred
compensation. In December 1999, certain officers and key employees were granted
options to purchase 510,000 shares of common stock at $11.25 per share that will
become exercisable upon an initial public offering ("IPO"), among other
conditions. As a result, non-cash compensation expense will be recognized upon
completion of an IPO based on the difference between the exercise price of those
options and the IPO price.
The Company also issued options to purchase 16,000 shares of common stock to
consultants during 1998. These options are exercisable at $7.00 per share, have
a 10-year life and vest over periods ranging from one to three years. The
Company issued an option to purchase 5,000 shares of common stock to a
consultant during 1999. This option is exercisable at $10.00 per share, has a
10-year life and vests over three years. The issuance and subsequent revaluation
of these options resulted in the Company recording deferred expense of $120,000
and $127,000 during 1998 and 1999. The fair value of each option granted was
estimated on the date of grant and each option was revalued periodically until
it vested using the Black-Scholes option-pricing model with the following
weighted-average assumptions during 1998 and 1999: expected volatility of 60%;
risk-free interest rate of 5.1% and 6.1%, respectively; initial expected life of
ten years; and no expected dividend yield.
The Company issued 9,510 shares of common stock valued at $89,000 during 1997,
10,353 shares of common stock valued at $81,000 during 1998, and 3,149 shares of
common stock valued at $31,000 during 1999 to SRI International in exchange for
research and development services.
F-20
<PAGE> 85
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Stockholders' Notes Receivable
The Company's Board of Directors has approved loans up to a maximum of $650,000
for salaried employees who are not officers to exercise options to purchase
shares of the Company's common stock. Employees borrowed $10,000 to purchase
3,000 shares of common stock in 1997, $22,000 to purchase 14,700 shares of
common stock in 1998 and $82,000 to purchase 25,000 shares of common stock in
1999. The notes are for full recourse and have been recognized within
stockholders' equity.
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution retirement plan covering all
employees who meet minimum eligibility requirements. During 1997, 1998 and 1999,
the Company made discretionary matching contributions equal to 50% of the amount
each employee elected to contribute up to a maximum Company match of 3% of an
employee's compensation. The Company's contributions under this plan amounted to
$79,000, $92,000 and $155,000 for 1997, 1998 and 1999, respectively.
12. INCOME TAXES
The components of the Company's income tax provision for the years ended
December 31 consist of:
<TABLE>
<CAPTION>
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $190,000
State..................................................... -- -- --
Deferred.................................................... -- -- --
-------- -------- --------
Income tax provision.............................. $ -- $ -- $190,000
======== ======== ========
</TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate. The effective tax rate and the statutory
federal income tax rate for the years ended December 31 are reconciled as
follows:
<TABLE>
<CAPTION>
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate................ (35.0)% (35.0)% (35.0)%
Purchased research and development.......................... -- -- 24.2
Research and development credits............................ (5.3) (4.0) (1.9)
Change in valuation allowance for income taxes.............. 41.2 39.9 12.4
Other....................................................... (0.9) (0.9) 1.0
----- ----- -----
0.0% 0.0% 0.7%
===== ===== =====
</TABLE>
F-21
<PAGE> 86
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
The significant components of net deferred tax assets recorded in the Company's
balance sheet at December 31 are:
<TABLE>
<CAPTION>
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue.......................................... $ 2,976,000 $ 7,661,000
Net operating loss carryforwards.......................... 13,939,000 12,072,000
Tax credit carryforwards.................................. 3,043,000 4,555,000
Capitalized project costs................................. 1,371,000 1,235,000
Allowance for bad debts................................... 513,000 --
Other..................................................... 131,000 235,000
------------ ------------
Total deferred tax assets......................... 21,973,000 25,758,000
------------ ------------
Deferred tax liabilities:
Amortization of intangible assets......................... (1,144,000) (1,470,000)
------------ ------------
Total deferred tax liabilities.................... (1,144,000) (1,470,000)
------------ ------------
Valuation allowance......................................... (20,829,000) (24,288,000)
------------ ------------
Net deferred income tax asset............................... $ -- $ --
============ ============
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards available
to reduce future taxable income of approximately $32,726,000 for federal income
tax reporting purposes expiring from 2006 through 2018, and $11,108,000 for
state income tax reporting purposes expiring from 2001 through 2003. The
difference between the federal and state net operating loss carryforwards is
attributed to the California limitation of loss carryforwards to 50% of net
operating losses and the capitalization of certain research costs for state
income tax purposes. Additionally, at December 31, 1999, the Company has
research and development credit carryforwards and alternative minimum tax
carryforwards of approximately $2,657,000 available to reduce future federal
income taxes expiring from 2003 through 2013 and $1,898,000 available to reduce
future state income taxes with no date of expiration. The Company has fully
reserved all net deferred tax assets, primarily consisting of net operating loss
and tax credit carryforwards, as management does not believe that their future
realization is more likely than not.
The extent to which the loss carryforwards can be used to offset future taxable
income may become limited if changes in the Company's stock ownership exceed
certain defined limits.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company issued 2,287,634 shares of Series G convertible preferred stock in
exchange for 92.5% of the outstanding common stock of Proteomics (see Note 2).
