<PAGE> 1
THIS FILING IS MADE PURSUANT TO RULE 424(b)(4) UNDER THE SECURITIES ACT OF 1933
IN CONJUNCTION WITH REGISTRATION NO. 333-36830 AND REGISTRATION NO. 333-42298
FILED ON JULY 26, 2000.
4,650,000 SHARES
[APPLIED MOLECULAR EVOLUTION LOGO]
COMMON STOCK
$19.00 PER SHARE
--------------------------------------------------------------------------------
This is an initial public offering of common stock of Applied Molecular
Evolution, Inc.
Prior to this offering, there has been no public market for our common stock.
The market price of the shares after the offering may be higher or lower than
the offering price.
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "AMEV."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Price to the public.................................. $19.00 $88,350,000
Underwriting discount................................ 1.33 6,184,500
Proceeds to Applied Molecular Evolution.............. 17.67 82,165,500
</TABLE>
We have granted an over-allotment option to the underwriters. Under this option,
the underwriters may elect to purchase a maximum of 697,500 additional shares
from us within 30 days following the date of this prospectus to cover
over-allotments.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
PAINEWEBBER INCORPORATED
SG COWEN
The date of this Prospectus is July 27, 2000.
<PAGE> 2
[INSIDE FRONT COVER OF PROSPECTUS]
[ARTWORK]
[Graphic depicting the directed evolution technology of AME. The graphic depicts
the basic steps in our AMEsystem directed evolution process. The left side of
the graphic shows the original gene being modified by application of our
DirectAME technology to generate a collection of genes. The middle of the
graphic depicts the next step in the process in which our ExpressAME technology
is used to produce a collection of proteins from the genes produced in the first
step. The final step is displayed on the right side of the page and shows the
improved protein being identified by applying our SelectAME screening
technology.]
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 2
Risk Factors................................................ 6
Forward-Looking Statements.................................. 10
Use of Proceeds............................................. 11
Dividend Policy............................................. 11
Capitalization.............................................. 12
Dilution.................................................... 13
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition 17
and Results of Operations.................................
Business.................................................... 22
Management.................................................. 36
Principal Stockholders...................................... 43
Certain Transactions........................................ 45
Description of Capital Stock................................ 46
Shares Eligible for Future Sale............................. 49
Underwriting................................................ 51
Legal Matters............................................... 53
Experts..................................................... 53
Where You Can Find More Information......................... 54
Index to Financial Statements............................... F-1
</TABLE>
1
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in the shares. You should read the entire
prospectus carefully.
OVERVIEW
We work in the emerging field of directed evolution, a process for optimizing
genes and proteins for specific commercial purposes. Since our inception, our
principal focus has been on applying our technology to human biotherapeutics,
the largest and most profitable target market for directed evolution.
Biotherapeutics, or biopharmaceuticals, are protein pharmaceuticals such as
antibodies, hormones and enzymes. We use our directed evolution technology to
develop improved versions of currently marketed, FDA-approved drugs as well as
novel human therapeutics.
DIRECTED EVOLUTION
The goal of directed evolution is to optimize proteins for commercial purposes.
By "optimize" we mean to systematically and substantially enhance a protein's
function. Protein optimization involves improving the functional characteristics
of a particular protein by changing its amino acid sequence. The sequence of
amino acids in a protein determines the protein's structure and function, and
the sequence of amino acids is specified in a gene. Therefore, a protein can be
optimized by altering the gene that produces it.
We perform all three of the fundamental steps in the process of directed
evolution. The first step involves modifying the original gene, which produces
the protein of interest, to create a diverse collection, or library, of genes.
The second step involves producing proteins from all the different genes
produced in step one. The third step entails evaluating, or screening, the
collection of proteins generated in step two to identify improved versions of
the original protein. This process can be repeated until a protein with the
desired characteristics is produced.
OUR APPROACH
Our AMEsystem(TM) directed evolution technology has been developed specifically
for application to human therapeutic proteins. We start by replacing one amino
acid at a time in a selected region of the target protein. We replace each amino
acid in the region of interest with each of the 19 other possible amino acids,
and evaluate the resulting proteins for improved characteristics. We then repeat
this process, combining positive changes until an optimized protein is produced.
Our proprietary approach differs from those of our competitors because we
precisely control the locations where we introduce change as well as the amount
of change we introduce. We also test the complete set of possible changes for
each amino acid of interest, thereby minimizing the risk of entirely missing a
possible improvement. Because it is precise and systematic, our approach is
efficient and cost-effective, and generally avoids the need to produce and test
millions of different proteins. We have also developed proprietary methods for
applying our technology to proteins that cannot be produced in bacteria, which
include many important classes of human therapeutic proteins.
We believe that we have a strong intellectual property position in directed
evolution based on our portfolio of fundamental patents, consisting of 16 issued
U.S. patents including the exclusive license to the Kauffman patents, which we
believe cover many directed evolution technologies.
We believe that we have validated our AMEsystem technology by optimizing product
candidates for corporate collaborators, including leading companies such as
MedImmune and Bristol-Myers Squibb. We have applied our directed evolution
technology to achieve the following successes:
- For MedImmune: we created several new monoclonal antibodies to potentially
treat a serious lung infection caused by the Respiratory Syncytial Virus, or
RSV. Monoclonal antibodies are proteins that selectively neutralize
disease-causing targets. By applying our AMEsystem technology, we created
new monoclonal antibodies that have been shown in animal models to be at
least
2
<PAGE> 5
10 times more potent than Synagis, MedImmune's current antibody for treating
RSV infection. MedImmune plans to develop one of these candidates through
clinical trials, and if successful, plans to market it as Numax, a potential
next generation product candidate for treating RSV.
We also increased by 90-fold in laboratory tests the affinity of Vitaxin, a
monoclonal antibody that attacks tumors by cutting off their blood supply, a
process known as anti-angiogenesis, and increased its manufacturing yield by
300%. This second generation Vitaxin is scheduled to enter at least one
clinical trial with MedImmune later this year.
- For Bristol-Myers Squibb: we believe that we significantly reduced the risk
that their anti-CD40 antibody, a monoclonal antibody to treat potential
complications caused by organ transplant rejection, would cause serious side
effects in patients, and we increased the affinity of this antibody for its
target by 500-fold, in laboratory tests. Bristol-Myers Squibb is expected to
enter Phase I clinical trials with anti-CD40 in 2001.
We also increased by over 30-fold in laboratory tests the affinity for its
target of BR96, a monoclonal antibody that targets solid tumors, and
expanded the range of tumors that it recognizes. Bristol-Myers Squibb has
licensed the improved version, hBR96, to Seattle Genetics for further
development. Seattle Genetics is now in preclinical development with the
improved version, hBR96.
OUR STRATEGY
Our goal is to be the leader in applying directed evolution to the development
and commercialization of novel human biotherapeutics. We have selected
biotherapeutics as our primary target market because it is the largest and
highest margin market for directed evolution. Protein pharmaceutical products
represent some of the world's highest revenue pharmaceutical products, with
worldwide sales projected to approach $20.0 billion by 2004.
Our business strategy includes five basic elements:
- We are seeking to optimize currently marketed, FDA-approved
biopharmaceuticals to create improved versions of these drugs with broader
patent protection.
- We plan to access and develop novel human biotherapeutics derived from a
wide variety of sources, including targets from our corporate collaborators
and from academic institutions. We also expect the sequencing of the human
genome to result in many new potential gene targets.
- We plan to continue to leverage strategic collaborations to expand our
product pipeline. We believe that we can add the greatest value to a project
by applying our AMEsystem technology early in the development process while
relying on our collaborators to further develop and commercialize product
candidates.
- We plan to internally develop a select number of promising projects which
address large market opportunities.
- We plan to further develop our AMEsystem technology by continuing to invest
significantly in research and development while simultaneously protecting
and expanding our strong intellectual property portfolio.
OUR DEVELOPMENT PROJECTS
- Corporate Collaborations. We are currently optimizing antibodies for
MedImmune and Cell Matrix. Our collaboration with MedImmune covers four
antibodies, one of which is expected to be developed and marketed as Numax
and another of which is our improved, second generation version of Vitaxin.
Our collaboration with Cell Matrix also covers four antibodies. We have
optimized antibodies for Bristol-Myers Squibb, including a product candidate
they recently licensed to Seattle Genetics. These relationships include
research and development reimbursement (all of which has been paid in the
case of Bristol-Myers Squibb), milestone payments and potential royalties on
product sales.
- Internal projects. We currently have several internal development projects.
The majority of these relate to improving currently marketed, FDA-approved
drugs.
3
<PAGE> 6
THE OFFERING
Common stock offered...................... 4,650,000 shares
Common stock to be outstanding after the
offering.................................. 22,102,002 shares
Use of proceeds........................... For expansion and enhancement of
our AMEsystem technology, internal
development projects, additional
research and development, and
general corporate purposes.
Proposed Nasdaq National Market symbol.... AMEV
The number of shares of common stock to be outstanding after the offering in the
table above is based on the number of shares outstanding as of June 16, 2000.
The number excludes:
- 1,797,140 shares of common stock issuable upon exercise of options
outstanding as of June 16, 2000, at a weighted average exercise price of
$0.51 per share
- 66,667 shares of common stock issuable upon the exercise of warrants to
purchase our preferred stock at a weighted average exercise price of
$5.62 per share
Unless otherwise stated, all information contained in this prospectus assumes:
- no exercise of the over-allotment option granted to the underwriters
- conversion, on a one-for-one basis, of all outstanding shares of our
preferred stock into an aggregate of 13,884,568 shares of common stock
OTHER CORPORATE INFORMATION
We were incorporated in Delaware in August 1989 under the name Ixsys, Inc. In
February 2000, we changed our name to Applied Molecular Evolution, Inc. Our
executive offices are located at 3520 Dunhill Street, San Diego, California,
92121, and our telephone number is (858) 597-4990. Our website is located at
AMEvolution.com. We do not consider information contained in our website to be a
part of this prospectus.
Applied Molecular Evolution, AME, AMEsystem, DirectAME, ExpressAME, SelectAME,
AMEvolution, Phase IV Pharmaceuticals and The Power of Protein Engineering are
our trademarks. All other product names, trade names and trademarks included in
this prospectus are the property of their respective owners.
4
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------------
1997 1998 1999 1999 2000
------- ------- ---------- ------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $ 3,329 $ 2,590 $ 2,592 $ 147 $ 831
Operating expenses:
Research and development............. 2,992 2,583 4,421 928 671
General and administrative........... 2,637 1,975 1,370 227 419
Amortization of deferred
compensation...................... -- -- 435 37 1,180
------- ------- ------- ------- -------
Total operating expenses............... 5,629 4,558 6,226 1,192 2,270
------- ------- ------- ------- -------
Loss from operations................... (2,300) (1,968) (3,634) (1,045) (1,439)
Minority interest...................... -- -- 45 -- 43
Interest income, net................... 79 101 213 31 38
------- ------- ------- ------- -------
Net loss............................... $(2,221) $(1,867) $(3,376) $(1,014) $(1,358)
======= ======= ======= ======= =======
Historical net loss per share.......... $ (1.43) $ (1.13) $ (1.39) $ (0.42) $ (0.53)
======= ======= ======= ======= =======
Pro forma net loss per share........... $ (0.24) $ (0.10)
======= =======
Pro forma weighted average shares
outstanding.......................... 14,070 14,217
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments... $2,325 $12,394 $93,359
Working capital..................................... 2,900 12,969 93,934
Total assets........................................ 5,502 15,571 96,536
Stockholders' equity................................ 3,667 13,736 94,701
</TABLE>
The pro forma balance sheet data above reflect:
- the sale of our Series F preferred stock in May and June 2000, for net
proceeds of $10.0 million, and the conversion of our preferred stock into
common stock
- the exercise of options to purchase 976,603 shares of our common stock
between April 1, 2000 and June 16, 2000, for cash of $39,341 and notes
receivable of $724,100
The pro forma as adjusted balance sheet data above give effect to the pro forma
adjustments above and our sale of 4,650,000 shares in the offering at an initial
public offering price of $19.00 per share, less underwriter discounts and
assumed offering expenses.
5
<PAGE> 8
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares.
WE HAVE NOT ACHIEVED PROFITABILITY AND MAY NEVER BECOME PROFITABLE.
We are at an early stage of development. We incurred a net loss of $3.4 million
for the year ended December 31, 1999, and our revenue for 1999 was only $2.6
million. Additionally, we have had net losses each year since inception and as
of March 31, 2000, had an accumulated deficit of $28.7 million. We expect to
report a net loss for fiscal year 2000, and we expect to report increasing net
losses for the foreseeable future. We may never achieve profitability. The size
of our net losses will depend, in part, on the rate of growth, if any, in our
contract revenue and on the level of our expenses. To date, we have derived most
of our revenue from collaborations and expect to continue to do so in the
foreseeable future. Revenue from collaborations are uncertain because our
ability to secure future agreements will depend upon our ability to address the
needs of our potential collaborators. We expect to spend significant amounts to
fund research and development and enhance our core technology. We expect that
our operating expenses will increase significantly in the near term and,
consequently, we will need to generate significant additional revenue to achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
We may need to raise more money to continue our operations. We may seek
additional funds from public and private stock offerings, corporate
collaborations, borrowings under lease lines of credit or other sources. If we
cannot raise more money, we may have to reduce our capital expenditures, scale
back our development of new products, reduce our workforce or license to others
products that we otherwise would seek to commercialize ourselves. We expect that
our current resources, together with the proceeds from this offering and future
operating revenue, will be sufficient to fund operations for only the next two
years. The amount of money we will need will depend on many factors, including:
- the success of our research and development efforts
- our ability to establish collaborative agreements
- our costs of prosecuting and maintaining patents
- market and competing technological developments
Additional capital may not be available on terms acceptable to us, or at all.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.
THE COMMERCIAL UTILITY OF OUR AMESYSTEM TECHNOLOGY IS UNPROVEN AND MAY NEVER BE
REALIZED.
While we have met with initial success in applying our AMEsystem technology, to
prove the commercial value of our technology, we or our collaborators will need
to commercialize biotherapeutics that we have optimized. Successful
commercialization of biotherapeutics requires: preclinical testing, clinical
trials, regulatory approval, and commercial manufacturing. It will take us or
our collaborators many years to complete these steps for any biotherapeutic. If
we or our collaborators do not undertake and successfully complete these
activities, then our AMEsystem technology will be of little commercial value,
and our ability to generate revenue will be limited. Currently, there are no
products in clinical trials that have been developed using our technology.
WE HAVE OPTIMIZED ONLY ONE TYPE OF PROTEIN AND MAY NOT BE ABLE TO OPTIMIZE
OTHERS, THEREBY LIMITING OUR MARKET POTENTIAL.
To date we have optimized only antibodies for corporate collaborators. If we are
unable to apply our AMEsystem technology to other types of
6
<PAGE> 9
proteins, the scope of our potential business will be significantly limited.
IF OUR COLLABORATORS ARE NOT SUCCESSFUL OR IF WE ARE UNABLE TO FIND
COLLABORATORS IN THE FUTURE, WE MAY NOT BE ABLE TO COMMERCIALIZE PRODUCT
CANDIDATES.
Our strategy for developing and commercializing product candidates calls for us
to enter into contractual arrangements with collaborators. We may be
unsuccessful in attracting collaborators to develop and commercialize our
products. Some collaborators may not perform their obligations as we expect, or
we may not derive any revenue from these arrangements. We do not know whether
these collaborators will successfully develop and market any products under
their respective agreements. Moreover, some of our collaborators are also
researching competing technologies and products targeted by our collaborative
programs. Our success depends in part upon the performance by these
collaborators of their responsibilities under these arrangements. We have no
control over the resources that any collaborator may devote to the development
and commercialization of products under these collaborations. Our collaborators
may terminate their agreements with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner. Our collaborators
may elect not to develop products arising out of our collaborative arrangements
or not to devote sufficient resources to develop, manufacture, market or sell
these products.
IF PRODUCT CANDIDATES WE OPTIMIZE DO NOT RECEIVE REGULATORY APPROVAL, NEITHER WE
NOR OUR COLLABORATORS WILL BE ABLE TO COMMERCIALIZE THESE PRODUCTS.
The U.S. Food and Drug Administration must approve any therapeutic product
before it can be marketed in the United States. The regulatory process is
expensive and time-consuming. Before we or a collaborator can file a new drug
application with the FDA, the product candidate must undergo extensive testing,
including animal studies and human clinical trials that can take many years and
may require substantial expenditures. Data obtained from such testing may be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Changes in regulatory policy for product approval may cause
delays or rejections. Because our product candidates will be developed in a
novel way, government regulatory authorities may subject these product
candidates to greater scrutiny than those developed using more conventional
methods. Our collaborators are in early stages of the FDA regulatory process for
drugs we have optimized.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY, OUR
COMPETITIVE POSITION COULD BE HURT.
The patent positions of biopharmaceutical and biotechnology companies, including
our patent position, are generally uncertain and involve complex legal and
factual questions. We may be able to protect our proprietary rights from
infringement by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. Furthermore, others may independently develop
similar or alternative technologies or design around our patented technologies.
Litigation or other proceedings to defend or enforce our intellectual property
rights could require us to spend significant time and money and could disrupt
and harm our business.
We also rely upon trade secrets, technical know-how and continuing inventions to
develop and maintain our competitive position. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose our technology, and we may not be
able to meaningfully protect our trade secrets, or be capable of protecting our
rights to our trade secrets.
IF WE INFRINGE THIRD-PARTY PATENTS OR BREACH OUR LICENSE AGREEMENTS, LITIGATION
MAY DEPLETE OUR RESOURCES AND UNDERMINE OUR ABILITY TO USE OUR AMESYSTEM
TECHNOLOGY.
Our commercial success also depends in part on neither infringing valid,
enforceable patents or proprietary rights of third parties, nor breaching any
licenses that may relate to our technology and products. We are aware of
third-party patents that may relate to our technology. It is possible that we
may unintentionally infringe these patents or other patents or proprietary
rights of third parties. Any legal action taken against us or our collaborative
partners claiming damages and
7
<PAGE> 10
seeking to enjoin commercial activities relating to our products and processes
affected by third-party rights may require us or our collaborators to obtain
licenses in order to continue to manufacture or market the affected products and
processes. In addition, these actions may subject us to potential liability for
damages. We or our collaborators may not prevail in an action, and any license
required under a patent may not be made available on commercially acceptable
terms, or at all. Litigation could result in substantial costs and the diversion
of management's efforts, regardless of the result of the litigation.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OUR TECHNOLOGY.
We are highly dependent on the principal members of our management and
scientific staff, particularly our President and Chief Executive Officer,
William D. Huse, M.D., Ph.D. If we lose their services we may not achieve our
objectives. In addition, recruiting and retaining qualified scientific personnel
to perform future research and development work will be critical to our success.
We do not have sufficient personnel to fully execute our business plan, and
there is currently a shortage of skilled executives and scientists, which is
likely to continue. As a result, competition for experienced executives and
scientists from numerous companies and academic and other research institutions
may limit our ability to hire or retain personnel on acceptable terms. If we
fail to attract and retain sufficient personnel, we may not be able to develop
or implement our technology.
PUBLIC PERCEPTION OF ETHICAL AND SOCIAL ISSUES MAY LIMIT THE USE OF OUR
TECHNOLOGY, WHICH COULD REDUCE OUR REVENUE.
Our success will depend upon our ability to develop products through the
application of our directed evolution technology. Governmental authorities
could, for social or other purposes, limit the use of genetic modification or
prohibit the practice of our technology. Ethical and other concerns about the
use of products derived from modified genes could adversely affect their market
acceptance. If our technology or the products we develop cannot be marketed as a
result, we would lose our core business.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME-CONSUMING AND COSTLY.
We use hazardous materials, including chemicals, and radioactive and biological
materials. These materials include o-phenylenediamine dihydrochloride, ethidium
bromide, and acrylamide. Our operations also produce hazardous waste products.
We cannot eliminate the risk of accidental contamination or discharge and any
resultant injury from these materials. We could be subject to civil damages in
the event of an improper or unauthorized release of, or exposure of individuals
to, hazardous materials. In addition, claimants may sue us for injury or
contamination that results from the use of these materials. Federal, state and
local laws and regulations govern the use, manufacture, storage, handling and
disposal of these materials. Compliance with environmental laws and regulations
may be expensive, and current or future environmental regulations may impair our
research, development, or production efforts.
IF PEOPLE ARE HARMED BY DRUGS DEVELOPED USING OUR AMESYSTEM TECHNOLOGY, WE MAY
BE SUED FOR PRODUCT LIABILITY.
We may be sued for product liability and other claims if our technology or
products developed from our technology are alleged to have caused harm. We may
not be able to avoid significant liability exposure. We maintain product
liability insurance, but we may not have sufficient coverage. If we are sued for
any injury caused by our products and found liable, our financial condition,
reputation and ability to find collaborators may be harmed.
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE
OUR STOCK PRICE TO FALL.
