<PAGE>
As filed with the Securities and Exchange Commission on October 2, 2000
Registration No. 333-39548
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
MediChem Life Sciences, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 8731 36-3518660
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
--------------
12305 South New Avenue
Lemont, Illinois 60439
(630) 257-1500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Michael T. Flavin, Ph.D.
Chairman and Chief Executive Officer
MediChem Life Sciences, Inc.
12305 South New Avenue
Lemont, Illinois 60439
(630) 257-1500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
R. Cabell Morris, Jr. Richard B. Romney
Winston & Strawn Dewey Ballantine LLP
35 West Wacker Drive 1301 Avenue of the Americas
Chicago, Illinois 60601 New York, New York 10019-6
(312) 558-5600 (212) 259-8000
--------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
--------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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--------------------------------------------------------------------------------
<PAGE>
PRELIMINARY PROSPECTUS October 2, 2000
Subject to completion
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
6,400,000 Shares
MEDICHEM LIFE SCIENCES, INC.
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of shares of our common stock. We expect
the public offering price to be between $10.00 and $12.00 per share.
We have applied to have our common stock listed on the Nasdaq National Market
under the symbol "MCLS."
Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk Factors" beginning on page 12.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per
Share Total
---------------------------------------------------------
<S> <C> <C>
Public offering price $ $
---------------------------------------------------------
Underwriting discount and commissions $ $
---------------------------------------------------------
Proceeds, before expenses, to MediChem $ $
---------------------------------------------------------
</TABLE>
The underwriters may also purchase up to 960,000 shares of common stock from us
at the public offering price to cover over-allotments, if any.
UBS Warburg LLC
Chase H&Q
William Blair & Company
The date of this prospectus is , 2000
<PAGE>
--------------------------------------------------------------------------------
[PHOTOGRAPHIC DEPICTIONS OF THE STAGES OF DRUG DISCOVERY AND DEVELOPMENT, AND
TEXTUAL REFERENCE TO MEDICHEM'S SERVICE OFFERINGS DURING EACH STAGE]
[Stages and service offerings are represented by the following labels:]
Genomics
Proteomics
The study of protein structure and function.
Lead Discovery
The identification of a compound that may be developed into a new drug.
Lead Optimization
An iterative process of modifying the structure of a promising compound to
optimize its therapeutic properties.
Chemical Process Development
The improvement or modification of existing chemical processes used to
create a new drug.
Chemical Synthesis & Scale up
The identification of new processes that are useful in scale up to produce
a compound in larger quantities.
Preclinical Testing
Phase I-IV Clinical Trials
[MediChem logo]
Harnessing the power of chemistry and biology through technology and
innovation.
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus summary.................. 3
The offering........................ 7
Summary financial data.............. 8
Risk factors........................ 12
Forward looking information......... 19
Use of proceeds..................... 20
Dividend policy..................... 20
Capitalization...................... 21
Dilution............................ 24
Selected financial data............. 26
Unaudited pro forma condensed
combined financial information ... 31
Management's discussion and analysis
of financial condition and results
of operations..................... 35
</TABLE>
<TABLE>
<S> <C>
Business............................ 44
Management.......................... 70
Related party transactions;
relationship with Advanced Life
Sciences.......................... 80
Corporate reorganization............ 83
Principal stockholders.............. 84
Description of capital stock........ 87
Shares eligible for future sale..... 90
Underwriting........................ 92
Legal matters....................... 94
Experts............................. 94
Where you can find more
information....................... 94
Index to financial statements....... F-1
</TABLE>
<PAGE>
Prospectus summary
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock discussed under "Risk Factors."
OUR BUSINESS
We are a drug discovery technology and services company that offers a broad
range of integrated chemistry R&D capabilities to pharmaceutical and
biotechnology companies. Recent advances in the study of genes and their
function, or genomics, have resulted in exponential growth in the number of
biological targets that can be exploited for new drug discovery. The explosion
in genomic information creates a significant gap between the capabilities
companies have to identify new drug targets and the chemistry resources
necessary to develop novel drug compounds. We bridge this gap by offering
chemistry services that span the drug development spectrum, from early stage
discovery technologies and services up until a potential drug enters clinical
testing. Our services are concentrated in the following stages of drug
development:
.proteomics, the study of protein structure and function;
.lead discovery, the identification of a compound that may be developed into a
new drug;
.lead optimization, an iterative process of modifying the structure of a
promising compound to optimize its therapeutic properties;
.chemical process development, the improvement or modification of existing
chemical processes used to create a new drug; and
.chemical synthesis and scale up, the identification of new processes that are
useful in scale up to produce a compound in larger quantities.
Drug discovery technologies and services are the tools used to advance a
promising compound through the drug development pipeline. We offer our
customers a complete range of technologies and services in the following
principal areas:
.proteomics services, to identify protein structures in order to identify lead
compounds;
.combinatorial chemistry, the process of synthesizing diverse combinations of
chemical compounds using high speed robotic technology;
.computational chemistry, the use of computer-assisted calculations to design
molecules or explain chemical behavior;
.medicinal chemistry, the process of introducing subtle changes to a molecule
and determining the specific biological activity that results from each
change;
.biocatalysis, the use of enzymes as reagents to facilitate chemical processes;
.analytical and separations chemistry, the process of purifying chemical
compounds and verifying their structures and purity; and
.chemical synthesis process development and scale up, the design and selection
of the optimal chemical processes for manufacturing a chemical compound on a
larger scale.
Our technology and services are designed to enable our pharmaceutical and
biotechnology customers to reduce overall development time and cost and to
pursue, simultaneously, a greater number of discovery and development
opportunities.
3
<PAGE>
We develop proprietary technologies that use automation and optimization to
compress the drug discovery process timeline. These proprietary platform
technologies complement our traditional chemistry services with opportunities
for up-front licensing fees and milestone and royalty payments for multiple
customers. In addition, we offer a strategic drug development program that
enables us to manage our clients' lead compounds through all stages of drug
development to potential commercialization.
CHALLENGES IN DRUG DISCOVERY AND DEVELOPMENT
In order to maintain historical growth rates and replace blockbuster drugs that
are coming off patent, pharmaceutical and biotechnology companies must
accelerate the pace of drug discovery and development. These companies are
capitalizing on advances in disciplines such as molecular biology, genomics and
proteomics that are presenting opportunities to develop therapeutics for
previously unmet or undermet medical needs. These opportunities, however, also
create challenges for pharmaceutical and biotechnology companies in the biology
and chemistry phases of drug discovery and development. Over the coming years,
pharmaceutical and biotechnology companies must:
.address the explosion of genomics information;
.expedite lead discovery and development;
.produce compounds that are chirally pure, meaning their molecular structure is
the mirror image of other compounds, but offer superior therapeutic
effectiveness;
.develop environmentally cleaner chemical synthesis techniques; and
.recruit high quality scientific talent.
In order to address these challenges, pharmaceutical and biotechnology
companies are increasingly turning to companies that offer specialized
technologies and services in the biology and chemistry phases of drug discovery
and development.
OUR SOLUTION
Founded in 1987, we believe we were the first independent chemistry company to
offer a broad array of discovery-related medicinal chemistry services to
pharmaceutical and biotechnology customers. Our development of strong
relationships with pharmaceutical companies, by initially providing basic
medicinal chemistry services, helped us to identify their unmet needs in the
later stages of the drug discovery process. In response, we expanded our
service offerings to include chemical process development, analytical and
separations chemistry and chemical synthesis and scale up.
In conjunction with the recent advances in genomics, we have broadened our
technology and service offerings in order to assist our customers in the early
stages of the drug discovery and development process. Our offerings in
proteomics, combinatorial chemistry and biocatalysis provide our clients with
sophisticated technology and the expertise to help streamline their early-stage
discovery and development efforts.
Today, we are well positioned as a drug discovery technology and services
provider to the life sciences, pharmaceutical and biotechnology industries,
capable of assisting our clients through a broad array of chemistry service and
technology offerings. The following areas of expertise represent our solutions
to the needs and challenges currently facing our pharmaceutical and
biotechnology clients:
.Proteomics. Through our Emerald BioStructures, Inc. subsidiary, we provide
proteomics services to identify protein structures that serve as a map for
computational and combinatorial chemists in the design and discovery of novel
lead compounds.
4
<PAGE>
.Combinatorial and Computational Chemistry. We create customized libraries of
compounds, based upon our clients' specifications and our computational
chemistry capabilities, in order to assist our clients in screening for
potential lead candidates. We use automated technology platforms to produce
chemical libraries that carefully match the scale and throughput needs of each
unique project.
.Medicinal Chemistry. We offer a broad spectrum of medicinal chemistry services
to our clients. These services range from determining the optimal compounds
and processes from among potential lead candidates, to the identification of
efficient synthetic chemical production processes to produce larger quantities
of a compound for use in pre-clinical and clinical studies.
.Biocatalysis. Our ThermoGen, Inc. subsidiary offers stable, easy-to-use
enzyme-based biocatalysts to perform difficult chemical reactions. Our
biocatalysts are more environmentally friendly and cost-effective reagents and
can be customized through enzymatic engineering--improving natural enzymes by
modifying their amino acid structure--and protein shuffling--a technique that
randomly combines module sections of proteins--in order to meet the unique
needs of our clients. In addition, biocatalysis can be used to produce
chirally pure compounds that meet the stringent specifications of the FDA in
an economical and efficient manner.
.Chemical Process Development. We offer technologies and expertise that help
our clients identify the best chemical production processes. Our patented
AutoOptimize(TM) technology combines robotics and statistical analysis to
enable our chemists to rapidly identify the best chemical processes for scale
up, significantly shortening our clients' lead compound development timeframe.
.Experienced Chemistry Project Teams. We have built teams of highly qualified
scientists that are available to our pharmaceutical and biotechnology
customers to satisfy their growing needs for scientific expertise in their
drug discovery and development efforts. Our chemistry teams work closely with
our customers to assure the timely and on-budget completion of complex
chemistry projects.
OUR STRATEGY
Our strategy is to further develop and expand our chemistry services and
platform technologies to capitalize on the opportunities in drug discovery and
development that exist and are rapidly increasing. We intend to leverage our
expertise by seeking royalty and milestone opportunities through our drug
discovery platform technologies and our strategic drug development program. Our
internal growth strategy focuses on expanding services offerings, developing
new customer relationships and expanding our scientific and physical resources.
We also intend to grow our business externally through selective acquisitions
that increase our customer base, platform technologies, chemistry services
offerings or geographic reach.
CORPORATE INFORMATION
Our principal executive offices are located at 12305 South New Avenue, Lemont,
Illinois 60439. Our telephone number is (630) 257-1500. Our web site is
http://www.medichem.com. We do not intend the information found on our web site
to be part of this prospectus and our web site may not contain all of the
information that is important to you.
"MediChem", the MediChem logo, AutoOptimize, ChiralSelect, BlockBuilder, Clover
Plates, Crystal Growth Matrices, Crystal Monitor, High Throughput
Crystallization, GMPure, MediCertified, RapidScan, RapidScreen, ThermoCat,
ThermoGenetic, ThermoFusion, TrueSubstrate and QuickScreen
5
<PAGE>
are trademarks of MediChem Life Sciences, Inc.'s operating subsidiaries. Other
trademarks and trade names appearing in this prospectus are the property of
their holders.
Immediately before the closing of this offering, we will reorganize our holding
company, MCR Holdings, Inc., to become a Delaware corporation by merging it
with and into us. Following the merger, we will be the surviving corporation
and the new holding company of our operating companies, MediChem Research,
Inc., ThermoGen, Inc. and Emerald BioStructures, Inc. We more fully describe
the merger and related transactions in this prospectus under "Corporate
Reorganization." References in this prospectus to Class A common stock, Class B
common stock, Class C common stock, Class A convertible preferred stock, Class
B redeemable preferred stock, Class C redeemable preferred stock and Class D
preferred stock refer to classes of stock of MCR Holdings before the merger.
Following the merger, we will have a single class of common stock and the prior
seven classes of stock will cease to exist. References in this prospectus to
common stock refer to common stock of MediChem Life Sciences, Inc. after the
merger. Unless the context indicates otherwise, the information in this
prospectus assumes that the corporate reorganization transactions have been
completed.
6
<PAGE>
The offering
<TABLE>
<S> <C>
Common stock we are offering............... 6,400,000 shares
Common stock to be outstanding after the
offering................................. 25,371,334 shares
Proposed Nasdaq National Market symbol..... MCLS
Use of proceeds............................ General corporate purposes and working
capital, including funding expansion of our
operations, expanding sales and marketing
function, increasing platform technologies
R&D, and making future acquisitions, as well
as repayment of indebtedness, and redemption
of existing capital stock and warrants. See
"Use of proceeds."
</TABLE>
Except as otherwise indicated, information in this prospectus, including the
number of shares to be outstanding after this offering assumes the following:
.a 18.65557 for one split of our common stock to be effected prior to the
closing of this offering;
.the automatic conversion of all outstanding shares of Class A preferred stock
into:
.6,351,120 shares of our common stock; and
.1,000 shares of our Class B redeemable preferred stock and simultaneous
automatic redemption of all 1,000 outstanding shares of Class B redeemable
preferred stock for $7.5 million out of the net proceeds from this offering;
.the automatic conversion of all outstanding shares of Class C preferred stock
into shares of our Class A common stock and simultaneous automatic redemption
of such shares of Class A common stock for $4.0 million out of the net
proceeds from this offering;
.the conversion of all outstanding shares of Class D preferred stock into
128,474 shares of our common stock; and
.no exercise of the underwriters' over-allotment option.
The information in this prospectus, unless otherwise indicated, does not assume
inclusion of the following:
.1,932,437 shares of common stock issuable upon exercise of stock options
outstanding as of
June 30, 2000 at a weighted average exercise price of $2.50 per share;
.2,500,000 shares of common stock available for issuance under our 2000 Stock
Incentive Plan; and
.net exercise of warrants to purchase 157,788 shares of our common stock at an
exercise price of $2.60 per share.
The number of shares of common stock outstanding after the offering is based on
shares outstanding as of June 30, 2000, based on the assumptions above. See
"Capitalization."
7
<PAGE>
Summary financial data
The following table summarizes the financial data for our business during the
periods indicated. You should read the data set forth below in conjunction with
"Management's discussion and analysis of financial condition and results of
operations" and our consolidated financial statements and related notes thereto
included elsewhere in this prospectus.
The pro forma consolidated statement of operations data for the year ended
December 31, 1999 and the six months ended June 30, 2000 is presented as if, on
January 1, 1999 we effected our 18.65557 for one stock split and completed the
acquisitions of ThermoGen and Emerald BioStructures through the issuance of
5,029,511 shares of our common stock.
The pro forma as adjusted consolidated balance sheet data as of June 30, 2000
adjusts the pro forma balance sheet data to reflect the consummation of this
offering and the application of a portion of the net proceeds to:
.the automatic conversion of all outstanding shares of our Class A preferred
stock into 6,351,120 shares of our common stock and 1,000 shares of our
Class B redeemable preferred stock and the simultaneous automatic redemption
of all 1,000 outstanding shares of Class B redeemable preferred stock for
$7.5 million; the automatic conversion of all outstanding shares of our
Class C preferred stock into shares of our Class A common stock and the
simultaneous automatic redemption of such shares of Class A common stock for
$4.0 million; and the conversion of all outstanding shares of our Class D
preferred stock into 128,474 shares of our common stock;
.the repayment of approximately $9.7 million of indebtedness anticipated to
be outstanding under our credit facility; and
.the redemption of the warrant to purchase 315,577 shares of our common stock
for $3.5 million.
8
<PAGE>
<TABLE>
<CAPTION>
Consolidated statement of Year Ended December 31,
operations data Pro Forma
1997 1998 1999 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contract revenues:
Contract revenue....... $4,683,560 $7,327,261 $11,255,534 $13,868,513
Contract revenue--
related party......... 1,205,948 1,497,055 2,476,829 2,476,829
---------- ---------- ----------- -----------
Total contract
revenues............ 5,889,508 8,824,316 13,732,363 16,345,342
Contract service costs:
Contract service
costs................. 2,077,238 3,681,044 5,281,963 6,817,128
Contract service
costs--related party.. 450,574 466,893 1,089,960 1,089,960
---------- ---------- ----------- -----------
Total contract
service costs....... 2,527,812 4,147,937 6,371,923 7,907,088
---------- ---------- ----------- -----------
Gross profit............. 3,361,696 4,676,379 7,360,440 8,438,254
Milestones and
intellectual property
revenue................. -- -- -- --
Milestones and
intellectual property
revenue--related party.. -- -- 1,787,612 1,787,612
Operating expenses:
Selling, general and
administrative........ 2,641,414 3,621,621 6,005,993 7,029,721
Depreciation and
amortization.......... 317,913 458,722 787,810 5,788,120
---------- ---------- ----------- -----------
Total operating
expenses............ 2,959,327 4,080,343 6,793,803 12,817,841
---------- ---------- ----------- -----------
Income (loss) from
operations.............. 402,369 596,036 2,354,249 (2,591,975)
---------- ---------- ----------- -----------
Other expense, net:
Interest expense....... 101,561 124,818 587,813 608,543
Interest income........ -- (1,350) (175,209) (175,209)
Other.................. (98,539) (48,068) -- --
Increase in value of
redeemable warrant.... -- -- -- --
---------- ---------- ----------- -----------
Total other expense,
net................. 3,022 75,400 412,604 433,334
---------- ---------- ----------- -----------
Income (loss) before
income taxes.......... 399,347 520,636 1,941,645 (3,025,309)
Income taxes
(benefit)............. 132,382 200,987 871,285 (568,824)
---------- ---------- ----------- -----------
Net income (loss).... 266,965 319,649 1,070,360 (2,456,485)
Less:
Allocation of income
to participating
securities.......... (103,983) (124,503) (282,512) --
Accretion to
redemption value of
preferred stock..... -- -- (623,498) --
---------- ---------- ----------- -----------
Net income (loss)
available to common
stockholders............ $ 162,982 $ 195,146 $ 164,350 $(2,456,485)
---------- ---------- ----------- -----------
Per share data:
Basic net income (loss)
available to common
stockholders.......... $ 0.01 $ 0.02 $ 0.02 $ (0.13)
---------- ---------- ----------- -----------
Weighted average number
of common shares
outstanding - basic..... 11,696,296 11,696,296 7,462,228 18,971,334(/1/)
</TABLE>
--------
(1) Pro forma weighted average shares outstanding assumes conversion of
Class A convertible preferred stock into 6,351,120 shares of common
stock, conversion of Class D preferred stock into 128,474 shares of
common stock, and issuance of 5,029,511 to effect the acquisitions of
ThermoGen and Emerald.
9
<PAGE>
<TABLE>
<CAPTION>
Consolidated statement of operations Six Months Ended June 30,
data (unaudited) Pro Forma
1999 2000 2000
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Contract revenues:
Contract revenue................... $4,834,944 $ 7,533,945 $ 8,683,794
Contract revenue--related party.... 1,202,895 1,356,485 1,356,485
---------- ----------- -----------
Total contract revenues.......... 6,037,839 8,890,430 10,040,279
Contract service costs:
Contract service costs............. 2,350,259 3,735,659 4,373,434
Contract service costs--related
party............................. 427,255 599,407 599,407
---------- ----------- -----------
Total contract service costs..... 2,777,514 4,335,066 4,972,841
---------- ----------- -----------
Gross profit......................... 3,260,325 4,555,364 5,067,438
Milestones and intellectual property
revenue............................. -- 222,000 222,000
Milestones and intellectual property
revenue--related party............ -- 350,000 350,000
Operating expenses:
Selling, general and
administrative.................... 2,716,307 4,245,278 6,101,806
Depreciation and amortization...... 312,706 985,009 3,085,280
---------- ----------- -----------
Total operating expenses......... 3,029,013 5,230,287 9,187,086
---------- ----------- -----------
Income (loss) from operations........ 231,312 (102,923) (3,547,648)
---------- ----------- -----------
Other expense, net:
Interest expense................... 132,787 427,577 425,805
Interest income.................... (11,903) (70,291) (70,522)
Other.............................. -- -- --
Increase in value of redeemable
warrant........................... -- 1,905,487 1,905,487
---------- ----------- -----------
Total other expense, net......... 120,884 2,262,773 2,260,770
---------- ----------- -----------
Income (loss) before income taxes.. 110,428 (2,365,696) (5,808,418)
Income taxes (benefit)............. 57,814 -- (1,228,571)
---------- ----------- -----------
Net income (loss)................ 52,614 (2,365,696) (4,579,847)
Less:
Allocation of income to
participating securities........ (1,072) -- --
Accretion to redemption value of
preferred stock................. (50,918) (654,336) --
---------- ----------- -----------
Net income (loss) available to common
stockholders........................ $ 624 $(3,020,032) $(4,579,847)
========== =========== ===========
Per share data:
Basic net income (loss) available
to common stockholders.......... $ -- $ (0.36) $ (0.24)
========== =========== ===========
Weighted average number of common
shares outstanding - basic........ 7,462,228 8,291,263 18,971,334(/1/)
</TABLE>
--------
(1) Pro forma weighted average shares outstanding assumes conversion of
Class A convertible preferred stock into 6,351,120 shares of common
stock, conversion of Class D preferred stock into 128,474 shares of
common stock, and issuance of 5,029,511 to effect the acquisitions of
ThermoGen and Emerald.
10
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 2000 Pro Forma
Consolidated balance sheet data Actual Pro Forma As Adjusted
------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents........ $ 1,599,754 (9,900,246) $ 40,428,400
Working capital.................. 2,159,506 (9,340,494) 40,988,152
Total assets..................... 70,621,366 59,121,366 109,450,012
Long-term debt and capital lease
obligations and redeemable
preferred stock................. 25,501,579 20,184,815 455,233
Total stockholders' equity....... 29,779,490 31,096,254 94,596,254
</TABLE>
11
<PAGE>
--------------------------------------------------------------------------------
Risk factors
You should carefully consider the risks described below, together with all of
the other information included in this prospectus, before deciding whether to
invest in our common stock. If any of the following risks actually occurs, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
RISKS RELATED TO OUR INDUSTRY
Our ability to generate revenue would be harmed if the pharmaceutical and
biotechnology industries reduce their spending on outsourced R&D projects.
We have benefited to date from the increasing trend of pharmaceutical and
biotechnology companies to outsource chemical R&D projects. A reversal or
slowing of this trend could slow our revenue growth. Our ability to generate
new business could be impaired by general economic downturns in our clients'
industries. In addition, the current trend toward mergers and consolidation in
the pharmaceutical industry could reduce the number of our potential customers
and decrease their aggregate R&D expenditures.
Our pharmaceutical and biotechnology customers' profitability may also be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of health care. For example, in certain foreign
markets pricing or profitability of pharmaceuticals is subject to government
control. In the U.S., there have been, and we expect that there will continue
to be, a number of federal and state proposals to implement similar government
control. To the extent health care reforms reduce the profitability of
pharmaceutical and biotechnology companies, our business opportunities could be
limited as a result of reduced outsourced R&D spending.
Our success will depend on our ability to compete in multiple areas of the
highly competitive drug development technology and services industry.
Because we provide many types of technologies and services, we compete in many
areas, including, but not limited to, proteomics, combinatorial and
computational chemistry, medicinal chemistry, biocatalysis and chemical process
development. We are one of very few chemistry service companies that have the
breadth of service offerings needed to take a customer's lead compound through
almost all stages of drug development. Competing in multiple areas presents
special challenges to our management, including keeping abreast of technical
and market developments across a broad range of specialties. In each unique
service area we face competition based on a number of factors, including size,
relative expertise, speed and costs of identifying and optimizing potential
lead compounds and chemical processes. We compete with the research departments
of pharmaceutical and biotechnology companies and other drug discovery
technology and service companies, as well as numerous academic and research
institutions. Many of these competitors have greater financial and other
resources than we do. Smaller companies also are significant competitors in
specific market segments.
Because our revenues are concentrated the loss of a significant customer would
harm our business.
Historically, a substantial portion of our revenue has been derived from
contracts with a limited number of significant customers. Our ten largest
customers have accounted for approximately 94%, 90% and 87% of total contract
revenues, which equaled $5.5 million, $8.6 million and $13.6 million, for the
years ended December 31, 1997, 1998 and 1999, respectively. In addition, our
top three customers for the year ended December 31, 1999 accounted for
approximately 45% of total contract revenues. Specifically, in 1999 our
affiliated company, Advanced Life Sciences, Inc., together with its joint
venture subsidiary, Sarawak MediChem Pharmaceuticals, Inc., accounted for 17%
of our total
--------------------------------------------------------------------------------
12
<PAGE>
Risk factors
--------------------------------------------------------------------------------
contract revenues, Pfizer, Inc. accounted for 17% of our total contract
revenues and AstraZeneca accounted for 11% of our total contract revenues. The
loss of any significant customer would significantly lower our revenues and
profitability.
Our contracts are generally terminable upon short notice.
Our contracts are generally terminable upon 10 to 90 days' notice. Our
contracts may be terminated for numerous reasons, many of which may be beyond
our control, such as a reduction or reallocation of a customer's R&D budget or
a change in a customer's overall financial condition. To date, we have not
experienced an early termination of a significant contract that has materially
impacted our operating results. However, the loss of a large contract or
multiple smaller contracts, or a significant decrease in revenue derived from a
contract, could significantly reduce our profitability and require us to
reallocate underutilized physical and professional resources.
Given the uncertainties inherent in the drug discovery and development process,
our ability to realize milestone or royalty payments is highly speculative.
To realize future milestone and royalty payments we must achieve specific
contractual objectives or our customers must generate revenues from drug
products developed in part by using our proprietary services and technologies.
During the year ended December 31, 1999 and the six months ended June 30, 2000,
we realized $1.8 million and $0.6 million of milestone and intellectual
property revenue, respectively. All but one of the engagements that resulted in
milestone payments or royalties have been with our affiliate Advanced Life
Sciences. Our present strategy, however, emphasizes seeking future milestone
and royalty arrangements to increase our overall profitability and we currently
have arrangements with unaffiliated customers that present opportunities for
milestone and royalty revenues. Development and commercialization of potential
drug candidates depend not only on the achievement of research objectives by us
and our collaborators, but also on each client's own financial, competitive,
marketing and strategic considerations and regulatory requirements imposed by
the FDA and other governmental entities in the U.S. and other countries, all of
which are beyond our control. Given the uncertainties inherent in the drug
discovery and development process, our ability to realize milestone or royalty
payments is highly speculative. Moreover, because milestone and royalty
revenues are generally incentive-based with low associated costs, failure to
achieve these revenues adversely impacts our profitability to a greater degree
than the loss of service revenues.