Net cash acquired in connection with the Proteomics acquisition is as follows:
<TABLE>
<S> <C>
Issuance of Series G convertible preferred stock............ $ 22,876,000
Issuance of stock options................................... 394,000
Fees and expenses........................................... 53,000
Less fair value of noncash net assets acquired.............. (23,302,000)
------------
Net cash acquired........................................... $ 21,000
============
</TABLE>
Equipment with a net book value of $59,000 was exchanged for research services
during 1997.
F-22
<PAGE> 87
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
During 1997, 1998, 1999 and the three months ended March 31, 2000 the Company
issued 3,000, 14,700, 25,000 and 1,000 shares of its common stock in exchange
for $10,000, $22,000, $82,000, and $10,000 in notes receivable.
The Company recorded deferred compensation of $120,000 in 1998 and $7,936,000 in
1999 related to the issuance of common stock options.
The Company recorded a $1,890,000 non-cash gain on a litigation settlement in
1998 (see Note 3).
14. RELATED PARTY TRANSACTIONS
Two of the Company's directors are managing directors of Technology Directors,
Inc. In 1998, the Company entered into a consulting and business development
arrangement with Technology Directors, Inc. to provide management advisor
services to the Company. In addition to compensation for these management
advisory services, Technology Directors, Inc. received a fee in connection with
amounts received under the Agreement with Dow. Expenses related to this
consulting arrangement totaled $302,000 and $644,000 during 1998 and 1999,
respectively, and were included in general, administrative and marketing
expenses. Amounts owed under this arrangement at December 31, 1998 and 1999
totaled $35,000 and $15,000, respectively, and are included in accounts payable.
Pursuant to an employment agreement with an employee and founder of Proteomics,
the Company is obligated to pay the employee $20,833 per month over two years
for a five-year non-compete agreement. In addition, the Company entered into a
license and consulting agreement with the employee covering certain biochip
technology developed by him. This agreement provides for a $4,000 per month
consulting fee over two years and license fees of $6,667 per month over five
years. The license is a worldwide, exclusive non-royalty bearing license to the
biochip technology. Expenses related to these arrangement totaled $190,000
during 1999. Amounts owed under these arrangements at December 31, 1999 were
$625,000 and were included in accounts payable and accrued expenses.
In March 1997, the Company entered into a research and development program with
Wesley Jessen Corporation for development of new anti-infective products for
certain ophthalmic applications. Three of the Company's directors are directors
of Wesley Jessen Corporation. In connection with this program, the Company
received payments of $525,000 in 1997 and $125,000 in 1998.
In 1999, the Company entered into a license agreement with Icon Genetics, AG,
and the International Institute of Cell Biology, National Academy of Sciences
and Ukraine. The Company's Chief Executive Officer and Chairman of the Board
serves as Chairman of the Supervisory Board of Icon Genetics. Another of the
Company's directors is a member of the Supervisory Board and a principal
shareholder of Icon Genetics AG. The license provides the Company an exclusive,
worldwide, fully paid-up license to specified technology for a license fee
payable in eight quarterly installments of $37,500. An additional $200,000 is
payable upon achievement of specified milestones. The Company was also granted a
worldwide, non-exclusive license to additional technology, subject to a 2%
royalty on the sale of products developed with such technology. Under the
agreement, the Company paid $213,000 in 1999 to Icon Genetics and the
International Institute of Cell Biology.
F-23
<PAGE> 88
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
15. RESTATEMENT
Subsequent to the issuance of the Company's 1999 financial statements, the
Company's management determined that the fair value of the warrant issued to Dow
(see Note 10) should have been recorded as a liability and that changes in the
fair value of the warrant should be reflected as other expense in the Company's
statement of operations. Previously management reflected the change in fair
value of the warrant in accumulated deficit and reflected such amounts in loss
applicable to common shareholders.
Subsequent to the issuance of the Company's 1999 financial statements, the
Company's management also determined that the receipt of common stock from a
shareholder in settlement of a legal dispute in 1998 (see Note 3) should have
been recorded as a gain on litigation settlement based on the fair value of the
shares received at the date of the settlement. Previously management reflected
the receipt of shares at historical cost.
As a result, the Company's 1998 and 1999 financial statements have been restated
from amounts previously reported to appropriately present these transactions.