Future sales of common stock by our stockholders under Rule 144 of the
Securities Act of 1933, or the Securities Act, or through the exercise of
outstanding registration rights or otherwise could have an adverse effect on the
price of our common stock. The 4,650,000 shares offered in this prospectus will
be eligible for sale in the public market following this offering. Additionally,
8
<PAGE> 11
3,382,382 shares of common stock will be eligible for sale in the public market
180 days after the date of this prospectus, upon expiration of lockup agreements
with the underwriters, in reliance on Rule 144(k) or Rule 701 under the
Securities Act, without any volume restrictions. At such time, 9,505,916
additional shares will become eligible for sale, subject to the volume
limitations of Rule 144. In addition, beginning 180 days after the date of this
prospectus, upon expiration of lockup agreements, holders of outstanding vested
options to purchase 1,017,162 shares will become eligible for sale upon exercise
of those options under Rule 701.
We intend to register a total of 5,450,000 shares of common stock reserved for
issuance under our stock option plans as soon as practicable following the date
of this prospectus. Some of our existing stockholders have rights to require us
to register their shares for future sale.
INVESTORS WILL INCUR IMMEDIATE DILUTION BECAUSE THE INITIAL PUBLIC OFFERING
PRICE OF A SHARE OF OUR COMMON STOCK WILL EXCEED ITS BOOK VALUE.
The initial public offering price of our common stock is substantially higher
than the book value per share of our outstanding common stock immediately after
this offering. Purchasers of shares of our common stock in this offering will
therefore incur immediate and substantial dilution in net tangible book value
per share.
OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL OWN SLIGHTLY LESS THAN A
MAJORITY OF OUR SHARES AFTER THIS OFFERING, AND MAY VOTE IN WAYS WITH WHICH YOU
DISAGREE BECAUSE THEY HAVE INTERESTS BOTH AS MANAGERS AND STOCKHOLDERS.
Our officers and directors and their affiliates will, in the aggregate, own
beneficially approximately 40.6% of our outstanding shares of common stock after
this offering. As a result, these stockholders, acting together, would be able
to effectively control most matters requiring approval by our stockholders,
including the election of a majority of the directors. If your interests as a
stockholder are different from their interests as both managers and
stockholders, you may not agree with their decisions.
9
<PAGE> 12
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements include,
among others, the following statements about our plans, objectives, expectations
and intentions and other statements contained in this prospectus that are not
historical facts. You can find these statements under "Prospectus Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
prospectus.
We typically identify forward-looking statements by using terms such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" and similar words, although we
express some forward-looking statements differently. You should be aware that
actual events could differ materially from those suggested in the
forward-looking statements due to a number of factors, including:
- failure to enter into additional collaborative agreements
- failure to successfully commercialize products developed with our technology
- competition and technological change
- uncertainty regarding our patents and patent rights (including the risk that
we may be forced to engage in costly litigation to protect patent rights and
the material harm to us if there were an unfavorable outcome of any such
litigation)
- government regulation
- changes in industry practice
- general economic conditions
- one-time events
You should also consider carefully the statements under "Risk Factors" and other
sections of this prospectus, which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements.
10
<PAGE> 13
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,650,000 shares of
common stock we are offering will be approximately $80,965,500. "Net Proceeds"
are what we expect to receive after paying the underwriters' discounts and other
expenses of this offering, based upon the initial public offering price of
$19.00 per share.
We currently plan to use the net proceeds of this offering for:
- expansion and enhancement of our AMEsystem technology -- $9,750,000
- internal development projects, including developing improved versions of
currently marketed, FDA-approved biopharmaceuticals -- $26,000,000
- additional research and development -- $3,250,000
The balance of the proceeds, $41,965,500, will be used for general corporate
purposes.
The timing and amount of our actual expenditures are subject to:
- the success of our research and development efforts
- our ability to establish collaborative agreements
- our costs of prosecuting and maintaining patents
- market and competing technological developments
We have broad discretion in determining how the proceeds of this offering will
be applied. Until we use the net proceeds of this offering, we intend to invest
the funds in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid dividends on our capital stock. We anticipate that we will
retain any earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay any dividends in
the foreseeable future.
11
<PAGE> 14
CAPITALIZATION
The following table shows as of March 31, 2000:
- our actual capitalization
- our pro forma capitalization reflecting:
- the sale of our Series F preferred stock in a private placement in May
and June 2000, for net proceeds of $10.0 million, and the conversion of
these shares into 2,244,444 shares of our common stock
- the conversion of 11,640,124 shares of our preferred stock outstanding as
of March 31, 2000, into 11,640,124 shares of our common stock
- the exercise of options to purchase 976,603 shares of our common stock
between April 1, 2000, and June 16, 2000, for cash of $39,341 and notes
receivable of $724,100
- deferred compensation expense of $14.9 million related to options granted
to employees between April 1, 2000, and June 16, 2000
- our pro forma as adjusted capitalization assuming the pro forma adjustments
described above and the completion of the offering at an initial public
offering price of $19.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current portion........... $ 17 $ 17 $ 17
-------- -------- --------
Stockholders' equity:
Preferred stock, $.001 par value: 11,810,666 shares
authorized, 11,640,124 shares issued and
outstanding, actual; 14,055,110 shares
authorized, no shares issued and outstanding, pro
forma; 5,000,000 shares authorized, no shares
issued and outstanding, pro forma as adjusted.... 12 -- --
Common stock, $.001 par value: 22,450,000 shares
authorized, 2,590,831 shares issued and
outstanding, actual; 27,296,832 shares
authorized, 17,452,002 shares issued and
outstanding, pro forma; 45,000,000 shares
authorized, 22,102,002 shares issued and
outstanding, pro forma as adjusted............... 3 17 22
Additional paid-in capital.......................... 37,326 62,969 143,929
Notes receivable from stockholders.................. -- (724) (724)
Accumulated other comprehensive loss................ (6) (6) (6)
Deferred compensation............................... (4,951) (19,803) (19,803)
Accumulated deficit................................. (28,717) (28,717) (28,717)
-------- -------- --------
Total stockholders' equity..................... 3,667 13,736 94,701
-------- -------- --------
Total capitalization........................ $ 3,684 $ 13,753 $ 94,718
======== ======== ========
</TABLE>
The number of shares of common stock outstanding in the table above is based on
the number of shares outstanding as of March 31, 2000, and excludes:
- 1,797,140 shares of common stock issuable upon exercise of options
outstanding as of June 16, 2000, at a weighted average exercise price of
$0.51 per share
- 66,667 shares of common stock issuable upon exercise of warrants to purchase
our preferred stock outstanding at a weighted average exercise price of
$5.62 per share
12
<PAGE> 15
DILUTION
Our historical net tangible book value as of March 31, 2000 was approximately
$2.3 million, or $0.88 per share. Historical net tangible book value per share
is equal to the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding as of March 31,
2000.
Our pro forma net tangible book value on March 31, 2000 was approximately $12.4
million, or approximately $0.71 per share. Pro forma net tangible book value per
share represents the amount of our stockholders' equity, less intangible assets,
divided by 17,452,002 shares of common stock outstanding assuming:
- the sale of our Series F preferred stock in a private placement in May
and June 2000, for net proceeds of $10.0 million, and the conversion of
these shares into 2,244,444 shares of our common stock
- the conversion of 11,640,124 shares of our preferred stock outstanding as
of March 31, 2000, into 11,640,124 shares of our common stock
- the exercise of options to purchase 976,603 shares of our common stock
between April 1, 2000 and June 16, 2000, for cash of $39,341 and notes
receivable of $724,100
- deferred compensation expense of approximately $14.9 million related to
options granted to employees between April 1, 2000 and June 16, 2000
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving effect
to our sale of 4,650,000 shares of common stock in this offering and after
deducting the underwriting discounts and estimated offering expenses, our pro
forma net tangible book value as of March 31, 2000 would have been $4.22 per
share. This amount represents an immediate increase in pro forma net tangible
book value of $3.51 per share to existing stockholders and an immediate dilution
of $14.78 per share to new investors purchasing shares in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $19.00
Historical net tangible book value per share as of March
31, 2000............................................... $0.88
Decrease attributable to issuance of Series F preferred
stock, conversion of preferred stock, and exercise of
stock options between April 1, 2000 and June 16,
2000................................................... 0.17
-----
Pro forma net tangible book value per share before the
offering............................................... 0.71
Increase per share attributable to new investors.......... 3.51
-----
Pro forma net tangible book value per share after this
offering.................................................. 4.22
------
Dilution per share to new investors......................... $14.78
------
</TABLE>
The following table shows the total consideration paid and the average price per
share paid by the existing stockholders and by new investors, after deducting
underwriting discounts and estimated offering expenses payable by us, at an
initial public offering price of $19.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 17,452,002 79.0% $ 40,621,838 31.5% $ 2.33
New investors................. 4,650,000 21.0 88,350,000 68.5 $19.00
---------- ----- ------------ -----
Total.................... 22,102,002 100.0% $128,971,838 100.0%
========== ===== ============ =====
</TABLE>
13
<PAGE> 16
The number of shares of common stock outstanding in the table above is based on
the number of shares outstanding as of March 31, 2000 and excludes:
- 1,797,140 shares of common stock issuable upon exercise of options
outstanding as of June 16, 2000 at a weighted average exercise price of
$0.51 per share
- 66,667 shares of common stock issuable upon the exercise of warrants to
purchase our preferred stock outstanding at a weighted average exercise
price of $5.62 per share
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected historical financial data. You should
read the financial statements included in this prospectus, including the notes
to the consolidated financial statements. The selected data in this section are
not intended to replace the consolidated financial statements.
We derived the selected financial data at December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 from the audited
financial statements included in this prospectus. Ernst & Young LLP, independent
auditors, audited those financial statements. We derived the selected financial
data at December 31, 1997, 1996 and 1995 and for the years ended December 31,
1995 and 1996 from audited financial statements that are not included in this
prospectus. We derived the selected financial data at March 31, 2000 and for
each of the three-month periods ended March 31, 1999 and 2000 from the unaudited
financial statements included in this prospectus. The unaudited financial
statements were prepared on the same basis as the audited financial statements.
Our management believes that the unaudited financial statements contain all
adjustments necessary to present fairly the information included in those
statements and that the adjustments made consist only of normal recurring
adjustments. The results of operations for the three months ended March 31, 2000
are not necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- --------------------
1995 1996 1997 1998 1999(1) 1999 2000(1)
------- ------- ------- ------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ 2,097 $ 3,145 $ 3,329 $ 2,590 $ 2,592 $ 147 $ 831
Operating expenses:
Research and development...... 4,416 4,709 2,992 2,583 4,421 928 671
General and administrative.... 1,982 2,614 2,637 1,975 1,370 227 419
Amortization of deferred
compensation ($65,344,
$22,813 and $569,392
related to research and
development and $369,806,
$14,201, and $611,043
related to general and
administrative for the year
ended December 31, 1999,
and for the three months
ended March 31, 1999 and
2000, respectively)........ -- -- -- -- 435 37 1,180
------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 6,398 7,323 5,629 4,558 6,226 1,192 2,270
------- ------- ------- ------- ------- ------- -------
Loss from operations............ (4,301) (4,178) (2,300) (1,968) (3,634) (1,045) (1,439)
Minority interest............... -- -- -- -- 45 -- 43
Interest income (expense),
net........................... (22) 4 79 101 213 31 38
------- ------- ------- ------- ------- ------- -------
Net loss........................ $(4,323) $(4,174) $(2,221) $(1,867) $(3,376) $(1,014) $(1,358)
======= ======= ======= ======= ======= ======= =======
Net loss per share.............. $ (3.63) $ (3.14) $ (1.43) $ (1.13) $ (1.39) $ (0.42) $ (0.53)
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding................... 1,191 1,328 1,551 1,659 2,429 2,429 2,577
Pro forma net loss per share.... $ (0.24) $ (0.10)
======= =======
Pro forma weighted average
shares outstanding............ 14,070 14,217
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999(1) 2000(1)
------ ------ ------ ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $3,737 $3,089 $3,920 $ 824 $3,498 $2,325
Working capital.............................. 766 (274) 1,052 313 3,225 2,900
Total assets................................. 6,391 5,384 5,717 2,752 5,938 5,502
Long-term obligations........................ 426 83 17 -- 17 17
Minority interest............................ -- -- -- -- 224 182
Stockholders' equity......................... 2,874 1,741 2,592 725 3,830 3,667
</TABLE>
---------------------------
(1) Amounts in 1999 and for the three months ended March 31, 2000, include the
results of Novasite Pharmaceuticals, Inc., our majority-owned subsidiary,
from July 13, 1999, its date of incorporation (see Note 1 of Notes to
Consolidated Financial Statements).
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this discussion together with the financial statements and other
financial information included in this prospectus.
OVERVIEW
We work in the emerging field of directed evolution, the process by which genes
and proteins are optimized for specific commercial purposes. We focus
principally on applying our technology to human biotherapeutics, the largest and
most profitable target market for directed evolution.
Since our formation, we have expended considerable resources on the development
of our AMEsystem technology and the development of Vitaxin, a product candidate
engineered from an antibody we licensed from The Scripps Research Institute.
Much of our research and development from 1995-1999 was allocated to preclinical
development and initial clinical trials for Vitaxin. In 1999 we licensed Vitaxin
to MedImmune, which is responsible for future clinical development expenses and
commercialization. MedImmune is preparing to initiate clinical trials with an
improved, second generation version of Vitaxin that we enhanced using our
AMEsystem technology.
To date we have generated revenue from research collaborations, product and
technology licenses, pre-paid royalties and government grants. We have strategic
collaborations with MedImmune, Bristol-Myers Squibb, and Cell Matrix. We have
licensed intellectual property to Biosite Diagnostics, Inc. in exchange for a
non-refundable, prepaid, fixed royalty which is being recognized over six years,
the estimated useful lives of the related patents. Our government grants have
come from the National Institutes of Health. Research funding from corporate
collaborators and government grants is recognized as revenue when the services
are rendered.
We have incurred losses since our inception. As of March 31, 2000, we had an
accumulated deficit of $28.7 million. These losses and this accumulated deficit
resulted from the significant costs incurred in the development of our
technology platform and the clinical development of Vitaxin. We expect these
losses to increase as we continue to invest in our AMEsystem technology and
internal development projects.
We have capitalized the costs incurred to file patent applications. These costs
are amortized over a six-year estimated life from the date of patent issuance.
At March 31, 2000, we had capitalized costs related to issued patents totalling
approximately $442,000 (net of accumulated amortization) and approximately
$944,000 related to unissued patents. These capitalized patent costs are
material relative to our stockholders' equity at March 31, 2000. Our results of
operations could be materially impacted when we begin amortizing the costs
related to unissued patents. In addition, we expense all costs related to
abandoned patent applications. If we elect to abandon any of our currently
issued or unissued patents, the related expense could be material to our results
of operations for the period of the abandonment.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenue. Revenue increased to $831,000 in the first three months of 2000 from
$147,000 in the first three months of 1999, an increase of $684,000. This
increase was primarily due to research collaboration revenue of $500,000 from a
new contract entered into with Cell Matrix in November 1999.
Research and development. Research and development expenses decreased to
$671,000 in the first three months of 2000 from $928,000 in the first three
months of 1999, a decrease of $257,000. The decrease was related primarily to
the elimination of clinical costs for Vitaxin which were incurred in 1999 and
were not incurred in 2000 as Vitaxin was licensed to MedImmune in February 1999.
We expect research and
17
<PAGE> 20
development expenses to increase for the foreseeable future as we support our
collaborative research programs, expand our technology platform and invest in
product development.
General and administrative. General and administrative expenses increased to
$419,000 in the first three months of 2000 from $227,000 in the first three
months of 1999, an increase of $192,000. The increase was due primarily to
increased management and administrative personnel expenses of $85,000 and an
increase of $107,000 in legal and professional fees in connection with expansion
of our business development efforts. We expect general and administrative
expenses to increase for the foreseeable future as we expand our business
development, legal and accounting staff, and incur additional costs related to
becoming a public company, including directors' and officers' insurance,
investor relations programs and increased professional fees.
Stock-based compensation. Deferred compensation for options granted is the
difference between the exercise price and the estimated fair value of our common
stock on the date the options were granted. In connection with our granting
stock options to employees, we recorded deferred stock compensation of $1.1
million in 1999 and $5.5 million in the first quarter of 2000. In addition, from
April 1, 2000 through June 16, 2000, we granted options to purchase an
additional 977,200 shares of common stock with exercise prices between $0.75 and
$1.25 per share under our 1992 Stock Plan and our 2000 Stock Plan and recorded
additional deferred stock compensation of $14.9 million.
Deferred compensation is included as a component of stockholders' equity and is
being amortized in accordance with FASB Interpretation No. 28 over the vesting
periods of the related options, which is generally four years. In connection
with options granted in 1999 and the first quarter of 2000, we recognized an
aggregate of $1,180,000 of amortization of deferred compensation in the first
quarter of 2000 ($569,000 and $611,000 related to research and development and
general and administrative, respectively). We will recognize additional
compensation expense of $9.5 million in the last three quarters of 2000 ($3.2
million and $6.3 million related to research and development and general and
administrative, respectively), $6.2 million in 2001 ($2.1 million and $4.1
million related to research and development and general and administrative,
respectively), $3.0 million in 2002 ($1.0 million and $2.0 million related to
research and development and general and administrative, respectively), $1.1
million in 2003 ($0.3 million and $0.7 million related to research and
development and general and administrative, respectively) and $51,000 in 2004
related to options granted as of June 16, 2000.
Deemed dividend on beneficial conversion of Series F preferred stock. On May 3,
2000 and June 15, 2000, we issued 1,133,333 shares and 1,111,111 shares of our
Series F preferred stock for $5.1 million and $5.0 million, respectively, which
will convert into shares of common stock upon the closing of this offering. We
will record a charge of $10.1 million to earnings applicable to common
stockholders for the beneficial conversion of our Series F preferred stock.
Interest income, net. Net interest income increased to $38,000 in the first
three months of 2000 from $30,000 in the first three months of 1999, an increase
of $8,000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Revenue was $2.6 million in both 1999 and 1998. Revenue in 1999 was
generated primarily from our collaboration with MedImmune ($2.0 million), while
1998 revenue was generated primarily from our collaboration with Bristol-Myers
Squibb ($2.4 million).
Research and development. Research and development expenses increased to $4.4
million in 1999 from $2.6 million in 1998, an increase of $1.8 million. The
increase was related primarily to an increase in the clinical development costs
of Vitaxin incurred in 1999.
General and administrative. General and administrative expenses decreased to
$1.4 million in 1999 from $2.0 million in 1998, a decrease of $600,000. The
decrease was due primarily to a reduction in administrative support personnel.
18
<PAGE> 21
Stock-based compensation. In connection with our granting stock options to
employees, we recorded deferred stock compensation of $1.1 million during the
year ended December 31, 1999, $435,000 ($65,000 and $370,000 related to research
and development and general and administrative, respectively) of which was
expensed in 1999.
Interest income, net. Net interest income increased to $213,000 in 1999 from
$101,000 in 1998, an increase of $112,000. The increase was due primarily to our
higher average cash and investment balances during 1999 as a result of licensing
Vitaxin and selling common stock to MedImmune in February 1999 and from the
private placement of equity securities of our subsidiary, Novasite
Pharmaceuticals, Inc., in November 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue decreased to $2.6 million in 1998 from $3.3 million in 1997, a
decrease of $700,000. This decrease was due to receiving nine months of funding
in 1998 compared to 12 months of funding in 1997 from Bristol-Myers Squibb
following our successful completion in September 1998 of the engineering of an
antibody under our collaboration with them.
Research and development. Research and development expenses decreased to $2.6
million in 1998 from $3.0 million in 1997, a decrease of $400,000. The decrease
was due primarily to the consolidation of facilities and the timing of
development costs for Vitaxin.
General and administrative. General and administrative expenses decreased to
$2.0 million in 1998 from $2.6 million in 1997, a decrease of $600,000. The
decrease was due to a decrease of $124,000 in facilities cost, a decrease of
$144,000 in legal and professional services, and a decrease of $332,000 in
administrative support personnel costs.
Interest income, net. Net interest income increased to $101,000 in 1998 from
$80,000 in 1997, an increase of $21,000. The increase was due to an interest
expense decrease of $67,000 from a reduction in outstanding lease line
obligations, partially offset by a decrease of $46,000 in interest income earned
on security deposits.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through private placements of equity
securities, with aggregate net proceeds of approximately $29.6 million through
March 31, 2000, and $15.8 million of cash generated from research collaborations
through March 31, 2000. We also completed a private placement of our Series F
preferred stock in May and June, 2000 for net proceeds of $10.0 million.
As of March 31, 2000, we had approximately $2.3 million in cash, cash
equivalents and short-term investments. On a pro forma basis, reflecting our
sale of Series F preferred stock, we had cash, cash equivalents and short-term
investments of $12.4 million as of March 31, 2000, compared to $3.5 million of
cash, cash equivalents and short-term investments as of December 31, 1999.