RISKS RELATED TO OUR BUSINESS
Our business generation, future growth and service capabilities are dependent
upon our ability to retain and motivate our key personnel and attract other
skilled scientific personnel in the future.
Our performance is highly dependent on the principal members of our senior
management and scientific staff, many of whom possess unique scientific skills.
In particular, we are highly dependent on and our business would be
significantly harmed if we lost the services of Michael T. Flavin, Ph.D., our
chairman, president and chief executive officer, or John L. Flavin, our
executive vice president and chief operating officer. The loss of Dr. Flavin,
as our founder, would harm our business as he provides the strategic direction
of our company and fosters our growth through established industry
relationships with customers and employees. The loss of Mr. Flavin would harm
our business as he is ultimately responsible for the management and operations
of our company. Although we have entered into agreements containing non-
competition restrictions and into employment agreements with our senior
scientific and management personnel, we do not have employment agreements with
all of our key personnel. If we are unable to retain our key management and
scientific personnel, our overall business operations would suffer and we could
lose the ability to offer certain services.
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13
<PAGE>
Risk factors
--------------------------------------------------------------------------------
In addition, our future success will depend to a significant extent on our
ability to attract, retain and motivate highly skilled chemists and other
scientists. Our ability to maintain, expand or renew our existing customer
engagements with our customers and obtain engagements from new customers
depends, in large part, on our ability to hire and retain sufficient numbers of
scientists with the skills necessary to keep pace with a rapidly changing
industry. We believe that there is a shortage of, and significant competition
for, scientists with the skills and experience in chemistry necessary to
perform the services we offer. We compete with the research departments of
pharmaceutical companies, biotechnology companies, chemistry research companies
and academic institutions for new personnel. The inability to hire additional
qualified personnel would inhibit our future growth.
Our recent growth and expansion may be difficult to manage and these
difficulties could damage our ability to increase our revenues and our profits.
Our operations have grown rapidly in recent years. This growth places
significant strain on our operational, human and financial resources. We
acquired ThermoGen and Emerald BioStructures in May 2000 and are in the process
of integrating their operations with ours. Our ability to compete effectively
will depend, in large part, upon our ability to expand, improve, integrate and
effectively utilize our operating, management, marketing and financial systems
to accommodate our expanded operations and those of our recently acquired
companies. The physical expansion of our facilities to accommodate future
growth may also lead to unanticipated costs and divert management and business
development resources. Our failure to effectively anticipate, implement and
manage the changes required to sustain our growth and successfully integrate
our recent acquisitions would disrupt our business operations and decrease our
profitability.
We and our customers are subject to substantial government regulations that are
expensive to comply with, expose us to possible enforcement actions, and could
block commercialization of drug candidates.
Our customers and collaborators, including our Advanced Life Sciences and
Sarawak MediChem Pharmaceuticals affiliates, are subject to substantial
regulation by governmental entities in the U.S. and other countries. Moreover,
to the extent that we act as project manager in providing or arranging for FDA-
regulated services for our customers, we also are subject to these
requirements. For example, we have performed chemistry research services and
engaged strategic partners to advance calonolide A, an anti-HIV drug that is
currently in Phase I clinical trials. Human pharmaceutical products are subject
to rigorous pre-clinical and clinical testing and other approval procedures by
the FDA and by foreign regulatory authorities. Various federal and, in some
cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of
pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and costly.
If the FDA finds that we or our customers have failed to comply with applicable
regulatory requirements, it can institute a wide variety of enforcement
actions, including fines, injunctions and civil penalties; recall or seizure of
products; the issuance of public notices or warnings; operating restrictions,
partial suspension or total shutdown of production; termination of ongoing
research; refusal of requests for approval of INDs or NDAs; withdrawal of
approvals previously granted; and criminal prosecution.
All facilities and manufacturing techniques used in the manufacture of products
for clinical use or for sale in the U.S. must be operated in conformity with
current good manufacturing practices, cGMP, guidelines established by the FDA.
Specifically, in our chemical synthesis and scale up service offerings, our
scientists scale up desired compounds that may be subject to cGMP requirements.
Our facilities are subject to periodic regulatory inspections to ensure
compliance with cGMP requirements. Failure
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14
<PAGE>
Risk factors
--------------------------------------------------------------------------------
on our part to comply with applicable requirements could result in the
termination of ongoing research or the disqualification of data for submission
to regulatory authorities. A finding that we had materially violated cGMP
requirements could result in additional regulatory sanctions and, in severe
cases, could result in a mandated closing of our facilities.
Our activities involve the use of hazardous materials, which subject us to
regulation, related costs and potential liabilities for injuries or violations
of environmental laws.
Our business frequently involves the controlled storage, use and disposal of
hazardous materials, including chemical and biological materials such as
hexane, ethyl acetate and hydrogen. Using these materials presents the risk of
accidental environmental contamination and physical injury and is subject to
federal, state and local regulations. Although we believe that our safety
procedures for handling and disposing of these hazardous materials comply with
the standards prescribed by law and regulation, we cannot completely eliminate
the risk of accidental contamination or injury. In the event of an accident, we
could be held liable for any damages that result, and any liability could
either exceed the $2.0 million aggregate limit on our insurance or fall outside
its coverage. We could incur significant costs or impairment of our business
efforts in order to comply with current or future environmental laws and
regulations.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
Obtaining new patented technologies and enforcing patents currently in our
broad technology platform is unpredictable and could increase our costs of
doing business and decrease our profits.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties
when necessary and conduct our business without infringing upon the proprietary
rights of others. A significant portion of our revenue has been derived from
providing services to our customers based on our broad base of patented
technologies. Currently, we derive revenue through the use of 6 patented
technologies and intend to increase revenue based upon the future use of over
20 patents pending issue. In addition, we generate revenue from 6 patented
technologies licensed from third parties, including AutoOptimize(TM) which is
exclusively licensed from Advanced Life Sciences.
The patent positions of pharmaceutical, biotechnology and chemistry services
firms are subject to challenge as the industries mature and competition
increases. Patent positions involve complex legal and factual questions and any
challenge to our position could result in a material expense. Although we are
not currently involved in any enforcement or infringement dispute, any future
challenges could be costly and have a negative impact on our profits. For
example, although we were issued a patent for our ThermoCat(R) family of
enzymes, competitors will likely aggressively develop and commercialize in this
area, which may require us to protect our patent through legal action. Our
patent applications will not necessarily result in the issuance of patents or,
if any patents are issued, will not necessarily provide us protection or
commercial advantage. In the event that a third party also files patent
applications for inventions that conflict with ours, we may have to participate
in interference proceedings with the United States Patent and Trademark Office
to determine priority of invention, which could result in the loss of the
opportunity to secure patent protection and the right to use the invention.
Even if the eventual outcome is favorable to us, we could incur substantial
costs as the result of such proceedings.
The filing and prosecution of patent applications, litigation to establish the
validity and scope of patents, assertion of patent infringement claims against
others and defense of patent infringement
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15
<PAGE>
Risk factors
--------------------------------------------------------------------------------
claims by others is expensive and time consuming. If a third party is found to
have rights covering products or processes used by us, we could be forced to
cease using the technologies, be subject to significant liability to the third
party, or be required to license technologies from the third party.
Furthermore, even if our patents are determined to be valid, enforceable and
broad in scope, our competitors may be able to design around the patents and
compete with us using alternative technology.
Some aspects of our technologies and services have been licensed from third
parties. In particular, our ChiralSelect(TM) technology is dependent in part on
a license from Regis Technologies, Inc. This license expires in August 2009. We
intend to use our ChiralSelect(TM) as an important technology to increase
future revenues. Our ChiralSelect(TM) sales would suffer if we fail to maintain
the right to use these technologies. Additionally, as we continue to provide a
broad range of chemistry related services to our customers, we may need to
license different technologies from third parties. If we cannot obtain these
licenses or are unable to do so in a cost effective manner, our service
offerings may be limited, which could decrease our revenues.
Much of our intellectual property is represented by the collective expertise of
our scientists of which our sole protection is non-competition and
confidentiality agreements, which may not adequately protect our rights or
prevent disclosure of proprietary information.
In an effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, we require employees, consultants and collaborators to
execute confidentiality and invention assignment agreements upon commencement
of a relationship with us. These measures may not provide meaningful protection
for our trade secrets or other confidential information and technology. If
these measures do not protect our rights, third parties could use our
technology and our ability to compete in our markets would be harmed. In the
event of unauthorized use or disclosure of our confidential and proprietary
information, we may not have adequate remedies. In addition, costly and time-
consuming litigation could be necessary to enforce and determine the scope of
our proprietary rights.
The breadth of our offered technologies and services increases the potential
that our business operations could infringe on or misappropriate the
proprietary rights of others.
We may be sued for infringing on the patent rights of others and may have to
pay substantial damages for past infringement, including treble damages, if it
is ultimately determined that our products infringe a third party's proprietary
rights. Because we produce and provide many different technologies and
services, the potential is increased for patent infringement suits by a wide-
range of companies. In particular, our ThermoGen subsidiary currently has and
develops proprietary biocatalysis processes. There are various third parties
with processes that may relate to ThermoGen's technologies. We may be found in
the future to infringe on these or other proprietary rights of third parties
which could affect our ability to increase our revenue in the future. The drug
discovery industry has a history of patent litigation and will likely continue
to have patent litigation suits concerning drug discovery technologies.
Existing patents could prevent us and our collaborators from developing
processes using such technologies. From time to time we attempt to obtain from
third parties licenses that are compatible with our business objectives. We may
not be able to obtain any licenses on acceptable terms, if at all.
RISKS RELATED TO THIS OFFERING
Our directors and executive officers will own approximately 66% of our common
stock, which may limit new investors from influencing corporate decisions.
After giving effect to the sale of the shares of common stock offered hereby,
our directors and executive officers will beneficially own in the aggregate
approximately 66% of our outstanding common stock.
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16
<PAGE>
Risk factors
--------------------------------------------------------------------------------
As a result, these stockholders will be able to exert significant influence
over the outcome of fundamental corporate transactions requiring stockholder
approval, including mergers, sales of assets and the election of the members of
our board of directors. This concentration of ownership may have the effect of
delaying or preventing a change in control.
Our stock price may decline due to events and developments unique to our
business or the life sciences industry generally.
The market prices for securities of comparable technology companies,
particularly life science companies, have been highly volatile and the market
has experienced significant price and volume fluctuations that are often
unrelated to the operating performance of particular companies. Factors that
could have a significant impact on the market price of our common stock
include:
.actual or anticipated variation in our quarterly operating results;
.failure to achieve, or changes in, financial estimates issued by securities
analysts;
.announcements of technological innovations or services by us or our
competitors;
.disputes or other developments concerning proprietary rights, including
patents and litigation matters and the ability to patent our technologies;
.conditions or trends in the pharmaceutical and biotechnology industries;
.additions or departures of key personnel;
.announcements by us of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
.regulatory developments in both the U.S. and foreign countries;
.public concern as to the efficacy of new technologies; and
.general market conditions.
In particular, the realization of any of the risks described in these "Risk
Factors" could dramatically impact the market price of our common stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted. This
type of litigation could result in substantial costs and a diversion of
management's attention and resources.
The stock market has recently experienced extreme price and volume fluctuations
that have frequently affected market prices of smaller capitalization companies
and are often unrelated to the operating performance of such companies. Because
it is unlikely that we will ever pay dividends, you will only be able to
benefit from holding our stock if the stock price appreciates.
Future sales of our common stock may depress our stock price.
Sales of substantial amounts of common stock in the public market after this
offering could adversely affect the market price of the common stock. In
addition to the 6.4 million shares of common stock offered hereby, up to
approximately 13.8 million shares of common stock owned by our current
stockholders will be eligible for sale in the public market pursuant to Rule
144 under the Securities Act
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17
<PAGE>
Risk factors
--------------------------------------------------------------------------------
of 1933, as amended, at various times beginning 90 days after the date of this
prospectus. Executive officers, directors and stockholders who in the aggregate
hold 18,644,655 shares of common stock and options to purchase 890,560 shares
of common stock have agreed, pursuant to certain lock-up agreements, that until
180 days after the date of this prospectus, they will not, directly or
indirectly, offer, sell, or otherwise dispose of, any shares of common stock,
other than:
.as a bona fide gift or gifts, provided that the donee or donees thereof agree
in writing to be bound by the lock-up agreements; or
.with the prior written consent of UBS Warburg LLC. However, UBS Warburg LLC
may, in its sole discretion, release all or any portion of the common stock
from the restrictions of the lock-up agreements.
You will incur immediate and substantial dilution and may incur dilution in the
future.
Purchasers of the common stock in this offering will incur immediate dilution
in the pro forma net tangible book value of our common stock of $9.41 per
share. Moreover, we may require additional funds to support our working capital
requirements or for other purposes, and may seek to raise additional funds
through public or private equity financing. Also, we may acquire other
companies or technologies or finance strategic alliances by issuing equity. Any
capital raising transaction may result in additional dilution to our
stockholders.
Provisions in our charter and bylaws could make it difficult for our
stockholders to make changes to our current management.
In the event our stockholders desire to make changes to our board of directors,
certain provisions of our certificate of incorporation and bylaws may make it
difficult. These provisions:
.provide for a classified board of directors of which approximately one third
of the directors will be elected each year;
.allow the authorized number of directors to be changed only by a resolution of
the board of directors;
.establish advance notice requirements for proposals that can be acted upon at
stockholder meetings; and
.limit who may call stockholder meetings.
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18
<PAGE>
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Forward looking information
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus summary," "Risk factors,"
"Use of proceeds," "Management's discussion and analysis of financial condition
and results of operations" and "Business" and elsewhere in this prospectus are
forward-looking statements. These statements include, but are not limited to,
statements about our plans, objectives, expectations and intentions and other
statements contained in the prospectus that are not historical facts. When used
in this prospectus, the words "anticipates," "believes," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "seeks," "should," "will" or
"would" or the negative of these terms or similar expressions are generally
intended to identify forward-looking statements. Because these statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including our plans, objectives, expectations and
intentions and other factors discussed under "Risk factors."
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19
<PAGE>
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Use of proceeds
We estimate that the net proceeds from the sale of the 6,400,000 shares of
common stock that we are offering will be approximately $63.5 million, or
approximately $73.3 million if the underwriters' over-allotment option is
exercised in full, based upon an assumed initial public offering price of
$11.00 per share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us.
We intend to use the majority of the net proceeds, approximately $38.8 million
or $48.6 million if the underwriters' over-allotment option is exercised in
full, from this offering for general corporate purposes and working capital,
including the following:
.expansion of our operations including, $5.0 million in facilities expansion
not funded through mortgage financing to meet the needs of our growing
business;
.expansion of sales and marketing capabilities;
.R&D to develop additional platform technologies; and
.potential acquisitions of companies or technologies.
In addition, we intend to use the remaining portion of the net proceeds,
approximately $24.7 million, from this offering for the following specific
purposes:
.$11.5 million for the mandatory redemption of our outstanding preferred stock,
including
.$7.5 million for the redemption of our Class B redeemable preferred stock;
and
.$4.0 million for the redemption of shares of our Class A common stock as a
result of the automatic conversion of all outstanding shares of our Class C
preferred stock;
.$3.5 million for the redemption of the warrant to purchase 315,577 shares of
our common stock; and
.$9.7 million to repay amounts anticipated to be outstanding under our credit
facility, of which approximately $5.0 million under the term loan bears
interest at a current annual rate of 11.89% and approximately $4.7 million
under the revolving line bears interest at a current annual rate of 10.64%.
The credit facility terminates on June 14, 2001 for acquisition loans and June
1, 2005 for working capital loans.
We have no current agreements or commitments for acquisitions of complementary
businesses or technologies. Pending these uses, we will invest the net proceeds
of this offering in short-term, investment grade and interest-bearing
securities.
Dividend policy
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends. Any payment of
dividends will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.
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20
<PAGE>
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Capitalization
The following table sets forth our capitalization as of June 30, 2000:
.On an actual basis giving effect to the 18.65557 for one split of our common
stock to be effected prior to the closing of this offering and without any
other adjustments to reflect subsequent or anticipated events; and
.On a pro forma basis to give effect to:
.the automatic conversion of all outstanding shares of our Class A preferred
stock into:
.6,351,120 shares of our common stock; and
.1,000 shares of our Class B redeemable preferred stock and simultaneous
automatic redemption of 1,000 shares of our Class B redeemable preferred
stock for $7.5 million out of the net proceeds from this offering;
.the automatic conversion of all outstanding shares of our Class C preferred
stock into shares of our Class A common stock upon the closing of
this offering and the simultaneous automatic redemption of such shares of
our Class A common stock for $4.0 million out of the net proceeds from this
offering;
.the conversion of all outstanding shares of our Class D preferred stock into
128,474 shares of our common stock;
.our reincorporation in Delaware and the effectiveness of our new equity
capitalization.
.On a pro forma as adjusted basis to give effect to:
.our receipt of the estimated net proceeds from our sale of 6,400,000 shares
of our common stock in this offering at an assumed initial offering price of
$11.00 and, after deducting the underwriting discounts and commissions and
estimated offering expenses, and the application of $9.7 million of the net
proceeds of this offering to repay certain outstanding indebtedness and $3.5
million for the redemption of the warrant to purchase 315,577 shares of our
common stock.
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21
<PAGE>
Capitalization
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of June 30, 2000
Actual Pro Forma
(in thousands) Pro Forma As Adjusted
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt and capital leases, including
current portions(/1/).......... $ 9,213 $ 9,213 $ 455
Redeemable stock warrant.......... 2,400 3,472 --
Redeemable preferred stock:
Class A convertible preferred
stock, par value $0.0005
Authorized shares--6,351,120
Issued and outstanding shares--
6,351,120
Redemption value--$22,499,458... 13,884 -- --
Class B 5% redeemable preferred
stock, par value $0.01
Authorized shares--1,000
Issued and outstanding shares--
none......................... -- -- --
Class C preferred stock, par
value $0.01
Authorized shares--440,000
Issued and outstanding shares--
400,000...................... 4 -- --
Stockholder's equity (deficit):
Class D preferred stock, par
value $0.01
Authorized shares--440,000
Issued and outstanding shares--
400,000...................... 4 -- --
Class A common stock, par value
$0.0005
Authorized shares--18,655,570
Issued and outstanding shares--
7,462,228.................... 124 -- --
Class B common stock, par value
$0.0005
Authorized shares--1,650,234
Issued and outstanding--none.... -- -- --
Class C common stock, par value
$0.0005;
Authorized shares--315,577
Issued and outstanding shares--
none......................... -- -- --
Preferred stock, par value $0.01;
Pro forma authorized shares--
10,000,000
Pro forma issued and outstanding
shares--none................. -- -- --
Common stock, par value $0.01;
Pro forma authorized shares--
100,000,000
Pro forma issued and
outstanding--18,971,334;
Pro forma as adjusted issued and
outstanding--25,371,334......... -- 189 253
Additional paid-in capital....... 41,261 43,588 107,024(/2/)
-------- -------- --------
Accumulated deficit.............. (11,609) (12,681) (12,681)
-------- -------- --------
Total stockholders' equity...... 29,780 31,096 94,596
-------- -------- --------
Total capitalization............ $ 55,281 $ 43,781 $ 95,051
======== ======== ========
</TABLE>
--------
(1) We estimate that approximately $9.7 million in debt, excluding capital
lease obligations, will be outstanding upon the closing of this
offering, all of which will be repaid in full with a portion of the net
proceeds from this offering. See "Use of Proceeds."
(2)Additional paid-in capital is computed as follows:
<TABLE>
<S> <C>
As of June 30, 2000............................................. 41,261
Automatic conversion Class A preferred stock into 6,351,120
shares of common stock......................................... 13,820
Conversion of Class A preferred stock into Class B redeemable
preferred stock................................................ (7,500)
Conversion of Class C preferred stock into Class A common and
automatic redemption........................................... (3,996)
Conversion of Class D preferred stock into 128,474 shares of
common stock................................................... 3
Issuance of common stock, net of offering costs................. 63,436
-------
107,024
</TABLE>
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22
<PAGE>
Capitalization
--------------------------------------------------------------------------------
The preceding table does not include:
.1,932,437 shares of our common stock issuable upon exercise of stock options
outstanding as of June 30, 2000 at a weighted average exercise price of $2.50
per share;
.2,500,000 shares of common stock available for issuance under our 2000 Stock
Incentive Plan; and
.net exercise of outstanding warrants to purchase 157,788 shares of our common
stock at an exercise price of $2.60 per share.
To the extent that these options and warrants are exercised, there will be
further dilution to new investors. Please see "Management-Employee Benefit
Plans," and Notes 10 and 13 of "Notes to Consolidated Financial Statements" for
further information regarding our stock option plans and outstanding warrants.
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<PAGE>
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Dilution
Our historical net tangible book value as of June 30, 2000 was approximately
$(25.6) million, or $(2.05) per share of our Class A common stock, based on the
number of split-adjusted common shares outstanding as of June 30, 2000.
Historical net tangible book value per share is equal to the amount of our
total tangible assets less total liabilities and redeemable preferred stock,
divided by the number of pro forma shares of Class A common stock outstanding
as of June 30, 2000.
Our pro forma net tangible book value, as of June 30, 2000, was $(23.2)
million, or $(1.22) per share based on the pro forma number of shares
outstanding as of June 30, 2000 of 18,971,334 calculated after giving affect
to:
.the automatic conversion of all outstanding shares of our Class A preferred
stock into 6,351,120 shares of our common stock on a one-for-one basis and
1,000 shares of our Class B redeemable preferred stock and simultaneous
automatic redemption of 1,000 shares of our Class B redeemable preferred stock
for $7.5 million out of the net proceeds from this offering;
.the automatic conversion of all outstanding shares of our Class C preferred
stock into shares of our Class A common stock upon the closing of this
offering and the simultaneous automatic redemption of such shares of our Class
A common stock for $4.0 million out of net proceeds from the offering;
.the conversion of all outstanding shares of our Class D preferred stock into
128,474 shares of our common stock; and
.the 18.65557 for one split of our common stock to be effected prior to the
closing of this offering.
Pro forma net tangible book value represents the amount of total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding after considering the conversion of all outstanding preferred stock
into common stock. After giving effect to our sale of common stock offered
hereby at an assumed initial public offering price of $11.00 per share, and our
receipt of the estimated net proceeds from the offering, our pro forma net
tangible book value as of June 30, 2000 would have been approximately $40.3
million, or $1.59 per share. This represents an immediate increase in net
tangible book value of $2.81 per share to existing stockholders and an
immediate dilution of $9.41 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $11.00
Historical net tangible book value per share as of June 30,
2000......................................................... $(2.05)
Increase per share attributed to the conversion of Class A
preferred stock to common stock and the conversion of Class D
preferred stock to common stock and the redemption of Class B
and Class C preferred stock.................................. .83
------
Pro forma net tangible book value per share as of June 30,
2000......................................................... (1.22)
------
Increase per share attributable to this offering................ 2.81
------
Pro forma net tangible book value per share after this
offering..................................................... 1.59
------
Dilution per share to new investors.............................. $ 9.41
======
</TABLE>
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24
<PAGE>
Dilution
--------------------------------------------------------------------------------
The following table summarizes, on a pro forma basis as of June 30, 2000, the
differences between existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid before deducting the underwriting
discounts and commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
Shares purchased Total consideration Average price
Number Percent Amount Percent per share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 18,971,334 74.77% $ 56,690,391 44.61% $ 2.99
New public investors...... 6,400,000 25.23% 70,400,000 55.39% $11.00
---------- ------- ------------ -------
Total..................... 25,371,334 100.00% $127,090,391 100.00%
========== ======= ============ =======
</TABLE>
The tables and calculations above assume no exercise of outstanding options or
warrants. At June 30, 2000, there were:
.1,932,437 shares of our common stock issuable upon the exercise of options
outstanding at a weighted average exercise price of $2.50 per share;
.157,788 shares of our common stock issuable upon the exercise of an
outstanding warrant at an exercise price of $2.60 per share; and
.2,500,000 additional shares of our common stock available for future grants
under our 2000 Stock Incentive Plan to be adopted at the close of this
offering. For a description of our stock option and stock purchase plans,
please see "Management-Employee benefit plans."
To the extent that these options or warrants are exercised, there will be
further dilution to new investors. Please see "Management-Employee benefit
plans" for further information regarding our stock option plan and stock
purchase plan.
If the underwriters exercise their over-allotment option in full, the following
will occur:
.the percentage of common stock held by our existing stockholders will decrease
from approximately 74.77% to approximately 72.05% of the total number of
shares of our common stock outstanding after this offering;
.the number of shares of our common stock held by new public investors will
increase to 7,360,000 or approximately 27.95% of the total number of shares of
our common stock outstanding after this offering; and
.an increase in pro forma net tangible book value to $1.93 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $9.07 per share to new investors.
--------------------------------------------------------------------------------
25
<PAGE>
--------------------------------------------------------------------------------
Selected financial data
You should read the following selected financial data in conjunction with the
consolidated financial statements and the notes to such statements and
"Management's discussion and analysis of financial condition and results of
operations" included elsewhere in this prospectus. We derived the statement of
operations data for the year ended December 31, 1995, 1996, 1997, 1998 and 1999
and the six months ended June 30, 1999 and 2000, the balance sheet data as of
December 31, 1995, 1996, 1997, 1998 and 1999 and the six months ended June 30,
1999 and 2000 from our financial statements. We include elsewhere in this
prospectus the consolidated financial statements as of December 31, 1998 and
1999 and for the years ended December 31, 1997, 1998 and 1999, which have been
audited by KPMG LLP, independent certified public accountants. We also include
our unaudited financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 elsewhere in this prospectus. Historical results
are not necessarily indicative of the results to be expected in the future.