The significant effects of the restatement on the Company's 1998 and 1999
financial statements are as follows:
<TABLE>
<CAPTION>
-----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
<S> <C> <C>
At December 31, 1998:
Warrant liability......................................... $ -- $ 2,616,000
Common stock.............................................. 35,472,000 30,966,000
For the year ended December 31, 1998:
Gain on litigation settlements............................ -- 1,890,000
Change in fair value of warrant........................... -- (1,224,000)
Net loss.................................................. (9,421,000) (8,755,000)
At December 31, 1999:
Warrant liability......................................... -- 11,380,000
Common stock.............................................. 52,739,000 39,469,000
For the year ended December 31, 1999:
Change in fair value of warrant........................... -- (5,353,000)
Net loss.................................................. (27,917,000) (33,270,000)
</TABLE>
F-24
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Large Scale Proteomics
In our opinion, the accompanying balance sheets and the related statements of
operations and accumulated deficit and of cash flows present fairly, in all
material respects, the financial position of Large Scale Proteomics (formerly
Large Scale Biology Corporation) (the Company) as of October 31, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
January 15, 1999,
except as to Note 10,
as to which the date is February 5, 1999
F-25
<PAGE> 90
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 194,989 $ 28,535
Accounts receivable....................................... 158,657 125,285
---------- ---------
Total current assets.............................. 353,646 153,820
Property and equipment, net................................. 757,930 207,341
Patents, net................................................ 10,875 22,388
---------- ---------
Total assets...................................... $1,122,451 $ 383,549
========== =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 128,896 $ 103,717
Accrued salaries and benefits............................. 385,538 366,079
Capital lease obligations................................. 22,911 21,185
Notes payable............................................. 14,276 7,635
Deferred revenue.......................................... 628,133 256,602
Deferred revenue -- equipment purchases................... 599,550 --
---------- ---------
Total current liabilities......................... 1,779,304 755,218
Capital lease obligations, net of current portion........... 13,686 36,855
---------- ---------
Total liabilities................................. 1,792,990 792,073
---------- ---------
Mandatorily redeemable preferred stock, class B, par value
$.001; 200,000 shares authorized; 163,800 shares issued
and outstanding........................................... 259,238 251,048
Commitments and contingencies
Shareholders' deficit:
Preferred stock, class A, par value $.001; 11,800,000
shares authorized; none issued and outstanding......... -- --
Common stock, class A, par value $.001; 20,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, class B, par value $.001; 10,000,000 shares
authorized; 9,795,081 shares issued and outstanding.... 9,795 9,795
Accumulated deficit....................................... (939,572) (669,367)
---------- ---------
Total shareholders' deficit....................... (929,777) (659,572)
---------- ---------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' deficit......... $1,122,451 $ 383,549
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 91
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenue................................................... $1,452,223 $1,272,204
Costs of revenue.......................................... 922,240 812,736
Research and development.................................. 36,839 22,343
General and administrative................................ 749,189 524,577
---------- ----------
Total operating expenses.......................... 1,708,268 1,359,656
---------- ----------
Loss from operations................................... (256,045) (87,452)
Other income and (expenses):
Other expenses............................................ (402) (20,053)
Interest expense.......................................... (9,151) (5,835)
Interest income........................................... 3,583 866
Other income.............................................. -- 270
---------- ----------
Net loss............................................... (262,015) (112,204)
Accumulated deficit:
Balance, beginning of year................................ (669,367) (548,973)
Preferred stock dividends................................. (8,190) (8,190)
---------- ----------
Balance, end of year...................................... $ (939,572) $ (669,367)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 92
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(262,015) $(112,204)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 130,052 63,486
Loss on disposal of property and equipment............. -- 17,961
Changes in assets and liabilities:
Accounts receivable.................................. (33,372) (57,050)
Other current assets................................. -- 11,938
Accounts payable and accrued expenses................ 25,179 (64,229)
Accrued salaries and benefits........................ 19,459 21,892
Deferred revenue..................................... 371,531 172,860
Deferred revenue -- equipment purchases.............. 599,550 --
--------- ---------
Net cash provided by operating activities......... 850,384 54,654
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (663,869) (36,337)
Costs of patents.......................................... (5,259) (9,354)
--------- ---------
Net cash used in investing activities............. (669,128) (45,691)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable............................... 6,641 --
Principal payments on notes payable....................... -- (7,492)
Principal payments on obligations under capital leases.... (21,443) (1,520)
--------- ---------
Net cash used in financing activities............. (14,802) (9,012)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 166,454 (49)
Cash, beginning of year..................................... 28,535 28,584
--------- ---------
Cash, end of year........................................... $ 194,989 $ 28,535
========= =========
Supplemental schedule of non-cash investing and financing
activities:
Property and equipment acquired under capital lease
obligations............................................ $ -- $ 59,560
Refinancing of notes payable.............................. $ 7,635 $ --
Preferred stock dividends................................. $ 8,190 $ 8,190
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 9,151 $ 5,835
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 93
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Large Scale Proteomics (the Company), formerly Large Scale Biology Corporation,
was incorporated in the State of Delaware and commenced operations in February
1987. The Company builds large-scale protein databases and the analytical
instrumentation and software necessary for their development. The databases
permit the evaluation of metabolic changes at the protein level providing a
unique tool for the discovery and development of new and/or improved drugs and
diagnostics. The Company intends to commercialize its databases via
non-exclusive, multi-year subscriptions to pharmaceutical, diagnostic and
biotechnology customers in conjunction with related services such as proprietary
studies (for client provided samples) and, for strategic partners, technology
transfer. The Company's core business is in two dimensional gel electrophoresis
and analytical database software technology utilized by pharmaceutical customers
seeking contract studies, software, instrumentation and consulting. In addition
to its commercial activities, the Company also invests significantly in
technology development funded through numerous federal research and development
(R&D) grants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts invested in accounts which are readily
convertible to cash with original maturities of three months or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management believes that contract receivables are fully collectible and no
allowance for doubtful accounts is necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases is
recorded at the lower of fair value or the net present value of future minimum
lease payments determined at the inception of the lease. Depreciation of assets
is calculated over the estimated useful lives, ranging from 5 to 7 years, of the
assets using the straight-line method. Upon retirement, the cost and related
accumulated depreciation is eliminated from the respective accounts and the
resulting gain or loss, if any, is included in operations. Equipment under
capital leases is amortized over the lease term or the estimated useful life of
the asset, whichever is less. Maintenance and repairs are charged to expense as
incurred.