In 1999, we used cash of approximately $3.2 million in operating activities to
fund our net losses of $3.4 million, offset by non-cash charges for depreciation
and patent amortization totaling $244,000, deferred compensation amortization
totaling $435,000 and decreases in deferred revenue of $237,000. We used
approximately $2.6 million of cash for operations in 1998 and $1.7 million in
1997.
In 1999, we used cash of approximately $1.9 million in investing activities,
compared to cash generated of $2.3 million in 1998 and cash used of $1.9 million
in 1997. Our investing activities consisted primarily of purchases and sales of
short-term investments, and capital expenditures for property and equipment to
be used in our business. We expect to continue to make investments in our
infrastructure, including purchasing property and equipment to support our
operations.
In 1999, we generated $6.3 million of cash from financing activities, primarily
from the net proceeds of sales of common stock, including $1.3 million from the
private placement of equity securities of Novasite.
19
<PAGE> 22
Our financing activities in 1998 used $65,000 in cash, primarily for the
payments on long-term equipment financing. Our financing activities in 1997
generated $2.7 million of cash, primarily from the net proceeds of sales of
preferred stock.
In July 1999, we incorporated Novasite Pharmaceuticals, Inc., our 78% owned
subsidiary, with the remaining 22% owned by Crabtree Ventures, LLC, which
invested $1.3 million in Novasite. Novasite has a proprietary technology
platform for discovering and optimizing small molecule drug candidates.
We expect our cash requirements to increase significantly in 2000 as we continue
our research and development efforts, hire additional personnel, grow our
administrative support activities and expand our facilities. We believe that our
cash, cash equivalents and short-term investments, including the net proceeds
from this offering will be sufficient to fund our operations for three years.
Over the course of the approximately next three years we plan to use:
- $9,750,000 to expand and enhance our AMEsystem technology,
- $26,000,000 to fund our internal development projects, and
- $3,250,000 to engage in additional research and development,
The balance of our capital would be devoted to working capital and to
discretionary projects which we might choose to commence over an extended period
of time and to general corporate purposes.
Internal development projects are those selected projects that we fund
internally, and develop independently without the assistance of collaborators.
Our plans include development of selected internal projects to a point where
they may be candidates for corporate collaborations. We may then choose between
continuing to develop these projects ourselves, or seeking to license them to
corporate collaborators. If we choose to develop and commercialize any internal
development projects without the assistance of collaborators, the costs of
development and commercialization would exceed our capital resources. We would
seek public or private financing to further develop these projects ourselves.
Our future capital requirements will depend on many factors, including the
following:
- the success of our research and development efforts
- our ability to establish collaborative agreements
- our costs of prosecuting and maintaining patents
- market and competing technological developments
Should we require additional financing due to unanticipated developments, such
financing may not be available when needed or may not be available on favorable
terms. We may either delay, scale back or eliminate some or all of our research
and development programs for lack of funds. Furthermore, our ability to operate
as a going concern may be adversely affected by insufficient funds. If
additional funds are raised by issuing equity securities, substantial dilution
to existing stockholders may result.
INCOME TAXES
We incurred net operating losses in 1997, 1998 and 1999, and consequently we did
not pay any federal or state income taxes. At December 31, 1999, we had federal
net operating loss carryforwards of approximately $20.6 million, which begin to
expire in 2005. The net operating loss carryforwards for state tax purposes were
approximately $1.0 million, which began to expire in 1999. We also had federal
and state research and development tax credit carryforwards of $621,000 and
$316,000, respectively, which begin to expire in 2005.
20
<PAGE> 23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the market
value of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, and government and non government debt securities. The average duration
of all of our investments in 1999 was less than one year. Due to the short-term
nature of these investments, we believe that we have no material exposure to
interest rates arising from our investments. Therefore, no quantitative tabular
disclosure is included in the prospectus.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which will be
effective for our fiscal year 2001. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. We believe that
adoption of SFAS 133 will not have a material effect on our financial
statements, since we currently do not hold derivative instruments or engage in
hedging activities.
In December 1999, the Securities and Exchange Commission issued SAB No. 101,
"Revenue Recognition." SAB 101 provides the SEC staff's views in applying
generally accepted accounting principles to various revenue recognition issues.
We believe that we are in compliance with the guidelines provided in SAB 101.
21
<PAGE> 24
BUSINESS
OVERVIEW
We work in the emerging field of directed evolution, a process for optimizing
genes and proteins for specific commercial purposes. Our technology has been
validated by, among other things, our recent success in optimizing Synagis for
MedImmune. We use our proprietary AMEsystem technology to rapidly create
improvements in proteins that would be too inefficient and expensive to achieve
through conventional methods. Since our inception, our principal focus has been
on applying our technology to human biotherapeutics, the largest and most
profitable target market for directed evolution. We plan to use our directed
evolution technology to develop improved versions of currently marketed,
FDA-approved biopharmaceuticals as well as novel human biotherapeutics.
BACKGROUND
DNA, Codons, Genes and Proteins
[DNA, Codons, Genes and Proteins Graphic]
The graphic above depicts a protein being produced from DNA as described in the
text below.
DNA is a molecule found in all living cells and is responsible for determining
the inherited characteristics of all living organisms. The entire DNA content of
an organism is called its genome. The human genome is organized into 46
chromosomes, and each chromosome contains a DNA molecule. Each DNA molecule
consists of two complementary strands comprised of four different chemical bases
called nucleotides, commonly referred to as A, C, G and T. Each set of three
adjacent nucleotides (e.g. CAG or GAG) is referred to as a codon, and codons are
organized into discrete units called genes. Genes direct the cell to make
proteins, and the sequence of codons within a gene determines the protein that
will be made by the cell.
22
<PAGE> 25
Scientific evidence amassed to date suggests that the human genome contains over
100,000 genes, with each gene consisting of anywhere from tens to millions of
codons. Genes are critically involved in the regulation of almost all aspects of
human biology and disease because they serve as the blueprints for the
production of proteins that control virtually all of a cell's normal biological
functions. For an organism to be healthy, genes must produce specific proteins
at the right time in the appropriate amounts in the correct cells, a process
known as gene expression. When a gene is expressed, its DNA directs the
production of a specific protein.
Proteins are composed of combinations of 20 different sub-units called amino
acids which are linked together like beads on a string. The specific sequence
and types of amino acids in a protein determine the ultimate structure and
function of the protein. Each codon in a gene specifies a corresponding amino
acid in a protein. Therefore, the specific sequence of codons contained in the
gene determines the amino acid composition and function of the protein. Any
change in any of the three nucleotides in a codon could result in the
incorporation of a different amino acid into the protein. This type of
alteration may lead to the production of a protein with altered biological
properties. Consequently, changes in nucleotides, e.g. if C is replaced by G
within a codon, can have a dramatic impact on the inherited biological
characteristics of an organism.
NATURAL EVOLUTION AND ITS LIMITATIONS
Evolution is the process by which living organisms adapt to their environment.
There are two fundamental steps in the evolutionary process. The first step is
the creation of genetic diversity through random events. The second step is the
natural selection of organisms which possess beneficially adaptive
characteristics that will be passed to the next generation.
The following critical limitations preclude natural evolution from efficiently
developing proteins optimized for specific purposes:
- It is extremely slow, requiring the passage of thousands and even millions
of years.
- Natural evolution creates only a portion of the possible protein diversity
because it introduces changes at the nucleotide level. Changes in individual
nucleotides within a gene may or may not alter the amino acid sequence of
the resulting protein. Therefore, a change that occurs at the nucleotide
level may not alter the functional characteristics of the protein that is
eventually produced. In contrast, by changing individual codons, it is
possible to explore the full range of possible amino acid changes in a
protein. Consequently, natural evolution is much less efficient at exploring
the full range of protein diversity than a process which introduces change
at the codon level.
- Selection occurs at the level of the whole organism, therefore individual
proteins are not necessarily optimized.
These limitations create an opportunity to improve natural proteins for
commercial purposes.
BIOTECHNOLOGY AND ITS CURRENT LIMITATIONS
The biotechnology industry aims to discover genes from natural sources and
subsequently develop proteins with important commercial applications from these
genes.
Genomics, which is the study of all the genetic information of a species and its
relationship to disease, is transforming biotechnology. Recent technological
advances in molecular biology and in scientific instrumentation have greatly
increased the ability of researchers to identify genes and subsequently
determine their functions. These developments are ultimately expected to lead to
the identification of all the genes in the human genome. To date, tens of
thousands of genes have already been identified. In spite of these recent
successes, genomics companies have been limited in their ability to develop
commercially successful protein products. As described above, a major reason for
this limitation is that naturally occurring genes produce proteins that have not
evolved for commercial purposes, and typically yield
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proteins that may be deficient with respect to characteristics such as potency,
stability, availability in the body, side effect profile and manufacturing cost.
Traditionally, the biotechnology industry has attempted to modify genes for
commercial purposes by employing two different strategies: random mutagenesis
and rational design. Random mutagenesis involves inducing random mutations in
genes in an effort to produce commercially viable proteins. Empiric evidence
suggests that random mutagenesis offers a low probability of improving a protein
and usually results in detrimental changes to the protein. Rational design
involves deliberately modifying a gene in an effort to change the structure of
the resultant protein. This approach is predicated on the theory that analyzing
the structure and shape of a protein will provide an understanding of its
function. Consequently, once the structure of a protein is known, it may be
possible to modify the underlying gene to improve the function of the protein.
The major drawbacks to rational design are that it is expensive, time-consuming,
and most significantly, imprecise. Moreover, rational design has rarely been
successfully implemented in practice.
DIRECTED EVOLUTION AND LIMITATIONS OF COMPETING APPROACHES
The goal of directed evolution is to optimize proteins for commercial purposes.
Protein optimization generally involves improving the functional characteristics
of a particular protein by changing its amino acids. For example, a particular
protein may have an initial amino acid sequence that makes it susceptible to
degradation at temperatures approximating that of the human body. Consequently,
its utility as a therapeutic agent would be severely limited. By using directed
evolution, the stability of this protein could be dramatically improved by
introducing changes in the amino acid sequence of the protein, and then
screening for those changes that allow the protein to survive at higher
temperatures while retaining its other important characteristics. Because the
sequence of amino acids in a protein determines the protein's structure and
function, and the sequence of amino acids is specified in genes, proteins can be
modified by altering the genes that produce them.
There are three fundamental steps in the process of directed evolution. In the
first step, a library, or collection, of genes is created by introducing changes
in the initial gene that produces the protein of interest. Ideally, this library
of genes should contain the optimal amount of genetic diversity. If the process
introduces too much genetic diversity, the efficiency of directed evolution may
be significantly reduced because excessive change in the genes of interest is
likely to destroy the function of most resulting proteins. Conversely, the
creation of an insufficient amount of genetic diversity significantly reduces
the probability of producing a functionally-improved protein. The second step
involves expressing proteins from all the different genes that were produced in
the first step to create a library of diverse proteins. The third step in the
process entails evaluating, or screening, this library to identify those
proteins with improvements in the desired characteristics. The process is then
repeated until a sufficiently improved protein is identified.
We believe that directed evolution potentially offers several advantages over
natural evolution and traditional biotechnology approaches to improve proteins.
The entire process can be rapidly completed, efficiently and cost-effectively
accomplishing in months what it takes traditional methods years to achieve.
Because directed evolution does not require any knowledge of the structure of
the protein being optimized, it is much more rapid than conventional approaches
such as rational design, which are based on time-consuming modeling techniques.
Directed evolution represents a significant step forward in the optimization of
proteins. There are currently a number of different competing approaches for
conducting directed evolution, including gene shuffling. We believe that these
competing approaches do not take full advantage of the potential of directed
evolution to optimize proteins, particularly biotherapeutics, our primary target
market.
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Gene Shuffling
Gene shuffling involves cleaving a collection of genes into fragments and then
recombining the fragments to create new gene variants. Gene shuffling does not
control the extent or precise location of changes introduced into the gene of
interest nor does it explore the full range of protein diversity. These
shortcomings significantly limit the usefulness of this approach in developing
improved proteins:
- Completeness of Diversity: gene shuffling lacks the ability to substitute
each of the 20 amino acids at a particular location in a protein. For
example, if all the various genes in a gene family begin with the same codon
ATG, they will all produce a protein that begins with the same amino acid.
If this family of genes is then shuffled in an effort to create genetic
diversity, all the gene variants that are produced will still begin with the
same codon ATG. Therefore, in this particular situation, shuffling fails to
introduce any of the other 19 possible amino acids into the beginning of the
protein. If modifying the first amino acid is critical to enhancing the
protein's function, gene shuffling will be unable to produce a
functionally-improved protein.
- Extent of Change: the very nature of gene shuffling requires the cleavage of
a collection of genes in multiple locations. Consequently, the shuffling
process cannot precisely control the number of changes introduced into the
genes. The greater the number of changes, the more likely it is that harmful
changes will be introduced. Furthermore, extensive change requires the
screening of larger libraries, which is more time-consuming and expensive.
- Location of Change: the gene shuffling approach lacks the ability to
precisely control where changes are introduced into a gene. This limitation
severely curtails the application of this technology to developing
biotherapeutics because changing just a single amino acid at an
inappropriate location can adversely impact the efficacy, potency and side
effect profile of a biotherapeutic.
Extremophile Isolation
Extremophile isolation attempts to identify previously undiscovered genetic
diversity in nature by collecting unusual organisms that have adapted through
natural selection to be able to survive in extreme environments. We believe that
this approach has limited application to the biotherapeutic market. It has taken
over two decades to transform mouse proteins, which are closely related to human
proteins, into biotherapeutics that the human immune system will not reject. We
expect it to be even more challenging to convert proteins from organisms that
are extremely different from humans into biotherapeutics which will not be
rejected by the human immune system.
OUR AMESYSTEM TECHNOLOGY
We use our proprietary AMEsystem technology to improve the function of a target
protein in order to enhance its commercial potential. The components of our
AMEsystem are precise and efficient methods for conducting the three fundamental
steps of directed evolution and address the limitations of alternative directed
evolution approaches. There are three components to our AMEsystem technology:
- DirectAME(TM): DirectAME is a patented gene synthesis process that enables
us to rapidly produce a library of diverse genes altered from the initial
gene.
- ExpressAME(TM): ExpressAME consists of several gene expression systems that
efficiently produce proteins from the genes produced using DirectAME.
- SelectAME(TM): SelectAME is a series of tests or screens which facilitate
the selection and identification of proteins with the optimal, desired
commercial properties from the protein libraries generated using ExpressAME.
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[AME SYSTEM(TM) GRAPHIC]
Step One: DirectAME
Our patented DirectAME technology addresses the limitations of competing
directed evolution approaches by generating the appropriate amount of genetic
diversity in a rapid and precise fashion, thereby dramatically increasing the
probability of creating and identifying the most functionally-improved proteins.
In contrast to alternative directed evolution approaches, our DirectAME approach
has the following strengths:
- Completeness of diversity. When optimizing the function of a protein by
applying directed evolution technology, it is critical that all 20 possible
amino acids be evaluated at each position of interest in the protein. By
changing codons as opposed to single nucleotides, our patented DirectAME
technology ensures that all 20 possible amino acids are expressed at each
position of interest within the protein. Competing approaches cannot achieve
such complete diversity without producing enormous protein libraries that
are not economically feasible to screen.
- Extent of change. The simultaneous introduction of a large number of amino
acid changes in each protein in a library is undesirable because most amino
acid changes are detrimental to the function of a protein. If multiple
changes are made at once, the majority of the proteins produced will not
possess the desired function, needlessly complicating the subsequent
screening process. We can use our DirectAME technology to create a diverse
library of proteins that differ from the initial target protein by a
specific number of amino acids. In doing so, we significantly increase the
probability of preserving the desired characteristics while keeping the
number of proteins at a level that is efficient to express and screen. As we
repeat the process, we introduce additional changes into the protein and
only select those changes that combine to produce a protein with improved
function.
- Location of change. Our DirectAME technology has the ability to change
specific, carefully targeted areas of a gene and ultimately a protein. This
ability to precisely alter a specific region of a target protein greatly
facilitates the synthesis of more focused libraries, significantly
increasing the likelihood
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of identifying improved proteins. The ability to change specific regions of
a protein in a deliberate and precise manner while leaving all other regions
unchanged has profound implications for the development of new
biotherapeutics as well as for improving currently marketed, FDA-approved
drugs.
Optimizing monoclonal antibodies demonstrates the importance of having the
ability to change amino acids only at specific locations. While antibodies
are relatively large proteins consisting of hundreds of amino acids, the
crucial sites on an antibody that determine its ability to bind to a
particular target, and ultimately its therapeutic effectiveness, constitute
less than 5% of the overall protein. These sites consist of six different
stretches of amino acids that are separated from one another. Therefore,
antibody optimization requires the ability to precisely confine amino acid
changes to these six specific regions while leaving the remainder of the
antibody unchanged.
Step Two: ExpressAME
Our ExpressAME technology encompasses a number of proprietary gene expression
systems that we use to produce protein libraries. A unique feature of our
ExpressAME system is that it enables us to apply our directed evolution
technology to virtually any protein, including those that cannot be produced in
bacteria. A significant shortcoming of competing technologies is that they rely
primarily on bacterial expression systems. However, many currently marketed,
FDA-approved biopharmaceuticals cannot be expressed in their functional,
properly folded states by bacteria, and thus require expression in mammalian
cells.
ExpressAME has been developed specifically to address the technical challenges
of conducting directed evolution in a broad spectrum of host organisms,
including both bacterial and mammalian cells. As a result, we can now rapidly
optimize many biotherapeutics which were previously not amenable to directed
evolution.
Step Three: SelectAME
Our SelectAME technology is a set of broadly applicable proprietary tests or
screens that are highly sensitive and capable of characterizing thousands to
millions of proteins simultaneously. In selecting a screen for use in the
directed evolution process, there is often a trade-off between the speed of
throughput, the rate at which proteins can be screened, and the ability to
predict the functional performance of the protein in the human body. We believe
that using the most predictive screen available, regardless of its throughput,
is essential for identifying the most improved proteins. By using our AMEsystem
technology, we have the flexibility to create libraries of proteins which are
appropriately matched to the particular screen that is being used. If the most
predictive screen that is available is low throughput, we can use DirectAME to
create smaller, more focused libraries containing proteins that have each been
changed at only one or two amino acid positions. Alternatively, when a high
throughput and highly predictive screen is available, DirectAME can be used to
generate larger protein libraries with multiple amino acid substitutions. In
contrast, competing technologies that do not have the control and precision of
DirectAME, and which therefore produce larger, less focused protein libraries,
predominantly rely on high throughput screens, which are often less predictive.
Repeating the Process
We repeat the process starting with one or more of the improved proteins
produced by our AMEsystem to further improve the function of the target protein.
We can also combine beneficial amino acid changes identified in the initial
protein library as a second strategy to achieve the same objective.
MARKET OPPORTUNITIES
While virtually any product or process that utilizes or could utilize DNA or
proteins can be improved though the application of our technology, we focus our
efforts on the biotherapeutic market, the largest
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and most profitable target market for directed evolution. We believe that the
level of technological sophistication and precision required to improve
currently marketed, FDA-approved biopharmaceuticals as well as to develop novel
biotherapeutics is significantly greater than that required by other potential
target markets for directed evolution technologies. Since our inception, we have
focused on developing and optimizing our AMEsystem technology to address these
multi-billion dollar market opportunities.
Biotherapeutics
Proteins are essential to all cellular processes and have tremendous commercial
value, particularly in the pharmaceutical industry. The worldwide sales of
therapeutic proteins are projected to approach $20.0 billion by 2004. Protein
pharmaceutical products such as erythropoietin, which had worldwide sales of
approximately $3.8 billion in 1998, represent some of the world's highest
revenue pharmaceutical products. The biotherapeutic market encompasses a wide
variety of compounds, each with tremendous potential to improve human health:
- Antibodies: Antibodies currently represent the fastest growing
biotherapeutic product category in dollar and percentage terms, due to the
application of recently developed, novel approaches for generating,
modifying and manufacturing antibodies. The FDA has approved eight
therapeutic antibodies, six of them in the last three years, with total
sales in 1999 of approximately $1.0 billion, including $227 million for
Synagis. The major obstacles to be overcome in antibody engineering include
unfavorable side effect profile, inadequate affinity for the target,
instability, manufacturing cost and potency.
As demonstrated through collaborations with our corporate partners, our
proprietary AMEsystem technology enables us to optimize human antibodies
with respect to potency, affinity, side effect profile, stability and
manufacturing cost. To date, we have optimized 10 different antibodies with
commercial potential.