--------------------------------------------------------------------------------
26
<PAGE>
Selected financial data
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Statement of operations data 1995 1996 1997 1998 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract revenues:
Contract revenue......... $3,207,128 $4,291,754 $4,683,560 $7,327,261 $11,255,534
Contract revenue--
related party........... -- 380,000 1,205,948 1,497,055 2,476,829
---------- ---------- ---------- ---------- -----------
Total contract
revenues............... 3,207,128 4,671,754 5,889,508 8,824,316 13,732,363
Contract service costs:
Contract service costs... 1,356,543 2,041,014 2,077,238 3,681,044 5,281,963
Contract service costs--
related party........... -- 380,776 450,574 466,893 1,089,960
---------- ---------- ---------- ---------- -----------
Total contract service
costs.................. 1,356,543 2,421,790 2,527,812 4,147,937 6,371,923
---------- ---------- ---------- ---------- -----------
Gross profit............. 1,850,585 2,249,964 3,361,696 4,676,379 7,360,440
Milestones and
intellectual property
revenue................. -- -- -- -- --
Milestones and
intellectual property
revenue--related party.. -- -- -- -- 1,787,612
Operating expenses:
Selling, general and
administrative.......... 1,581,190 1,542,689 2,641,414 3,621,621 6,005,993
Depreciation and
amortization............ 144,052 291,000 317,913 458,722 787,810
---------- ---------- ---------- ---------- -----------
Total operating
expenses............... 1,725,242 1,833,689 2,959,327 4,080,343 6,793,803
---------- ---------- ---------- ---------- -----------
Income (loss) from
operations............. 125,343 416,275 402,369 596,036 2,354,249
---------- ---------- ---------- ---------- -----------
Other expense, net:
Interest expense......... 33,931 66,666 101,561 124,818 587,813
Interest income.......... (15,105) 112 -- (1,350) (175,209)
Other.................... -- -- (98,539) (48,068) --
Increase in value of
redeemable warrant.... -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Total other expense, net.. 18,826 66,778 3,022 75,400 412,604
---------- ---------- ---------- ---------- -----------
Income (loss) before
income taxes........... 106,517 349,497 399,347 520,636 1,941,645
Income taxes............. 80,238 193,965 132,382 200,987 871,285
---------- ---------- ---------- ---------- -----------
Net income (loss)........ 26,279 155,532 266,965 319,649 1,070,360
Less:
Allocation of income to
participating
securities........... (10,236) (60,580) (103,983) (124,503) (282,512)
Accretion to redemption
value of preferred
stock................ -- -- -- -- (623,498)
---------- ---------- ---------- ---------- -----------
Net income (loss)
available to common
stockholders........... $ 16,043 $ 94,952 $ 162,982 $ 195,146 $ 164,350
========== ========== ========== ========== ===========
</TABLE>
--------------------------------------------------------------------------------
27
<PAGE>
Selected financial data
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Statement of operations data 1995 1996 1997 1998 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data:
Basic net income (loss)
available to common
stockholders.......... $ -- $ 0.01 $ 0.01 $ 0.02 $ 0.02
========== ========== ========== ========== =========
Diluted net income (loss)
available to common
stockholders.......... $ -- $ 0.01 $ 0.01 $ 0.02 $ 0.02
========== ========== ========== ========== =========
Weighted average number of
common shares
outstanding--basic..... 11,696,296 11,696,296 11,696,296 11,696,296 7,462,228
Weighted average number of
common shares
outstanding--diluted... 11,696,296 11,696,296 11,696,296 11,879,774 7,861,001
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
Balance sheet data 1995 1996 1997 1998 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents.......... $ 16,429 $ 36,961 $ 237,981 $ 171,462 $ 8,164,730
Working capital......... (292,689) (309,967) (208,900) (373,289) 3,392,080
Total assets............ 989,222 2,165,396 2,355,861 3,959,662 17,939,980
Long-term debt and
capital lease
obligations and
redeemable preferred
stock................ 179,963 466,499 592,458 555,669 18,642,910
Total stockholders'
equity (deficit)..... 212,367 367,899 634,864 957,678 (8,559,777)
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
28
<PAGE>
Selected financial data
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(unaudited)
Statement of operations data 1999 2000
-------------------------------------------------------------------------------
<S> <C> <C>
Contract revenues:
Contract revenue..................................... $4,834,944 $ 7,533,945
Contract revenue--related party...................... 1,202,895 1,356,485
---------- -----------
Total contract revenues............................. 6,037,839 8,890,430
Contract service costs:
Contract service costs............................... 2,350,259 3,735,659
Contract service costs--related party................ 427,255 599,407
---------- -----------
Total contract service costs........................ 2,777,514 4,335,066
---------- -----------
Gross profit......................................... 3,260,325 4,555,364
Milestones and intellectual property revenue......... -- 222,000
Milestones and intellectual property revenue--related
party............................................... -- 350,000
Operating expenses:
Selling, general and administrative.................. 2,716,307 4,245,278
Depreciation and amortization........................ 312,706 985,009
---------- -----------
Total operating expenses............................ 3,029,013 5,230,287
---------- -----------
Income (loss) from operations......................... 231,312 (102,923)
---------- -----------
Other expense, net:
Interest expense..................................... 132,787 427,577
Interest income...................................... (11,903) (70,291)
Other................................................ -- --
Increase in value of redeemable warrant.............. -- 1,905,487
---------- -----------
Total other expense, net.............................. 120,884 2,262,773
---------- -----------
Income (loss) before income taxes..................... 110,428 (2,365,696)
Income taxes......................................... 57,814 --
---------- -----------
Net income (loss).................................... 52,614 (2,365,696)
Less:
Allocation of income to participating securities.... (1,072) --
Accretion to redemption value of preferred stock.... (50,918) (654,336)
---------- -----------
Net income (loss) available to common stockholders.... $ 624 $(3,020,032)
========== ===========
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
29
<PAGE>
Selected financial data
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(unaudited)
Statement of operations data 1999 2000
--------------------------------------------------------------------------------
<S> <C> <C>
Per share data:
Basic net income (loss) available to common stockholders.. $ -- $ (0.36)
========= =========
Diluted net income (loss) available to common
stockholders............................................. $ -- $ (0.36)
========= =========
Weighted average number of common shares outstanding--
basic..................................................... 7,462,228 8,291,263
Weighted average number of common shares outstanding--
diluted................................................... 7,718,425 8,291,263
</TABLE>
<TABLE>
<CAPTION>
As of
June 30, 2000
Balance sheet data (unaudited)
------------------------------------------------------------------------------
<S> <C>
Cash and cash equivalents....................................... $ 1,599,754
Working capital................................................. 2,159,506
Total assets.................................................... 70,621,366
Long-term debt and capital lease obligations and redeemable
preferred stock................................................ 25,501,579
Total stockholders' equity (deficit)............................ 29,779,490
</TABLE>
--------------------------------------------------------------------------------
30
<PAGE>
--------------------------------------------------------------------------------
Unaudited pro forma condensed combined financial information
On May 31, 2000, we acquired all of the outstanding common stock of ThermoGen,
Inc. and Emerald BioStructures, Inc. The total purchase price of ThermoGen was
$29.7 million which has been allocated to the fair values of assets acquired
and liabilities assumed as follows: patents--$6.9 million; trade name--$3.1
million; contracts and customer base--$15.6 million; net liabilities assumed--
$1.4 million; and goodwill--$15.6 million. Included in goodwill is
approximately $10.1 million related to the establishment of deferred tax
liabilities in conjunction with the purchase. The total purchase price of
Emerald BioStructures was $12.0 million which has been allocated to the fair
values of assets acquired and liabilities assumed as follows: patents--$1.1
million; trade name--$599,000; contracts and customer base--$4.4 million;
proprietary technology--$300,000; net assets assumed--$1,000; and goodwill--
$8.1 million. Included in goodwill is approximately $2.5 million related to the
establishment of deferred tax liabilities in conjunction with the purchase.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1999 and the six-month period ended June 30, 2000
reflects conversion of outstanding capital stock to a single class of common
stock, a 18.65557 for one stock split, and the acquisition of ThermoGen and
Emerald BioStructures as if they occurred on January 1, 1999. The unaudited pro
forma condensed combined statements of operations for the year ended December
31, 1999 and the six-month period ended June 30, 2000 present the results of
continuing operations. Accordingly, the discontinued operations of MCR
Holdings, Inc. and an extraordinary gain on the extinguishment of accounts
payable recognized by ThermoGen for the year ended December 31, 1999 are not
presented.
Since the pro forma financial information is based upon the financial condition
and operating results of the acquired entities during periods when they were
not under our control, influence or management, the information presented may
not be indicative of the results which would have actually been obtained had
the acquisitions been completed as of the respective periods presented, nor are
they indicative of future financial or operating results. The unaudited pro
forma condensed combined statement of operations does not give effect to any
synergies that may occur due to our integration with our acquired entities nor
does it give effect to any incremental costs which may be incurred to achieve
such integration. The unaudited pro forma condensed combined financial
statements should be read in conjunction with our historical audited financial
statements and notes thereto as well as the audited historical financial
statements of ThermoGen and Emerald BioStructures and notes thereto included
elsewhere in this prospectus.
--------------------------------------------------------------------------------
31
<PAGE>
Unaudited pro forma condensed combined financial information
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MediChem
Life Emerald
Sciences, ThermoGen, BioStructures, Pro Forma Pro Forma
Inc. Inc. Inc. adjustments combined
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract revenues:
Contract revenue....... $11,255,534 $1,571,918 $204,993 $13,032,445
Contract revenue--
related party........ 2,476,829 -- -- 2,476,829
Grant revenue.......... -- 495,414 340,654 836,068
----------- ---------- -------- ----------- -----------
Total contract
revenues............ 13,732,363 2,067,332 545,647 16,345,342
Contract service costs:
Contract service
costs................ 5,281,963 700,527 113,852 6,096,342
Contract service
costs--related
party................ 1,089,960 -- -- 1,089,960
Research and
development.......... -- 495,414 225,372 720,786
----------- ---------- -------- ----------- -----------
Total contract service
costs............... 6,371,923 1,195,941 339,224 7,907,088
----------- ---------- -------- ----------- -----------
Gross profit............ 7,360,440 871,391 206,423 8,438,254
Milestones and
intellectual property
revenues--related
party................. 1,787,612 -- -- 1,787,612
Operating expenses:
Selling, general and
administrative....... 6,005,993 916,189 107,539 7,029,721
Depreciation and
amortization......... 787,810 17,760 47,554 $ 3,657,928(a) 5,788,120
1,277,068(b)
----------- ---------- -------- ----------- -----------
Total operating
expenses............ 6,793,803 933,949 155,093 4,934,996 12,817,841
----------- ---------- -------- ----------- -----------
Income (loss) from
operations............ 2,354,249 (62,558) 51,330 (4,934,996) (2,591,975)
----------- ---------- -------- ----------- -----------
Other expense, net:
Interest expense....... 587,813 57,524 18,914 (15,348)(c) 608,543
(40,360)(d)
Interest income........ (175,209) -- -- (175,209)
----------- ---------- -------- ----------- -----------
Total other expense,
net................. 412,604 57,524 18,914 (55,708) 433,334
----------- ---------- -------- ----------- -----------
Income (loss) from
continuing operations
before income taxes... 1,941,645 (120,082) 32,416 (4,879,288) (3,025,309)
Income taxes (benefit).. 871,285 -- -- (1,440,109) (568,824)
----------- ---------- -------- ----------- -----------
Income (loss) from
continuing
operations............ 1,070,360 (120,082) 32,416 (3,439,179) (2,456,485)
Allocation of income to
participating
securities............ (282,512) -- -- 282,512 (f) --
Accretion to redemption
value of preferred
stock................. (623,498) -- -- 623,498 (g) --
----------- ---------- -------- ----------- -----------
Income (loss) from
continuing operations
available to common
stockholders.......... $ 164,350 $ (120,082) $ 32,416 $(2,533,169) $(2,456,485)
=========== ========== ======== =========== ===========
Per share data:
Income (loss) from
continuing operations
available to common
stockholders......... $ (0.13)
===========
Weighted average number
of shares
outstanding--basic... 18,971,334
===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined statements of
operations.
--------------------------------------------------------------------------------
32
<PAGE>
Unaudited pro forma condensed combined financial information
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX-
MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
MediChem Emerald
Life Sciences, ThermoGen, BioStructures, Pro Forma Pro Forma
Inc. Inc. Inc. adjustments combined
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract revenues:
Contract revenue.................... $ 7,236,780 $ 792,914 $ 243,902 $ 8,273,596
Contract revenue--related party..... 1,356,485 -- -- 1,356,485
Grant revenue....................... -- 165,727 244,471 410,198
----------- ---------- --------- ---------- -----------
Total contract revenues............ 8,593,265 958,641 488,373 10,040,279
Contract service costs:
Contract service costs.............. 3,642,317 333,100 122,279 4,097,696
Contract service costs--related
party............................. 599,407 -- -- 599,407
Research and development............ -- 165,727 110,011 275,738
----------- ---------- --------- ---------- -----------
Total contract service costs....... 4,241,724 498,827 232,290 4,972,841
----------- ---------- --------- ---------- -----------
Gross profit......................... 4,351,541 459,814 256,083 5,067,438
Milestones and intellectual property
revenues .......................... 222,000 -- -- 222,000
Milestones and intellectual property
revenues--related party............ 350,000 -- -- 350,000
Operating expenses:
Selling, general and
administrative.................... 4,079,635 1,274,059 748,112 6,101,806
Depreciation and amortization....... 560,823 25,523 31,435 $1,828,965 (a) 3,085,280
638,534 (b)
----------- ---------- --------- ---------- -----------
Total operating expenses........... 4,640,458 1,299,582 779,547 2,467,499 9,187,086
----------- ---------- --------- ---------- -----------
Income (loss) from operations........ 283,083 (839,768) (523,464) (2,467,499) (3,547,648)
----------- ---------- --------- ---------- -----------
Other (income) expense, net:
Interest expense.................... 414,216 30,991 3,816 (6,395)(c) 425,804
(16,823)(d)
Interest income..................... (70,291) -- (231) (70,522)
Increase in value of redeemable
stock warrant..................... 1,905,487 -- -- 1,905,487
----------- ---------- --------- ---------- -----------
Total other (income) expense, net.. 2,249,412 30,991 3,585 (23,218) 2,260,770
----------- ---------- --------- ---------- -----------
Income (loss) from continuing
operations before income taxes..... (1,966,329) (870,759) (527,049) (2,444,281) (5,808,418)
Income taxes (benefit)............... -- -- 711 (1,229,282)(e) (1,228,571)
----------- ---------- --------- ---------- -----------
Income (loss) from continuing
operations......................... (1,966,329) (870,759) (527,760) (1,214,999) (4,579,847)
Accretion to redemption value of
preferred stock.................... (654,336) -- -- 654,336 (g) --
----------- ---------- --------- ---------- -----------
Income (loss) from continuing
operations available to common
stockholders....................... $(2,620,665) $ (870,759) $(527,760) $ (560,663) $(4,579,847)
=========== ========== ========= ========== ===========
Per share data:
Income (loss) from continuing
operations available to common
stockholders...................... $ (0.24)
===========
Weighted average number of shares
outstanding--basic................ 18,971,334
</TABLE>
See accompanying notes to unaudited pro forma condensed combined statements of
operations.
--------------------------------------------------------------------------------
33
<PAGE>
Unaudited pro forma condensed combined financial information
-------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Continued)
The pro forma statements of operations adjustments consist of:
(a) To reflect the increase in depreciation and amortization expense due to
the amortization of goodwill and other intangible assets from the
acquistion of ThermoGen over the following estimated useful lives;
<TABLE>
<S> <C>
Patents and proprietary technology.................. 15 years
Trade names......................................... 15 years
Contracts and customer base......................... 8 years
Goodwill............................................ 15 years
</TABLE>
(b) To reflect the increase in depreciation and amortization expense due to
the amortization of goodwill and other intangible assets from the
acquisition of Emerald BioStructures over the following estimated
useful lives;
<TABLE>
<S> <C>
Patents and proprietary technology.................. 10 years
Trade names......................................... 15 years
Contracts and customer base......................... 8 years
Goodwill............................................ 15 years
</TABLE>
(c) To reflect a reduction in interest expense as a result of the $132,904
ThermoGen note payable conversion to common stock.
(d) To reflect the reduction in interest expense on the notes payable to
shareholders of $350,577 for ThermoGen as a result of their repayment.
(e) To reflect the income tax effect of considering ThermoGen and Emerald
BioStructures as taxable C-corporations, the increase in nondeductible
goodwill amortization expense and decrease in interest expense at an
estimated statutory tax rate of 39.5%. We expect to pay taxes on losses
incurred or our effective tax rate on income to be higher in the future
because recorded goodwill is non-deductible for tax purposes.
(f) To adjust the allocation of income to participating securities to zero,
to effect the conversion of the Class A convertible preferred stock and
conversion and redemption of the Class C convertible preferred stock.
(g)To eliminate the accretion to the redemption value of the Class A
convertible preferred stock to effect its conversion to common stock.
-------------------------------------------------------------------------------
34
<PAGE>
--------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations
The following discussion and analysis should be read with "Selected financial
and operating data" and our financial statements and notes included elsewhere
in this prospectus. The discussion in this prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this prospectus should be read as applying to all related forward-looking
statements wherever they appear in this prospectus. Our actual results could
differ materially from those discussed here. Factors that could cause or
contribute to these differences include those discussed in "Risk Factors," as
well as those discussed elsewhere in this prospectus.
OVERVIEW
Founded in 1987, we believe we were the first independent chemistry company to
offer a broad array of discovery-related medicinal chemistry services to
pharmaceutical and biotechnology customers. From a company focused exclusively
on medicinal chemistry services, we have evolved into a full-service drug
discovery technology and services company. Our development of strong
relationships with pharmaceutical companies by initially providing basic
medicinal chemistry services helped us to identify their unmet needs in the
later stages of the drug discovery process. In response, we expanded our
service offerings to include process development, analytical and separations
chemistry and chemical synthesis and scale up. To capitalize on recent advances
in genomics, we have developed technology and services in early-stage
proteomics, combinatorial chemistry and biocatalysis.
Recent acquisitions
On May 31, 2000, we acquired all the outstanding common stock of ThermoGen and
Emerald BioStructures. The acquisitions were accounted for using the purchase
method of accounting and our results of operations for the six months ended
June 30, 2000 include the operations of ThermoGen and Emerald BioStructures
from their date of acquisition.
ThermoGen. We acquired ThermoGen in exchange for 3,452,909 shares of our common
stock and the assumption of options to purchase 475,456 shares of our common
stock. ThermoGen, based in Chicago, Illinois, is a leading provider of
biocatalysis services and products through the use of proprietary technologies
that expand our technology and chemistry service offerings. ThermoGen's
proprietary technologies permit our customers to perform difficult chemical
reactions with stable, easy-to-use biocatalysts that are environmentally
friendly and cost effective. ThermoGen develops and sells proprietary
biocatalysis products and process research services to the pharmaceutical,
agricultural chemical and food industries. We believe that by integrating
ThermoGen's biocatalysis technology, we provide our clients with chemical
processes that are more efficient and shorten the chemical process development
timeframe. Our acquisition of ThermoGen allows us to provide biocatalysis
services and products to our existing customers and provides opportunities to
market our broad range of chemistry services to new clients. We also believe
that ThermoGen's technology and intellectual property will enhance our current
service and product offerings, thereby improving our efficiency.
ThermoGen was founded in 1988 and had revenues of $2.1 million for the year
ended December 31, 1999 and a staff of over 20 professionals. ThermoGen has
been recognized for its leading biocatalysis technology, having been awarded
more than a dozen Small Business Innovation Research, SBIR, grants
--------------------------------------------------------------------------------
35
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
from the National Institutes of Health, NIH, totaling over $4.0 million for
technology development. ThermoGen was also awarded the 1999 Tibbets Award from
the U.S. Small Business Administration for its excellence in developing and
commercializing its proprietary biocatalysis platform technologies.
Emerald BioStructures. We acquired Emerald BioStructures, Inc., in exchange for
1,576,602 shares of our common stock. Emerald BioStructures, based near
Seattle, Washington, is a leading provider of research products and services in
protein structure determination to the pharmaceutical and biotechnology
industries. We believe Emerald BioStructures is well positioned to benefit from
the bottleneck resulting from the explosion in genomic information. Emerald
BioStructures' proteomics services help bridge the gap between the genomic
information and the chemistry services necessary to identify new lead
compounds. Emerald BioStructures offers an integrated platform of technologies
in proteomics that enables more efficient determination of protein structure
and function. Our acquisition of Emerald BioStructures allows us to provide
proteomics services to our existing customers and provides opportunities to
market our broad range of chemistry services to new clients. We believe Emerald
BioStructures' proteomics platform technologies improve the efficiency of our
current service and product offerings.
Emerald BioStructures was founded in 1997 and had revenues of $546,000 for the
year ended December 31, 1999 and a staff of 5 professionals. Emerald
BioStructures has been recognized for its leading proteomics technologies,
having been awarded five SBIR grants from the NIH totaling over $850,000 for
technology development.
Contract revenue
Our contract revenue consists primarily of fees earned under contracts with
third-party customers. In general, we provide services to our customers on the
following bases:
.a full-time equivalent basis that establishes the number of full-time
equivalents contracted for a project, the duration of the contract period and
the fixed price per full-time equivalent, plus materials and out-of-pocket
expenses; and
.to a lesser extent, a fixed price basis.
Our full-time equivalent contracts generally range from three to twelve month
periods. Fixed price contracts are entered into for much shorter periods of
time, generally two to three months. We estimate that fixed price contracts
represent less than 10% of our annual revenues. Because our fixed price
contracts relate to projects that are generally defined in scope, of short
duration and involve services and processes that we have substantial experience
with, we have not historically experienced any material cost overruns under
these contracts. Generally, our contracts may be terminated by the customer
upon 90 days or less prior notice. We recognize contract revenue on a per diem
basis or percentage-of-completion basis. Cost of revenue consists primarily of
compensation and associated fringe benefits for employees and other direct
project-related costs, such as laboratory supplies, chemicals and other costs
reimbursed by our customers.
Milestone and intellectual property revenue--related party
Milestone and intellectual property revenue represents revenues derived from
achieving milestones in connection with customer collaborations and licensing
fees related to our proprietary drug discovery platform technologies. Milestone
revenue is earned upon the successful completion or attainment of specific
project objectives and is unique to the individual project. Intellectual
property revenue is derived through the sale or licensing of intellectual
property rights that we have developed. Milestone and intellectual property
revenues have minimal associated costs. Our operating strategy emphasizes
--------------------------------------------------------------------------------
36
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
entering contracts for drug discovery services that contain provisions for
licensing, milestone and royalty payments should our proprietary technology
lead to the discovery of new processes or products that reach certain
milestones and market approval. To date, substantially all of our milestone and
royalty revenues have been received from our affiliate, Advanced Life Sciences.
Operating expenses
Operating expenses include selling, general and administrative expense and
depreciation and amortization. Selling, general and administrative expense
consists of compensation and related fringe benefits for marketing and
administrative employees, professional services, marketing costs and costs
related to facilities and information services. Depreciation expense reflects
the depreciation of our facilities and equipment. Following the acquisition of
ThermoGen and Emerald BioStructures, we will record significant amortization
expenses related to goodwill and other acquired intangible assets. We currently
estimate that annual amortization resulting from these acquisitions to be
approximately $4.9 million. In addition, following this offering we expect to
incur R&D expense as we further develop platform technologies.
Redeemable stock warrant
In connection with obtaining our credit facility in June 1999, we issued to our
lender a warrant to purchase 315,577 shares of our Class C common stock at an
exercise price of $0.0005 per share. Because the holder of this warrant can
require us to redeem the warrant for the fair market value of the underlying
common stock upon the occurrence of certain events, applicable accounting rules
require us to reflect this redemption obligation in our financial statements as
a liability. Furthermore, the liability must be adjusted to reflect subsequent
changes in fair market value, with a corresponding charge to earnings. As of
June 30, 2000 an increase in our estimated fair market value resulted in a
$1.9 million increase in our redeemable warrant liability and a corresponding
expense reflected in other expenses. We plan to redeem the warrant with a
portion of the net offering proceeds, thereby eliminating the liability, but
resulting in a further expense representing the increase in fair market value
from June 30, 2000 until the consummation of our initial public offering. This
expense is estimated to be approximately $1.1 million on a pre-tax basis and
will be incurred in the period in which we consummate this offering.
Related party
As part of our June 1999 venture capital funding transaction, we spun-off
Advanced Life Sciences. At the time of the spin-off, we exchanged our 100%
common stock interest in Advanced Life Sciences for non-voting preferred stock
having a stated value of $2.5 million and a carrying value of zero. We
accounted for the spin-off as a transfer under commonly-controlled entities due
to MediChem's ownership of Advanced Life Sciences. The initial carrying value
of our investment is recorded at the historical carrying value of our
investment in the common stock of Advanced Life Sciences which was zero because
the carrying value of technology contributed by us to form Advanced Life
Sciences was zero. Applicable accounting rules require that all transactions
with Advanced Life Sciences following the spin-off be reflected in our
financial statements as related party transactions. Related party contract
revenue and contract service costs for the periods commencing January 1, 1996
are exclusively related to Advanced Life Sciences' joint venture, Sarawak
MediChem Pharmaceuticals, until the June 1999 spin-off of Advanced Life
Sciences. For all periods thereafter, related party revenues and costs
comprised of transactions with both Advanced Life Sciences and Sarawak MediChem
Pharmaceuticals.
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RESULTS OF OPERATIONS
Six months ended June 30, 2000 compared with six months ended June 30, 1999
Contract revenue
Total contract revenue including related party increased 50% to $8.9 million
for the six months ended June 30, 2000, from $6.1 million for the six months
ended June 30, 1999. A portion of this increase was due to one month of revenue
from ThermoGen, $199,000, and Emerald BioStructures, $99,000, our newly
acquired companies as of May 31, 2000 while the remainder of the increase is
due to general sales growth. Contract revenue excluding related party increased
56% to $7.5 million for the six months ended June 30, 2000, from $4.8 million
for the six months ended June 30, 1999. Increased contract revenue excluding
related party was achieved across all lines of service offerings, with the
largest increases realized in medicinal chemistry and analytical and
separations chemistry. Contract revenue--related party increased 6% to $1.4
million for the six months ended June 30, 2000, from $1.3 million for the six
months ended June 30, 1999.