PATENTS
Legal costs incurred for patent research and application expenses are
capitalized as incurred and amortized on a straight-line basis over the
estimated useful life of the patents, once granted. The estimated useful life of
all patents is 5 years.
LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets utilizing
qualitative and quantitative factors. At such time as an impairment in value is
identified, the impairment will be quantitatively measured in accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and charged to operations.
REVENUE RECOGNITION
Commercial research revenue is recognized as services are performed. Deferred
commercial revenue represents that portion of revenue received, which has not
yet been earned. Grant revenue is recognized as expenses are incurred and
billed, except that revenue received for equipment purchases is deferred and
recognized as revenue as the related equipment is depreciated. Revenue from the
sale of instrumentation is recognized upon shipment of the product, provided
that the fee is fixed and determinable, persuasive evidence of an arrangement
exists and collection of the resulting receivable is probable. The
F-29
<PAGE> 94
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company has not experienced any returns of its products. Revenue related to
software support is recognized ratably over the terms of the related agreements.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash and cash equivalents in bank deposit
accounts which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company does not believe it is
exposed to any significant credit risk on cash and cash equivalents.
The majority of the Company's revenue is derived through grants with the U.S.
Government. For the years ended October 31, 1998 and 1997, approximately 60% and
81%, respectively, of the Company's revenue was derived from these agreements.
At October 31, 1998 and 1997, the U.S. Government represented approximately 40%
and 37%, respectively, of the total accounts receivable balance. At October 31,
1998, one commercial customer represented approximately 15% of that total
accounts receivable balance. Additionally, at October 31, 1997, three commercial
customers represented approximately 17%, 10% and 10%, respectively, of the total
accounts receivable balance.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years
for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the current tax provision for the period plus the change
during the period in deferred tax assets and liabilities.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
--------------------
OCTOBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Office furniture and equipment.............................. $256,507 $208,314
Laboratory equipment........................................ 724,436 116,667
-------- --------
980,943 324,981
Less accumulated depreciation............................... 223,013 117,640
-------- --------
Property and equipment...................................... $757,930 $207,341
======== ========
</TABLE>
The Company leases certain office and laboratory equipment under capital leases.
As of October 31, 1998, the cost and accumulated amortization related to these
capital leases was $67,956 and $17,145, respectively. As of October 31, 1997,
the cost and accumulated amortization related to these capital leases was
$67,956 and $4,039, respectively.
Depreciation expense was $113,280 and $52,667 for the years ended October 31,
1998 and 1997, respectively.
F-30
<PAGE> 95
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PATENTS
Patents consist of the following:
<TABLE>
<CAPTION>
----------------------
OCTOBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Patents..................................................... $ 128,711 $ 123,452
Accumulated amortization.................................... (117,836) (101,064)
--------- ---------
$ 10,875 $ 22,388
========= =========
</TABLE>
Amortization expense was $16,772 and $10,819 for the years ended October 31,
1998 and 1997, respectively.
5. NOTES PAYABLE
The Company issued a note payable for $6,641 during 1998. This note bears
interest at 10% and matures on November 1, 1999.
The Company borrowed $7,635 from Company officers on October 31, 1997, evidenced
by non-interest bearing notes payable due October 31, 1998. During fiscal 1998,
the Company renegotiated the terms of these notes, which now mature on November
1, 1999.
6. INCOME TAXES
The significant components of deferred tax assets and liabilities are temporary
differences arising from the following at October 31:
<TABLE>
<CAPTION>
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities):
Property and equipment.................................... $(251,757) $ (35,423)
Accrued expenses.......................................... 148,895 141,380
Net operating loss carryforwards.......................... 104,858 48,993
Deferred revenue.......................................... 357,659 99,100
Research and experimentation credit carryforwards......... 88,036 71,036
Deferred rent............................................. 13,211 9,523
--------- ---------
460,902 334,609
Valuation allowance....................................... (460,902) (334,609)
--------- ---------
Net deferred tax asset............................ $ -- $ --
========= =========
</TABLE>
Realization of net deferred tax assets at the balance sheet date are dependent
upon future earnings which are uncertain. Accordingly, a full valuation
allowance was recorded against these assets as of October 31, 1998 and 1997.
The Company has available at October 31, 1998, unused operating loss
carryforwards of $271,512, which may be applied against future taxable income,
expiring in various years through 2018. The Company has tax credit carryforwards
of $88,036 expiring beginning in 2007 to reduce future federal income taxes to
the extent permitted under the Internal Revenue Code.
7. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases certain equipment under capital leases expiring at various
dates through 2000. The Company occupies office space and laboratory facilities
under an operating lease with an original term in excess of one year. The
Company has
F-31
<PAGE> 96
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
been granted free rent periods under the office and laboratory lease, which
contains a fixed annual rent escalation clause. The accompanying statements of
operations reflects rent expense of $127,956 and $131,596 computed on a
straight-line basis over the term of the lease for the years ended October 31,
1998 and 1997, respectively. Included in accounts payable and accrued expenses
at October 31, 1998 and 1997 were $24,659 and $34,208, respectively, of deferred
rent.
Future minimum lease payments at October 31, 1998 are as follows:
<TABLE>
<CAPTION>
--------------------
OPERATING CAPITAL
LEASE LEASE
--------- -------
<S> <C> <C>
1999........................................................ $147,065 $26,874
2000........................................................ 99,985 14,573
-------- -------
$247,050 41,447
========
Less amount representing interest........................... 4,850
-------
36,597
Less current portion........................................ 22,911
-------
Long-term portion........................................... $13,686
=======
</TABLE>
PROPERTY AND EQUIPMENT
During the fiscal year ended October 31, 1998, $656,542 of property and
equipment was purchased with Federal grant funds. Although title vests with the
Company, at the conclusion of the grant program the final disposition of the
property and equipment procured with these funds resides with the Federal
Government.
LITIGATION AND CLAIMS
The Company from time to time is subject to litigation relating to matters in
the ordinary course of business. The Company believes that any ultimate
liability resulting from these contingencies will not have a material adverse
effect on the Company's results of operations or financial position.
8. MANDATORILY REDEEMABLE PREFERRED STOCK
Under the terms of the Company's Certificate of Relative Rights and Preferences,
the holders of the Class B Mandatorily Redeemable Preferred Stock (Preferred
Stock) are entitled to redeem the Preferred Stock at any time on or after
January 1, 1997 for $1.00 per share plus all cumulative dividends unpaid to date
at an annual rate of $.05 per share. These dividends hold preference to the
holders of the Company's Common Stock and Class A Preferred Stock. For each of
the years ended October 31, 1998 and 1997, the Company recorded dividends of
$8,190. In the event of liquidation or dissolution of the Company, the holders
of the Preferred Stock are entitled to $1.00 per share plus all cumulative
dividends unpaid to date of liquidation.
9. STOCK OPTIONS
During fiscal 1998, the Company granted non-qualified common stock options to
certain of its employees at $.10 per share, the estimated fair value of the
underlying common stock at the date of grant. The options expire ten years from
the date of grant and vest either immediately or one-fourth on the first
anniversary of the employee's date of hire and pro rata on a monthly basis
thereafter.
F-32
<PAGE> 97
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
------------------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE CONTRACTUAL
NUMBER OF EXERCISE LIFE
OPTIONS PRICE IN YEARS
--------- -------- -----------
<S> <C> <C> <C>
Outstanding October 31, 1996................................ 100,000 $0.001 0.58
Granted................................................... -- -- --
Exercised................................................. -- -- --
Expired or cancelled...................................... -- -- --
-------
Outstanding October 31, 1997................................ 100,000 0.001 0.58
Granted................................................... 107,500 0.10 9.14
Exercised................................................. -- -- --
Expired or cancelled...................................... -- -- --
-------
Outstanding October 31, 1998................................ 207,500 $ 0.05 5.02
=======
Exercisable............................................... 186,070 $ 0.05
=======
</TABLE>
The Company elected the disclosure-only presentation of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.
123), in fiscal 1997 and, consequently, makes no charge against operations in
the financial statements with respect to the fair value of the options granted.
To measure stock-based compensation in accordance with SFAS No. 123, the fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model.
The following table sets forth the assumptions used and the pro forma net loss
resulting from applying SFAS No. 123:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $ (262,015)
Pro forma................................................. $ (265,517)
Risk-free interest rate..................................... 4.4% to 5.9%
Expected life in years...................................... 10
Dividend yield.............................................. 0%
Volatility.................................................. 0%
Weighted average remaining contractual life in years........ 9.1
Weighted average fair value at date of grant in dollars..... $ 0.04
</TABLE>
10. SUBSEQUENT EVENTS
On January 25, 1999, the Company signed an agreement with Biosource
Technologies, Inc. (Biosource) whereby Biosource would purchase at least 80% of
the common stock of the Company from certain shareholders. For each share of
Company common stock tendered to Biosource, the shareholder will receive
one-fourth of a share of Series G Preferred Stock of Biosource. As of February
5, 1999, eighty percent of the outstanding common stock of the Company had been
tendered to Biosource.
On January 28, 1999, the Company redeemed all of the outstanding shares of Class
B Preferred Stock for $261,286.