- Cytokines: Cytokines are proteins secreted by cells that regulate the body's
immune system as well as its responses to inflammation. Cytokines have been
implicated in a wide variety of diseases such as rheumatoid arthritis,
sepsis and lupus that afflict millions of individuals. Perhaps the best
known and well-studied cytokine is granulocyte-colony-stimulating factor,
commonly known as G-CSF, which acts on the bone marrow to increase its
production of white blood cells. G-CSF attained worldwide sales of over $1.6
billion in 1998 and is one of the world's highest revenue pharmaceutical
products. Worldwide sales of cytokines totaled almost $8.0 billion in 1997.
- Hormones: Hormones are proteins that are critical to the daily function and
normal growth and development of the human body. Human growth hormone, for
example, is a naturally occurring human protein produced in the pituitary
gland that regulates metabolism and is responsible for growth in children.
Many of the most debilitating and chronic human diseases are due to hormone
deficiencies. Sales of human growth hormone totaled more than $1.5 billion
in 1998.
- Serum Proteins: Serum proteins are proteins that are found in the plasma or
serum portion of human blood. Hemophilia is one example of a disease due to
deficiencies in serum proteins. In this disease, a deficiency in one or more
of the plasma proteins needed to form a blood clot results in a bleeding
disorder. The treatment for hemophilia involves the administration of the
missing serum protein. The total worldwide market for serum proteins for
hemophiliacs in 1999 was approximately $1.0 billion.
- Enzymes: Enzymes constitute the majority of proteins in all cells. These
proteins speed up cellular processes and are therefore critical to the
normal function of cells. Enzymatic deficiencies are often fatal. Gaucher's
disease, for example, is a seriously debilitating, sometimes fatal, genetic
disorder caused by a deficiency in an important enzyme called
glucocerebrosidase. Administration of the synthetic form of this enzyme,
called Cerezyme, is the only treatment available to these patients.
Worldwide sales of Cerezyme totaled approximately $470 million in 1999.
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- Growth Factors: Growth factors represent an emerging class of biotherapeutic
compounds that show great promise in treating a host of different diseases.
For example, vascular endothelial growth factor, commonly known as VEGF, is
a protein that is secreted by oxygen-deprived tissues. It acts by binding to
specific receptors on blood vessels to stimulate the formation of new blood
vessels, a process known as angiogenesis. Patients who suffer from coronary
artery disease and who are not candidates for angioplasty or bypass surgery
may benefit from the administration of this growth factor. This class of
biotherapeutics may have a very large patient population. Given that the
majority of these proteins are still in the very early stages of
development, they represent attractive candidates for optimization using our
AMEsystem technology.
COMMERCIAL PROBLEMS SOLVED USING OUR AMESYSTEM TECHNOLOGY
By applying our proprietary AMEsystem technology, we have successfully addressed
many significant challenges involved in the biopharmaceutical development
process. We believe that our technology platform has been validated through its
successful application to critical, time-sensitive projects for MedImmune,
Bristol-Myers Squibb, Seattle Genetics and Cell Matrix.
Expanded Market Opportunity and Increased Potency
The use of Synagis, MedImmune's monoclonal antibody against Respiratory
Syncytial Virus, is limited to the treatment of high-risk infants due to the
drug's high cost and requirement for intravenous administration. By using our
directed evolution technology, we created several new drug candidates for
MedImmune that have been shown in animal models to be at least 10 times more
potent than Synagis. MedImmune is expected to take one of these candidates
through clinical trials, and if successful, market it as Numax. If Numax's
significantly increased potency is confirmed in human clinical trials expected
to begin in January 2001, MedImmune could develop Numax for new markets
including the elderly, reduce production costs, and pursue various delivery
forms to broaden the product's use.
Increased Potency and Decreased Manufacturing Costs
MedImmune encountered a significant problem while attempting to commercialize
Vitaxin, a monoclonal antibody product candidate designed to treat various
cancers by cutting off their blood supply, a process known as anti-angiogenesis.
A particular structural feature in the first generation antibody made it
susceptible to significant degradation during the manufacturing process,
resulting in a loss of over 70% of the product yield. By applying our AMEsystem
technology to Vitaxin, we successfully created a second generation version of
the antibody that is significantly more stable than its predecessor. Our
directed evolution technology decreased manufacturing costs by improving the
yield by more than 300% and also increased the affinity of the antibody for its
target by 90-fold. Second generation Vitaxin is scheduled to enter at least one
of seven planned Phase II clinical trials with MedImmune later this year.
Reduced Side Effects and Improved Affinity
Bristol-Myers Squibb's anti-CD40 antibody is a mouse antibody which, if
administered to humans, would cause a significant immune reaction, rendering the
antibody ineffective and potentially causing serious side effects in patients.
Prior to collaborating with us, Bristol-Myers Squibb had attempted
unsuccessfully over a two-year period to improve its anti-CD40 antibody by
applying rational design techniques. Through the application of our AMEsystem
technology, we optimized the antibody in just four months, yielding an antibody
with a 500-fold increased affinity for its target and a significantly reduced
risk for causing an immune reaction. Bristol-Myers Squibb is expected to enter
Phase I clinical trials with anti-CD40 in 2001.
Expanded Therapeutic Potential
Seattle Genetics' BR96 is an antibody in development for treating solid tumors.
The commercial potential of BR96 was limited by its recognition of only a narrow
set of tumors. We optimized this antibody by
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increasing its affinity and broadening its ability to recognize tumors. Seattle
Genetics is now in preclinical development with the improved version, hBR96.
Enabling the Commercialization of a Discovery Technology
Subtractive immunization is a novel approach to discover antibodies that
recognize unique therapeutic targets. However, this approach usually results in
low-affinity antibodies that are unlikely to be commercially successful. By
applying our AMEsystem technology to this problem, we can increase the affinity
of antibodies produced by this process. For Cell Matrix, we optimized HUI77 and
HUIV26, anti-angiogenic mouse antibodies discovered using subtractive
immunization, which could enable Cell Matrix to pursue the commercialization of
these antibodies.
BUSINESS STRATEGY
Our goal is to be the leader in applying directed evolution to the development
and commercialization of human biotherapeutics. We have selected biotherapeutics
as our primary target industry because we believe that it is the largest and
highest margin market for directed evolution. Our business strategy includes
five basic elements:
- Optimize Currently Marketed Biopharmaceuticals. We are seeking to optimize
FDA-approved biopharmaceuticals to create improved versions of these drugs
with broader patent protection. We are already using our proprietary
AMEsystem technology to significantly improve important characteristics of
established biopharmaceuticals, acting independently or in collaboration
with the initial developers. We believe that focusing on approved products
with known therapeutic profiles and proven markets represents an attractive,
lower risk development strategy.
- Develop Novel Biotherapeutics. We plan to access and develop novel human
biotherapeutics from a wide variety of sources. We plan to continue our
collaborations with leading pharmaceutical and biotechnology companies that
are facing technical challenges to the development and commercialization of
their therapeutic proteins. We also expect genomics and the sequencing of
the human genome to yield an expanding number of novel proteins to optimize
and commercially develop. Finally, we will continue to license additional
biotherapeutic product candidates from leading academic institutions.
- Leverage Strategic Collaborations. We plan to continue to leverage strategic
collaborations to expand our product pipeline. Our goal is to combine our
expertise with that of our collaborators. We believe that we can add the
greatest value to a project by applying our AMEsystem technology early on in
the development process while relying on our collaborators to further
develop and commercialize the improved product candidates. Collaborators
provide financial support for research and development, and pay milestones
and royalties on any product sales.
- Invest in Selected Internal Development Projects. We plan to select a
limited number of promising projects for internal development. We plan to
focus on projects that we believe have lower development risks and target
large, highly profitable markets such as oncology, infectious diseases and
autoimmune diseases.
- Enhance Our AMEsystem Technology. We plan to continue to develop our
AMEsystem technology by investing significantly in research and development
while simultaneously protecting and expanding our strong intellectual
property portfolio. We plan to license and acquire from others technologies
that complement and expand our core capabilities.
DEVELOPMENT PROGRAMS
Since inception, we have entered into numerous corporate collaborations and have
pursued our own development projects. We expect that strategic collaborations
will continue to be an important element of
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our business strategy. Unless specifically mentioned, we do not have
commercialization rights to the intellectual property developed from our
collaborations. The following is a summary of our development programs and
related corporate collaborations:
MedImmune
In February 1999, we entered into a four antibody strategic collaboration with
MedImmune, a leader in the commercial development of therapeutic antibodies. The
agreement covers the licensing of Vitaxin to MedImmune as well as the
optimization of three additional antibodies, including Synagis. Licenses granted
under this agreement are exclusive and worldwide covering the right to research,
develop, sell and sublicense. The business terms of the agreement include
potential royalties which may last the life of the applicable patents as well as
other payments of up to $45 million including an aggregate of $750,000 in
research and development support, $40.5 million in potential milestone payments,
and an equity investment. Under the terms of the agreement portions of the
milestone payments may be creditable against royalties. We have received $7.4
million from MedImmune to date. The duration of the research and development
aspect of this agreement is up to twenty four months although it may be
terminated by MedImmune on 90 days notice or by us in the event of a default by
MedImmune.
Synagis, MedImmune's flagship product, is currently the only FDA-approved
monoclonal antibody for the treatment of Respiratory Syncytial Virus infection.
Cost constraints and the requirement for intravenous administration have limited
the drug's use to treating only high-risk infants. By applying our AMEsystem
technology, we created several new drug candidates for treating this serious
lung infection that have been demonstrated in animal models to be at least 10
times more potent than Synagis. MedImmune is expected to take one of these
candidates through clinical trials, and if successful, market it as Numax. This
more potent version of Synagis, which is expected to enter clinical trials in
2001, could enable MedImmune to address new markets including the elderly,
reduce production costs and pursue additional methods for administering the drug
in order to broaden the product's use.
Vitaxin is an anti-angiogenic antibody with potential applications in oncology,
rheumatoid arthritis, diabetic retinopathy, and macular degeneration. We
originally licensed the mouse antibody from which Vitaxin was derived from The
Scripps Research Institute. We then improved Vitaxin to overcome a potential
immune reaction in humans and licensed it to MedImmune. MedImmune is now
focusing on a second generation version of Vitaxin that we developed using our
AMEsystem technology. This version of the antibody has significantly improved
affinity as well as decreased manufacturing costs. Before the end of 2000,
MedImmune plans to initiate at least one of seven planned Phase II clinical
trials with second generation Vitaxin for the treatment of a variety of cancers
and arthritis.
Bristol-Myers Squibb
We have entered into two separate agreements with Bristol-Myers Squibb, one of
the largest pharmaceutical companies in the world. We have completed our
optimization work under these agreements and have received over $27 million to
date and will potentially receive future royalties as well as up to $3,850,000
in potential milestones. Under the terms of the agreement portions of the
milestone payments may be creditable against royalties.
In June 1993, we entered into the initial strategic collaboration with
Bristol-Myers Squibb to optimize their BR96 anti-solid tumor antibody and to
develop a discovery technology program to treat tumors. Bristol-Myers Squibb
renewed this collaboration in 1995. As discussed below, hBR96, our improved
version of BR96, is currently being developed by Seattle Genetics, a private
biotechnology company founded by former Bristol-Myers Squibb scientists. Based
on the success of our initial collaborations, Bristol-Myers Squibb amended our
agreement in 1998 to include the optimization of its anti-CD40 antibody for
organ transplant rejection therapy, which has now been completed. Bristol-Myers
Squibb is expected to begin Phase I clinical trials with its anti-CD40 antibody
in 2001.
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Seattle Genetics
Seattle Genetics is in preclinical development with hBR96 for the potential
treatment of breast, lung, ovarian, prostatic, colorectal, and pancreatic
cancers. After we optimized BR96 for Bristol-Myers Squibb, Seattle Genetics
licensed this product from Bristol-Myers Squibb and is continuing to develop
this antibody. Under our original agreement with Bristol-Myers Squibb, we may
receive milestones and royalties from this product.
Cell Matrix
In November 1999, we entered into a strategic collaboration covering four novel
antibody therapeutics with Cell Matrix, a private biotechnology company
developing anti-angiogenic antibodies for the treatment of cancer. Under the
terms of the agreement, we may receive potential royalties which may last up to
10 years from the date of the first commercial sale of a product developed from
this collaboration as well as up to $17 million in other payments including $2.0
million in research funding and $15.0 million in potential milestone payments.
Under the terms of the agreement portions of the milestone payments may be
creditable against royalties. We recently completed the optimization of the
first two compounds. We have received $500,000 from Cell Matrix to date. The
duration of the collaboration is for seven months, with an option to extend it
for an additional seven months. This agreement may be terminated by either party
for cause. In the event that this agreement is terminated we will receive an
exclusive license to commercialize intellectual property developed from our
collaboration.
Internal Development Programs
We are using our AMEsystem technology to develop both improved versions of
currently marketed biopharmaceuticals and novel human therapeutics. We are
working on improving four currently marketed, FDA-approved drugs that are
already marketed by third parties and in their present, unimproved forms are
expected to each have sales in excess of $500 million in 2000. We are also
developing a number of product candidates based on a therapeutic enzyme we
licensed from the University of Nebraska Medical Center in March 2000. We are
optimizing these products for attractive markets including cancer. We are in the
process of applying our directed evolution technology to optimize versions of
these products which we plan to take into preclinical development.
We have full commercialization rights to these internal development projects.
INTELLECTUAL PROPERTY
We hold patents and rights to patents within the field of directed evolution
with an extensive portfolio that includes 16 issued U.S. patents related to our
proprietary directed evolution technology. Twenty-eight counterpart patents to
these U.S. patents are issued in other major industrialized countries. We have
an additional 22 pending U.S. patent applications and 33 pending foreign and
international counterpart applications relating to our AMEsystem technology and
the application of this technology to diverse industries including protein
pharmaceuticals and industrial enzymes.
Our intellectual property portfolio includes trade secrets, know-how,
trademarks, patents and patent applications related to DirectAME gene synthesis,
ExpressAME protein expression and SelectAME protein screening as well as the
exclusive license to the Kauffman patents.
- DirectAME: The DirectAME gene synthesis patents are directed to methods for
generating diversity which can be used for conducting directed evolution.
They claim methods for introducing changes at the codon level to generate
genetic diversity.
- ExpressAME: ExpressAME is a system used for conducting directed evolution
in both bacterial and mammalian cells. This system enables the expression of
many therapeutic proteins in their functional, properly folded states, a
feature that cannot always be achieved by relying exclusively on bacterial
expression systems.
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- SelectAME: We have a number of issued patents and pending patent
applications relating to our SelectAME technologies for screening protein
libraries. The patents and patent applications describe methods for
evaluating protein function.
- The Kauffman patent family comprises six issued U.S. patents with claims
covering methods of randomly generating proteins, which we believe is
required by many directed evolution technologies. We were granted an
exclusive license to the Kauffman patent family in 1994. The first Kauffman
patent application was filed in 1985, and the first U.S. Kauffman patent
issued in 1998 with a term extending into 2015. Their patent prosecution
history includes a successful defense to an opponent's challenge in Japan.
We are fully committed to investing in the further development and expansion of
our leading intellectual property position in directed evolution.
COMPETITION
We work in the field of directed evolution. We are aware that companies such as
Maxygen, Inc., Diversa Corporation, and Enchira Biotechnology Corporation rely
on alternative methods such as gene shuffling and extremophile isolation for
obtaining or generating genetic diversity. Some or all of these companies will
compete against us to develop novel human biotherapeutic products and to improve
currently marketed, FDA-approved drugs. Academic institutions such as the
California Institute of Technology and the University of Washington are also
working in this field. In the future, we expect the field to become highly
competitive and that companies and academic and research institutions will seek
to develop technologies that could be competitive with our AMEsystem technology.
Any products that we may develop through our AMEsystem technology will compete
in highly competitive markets, especially our improved versions of FDA-approved
biopharmaceuticals.
Many of our potential competitors have substantially greater financial,
technical and personnel resources than we do, and we cannot be certain that they
will not succeed in developing technologies and products that would render our
technology and products or those of our collaborators obsolete or
noncompetitive. In addition, many of those competitors have significantly
greater experience than we do in their respective fields. Our ability to compete
successfully will depend, in part, on:
- our ability to demonstrate the applicability of our technology to optimizing
a broad range of proteins
- the cost-effectiveness of our optimization approach
- our ability to develop products that reach the market first
- our ability to develop products that are technologically superior to other
products in the market
- our ability to obtain and enforce patents covering our technology
GOVERNMENT REGULATION
Our collaborators are in early stages of the FDA regulatory process for drugs we
have optimized.
None of the product candidates with respect to which we have collaborators are
currently in human clinical trials. Medimmune is expected to commence a Phase I
human clinical trial with Numax in January 2001 and at least one Phase II
clinical trial with second generation Vitaxin in 2000. Bristol-Myers Squibb is
expected to enter a Phase I clinical trial with anti-CD40 in 2001, and Seattle
Genetics is now in preclinical development with hBR96. HU177 and HUIV26,
anti-angiogenic mouse antibodies, have not entered into any clinical trials with
Cell Matrix.
Our corporate collaborators will control all aspects of the clinical testing of
these product candidates, and we do not have any results from completed trials
for these current product candidates.
We do not have any product candidates of our own in pre-clinical or clinical
development.
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<PAGE> 36
Any products we, or our collaborators, develop will require regulatory
clearances prior to clinical trials and additional regulatory clearances prior
to commercialization. Drugs are subject to regulation under the Federal Food,
Drug and Cosmetic Act, and biological products, in addition to being subject to
provisions of that Act, are regulated under the Public Health Service Act. Both
statutes and related regulations govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices.
FDA approval is required prior to marketing a pharmaceutical product in the
United States. To obtain this approval the FDA requires clinical trials to
demonstrate the safety, efficacy, and potency of the product candidates.
Clinical trials are the means by which experimental drugs or treatments are
tested in humans. New therapies typically advance from laboratory, research,
animal, preclinical, testing and finally through several phases of clinical,
human testing. Upon successful completion of clinical trials, approval to market
the therapy for a particular patient population may be requested from the FDA in
the United States and/or its counterparts in other countries.
Clinical trials are normally done in three phases. In Phase I, trials are
conducted with a small number of patients or healthy volunteers to determine the
safety profile, the pattern of drug distribution and metabolism and early
evidence on effectiveness. In Phase II, trials are conducted with a larger group
of patients afflicted with a target disease in order to determine preliminary
efficacy, optimal dosages and expanded evidence of safety. In Phase III, large
scale, multi-center, comparative trials are conducted with patients afflicted
with a target disease in order to provide enough data for the statistical proof
of safety, efficacy, and potency required by the FDA and other regulatory
authorities. For life-threatening diseases, initial human testing generally is
done in patients rather than healthy volunteers. These studies may provide
results traditionally obtained in Phase II trials and are referred to as "Phase
I/II" trials.
Obtaining FDA approval is a costly and time-consuming process. Generally, in
order to gain FDA pre-market approval, preclinical studies must be conducted in
the laboratory and in animal model systems to gain preliminary information on an
agent's efficacy and to identify any major safety concerns. The results of these
studies are submitted as a part of an application for an Investigational New
Drug, IND, which the FDA must review and allow before human clinical trials can
start. The IND includes a detailed description of the clinical investigations.
A company must sponsor and file an IND for each proposed product and must
conduct clinical studies to demonstrate the safety, efficacy and potency that
are necessary to obtain FDA approval. The FDA receives reports on the progress
of each phase of clinical testing, and it may require the modification,
suspension, or termination of clinical trials if an unwarranted risk is
presented to patients.
After completion of clinical trials of a new product, FDA marketing approval
must be obtained. If the product is regulated as a biologic, a Biologic License
Application, or BLA, is required. If the product is classified as a new drug, a
New Drug Application, or NDA, is required. The NDA or BLA must include results
of product development activities, preclinical studies and clinical trials in
addition to detailed manufacturing information.
Applications submitted to the FDA are subject to an unpredictable and
potentially prolonged approval process. The FDA may ultimately decide that the
application does not satisfy its criteria for approval or require additional
preclinical or clinical studies. Even if FDA regulatory clearances are obtained,
a marketed product is subject to continual review, and later discovery of
previously unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market as well as possible civil or criminal
sanctions. Before marketing clearance is secured, the manufacturing facility
will be inspected for current Good Manufacturing Practices, or GMP, compliance
by FDA inspectors. The manufacturing facility must satisfy current GMP
requirements prior to marketing clearance. In addition, after marketing
clearance is secured, the manufacturing facility will be inspected periodically
for GMP compliance by FDA inspectors, and, if the facility is located in
California, by inspectors from the Food and Drug Branch of the California
Department of Health Services.
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<PAGE> 37
In both domestic and foreign markets, sales of any approved products will depend
on reimbursement from third party payers, such as government and private
insurance plans. Third party payers are increasingly challenging the prices
charged for medical products and services. If we succeed in bringing one or more
products to market, these products may not be considered cost-effective,
reimbursement may not be available, or reimbursement policies may adversely
affect our ability to sell our products on a profitable basis.
We also are subject to various federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with our research.
The extent of government regulation which might result from any future
legislation or administrative action cannot be accurately predicted.