Gross profit
Gross profit from total contract revenue increased 40% to $4.6 million for the
six months ended June 30, 2000, from $3.3 million for the six months ended June
30, 1999. Contract revenue gross profit increased 52% to $3.8 million for the
six months ended June 30, 2000, from $2.5 million for the six months ended June
30, 1999. Contract revenue--related party gross profit decreased 2% to $757,000
for the six months ended June 30, 2000, from $776,000 for the six months ended
June 30, 1999.
Gross profit as a percent of total contract revenue decreased to 51% for the
six months ended June 30, 2000, from 53% for the six months ended June 30,
1999. Contract revenue gross profit as a percent of contract revenue decreased
to 50% for the six months ended June 30, 2000, from 51% for the six months
ended June 30, 1999 due to lower utilization of scientific staff. Contract
revenue--related party gross margin decreased to 56% of contract revenue for
the six months ended June 30, 2000, from 61% for the six months ended June 30,
1999. This decline resulted from an increase in services provided in connection
with SBIR grants, which typically have lower margins than other services
provided.
Milestone and intellectual property revenue
In the six months ended June 30, 2000, we derived $572,000 of milestone and
intellectual property revenue. In the six months ended June 30, 1999, we
derived no milestone and intellectual property revenue. The majority of this
revenue, $350,000, was related party, and resulted from the achievement of a
contract milestone with Advanced Life Sciences that provided for demonstrating
the commercial feasibility of our ChiralSelectTM technology. The remaining
revenue, $222,000, was earned as a result of fulfilling third party project
completion milestones in connection with our strategic drug development
program.
Operating expenses
Selling, general and administrative expenses increased 56% to $4.2 million for
the six months ended June 30, 2000, from $2.7 million for the six months ended
June 30, 1999. As a percentage of total contract revenues, selling, general and
administrative expenses increased 2 percentage points to 48% for the six months
ended June 30, 2000, from 44% for the six months ended June 30, 1999. The
increase in selling, general and administrative expenses was due primarily to a
general increase in administrative and marketing personnel to support our
expanding market base, an increase in facility costs associated with facilities
expansion and integration efforts relating to the ThermoGen and Emerald
BioStructures acquisitions.
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Depreciation and amortization expenses increased to $985,000 for the six months
ended June 30, 2000, from $313,000 for the six months ended June 30, 1999. The
increase was due to higher depreciation expenses associated with facilities
expansion and the inclusion of $411,000 of amortization expense resulting from
the ThermoGen and Emerald BioStructures acquisitions.
Other expenses, net
Other expenses, net increased to $2.3 million for the six months ended June 30,
2000, from $121,000 for the six months ended June 30, 1999. This increase was a
result of an increase in interest expense on additional borrowings primarily
due to the purchase of land in Woodridge, Illinois and general corporate
purposes. Other expense, net for the six months ended June 30, 2000 also
included a charge of $1.9 million representing an increase in our redeemable
warrant liability as of June 30, 2000 due to an increase in the estimated fair
value of the Class A common stock underlying the warrant.
Interest income increased to $70,000 in the six months ended June 30, 2000,
from $12,000 in the six months ended June 30, 1999, as cash balances rose from
the sale of preferred shares, and the issuance of term debt in June 1999.
Income taxes
Income taxes decreased to $0 in the six months ended June 30, 2000, from
$58,000 in the six months ended June 30, 1999. We made no provision for taxes
for the six months ending June 30, 2000 as a result of our expected annual
operating loss and our assessment that it is unlikely that we will be able to
utilize the tax benefit of our operating loss in the foreseeable future.
Year ended December 31, 1999 compared with year ended December 31, 1998
Contract revenue
Total contract revenue including related party increased 56% to $13.7 million
in 1999, from $8.8 million in 1998. Contract revenue excluding related party
increased 59% to $11.3 million in 1999, from $7.3 million in 1998. Increased
contract revenue excluding related party was achieved from higher volume in all
of our service offerings, with notable increases attributable to combinatorial
chemistry, chemical process development, chemical synthesis and scale up.
Contract revenue--related party increased 67% to $2.5 million in 1999, from
$1.5 million in 1998. The increase in contract revenue--related party was
achieved from higher volume in medicinal chemistry services, analytical and
separations chemistry and chemical synthesis.
Gross profit from contract revenue
Gross profit from total contract revenue increased 59% to $7.4 million in 1999,
from $4.7 million in 1998, which corresponds directly with the 1999 over 1998
increase in total contract services revenue. Contract services gross profit
increased 67% to $6.0 million in 1999, from $3.6 million in 1998. Contract
services--related party gross profit increased 40% to $1.4 million in 1999,
from $1.0 million in 1998.
Gross profit as a percent of total contract revenue for 1999 remained at 54%,
the same level that was achieved in 1998. Contract services gross profit
remained relatively constant as a percentage of contract revenue, reflecting a
fairly consistent mix of the types of services provided during the two years.
Contract services--related party gross profit declined to 56% of contract
revenue in 1999, from 69% in 1998. This decline resulted from an increased mix
of relatively lower margin SBIR services.
Milestone and intellectual property revenue--related party
During 1999, we derived milestone and intellectual property revenue of $1.8
million. We derived no milestone and intellectual property revenue in 1998. For
the twelve months ended December 31, 1999, milestone revenue and intellectual
property revenue were $1.4 million, and $400,000, respectively. Of
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our 1999 milestone revenue, $1.0 million, resulted from the achievement of
contract milestones with Advanced Life Sciences upon demonstrating the
commercial feasibility and patent approval of our AutoOptimizeTM technology. In
addition, a $400,000 milestone payment was received from Advanced Life Sciences
as a result of a patent issued to Advanced Life Sciences related to its
robustaflavone compound. $400,000 of intellectual property revenue was received
from Advanced Life Sciences as a result of the sale of our patented purine
acyclic nucleotides synthesis process to Advanced Life Sciences.
Operating expenses
Selling, general and administrative expenses increased 66% to $6.0 million in
1999, from $3.6 million in 1998. As a percentage of total contract revenue,
selling, general and administrative expenses increased to 44% in 1999, from 41%
in 1998. The increase was due primarily to a general increase in administration
and marketing personnel to support our expanding market base and an increase in
facility costs associated with facility expansion.
Depreciation and amortization expenses increased to $788,000 in 1999, from
$459,000 in 1998. The increase was due to higher depreciation expense
associated with facilities expansion.
Other expenses, net
Other expenses, net increased to $412,000 in 1999, from $75,000 in 1998. Other
expenses, net increased as a result of increased interest expense on additional
borrowings that were entered into by us for the purchase of land in Woodridge,
Illinois and from a term loan note from the private placement.
Interest income increased to $175,000 in 1999, from $1,000 in 1998. Interest
income increased as a result of increased cash balances from the sale of
preferred stock and the issuance of term debt. Other income of $48,000 in 1998
was the result of a gain from insurance proceeds in excess of book value for
fixed assets involuntarily converted from a lab fire that occurred in 1997.
There were no insurance proceeds received in 1999.
Income tax expense
Income tax expense increased 334% to $871,000 in 1999, from $201,000 in 1998.
The effective tax rates for 1999 and 1998 were 44%, and 38%, respectively. The
effective tax rate increase for 1999 is primarily due to additional taxes
resulting from our expansion into multiple states.
Year ended December 31, 1998 compared with year ended December 31, 1997
Contract revenue
Total contract revenue including related party increased 50% to $8.8 million in
1998, from $5.9 million in 1997. Contract revenue excluding related party
increased 56% to $7.3 million in 1998, from $4.7 million in 1997. The increase
in contract revenue excluding related party was due to an overall increase in
our customers' demand for medicinal chemistry services. This demand translated
into strong sales from our newly formed combinatorial chemistry and chemical
process development services, and provided the impetus for our Des Plaines,
Illinois laboratory expansion. Contract revenue--related party increased 24% to
$1.5 million in 1998, from $1.2 million in 1997. The increase in contract
revenue--related party was driven by an increase in chemical process
development services as well as an increase in contract pricing consistent with
standard third party rates.
Gross profit from contract revenue
Gross profit from total contract revenue increased 39% to $4.7 million in 1998,
from $3.4 million in 1997. Contract services gross profit increased 42% to $3.7
million in 1998, from $2.6 million in 1997.
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Management's discussion and analysis of financial condition and results of
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Contract services--related party gross profit increased 36% to $1.0 million in
1998, from $756,000 in 1997.
Gross profit as a percentage of total contract revenues decreased to 53% in
1998, from 57% in 1997. Contract services gross profit decreased to 50% of
contract revenue in 1998, from 56% in 1997. The decrease resulted from our
aggressive recruiting efforts to staff the new Des Plaines, Illinois facility.
Contract services--related party gross profit increased to 69% of contract
revenue in 1998, from 63% in 1997. The increase is due primarily to higher
contract pricing consistent with standard third-party rates.
Operating expenses
Selling, general and administrative expenses increased 37% to $3.6 million in
1998, from $2.6 million in 1997. As a percentage of total contract revenues,
selling, general and administrative expenses declined to 41% in 1998, from 45%
in 1997. The increase in selling, general and administrative expenses was
principally due to an increase in the number of administrative and marketing
personnel necessary to support our expanding market base, increased advertising
costs associated with a new advertising campaign and higher lease charges
associated with the opening of our new Des Plaines, Illinois facility.
Depreciation and amortization expenses increased to $459,000 in 1998, from
$318,000 in 1997. The increase was due to higher depreciation expense resulting
from higher capital spending associated with facilities expansion.
Other expenses, net
Other expenses, net increased to $75,000 in 1998, from $3,000 in 1997. This
increase was a result of increased interest expense on additional borrowings
that were entered into by us to fund general working capital purposes.
Interest income increased to $1,000 in 1998, from none in 1997. Interest income
increased as a result of higher on-hand cash balances. Other income of $48,000
in 1998 and $99,000 in 1997 was the result of insurance proceeds in excess of
fixed asset book value for a lab fire that occurred in 1997.
Income taxes
Income taxes increased 52% to $201,000 in 1998, from $132,000 in 1997. The
effective tax rates for 1998 and 1997 were 39% and 34%, respectively. The
resulting increase in income taxes and the effective tax rate for 1998 was
driven by the elimination of a U.S. Federal income tax rate benefit that was
realized from the use of graduated federal rates in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our business through cash flows from operations and proceeds
from borrowings and the issuance of preferred stock. During the six months
ended June 30, 2000 and the years ended December 31, 1999, 1998 and 1997, we
generated (used) ($2.1) million, $1.6 million, $320,000 and $943,000,
respectively, in cash flows from operations and in addition we raised $10.0
million in 1999 through borrowings and the issuance of preferred stock.
During the six months ended June 30, 2000 and the years ended December 31,
1999, 1998 and 1997, total capital expenditures were $3.0 million, $4.2
million, $726,000 and $667,000, respectively. Capital expenditures were
incurred predominantly in connection with our expansion of service offerings,
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including analytical and separations chemistry, chemical synthesis and scale up
and with our facilities expansions in 1999. In April 1999, we began to develop
a 14-acre site in Woodridge, Illinois for the construction of a new 100,000
square foot headquarters and discovery laboratories center. This facility is
estimated to cost $17.5 million for construction and an additional $3.0 million
for laboratory instrumentation, software, furniture and equipment upgrades. A
total of $5.1 million of the estimated total costs of our new facility had been
incurred through June 30, 2000. In May 2000, we received an 18-month
construction commitment for an additional $12.0 million to finance the project.
Upon completion of the project, we anticipate entering into a mortgage loan as
a more permanent form of financing for our facility. The new facility is
anticipated to be operational by the first quarter of 2001. The new offices and
laboratories have been developed with the capability of being expanded an
additional 100,000 square feet.
Working capital was $2.2 million at June 30, 2000, compared to $3.4 million at
December 31, 1999, and ($373,000) at December 31, 1998. The decrease in working
capital for the six months ended June 30, 2000 was primarily due to a $3.0
million cash payment that was made on March 24, 2000, to repay a promissory
note to Dr. Michael T. Flavin, our chief executive officer and president, in
connection with the issuance of preferred stock in June 1999. The increase in
working capital at December 31, 1999 as compared to December 31, 1998, was
attributable primarily to the proceeds from borrowings and the issuance of
preferred stock.
We have available a credit facility to supplement our liquidity needs. The
credit facility provides for revolving credit loans in the amount of $15.0
million. Loans for working capital purposes are limited to $7.5 million and
loans for acquisitions are limited to the amounts available under the facility
less outstanding loans for working capital purposes. Loans for acquisitions are
subject to mandatory repayment schedules, generally five years. The credit
facility commitment terminates on June 14, 2001 for acquisition loans and June
1, 2005 for working capital loans. As of June 30, 2000, we had drawn an
aggregate of $2.0 million under the credit facility. All loans under this
credit facility bear interest at the floating LIBOR rate plus 4.0%. The
interest rate on such indebtedness at June 30, 2000 was 10.65% per annum. The
credit facility restricts or prohibits us from incurring additional
indebtedness, incurring liens, disposing of assets and requires us to maintain
certain financial ratios on an ongoing basis. The credit facility is secured by
a lien on substantially all of our assets. We intend to use a portion of the
net proceeds from this offering to repay in full and terminate the credit
facility.
We believe that the net proceeds from this offering, together with cash
generated from operations and borrowings under the mortgage loan, will be
sufficient to fund our anticipated working capital needs and capital
expenditures, other than financing necessary to complete future acquisitions,
if any, for at least the next 24 months. Future acquisitions, if any, could be
funded with cash from operations, the net proceeds of this offering and/or the
issuance of debt or equity securities. There can be no assurance that
attractive acquisition opportunities will be available to us or will be
available at prices and upon such other terms that are attractive to us. We
regularly evaluate potential acquisitions of other businesses, products and
product lines and may hold discussions regarding such potential acquisitions.
As a general rule, we will publicly announce such acquisitions only after a
definitive purchase agreement has been signed. In addition, in order to meet
our long-term liquidity needs or consummate future acquisitions, we may incur
additional indebtedness or issue additional equity and debt securities, subject
to market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to us or at all. Our failure to
raise the funds necessary to finance our future cash requirements or consummate
future acquisitions could adversely affect our ability to pursue our strategy
and could negatively affect our operations in future periods.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 activities
without 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 fair value of 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 prevailing rate and the prevailing rate later rises, the fair value of the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
government and non-government debt securities and money market funds. The
average duration of all our investments has generally been less than one year.
Due to the short-term nature of these investments, we believe we have no
material exposure to interest rate risk arising from our investments.
Therefore, no quantitative tabular disclosure is required.
We intend to repay the term loan note and line of credit from the proceeds of
this offering. Should we not repay those obligations, we may incur additional
interest expense. Our term loan note bears interest at a rate of LIBOR plus
5.25% and our line of credit bears interest at a rate of LIBOR plus 4.00%. A
one percentage point increase in our rate of interest for these borrowings at
June 30, 2000 would cause us to pay an additional $70,000 annually in interest.
We have operated primarily in the United States and all funding activities with
our collaborators to date have been made in U.S. dollars. Accordingly, we have
not had any exposure to foreign currency rate fluctuations.
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Business
OVERVIEW
We are a drug discovery technology and services company that offers a broad
range of integrated chemistry R&D capabilities to pharmaceutical and
biotechnology companies. Recent advances in the study of genes and their
function, or genomics, have resulted in exponential growth in the number of
biological targets that can be exploited for new drug development. The
explosion in genomic information creates a significant gap between the
capabilities companies have to identify new drug targets and the chemistry
resources necessary to develop novel drug compounds. We bridge this gap by
offering chemistry services that span the entire drug development spectrum,
from early stage discovery technologies and services up until a potential drug
enters clinical testing. We offer our customers a complete range of
technologies and services in the following principal areas:
.proteomics, the study of protein structure and function;
.combinatorial chemistry, the process of synthesizing diverse combinations of
chemical compounds using high speed robotic technology;
.computational chemistry, the use of computer-assisted calculations to design
molecules or explain chemical behavior;
.medicinal chemistry, the process of introducing subtle changes to a molecule
and determining the specific biological activity that results from each
change;
.biocatalysis, the use of enzymes as reagents to facilitate chemical processes;
.analytical and separations chemistry, the process of purifying chemical
compounds and verifying their structures and purity; and
.chemical synthesis process development and scale up, the design and selection
of the optimal chemical processes for manufacturing a chemical compound on a
larger scale.
Our technology and services are designed to enable our pharmaceutical and
biotechnology customers to reduce overall development time and cost and to
pursue, simultaneously, a greater number of discovery and development
opportunities.
Founded in 1987, we believe we were the first independent chemistry company to
offer a broad array of discovery-related medicinal chemistry services to
pharmaceutical and biotechnology customers. From a company focused exclusively
on medicinal chemistry services, we have evolved into a full-service drug
discovery technology and services company. Our development of strong
relationships with pharmaceutical companies by initially providing basic
medicinal chemistry services helped us to identify their unmet needs in the
later stages of the drug discovery process. In response, we expanded our
service offerings to include chemical process development, analytical and
separations chemistry and chemical synthesis and scale up. To capitalize on
recent advances in genomics, we have developed technology and services in
early-stage proteomics, combinatorial chemistry and biocatalysis.
We have developed proprietary platform technologies in the areas of proteomics,
biocatalysis, chiral chemistry and automated process research. These
technologies utilize automation and optimization to compress the drug discovery
process timeline and are adaptable to multiple customer applications. These
proprietary platform technologies complement our traditional chemistry services
and associated revenues with opportunities for up-front licensing fees and
milestone and royalty payments.
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We have grown our drug discovery technology and services revenue at a compound
annual growth rate of 49.5% over the past five years, including annual growth
rates of 33.3%, 47%, 38.8%, 55.4% and 78% in the years 1995 through 1999,
respectively. Since 1987, we have provided chemistry services on over 490
projects for more than 75 clients, including 15 of the top 25 pharmaceutical
companies and many well-known biotechnology companies. In 1999, we earned over
75% of our revenues from existing customers, as our largest customers either
increased project levels or added additional work along the drug discovery and
development pathway.
In May 2000, we expanded our technology and service offerings by acquiring
ThermoGen, Inc. and Emerald BioStructures, Inc. ThermoGen is a leading provider
of biocatalysis services and products through the use of proprietary
technologies which allow its customers to perform difficult chemical reactions
with stable, easy-to-use biocatalysts that are environmentally friendly and
cost effective. Emerald BioStructures is a leading provider of proteomics
products and services that bridge the gap between the genomic information and
chemistry services necessary to identify new lead compounds.
Our integrated drug development service capabilities and proprietary
technologies also enable us to effectively develop our clients' lead compounds
internally through our strategic drug development program. This program
provides "virtual" pharmaceutical companies who discover or in-license
promising lead compounds with the necessary infrastructure to develop these
compounds. We have the capability to take a client's lead compound from lead
discovery through early-stage clinical development. Through our strategic drug
development program we offer two types of services: direct services, including
our lead discovery through chemical synthesis and scale up capacities, and
indirect services which we arrange for through our project management
expertise, including pre-clinical testing and clinical trials of product
candidates.
Our role in developing the drug pipeline of Advanced Life Sciences and Sarawak
MediChem Pharmaceuticals is an example of the benefits of our strategic
partnership with these affiliates. Advanced Life Sciences and Sarawak MediChem
Pharmaceuticals do not have a scientific staff and have relied upon our drug
discovery and development services, platform technologies and project
management services to develop their promising drug compounds. As a result, we
have gained valuable experience and credibility and we intend to aggressively
market our drug development capabilities to third-party customers in order to
generate incremental service revenues, enhance our market reputation and create
opportunities to earn milestone and royalty revenues.
Our headcount, following the ThermoGen and Emerald BioStructures acquisitions,
has increased significantly to 202 employees as of July 31, 2000 from 81 at the
end of 1997. As of July 31, 2000, we employed 153 chemists, biochemists and
molecular biologists of whom 65 hold Ph.D. degrees. This compares to 64
chemists and 17 with Ph.D.s who we employed at the end of 1997. We are in the
process of expanding our infrastructure to accommodate growth by developing a
100,000 square foot headquarters and discovery laboratories center in
Woodridge, Illinois.
INDUSTRY BACKGROUND
The pace of drug discovery has accelerated significantly in recent years.
Advances in disciplines such as molecular biology, genomics and high throughput
synthesis and screening are fueling opportunities to develop therapeutics for
previously unmet or undermet medical needs. Of these advances, genomics is
having the greatest impact on the pace of the biological discovery process. In
addition, pharmaceutical
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and biotechnology companies are under increasing pressure to deliver new drugs
to market and reduce the time and cost required for drug development, while
meeting ever-increasing requirements for environmentally cleaner chemistry
processes.
In order to take advantage of these opportunities and to respond to these
pressures, many pharmaceutical companies are increasingly augmenting their
internal R&D capacity by outsourcing to independent chemistry research
companies. In addition, many biotechnology companies have limited physical
infrastructure and are electing to outsource rather than develop certain R&D
functions in-house.
Rapid advances in genomics and proteomics
Recent advances in the study of the human genome have resulted in an
exponential increase in the number of new drug targets. It has been estimated
that the human genome could contain as many as 140,000 genes, of which
approximately 10,000 have been identified as potentially important
pharmaceutical targets in the treatment of disease. This compares to less than
500 gene targets that have been available to the pharmaceutical industry over
the past 50 years. As the identification of the entire human genome nears
completion, a vast number of important gene targets will be identified for
development, creating a massive bottleneck of targets.
We believe that companies positioned in the proteomics sector will be direct
beneficiaries of the explosion in genomics. As genomics is the large scale
study of genes, proteomics is the large scale study of proteins. Genes contain
the information necessary to create proteins, the molecules that carry out a
cell's biological function. Humans may produce one million or more distinct
proteins. Most diseases result from abnormalities in the presence, expression
or performance of proteins within cells. Consequently, the pharmaceutical and
biotechnology industries are focusing on the role genes and proteins play in
disease processes, which can facilitate more efficient and predictable drug
discovery and development.
With the recently announced completion of a rough draft of the human genome,
the next hurdle will be determining the role that the large number of
therapeutically relevant genes play in human disease. In the coming years, the
identification and three-dimensional structure determination of therapeutically
relevant protein drug targets arising from these genes will represent a
challenge to pharmaceutical and biotechnology companies and a tremendous
opportunity for chemistry service providers.
Chemistry's role in drug development
The drug discovery and development process typically involves biologists and
chemists working together to prepare and deliver new chemical substances,
develop laboratory models of disease and test compounds to identify agents that
demonstrate the desired activity, all with a goal of creating a marketable
drug. The drug discovery and development process includes the following stages:
.drug discovery and development -- the identification of a compound that may be
developed into a new drug and the modification of its structure to optimize
its therapeutic properties;
.pre-clinical testing -- the testing of the compound in increasingly complex
animal models;
.clinical trials -- the multi-phase testing of the compound for safety and
effectiveness in humans; and
.product commercialization -- the manufacture, marketing and sale of commercial
quantities of the approved drug.
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Chemistry is an important element of the drug discovery and development
process. Chemistry technologies and services are provided in the following
stages:
.Lead Discovery represents the first major hurdle in drug discovery and
involves the identification of one or more lead compounds that interact with a
biological target, such as an enzyme, receptor or other protein, that may be
associated with a disease. Determining the chemical structure of the
biological target through proteomics provides a molecular map. Computational
chemistry utilizes these protein structure maps in computer-aided studies of
the interaction between three-dimensional molecular structures of the
potential drug compounds and biological targets. Using medicinal chemistry,
potential leads can be identified through synthetic processes or through the
isolation and extraction of biologically active materials from natural
products, a process known as natural product isolation. Combinatorial
chemistry automates the lead discovery process, generating libraries of
potential lead compounds by systematically combining a small number of
chemical reagents in a variety of combinations defined by a given chemical
reaction approach. A biological test or assay based on the target is developed
and used to test or "screen" chemical compounds. The objective of lead
discovery is to identify a lead compound for further advancement in the
development process.
.Lead Optimization refers to the process which follows the screening of large
batches of new compounds, during which several may appear to act upon the
desired biological target. At this point, medicinal chemistry becomes an
iterative process, as chemists synthesize analogous compounds that
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share beneficial features to the lead but may vary slightly in chemical
structure. After observing which compound achieves the optimal action upon the
target, the compound is moved toward the development phase. However, the
compound may need additional modifications to its chemical structure to
improve its bioavailability or toxicity profile. In this case, medicinal
chemists will select modifications to optimize the lead compound and its
pharmacological effects. As the product is moved into pre-clinical
development, medicinal chemists will continue to synthesize analogs of the
lead compound to improve efficacy or safety profiles and broaden patent
coverage.
.Chemical Process Development refers to the synthesis processes required in the
scale up of chemical production as compounds progress through the drug
discovery and development process into pre-clinical and early clinical trials.
Chemical process development covers the range of services that strive to
optimize the efficiency, safety and cost effectiveness of synthetic pathways
and other processes in the small-to-moderate manufacture of intermediates and
final drug compounds. Process optimization and development includes the
improvement or modification of existing chemical processes, or the innovation
of alternative routes to existing compounds that may use different
intermediates or otherwise improve upon the original production pathway.
.Chemical Synthesis and Scale up refers to the production of larger quantities
of chemicals that are required for further pre-clinical and clinical
development. Larger scale techniques are utilized in conjunction with larger
scale equipment. The synthetic process that was identified during the chemical
development phase is utilized to produce kilogram quantities of material to be
used in pre-clinical and clinical studies. Typically the compound will be
studied in late stage pre-clinical testing and human clinical trials, in which
case the synthetic process must be implemented under current good
manufacturing practices, cGMP, as outlined by the U.S. Food and Drug
Administration. cGMP chemists and quality assurance specialists follow strict
regulatory guidelines that certify the purity of active drug compounds being
produced.