F-33
<PAGE> 98
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
UNAUDITED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999
<TABLE>
<CAPTION>
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Revenue..................................................... $ 275,000 $ 338,000
Costs and expense:
Development agreements.................................... 171,000 228,000
Research and development.................................. 9,000 28,000
General administration marketing.......................... 198,000 33,000
--------- ---------
Total costs and expenses............................... 378,000 289,000
--------- ---------
Income (loss) from operations............................... (103,000) 49,000
Other income (expense)...................................... (2,000) --
--------- ---------
Net income (loss)........................................... (105,000) 49,000
Accumulated deficit:
Balance, October 31....................................... (669,000) (940,000)
Preferred stock dividends................................. (2,000) (2,000)
--------- ---------
Balance, January 31....................................... $(776,000) $(893,000)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 99
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999
<TABLE>
<CAPTION>
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(105,000) $ 49,000
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation of property and equipment................. 14,000 43,000
Changes in assets and liabilities:
Accounts receivable.................................. 48,000 14,000
Accounts payable and accrued expenses................ (7,000) (257,000)
Deferred revenue..................................... 272,000 295,000
--------- ---------
Net cash provided by operating activities......... 222,000 144,000
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (136,000) (51,000)
--------- ---------
Net cash used in investing activities............. (136,000) (51,000)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of note payable.................... 26,000 --
Redemption of preferred stock............................. -- (261,000)
Principal payments on long-term debt...................... (5,000) (6,000)
--------- ---------
Net cash provided by (used in) financing
activities........................................ 21,000 (267,000)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 107,000 (174,000)
Cash and cash equivalents at beginning of period............ 29,000 195,000
--------- ---------
Cash and cash equivalents at end of period.................. $ 136,000 $ 21,000
========= =========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 100
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999
1. BASIS OF PRESENTATION
Large Scale Proteomics Corporation (formerly Large Scale Biology Corporation)
(the "Company") builds large-scale protein databases and the analytical
instrumentation and software necessary for their development. The Company's core
business is in two dimensional gel electrophoresis and analytical database
software technology utilized by pharmaceutical customers seeking contract
studies, software, instrumentation and consulting.
Basis of Accounting -- These financial statements have been prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles.
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported revenue and expenses during the period. Actual
results could differ from those estimates.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Company's financial
position, results of operations and cash flows for the interim periods
presented. All adjustments are normal recurring entries. Such financial
statements are not necessarily indicative of the results to be expected for the
full year.
2. LARGE SCALE BIOLOGY CORPORATION
In January 1999, the Company entered into an agreement ("Agreement") to be
acquired by Large Scale Biology Corporation (formerly Biosource Technologies,
Inc.) ("Parent Corporation"). In exchange for 2,287,634 shares of its Series G
convertible preferred stock, the Parent Corporation acquired 92.5% of the
Company's common stock.
In conjunction with the acquisition of the Company, certain employees waived
their rights to a portion of their deferred salaries. As a result, the Company
reversed $191,000 of previously recognized deferred salary costs during the
three months ended January 31, 1999.
Also in January 1999, the Company entered into a one year, $1,110,000 research
and development agreement with the Parent Corporation. The Company is entitled
to receive up to $1,110,000 for performance under the terms of the agreement.
Revenue will be recognized as services are provided over the term of the
agreement. The Company recognized no income for the three months ended January
31, 1999 and had $400,000 in deferred revenue at January 31, 1999 related to
this contract.
3. SUBSEQUENT EVENTS
Subsequent to February 1, 1999, the Parent Corporation provided cash advances to
the Company in exchange for a note accruing interest at 8.75% per year. The note
matures March 31, 2000. At December 31, 1999, the balance of the note was
$3,682,000 (including $126,000 of accrued interest).
On March 8, 2000, the Company exercised its option to acquire the 7.5% of the
Company's common stock not held by the Parent Corporation for $74,000. As a
result, the Company is now wholly owned by the Parent Corporation.
F-36
<PAGE> 101
[LOGO]
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us in connection with the sale of common stock
being registered. All amounts are estimates except the SEC registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $23,845
NASD Filing Fee............................................. 9,532
Nasdaq National Market Listing Fee.......................... *
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent Fees......................................... *
Miscellaneous............................................... *
-------
Total............................................. *
=======
</TABLE>
-------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to award
or a corporation's board of directors to grant indemnification to directors and
officers in terms sufficiently broad to permit the indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the "Securities Act"). Our
bylaws provide for mandatory indemnification of our directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. Our certificate of
incorporation provides that, subject to Delaware law, our directors will not be
personally liable for monetary damages for breach of the directors' fiduciary
duty as directors to Large Scale Biology Corporation and its stockholders. This
provision in the certificate of incorporation does not eliminate the directors'
fiduciary duty, and in appropriate circumstances equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the company or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct, or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
We have entered into indemnification agreements with our officers and directors,
a form of which will be filed with the Securities and Exchange Commission as an
exhibit to our registration statement on Form S-1 (No. 333-34198). The
indemnification agreements provide our officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section of the underwriting
agreement contained in exhibit 1.1 hereto, indemnifying our officers and
directors against certain liabilities, and section 1.11 of the Third Amended and
Restated Registration Rights Agreement contained in exhibit 4.2 hereto,
indemnifying the parties thereto, including controlling stockholders, against
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has issued unregistered securities
to a limited number of persons as described below:
In February 1999, in connection with the acquisition of our subsidiary, Large
Scale Proteomics Corporation, we issued 2,287,634 shares of our Series G
convertible preferred stock in exchange for 92.5% of the outstanding shares of
Large Scale Proteomics Corporation's capital stock.