EMPLOYEES
As of June 16, 2000, we had 30 full-time employees, 15 of whom hold advanced
degrees. Of these, 20 were engaged in research and development and 10 were
engaged in business development, finance and general administration. None of our
employees is represented by labor unions or covered by collective bargaining
agreements. We have not experienced any work stoppages and consider our employee
relations to be good.
FACILITIES
Our executive office and research facilities are currently located in San Diego,
California. We lease approximately 24,000 square feet of space. These facilities
are leased through December 16, 2003. We believe that our existing facilities
and equipment are well maintained and in good working condition. We believe that
our current facilities will provide adequate capacity for the foreseeable
future.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 38
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and key employees, and their ages and
positions as of May 3, 2000, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Costa G. Sevastopoulos, Ph.D.(1)... 57 Chairman of the Board
William D. Huse, M.D., Ph.D........ 46 Chief Executive Officer, President and Director
Lawrence E. Bloch, M.D., J.D....... 35 Chief Financial Officer, Vice President of
Business Development and Secretary
Jeffry D. Watkins, Ph.D............ 38 Vice President of Research
Keith S. Manchester, M.D........... 31 Director of Business Development
Cheryl C. Gabele................... 45 Director of Finance and Administration
James J. Bochnowski(1)(2).......... 56 Director
John G. Morris(1)(2)............... 37 Director
Peter K. Hilal, M.D.(1)(2)......... 35 Director
</TABLE>
-------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
COSTA G. SEVASTOPOULOS, PH.D. has been our Chairman since 1997 and has served as
a director since 1991. From May 1997 to December 1998, Dr. Sevastopoulos served
as President and Chief Executive Officer. He co-founded Delphi Ventures, a
venture capital partnership which specializes in medical and healthcare
investments, in 1988 and served as a General Partner from 1988 to 1994. Dr.
Sevastopoulos is also Chairman of Idun Pharmaceuticals, Inc., a private
biotechnology company, and a director of CV Therapeutics, Inc., a public
biotechnology company. Dr. Sevastopoulos received an M.S. in electrical
engineering from the California Institute of Technology, an MBA from INSEAD,
France, and a Ph.D. in molecular biology from the University of California at
Berkeley.
WILLIAM D. HUSE, M.D., PH.D. founded our company in 1989 and has been our Chief
Executive Officer since January 1999. Dr. Huse was affiliated with The Scripps
Research Institute from 1989 to 1990. Prior to joining Scripps, Dr. Huse was
Vice President, Research and Development at Stratagene, Inc., a private
biotechnology company, from 1986 to 1989. Dr. Huse was an Assistant Professor at
Yale University School of Medicine, Section of Molecular Neurobiology, from 1984
to 1986. Dr. Huse received his M.D. and Ph.D. in Neurosciences from the Albert
Einstein School of Medicine. Dr. Huse completed his post-doctoral work at Cold
Spring Harbor Laboratory.
LAWRENCE E. BLOCH, M.D., J.D. has been our Vice President of Business
Development since July 1999, our Chief Financial Officer since March 2000 and
our Secretary since April 2000. From 1998 to 1999, he served as a consultant to
several private biotechnology companies, including U.S. Genomics, Inc. In 1995,
Dr. Bloch co-founded CareCom, Inc., a developer of patient-oriented internet
applications, and served as its President from 1995 to 1999. Dr. Bloch holds a
J.D. from Harvard Law School, an M.D. from Harvard Medical School, and an MBA
from Harvard Business School. Dr. Bloch is also a member of the Board of
Directors of our subsidiary, Novasite Pharmaceuticals, Inc.
JEFFRY D. WATKINS, PH.D. has been our Vice President of Research since June
1998. From 1994 to 1998, Dr. Watkins held a variety of research positions in our
company. From 1993 to 1994, he was a research scientist at Hybritech, Inc., a
public biotechnology company focusing on diagnostics. Dr. Watkins holds a Ph.D.
in biochemistry from Purdue University. He completed his post-doctoral research
at The Scripps Research Institute and at Purdue University. He is also the
recipient of a National Institutes of Health Postdoctoral Fellowship. Dr.
Watkins has authored multiple scientific peer-reviewed articles, was named
inventor on seven directed evolution patents and has been the principal
investigator on multiple federal grants.
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<PAGE> 39
KEITH S. MANCHESTER, M.D. joined us in March 2000 as Director of Business
Development. From 1999 to 2000, he was an associate at Vestar Capital Partners,
a private equity firm specializing in management buyouts. From 1997 to 1999, Dr.
Manchester was an investment banker in the healthcare group at Goldman, Sachs &
Co. He completed his surgical internship at Parkland Medical Hospital in Dallas,
Texas. Dr. Manchester holds an A.B. from Harvard College and an M.D. from
Harvard Medical School.
CHERYL C. GABELE has been our Director of Finance and Administration since May
1999. From 1995 to 1999, Ms. Gabele was Director, Finance and Administration at
Idun Pharmaceuticals, Inc., a private biotechnology company. In the past, she
served as the Chief Financial Officer for Mini-Graphic Systems, Inc., a document
imaging company, and for Sunland Consolidated, Inc., a real estate developer.
Ms. Gabele earned a B.S. in accounting from San Diego State University and has
held a State of California C.P.A. certificate since 1980.
JAMES J. BOCHNOWSKI has served as a director since 1997. Mr. Bochnowski
co-founded Delphi Ventures, a venture capital partnership which specializes in
medical and healthcare investments, in 1988. In 1980, he co-founded Technology
Venture Investors, a private venture capital partnership. Mr. Bochnowski has a
B.S. in aerospace engineering from MIT and an MBA from Harvard Business School.
JOHN G. MORRIS has served as a director since 1998. Since 1997, Mr. Morris has
been a Vice President of HarbourVest Partners, a private equity firm. Prior to
this, he was employed by Abbott Capital Management. He currently serves on the
advisory boards of the private equity partnerships of Bruckmann, Rosser,
Sherrill & Co., Domain Partners, Essex Woodlands Health Ventures, GTCR Capital
Partners, Marquette Venture Partners and Oak Investment Partners. He holds an
MBA in finance from Columbia University.
PETER K. HILAL, M.D. joined our Board of Directors in May 2000. In 1997, Dr.
Hilal founded Hilal Capital Management LLC, an investment management firm
specializing in private and public equity investments in the life-sciences
sector. From 1996 to 1997, he was a Principal at Oracle Management, Inc., an
investment management firm specializing in the healthcare sector. Prior to that,
Dr. Hilal was a senior executive in the marketing, strategic planning, and
research areas at Merck & Co. Dr. Hilal received an A.B. and M.D. from Columbia
University and holds an MBA from Harvard Business School.
SCIENTIFIC ADVISORY BOARD
MICHAEL H. FREEDMAN, PH.D. is a Professor of Mathematics at the University of
California, San Diego. Previously, Dr. Freedman held the position of Professor
at the Institute of Advanced Studies, Princeton, New Jersey. In 1986, Dr.
Freedman was awarded the distinguished Fields Medal in recognition of his
outstanding mathematical achievements. Dr. Freedman's main area of interest lies
in the development of new methods for topological analysis. Dr. Freedman
received a Ph.D. from Princeton University.
STUART A. KAUFFMAN, M.D. serves as an external professor at the Santa Fe
Institute. He co-founded the Bios Group LP, a private developer of business
software, in 1996 and currently serves as its Chief Scientific Officer. His
major areas of research include developmental genetics, theoretical biology,
evolution and the origin of life. Dr. Kauffman is a co-inventor of the Kauffman
Patents, which are licensed exclusively to us. He received his M.D. from the
University of California, San Francisco in 1968.
ZAVERIO M. RUGGERI, M.D. is a member of the Department of Molecular and
Experimental Medicine and the Department of Vascular Biology at The Scripps
Research Institute, La Jolla, California. Dr. Ruggeri is Chairman of our
Scientific Advisory Board, and his main area of interest is the study of the
multimeric structure of Factor VIII/von Willebrand Factor. Dr. Ruggeri received
his M.D. from the University of Milan, Italy.
JAMES F. YOUNG, PH.D. has served as Executive Vice President, Research and
Development for MedImmune since March 2000. He joined MedImmune in March 1989 as
Vice President, Research and Development and in 1995 was promoted to Senior Vice
President, Research and Development. He holds a Ph.D. in microbiology and
immunology from Baylor College of Medicine, Houston, Texas.
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<PAGE> 40
BOARD COMPOSITION
We currently have authorized five directors. Following this offering, our Board
will consist of five directors divided into three classes, with each class
serving for a term of three years. At each annual meeting of stockholders,
directors will be elected by the holders of common stock to succeed the
directors whose terms are expiring. Messrs. Huse and Hilal are class I directors
whose terms will expire in 2001. Messrs. Morris and Sevastopoulos are class II
directors whose terms expire in 2002 and Mr. Bochnowski is a class III director
whose term will expire in 2003. This classification of the Board of Directors
may delay or prevent change in control of our company or in our management. See
"Description of Capital Stock -- Anti-Takeover Provisions." All directors are
elected to hold office until our next annual meeting of stockholders and until
their successors have been elected. Officers are appointed at the first Board of
Directors meeting following the stockholders' meeting at which the directors are
elected and serve at the discretion of the Board of Directors. There are no
family relationships among any of our directors or executive officers.
We are party to an agreement by which we have agreed to cause the nomination of
Peter K. Hilal as a member of our Board of Directors, so long as our
stockholders affiliated with Dr. Hilal own at least 448,889 shares of the common
stock issued upon conversion of the Series F Preferred Stock. We have also
agreed with Dr. Hilal to increase the number of authorized directors from five
to seven.
COMMITTEES OF THE BOARD OF DIRECTORS
The audit committee reviews the selection of independent auditors, the results
and scope of the audit and other services provided by our independent auditors
and evaluates our internal accounting procedures.
The compensation committee reviews and approves compensation and benefits for
our executive officers. The compensation committee also administers our
compensation and stock plans and makes recommendations to the Board of Directors
regarding such matters.
DIRECTOR COMPENSATION
Directors do not receive compensation for their services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors or
compensation committee of any other entity that has one or more executive
officers serving as a member of our Board of Directors or compensation
committee.
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<PAGE> 41
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual compensation we paid during 1999 to
our Chief Executive Officer and to our two other highest paid executive
officers. These individuals are referred to as the "named executive officers"
here and elsewhere in this prospectus.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES OTHER
--------------------- UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
William D. Huse.................... $225,374 -- -- --
Chief Executive Officer
Lawrence E. Bloch.................. 60,000 -- 130,000 $28,516
Chief Financial Officer(1)
Jeffry D. Watkins.................. 119,575 -- -- --
Vice President of Research
</TABLE>
-------------------------
(1) Dr. Bloch's annual salary represents partial year compensation for the
period July 1999 through December 1999. His other annual compensation
includes $12,891 related to relocation expenses and $15,625 related to
consulting services.
1999 OPTION GRANTS
The following tables set forth certain information regarding options granted to
each of our named executive officers during 1999.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUALS GRANTS REALIZABLE VALUE AT
---------------------------------------------------------- ASSUMED ANNUAL RATES
NUMBER OF PERCENTAGE OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN PER EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR SHARE(2) DATE(3) 5% 10%
---- ------------- -------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence E. Bloch.... 130,000 62.9% $0.45 07/01/09 $3,964,870 $6,348,044
</TABLE>
-------------------------
(1) These incentive stock options are exercisable in full immediately, but the
stock purchased on exercise of the options is subject to repurchase by us.
Our repurchase right lapses as to 12.5% of the shares covered by the
respective options on the six month anniversary of the date of grant, and
lapses ratably on a daily basis thereafter, with the repurchase right
terminating in full on the fourth anniversary of the date of grant. Under
the terms of the 1992 Stock Plan, the committee designated by the Board of
Directors to administer the 1992 Stock Plan retains the discretion, subject
to certain limitations within the 1992 Stock Plan, to modify, extend or
renew outstanding options and to reprice outstanding options. Options may be
repriced by canceling outstanding options and reissuing new options with an
exercise price equal to the fair market value on the date of reissue, which
may be lower than the original exercise price of such canceled options.
(2) We have granted options at an exercise price equal to the fair market value
of the underlying common stock on the date of grant, as determined in good
faith by our Board of Directors, and the options vest over four years from
the date of grant. In determining the fair market value of our common stock,
our Board of Directors considers valuations of comparable companies, prices
at which we have issued preferred stock, valuation reports and analyses
prepared by third parties, the relative rights and preferences of our
preferred stock as compared to our common stock, and the lack of liquidity
of our securities. Once we become a publicly-held company, the fair market
value of our stock will equal trading market prices.
(3) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(4) The dollar amounts under these columns represent the potential realizable
value of each grant over the term of the options based on assumed rates of
stock appreciation of 5% and 10%, compounded annually. The 5% and 10%
assumed rates of appreciation are suggested by the rules of the Securities
and Exchange Commission and do not represent our estimate or projection of
the future common stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our stock.
The potential realizable values above assume that the initial public
offering price of $19.00 per share was the fair market value of the common
stock on the date of grant and that the price of the applicable stock
increases from the date of grant until the end of the ten year option term
at the annual rates specified. There is no assurance provided to any holder
of our securities that the actual stock price appreciation over the ten year
option terms will be the assumed 5% and 10% rates at any other defined rate.
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<PAGE> 42
1999 OPTION VALUES
The following table sets forth for the named executive officers, the number and
value of securities underlying options that were held by each executive officer
as of December 31, 1999. There were no options exercised by such individuals in
such period.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
----------------------- ------------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
William D. Huse................................ 282,286 187,714 $5,277,407 $3,482,093
Lawrence E. Bloch.............................. 16,283 113,717 302,056 2,109,444
Jeffry D. Watkins.............................. 68,512 67,963 1,271,896 1,260,715
</TABLE>
---------------------------
(1) Calculated on the basis of the initial public offering price of the
underlying securities minus the exercise price.
EMPLOYEE BENEFIT PLANS
1992 Stock Plan and 2000 Stock Plan
In May 1992, our Board of Directors adopted the 1992 Stock Plan. The 1992 Stock
Plan has been amended three times. A total of 3,100,000 shares of common stock
were reserved for issuance under the 1992 Stock Plan pursuant to the direct
award or sale of shares or the exercise of options granted under the 1992 Stock
Plan. In April 2000, our Board of Directors adopted the 2000 Stock Plan. A total
of 1,600,000 shares of common stock are reserved for issuance under the 2000
Stock Plan. If any option granted under the 1992 Stock Plan or the 2000 Stock
Plan expires, does not vest or terminates for any reason without having been
exercised, then the unvested or unpurchased shares subject to that option will
once again be available for additional option grants.
Under the 1992 Stock Plan and the 2000 Stock Plan, all of our employees and
directors, including those of any subsidiary, and any independent contractor or
advisor who performs services for us or a subsidiary are eligible to purchase
shares of common stock and to receive awards of shares or grants of nonstatutory
options. Employees are also eligible to receive grants, under the 1992 Stock
Plan, of incentive stock options, or ISOs, intended to qualify under Section 422
of the Internal Revenue Code of 1986, as amended, or the Code. The 1992 Stock
Plan and the 2000 Stock Plan are administered by a committee of our Board of
Directors, which selects the persons to whom shares will be sold or awarded or
options will be granted, determines the number of shares to be made subject to
each sale, award or grant, and prescribes other terms and conditions, including
the type of consideration to be paid upon sale or exercise and vesting
schedules, in connection with each sale, award or grant.
The exercise price under the nonstatutory stock options generally must be at
least 85% of the fair value of the common stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair value of the
common stock on the date of grant and, in the case of ISOs granted to holders of
more than 10% of the voting power of the company, not less than 110% of such
fair value. The term of an option cannot exceed 10 years, and the term of an ISO
granted to a holder of more than 10% of the voting power of the company cannot
exceed five years. Options generally expire not later than 90 days following a
termination of employment or six months following the optionee's death or
permanent disability. The purchase price of shares sold under the 1992 Stock
Plan generally must be at least 85% of the fair value of the common stock and,
in the case of a holder of more than 10% of the voting power of the company, not
less than 110% of such fair value. Options granted pursuant to the 1992 Stock
Plan generally vest ratably over a period of four years.
As of June 16, 2000, under the 1992 Stock Plan we had outstanding options to
purchase an aggregate of 1,797,140 shares of common stock at exercise prices
ranging from $0.04 to $0.75 per share, or a weighted
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<PAGE> 43
average exercise price per share of $0.51. A total of 674,141 shares of common
stock were available for future issuance under the 1992 Stock Plan as of such
date.
In April 2000, June 2000 and July 2000, under the 2000 Stock Plan, we issued
options to purchase 800,000 shares, 100,000 shares and 60,000 shares of common
stock, respectively, to our executive officers and senior managers at exercise
prices of $0.75 per share, $1.25 per share and $1.25 per share, respectively.
These options vest over seven years but may accelerate in the event we are
acquired or our aggregate public market value exceeds specified levels. As of
July 20, 2000, a total of 640,000 shares of common stock were available for
future issuance under the 2000 Stock Plan.
2000 Employee Stock Purchase Plan
The board of directors adopted our 2000 Employee Stock Purchase Plan on June 20,
2000, to be effective upon completion of this offering. We will be submitting it
for approval by our stockholders prior to the completion of this offering. A
total of 750,000 shares of common stock have been reserved for issuance under
our 2000 Employee Stock Purchase Plan. The number of shares reserved for
issuance under the 2000 Employee Stock Purchase Plan will be increased on the
first day of each of our fiscal years, commencing 2001, by the lesser of:
- 5% of our fully diluted outstanding common stock on the day of the
increase; or
- a lesser number of shares determined by our Board of Directors.
Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, is administered by the Board of
Directors or by a committee appointed by the board. Employees, including our
officers and employee directors but excluding 5% or greater stockholders, are
eligible to participate if they are customarily employed for more than 20 hours
per week and for at least five months in any calendar year. Our 2000 Employee
Stock Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation.
The 2000 Employee Stock Purchase Plan will be implemented during a series of
overlapping offering periods of 24 months' duration, with new offering periods,
other than the first offering period, commencing on January 1 and July 1 of each
year. Our 2000 Employee Stock Purchase Plan establishes two accumulation periods
per year, neither of which will exceed six months. During each accumulation
period, payroll deductions will accumulate, without interest. On the purchase
dates set by the Board of Directors for each accumulation period, accumulated
payroll deductions will be used to purchase common stock. The initial offering
period is expected to commence on the first day of the month which is at least
30 days after the date of this offering and end on December 31, 2001. The
initial accumulation period will begin on the first day of the month which is at
least 30 days after the date of this offering and end on December 31, 2000.
The purchase price will be equal to 85% of the fair market value per share of
common stock on either the last day of the accumulation period or on the last
trading day before the commencement of the applicable offering period, whichever
is less. Employees may withdraw their accumulated payroll deductions at any
time. Participation in our 2000 Employee Stock Purchase Plan ends automatically
on termination of employment with us. Immediately prior to the effective time of
a corporate reorganization, the accumulation period then in progress will
terminate and stock will be purchased with the accumulated payroll deductions
unless the 2000 Employee Stock Purchase Plan is assumed by the surviving
corporation or its parent corporation pursuant to the plan of merger or
consolidation.
EMPLOYMENT AGREEMENTS
We do not have employment agreements with our executive officers, other than
agreements that we maintain with all of our employees and option agreements
under which we issue incentive and non-qualified stock options to employees.
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<PAGE> 44
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our Certificate of Incorporation that limit the
liability of our directors for monetary damages for breach of their fiduciary
duty as directors, except for liability that cannot be eliminated under the
Delaware General Corporation Law. The Delaware law provides that directors of a
company will not be personally liable for monetary damages for breach of their
fiduciary duty as directors, except for liability for the following:
- for any breach of their duty of loyalty to us or our stockholders
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
- for unlawful payment of dividends or unlawful stock repurchase or
redemption, as provided in Section 174 of the Delaware law
- for any transaction from which the director derived an improper personal
benefit
Any amendment or repeal of these provisions requires the approval of the holders
of shares representing at least 66 2/3% of our capital stock entitled to vote in
the election of directors, voting as one class.
Our Certificate of Incorporation and Bylaws also provide that we shall indemnify
our directors and officers to the fullest extent permitted by the Delaware law.
We have entered into separate indemnification agreements with our directors and
executive officers that could require us, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. We believe that
the limitation of liability provision in our Restated Certificate of
Incorporation and the indemnification agreements will facilitate our ability to
continue to attract and retain qualified individuals to serve as our directors
and executive officers.
42
<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of our
common stock as of June 16, 2000:
- each person who is known by us to own beneficially more than 5% of our
common stock
- each of our directors
- each of our named executive officers
- all of our directors and executive officers as a group
Beneficial ownership is determined according to the rules of the Securities and
Exchange Commission, and generally means that a person has beneficial ownership
of a security and warrants if he or she possesses sole or shared voting or
investment power of that security, and includes options and warrants that are
currently exercisable or exercisable within 60 days. Information with respect to
beneficial ownership has been furnished to us by each director, officer or 5% or
more stockholder, as the case may be. Except as otherwise indicated, we believe
that the beneficial owners of the common stock listed below, based on the
information each of them has given to us, have sole investment and voting power
with respect to their shares, except where community property laws may apply.