Chemistry R&D outsourcing
Total domestic R&D spending by the U.S. pharmaceutical industry has grown at a
compound annual rate of approximately 13% from 1970 to 1999. According to
estimates by Pharmaceutical Research and Manufacturers of America, PhRMA, U.S.
pharmaceutical companies spent over $24 billion on R&D in 1999, up nearly 14%
from 1998. U.S. pharmaceutical companies spent approximately $5.2 billion on
chemistry services in 1998, which represents approximately 30% of total
domestic R&D spending by such companies. Chemistry spending growth by U.S.
pharmaceutical companies has outpaced that of manufacturing, drug development
and sales and marketing at 16% from 1996 through 1998 according to PhRMA. We
believe multiple factors exist that are driving pharmaceutical and
biotechnology companies to increasingly rely on outsourcing for their chemistry
requirements.
The vast amount of both public and private investment in the areas of
biological drug discovery is evidence of the upcoming demand surge for
chemistry related services. Since January 2000, over $10 billion has been
raised in the public equity markets by companies offering services in the early
stages of biological drug discovery. In addition, the U.S. government has spent
approximately $3 billion on the Human Genome Project. Finally, with patent
expirations and controlled reimbursement increasing demand for new compounds,
companies are expanding their total investment in the earliest phases of R&D
and exhausting their in-house capacity.
Challenges in drug discovery and development
The pharmaceutical and biotechnology industries today are under significant
pressure to maintain historical revenue growth rates by replacing the number of
blockbuster drugs imminently coming off patent and taking advantage of emerging
technologies to develop new therapeutic agents. This central challenge provides
a number of secondary challenges for pharmaceutical and biotechnology
companies, which include the following:
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.Address the Explosion of Genomic Information. The explosion of genomic
information is both a benefit and challenge to pharmaceutical and
biotechnology companies. The industry has moved from having fewer than 500
gene targets in its potential therapeutic portfolio, to an estimated 10,000
targets, as the mapping of the human genome is completed. Given these greatly
broadened possibilities, pharmaceutical and biotechnology companies will need
additional capacity for lead compound discovery and optimization.
.Expedite Lead Discovery and Development. Greatly expanded available targets
translate into an increased pressure to evaluate potential drug candidates as
quickly and efficiently as possible. Building on this, the industry must seek
ways to rationalize the process of both developing leads and moving them
forward, thereby reducing the risk of spending large amounts of time and money
on the development of drug candidates that ultimately prove to be
unsuccessful.
.Produce Chirally Pure Compounds. Recent changes in FDA regulations have placed
increasing pressure on pharmaceutical companies to develop chirally pure
compounds. Chiral compounds are molecules that are chemically identical but
have mirror images. Often one chiral compound of a chemical structure is the
most active and best affects the desired biological function; others are often
inactive or less effective and may needlessly contribute to drug side effects.
Because of these potential side effects, the FDA is now requiring data on each
chiral compound, significantly increasing the effort and cost needed for
approval. Therefore, pharmaceutical companies have become intent on developing
single-isomer chiral pharmaceuticals, but have found that doing so using
traditional chemistry approaches is difficult, expensive or simply impossible.
.Employ Environmentally Cleaner Chemical Synthesis Techniques. The EPA and OSHA
are placing increasing regulatory pressure on drug developers to employ more
environmentally friendly biological scale up techniques, such as biocatalysis,
as opposed to utilizing traditional chemical reagents and catalysts, which
often involve hazardous substances. Pharmaceutical companies are increasingly
looking to outside providers for more environmentally friendly scale up
techniques.
.Recruit High Quality Scientific Talent. Pharmaceutical companies have found it
increasingly difficult to recruit high quality scientists for their chemistry
R&D departments. With an estimated 2,300 chemistry Ph.D.s awarded in 1998, the
number of graduates is still growing, but at an increasingly slower rate and
significantly slower than demand. Annual growth in the number of chemistry
doctorates awarded, for example, has slowed to 3% in 1998 from 7% in 1990.
Pharmaceutical companies have found it difficult to satisfy their own internal
needs and have turned to independent chemistry research companies.
OUR SOLUTIONS
As a drug discovery technology and services provider to the life sciences
industry, we are well positioned to help pharmaceutical companies address the
challenges they are currently facing. The following represent areas of
expertise that we offer to address the pharmaceutical industry's current
challenges:
.Proteomics. We believe that there will be an increasing demand for proteomics
services since most diseases result from abnormalities in the presence,
expression or performance of proteins within cells. The considerable resources
currently directed at genomics are shifting to proteomics as identification of
the human genome nears completion. Through our Emerald BioStructures
subsidiary, we provide proteomics services in the areas of protein expression,
protein crystallization and three-dimensional structural determination. The
protein structures determined using our advanced proteomics services serve as
a map for computational and combinatorial chemists in the design and discovery
of novel lead compounds.
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.Combinatorial and Computational Chemistry. We believe that combinatorial and
computational chemistry are powerful chemical synthesis and data
interpretation tools that can dramatically speed the drug discovery and
development process. Our combinatorial synthesis group develops and validates
chemical technologies used to produce focused lead compound libraries. We have
extensive expertise in library purification using a variety of techniques. We
create tailored libraries, using a broad range of reaction technologies, based
both upon our clients' specifications and unique designs arising from our
computational chemistry capabilities. We use automated technology platforms to
produce chemical libraries that carefully match the scale and throughput needs
of each unique project.
.Medicinal Chemistry. We believe that there will be increasing demand for high
quality medicinal chemistry services as a large number of potential lead
compounds must be developed and optimized using traditional medicinal
chemistry procedures. As implied by our name, MediChem, we were founded with
the focus of providing medicinal chemistry services to the pharmaceutical and
biotechnology industries. We offer a broad spectrum of medicinal chemistry
services for clients. These services range from determining the optimal
compounds and processes from among potential lead candidates to the
identification of efficient synthetic chemical production processes to produce
larger quantities of compounds for use in pre-clinical and clinical studies.
.Chemical Process Development. We believe there is an increasing need for the
development and optimization of chemical processes once a lead compound has
been selected as a drug candidate. We offer expertise and technologies that
help our clients to identify the best chemical production processes.
Specifically, through the combined use of robotics and statistical analysis,
our patented AutoOptimize(TM) technology enables the chemist to rapidly
identify the best chemical process for scale up, significantly shortening our
clients' lead compound development timeframe.
.Biocatalysis. Biocatalysis relies on enzymes, which are proteins that can
enable and accelerate desired chemical reactions. This technology has
applications across the breadth of the drug discovery and development process.
Biocatalysis can be used in combinatorial chemistry to develop unique
molecular libraries. In lead optimization, biocatalysis is used to modify
specific portions of a molecule while maintaining the principal integrity of
the chemical structure. Finally, in chemical process development and scale up,
biocatalysis is used to facilitate and optimize reaction conditions.
Our ThermoGen subsidiary offers stable, easy-to-use enzyme-based biocatalysts
to perform difficult chemical reactions. Our biocatalysts are more
environmentally friendly and cost effective reagents and can be customized
through enzymatic engineering--improving natural enzymes by modifying their
amino acid structure--and protein shuffling--a technique that randomly
combines module sections of proteins--in order to meet the unique needs of
our clients. In addition, biocatalysis can be used to produce chirally pure
compounds that meet the stringent specifications of the FDA in an economical
and efficient manner.
.Experienced Chemistry Project Teams. We have built teams of highly qualified
scientists that are available to our pharmaceutical and biotechnology
customers to satisfy their growing needs for scientific expertise in drug
discovery and development. To more efficiently serve our customers, our
scientists are organized into teams focused on specialized chemistry service
and technology offerings. Each team is headed by a scientist experienced in
complex chemistry project management who works closely with our customers to
assure timely and on-budget completion of chemistry-related projects. Our
scientific staff currently consists of 153 degreed chemistry, biochemistry and
molecular biology professionals, which include 65 Ph.D.s, after giving effect
to our recent ThermoGen and Emerald BioStructures acquisitions. We believe we
effectively attract high quality scientific and business professionals through
our entrepreneurial culture and innovation incentives.
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BUSINESS STRATEGY
Leverage and expand technology platform
We will invest in drug discovery platform technologies to leverage our
scientific talent base and increase revenues. Proprietary technologies such as
Crystal Monitor(TM), ThermoCat(TM) libraries, ThermoFusion(TM),
ChiralSelect(TM) and AutoOptimize(TM) will be applied to client programs in the
early stages of drug discovery. We intend to leverage these technologies to
generate revenues from upfront licensing fees, milestone and royalty payments
and through our integrated chemistry research services. These proprietary
technologies will also be applied to our strategic drug development program.
Expand service offerings
We have expanded our service offerings beyond traditional medicinal chemistry
to keep pace with the needs of our customers. In 1997, we began offering
combinatorial chemistry as a natural extension of our medicinal chemistry
capabilities. More recently, we increased our capabilities in analytical
chemistry and cGMP synthesis, or the production of molecules under current good
manufacturing practices. As evidenced by our recent acquisitions of ThermoGen
and Emerald BioStructures, we have further expanded our capabilities in the
early stages of drug discovery and intend to continue this expansion. In
addition, we intend to further expand and develop our chemical process
development and scale up capabilities.
Expand customer relationships
We seek to expand the number of service offerings used by each of our customers
by providing chemistry-related services across many phases of drug discovery
and development prior to bulk manufacturing. In 1999, six of our ten largest
customers utilized more than one of our service offerings. Our recent expansion
into proteomics and biocatalysis provides us with an opportunity to pull
customers from these service offerings into our later-stage services as well as
to expand our current relationships into earlier stages of drug discovery. We
believe that our existing customer base also provides us with an excellent
source of referrals.
Enter collaborations through our strategic drug development program
Recent advances in biotechnology have fueled the emergence of "virtual"
pharmaceutical companies who discover or in-license lead compounds. These
companies have undertaken aggressive efforts to discover promising lead
compounds, but do not have the in-house infrastructure or experience to develop
them. Our integrated chemistry service and technology offerings provide an
alternative for customers that historically had to sell a significant portion
of their proprietary technology to gain access to the development capabilities
of a large strategic partner. Our role in developing the drug pipeline of our
Advanced Life Sciences and Sarawak MediChem Pharmaceuticals affiliates is an
example of the benefits of our strategic drug development program. Advanced
Life Sciences and Sarawak MediChem Pharmaceuticals do not have a scientific
staff and have relied upon our drug discovery and development services,
platform technologies and project management services to develop their
promising drug compounds. Our work provides valuable experience and credibility
and we intend to aggressively market our drug development capabilities to
third-party customers in order to generate incremental service revenues,
enhance our market reputation and create opportunities to obtain milestone and
royalty revenues.
Increase customer base
We are seeking to increase our customer base in both domestic and international
markets. We believe there are significant opportunities for growth in
geographic areas in which we have not conducted significant marketing efforts
to date. Accordingly, we plan to expand our U.S. and international marketing
efforts beyond our existing presence in Illinois, California, Connecticut and
Maryland by opening sales offices in other pharmaceutical and biotechnology
markets. Our acquisition of Emerald
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BioStructures provides us access to a key emerging biotechnology market in
Seattle, Washington. We also believe international markets represent an
opportunity. The international market is under-served by chemistry services
companies, with minimal penetration from U.S.-based companies. To access this
market, we presently engage consultants based in important geographical regions
and are exploring opportunities to open sales offices in key international
markets. In addition, we generate business from other industries, such as
agricultural chemicals, food and personal care, that have a need for chemistry
R&D services and we intend to expand these customer segments in the future.
Increase capacity
We will seek to support our future growth by increasing capacity both in terms
of the number of scientists employed and the size of our facilities within each
of our service offerings. We have significantly increased our scientific staff,
and continually seek to recruit and hire additional experienced scientists. We
have recently increased research capacity at our Lemont, Illinois facility by
adding 8,000 square feet of laboratory space. In addition, we are developing a
14 acre site in Woodridge, Illinois for the construction of a new 100,000
square foot headquarters and discovery laboratories center. This new facility
is expected to be operational in the first quarter of 2001 and will accommodate
up to 200 employees.
Growth through acquisition
A key element of our growth strategy is to expand through the acquisition of
selected drug discovery and technology companies. We believe that selected
acquisitions offer the opportunity to grow in the following ways:
.expand customer base;
.expand drug discovery platform technologies;
.expand breadth and scale of drug discovery service offerings;
.expand geographic reach of market presence; and
.increase process development and scale up technologies.
We believe that numerous suitable acquisition candidates with these
capabilities are available.
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SERVICE AND PLATFORM TECHNOLOGY OFFERINGS
We are a drug discovery technology and services company that offers a broad
range of integrated chemistry R&D capabilities to pharmaceutical and
biotechnology companies. Our service and platform technology offerings span the
drug discovery process and include:
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Service offerings
.Proteomics. Protein structures identified through our proteomics services,
patented technologies and collaborations can be the basis for the discovery of
novel drug targets. Through our expertise in applying computational chemistry
to design molecules for interaction with biological targets, called small
molecule design, we help our clients use drug targets to further design and
identify lead compounds with the most desirable action on the drug target. Our
proteomics offerings are a key component in our strategy to bridge the gap
between the genomic information and chemistry services necessary to identify
new lead compounds. We believe that early involvement in the drug discovery
process presents follow-on chemistry service opportunities throughout the drug
development cycle as well as opportunities to earn royalty and milestone
revenues.
Through our Emerald BioStructures subsidiary, we offer a fully integrated set
of proteomics services and proprietary technologies aimed at determining the
three-dimensional structure of our clients' protein targets. These services
include protein expression, purification, crystallization and structure
determination. The structural information gathered from these services
enables our scientists to use our powerful computational chemistry tools to
assist our customers in the design of novel compounds. Emerald BioStructures'
patented technologies and the expertise of their molecular biologists and
crystallographers combined with our unique collaborations provide our clients
with the structural data necessary to more efficiently and economically
design potential lead candidates.
Through our collaboration with the Argonne National Laboratory's Structural
Biology Center, we provide ready access to the Advanced Photon Source, APS.
By using the high brilliance APS X-ray beam, one of only three in the world,
Emerald BioStructures identifies protein structures faster and with a greater
degree of resolution than conventional facilities can provide. The APS can
provide important information on the molecular structure and mechanisms
governing the biological functions of proteins, information that helps
Emerald BioStructures' scientists understand and control protein behavior in
disease processes.
.Combinatorial and Computational Chemistry. Combinatorial chemistry is a
powerful chemical synthesis tool that can dramatically speed the drug
discovery and development process. Combinatorial chemistry allows chemists to
prepare in a short period of time libraries of relatively large numbers of
chemical analogs, which are variants of a molecule that are prepared in a
medicinal chemistry or lead optimization program. This is done through the use
of robotic synthesizers and high throughput purification equipment, which is
specialized equipment used to rapidly purify molecules, particularly molecules
prepared using combinational chemistry. Many companies prepare chemical
libraries consisting of extremely large numbers of individual compounds,
numbering in the tens of thousands to hundreds of thousands. We specialize in
high-quality focused libraries, numbering from three to five thousand
compounds, that are carefully designed through the use of computational
chemistry. We can prepare these focused libraries more rapidly and, because
they are designed using computer-aided methods, we believe they contain more
relevant potential therapeutic agents.
In collaboration with our clients, we design chemical libraries that will act
upon a particular biological target using both generally available scientific
data and our clients' proprietary data. Our computational chemistry team can
build vast "virtual libraries" around multiple sets of chemical templates,
then condense the large virtual library into more focused libraries that can
then be physically synthesized. These libraries are intended to rapidly
generate rich structure-activity relationships, SARs, which are the
correlations between a molecule's structure and its effect on biological
activity. SARs allow medicinal chemists to select therapeutic lead molecules
in a greatly shortened timeframe.
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Our combinatorial synthesis group develops and validates chemistries used to
produce chemical libraries, including method development for analyses of
final library purity. We create tailored libraries, using a broad range of
reaction technologies, based both upon our clients' specifications and unique
designs arising from our computational chemistry capabilities. Our
combinatorial group has extensive expertise in library purification using a
variety of techniques. All final products from each library are analyzed for
purity to meet customer specifications. Final libraries are delivered to our
clients in a format of their choosing, along with electronic database files
that are easily incorporated into their own internal databases.
In addition to the preparation of chemical libraries, we apply combinatorial
approaches to problems in chemical process development using our patented
AutoOptimize(TM) technology, which is described under Proprietary Drug
Discovery Platform Technologies.
.Medicinal Chemistry. As implied by our name, MediChem, we were founded with
the focus of providing medicinal chemistry services to the pharmaceutical and
biotechnology industries. Our in-house chemistry-focused resources, combined
with our network of external collaborators, provides a framework for managing
an entire medicinal chemistry program from lead discovery through early-stage
human clinical trials. Our scientific staff possesses a wealth of expertise in
medicinal chemistry research, obtained through academic training, prior
industry experience and through servicing the sophisticated needs of our
customers. Our medicinal chemistry management team applies the requisite tools
to conduct full-scale medicinal chemistry programs for our clients.
We offer our clients a broad spectrum of medicinal chemistry services. These
services range from early-stage lead optimization studies that culminate in
candidate selection for development to the identification of viable synthetic
routes required to produce materials for both pre-clinical and clinical
studies. Our lead optimization programs include analog synthesis and focused
compound libraries obtained from combinatorial chemistry, the collection and
analysis of SAR data and computer-assisted drug design. Success in these
programs is defined by the improved biological activity and safety profile of
lead compounds.
.Biocatalysis. Our services in the field of biocatalysis allow clients to
efficiently develop economical chemical process methods utilizing the power of
enzyme-catalyzed reactions, during which biological molecules act as reagents
in the chemical process. When coupled with proteomics, combinatorial
chemistry, lead optimization and chemical process development, biocatalysis is
an integral part of a multidisciplinary service approach to a drug discovery
program. Three of the most important applications of biocatalysis are the
production of chiral chemical compounds, the optimization of chemical
processes and the application of protein shuffling--randomly combining modular
sections of proteins--to streamline chemical syntheses.
Through our ThermoGen subsidiary, we offer an enzyme-based technology
platform, or a series of technologies used together for applying enzyme
catalysts, that can be applied to perform difficult chemical reactions with
stable, easy-to-use biocatalysts that are environmentally friendly and cost
effective. ThermoGen's tailored biosynthetic processes are designed to
streamline our clients' chemical processes and reduce overall drug
development time and cost. We offer customers valuable enzyme-catalyzed
reactions at both the process development and scale up stages of chemical
processing. Once an enzyme capable of conducting a desired chemical reaction
is identified, the reaction can be scaled up using our synthetic chemistry
resources. In this manner, synthetic chemical and biocatalytic processes are
coupled to produce an efficient and economical process for production of lead
compounds. Our integrated approach represents a value-added opportunity to
accelerate our customers' drug development timeline.
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.Chemical Process Development. Once a lead compound has been selected for
development as a potential drug candidate, a viable manufacturing method must
be identified. Although an initial synthetic route has been designed, that
initial method may be inappropriate for large-scale manufacturing. Thus,
chemical process research is conducted to identify a synthesis process that is
efficient, economical and safe.
Our scientists utilize a variety of tools in conducting chemical process
development. Molecular modeling enables our scientists to predict the
behavior of reactants in a proposed chemical reaction, allowing them to avoid
reaction pathways that could pose safety hazards. Our scientists combine
robotics and statistical analysis to rapidly optimize discrete chemical
reactions. Our biocatalysis technology can be applied to identify a safe,
efficient solution to a chemical reaction problem that could not be readily
solved through the use of traditional chemistry methods. Following initial
computational reaction design and automated reaction optimization, the
process is then subject to large-scale validation. By employing computational
chemistry, automation and biocatalysis, our approach to chemical process
research adds tremendous value to our clients in the form of decreased
development times and production costs, and dramatically expands the range of
underlying research data that can be used to strengthen patent applications
and ultimately broaden patent coverage.
.Analytical and Separations Chemistry. Our analytical and separations services
utilize a broad range of spectroscopic and chromatographic techniques to
assist clients in validating and purifying chemical compounds. Spectroscopic
services, such as nuclear magnetic resonance spectroscopy and mass
spectrometry, are used to identify and verify chemical structures.
Chromatographic services include the use of high-performance liquid
chromatography, HPLC, technologies to separate extremely complex mixtures and
isolate chemical impurities. The compounds produced by chemical synthesis,
including intermediate and final products, are validated using chromatographic
techniques. These analytical validations form the basis of the Chemistry,
Manufacturing and Control section when our clients file an Investigational New
Drug, IND, application with the FDA.
Because the U.S. Food and Drug Administration and the European Committee for
Proprietary Medicinal Products have required manufacturers to research and
characterize each chiral version of a drug proposed to be marketed, obtaining
pure compounds containing one chiral version has become an essential
requirement in the pharmaceutical industry. Through the experience of our
highly qualified scientists as well as our technologies, such as
ChiralSelect(TM), we enable our customers to perform complex separations and
purifications of chiral chemical compounds.
.Chemical Synthesis and Scale Up. Once an optimal method of chemical synthesis
has been identified through chemical process development, our scientists then
scale up the desired compound on the scale appropriate to the compound's stage
of development, ranging from grams to multiple kilograms. The synthesis of
compounds is conducted under good laboratory practices, GLP, guidelines or, if
the compound is undergoing early-stage clinical studies, under current good
manufacturing practices, cGMP, guidelines. We have the capacity to produce
multiple-kilogram quantities of compounds under either GLP or cGMP guidelines.
In addition, when larger quantities are required, we contract with large-scale
chemical manufacturers to meet these requirements.
DRUG DISCOVERY PLATFORM TECHNOLOGIES
Proteomics platform technologies
Our proteomics subsidiary, Emerald BioStructures, offers drug discovery tools
and technologies to pharmaceutical and biotechnology companies aimed at
determining the three-dimensional X-ray crystal structure of our clients'
protein targets. These tools and technologies include the following:
.High Throughput Crystallization(TM), a system for screening large numbers of
potential crystallization conditions for pharmaceutically relevant protein
drug targets;
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.Crystal Monitor(TM), a powerful relational database software tool for the
capture and analysis of protein crystallization trial information;
.Clover Plates(TM), specialized plates that allow for multiple independent
protein crystallization experiments; and
.Crystal Growth Matrices(TM), novel formulations that decrease the time and
cost required to design protein crystallization arrays and increase the
ability to repeat crystal growth multiple times using a particular set of
crystallization conditions.
Biocatalysis platform technologies
Our subsidiary, ThermoGen, has developed a broad technology platform for rapid
enzyme discovery, enzyme engineering, protein shuffling, process development
and scale up. ThermoGen's proprietary technologies include the following:
.ThermoCat(R) enzyme products are stable biocatalysts for chemical synthesis
applications. ThermoGen's proprietary collections of enzymes, organisms and
gene libraries are rich sources of biocatalysts. These biocatalysts have been
developed to target the growing need for catalysts and can economically
produce chiral stereoisomers, or single-isomer molecules, and other complex
compounds. Using ThermoGen's core technology base, over 25 new biocatalysts
have been commercialized. The ThermoCat(R) biocatalysts are being sold in
three forms: QuickScreen(R) kits, bulk biocatalysts and immobilized
biocatalysts, which attach enzymes to a solid matrix than can easily be
filtered upon completion of a chemical reaction.
.The ThermoGenetic(TM) Stabilization System helps develop genetically
stabilized proteins, or proteins that have been genetically engineered to have
an increased lifetime. By inserting a gene of interest into a thermophilic
microorganism, which lives in extremely high-temperature environments, our
technology allows the generation of modified proteins that function at high
temperatures.
.ThermoFusion(TM) allows the construction of new enzymes by shuffling sections
of proteins. The enzymes that result from this process can combine multiple
enzymatic processes into a single enzyme. In addition, ThermoGen's protein
technology enables the production of novel enzymes that will catalyze with
enzymatic properties not available through natural means.
.RapidScreen(TM) and TrueSubstrate(TM) methods allow rapid qualitative or
quantitative comparison of enzyme properties for use in a variety of screening
applications. Such applications include process optimization, or the
development of chemical synthetic pathways suitable for large-scale
manufacture of chemical products. Utilizing this technology, ThermoGen can
compare large libraries of enzymes against libraries of substrates or process
conditions rapidly and effectively.
ChiralSelect(TM)
A persistent problem in drug development is the identification of methods to
isolate pure drug candidates. Other than the development of a synthetic route,
which provides only one desired chiral version, chiral HPLC is the most rapid
and efficient method for the large-scale isolation of pure chiral compounds.
Chiral stationary phases, CSPs, are specialized materials that can effect
separation of chemical isomers. Despite the commercial availability of a
variety of CSPs, challenging separations problem still persist, emphasizing the
continuing need to develop new and improved CSPs for certain drug candidates.
Our ChiralSelect(TM) technology is a novel approach to discover the optimal
HPLC separation method, which provides the best means for separating a chemical
mixture. ChiralSelect(TM) involves the rational design and synthesis of diverse
libraries of novel CSPs for screening our clients' chemical mixtures to
facilitate
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the determination of the most efficient CSP for chiral separation requirements.
We developed our ChiralSelect(TM) technology as part of our relationship with
Advanced Life Sciences and Regis Technologies and use the technology pursuant
to exclusive, unlimited licenses from Advanced Life Sciences and Regis
Technologies. The ChiralSelect(TM) license agreements with Advanced Life
Sciences and Regis Technologies require us to pay each of them 4% of contract
revenue derived from the ChiralSelect(TM) platform technology. In the event
that the ChiralSelect(TM) technology is patented, our royalty obligation to
Regis Technologies will increase to 6%. The license with Regis Technologies
expires in August 2009 and cannot be terminated prior to that time without our
consent. Our license with Advanced Life Sciences is perpetual. See "Business--
Patents and Proprietary Rights--Platform Technologies Licensed from Advanced
Life Sciences."
AutoOptimize(TM)
In many instances, the identification of a reliable and economical synthetic
method for large-scale production of a therapeutic agent becomes a critical
bottleneck in the development of new drugs. Our patented AutoOptimize(TM)
technology is an efficient method for rapidly optimizing chemical processes
that couples robotics and statistical analysis. Our automated techniques
generate "libraries" of hundreds of unique reaction conditions that combine
multiple reaction variables, such as solvent, temperature, reagent ratios and
catalyst selection. Using an iterative process, we conduct statistically-
designed experiments that allow the identification of critical reaction
variables, then perform multiple cycles of the design/reaction/analysis
sequence until the optimal set of reaction variables is determined. Our method
is far more efficient than traditional, time-consuming bench-scale reaction
optimization, which requires a chemist to manually and frequently change one
variable at a time, often missing subtle, but critical, cross-variable effects.