II-1
<PAGE> 103
In September 1998, we issued to Dow a warrant to purchase up to 1,232,061 shares
of our common stock at an exercise price of $10.00 per share, subject to
increase over time to up to $15.21 per share. As of December 31, 1999, 1,232,061
shares of common stock are exercisable under the warrant at $13.23 a share. The
warrant exercise price increases to $15.21 on September 1, 2000. The warrant
expires upon the earlier of August 31, 2003 or two years after termination of
the Dow Agreement. If the warrant is exercised and we have not effected an
initial public offering of our common stock by December 31, 2008, we must
arrange a private sale of the related common stock or repurchase the related
common stock at its fair market value as determined by a nationally recognized
investment bank.
In March and April 1998, we issued and sold 1,000,000 of our convertible Series
F convertible preferred stock to Technology Directors II BST, LLC, Brown
University Third Century Fund, Marvyn Carton and twelve other investors for an
aggregate purchase price of $7,000,000.
In January 1988, we issued to Equitec Leasing Company a warrant to purchase
29,322 shares of our common stock at an exercise price of $2.39 per share. The
warrant was transferred on January 14, 2000 to two individuals, Arnold Zimmerman
and Sebastian J. Trusso in equal portions, covering 14,661 shares each.
In December 1997, we issued to Bruce A. Boyd a warrant to purchase 46,875 shares
of our Series E convertible preferred stock at an exercise price of $12.62 per
share.
In December 1997, we issued to Bay City Capital LLC a warrant to purchase
100,000 shares of our Series E convertible preferred stock at an exercise price
of $4.00 per share.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to share certificates and instruments issued in
these transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits listed in the exhibit Index are filed as part of this registration
statement.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated January 25,
1999, by and amongst registrant, the entity formerly known
as Biosource Technologies, Inc., Large Scale Biology
Corporation, N. Leigh Anderson, Constance L. Seniff and
Robert J. Walden and fourteen Large Scale Biology
shareholders.
3.1* Amended and Restated Certificate of Incorporation, to be
effective upon consummation of this offering.
3.2* Amended and Restated Bylaws, to be effective upon
consummation of this offering.
4.1* Form of registrant's Specimen Common Stock Certificate.
4.2 Information and Registration Rights Agreement dated October
11, 1990 by and among the registrant and the parties who are
signatories thereto.
4.3 Amendment to the Information and Registration Rights
Agreement dated October 11, 1990 by and among the registrant
and the parties who are signatories thereto.
4.4 Second Amendment to the Information and Registration Rights
Agreement dated October 10, 1991 by and among the registrant
and the parties who are signatories thereto.
4.5 Third Amendment to the Information and Registration Rights
Agreement dated March 20, 1998 by and among the registrant
and the parties who are signatories thereto.
</TABLE>
II-2
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
4.6 Fourth Amendment to the Information and Registration Rights
Agreement dated September 1, 1998 by and among the
registrant and the parties who are signatories thereto.
4.8 Warrant to purchase Series E Convertible Preferred Stock
dated May 31, 1997, by and between the registrant and Bruce
A. Boyd.
4.9 Warrant to purchase Series E Convertible Preferred Stock
dated February 21, 1997, by and between the registrant and
Bay City Capital LLC.
4.10 Warrant to purchase 1,232,061 shares of common stock dated
September 1, 1998, by and between the registrant and the Dow
Chemical Company.
4.11* Warrant to purchase 29,322 shares of common stock dated
January 29, 1988, by and between the registrant and the
Equitec Leasing Company assigned in equal shares on January
14, 2000 to Arnold Zimmerman and Sebastian J. Trusso.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being
registered.
10.1* Registrant's Amended and Restated 2000 Stock Plan.
10.2* Registrant's 2000 Stock Incentive Plan.
10.3* Registrant's 2000 Employee Stock Purchase Plan.
10.4 Form of registrant's Directors' and Officers'
Indemnification Agreement.
10.5+ Dow Collaboration and License Agreement dated August 24,
1998, by and among the registrant and Dow Chemical Company
and its subsidiary Dow Agrosciences LLC.
10.6 Grant from National Cancer Institute to Large Scale Biology
dated January 5, 2000.
10.7 Employment agreement between the registrant and Dr. N. Leigh
Anderson.
10.8 Employment agreement between the registrant and Dr. Norman
Anderson.
16.1 Letter from PricewaterhouseCoopers, LLP regarding change in
accountants.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
23.4* Consent of Howrey Simon Arnold & White LLP
24.1** Power of Attorney.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
-------------------------
* To be filed by amendment
** Previously filed
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(b) Financial Statement Schedule
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing specified in
the underwriting agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
Delaware General Corporation Law, our certificate of incorporation or our
bylaws, indemnification agreements entered into between the company and our
officers and directors, the underwriting agreement, or otherwise, we have been
advised that in the opinion of the commission such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
II-3
<PAGE> 105
than the payment by us of expenses incurred or paid by any of our directors,
officers or controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective;
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vacaville, State of California, on this 29th day of
June, 2000.
By: /s/ ROBERT L. ERWIN*
---------------------------------------
Robert L. Erwin
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the persons whose signatures appear
below, which persons have signed such registration statement in the capacities
and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ROBERT L. ERWIN* Chairman of the Board and Chief Executive June 29, 2000
----------------------------------------------------- Officer
Robert L. Erwin (Principal Executive Officer)
/s/ DAVID R. MCGEE Senior Vice President, Chief Operating June 29, 2000
----------------------------------------------------- Officer and Assistant Secretary
David R. McGee, Ph.D.