This table lists applicable percentage ownership based on 17,452,002 shares of
common stock outstanding (assuming conversion of the preferred stock) as of June
16, 2000, and also lists applicable percentage ownership based on 22,102,002
shares of common stock outstanding after completion of this offering. Options
and warrants to purchase shares of our common stock that are exercisable within
60 days of June 16, 2000, are deemed to be beneficially owned by the persons
holding these options and warrants for the purpose of computing percentage
ownership of that person, but are not treated as outstanding for the purpose of
computing any other person's ownership percentage. Shares underlying options and
warrants that are deemed beneficially owned are listed in this table separately
in the column labeled "Shares Subject to Options and Warrants." These shares are
included in the number of shares listed in the column labeled "Total Number."
In March 2000, Alpha Bioventures, LLC, purchased 2,708,572 shares of Series D
and E preferred stock from Bristol-Myers Squibb. Dr. Huse, one of our directors
and our Chief Executive Officer and President, is the manager and a member of
Alpha Bioventures, LLC. Drs. Bloch and Watkins, two of our executive officers,
are both members of Alpha Bioventures, LLC.
Unless otherwise indicated, the address for each person or entity named below is
Applied Molecular Evolution, Inc., 3520 Dunhill Street, San Diego, California
92121.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------------------------------------------
SHARES SUBJECT
TOTAL TO OPTIONS AND PERCENT BEFORE PERCENT AFTER
NAME OF BENEFICIAL OWNER NUMBER WARRANTS OFFERING OFFERING
------------------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
William D. Huse, M.D., Ph.D.(1)........ 3,341,566 470,000 18.6% 14.8%
Alpha Bioventures, LLC(2).............. 2,708,572 -- 15.5% 12.3%
Peter K. Hilal, M.D.
Entities affiliated with Hilal
Capital Management LLC(3)............ 2,222,222 -- 12.7% 10.1%
Entities affiliated with Domain
Partners(4).......................... 1,929,011 -- 11.1% 8.7%
James J. Bochnowski
Entities affiliated with Delphi
Ventures(5).......................... 1,286,010 -- 7.4% 5.8%
Attenuon, LLC(6)....................... 1,200,000 -- 6.9% 5.4%
Entities affiliated with Medicus
Venture Partners(7).................. 1,100,738 -- 6.3% 5.0%
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------------------------------------------
SHARES SUBJECT
TOTAL TO OPTIONS AND PERCENT BEFORE PERCENT AFTER
NAME OF BENEFICIAL OWNER NUMBER WARRANTS OFFERING OFFERING
------------------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
John G. Morris
HarbourVest Partners III L.P.(8)..... 937,500 -- 5.4% 4.2%
MedImmune, Inc.(9)..................... 907,143 -- 5.2% 4.1%
Lawrence E. Bloch, M.D., J.D.(10)...... 759,932 210,000 4.3% 3.4%
Jeffry D. Watkins, Ph.D.(11)........... 631,441 216,475 3.6% 2.8%
Costa G. Sevastopoulos, Ph.D........... 250,000 250,000 1.4% 1.1%
All directors and executive officers as
a group (7 persons).................. 9,428,671 1,146,475 50.7% 40.6%
</TABLE>
---------------------------
(1) Includes 1,606,506 shares held by Alpha Bioventures, LLC. Dr. Huse is a
member and the manager of Alpha Bioventures, LLC.
(2) The address of Alpha Bioventures, LLC is 343 Satterly Road, Ferrisburg, VT
05456.
(3) The address of entities affiliated with Hilal Capital Management LLC is 60
East Forty-Second Street, Suite 1946, New York, NY 10165. Peter K. Hilal
holds voting and investment control over the shares held by Hilal Capital
Management LLC. The total number of shares does not include $5.0 million of
our common stock which we expect will be sold to Dr. Hilal at the initial
offering price.
(4) The address of entities affiliated with Domain Partners is One Palmer
Square, Princeton, NJ 08542. Brian Dovey, James Blair, and Jesse Treu hold
voting and investment control over the shares held by Domain Partners.
(5) The address of entities affiliated with Delphi Ventures is 3000 Sand Hill
Road, Building 1, Suite 135, Menlo Park, CA 94025. Mr. Bochnowski, one of
our directors, is a general partner of Delphi Ventures II, L.P.
(6) The address of Attenuon, LLC is c/o DE Shaw & Co., 39th Floor, Tower 45,
120 West Forty-Fifth Street, New York, NY 10036. David E. Shaw holds voting
and investment control over the shares held by Attenuon.
(7) The address of entities affiliated with Medicus Venture Partners is 800
Airport Boulevard, Suite 508, Burlingame, CA 94010. John M. Reher holds
voting and investment control over the shares held by Medicus Venture
Partners.
(8) The address of HarbourVest Partners III L.P. is One Financial Center, 44th
Floor, Boston, MA 02111. Mr. Morris, one of our directors, is a Vice
President of HarbourVest Partners, LLC.
(9) The address of MedImmune, Inc. is 35 West Watkins Mill Road, Gaithersburg,
MD 20878.
(10) Includes 349,932 shares held by Alpha Bioventures, LLC. Dr. Bloch is a
member of Alpha Bioventures, LLC.
(11) Includes 174,966 shares held by Alpha Bioventures, LLC. Dr. Watkins is a
member of Alpha Bioventures, LLC.
44
<PAGE> 47
CERTAIN TRANSACTIONS
Under our 2000 Stock Plan, on April 7, 2000, we granted options for an aggregate
of 800,000 shares of our common stock, at an exercise price of $0.75 per share,
to some of our officers and directors. On June 15, 2000, these options were
exercised in exchange for cash and promissory notes, including: 280,000 shares
purchased by William D. Huse, one of our directors and our Chief Executive
Officer and President, for $280 cash and a promissory note for $209,720; 240,000
shares purchased by Jeffry D. Watkins, our Vice President of Research, for $240
cash and a promissory note for $179,760; 200,000 shares purchased by Lawrence E.
Bloch, our Chief Financial Officer, Vice President of Business Development and
Secretary, for $200 cash and a promissory note for $149,800; 40,000 shares
purchased by Cheryl C. Gabele, our Director of Finance and Administration, for
$40 cash and a promissory note for $29,960; and 40,000 shares purchased by Keith
S. Manchester, our Director of Business Development, for $40 cash and a
promissory note for $29,960. On June 16, 2000, under the same stock plan, Dr.
Manchester also received options for 100,000 shares of our common stock, at an
exercise price of $1.25 per share. On the same day, these options were exercised
in exchange for $100 cash and a promissory note for $124,900. On July 6, 2000,
under the same stock plan, Cheryl C. Gabele also received options for 60,000
shares of our common stock, at an exercise price of $1.25 per share. On July 12,
2000 these options were exercised in exchange for $60 cash and a promissory note
for $74,940. As of July 20, 2000, the full amount of each of these promissory
notes was still outstanding. Interest, at the rate of 6.62%, cumulates and is
payable with principal at maturity. The maturity date for all of these
promissory notes is June 2005, with the exception of the 60,000 shares granted
to Cheryl C. Gabele on July 12, 2000, the maturity date of which is July 2005.
All of these promissory notes are full recourse and are also collateralized by
the shares.
We currently expect that $5.0 million of our common stock to be sold in this
offering will be sold to Peter K. Hilal, one of our directors, at the initial
offering price.
45
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of this offering, our authorized capital stock, after giving
effect to the conversion of all outstanding preferred stock into common stock
and the amendment of our Certificate of Incorporation, will consist of
45,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value. As of June 16, 2000, and assuming the
conversion of all outstanding preferred stock into common stock upon the closing
of this offering, there were outstanding:
- 17,452,002 shares of common stock held by 110 stockholders of record
- options to purchase 1,797,140 shares of common stock
- warrants to purchase 66,667 shares of common stock
COMMON STOCK
The holders of common stock are entitled to one vote per share on all matters
submitted to be voted on by the stockholders, including the election of
directors, and do not have cumulative voting rights. Accordingly, the holders of
a majority of the shares of common stock entitled to vote in any election of
directors can elect all of the directors standing for election, if they so
choose. Subject to preferences that may be applicable to any then outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of our common stock will be
entitled to share ratably in the net assets legally available for distribution
to stockholders after the payment of all our debts and other liabilities,
subject to the prior rights of any preferred stock then outstanding. Holders of
common stock have no preemptive, conversion, subscription or other rights, and
there are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are, and the common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
As of June 16, 2000, assuming the closing of this offering, all outstanding
shares of preferred stock would have been converted into 13,884,568 shares of
common stock. Following the conversion, our Certificate of Incorporation will be
amended and restated to delete all references to such shares of preferred stock.
The Certificate of Incorporation, as restated, gives to the Board of Directors
the authority, without further action by stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon such preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of the common stock.
The issuance of preferred stock could:
- adversely affect the voting power of holders of common stock and reduce the
likelihood that such holders will receive dividend payments and payments
upon liquidation
- decrease the market price of our common stock
- delay, deter or prevent a change in our control
We have no present plans to issue any shares of preferred stock.
46
<PAGE> 49
WARRANTS
As of April 30, 2000, there were warrants outstanding to purchase 66,667 shares
of Series E preferred stock at an exercise price of $5.625 per share which will
convert to warrants to purchase an equivalent number of shares of common stock
upon completion of this offering. The warrants to purchase 26,667 shares expire
on August 29, 2001, and the warrants to purchase 40,000 shares expire on June
23, 2002. The warrants contain provisions for the adjustment of the exercise
price and the aggregate number of shares issuable upon the exercise of the
warrants under certain circumstances, including stock dividends, stock splits,
reorganization, reclassifications, consolidations and certain dilutive issuances
of securities at prices below the then existing exercise price.
REGISTRATION RIGHTS
After this offering, the holders of 907,143 shares of common stock, the
Registrable Shares, and 13,884,568 shares of common stock issued upon conversion
of our Convertible Preferred Stock, Series A preferred stock, Series B preferred
stock, Series C preferred stock, Series D preferred stock, Series E preferred
stock and Series F preferred stock, or the Preferred Registrable Shares, or
their permitted transferees, are entitled to rights with respect to the
registration of such shares under the Securities Act. If we propose to register
any of our securities under the Act for our own account, holders of Registrable
Shares and Preferred Registrable Shares are entitled to notice of such
registration and are entitled to include Registrable Shares and Preferred
Registrable Shares therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in such registration. In addition, commencing one year after the
effective date of the Registration Statement of which this prospectus is a part,
holders of at least 25% of the Registrable Shares and 25% of the Preferred
Registrable Shares may require us to prepare and file a registration statement
under the Act at our expense covering at least 20% of the shares entitled to
registration rights, or such lesser percentage if the aggregate offering price
is at least $7,500,000, and we are required to use our best efforts to effect
such registration, subject to conditions and limitations. We are not obligated
to effect more than three of these stockholder-initiated registrations. Further,
holders of Registrable Shares and Preferred Registrable Shares may require us to
file additional registration statements on Form S-3, subject to certain
conditions and limitations.
ANTI-TAKEOVER PROVISIONS
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in our control.
Certificate of Incorporation and Bylaw Provisions
Our Certificate of Incorporation, which will become effective shortly following
the closing of the offering, provides that any action required or permitted to
be taken by our stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing. In
addition, our Bylaws provide that special meetings of our stockholders may be
called only by the Chairman of the Board, our Chief Executive Officer, or by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors.
47
<PAGE> 50
Our Certificate of Incorporation also specifies that the authorized number of
directors may be changed only by resolution of the Board of Directors and does
not include a provision for cumulative voting for directors. Under cumulative
voting, a minority stockholder holding a sufficient percentage of a class of
shares may be able to ensure the election of one or more directors. Our
Certificate of Incorporation will also provide that the Board of Directors will
be divided into three classes, with each director assigned to a class with a
term of three years. These and other provisions contained in our Certificate of
Incorporation and Bylaws could delay or discourage certain types of transactions
involving an actual or potential change in our control or change in our
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management or approve transactions that
stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServe Trust
Company.
LISTING
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "AMEV."
48
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
When the offering is completed, we will have a total of 22,102,002 shares of
common stock outstanding. The 4,650,000 shares offered by this prospectus will
be freely tradeable unless they are purchased by our "affiliates," as defined in
Rule 144 under the Securities Act. Shares purchased by affiliates may generally
only be sold pursuant to an effective registration statement under the
Securities Act or in compliance with Rule 144. The remaining 17,452,002 shares
are "restricted," which means they were originally sold in offerings that were
not subject to a registration statement filed with the Securities and Exchange
Commission. These restricted shares may generally be resold only through
registration under the Securities Act or under an available exemption from
registration, such as provided through Rule 144.
RULE 144
Generally, Rule 144 as currently in effect provides that, beginning 90 days
after the first date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
- one percent of the number of shares of common stock then outstanding, which
based on the shares outstanding immediately after this offering will equal
approximately 221,020 shares or
- the average weekly trading volume of the common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of the notice on
Form 144 with respect to the sale
Rule 144 regulates as the manner of sales and imposes requirements for notice
and the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, may sell his or her shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted (including
by a lock-up agreement), a person who has been a non-affiliate for at least two
years may sell his or her shares in the open market.
One hundred eighty days after the date of this prospectus 12,888,298 shares of
our common stock will be eligible for sale under Rule 144.
RULE 701
Rule 701 permits any of our employees, officers, directors or consultants who
purchased their shares under a compensatory stock or option plan or other
written agreement prior to the effective date of this offering to sell such
shares under Rule 144 without complying with the holding period, public
information, volume limitation or notice requirements of Rule 144. All holders
of Rule 701 shares may not sell their Rule 701 shares until 90 days after the
date of this prospectus. However, substantially all shares of our common stock
issued under Rule 701 are subject to lock-up agreements described below.
LOCK-UP AGREEMENTS
Substantially all of our stockholders have entered into lock-up agreements with
us prohibiting them from offering, selling, pledging or otherwise disposing of
their shares for a period of 180 days after the date of this prospectus. In
addition, our directors, officers and other stockholders who own shares of
common stock have agreed to similar lock-up agreements with the underwriters
prohibiting them from offering, selling, pledging or otherwise disposing of
these shares for the same 180-day period. This generally means that the
stockholders cannot sell these shares during the 180 days following the date of
this prospectus.
49
<PAGE> 52
STOCK OPTIONS
We intend to file registration statements under the Securities Act covering
approximately 5,450,000 shares of common stock reserved for issuance under the
1992 Stock Plan, the 2000 Stock Plan and the 2000 Employee Stock Purchase Plan.
These registration statements are expected to be filed soon after the date of
this prospectus and will automatically become effective upon filing.
Accordingly, shares registered under these registration statements will be
available for sale in the open market, unless such shares are subject to vesting
restrictions with us or to the lock-up restrictions described above.
50
<PAGE> 53
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., PaineWebber Incorporated and SG Cowen
Securities Corporation are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
CIBC World Markets Corp..................................... 2,130,000
PaineWebber Incorporated.................................... 1,065,000
SG Cowen Securities Corporation............................. 1,065,000
Chase H&Q................................................... 60,000
Deutsche Bank Securities Inc................................ 60,000
Fleetboston Robertson Stephens Inc.......................... 60,000
Adams, Harkness & Hill, Inc. ............................... 30,000
William Blair & Company, L.L.C. ............................ 30,000
Fahnestock & Co. Inc. ...................................... 30,000
Gerard Klauer Mattison & Co., LLC........................... 30,000
Josephthal & Co. Inc........................................ 30,000
Sanders Morris Harris....................................... 30,000
Stephens Inc. .............................................. 30,000
---------
Total.................................................. 4,650,000
=========
</TABLE>
The underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
The underwriters do not intend to use any means of distributing or delivering
the prospectuses other than by hand or the mails and do not intend to use any
forms of prospectus other than printed prospectuses.
The shares should be ready for delivery on or about August 1, 2000 against
payment in immediately available funds. The representatives have advised us that
the underwriters propose to offer the shares directly to the public at the
public offering price that appears on the cover page of this prospectus. In
addition, the representatives may offer some of the shares to other securities
dealers at such a price less a concession of $1.33 per share. The underwriters
may also allow, and such dealers may reallow, a concession not in excess of
$0.80 per share to other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 697,500 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to the public
will be $101,602,500, and the total proceeds to us will be $94,490,325. The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a
51
<PAGE> 54
number of additional shares proportionate to the underwriter's initial amount
reflected in the foregoing table.
In connection with the offering, the underwriters may make short sales of our
common stock and may purchase our stock on the open market to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
"Covered" short sales are sales made in an amount not greater than the
underwriters' over-allotment option to purchase additional shares in the
offering. The underwriters may close out any covered short position by either
exercising their over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are sales
in excess of the over-allotment option. The underwriters must close out any
naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding a decline in the
market price of our common stock. As a result, the price of our common stock may
be higher than the price that might otherwise exist in the open market.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us.
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH FULL
EXERCISE OF EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- ---------------
<S> <C> <C> <C>
Applied Molecular Evolution.............................. $ 1.33 $ 6,184,500 $ 7,112,175
</TABLE>
We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $1,200,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
In addition, we have retained CIBC World Markets Corp. for a twelve month period
to act as a financial advisor to us in connection with capital market financial
transactions. We have agreed to pay CIBC World Markets Corp. a fee of $200,000
for such services and to indemnify CIBC World Markets Corp. against certain
liabilities and expenses in connection with such services.
We, our officers and directors and substantially all other stockholders have
agreed to a 180-day "lock up" with respect to 17,029,609 shares of common stock
and other securities that they beneficially own, including securities that are
convertible into shares of common stock and securities that are exchangeable or
exercisable for shares of common stock. This means that for a period of 180 days
following the date of this prospectus, we and such persons may not offer, sell,
pledge or otherwise dispose of these securities without the prior written
consent of CIBC World Markets Corp.
The representatives have informed us that they do not expect discretionary sales
by the underwriters to exceed five percent of the shares offered by this
prospectus.
The underwriters have reserved for sale up to 200,000 shares for employees,
directors and other persons associated with us. These reserved shares will be
sold at the initial public offering price. In addition, we expect that $5.0
million of our common stock to be sold in this offering will be sold to Peter K.
Hilal, one of our directors, at the initial offering price. The number of shares
available for sale to the general public in the offering will be reduced to the
extent reserved shares are purchased by such persons. The
52
<PAGE> 55
underwriters will offer to the general public, on the same terms as other shares
offered by this prospectus, any reserved shares that are not purchased by such
persons.
There is no established trading market for the shares. The offering price for
the shares has been determined by us and the representatives, based on the
following factors:
- estimates of our business potential and earnings prospects
- an assessment of our management
- consideration of the above factors in relation to market valuations of
companies in related businesses
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. The underwriters may, however, engage in the following activities
in accordance with the rules:
- Stabilizing transactions -- The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
- Over-allotments, short sales and syndicate covering transactions, as
described above.
- Penalty bids -- If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group members
who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock offered
by this prospectus will be passed upon for Applied Molecular Evolution by
Pillsbury Madison & Sutro LLP, San Francisco, California and for the
underwriters by McDermott, Will & Emery, Los Angeles, California. A partner of
Pillsbury Madison & Sutro LLP owns 70,000 shares of common stock and 121,023
shares of preferred stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements at December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
53
<PAGE> 56
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules to the
registration statement. Please refer to the registration statement, exhibits and
schedules for further information with respect to Applied Molecular Evolution
and the common stock offered by this prospectus. Statements contained in this
prospectus regarding the contents of any contract or other document are not
necessarily complete. With respect to any contract or document filed as an
exhibit to the registration statement, you should refer to the exhibit for a
copy of the contract or document, and each statement in this prospectus
regarding that contract or document is qualified by reference to the exhibit. A
copy of the registration statement and its exhibits and schedules may be
inspected without charge at the SEC's public reference room, located at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing financial
statements audited by independent certified public accountants and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year.
54
<PAGE> 57
APPLIED MOLECULAR EVOLUTION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and March 31, 2000 (unaudited)............................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and for the three months
ended March 31, 1999 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 for the three months
ended March 31, 1999 and 2000 (unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Applied Molecular Evolution, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Molecular Evolution, Inc. and its subsidiary 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Molecular Evolution, Inc. and its subsidiary at December 31, 1998 and 1999, and
the consolidated 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.
As discussed in Note 9 to the consolidated financial statements, the
consolidated balance sheet as of December 31, 1999, and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1999, have been restated.