Our AutoOptimize(TM) technology platform provides our clients with a rapid and
cost effective alternative to traditional process optimization. We developed
our AutoOptimize(TM) as part of our relationship with Advanced Life Sciences
and use the technology pursuant to an exclusive unlimited license from Advanced
Life Sciences that can only be cancelled with our consent and that requires us
to pay Advanced Life Sciences 8% of our contract revenue relating to the use of
the AutoOptimize(TM) technology. See "Business--Patents and Proprietary
Rights--Platform Technologies Licensed from Advanced Life Sciences."
BlockBuilder(TM)
Our BlockBuilder(TM) program is a service offering that utilizes our synthesis
technologies to efficiently produce unique combinatorial chemistry building
blocks and scaffolds. The program fills an important and growing need in the
chemical discovery research marketplace. This need is driven by the widespread
and growing popularity of combinatorial chemistry as a technique for
discovering new chemical entities. Because research organizations are investing
heavily in automated chemical synthesis to achieve discovery objectives, the
need for greater numbers of customized building block compounds has become more
pronounced. Our program is designed to provide a high throughput, cost-
effective source of custom synthesized unique combinatorial building blocks and
scaffolds on an exclusive basis to our clients.
MediCertified(TM)
Our MediCertified(TM) program utilizes our chemical synthesis and analytical
technologies to provide a "one-stop-shop" approach to the chemical synthesis
and validation of analytical reference standards. This certification is used in
generating the documentation required in FDA filings in connection with the
manufacture of drug substances. We use our MediCertified(TM) program to
discover and develop synthetic processes to produce drug impurities and
metabolites, develop a method for validating the chemical structure and purity
of each impurity or metabolite and utilize these compounds and associated data
to support our clients' FDA filings.
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STRATEGIC DRUG DEVELOPMENT PROGRAM
In conjunction with our drug discovery technology and integrated chemistry
research services, our strategic drug development program provides our
customers with a continuum of drug discovery and development services and
technologies. We are focused on serving the growing number of biotechnology and
"virtual" pharmaceutical companies who discover or in-license promising lead
compounds with therapeutic potential but may not have the in-house
infrastructure or experience to develop them. Our development program provides
these customers with an alternative to selling a significant portion of their
proprietary technology to gain access to the development capabilities of a
large strategic partner. Although focused on the biotechnology and "virtual"
pharmaceutical sector, our development program also has the potential to serve
fully integrated pharmaceutical firms who need additional development capacity.
Many of these companies have promising lead compounds that fall below internal
market size thresholds but still represent substantial opportunities for
companies focused on "middle market" therapeutic areas.
We are one of very few chemistry service companies that have the breadth of
service offerings needed to take a customer's lead compound through lead
optimization, chemical process development and chemical synthesis and scale up.
In addition, our drug discovery platform technologies enable us to provide our
customers with proprietary techniques to enhance the speed and efficiency of
their discovery and development efforts.
Through our strategic drug development program we offer two types of services:
direct services, including our lead discovery through chemical synthesis and
scale up capacities, and indirect services which we arrange for through our
project management expertise, including pre-clinical testing and clinical
trials of product candidates. We contract with third parties for services
relating to the pre-clinical research, clinical trials and chemical
manufacturing stages of drug development. Projects in our strategic drug
development program are longer term in nature, beginning in lead discovery and
moving through clinical development to potential commercialization. Through
this program we are building relationships with our customers and establishing
a recurring revenue base. We generate revenues from this program in the form of
chemistry service revenues, milestone fees and royalty payments.
Overall, our development program provides customers with access to fully-
integrated chemistry discovery and development services from lead discovery
through clinical development. Through our collaborations with our Advanced Life
Sciences and Sarawak MediChem Pharmaceuticals affiliates, we have performed
chemistry research services and engaged strategic partners to advance
calanolide A, an anti-HIV drug, from early optimization work through synthetic
route development, pre-clinical studies, IND filing and into human clinical
trials performed under our management by a contract research organization.
Calanolide A is currently in Phase I clinical trials. In addition, we have
implemented process research and scale up chemistry services in connection with
Immtech International, Inc.'s lead compound. We are also providing project
management services to Immtech as we work closely with strategic partners in
connection with the production of scale up information and preparation of
chemical and analytical regulatory data associated with Immtech's IND filing.
Having successfully taken a lead compound into the clinical trial stage of
development, we are positioned to replicate our successful strategy for other
clients although we have not yet prepared and filed an IND submission or
managed clinical trials for any client other than Sarawak MediChem
Pharmaceuticals.
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RELATIONSHIP WITH ADVANCED LIFE SCIENCES, INC.
Overview
In late 1998, we made a strategic decision to operate our proprietary drug
development and chemistry services businesses as separate entities. Advanced
Life Sciences is an early-stage drug development company with significant R&D
expenditures that is unlikely to generate meaningful revenues in the next
several years. MediChem is an established drug discovery technology and
services company that has generated positive operating income throughout our
existence. Our management believed that the objectives of these businesses were
better pursued independently, given their distinct business models and funding
requirements. To accomplish our objectives, on January 1, 1999, we contributed
all of our proprietary drug development and certain platform technology assets
to a wholly-owned subsidiary, Advanced Life Sciences. The assets we contributed
to Advanced Life Sciences included ownership rights to all patented compounds
in various stages of drug development and our 50% joint venture interest in
Sarawak MediChem Pharmaceuticals, Inc.
We spun-off Advanced Life Sciences immediately prior to our June 1999 venture
capital funding transaction. Management recognized that MediChem's revenue
generating chemistry services model and Advanced Life Sciences' capital-
intensive, R&D drug development model appealed to different investor profiles
and objectives. We realized, however, that maintaining access to Advanced Life
Sciences' technology development potential was important to our business and
desired to foster a strategic alliance with Advanced Life Sciences by entering
license and collaborative arrangements. The spin-off was effected by exchanging
our 100% common stock interest in Advanced Life Sciences for non-voting
preferred stock with a par value of $2.5 million and a 7% cumulative preferred
dividend. Our chairman and chief executive officer, Dr. Michael T. Flavin, who
was our sole stockholder prior to the venture capital investment, made an
equity investment in Advanced Life Sciences and became its sole common
stockholder.
Applicable accounting rules require that all transactions with Advanced Life
Sciences following the spin-off be reflected in our financial statements as
related party. Transactions with Advanced Life Sciences' joint-venture
subsidiary, Sarawak MediChem Pharmaceuticals, are also reflected in our
financial statements as related party since Sarawak MediChem Pharmaceuticals'
inception in 1996.
Advanced Life Sciences was founded to discover, in-license and develop patented
drug compounds. Like many "virtual" pharmaceutical companies, Advanced Life
Sciences has no scientific staff and conducts its operations through a master
service agreement with us pursuant to which we provide comprehensive project
management services. All chemistry and laboratory services provided by us to
Advanced Life Sciences or Sarawak MediChem Pharmaceuticals are billed at our
standard rates and collected in the ordinary course consistent with any third-
party customer. In addition, as a chemistry research service provider to
Advanced Life Sciences, we developed the AutoOptimize(TM) and ChiralSelect(TM)
technologies and received milestone payments related to their successful
commercialization as well as the patent issuance for AutoOptimize(TM). We have
the exclusive rights to use the AutoOptimize(TM) and ChiralSelect(TM)
technologies pursuant to an unlimited license from Advanced Life Sciences in
exchange for the payment of a royalty to Advanced Life Sciences. See
"Business--Patents and Proprietary Rights--Platform Technologies Licensed from
Advanced Life Sciences." We do not fund Advanced Life Sciences operations,
instead, since the spin-off Advanced Life Sciences has relied upon SBIR grants
from the NIH and debt and equity investments from its sole common stockholder,
Dr. Flavin.
Sarawak MediChem Pharmaceuticals is a development stage pharmaceutical company
with a current portfolio of proprietary anti-viral drugs in various stages of
clinical and pre-clinical development.
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Sarawak MediChem Pharmaceuticals represents a 50:50 joint venture between
Advanced Life Sciences and the Government of Malaysia. Sarawak MediChem
Pharmaceuticals' potential anti-HIV products arose from a family of naturally
occurring compounds, collectively known as calanolides, which were discovered
in the tropical rainforest of Sarawak, Malaysia, on the island of Borneo.
Sarawak MediChem Pharmaceuticals has funded its operations through investments
from its joint venture partner, the Government of Malaysia.
Advanced Life Sciences' success is an example of the benefits we offer
"virtual" pharmaceutical and biotechnology customers through our strategic drug
development program. Utilizing our drug discovery and development services,
platform technologies and project management services, Advanced Life Sciences
has several promising drug compounds in development. For example, Advanced Life
Sciences has developed a promising anti-HIV compound through its Sarawak
MediChem Pharmaceuticals joint venture that is currently in Phase I clinical
trials. In addition, Advanced Life Sciences has developed an anti-inflammatory
treatment, currently in pre-clinical development; an anti-cancer compound in
pre-clinical co-development with the National Cancer Institute, NCI, and two
early-stage pre-clinical products with cancer and viral applications.
Our relationship with Advanced Life Sciences is an example of our strategy to
establish collaborations with emerging "virtual" pharmaceutical and
biotechnology companies. We believe that our relationship with Advanced Life
Sciences provides incremental service revenue opportunities, enhances our
market reputation as a manager of drug development programs and provides
opportunities to obtain future milestone and royalty revenues.
INSTITUTIONAL COLLABORATIONS
Through our relationship as the preferred project manager of Advanced Life
Sciences' drug development program, we provide services and technologies on a
number of collaborations that Advanced Life Sciences has with prominent
research institutions that provide services or possess technology complementary
to those we provide or possess. In addition to incremental service revenues,
these collaborations provide significant benefits to us in terms of experience
in performing services on advanced projects, access to possible new
technologies which enhance our ability to market our services to third-party
customers and potential to obtain future milestone payments. Examples of
collaborations that we have fully serviced include the following cooperative
R&D agreements, or CRADAs:
.NCI CRADA. Advanced Life Sciences and the NCI have established a CRADA to
identify and capitalize on the therapeutic value of the calanolide class of
anti-HIV agents. The objective of this alliance is to combine our chemical
research experience with the biological expertise of NCI to advance the
calanolide compounds to commercialization.
.Argonne CRADA. Advanced Life Sciences has also established a CRADA with
Argonne National Laboratory. This CRADA was established to combine our
synthesis and medicinal chemistry expertise with the computational chemistry
and structural biology strengths of Argonne. The aim of this collaboration is
to further the discovery and development of new drug candidates that inhibit
amyloid fibril formation, which is suspected to be a cause of Alzheimer's
disease.
.Southern Research Institute CRADA. Advanced Life Sciences and Southern
Research Institute have established a research collaboration to discover and
develop novel anti-viral agents. The goal of this collaboration is to bring
together our expertise in combinatorial synthesis and medicinal chemistry and
the high throughput anti-viral screening capabilities of Southern Research
Institute to discover and develop new anti-viral drug candidates.
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.Walter Reed Army Hospital CRADA. Advanced Life Sciences and Walter Reed Army
Hospital have established a CRADA to discover and develop novel anti-malaria
agents. This collaboration is focused on coupling our expertise in
combinatorial synthesis and medicinal chemistry and the high throughput anti-
malaria screening capabilities of Walter Reed to discover and develop new
anti-malaria drug candidates.
ACQUISITION OF THERMOGEN
On May 31, 2000, we acquired ThermoGen in exchange for 3,452,909 shares of our
common stock and the assumption of options to purchase 475,456 shares of our
common stock. ThermoGen, based in Chicago, Illinois, is a leading provider of
biocatalysis services and products through the use of proprietary technologies
that expand our technology and chemistry service offerings. ThermoGen's
proprietary technologies permit our customers to perform difficult chemical
reactions with stable, easy-to-use biocatalysts that are environmentally
friendly and cost effective. ThermoGen develops and sells proprietary
biocatalyst products and process research services to the pharmaceutical,
agricultural chemical and food industries. We believe that by integrating
ThermoGen's biocatalysis technology, we provide our clients with chemical
processes that are more efficient and shorten the chemical process development
timeframe. Our acquisition of ThermoGen allows us to provide biocatalysis
services and products to our existing customers and provides opportunities to
market our broad range of chemistry services to new clients. We also believe
that ThermoGen's technology and intellectual property will enhance our current
service and product offerings, thereby improving our efficiency.
ThermoGen was founded in 1988 and had revenues of $2.1 million for the year
ended December 31, 1999 and a staff of over 20 professionals. ThermoGen has
been recognized for its leading biocatalysis technology, having been awarded
more than a dozen SBIR grants from the NIH totaling over $4 million for
technology development. ThermoGen was awarded the 1999 Tibbets Award from the
U.S. Small Business Administration for its excellence in developing and
commercializing its proprietary biocatalysis platform technologies.
ACQUISITION OF EMERALD BIOSTRUCTURES
On May 31, 2000, we acquired Emerald BioStructures, Inc., in exchange for
1,576,602 shares of our common stock. Emerald BioStructures, based near
Seattle, Washington, is a leading provider of research products and services in
protein structure determination to the pharmaceutical and biotechnology
industries. We believe Emerald BioStructures is well-positioned to benefit from
the bottleneck resulting from the explosion in genomic information. Emerald
Biostructures' proteomics services help bridge the gap between genomic
information and the chemistry services necessary to identify new lead
compounds. Emerald BioStructures offers an integrated platform of technologies
in proteomics that enables more efficient determination of protein structure
and function. Our acquisition of Emerald BioStructures allows us to provide
proteomics services to our existing customers and provides opportunities to
market our broad range of chemistry services to new clients. We believe Emerald
BioStructures' proteomics platform technologies improve the efficiency of our
current service and product offerings.
Emerald BioStructures was founded in 1997 and had revenues of $0.5 million for
the year ended December 31, 1999 and a staff of 5 professionals. Emerald
BioStructures has been recognized for its leading proteomics technologies,
having been awarded five SBIR grants from the NIH totaling over $850,000 for
technology development.
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MARKETING
We market the majority of our services directly to pharmaceutical and other
life science companies. Since our inception, our senior management and business
development groups have marketed our services. Our business development
professionals possess the requisite technical and business backgrounds to
communicate effectively with prospective clients and their R&D professionals.
An important component of our strategy is to pursue long-term collaborative
relationships with selected clients.
We market our services directly to clients through meetings with senior
management of pharmaceutical and biotechnology companies, participation in
scientific symposia and trade shows, media relations and public relations,
targeted mailings, maintenance of an extensive internet website and selected
advertisements in scientific and trade journals. An independent marketing
communication agency has been retained to assist with brochure design,
advertising and media relations. In addition, our scientists and senior
management present technical papers at scientific symposia on a regular basis.
Historically, we have focused our marketing efforts in the United States from
our business development and client communication offices in Chicago, Illinois,
South San Francisco, California, Seattle, Washington, New London, Connecticut,
La Jolla, California and Annapolis, Maryland. In the past several years, we
have expanded our efforts to include Western Europe, Japan and the Far East.
Such efforts include increased presence at international trade shows,
advertising in trade publications, visits by business development professionals
and senior management to potential clients and the retention of independent
marketing consultants. We are currently exploring opportunities to open sales
offices in international locations.
CUSTOMERS
Since our inception, we have conducted over 490 projects for more than 75
customers. Our customers include pharmaceutical companies, biotechnology
companies, personal care companies, agricultural chemical companies and
specialty chemical manufacturers. Contract revenue from pharmaceutical
companies accounted for 71% and contract revenue from biotechnology companies
accounted for 29% of our aggregate contract revenue, including licensing fees,
milestones and royalties for the year ended December 31, 1999. Our ten largest
customers have accounted for approximately 94%, 90% and 87% of total contract
revenues for the years ended December 31, 1997, 1998 and 1999, respectively.
Contract revenue from our affiliates Advanced Life Sciences and Sarawak
MediChem Pharmaceuticals, accounted for 17%, contract revenue from Pfizer
accounted for 17% and contract revenue from AstraZeneca accounted for 11% of
total contract revenue, respectively, for the year ended December 31, 1999. No
other customers accounted for more than 10% of our total revenues during this
period. For the six months ended June 30, 2000, contract revenue from our three
largest customers represented approximately 37% of total contract revenue.
COMPETITORS
We face competition based on a number of factors, including size, relative
expertise and sophistication, speed and costs of identifying and optimizing
potential lead compounds and of developing and optimizing chemical processes.
We compete with the research departments of pharmaceutical companies,
biotechnology companies, contract research companies and research and academic
institutions. Many of these competitors have greater financial and other
resources than we do.
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Historically, pharmaceutical companies have maintained close control over their
R&D activities, including the synthesis, screening and optimization of chemical
compounds and the development of chemical processes. Many of these companies,
which represent a significant potential market for our products and services,
are developing or already possess in-house technologies and services offered by
us. Academic institutions, governmental agencies and other research
organizations are also conducting research in areas in which we provide
services, either on their own or through collaborative efforts.
We anticipate that we will face increased competition in the future as new
companies enter the market and advanced technologies become available. Our
services and expertise may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or
more of our competitors. The existing approaches of our competitors or new
approaches or technologies developed by our competitors may be more effective
than those developed by us. There can be no assurance that our competitors will
not develop more effective or more affordable technologies or services, thus
rendering our technologies and/or services obsolete, uncompetitive or
uneconomical.
We believe that the successful recruitment and retention of qualified Ph.D.,
M.S. and B.S.-level scientists and business professionals is a key element in
achieving our strategic goals. We believe that as competitive pressures in the
pharmaceutical industry to produce lead compounds increase, the recruitment and
retention of chemists and seasoned business professionals will become
increasingly competitive. In order to meet this challenge, we actively recruit
at colleges and universities, through third-party recruitment firms and through
the contacts of our employees.
PATENTS AND PROPRIETARY RIGHTS
Platform technologies licensed from Advanced Life Sciences
We use AutoOptimize(TM) technology in our business pursuant to an exclusive,
unlimited license agreement with Advanced Life Sciences, which is terminable
only upon our mutual agreement with Advanced Life Sciences. The
AutoOptimize(TM) license agreement requires us to pay Advanced Life Sciences 8%
of all contract revenue derived from this platform technology. We use
ChiralSelect(TM) technology in our business pursuant to exclusive, unlimited
license agreements with Advanced Life Sciences and Regis Technologies, Inc. The
ChiralSelect(TM) license agreements with Advanced Life Sciences and Regis
Technologies requires us to pay each of them 4% of all contract revenue derived
from the ChiralSelect(TM) platform technology. In the event that the
ChiralSelect(TM) technology is patented, our royalty obligation to Regis
Technologies will increase to 6%. The Advanced Life Sciences license agreement
is perpetual and the Regis Technologies license agreement terminates in August
2009 unless terminated previously with our mutual consent.
Under our license agreements, Advanced Life Sciences is obligated to pay us
certain milestone payments for our role in developing the AutoOptimize(TM) and
ChiralSelect(TM) technologies. The milestone payments are due upon
demonstrating commercial use, the issuance of a United States patent and for
each publication relating to the platform technology in a peer-reviewed
journal. Through the date of this prospectus, we have fully realized $1.4
million of the total milestone payments payable from Advanced Life Sciences due
to the commercialization and issued patent on AutoOptimize(TM) and $0.3 million
of the total milestone payments payable from Advanced Life Sciences due to the
commercialization of ChiralSelect(TM). The possibility of receiving future
peer-reviewed publication milestone rights from Advanced Life Sciences
continues. The possibility of receiving future milestones from Advanced Life
Sciences due to ChiralSelect(TM) being patented continues.
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General
While it is important to our growth that we obtain and enforce patents, protect
trade secrets and obtain licenses to technology owned by third parties wherever
required, there can be no assurance that any patent applications will result in
the issuance of patents. In addition, if any patents are issued, we cannot be
sure whether they will provide significant proprietary protection or commercial
advantage, or will not be circumvented by others.
Our plan is to conduct our business without infringing upon the proprietary
rights of others. However, in the event a third party has also filed one or
more patent applications for inventions which conflict with those we own, we
may have to participate in interference proceedings declared by the Patent and
Trademark Office to determine priority of invention, which could result in the
loss of any opportunity to secure patent protection for the inventions and the
loss of any right to use the inventions. The patent positions of chemical,
pharmaceutical, medical products, personal care products and biotechnology
firms can be uncertain and involve complex legal and factual questions. Even if
the eventual outcome is favorable to us, such proceedings could result in
substantial cost to us.
The filing and prosecution of patent applications, litigation to establish the
validity and scope of patents, assertion of patent infringement claims against
others and the defense of patent infringement claims by others can be expensive
and time consuming. There can be no assurance that in the event that any claims
with respect to any of our patents, if issued, are challenged by one or more
third parties, that any court or patent authority ruling on such challenge will
determine that such patent claims are valid and enforceable. An adverse outcome
in such litigation could cause us to lose exclusivity afforded by the disputed
rights. If a third party is found to have rights covering products or processes
we use, we could be forced to cease using the technologies covered by such
rights, could be subject to significant liability to such third party and could
be required to license technologies from such third party. Furthermore, even if
the patents we own or license are determined to be valid, enforceable and broad
in scope, there can be no assurance that competitors will not be able to design
around such patents and compete with us and our licensees using the resulting
alternative technology.
We seek patent protection with respect to products and processes developed in
the course of our activities when we believe such protection is in our best
interest and when the cost of seeking such protection is in line with potential
benefits. However, no assurance can be given that any patent application will
be filed, that any filed applications will result in issued patents or that any
issued patents will provide us with a competitive advantage or will not be
successfully challenged by third parties. The protections afforded by patents
will depend upon their scope and validity, and others may be able to design
around our patents.
From time to time, we may also enter into collaborations or other arrangements
with our customers whereby we retain certain ownership rights or may be
entitled to receive milestones and royalties with respect to proprietary
technology we developed during the contract period. However, many of our
contracts provide that our customers maintain ownership of proprietary
technology that is developed in the course of work performed under the
contract.
We also rely upon trade secrets and proprietary know-how for certain unpatented
aspects of our technology. To protect such information, we require all
employees, consultants and licensees to enter into confidentiality agreements
limiting the disclosure and use of such information. There can be no assurance
that these agreements provide meaningful protection or that they will not be
breached, that we would have adequate remedies for any such breach or that our
trade secrets, proprietary know-how and technological advances will not
otherwise become known to others. In addition, there can be no
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assurance that, despite precautions taken by us, others have not and will not
obtain access to our proprietary technology. Further, there can be no assurance
that third parties will not independently develop substantially equivalent or
better technology.
Potential liability and insurance
In connection with our services provided to Sarawak MediChem Pharmaceuticals,
we attempt to manage our risk of liability for personal injury to or death of
clinical trial participants from administration of products under study through
a specific insurance policy for that purpose. We also attempt to manage our
risk of liability in connection with services provided to other clients through
measures such as contractual indemnification provisions with clients and
through insurance maintained by clients. The contractual indemnifications
generally do not protect us against certain of our own actions, such as
negligence. The contractual arrangements are subject to negotiation with
clients and the terms and scope of such indemnification vary from client to
client and from trial to trial. Although most of our clients are large, well-
capitalized companies, the financial performance of these indemnities is not
secured. Therefore, we bear the risk that an indemnifying party may not have
the financial ability to fulfill its indemnification obligations. We could be
materially adversely affected if we were required to pay damages or incur
defense costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the scope or level of insurance coverage
maintained by the client or where the indemnifying party does not fulfill its
indemnification obligations. Other than our policy in connection with Sarawak
MediChem Pharmaceuticals, we do not currently maintain liability insurance with
respect to these risks.
Government Regulation
Our customers and collaborators, including Advanced Life Sciences and Sarawak
MediChem Pharmaceuticals, are subject to substantial regulation by governmental
entities in the U.S. and other countries. Moreover, to the extent that we act
as project manager in providing or arranging for FDA-regulated services for our
customers, we also are subject to these requirements. The nature and the extent
to which such regulation may apply to our customers will vary depending on the
nature of any such pharmaceutical products. Virtually all pharmaceutical
products developed by our customers will require regulatory approval by
governmental agencies prior to commercialization. Human pharmaceutical products
are subject to rigorous pre-clinical and clinical testing and other approval
procedures by the FDA and by foreign regulatory authorities. Various federal
and, in some cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and require the expenditure of substantial
resources.
Generally, in order to gain FDA approval, a company first must conduct pre-
clinical studies in the laboratory and in animal models to gain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as a part of an IND that the FDA must
review before human clinical trials of an investigational drug can start. In
order to commercialize any products, we or our customer will be required to
sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety and efficacy that are necessary
to obtain FDA approval of any such products. Clinical trials are normally done
in three phases and generally take two to five years to complete. After
completion of clinical trials of a new product, FDA and foreign regulatory
authority marketing approval must be obtained. If the product is classified as
a new drug, we or our customer will be required to file an NDA and receive
approval before commercial marketing of the drug. The testing and approval
processes require substantial time, effort and expense and there can be no
assurance that any approval will be granted on
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a timely basis, if at all. NDAs submitted to the FDA can take several years to
obtain approval. 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. For marketing outside the U.S., we will also be subject to foreign
regulatory requirements governing human clinical trials and marketing approvals
for pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country
to country.
All facilities and manufacturing techniques used in the manufacture of products
for clinical use or for sale in the U.S. must be operated in conformity with
cGMP guidelines as established by the FDA. Our facilities are subject to
scheduled periodic regulatory inspections to ensure compliance with cGMP
requirements. If the FDA finds that we have failed to comply with these
requirements or that we or our customers have failed to comply with any
applicable regulatory requirements, the agency can institute a wide variety of
enforcement actions. Our or our customers' failure to comply with applicable
requirements could lead to an FDA enforcement action that may have a material
adverse effect on our business. See "Risk factors--We and our customers are
subject to substantial government regulation."
Our R&D processes involve the controlled use of hazardous materials. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although we believe that our activities currently comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event
of such an accident, we could be held liable for any damages that result and
any such liability could exceed our resources. In addition, there can be no
assurance that we will not be required to incur significant costs to comply
with environmental laws and regulations in the future.