/s/ LAURENCE K. GRILL Senior Vice President, Research June 29, 2000
-----------------------------------------------------
Laurence K. Grill, Ph.D.
/s/ R. BARRY HOLTZ* Senior Vice President, Bioprocess Development June 29, 2000
-----------------------------------------------------
R. Barry Holtz, Ph.D.
/s/ JOHN S. RAKITAN* Senior Vice President, General Counsel and June 29, 2000
----------------------------------------------------- Secretary (Principal Financial Officer)
John S. Rakitan
/s/ MICHAEL D. CENTRON Treasurer and Controller June 29, 2000
----------------------------------------------------- (Principal Accounting Officer)
Michael D. Centron
/s/ N. LEIGH ANDERSON* Director June 29, 2000
-----------------------------------------------------
N. Leigh Anderson, Ph.D.
/s/ MARVYN CARTON* Director June 29, 2000
-----------------------------------------------------
Marvyn Carton
/s/ BERNARD I. GROSSER* Director June 29, 2000
-----------------------------------------------------
Bernard I. Grosser, M.D.
/s/ CHARLES A. HAYES* Director June 29, 2000
-----------------------------------------------------
Charles A. Hayes
/s/ SOL LEVINE* Director June 29, 2000
-----------------------------------------------------
Sol Levine
/s/ JOHN W. MAKI* Director June 29, 2000
-----------------------------------------------------
John W. Maki
</TABLE>
II-5
<PAGE> 107
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN J. O'MALLEY* Director June 29, 2000
-----------------------------------------------------
John J. O'Malley
/s/ JAMES P. TENBROEK* Director June 29, 2000
-----------------------------------------------------
James P. TenBroek
/s/ ROBERT WALDEN* Director June 29, 2000
-----------------------------------------------------
Robert Walden
/s/ JACOBO ZAIDENWEBER* Director June 29, 2000
-----------------------------------------------------
Jacobo Zaidenweber, M.D.
*By: /s/ DAVID R. MCGEE Attorney-In-Fact June 29, 2000
-------------------------------------------------
David R. McGee
</TABLE>
II-6
<PAGE> 108
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated January 25,
1999, by and amongst registrant, the entity formerly known
as Biosource Technologies, Inc., Large Scale Biology
Corporation, N. Leigh Anderson, Constance L. Seniff and
Robert J. Walden and fourteen Large Scale Biology
shareholders.
3.1* Amended and Restated Certificate of Incorporation, to be
effective upon consummation of this offering.
3.2* Amended and Restated Bylaws, to be effective upon
consummation of this offering.
4.1* Form of registrant's Specimen Common Stock Certificate.
4.2 Information and Registration Rights Agreement dated October
11, 1990 by and among the registrant and the parties who are
signatories thereto.
4.3 Amendment to the Information and Registration Rights
Agreement dated October 11, 1990 by and among the registrant
and the parties who are signatories thereto.
4.4 Second Amendment to the Information and Registration Rights
Agreement dated October 10, 1991 by and among the registrant
and the parties who are signatories thereto.
4.5 Third Amendment to the Information and Registration Rights
Agreement dated March 20, 1998 by and among the registrant
and the parties who are signatories thereto.
4.6 Fourth Amendment to the Information and Registration Rights
Agreement dated September 1, 1998 by and among the
registrant and the parties who are signatories thereto.
4.8 Warrant to purchase Series E Convertible Preferred Stock
dated May 31, 1997, by and between the registrant and Bruce
A. Boyd.
4.9 Warrant to purchase Series E Convertible Preferred Stock
dated February 21, 1997, by and between the registrant and
Bay City Capital LLC.
4.10 Warrant to purchase 1,232,061 shares of common stock dated
September 1, 1998, by and between the registrant and the Dow
Chemical Company.
4.11* Warrant to purchase 29,322 shares of common stock dated
January 29, 1988, by and between the registrant and the
Equitec Leasing Company assigned in equal shares on January
14, 2000 to Arnold Zimmerman and Sebastian J. Trusso.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being
registered.
10.1* Registrant's Amended and Restated 2000 Stock Plan.
10.2* Registrant's 2000 Stock Incentive Plan.
10.3* Registrant's 2000 Employee Stock Purchase Plan.
10.4 Form of registrant's Directors' and Officers'
Indemnification Agreement.
10.5+ Dow Collaboration and License Agreement dated August 24,
1998, by and among the registrant and Dow Chemical Company
and its subsidiary Dow Agrosciences LLC.
10.6 Grant from National Cancer Institute to Large Scale Biology
dated January 5, 2000.
10.7 Employment agreement between the registrant and Dr. N. Leigh
Anderson.
10.8 Employment agreement between the registrant and Dr. Norman
Anderson.
16.1 Letter from PricewaterhouseCoopers LLP regarding change in
accountants.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
23.4* Consent of Howrey Simon Arnold & White LLP.
</TABLE>
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
24.1** Power of Attorney.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
-------------------------
* To be filed by amendment
** Previously filed
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