/s/ ERNST & YOUNG LLP
San Diego, California
January 27, 2000, except for Note 8,
as to which the date is June 15, 2000,
and Note 9, as to which the
date is July 26, 2000
F-2
<PAGE> 59
APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
------------ ------------ ------------ -------------
(RESTATED) (RESTATED) (RESTATED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 824,077 $ 1,974,466 $ 1,134,423
Short-term investments....................... -- 1,523,481 1,190,302
Prepaid expenses and other current assets.... 290,201 611,349 1,232,920
------------ ------------ ------------
Total current assets........................... 1,114,278 4,109,296 3,557,645
Property and equipment, net.................... 347,763 441,793 514,763
Patents, net................................... 1,234,140 1,344,152 1,385,922
Other assets................................... 55,466 42,432 43,503
------------ ------------ ------------
Total assets................................... $ 2,751,647 $ 5,937,673 $ 5,501,833
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........ $ 547,122 $ 629,707 $ 466,423
Current portion of deferred revenue.......... 236,667 236,667 177,501
Current portion of long-term obligations..... 17,092 17,788 13,438
------------ ------------ ------------
Total current liabilities...................... 800,881 884,162 657,362
Deferred revenue............................... 1,104,444 867,777 867,777
Deferred rent.................................. 121,086 114,112 110,656
Long-term obligations, less current portion.... -- 17,249 17,249
Minority interest.............................. -- 224,493 181,811
Commitments (Note 4)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 11,810,666 actual and
5,000,000 pro forma
Issued and outstanding
shares -- 11,640,124 actual and none pro
forma
Liquidation value -- $24,551,058 actual
and $0 pro forma........................ 11,640 11,640 11,640 $ --
Common stock, $.001 par value:
Authorized shares -- 22,450,000 actual and
45,000,000 pro forma
Issued and outstanding
shares -- 1,659,278, 2,569,846 and
2,590,831 at December 31, 1998 and 1999
and March 31, 2000, respectively, actual
and 14,230,955 pro forma................ 1,659 2,569 2,590 14,230
Additional paid-in capital................... 24,695,121 31,831,323 37,326,832 37,326,832
Deferred compensation........................ -- (649,077) (4,951,480) (4,951,480)
Accumulated other comprehensive loss......... -- (7,785) (5,592) (5,592)
Accumulated deficit.......................... (23,983,184) (27,358,790) (28,717,012) (28,717,012)
------------ ------------ ------------ ------------
Total stockholders' equity..................... 725,236 3,829,880 3,666,978 $ 3,666,978
------------ ------------ ------------ ============
Total liabilities and stockholders' equity..... $ 2,751,647 $ 5,937,673 $ 5,501,833
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 60
APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Contract revenue (from related party in
1997 and 1998)...................... $ 3,250,947 $ 2,437,841 $ 2,008,462 $ 87,821 $ 721,674
Other revenue.......................... 77,686 152,229 583,852 59,167 109,687
----------- ----------- ----------- ----------- -----------
Total revenue............................ 3,328,633 2,590,070 2,592,314 146,988 831,361
Operating expenses:
Research and development............... 2,992,391 2,583,179 4,421,167 927,664 671,001
General and administrative............. 2,636,455 1,974,504 1,369,709 226,891 419,117
Amortization of deferred compensation
($65,344, $22,813, and $569,392
related to research and development
and $369,806, $14,201, and $611,043
related to general and
administrative for the year ended
December 31, 1999, and for the three
months ended March 31, 1999 and
2000, respectively)................. -- -- 435,150 37,014 1,180,435
----------- ----------- ----------- ----------- -----------
Total operating expenses................. 5,628,846 4,557,683 6,226,026 1,191,569 2,270,553
----------- ----------- ----------- ----------- -----------
Loss from operations..................... (2,300,213) (1,967,613) (3,633,712) (1,044,581) (1,439,192)
Minority interest........................ -- -- 45,178 -- 42,682
Interest income, net..................... 79,544 100,816 212,928 30,312 38,288
----------- ----------- ----------- ----------- -----------
Net loss................................. $(2,220,669) $(1,866,797) $(3,375,606) $(1,014,269) (1,358,222)
=========== =========== =========== =========== ===========
Net loss per share, basic and diluted.... $ (1.43) $ (1.13) $ (1.39) $ (0.42) $ (0.53)
=========== =========== =========== =========== ===========
Weighted average shares outstanding,
basic and diluted...................... 1,550,932 1,659,446 2,429,456 2,428,861 2,576,608
Pro forma net loss per share, basic and
diluted................................ $ (0.24) $ (0.10)
=========== ===========
Pro forma weighted average shares
outstanding, basic and diluted......... 14,069,580 14,216,732
</TABLE>
See accompanying notes.
F-4
<PAGE> 61
APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------ PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- ------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................ 11,106,791 $11,107 1,410,149 $1,410 $21,623,830 $ --
Exercise of stock options for cash........ -- -- 249,079 249 71,799 --
Issuance of Series E preferred stock...... 533,333 533 -- -- 2,999,467 --
Net loss and comprehensive loss........... -- -- -- -- -- --
---------- ------- --------- ------ ----------- -----------
Balance at December 31, 1997................ 11,640,124 11,640 1,659,228 1,659 24,695,096 --
Issuance of common stock.................. -- -- 250 -- 25 --
Net loss and comprehensive loss........... -- -- -- -- -- --
---------- ------- --------- ------ ----------- -----------
Balance at December 31, 1998................ 11,640,124 11,640 1,659,478 1,659 24,695,121 --
Issuance of common stock, net............. -- -- 907,143 907 5,109,158 --
Exercise of stock options for cash........ -- -- 3,225 3 1,073 --
Deferred compensation..................... -- -- -- -- 1,080,518 (1,080,518)
Amortization of deferred compensation..... -- -- -- -- -- 435,150
Issuance of stock options to
consultants............................. -- -- -- -- 23,688 (23,688)
Compensation related to consultant stock
options................................. -- -- -- -- -- 19,979
Minority investor's investment in Novasite
(Restated).............................. -- -- -- -- 921,765 --
Unrealized loss on short-term
investments............................. -- -- -- -- -- --
Net loss (Restated)....................... -- -- -- -- -- --
Comprehensive loss........................ -- -- -- -- -- --
---------- ------- --------- ------ ----------- -----------
Balance at December 31, 1999 (Restated)..... 11,640,124 11,640 2,569,846 2,569 31,831,323 (649,077)
Exercise of stock options for cash
(unaudited)............................. -- -- 20,985 21 8,817 --
Deferred compensation (unaudited)......... -- -- -- -- 5,483,092 (5,483,092)
Amortization of deferred compensation
(unaudited)............................. -- -- -- -- -- 1,180,435
Issuance of stock options to consultants
(unaudited)............................. -- -- -- -- 3,600 (3,600)
Compensation related to consultant stock
options (unaudited)..................... -- -- -- -- -- 3,854
Unrealized gain on short-term investments
(unaudited)............................. -- -- -- -- -- --
Net loss (unaudited) (Restated)........... -- -- -- -- -- --
Comprehensive loss (unaudited)............ -- -- -- -- -- --
---------- ------- --------- ------ ----------- -----------
Balance at March 31, 2000 (unaudited)
(Restated)................................ 11,640,124 $11,640 2,590,831 $2,590 $37,326,832 $(4,951,480)
========== ======= ========= ====== =========== ===========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
LOSS DEFICIT EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1996................ $ -- $(19,895,718) $ 1,740,629
Exercise of stock options for cash........ -- -- 72,048
Issuance of Series E preferred stock...... -- -- 3,000,000
Net loss and comprehensive loss........... -- (2,220,669) (2,220,669)
------- ------------ -----------
Balance at December 31, 1997................ -- (22,116,387) 2,592,008
Issuance of common stock.................. -- -- 25
Net loss and comprehensive loss........... -- (1,866,797) (1,866,797)
------- ------------ -----------
Balance at December 31, 1998................ -- (23,983,184) 725,236
Issuance of common stock, net............. -- -- 5,110,065
Exercise of stock options for cash........ -- -- 1,076
Deferred compensation..................... -- -- --
Amortization of deferred compensation..... -- -- 435,150
Issuance of stock options to
consultants............................. -- -- --
Compensation related to consultant stock
options................................. -- -- 19,979
Minority investor's investment in Novasite
(Restated).............................. -- -- 921,765
Unrealized loss on short-term
investments............................. (7,785) -- (7,785)
Net loss (Restated)....................... -- (3,375,606) (3,375,606)
-----------
Comprehensive loss........................ -- -- (3,383,391)
------- ------------ -----------
Balance at December 31, 1999 (Restated)..... (7,785) (27,358,790) 3,829,880
Exercise of stock options for cash
(unaudited)............................. -- -- 8,838
Deferred compensation (unaudited)......... -- -- --
Amortization of deferred compensation
(unaudited)............................. -- -- 1,180,435
Issuance of stock options to consultants
(unaudited)............................. -- -- --
Compensation related to consultant stock
options (unaudited)..................... -- -- 3,854
Unrealized gain on short-term investments
(unaudited)............................. 2,193 -- 2,193
Net loss (unaudited) (Restated)........... -- (1,358,222) (1,358,222)
-----------
Comprehensive loss (unaudited)............ -- -- (1,356,029)
------- ------------ -----------
Balance at March 31, 2000 (unaudited)
(Restated)................................ $(5,592) $(28,717,012) $ 3,666,978
======= ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 62
APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $(2,220,669) $(1,866,797) $(3,375,606) $(1,014,269) $(1,358,222)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of deferred compensation........ -- -- 435,150 37,014 1,180,435
Depreciation and amortization................ 394,013 397,614 244,213 64,667 57,941
Compensation related to consultant stock
options.................................... -- -- 19,979 -- 3,854
Deferred revenue............................. 36,029 (1,096,730) (236,667) 1,140,833 (59,166)
Deferred rent................................ 18,579 (327) (6,974) (1,744) (3,456)
Minority interest............................ -- -- (45,178) -- (42,682)
Write-off of abandoned patents............... -- -- 3,017 -- --
Changes in operating assets and liabilities:
Prepaid expenses and other assets.......... 283,105 (135,533) (308,114) (94,316) (622,642)
Accounts payable and accrued expenses...... (181,546) 63,390 82,585 (118,709) (163,284)
----------- ----------- ----------- ----------- -----------
Net cash flows provided by (used in)
operations................................... (1,670,489) (2,638,383) (3,187,595) 13,476 (1,007,222)
INVESTING ACTIVITIES
Purchase of property and equipment............. (69,773) (9,064) (181,679) (10,794) (103,911)
Proceeds from disposal of property and
equipment.................................... 14,857 159 -- -- --
Purchase of short-term investments............. (2,686,079) -- (3,906,569) (3,684,614) --
Proceeds from sale of short-term investments... 936,868 2,740,449 2,375,303 -- 335,372
Patents........................................ (124,229) (383,498) (224,653) (46,172) (68,770)
----------- ----------- ----------- ----------- -----------
Net cash flows provided by (used in) investing
activities................................... (1,928,356) 2,348,046 (1,937,598) (3,741,580) 162,691
FINANCING ACTIVITIES
Payments on long-term obligations.............. (390,999) (65,489) (26,995) (4,437) (4,350)
Proceeds from line of credit................... 1,500,000 -- -- -- --
Repayments on line of credit................... (1,500,000) -- -- -- --
Issuance of preferred stock, net............... 3,000,000 -- -- -- --
Issuance of common stock, net.................. 72,048 25 5,111,141 5,110,367 8,838
Investment in subsidiary by minority investor,
net.......................................... -- -- 1,191,436 -- --
----------- ----------- ----------- ----------- -----------
Net cash flows provided by (used in) financing
activities................................... 2,681,049 (65,464) 6,275,582 5,105,930 4,488
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents.................................. (917,796) (355,801) 1,150,389 1,377,826 (840,043)
Cash and cash equivalents at the beginning of
the period................................... 2,097,674 1,179,878 824,077 824,077 1,974,466
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at the end of the
period....................................... $ 1,179,878 $ 824,077 $ 1,974,466 $ 2,201,903 $ 1,134,423
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest......................... $ 73,466 $ 6,405 $ 2,462 $ 564 $ 495
=========== =========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations entered into for
equipment.................................... $ -- $ -- $ 44,940 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 63
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Applied Molecular Evolution, Inc. (the "Company" or "AME"), a Delaware
corporation, was incorporated on August 14, 1989, as Ixsys, Inc., and changed
its name to Applied Molecular Evolution, Inc., in February 2000. The Company has
a broad technology platform termed AMEsystem, which the Company's management
believes will provide AME with a valuable and efficient solution to optimizing
proteins with commercial potential. To date, the Company has successfully
utilized its proprietary technology to optimize monoclonal antibodies for
pharmaceutical and biotechnology companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
Novasite Pharmaceuticals, Inc. ("Novasite"), which is 78% owned by AME and which
was incorporated in 1999. All significant intercompany accounts and transactions
have been eliminated. Minority interest at March 31, 2000, represents the
minority stockholders' proportionate share of the net assets of Novasite at such
date.
The Company contributed the rights to two patents with a carrying value of
approximately $38,000 and the minority investor contributed $1,250,000 in gross
cash proceeds to Novasite. Novasite is performing research and development
related to the patented technology, using both its own employees and certain
employees of the Company on a contract services basis. The net loss of Novasite
($205,353 in 1999 and $194,009 in the three months ended March 31, 2000) is
allocated to the minority interest based on its 22% ownership percentage of
Novasite. The amount ($921,765) by which AME's initial ownership interest in
Novasite's equity exceeded AME's cost basis in its investment has been recorded
as additional paid-in capital of AME.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist primarily of highly liquid investments with
original maturities of 90 days or less when purchased. Short-term investments
consist of debt securities with maturities in excess of 90 days when purchased.
In accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, management determines the appropriate classification
of short-term investment securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Securities classified as
available-for-sale are carried at fair value, with unrealized gains and losses,
if any, reported in comprehensive loss.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts payable and accrued liabilities, are carried
at cost, which management believes approximates fair value due to the short-term
maturity of these instruments. Short-term investments are carried at fair value.
The difference between fair value and cost is reported as unrealized loss on
short-term investments in the consolidated balance sheets.
F-7
<PAGE> 64
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents. The Company limits
its exposure to credit loss by placing its cash with high credit quality
financial institutions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (3 to 10 years) using the straight-line method.
Leasehold improvements and assets under capital leases are stated at cost and
amortized on a straight-line basis over the shorter of the estimated useful
lives of the assets or the lease term.
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, if indicators of impairment
exist, the Company assesses the recoverability of the affected long-lived assets
by determining whether the carrying value of such assets can be recovered
through the undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by comparing the
carrying value of the asset to the present value of the expected future cash
flows associated with the use of the asset. While the Company's current and
historical operating and cash flow losses are indicators of impairment, the
Company believes the future cash flows to be received from the long-lived assets
will exceed the assets' carrying value, and accordingly the Company has not
recognized any impairment losses through December 31, 1999.
PATENT COSTS
Legal costs incurred in filing patent applications have been capitalized and,
upon patent issuance, are amortized over the six-year estimated useful lives of
the patents. Costs related to abandoned patent applications are expensed at the
time of abandonment.
INCOME TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax
asset or liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. The Company has
provided a full valuation allowance against the net deferred tax asset.
DEFERRED RENT
Rent expense is recorded on a straight-line basis over the term of the lease.
The difference between rent expense and amounts paid under the lease agreements
is recorded as deferred rent in the accompanying consolidated balance sheets.
COMPREHENSIVE LOSS
In accordance with SFAS No. 130, Reporting Comprehensive Income, all components
of comprehensive income or loss, including net income or loss, are reported in
the financial statements in the period in which they are recognized.
Comprehensive income or loss is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner sources. Net
income or loss and other
F-8
<PAGE> 65
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
comprehensive income or loss, including foreign currency translation adjustments
and unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income or loss.
INTERIM FINANCIAL INFORMATION
The consolidated balance sheet at March 31, 2000, the consolidated statements of
operations and cash flows for the three months ended March 31, 1999 and 2000,
and the consolidated statement of stockholders' equity for the three months
ended March 31, 2000, are unaudited. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary to state fairly
therein, in accordance with generally accepted accounting principles.
NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity with
SFAS No. 128, Earnings per Share, and Staff Accounting Bulletin 98 issued by the
Staff of the Securities and Exchange Commission (SAB 98), for all periods
presented. Under the provisions of SAB 98, common stock and preferred stock that
has been issued or granted for nominal consideration prior to the anticipated
effective date of the initial public offering must be included in the
calculation of basic and diluted net loss per common share as if these shares
had been outstanding for all periods presented. To date, the Company has not
issued or granted shares for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share has been
computed using the weighted average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Pro forma basic and
diluted net loss per common share, as presented in the statements of operations,
has been computed for the year ended December 31, 1999, and the three month
period ended March 31, 2000, as described above, and also gives effect to the
assumed conversion of preferred stock which will automatically convert to common
stock immediately prior to the completion of the Company's initial public
offering (using the "as if converted" method) from the original date of
issuance.
The following table presents the calculation of net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ------------ ------------
(RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss................ $(2,220,669) $(1,866,797) $(3,375,606) $(1,014,269) $(1,358,222)
=========== =========== =========== =========== ===========
Net loss per share,
basic and diluted..... $ (1.43) $ (1.12) $ (1.39) $ (0.42) $ (0.53)
=========== =========== =========== =========== ===========
Weighted average shares
used in computing net
loss per share, basic
and diluted........... 1,550,932 1,659,446 2,429,456 2,428,861 2,576,608
Pro forma net loss per
share, basic and
diluted (unaudited)... $ (0.24) $ (0.10)
=========== ===========
</TABLE>
F-9
<PAGE> 66
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ------------ ------------
(RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares used to compute
pro forma net loss per
share:
Weighted average shares
used in computing net
loss per share, basic
and diluted........... 2,429,456 2,576,608
Pro forma adjustment to
reflect weighted
average effect of
assumed conversion of
preferred stock
(unaudited)........... 11,640,124 11,640,124
----------- -----------
Shares used in computing
pro forma net loss per
share, basic and
diluted (unaudited)... 14,069,580 14,216,732
</TABLE>
The Company has excluded all preferred stock, outstanding stock options and
warrants, and shares subject to repurchase from the calculation of diluted loss
per common share because all such securities are antidilutive for all periods
presented. The total number of shares excluded from the calculation of diluted
net loss per share, prior to application of the treasury stock method for
options and warrants, was 12,376,499, 12,928,966 and 13,008,863 for the years
ended December 31, 1997, 1998 and 1999, and 12,951,566 and 13,505,419 for the
three months ended March 31, 1999 and 2000, respectively. Such securities, had
they been dilutive, would have been included in the computation of diluted net
loss per share.
REVENUE RECOGNITION
Revenue from the sale of a specified quantity of Vitaxin to MedImmune (Note 3)
is included in contract revenue in 1999, and was recorded upon the shipment of
the specified quantity of Vitaxin and the acceptance of the product by
MedImmune, which occurred in August 1999. Contract revenue from related party in
1997 and 1998 consists of amounts received under collaborative agreements with
Bristol-Myers Squibb (Note 6), and was recognized as services were performed
under the contract. Contract revenue from unrelated parties in 1999 also
includes amounts received under collaborative agreements with MedImmune and Cell
Matrix (Note 6), and is recognized either (i) ratably over the term of the
agreement, which approximates the performance of services, for contracts
specifying payment for services over a given period, or (ii) as services are
performed under the agreement, for contracts specifying payment on a
per-full-time employee basis.
Other revenue consists principally of research grants and a non-refundable,
prepaid royalty fee received from Biosite which is being recognized ratably over
the estimated useful lives of the related patents (Note 7). Grant revenue is
recognized as the research expenses related to the grants are incurred. All
F-10
<PAGE> 67
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
amounts received under the collaborative research agreements or research grants
are not refundable, regardless of the success of the underlying research.
Revenue earned related to up front product and technology license fees is
recognized in accordance with Question 5 of Staff Accounting Bulletin 101.
Accordingly, amounts received under multiple-element arrangements requiring
on-going services or performance by the Company are recognized over the period
of such services or performance.
Revenue from milestones will be recognized upon achievement of the milestone,
unless the amounts received are creditable against royalties due to the Company.
Under the Company's research agreement with MedImmune (Note 7), MedImmune may
make milestone payments in the form of either cash payment or a purchase of
equity at a specified premium to the then-current fair value of the Company's
stock and a portion of such milestones are creditable against future royalties.
Upon receipt of a cash milestone payment, the amount creditable against future
royalties will be recorded as deferred royalty revenue and recognized as
royalties would otherwise be due to the Company. Upon receipt of an equity
milestone payment, the specified premium will be recorded as deferred royalty
revenue and recognized as royalties would otherwise be due to the Company. In
the event the Company is notified by MedImmune that MedImmune is terminating the
development of all products for which royalties could be due to the Company, any
amount then recorded as deferred royalty revenue will be recognized in full.
Amounts received in excess of revenue recognized are recorded as deferred
revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations,
in accounting for its employee and director stock options. Under APB 25, when
the purchase price of restricted stock or the exercise price of the Company's
employee stock options equals or exceeds the fair value of the underlying stock
on the date of issuance or grant, no compensation expense is recognized.