EMPLOYEES
As of July 31, 2000, taking into account the ThermoGen and Emerald
BioStructures acquisitions, we had 202 employees, 153 of whom hold degrees in
chemistry, biochemistry or molecular biology broken down by degree level as
follows: 65 Ph.D., 32 M.S. and 56 B.S. The majority of our employees are
working scientists, with approximately 16 of these scientists working in our
business development, client communications and administration groups. None of
our employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
PROPERTIES
Our principal executive offices and laboratories are located in Lemont,
Illinois, and encompass approximately 50,000 square feet of leased space,
pursuant to a lease agreement expiring in September 2003, with an option to
purchase the facility or enter into a four-year lease agreement. We also occupy
15,000 square feet of additional laboratory space in Des Plaines, Illinois. Our
lease runs through October 2000, with an option to lease on a year-to-year
basis. Three satellite business development offices are being leased in South
San Francisco, California, for 1,460 square feet, in New London, Connecticut,
for 1,630 square feet and in La Jolla, California, for 150 square feet.
ThermoGen operates from a 10,000 square foot leased facility located in
Chicago, Illinois. Emerald BioStructures operates from a 8,500 square foot
leased facility located near Seattle, Washington.
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We are developing a 14 acre site in Woodridge, Illinois for the construction of
a new 100,000 square foot headquarters and discovery laboratories center. This
new facility is expected to be operational in the first quarter of 2001. The
offices and laboratories have the capability of expanding to 200,000 square
feet.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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SCIENTIFIC ADVISORY BOARD
We have recently established an independent scientific advisory board to obtain
outside expertise in our strategic planning and positioning of technology
platforms. We generally compensate our scientific advisors for their services
with a combination of cash payments and stock options. The scientists on our
advisory board are not employees, and they may have conflicting obligations
that limit their involvement with MediChem. We expect that the experience of
the independent scientific advisory board will assist us in targeting our
service offerings in each stage of drug development. Scientific advisory board
members include:
Peter Beak, Ph.D. is a professor in the chemistry department at the University
of Illinois at Champaign/Urbana. Dr. Beak specializes in the use of
organolithium reagents in asymmetric synthesis.
Robert Chorvat, Ph.D. is associate director of the chemical & physical sciences
department at DuPont Pharmaceuticals. Dr. Chorvat manages programs in the
discovery of drug therapies for cardiovascular and central nervous system
diseases.
Heidi Hamm, Ph.D. is a professor in the molecular pharmacology and biological
chemistry departments at the Institute for Neuroscience at Northwestern
University. Dr. Hamm focuses on molecular mechanisms of cellular communication,
with special emphasis on G-protein coupled receptors (GPCRs) involved in
neurobiology.
Fred Hershenson, Ph.D. is a retired senior vice president of drug development
at Parke-Davis/Warner Lambert Co. Dr. Hershenson has extensive experience in
the management of medicinal chemistry, regulatory affairs, toxicology, chemical
development and pharmaceutical development.
Trevor Laird, Ph.D. is a principal at Scientific Update, Inc., Sussex, UK, and
the editor of the Journal of Organic Process Research and Development. Dr.
Laird is a consultant in the areas of organic chemistry, process research and
development, scale up and manufacturing.
John Pezzuto, Ph.D. is a professor at the University of Illinois at Chicago, in
the department of medicinal chemistry and pharmacology. Dr. Pezzuto has
extensively studied natural products as new drugs; especially those used as
anti-cancer agents.
Andrew Wang, Ph.D. is a professor in the department of cellular biology at the
University of Illinois at Champaign/Urbana. Dr. Wang is an expert in the
structure and function of biological macromolecules.
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<PAGE>
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Management
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is the name, age, position and a brief account of the business
experience of each of our executive officers, directors and key employees.
<TABLE>
<CAPTION>
Name Age Position
-------------------------------------------------------------------------------
<C> <C> <S>
Michael T. Flavin, Ph.D..... 44 Chairman of the Board of Directors,
President and Chief Executive Officer
John L. Flavin.............. 31 Executive Vice President and Chief Operating
Officer--MediChem; Chief Executive Officer--
ThermoGen and Emerald BioStructures;
Director
R. Richard Wieland II....... 55 Executive Vice President and Chief Financial
Officer
Jeffrey A. Whitnell......... 44 Vice President of Finance and Treasurer
Shirley A. Pine............. 46 Vice President of Administration
David E. Zembower, Ph.D..... 36 Vice President of Operations
Vernon O. Sebby............. 42 Vice President of Business Development and
Client Communications
Ze-Qi Xu, Ph.D.............. 38 Vice President of Strategic Drug Development
David C. Demirjian, Ph.D.... 38 Vice President of Technology Strategy--
MediChem; President--ThermoGen; Director
Lance Stewart, Ph.D......... 35 President--Emerald BioStructures
Hidong Kim, Ph.D............ 34 Vice President of Operations--Emerald
BioStructures
Michael J. Cogan............ 30 Controller
Darsh T. Wasan, Ph.D........ 60 Director
Robert D. Weist (2)......... 59 Director
Brother James Gaffney, FSC.. 57 Director
Peter R. Gates (1)(2)....... 49 Director
Damion E. Wicker, M.D. (1).. 39 Director
W. Brett Ingersoll (2)...... 35 Director
Larry C. Hansen, Ph.D. (1).. 55 Director
</TABLE>
--------
(1) Member of the compensation committee
(2) Member of the audit committee
Michael T. Flavin, Ph.D. Dr. Michael Flavin founded MediChem in 1987 and has
been chairman of the board of directors, president and chief executive officer
since that time. Dr. Flavin holds a B.S. degree in chemistry from the
University of Notre Dame and a Ph.D. in medicinal chemistry from the
University of Illinois at Chicago. He performed his postdoctoral research
fellowship at Harvard University, specializing in carbohydrate chemistry.
Prior to founding MediChem, Dr. Flavin was a senior research scientist at
Baxter International. Dr. Flavin is the brother of John L. Flavin.
John L. Flavin Mr. Flavin joined us in 1991 and served as our director of
financial operations from 1991 until 1996. In 1996, Mr. Flavin was appointed
our vice president of operations. Mr. Flavin was appointed as our executive
vice president and chief operating officer in May 2000. In connection with our
May 31, 2000 acquisitions of ThermoGen and Emerald BioStructures, Mr. Flavin
was appointed chief executive officer of both subsidiaries. He is also a
member of our board of directors. He holds a B.S. in business administration
from Marquette University and a M.B.A. in finance from the Lewis University
Graduate School of Management. Mr. Flavin is the brother of Dr. Michael T.
Flavin.
R. Richard Wieland II Mr. Wieland was appointed executive vice president and
chief financial officer in May 2000. Mr. Wieland joined SMP in November 1999
as chief financial officer. Prior to joining us, he was an independent
consultant from October 1998 to October 1999 and he was senior vice
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Management
--------------------------------------------------------------------------------
president and chief financial officer at BioGenex Laboratories from December
1996 to August 1998. From March 1995 to November 1996, Mr. Wieland was an
independent consultant, and he was president and acting chief financial officer
of Option Care Inc. from October 1993 to February 1995. Mr. Wieland obtained
his M.B.A. in finance from Washington University and his B.A. in accounting and
economics from Monmouth College.
Jeffrey A. Whitnell Mr. Whitnell was appointed vice president of finance and
treasurer in May 2000. Mr. Whitnell joined us in 1997 as chief financial
officer. Prior to that time he worked for ten years with Akzo Nobel as a
controller. Mr. Whitnell earned his C.P.A. after graduating from the University
of Illinois with a B.S. in accounting. He also holds a M.B.A. in finance from
the University of Chicago Graduate School of Business.
Shirley A. Pine Ms. Pine was appointed as our vice president of administration
in May 2000. Ms. Pine joined us in 1993 as manager of human resources. In 1995,
she was promoted to director of human resources. Ms. Pine earned a B.A. in
education from Valparaiso University.
David E. Zembower, Ph.D. Dr. Zembower joined us in March 1995 as senior
research scientist. In November 1996, he was promoted to director of
combinatorial chemistry. In March 2000, he was appointed vice president of
operations. Dr. Zembower holds a B.S. degree in chemistry from the University
of Central Florida and earned his Ph.D. in organic chemistry from the Georgia
Institute of Technology. He completed his postdoctoral fellowship at the Mayo
Clinic under a National Cancer Institute training grant.
Vernon O. Sebby Mr. Sebby joined us in October 1999 as vice president of
business development and client communications. Prior to joining us, Mr. Sebby
was vice president of strategy and support for Metals USA from February 1998 to
October 1999 and general manager of sales and marketing from November 1993 to
February 1998. Mr. Sebby received his B.A. in communications from Lewis
University.
Ze-Qi Xu, Ph.D. Dr. Xu was appointed vice president of strategic drug
development in May 2000. Dr. Xu joined us in 1994 as senior research scientist.
Dr. Xu has been the project leader for the calanolide A program and continues
to direct the clinical development of this investigational anti-HIV compound.
Dr. Xu holds a B.S. degree in chemistry from Jiangxi Normal University (China),
a M.S. degree in organic chemistry from Shanghai Medical University (China) and
a Ph.D. in organic chemistry from the Shanghai Institute of organic chemistry
(China). He performed his postdoctoral fellowships at Clemson University and
the Michigan Cancer Foundation.
David C. Demirjian, Ph.D. Dr. Demirjian joined us in May 2000 as vice president
of technology strategy at MediChem, president of our ThermoGen subsidiary and a
member of our board of directors. Dr. Demirjian founded ThermoGen in 1988 and
served as its president since that date. Dr. Demirjian received a B.S.A. in
cellular and molecular biology from the University of Michigan and a Ph.D. in
genetics from the University of Chicago.
Lance Stewart, Ph.D. Dr. Stewart joined us in May 2000 as president of our
Emerald BioStructures subsidiary. From January 1998 to May 2000, Dr. Stewart
was president and chief executive officer of Emerald BioStructures. From
January 1996 to December 1997 he was a research assistant professor in the
department of biological structure at University of Washington. Prior to that
time, Dr. Stewart was a postdoctoral fellow in the department of microbiology
at the University of Washington. Dr. Stewart earned his Ph.D. in biochemistry
and virology from Cornell University and holds a B.Sc. with honors in biology
from McMaster University.
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Management
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Hidong Kim, Ph.D. Dr. Kim joined us in May 2000, as vice president of
operations for our Emerald BioStructures subsidiary. From August 1997 to May
2000, Dr. Kim served as vice president of Emerald BioStructures. From August
1994 to July 1997, Dr. Kim was a postdoctoral fellow in the Howard Hughes
Medical Institute at the University of Washington. Dr. Kim earned a Ph.D. and
M.A. in physical chemistry from Harvard University and holds a B.A. with
highest honors in chemistry from Oberlin College.
Michael J. Cogan Mr. Cogan joined us in 1996 as our manager of accounting and
was appointed our controller in 1998. Mr. Cogan earned his C.P.A. after
graduating from the University of Illinois in 1995 with a B.S. in accounting
and a B.S. in finance.
Darsh T. Wasan, Ph.D. Dr. Wasan joined our board in March 1999 and is currently
vice president for international affairs and Motorola Chair in chemical
engineering at Illinois Institute of Technology. From 1991 to 1995 he served as
provost and vice president of IIT, and in 1995 was appointed vice president for
international affairs and Motorola Chair in chemical engineering. Dr. Wasan
obtained a B.S. degree in chemical engineering in 1960 from the University of
Illinois at Urbana and a Ph.D. in chemical engineering from the University of
California at Berkeley in 1965.
Robert D. Weist Mr. Weist joined our board in March 1999. He has served as vice
chairman of the board of directors of HYSEQ, Inc. since March 1994, and served
as the president and a director of HYSEQ from May 1993 until March 1994. Mr.
Weist has also been President of Weist Associates, a management consulting
firm, since April 1992. Prior to that, Mr. Weist was senior vice president,
general counsel and secretary of Amgen, Inc. Mr. Weist holds a B.S. in chemical
engineering from Purdue University, a J.D. from New York University and an
M.B.A. from the University of Chicago Graduate School of Business.
Brother James Gaffney, FSC Brother Gaffney joined our board in March 1999 and
is the president of Lewis University. In 1988, Brother Gaffney was appointed
the twelfth president of Lewis University in Romeoville, Illinois. Brother
Gaffney obtained a B.A. degree in religious studies and a M.Ed. degree in
education from Saint Mary's University of Minnesota. He received an M.A. degree
in theology from Manhattan College in New York and obtained a D.Min. degree in
theology from the University of Saint Mary of the Lake in Mundelein, Illinois.
Peter R. Gates Mr. Gates joined our board in August 1999 and is currently
managing director of MedEquity Investors, L.L.C. He has held that position
since June 1998. Mr. Gates served as an independent consultant from September
1997 to June 1998. Prior to that time, Mr. Gates was senior vice president of
Concentra Managed Care from August 1996 to September 1997 and was a vice
president of Mercer Management Consulting from January 1995 to August 1996. He
is a graduate of Princeton University and the Harvard Business School. Mr.
Gates currently serves as a director of Microelectronic Modules Corporation.
Damion E. Wicker, M.D. Dr. Wicker joined our board in August 1999 and has been
a general partner with Chase Capital Partners since January 1996. Dr. Wicker
was a principal at Chase Capital Partners from April 1993 to January 1996. Dr.
Wicker received a B.S. with honors from MIT in biomedical engineering, an M.D.
from Johns Hopkins, and an M.B.A. from the Wharton School of the University of
Pennsylvania. Dr. Wicker currently is a director of Praecis Pharmaceuticals,
Genomic Solutions, VI Technologies and several privately held companies.
W. Brett Ingersoll Mr. Ingersoll joined our board in August 1999 and currently
heads Chase Capital Partners's investment practice in Health Care Services. He
has been an employee of Chase Capital
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Management
--------------------------------------------------------------------------------
Partners for the past 5 years. He received his B.A. from Brigham Young
University in economics and an M.B.A. from the Harvard Business School. Mr.
Ingersoll currently serves as a director of HealthMarket, Inc., CB
Technologies, Tricordia Health, LLC, SMG, Inc. and HealthNet.
Larry C. Hansen, Ph.D. Dr. Hansen joined our board in May 1999 and currently is
senior vice president, global pre-clinical development at G.D. Searle, a
position he has held since August 1994. In 1993, Dr. Hansen was named vice
president, pre-clinical development of Searle. Dr. Hansen received his B.S.
degree in chemistry from Texas Tech University and his M.S. and Ph.D. degrees
in analytical chemistry from the University of Cincinnati. He completed a
postdoctoral fellowship through the NIH National Research Council at Wright-
Patterson Air Force Base in 1973.
BOARD COMPOSITION
We currently have ten authorized directors. In accordance with the terms of our
certificate of incorporation, the terms of office of the directors are divided
into three classes:
.Class I, whose term will expire at the annual meeting of stockholders to be
held in 2001;
.Class II, whose term will expire at the annual meeting of stockholders to be
held in 2002; and
.Class III, whose term will expire at the annual meeting of stockholders to be
held in 2003.
The Class I directors are Larry C. Hansen, Ph.D., W. Brett Ingersoll and Robert
D. Weist, the Class II directors are Brother James Gaffney, FSC, Darsh T.
Wasan, Ph.D. and Damion E. Wicker, M.D., and the Class III directors are
Michael T. Flavin, Ph.D., John L. Flavin, Peter R. Gates and David C.
Demirjian, Ph.D. At each annual meeting of stockholders after the initial
classification or special meeting in lieu thereof, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election or special
meeting held in lieu thereof. The authorized number of directors may be changed
only by resolution of the board of directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one third of the directors. This classification of the board of directors may
have the effect of delaying or preventing changes in control or management of
MediChem.
BOARD COMMITTEES
The compensation committee of the board of directors reviews and makes
recommendations to the board regarding all forms of compensation provided to
our executive officers and directors, including stock compensation and loans.
In addition, the compensation committee reviews and makes recommendations on
bonus and stock compensation arrangements for all of our employees. As part of
these responsibilities, the compensation committee also administers our
Incentive Compensation Plan. The current members of the compensation committee
are Mr. Gates and Drs. Hansen and Wicker.
The audit committee of the board of directors reviews and monitors our
corporate financial reporting and our external audits, the results and scope of
the annual audit and other services provided by our independent auditors and
our compliance with legal matters that have a significant impact on our
financial reports. The audit committee also consults with management and our
independent auditors before the presentation of financial statements to
shareholders and, as appropriate, initiates inquiries into aspects of our
financial affairs. In addition, the audit committee has the responsibility to
consider and recommend the appointment of, and to review fee arrangements with,
our independent auditors. The current members of the audit committee are
Messrs. Gates, Ingersoll and Weist.
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Management
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DIRECTOR COMPENSATION
Non-employee, non-significant shareholder directors will receive $1,500 for
each board or board committee meeting attended. All of our directors who are
not employees or current shareholders of the company will be eligible to
receive equity incentives in the form of stock option grants under our 2000
Stock Incentive Plan. On January 1, 1998, directors Darsh Wasan, Robert Weist
and Larry Hansen were each granted stock options for 9,327 shares at $0.47. The
options for such shares are entirely vested.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Mr. Gates and Drs. Hansen and
Wicker. No member of the compensation committee has been an officer or employee
of ours at any time. None of our executive officers serves as a member of the
board of directors or compensation committee of any other company that has one
or more executive officers serving as a member of our board of directors or
compensation committee. Prior to the formation of the compensation committee in
March 1999, the board of directors as a whole made decisions relating to
compensation of our executive officers.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation and our bylaws provide that our directors and
officers shall be indemnified by us to the fullest extent authorized by
Delaware law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with their service
for or on our behalf. In addition, the certificate of incorporation provides
that our directors will not be personally liable for monetary damages to us for
breaches of their fiduciary duty as directors, unless they violated their duty
of loyalty to us or to our stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. We have
obtained insurance which insures our directors and officers against specified
losses and which insures us against specific obligations to indemnify our
directors and officers.
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Management
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EXECUTIVE COMPENSATION
Summary of cash and other compensation
The following table shows all compensation paid during the year ended December
31, 1999 to our Chief Executive Officer and our four other highest-paid
executive officers, collectively referred to as the named executive officers,
by MedChem, Advanced Life Sciences and Sarawak MediChem Pharmaceuticals for
services rendered in all capacities to MediChem and its affiliates at any time
during such period. Other compensation consists of matching payments made under
our 401(k) employee savings plan.
Summary compensation
<TABLE>
-------------------------------------------------------------------------------------------
<CAPTION>
Long-term
Annual compensation compensation awards
Number of
Number of shares
shares underlying
underlying Advanced Life
MediChem Sciences
options options Other
Name and principal position Salary Bonus granted granted Compensation
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael T. Flavin, Ph.D.,
Chairman of the Board of
Directors, President and Chief
Executive Officer............. $160,000 $ -- -- -- $1,600
Jeffrey A. Whitnell,
Vice President of Finance and
Treasurer..................... 117,116 25,347 149,244 -- 1,709
John L. Flavin,
Executive Vice President and
Chief Operating Officer--
MediChem; Chief Executive
Officer--ThermoGen and
Director...................... 114,135 -- 216,404 4,000 1,370
David E. Zembower, Ph.D.,
Vice President of Operations.. 84,981 16,600 27,983 4,000 1,212
Ze-Qi Xu, Ph.D.,
Vice President of Strategic
Drug Development.............. 98,308 1,000 27,983 8,000 1,004
</TABLE>
Options
The following table shows information regarding options granted to the
executive officers listed in the summary compensation table above during the
fiscal year ended December 31, 1999. We have not granted any stock appreciation
rights.
Each option represents the right to purchase one share of our common stock. The
options generally vest by one-third on the third, fourth and fifth
anniversaries of the grant. The exercise price for options granted is equal to
the fair market value of a share of common stock on the date of grant. The fair
market value of our common stock on a given date is the conversion price for
the convertible preferred stock sold in our most recent issuance. For stock
options granted after this time, in accordance with applicable accounting
standards, we have determined the fair market value of our common stock based
on the estimated initial public offering price. As a result, we will record a
deferred stock compensation expense for such options in an amount equal to the
difference between the estimated fair market value
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on the date of grant and the initial public offering price. See "Management--
Employee benefit plans" for more details regarding these options.
The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
required by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the exercise price per
share, representing the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance of
our common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.
Option grants In last fiscal year
<TABLE>
-------------------------------------------------------------------------------------------
<CAPTION>
Individual Grants of MediChem Options
Potential
% of Realized Value
total at Assumed Annual
Number of options Exercise Rates of Stock
securities granted price Price Appreciation
underlying to per Expiration for Option Term
Name options granted employees share date 5% 10%
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael T. Flavin....... -- -- -- -- -- --
Jeffrey A. Whitnell..... 149,244 21.02% $ 2.36 06/30/2009 $ 221,672 $ 561,760
John L. Flavin.......... 216,404 30.49 2.36 06/30/2009 321,425 814,553
David E. Zembower....... 27,983 3.94 2.36 06/30/2009 41,563 105,329
Ze-Qi Xu................ 27,983 3.94 2.36 06/30/2009 41,563 105,329
The following table relates to option grants by Advanced Life Sciences in the
prior fiscal year to our named executive officers, in connection with services
rendered to Advanced Life Sciences.
<CAPTION>
Individual Grants of Advanced Life Sciences
Options
Potential
Realized Value
at Assumed Annual
Number of % of Exercise Rates of Stock
securities total price Price Appreciation
underlying options per Expiration for Option Term
Name options granted granted share Date 5% 10%
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael T. Flavin....... -- -- -- -- -- --
Jeffrey A. Whitnell..... -- -- -- -- -- --
John L. Flavin.......... 4,000 5.88% $0.625 12/22/2009 $1,572 $3,984
David E. Zembower....... 4,000 5.88 0.625 12/22/2009 1,572 3,984
Ze-Qi Xu................ 8,000 11.76 0.625 12/22/2009 3,145 7,969
</TABLE>
The Advanced Life Sciences options reported above did not begin vesting until
after December 31, 1999, and the named executive officers have not exercised
any options to date.
The following table shows information as of December 31, 1999 concerning the
number and value of unexercised options held by each of the executive officers
listed in the summary compensation table
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Management
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above. There was no public trading market for the common stock as of December
31, 1999. Accordingly, the value of unexercised in-the-money options listed
below has been calculated on the basis of an assumed initial public offering
price of $11.00 per share, less the applicable exercise price per share,
multiplied by the number of shares underlying such options. Options to purchase
the common stock of Advanced Life Sciences were granted at fair market value at
the date of issuance, December 22, 1999, and there is no reportable in-the-
money value.
Aggregated option exercises in the year ended December 31, 1999 and year-end
option values--MediChem
<TABLE>
--------------------------------------------------------------------------------------------------------------
<CAPTION>
Individual
Grants to
Shares MediChem Number of securities Value of unexercised
acquired Options underlying unexercised in-the-money options
upon Value options at December 31, 1999 at December 31, 1999
Name exercise realized Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael T. Flavin....... -- $ -- -- 31,210 $ -- $ 328,579
Jeffrey A. Whitnell..... -- -- 49,748 120,185 429,737 1,077,282
John L. Flavin.......... -- -- 72,134 169,156 623,118 1,508,236
David E. Zembower....... -- -- 9,327 39,195 80,576 377,389
Ze-Qi Xu................ -- -- 9,327 41,023 80,576 396,636
</TABLE>
In March 2000, Sarawak MediChem Pharmaceuticals granted the following named
executive officers nonqualified stock options to purchase the number of shares
set forth below, at an exercise price of $2,333.33 per share:
<TABLE>
<S> <C>
John L. Flavin........................................................ 5
Ze-Qi Xu.............................................................. 36
</TABLE>
In May 2000, we granted the following named executive officers incentive stock
options to purchase the number of shares set forth below, at an exercise price
of $7.61 per share:
<TABLE>
<S> <C>
John L. Flavin..................................................... 27,983
David E. Zembower.................................................. 9,327
Ze-Qi Xu........................................................... 9,327
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our executive officers.
The executive officers have agreed not to compete with us during their term of
employment and for one year after resignation or termination. The agreements
provide for the payment of salary for a maximum of 12 months after any
resignation or termination if the executive fails to attain other employment as
a result of the non-compete provisions.
Each of the executives has further agreed not to disclose confidential
information or use such information for personal benefit, either during or
after employment with us. The agreements give us full rights to any inventions
of the executives made during or within 120 days after employment with us,
unless the particular invention does not relate directly to our business and
was not produced during company time or with company resources.
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EMPLOYEE BENEFIT PLANS
1998 Incentive Compensation Plan
Our 1998 Incentive Compensation Plan was approved by our board of directors and
became effective on January 1, 1998. The maximum combined number of shares of
Class B non-voting common stock for which options may be granted under the 1998
Incentive Compensation Plan is 2,000,000, which shares may be incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986
or nonqualified stock options. The 1998 Incentive Compensation Plan also
authorizes options up to a maximum of 40,000 shares of Class C preferred stock
and 40,000 shares of Class D preferred stock.
As of June 30, 2000, we had 1,932,437 options to purchase shares of Class B
common stock, 24,564 options to purchase shares of Class C preferred stock and
24,564 options to purchase shares of Class D preferred stock outstanding to
employees, directors and consultants under the plan. There will be no further
options issued under this 1998 Incentive Compensation Plan. The compensation
committee of our board administers the incentive plan. The committee has the
complete discretion to make all decisions relating to the interpretation and
operations of our incentive plan. The committee has the discretion to determine
who will receive an award, what type of award it will be, how many shares will
be covered by the award, what the vesting requirements will be, if any, and
what the other features and conditions of each award will be.
2000 Stock Incentive Plan
In September 2000, the board of directors adopted the 2000 Stock Incentive
Plan. The 2000 Stock Incentive Plan is designed to enhance our long-term
profitability and stockholder value by aligning the interests of selected
directors, officers, employees and consultants with our performance targets.
The 2000 Stock Incentive Plan is administered by the compensation committee of
our board of directors, which has exclusive authority to grant awards under the
2000 Stock Incentive Plan and to make all interpretations and determinations
affecting the 2000 Stock Incentive Plan. The board of directors has the sole
discretion, for example, to determine the individuals to be granted awards, the
type of award granted, the number of shares of common stock to be subject to
each award granted, the exercise price of each award, the conditions with
respect to vesting and exercisability of awards and all other conditions of any
award under the 2000 Stock Incentive Plan. Following this offering, the 2000
Stock Incentive Plan provides that it will be administered by a committee
consisting of at least two "outside directors" within the meaning of Code
Section 162(m).