Options or stock awards issued to non-employees are recorded at their fair value
as determined in accordance with SFAS No. 123 and EITF 96-18 and recognized over
the related service period.
SEGMENT REPORTING
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, requires the use of a management approach in identifying segments
of an enterprise. Management has determined that the Company operates in one
business segment, which is scientific research and development activities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of recorded assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the recorded amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
F-11
<PAGE> 68
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which the Company will adopt
effective January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management does not believe the adoption of
SFAS No. 133 will impact the financial statements as the Company currently does
not invest in derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulleting No. 101, Revenue Recognition (SAB 101). SAB 101 provides
the SEC Staff's views in applying generally accepted accounting principles to
various revenue recognition issues and specifically addresses revenue
recognition for upfront, non-refundable fees received in connection with
research collaboration arrangements. It is the SEC's position that such fees
should be generally recognized over the term of the agreement. The historical
financial statements reflect the Company's application of SAB 101.
2. BALANCE SHEET DETAILS
SHORT-TERM INVESTMENTS
At December 31, 1999, short-term investments consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE GAIN (LOSS)
---------- ---------- -----------
<S> <C> <C> <C>
Obligations of U.S. government agencies........ $1,194,129 $1,186,101 $(8,028)
Corporate debt securities...................... 337,137 337,380 243
---------- ---------- -------
$1,531,266 $1,523,481 $(7,785)
========== ========== =======
</TABLE>
At March 31, 2000, short-term investments consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE LOSS
---------- ---------- ----------
<S> <C> <C> <C>
Obligations of U.S. government agencies......... $1,195,894 $1,190,302 $(5,592)
---------- ---------- -------
$1,195,894 $1,190,302 $(5,592)
========== ========== =======
</TABLE>
All of the short-term investments mature in 2000.
F-12
<PAGE> 69
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Contract research receivable...................... $ -- $374,538 $1,001,380
Other............................................. 290,201 236,811 231,540
-------- -------- ----------
$290,201 $611,349 $1,232,920
======== ======== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment........................ $ 1,622,386 $ 1,677,682 $ 1,778,724
Office furniture and equipment.............. 419,387 580,465 581,109
Leasehold improvements...................... 458,379 468,624 470,849
----------- ----------- -----------
2,500,152 2,726,771 2,830,682
Accumulated depreciation.................... (2,152,389) (2,284,978) (2,315,919)
----------- ----------- -----------
$ 347,763 $ 441,793 $ 514,763
=========== =========== ===========
</TABLE>
PATENT COSTS
Patent costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Issued patent costs............................ $ 618,233 $ 662,064 $ 665,682
Accumulated amortization....................... (101,206) (196,602) (223,602)
---------- ---------- ----------
517,027 465,462 442,080
Unissued patent costs.......................... 717,113 878,690 943,842
---------- ---------- ----------
$1,234,140 $1,344,152 $1,385,922
========== ========== ==========
</TABLE>
F-13
<PAGE> 70
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
3. STOCKHOLDERS' EQUITY
PREFERRED STOCK
A summary of preferred stock issued and outstanding at December 31, 1998 and
1999 and at March 31, 2000 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND LIQUIDATION
OUTSTANDING PAR VALUE VALUE
----------- --------- -----------
<S> <C> <C> <C>
Convertible Preferred........................... 500,000 $ 500 $ 258,750
Series A........................................ 1,062,802 1,063 550,000
Series B........................................ 3,097,625 3,097 3,252,506
Series C........................................ 4,271,125 4,271 6,833,800
Series D........................................ 1,108,572 1,109 4,656,002
Series E........................................ 1,600,000 1,600 9,000,000
---------- ------- -----------
11,640,124 $11,640 $24,551,058
========== ======= ===========
</TABLE>
The Convertible Preferred Stock and Series A, B, C, D and E preferred stock are
convertible at the option of the holders into a total of 11,640,124 shares of
common stock, subject to certain antidilution provisions. In addition, all of
the shares of preferred stock will automatically convert into common shares upon
the closing of an underwritten public offering of equity securities which
results in gross offering proceeds of at least $10,000,000, at a per share price
of not less than $5.00. The holder of each share of preferred stock is entitled
to one vote for each share of common stock into which it would convert.
Upon the approval of the holders of at least 66 2/3% of the then outstanding
shares of Convertible Preferred Stock and Series A, B, C, D and E preferred
stock, such shares may be redeemed, at the option of the Board of Directors, for
$0.5693, $0.65, $1.05, $1.60, $4.20 and $5.625, respectively, per share plus any
declared but unpaid dividends.
The holders of Convertible Preferred Stock and Series A, B, C, D and E preferred
stock are entitled to annual dividends of $0.04, $0.04, $0.08, $0.13, $0.34 and
$0.45 per share, respectively, per share, payable whenever funds are legally
available, when, and if, declared by the Board of Directors.
WARRANTS
During 1996 and 1997, in connection with a short-term loan and security
agreements, the Company issued warrants to purchase 26,667 shares and 40,000
shares, respectively, of Series E preferred stock at an exercise price of $5.625
per share, exercisable upon the earlier of August 29, 2001 and June 23, 2002,
respectively, or two years after the date of an initial public offering of the
Company's common stock.
STOCK OPTION PLAN
The Company's 1992 Stock Plan has authorized the grant of options for up to
3,100,000 shares of common stock to employees, directors and consultants. All
options granted have 10 year terms and generally vest ratably over four years of
continued employment. In April 2000, the Company adopted the 2000 Stock Plan and
authorized the issuance of 1,600,000 stock options under terms comparable to the
1992 Stock Plan.
F-14
<PAGE> 71
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires use of option valuation models which the
Company believes were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma net loss information is required to be disclosed by SFAS No. 123 and
has been determined as if the Company has accounted for its employee stock
options under the fair value method prescribed in that Statement. Option
valuation models require the input of highly subjective assumptions. The minimum
value pricing model, which is specified for use by non-publicly owned companies
by SFAS 123, is similar to the Black-Scholes option valuation model, which was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable, except that it excludes the
factor for volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The fair value of these options was estimated at the date of grant using the
minimum value pricing model with the following weighted average assumptions for
1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000:
Risk-free interest rate of 6%; dividend yield of 0%; and a weighted-average life
of the option of four years for 1997 and 1998, two years for 1999 and the three
months ended March 31, 1999, and one year for the three months ended March 31,
2000.
The stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1996........................ 1,593,156 $0.10
Granted........................................... 118,325 $0.45
Canceled.......................................... (730,027) $0.40
Exercised......................................... (249,079) $0.29
---------
Balance at December 31, 1997........................ 732,375 $0.37
Granted........................................... 641,300 $0.45
Canceled.......................................... (151,250) $0.44
Exercised......................................... (250) $0.10
---------
Balance at December 31, 1998........................ 1,222,175 $0.37
Granted........................................... 206,600 $0.45
Canceled.......................................... (123,478) $0.45
Exercised......................................... (3,225) $0.33
---------
Balance at December 31, 1999........................ 1,302,072 $0.41
Granted (unaudited)............................... 607,500 $0.75
Canceled (unaudited).............................. (89,959) $0.45
Exercised (unaudited)............................. (20,985) $0.42
---------
Balance at March 31, 2000 (unaudited)............... 1,798,628 $0.50
=========
</TABLE>
F-15
<PAGE> 72
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
Exercise prices for options outstanding as of December 31, 1999, were $0.20 to
$0.45 ($0.20 to $0.75 at March 31, 2000.) The weighted average contractual life
of these options is eight years at December 31, 1999 (7.8 years at March 31,
2000).
At December 31, 1999, 1,266,797 shares were available for future option grants
(749,256 at March 31, 2000) and 1,302,072 shares of Common Stock were reserved
for issuance upon exercise of outstanding options (1,798,628 at March 31, 2000).
The weighted average fair value of options granted in 1997, 1998 and 1999 and
for the three-month periods ended March 31, 1999 and 2000 were $0.12, $0.11,
$0.03, $0.03, and $0.04, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Actual net loss......... $(2,220,669) $(1,866,797) $(3,375,606) $(1,014,269) $(1,358,222)
Pro forma net loss...... $(2,224,044) $(1,872,671) $(3,406,506) $(1,021,810) $(1,363,880)
Actual net loss per
share................. $ (1.43) $ (1.12) $ (1.39) $ (0.42) $ (0.53)
Pro forma net loss per
share................. $ (1.43) $ (1.13) $ (1.40) $ (0.42) $ (0.53)
</TABLE>
During the year ended December 31, 1999, and the three months ended March 31,
2000, in connection with the grant of certain stock options to employees, the
Company recorded deferred stock compensation totaling approximately $1.1 million
and $5.5 million, respectively, representing the difference between the exercise
price and the estimated fair value of the Company's common stock on the date
such stock options were granted. Deferred compensation is included as a
reduction of stockholders' equity and is being amortized to expense over the
vesting period of the options in accordance with FASB Interpretation No. 28,
which permits an accelerated amortization methodology. During the year ended
December 31, 1999, and the three months ended March 31, 2000, the Company
recorded amortization of deferred stock compensation expense of approximately
$435,000 and $1,180,000, respectively.
COMMON STOCK SOLD TO MEDIMMUNE
In conjunction with a collaborative research and development agreement entered
into with MedImmune Inc. ("MedImmune") in February 1999 (Note 7), MedImmune paid
the Company an aggregate of $6,350,001, before expenses of $39,936, for (i)
907,143 shares of common stock, (ii) a specified quantity of Vitaxin, and (iii)
an exclusive license to Vitaxin. At MedImmune's request the agreement did not
allocate the total proceeds among the three elements of the agreement. Of the
aggregate proceeds of $6,350,001, $1,200,000 was refundable if the Company did
not deliver the specified quantity of Vitaxin. This amount approximates the
Company's actual cost to acquire the specified quantity of Vitaxin from a
third-party manufacturer and provide it to MedImmune. Accordingly, the Company
allocated such amount to the specified quantity of Vitaxin and recognized it as
revenue in August 1999 when the Vitaxin was delivered to and accepted by
MedImmune. The Company considered available objective evidence related to the
value of the other two elements of the agreement, including (i) offers made in
late 1998 by another company to acquire a license to Vitaxin without a
contemporaneous equity investment in the company, and (ii) offers made in late
1998 by another company to acquire the Company. The Company also considered that
(i) there had been no other sales of common stock to independent outside
investors in 1998 or 1999, (ii) the limited number of offers received for either
a Vitaxin license or an acquisition of the Company, and (iii) the persuasiveness
of the amounts in these offers given that the transactions were
F-16
<PAGE> 73
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
not ultimately consummated. Ultimately, while the Company believes a significant
portion of the proceeds related to the value of the license to Vitaxin, the
Company concluded that the available objective evidence was not persuasive
enough to support an allocation of the remaining proceeds ($5,110,065) between
the license and equity elements of the agreement, and accordingly the entire
remaining proceeds were allocated to common stock.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, a total of 11,640,124 common shares have been reserved for
the conversion of preferred stock into common stock. In addition, 1,302,072 and
66,667 common shares have been reserved for issuance upon the exercise of stock
options and warrants, respectively.
4. LONG-TERM OBLIGATIONS AND LEASE COMMITMENTS
The Company leases its facilities under an operating lease which expires in
2003. The lease provides for escalating rent payments during the term. For
financial reporting purposes, rent expense is recognized on a straight-line
basis over the term of the lease. Accordingly, rent expense recognized in excess
of rent paid is reflected as deferred rent. Under the lease agreement, the
Company is required to pay a percentage of operating expenses relating to the
building.
Rent expense was $472,156, $415,400, $415,400, and $83,100 for the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 2000,
respectively. Equipment recorded under equipment notes payable totaled
approximately $1,441,000 at December 31, 1998 and 1999, less accumulated
amortization of $1,430,355 and $1,441,000 at December 31, 1998 and 1999,
respectively. At December 31, 1999 and March 31, 2000, equipment recorded under
capital leases totaled $44,940 less accumulated amortization of $4,494 and
$6,741, respectively.
Annual future minimum lease payments as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- -------
<S> <C> <C>
2000.................................................. $ 449,224 $19,376
2001.................................................. 315,794 17,761
2002.................................................. 274,700 --
2003.................................................. 282,341 --
2004.................................................. 6,659 --
---------- -------
Total minimum lease payments..................... $1,328,718 37,137
==========
Less amount representing interest..................... 2,100
-------
Present value of capital lease obligations............ 35,037
Less current portion.................................. 17,788
-------
Capital lease obligations, non-current................ $17,249
=======
</TABLE>
5. INCOME TAXES
At December 31, 1999, the Company had federal and California tax net operating
loss carryforwards of approximately $20,591,000 and $1,044,000, respectively.
The difference between the tax loss carryforwards for federal and California
purposes is primarily attributable to the capitalization of research and
F-17
<PAGE> 74
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
development expenses for California and the 50% limitation of California loss
carryforwards. The federal tax loss carryforwards will begin expiring in 2005,
unless previously utilized. Approximately $65,000 of the California tax loss
carryforward expired during 1999, and the related deferred tax asset and tax
loss carryforward amounts have been reduced accordingly. The remaining
California tax loss carryforward will begin expiring in 2000 unless previously
utilized. The Company also has federal and California research and development
tax credit carryforwards totaling $621,000 and $316,000, respectively, which
will expire beginning in 2005 unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, use of the Company's net
operating loss and tax credit carryforwards will be limited as a result of
certain cumulative changes in the Company's stock ownership which occurred
during 1993. However, the Company believes that the limitation will not have a
material impact on the utilization of the carryforwards.
Significant components of the Company's deferred tax assets as of December 31,
1998 and 1999 are shown below. A valuation allowance of $9,248,000, of which
$9,902,000 relates to 1998, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 7,879,000 $ 7,267,000
Research and development credits................ 562,000 826,000
Capitalized research expense.................... 1,044,000 969,000
Deferred revenue................................ 546,000 450,000
Other........................................... 374,000 273,000
----------- -----------
Total deferred tax assets.................... 10,405,000 9,785,000
Valuation allowance for deferred tax assets....... (9,902,000) (9,248,000)
----------- -----------
Net deferred tax assets........................... 503,000 537,000
Deferred tax liabilities:
Patent expenses................................. (503,000) (537,000)
----------- -----------
Net deferred tax liabilities...................... $ -- $ --
=========== ===========
</TABLE>
6. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Cell Matrix
On November 29, 1999, the Company entered into a seven-month collaboration
agreement with Cell Matrix, Inc. ("Cell Matrix"), with an option to extend for
an equal period which has since been extended through August 15, 2000, to
humanize and optimize candidate molecules and to perform some preclinical
development. Pursuant to the terms of the agreement, Cell Matrix will pay AME in
equal quarterly installments for the humanization and optimization of each of
the two candidate molecules. In addition, Cell Matrix shall make milestone
payments to AME for each enhanced antibody. The agreement also provides that
Cell Matrix will make additional payments to the Company upon the achievement of
certain milestones and pay royalties on its net sales of products developed. As
of December 31, 1999 and for the three months ended March 31, 2000, the Company
had recorded revenue of $166,667 and $500,000 related to research activities
performed under the agreement.
F-18
<PAGE> 75
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
MedImmune
On February 24, 1999, the Company entered into a six-month collaboration
agreement with MedImmune, with an option to extend for up to 24 months, to
produce optimized antibodies. MedImmune exercised its option to extend the
Agreement. Pursuant to the terms of the agreement, MedImmune agreed to fund
research for a stated number of full-time employees dedicated to the specified
research. In addition, MedImmune will pay royalties to AME on net sales of
products developed. The agreement also provides that MedImmune will make
additional payments, either through cash payments or equity purchases at a
specified premium to then-current fair value, to the Company upon the
achievement of certain milestones. Under the terms of the agreement, MedImmune
has the option to credit up to 65% of cash payments and 20% of equity purchases
against future royalty payments. At the time of a cash payment, 35% of the
payment will be recognized as milestone revenue and the remaining 65% recorded
as deferred royalty revenue. Additionally, if MedImmune makes the milestone
payment through an equity purchase, 20% of the amount will be recorded as
deferred royalty revenue.
Bristol-Myers Squibb
During 1993 and 1995, the Company entered into two collaborative agreements with
Bristol-Myers Squibb to discover and develop certain antibodies for use in human
cancer therapy. The Company was required to provide a specified level of
scientific research through September 1998. Included in the statements of
operations are contract revenues from a related party related to this agreement
of $3,250,947 and $2,437,841 for the years ended December 31, 1997 and 1998,
respectively. As of December 31, 1998, the Company had received all contract
revenue payments specified under the agreement and had completed all its
performance obligations. The Company does not anticipate any future contract
revenue under this agreement.
7. LICENSE AGREEMENTS
MedImmune
Vitaxin, AME's angiogenesis inhibitor, was exclusively licensed to MedImmune in
return for an equity investment, milestone payments and royalties. Under the
agreement, MedImmune is responsible for all future clinical development,
manufacturing and commercialization of Vitaxin. MedImmune made a $5.15 million
equity investment in AME in February 1999 (Note 3), and pursuant to the terms of
the agreement and will pay milestones and royalties related to the development
and commercialization of any resulting products.
Biosite
During 1998, the Company entered into a License Agreement with Biosite
Diagnostics, Inc. ("Biosite"). The Company granted Biosite non-exclusive rights
to certain AME patent technology in exchange for an upfront, non-refundable
royalty fee of $1,475,000. The Company is recognizing the royalty fee as revenue
over the estimated lives of the related patents. As of December 31, 1998 and
1999 and for the three months ended March 31, 2000, $1,341,111, $1,104,444 and
$1,045,278, respectively, of the amount originally received is included in
deferred revenue.
F-19
<PAGE> 76
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
TSRI
During 1994, the Company entered into a license agreement with The Scripps
Research Institute of California ("TSRI"). TSRI granted the Company exclusive
rights to certain technology relating to a murine monoclonal antibody and the
use of the antibody as an inhibitor of angiogenesis. In exchange, the Company
paid TSRI $100,000 and issued TSRI 20,000 shares of AME common stock. The
Company also agreed to provide TSRI additional payments based on the completion
of certain clinical and approval milestones. In addition, the Company has agreed
to reimburse TSRI for a portion of its past and future patent costs related to
the licensed technology and pay royalties to TSRI on net sales of each licensed
product. The exclusive license will expire 10 years after the date of the first
commercial sale of such licensed product.
8. SUBSEQUENT EVENT
PRIVATE PLACEMENT OF SERIES F PREFERRED STOCK
On May 3, 2000, the Company sold 1,133,333 shares of our Series F preferred
stock at $4.50 per share for proceeds of $5.1 million. On June 15, 2000, the
Company sold an additional 1,111,111 shares of our Series F preferred stock at
$4.50 per share for proceeds of $5.0 million. The Series F preferred stock has
similar rights and terms to the Company's other outstanding series of preferred
stock, but has a liquidation and redemption value of $4.50 per share and
dividend rights of $0.36 per share. The Series F preferred stock was sold
primarily to the affiliates of an independent accredited investor, however the
price was substantially below the anticipated initial public offering price
contemplated by this prospectus. Accordingly, pursuant to EITF 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features, the Company will
record a deemed dividend on the Series F preferred stock equal to the lesser of
(i) the difference between the initial public offering price and the Series F
sale price, or (ii) the aggregate Series F sale price.
INITIAL PUBLIC OFFERING
In April 2000, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the preferred stock outstanding will automatically convert into shares of common
stock on a one-to-one basis.
9. RESTATEMENT
The Company has restated its financial statements for the year ended December
31, 1999 and the three months ended March 31, 2000. The restatement for the
three months ended March 31, 2000 reflects $392,000 in increased amortization of
deferred compensation and a change in the Company's accounting for its
investment in Novasite. The restatement for the year ended December 31, 1999
reflects only the change in accounting for Novasite.
As restated, Novasite's loss is allocated to the minority investor only to the
extent of such investor's ownership interest in Novasite. In addition, the
amount ($921,765) by which the Company's ownership interest in Novasite's net
assets at the time of the minority investment exceeded the Company's investment
has been recorded directly into the Company's additional paid-in capital. The
effect of these
F-20
<PAGE> 77
APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information pertaining to March 31, 2000 and the three months ended
March 31, 1999 and 2000 is unaudited)
adjustments for the year ended December 31, 1999 and the three months ended
March 31, 2000 was to decrease the minority interest in Novasite's losses by
$160,175 and $151,327, respectively.
The net effect of these adjustments on the year ended December 31, 1999 was to
increase net loss by $160,175 or $0.07 per share and on the three months ended
March 31, 2000 was to increase net loss by $543,327 or $0.21 per share.
F-21
<PAGE> 78
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[APPLIED MOLECULAR EVOLUTION LOGO]
APPLIED MOLECULAR
EVOLUTION, INC.
4,650,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
July 27, 2000
CIBC WORLD MARKETS
PAINEWEBBER INCORPORATED
SG COWEN
--------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
UNTIL AUGUST 21, 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