Participation in the 2000 Stock Incentive Plan is limited to our directors,
officers, employees and consultants who are selected from time to time by the
board of directors or by a committee appointed by the board of directors.
Awards under the 2000 Stock Incentive Plan may be in the form of incentive
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986, non-qualified stock options which are not intended to meet the
requirements of Section 422 of the Internal Revenue Code, shares of restricted
stock, performance shares, or stock appreciation rights.
An aggregate of 2,500,000 shares of our common stock will be initially reserved
for issuance under the 2000 Stock Incentive Plan. The aggregate number of
shares of our common stock available for issuance under the 2000 Stock
Incentive Plan will be increased as of the first day of each calendar year
beginning on January 1, 2001, by an amount equal to 2.5% of the total number of
our shares of common stock then outstanding. As of July 31, 2000, no options
have been granted under such plan.
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Advanced Life Sciences and Sarawak MediChem Pharmaceuticals Stock Incentive
Plans
In addition to stock option grants and other compensation received from
MediChem, certain of our employees have received stock option grants from
Advanced Life Sciences and/or Sarawak MediChem Pharmaceuticals in connection
with services rendered to these two affiliates of MediChem.
Under the Advanced Life Sciences Stock Incentive Plan, five of our employees
have received nonqualified stock options to purchase common stock of Advanced
Life Sciences. There are 80,000 shares authorized under the plan and 68,000 of
such options are outstanding. The options vest ratably on a monthly basis over
a period of three years and have an exercise price of $0.625 per share. Our
management employees that have received stock options for services to Advanced
Life Sciences are John Flavin, Ze-Qi Xu, David Zembower and Richard Wieland.
Under the Sarawak MediChem Pharmaceuticals Stock Incentive Plan, seven of our
employees have received nonqualified stock options to purchase common stock of
Sarawak MediChem Pharmaceuticals. There are 180 shares authorized under the
plan and 178 of such options are outstanding. The options vest ratably on a
monthly basis over a period of three years, and have an exercise price of
$2,333.33 per share. All grants under the plan are dated March 28, 2000. Our
management employees that have received stock options for services to Sarawak
MediChem Pharmaceuticals are John Flavin, Ze-Qi Xu and Richard Wieland.
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Related party transactions; relationship with Advanced Life Sciences
General
Prior to the consummation of this offering, we owned all of the existing
preferred stock of Advanced Life Sciences, which has a par value of $2.5
million and a 7% cumulative preferred dividend. The preferred stock was issued
in connection with the spin-off of Advanced Life Sciences without the payment
by us of any cash consideration. Our chairman and chief executive officer, Dr.
Michael T. Flavin, is the sole common stockholder of Advanced Life Sciences. In
the ordinary course of business, we have routinely provided chemistry research
and other project management services to Advanced Life Sciences. See
"Business--Relationship with Advanced Life Sciences, Inc.--Overview" and
"Management's discussion and analysis of financial condition and results of
operations--Related party; discontinued operations."
Advanced Life Sciences was founded to discover, in-license and develop patented
drug compounds. Like many "virtual" pharmaceutical companies, Advanced Life
Sciences has no scientific staff and conducts its operations through a master
service agreement with us pursuant to which we provide comprehensive project
management services. The master service agreement resulted from an "arm's-
length" negotiation and is on terms that are at least as favorable as the terms
that could be obtained by us in comparable negotiations made on an arm's-length
transaction between unaffiliated parties. All chemistry and laboratory services
provided by us to Advanced Life Sciences or Sarawak MediChem Pharmaceuticals
are billed at our standard rates and collected in the ordinary course
consistent with any third-party customer.
SARAWAK MEDICHEM PHARMACEUTICALS SERVICES
Advanced Life Sciences has a 50% joint venture interest in Sarawak MediChem
Pharmaceuticals. Sarawak MediChem Pharmaceuticals is a development stage
pharmaceutical company with a current portfolio of proprietary anti-viral drugs
in various stages of clinical and pre-clinical development. We provide
chemistry research and various project management services to Sarawak MediChem
Pharmaceuticals that are reimbursed based upon negotiated contractual rates and
are recorded as contract revenue-related party. Contract revenue from Sarawak
MediChem Pharmacenticals was $1,497,000 and $1,422,000 for the years ended
December 31, 1998 and 1999, respectively, and $704,000 for the six month period
ended June 30, 2000. See "Business--Relationship with Advanced Life Sciences,
Inc.--Overview" and "Management's discussion and analysis of financial
condition and results of operations--Results of operations."
ADVANCED LIFE SCIENCES SERVICES
We entered into a master service agreement with Advanced Life Sciences in March
1999. Pursuant to the agreement, we provide certain research services,
laboratory analysis and/or data management services as requested by Advanced
Life Sciences from time to time during the term of the agreement. The specific
details of each assignment or task are separately negotiated in arm's-length
negotiations and are on terms that are at least as favorable as the terms that
could be obtained by us in comparable negotiations made on an arm's-length
transaction between unaffiliated parties. Such amounts billed under the
agreement are recorded as contract revenue-related party. Contract revenue from
Advanced
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<PAGE>
Related party transactions; relationship with Advanced Life Sciences
--------------------------------------------------------------------------------
Life Sciences in connection with the agreement was $880,801 from the date of
the spin off to December 31, 1999, and $650,770 for the six months ended June
30, 2000. The agreement can be terminated upon 90 days' notice by either party.
See "Management's discussion and analysis of financial condition and results of
operations--Results of operations."
LICENSE AGREEMENTS
In addition, as a chemistry research service provider to Advanced Life
Sciences, we developed the AutoOptimize(TM) and ChiralSelect(TM) technologies
and received milestone payments related to their successful commercialization
as well as the patent issuance for AutoOptimize(TM). Milestone payments
received from Advanced Life Sciences totaled $1.4 million and $0.3 million for
the year ended December 31, 1999 and the six month period ended June 30, 2000,
respectively. We have the exclusive rights to use the AutoOptimize(TM) and
ChiralSelect(TM) technologies pursuant to an unlimited license from Advanced
Life Sciences in exchange for the payment of a royalty to Advanced Life
Sciences. Our royalty payments to Advanced Life Sciences totaled $12,387 and $0
for the year ended December 31, 1999 and the six-month period ended June 30,
2000, respectively. See "Patents and proprietary rights--Platform technologies
licensed from Advanced Life Sciences" and "Management's discussion and analysis
of financial condition and results of operations--Results of operations" and
"Business--Drug discovery platform technologies."
SERIES D PREFERRED STOCK
As of July 31, 2000, we had 400,000 shares of Class D preferred stock issued
and outstanding, all of which were held by Dr. Michael Flavin, our chairman,
president and chief executive officer. Our Class D preferred stock serves as a
"tracking" stock tied to the performance of our non-voting $2.5 million par
value, preferred stock investment in Advanced Life Sciences. Pursuant to our
articles of incorporation, upon an initial public offering all of the
outstanding Class D preferred stock would be redeemed in exchange for all of
our preferred stock investment in Advanced Life Sciences. Given the speculative
nature of early stage drug development companies, the realizable value of the
$2.5 million Advanced Life Sciences preferred stock was uncertain at the time
of its issuance and it has not been attributed any value in our financial
statements. The terms of our Class D preferred stock are exclusively linked to
the performance of the $2.5 million Advanced Life Sciences preferred stock and
provide no other right to or claim upon our equity. The value of our Class D
preferred stock depends exclusively on the value of the Advanced Life Sciences
preferred stock, and the sole holder of Class D preferred stock has voting
rights with respect to any disposition of our Advanced Life Sciences preferred
stock. A class of equity that is linked to a specific asset or subsidiary is
commonly referred to as a "tracking" stock.
Instead of distributing our Advanced Life Sciences preferred stock to Dr.
Flavin, in June 2000 we agreed with Dr. Flavin to amend our articles of
incorporation so that the outstanding Class D preferred stock would be
converted into the right to receive $1.41 million of our common stock, or
128,474 shares, upon the consummation of this offering. The remaining portion
of the $1.5 million value of our Class D preferred stock, approximately
$90,000, will be issued to the holders of options to purchase Class D preferred
stock for the redemption of such options. The number of shares of common stock
we will issue will be determined by dividing $1.41 million, the net after-tax
value of the Advanced Life Sciences preferred stock less the pro rata portion
distributed to option holders, by the initial public offering price. As a
result of our agreement with Dr. Flavin, the outstanding Class D preferred
stock will be terminated as part of this offering and we will retain our $2.5
million par value, preferred stock ownership interest in Advanced Life
Sciences.
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Related party transactions; relationship with Advanced Life Sciences
--------------------------------------------------------------------------------
SALE OF PURINE ACYCLIC NUCLEOTIDE PATENT
In October 1999, we sold our patented purine acyclic nucleotide synthesis
process to Advanced Life Sciences for $400,000. This is an efficient chemical
process for the development of a class of compounds termed purine acyclic
nucleotides. This class of compounds exhibits potent antiviral activity,
including activity against HIV and hepatitis B. Advanced Life Sciences
purchased this patent to supplement its drug development portfolio. This
technology is being further refined for marketing to pharmaceutical companies
who are developing purine acyclic nucleotide compounds for antiviral
treatments. The sale of this patent resulted from an arm's-length negotiation
and was on terms that were at least as favorable as the terms that could have
been obtained by us in comparable negotiations made with an unaffiliated party.
A senior accounting officer and principal executive officer determined the
price of the patent after computing the aggregate R&D expenses incurred in
connection with developing and obtaining the patent. Additional terms of the
sale were determined with the advice of our outside patent counsel.
CONVERTED EMPLOYEE OPTIONS
As of June 30, 2000, we had outstanding options to purchase 24,564 shares of
each of our Class C preferred stock and Class D preferred stock. In connection
with this offering and our related corporate reorganization, the entire class
of our Class C preferred stock will automatically convert into the right to
receive $4.0 million in cash. The 24,564 options outstanding against the Class
C preferred stock will convert into the right to receive a proportionate, or
5.8% in the aggregate, share in the $4.0 million cash conversion consideration.
The outstanding shares of Class D preferred stock will automatically convert
into the right to receive approximately $1.41 million of our common stock. The
24,564 options to purchase Class D preferred stock will convert to the right to
receive $90,000 cash in the aggregate, which is the option holders'
proportionate interest in the $1.5 million value of the Class D preferred
stock. Our Named Executive Officers hold options to purchase 6,416 shares in
each of our Class C and Class D preferred stock. The following table sets forth
the amount of cash that each will receive following the conversion of Class C
and Class D preferred stock options.
<TABLE>
<CAPTION>
Cash from Cash from
Number of Class C Class D
Named executive officer options conversion conversion
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael T. Flavin, Ph.D. ....................... 1,673 $15,762.05 $ 5,910.77
Jeffrey A Whitnell.............................. 1,109 10,448.37 3,918.14
John L. Flavin.................................. 1,334 12,568.19 4,713.07
David E. Zembower, Ph.D. ....................... 1,101 10,372.99 3,889.87
Ze-Qi Xu, Ph.D. ................................ 1,199 11,296.29 4,236.11
----- ---------- ----------
Total...................................... 6,416 $60,447.89 $22,667.96
</TABLE>
LOANS FROM DR. FLAVIN
On June 14, 1999, we issued a $3.0 million promissory note to Dr. Michael T.
Flavin, our chairman, chief executive officer and president, in connection with
the June 1999 venture capital investment and our issuance of preferred stock.
The purpose of Dr. Flavin's loan to us was to increase our working capital
during the period in which we had significant potential indemnification
obligations to our venture capital investors. Such obligations arose from
customary representations and warranties we made about our business to the
venture capital investors in connection with their investment. We repaid the
promissory note on March 24, 2000.
In March 2000, we obtained an 18-month bank construction commitment for a $12.0
million construction loan to be used for the development of our new
headquarters and discovery laboratories center in Woodridge, Illinois. At the
earlier of 18 months from the date of the loan or completion of construction,
the loan will be refinanced through a $12.0 million commercial mortgage loan.
Dr. Michael T. Flavin, our chairman, chief executive officer and president, has
personally guaranteed $3.0 million of each of the mortgage loan facility and
the construction commitment.
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Corporate reorganization
GENERAL
We are offering shares of our common stock pursuant to this prospectus. We have
granted the underwriters the right to purchase up to an additional 960,000
shares of our common stock to cover over-allotments, if any. Our net proceeds
from this offering will be approximately $63.5 million, or approximately $73.3
million if the underwriters' overallotment option is exercised in full. This
offering is conditioned upon completion of the merger described below. The
purpose of the merger is to enable MediChem Life Sciences, Inc. to become our
holding company and continue as a Delaware corporation.
THE MERGER
Before this offering, MediChem Life Sciences, will be a wholly-owned subsidiary
of MCR Holdings, Inc., an Illinois corporation. Immediately prior to this
offering, MCR Holdings will merge with and into MediChem Life Sciences.
MediChem Life Sciences shall survive as a Delaware corporation. Following the
merger, the separate corporate existence of MCR Holdings shall cease, and
MediChem Life Sciences shall succeed to all the rights and obligations of MCR
Holdings. At the effective time of such merger, each outstanding share of
common stock of MCR Holdings automatically will convert into 18.65557 shares of
common stock of MediChem Life Sciences and each outstanding share of common
stock of MediChem Life Sciences held by MCR Holdings shall be cancelled. As a
result of all these actions, existing MCR Holdings' stockholders automatically
will become MediChem Life Sciences stockholders, and MediChem Life Sciences
then will own all of the outstanding common stock of MediChem Research, Inc.,
ThermoGen, Inc. and Emerald BioStructurers, Inc.
Each outstanding option to purchase Class A common stock of MCR Holdings,
including options assumed in connection with the acquisition of ThermoGen,
shall be assumed by MediChem Life Sciences and shall be deemed to constitute an
option to acquire, on the same terms and conditions applicable under any such
option, the same number of shares of common stock of MediChem Life Sciences as
the holder of such option would have been entitled to receive had such holder
exercised such option in full immediately prior to the merger at a price per
share equal to the aggregate exercise price for the shares subject to such
option divided by the number of full shares of common stock of MediChem Life
Sciences deemed to be purchasable pursuant to such option. In addition all
options converted into the right to purchase shares of MediChem Life Services
common stock will retain their original vesting schedules.
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Principal stockholders
The following table sets forth certain information regarding beneficial
ownership of our common stock as of June 30, 2000 and as adjusted to reflect
the sale of the shares of common stock offered hereby under this prospectus by:
.each person or group of affiliated persons who is known by us to own
beneficially five percent or more of the outstanding shares of common stock;
.each of our directors;
.each executive officer listed in the "Summary Compensation" table above; and
.all of our directors and executive officers as a group.
Except as indicated in the footnotes to this table and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of our common stock shown as
beneficially owned by them. Beneficial ownership and percentage ownership are
determined in accordance with the rules of the SEC. The table below includes
the number of shares underlying options and warrants which are exercisable
within 60 days from July 31, 2000 and assumes:
.the automatic conversion of all outstanding shares of our Class A preferred
stock into 6,351,120 shares of our common stock upon the closing of this
offering;
.the conversion of all outstanding shares of our Class D preferred stock into
128,474 shares of our common stock upon the closing of this offering;
.an 18.65557 for one split of our common stock to be effected prior to the
closing of this offering; and
.the underwriters' over allotment is not exercised.
It is therefore based on 18,971,334 shares of our Class A common stock
outstanding prior to this offering and 25,371,334 shares of our common stock
outstanding immediately after this offering.
<TABLE>
<CAPTION>
Shares beneficially Shares beneficially
owned prior to this owned after this
offering (1) offering (1)
Number of Number of
shares shares
Beneficial Owner outstanding Percent outstanding Percent
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Five percent shareholders
Michael T. Flavin, Ph.D. (2)........ 7,590,702 40.01% 7,590,702 29.92%
MediChem Life Sciences, Inc.
12305 South New Avenue
Lemont, IL 60439
ChaseMedichem Partners, LLC
(3)(4)(5)(6)..................... 3,641,253 19.19 3,641,253 14.35
c/o Chase Capital Partners
Attn: Robert W. Daly
36 Washington Street, Suite 170
Wellesley Hills, MA 02481-1904
</TABLE>
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84
<PAGE>
Principal stockholders
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares beneficially Shares beneficially
owned prior to this owned after this
offering (1) offering (1)
Number of Number of
shares shares
Beneficial Owner outstanding Percent outstanding Percent
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peachtree Medichem Partners, LLC
(3)(5)........................... 2,115,322 11.15% 2,115,322 8.34%
Attn: Robert W. Daly
36 Washington Street, Suite 170
Wellesley Hills, MA 02481-1904
MedEquity Investors Partners, LLC
(3)(5)........................... 382,840 2.02 382,840 1.51
Attn: Robert W. Daly
36 Washington Street, Suite 170
Wellesley Hills, MA 02481-1904
Malcolm Casadaban, Ph.D. (7)........ 1,580,256 8.33 1,580,256 6.23
c/o ThermoGen, Inc.
2225 West Harrison Street
Chicago, IL 60615
David C. Demirjian, Ph.D. (7)....... 1,855,083 9.78 1,855,083 7.31
c/o ThermoGen, Inc.
2225 West Harrison Street
Chicago, IL 60612
Directors and Named Executive
Officers
John L. Flavin...................... 72,134 * 72,134 *
Darsh T. Wasan, Ph.D................ 9,327 * 9,327 *
Robert D. Weist..................... 9,327 * 9,327 *
Bro. James Gaffney, FSC............. -- -- -- --
Peter R. Gates (3).................. 6,139,416 32.36 6,139,416 24.20
Damion E. Wicker, M.D. (4).......... 3,641,253 19.19 3,641,253 14.35
W. Brett Ingersoll (4).............. 3,641,253 19.19 3,641,253 14.35
Larry C. Hansen, Ph.D............... 9,327 * 9,327 *
Jeffrey A. Whitnell................. 49,748 * 49,748 *
David E. Zembower, Ph.D............. 9,327 * 9,327 *
Ze-Qi Xu, Ph.D...................... 9,327 * 9,327 *
All directors and executive officers
as a group (17 persons).......... 17,046,083 88.95 17,046,083 66.68
</TABLE>
--------
*Less than 1%.
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85
<PAGE>
Principal stockholders
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--------
(1) "Beneficial ownership" generally means any person who, directly or
indirectly, has or shares voting or investment power with respect to a
security or has the right to acquire such power within 60 days. Unless
otherwise indicated, we believe that each holder has sole voting and
investment power with regard to the equity interests listed as beneficially
owned. Holders of options under our 1998 Incentive Compensation Plan are
not deemed to be beneficial owners because of the vesting requirements
under the plan. Such holders will not have the right to acquire voting or
investment power within 60 days of the date hereof.
(2) Such shares are held by the Michael Flavin Revocable Trust of which Dr.
Flavin serves as the trustee. By virtue of his position as trustee, Dr.
Flavin may be deemed to be the beneficial owner of all shares held by such
trust.
(3) Mr. Gates is affiliated with ChaseMedichem Partners, LLC, Peachtree
Medichem Partners, LLC and MedEquity Investors Partners, LLC which
following the offering are expected to beneficially own 14.35%, 8.34% and
1.51%, respectively, of the common stock of MediChem. Mr. Gates may be
deemed to share indirect voting or investment power and as such,
beneficially own all of the shares of common stock held by such entities.
Mr. Gates disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest.
(4) Dr. Wicker and Mr. Ingersoll are affiliated with ChaseMedichem Partners,
LLC, which following the offering is expected to beneficially own 14.35% of
the common stock of MediChem. Dr. Wicker and Mr. Ingersoll may be deemed to
share indirect voting or investment power and as such, beneficially own all
of the shares of common stock of ChaseMedichem Partners. Dr. Wicker and Mr.
Ingersoll disclaim beneficial ownership of such shares, except to the
extent of their pecuniary interest.
(5) MedEquity Investors, L.L.C. is the managing member of each of ChaseMedichem
Partners LLC, Peachtree Medichem Partners, LLC and MedEquity Investors
Partners, LLC. Mr. Robert W. Daly is the sole manager of MedEquity
Investors, L.L.C. and as such may be deemed to share voting and investment
power with respect to shares owned by such entities. Mr. Daly disclaims
beneficial ownership of such shares, except to the extent of his pecuniary
interest.
(6) Chase Medichem is a single purpose limited liability company formed by
Chase Capital Partners for its investment in MediChem.
(7) Includes 354,762 shares owned by Dr. Demirjian and 302,188 shares owned by
Dr. Casadaban which are held in escrow under our merger agreement with
ThermoGen. During the two-year indemnification period in connection with
the merger, Drs. Demirjian and Casadaban are entitled to vote such shares
and receive dividends thereon, but may not transfer or encumber such
shares.
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<PAGE>
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Description of capital stock
The following information describes our common stock and preferred stock, as
well as options and warrants to purchase our common stock, and provisions of
our certificate of incorporation and our bylaws, all as will be in effect upon
the closing of this offering. This description is only a summary. You should
also refer to the certificate and bylaws which have been filed with the SEC as
exhibits to our registration statement, of which this prospectus forms a part.
The description of the common stock and preferred stock, as well as options and
warrants to purchase our common stock, reflect changes to our capital structure
that will occur upon the closing of this offering in accordance with the terms
of the certificate.
Upon completion of this offering, our authorized capital stock will consist of
100,000,000 shares of our common stock, par value $0.01 per share, and
10,000,000 shares of preferred stock, par value $0.01 per share.
COMMON STOCK
As of June 30, 2000, there were 18,971,334 shares of our common stock
outstanding and held of record by 77 stockholders after giving effect to:
.the 18.65557 for one split of our common stock;
.the automatic conversion of all outstanding shares of our Class A preferred
stock into 6,351,120 shares of our common stock; and
.the conversion of all outstanding shares of our Class D preferred stock into
128,474 shares of our common stock.
There will be 25,371,334 shares of common stock outstanding upon the closing of
this offering, which gives effect to the issuance of 6,400,000 shares of common
stock offered by us under this prospectus.
Each share of common stock will have identical rights and privileges in every
respect upon the closing of this offering. The holders of our common stock are
entitled to vote upon all matters submitted to a vote of our stockholders and
are entitled to one vote for each share of common stock held. Subject to the
prior rights and preferences, if any, applicable to shares of our preferred
stock, the holders of common stock are entitled to receive such dividends,
payable in cash, stock or otherwise, as may be declared by our board out of any
funds legally available for the payment of dividends. If we voluntarily or
involuntarily liquidate, dissolve or wind-up, the holders of common stock will
be entitled to receive after distribution in full of the preferential amounts,
if any, to be distributed to the holders of preferred stock or any series of
preferred stock, all of the remaining assets available for distribution ratably
in proportion to the number of shares of common stock held by them. Holders of
common stock have no preferences or any preemptive conversion or exchange
rights.
PREFERRED STOCK
Our certificate of incorporation authorizes the issuance of 10,000,000 shares
of preferred stock. Our board is authorized to provide for the issuance of
shares of preferred stock in one or more series, and to fix for each series
voting rights, if any, designation, preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions as provided in a resolution or resolutions adopted by the board.
The board may authorize the issuance of shares of preferred stock
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<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
with terms and conditions which could discourage a takeover or other
transaction that holders of some or a majority of shares of common stock might
believe to be in their best interests or in which holders of common stock might
receive a premium for their shares over the then market price.
OPTIONS
As of June 30, 2000, options to purchase a total of 1,932,437 shares of our
common stock were outstanding at a weighted average exercise price of $2.50.
Options to purchase an additional total of 2,500,000 shares of common stock may
be granted under our 2000 Stock Incentive Plan. Please see "Management--
Employee benefit plans."
WARRANTS
As of June 30, 2000, a warrant to purchase a total of 315,577 shares of our
common stock, at an exercise price of $0.0005 per share, and a warrant to
purchase a total of 157,788 shares of our common stock, at an exercise price of
$2.60 per share, were outstanding. The warrants expire June 14, 2009 and June
14, 2004, respectively. The warrants contain anti-dilution provisions providing
for adjustments of the exercise price and the number of shares underlying the
warrants upon the occurrence of certain events, including any recapitalization,
reclassifications, stock dividend, stock split, stock combination or similar
transaction. The holders of the warrants are entitled to registration rights
with respect to the common stock issuable upon their exercise, which are
described below. All of the warrants are currently exercisable.
The warrant covering 315,577 shares of our common stock was issued to our
lender in connection with our June 1999 credit facility. This warrant's terms
provide the lender with the right to require us to redeem the warrant upon the
occurrence of certain events. Similarly, we have the right to redeem the
warrant upon certain events. The redemption price is the fair market value per
share of common stock at the time of redemption. We plan to redeem this warrant
with a portion of the net offering proceeds at an estimated cost of
approximately $3.5 million.
REGISTRATION RIGHTS
At any time six months following the effective date of this offering, the
holders of 6,351,120 shares of common stock and the holder of a warrant to
purchase 157,788 shares of our common stock will be entitled to demand, under
certain circumstances, the registration of their shares under the Securities
Act of 1933. The common stock registration rights are held by the four private
equity companies that provided financing in June, 1999. We are not required to
effect more than two registrations for such holders pursuant to these demand
registration rights, under certain circumstances. In addition, after the
closing of this offering these holders will be entitled to piggyback
registration rights with respect to the registration of their shares of common
stock. If we propose to register any shares of common stock either for our
account or for the account of other security holders, the holders of shares
having piggyback rights are entitled to receive notice of the registration and
are entitled to include their shares in the registration, subject to some
limitations. These registration rights are subject to conditions and
limitations, among which is the right of the underwriters of an offering to
limit the number of shares of common stock held by security holders with
registration rights to be included in such registration. We are generally
required to bear all of the expenses of all these registrations, including the
reasonable fees of a single counsel acting on behalf of all selling
stockholders, except underwriting discounts and selling commissions.
Registration of any of the shares of our common stock held by security holders
with registration rights would result in such shares becoming freely tradable
without restriction under the Securities Act immediately upon effectiveness of
such registration.
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88
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law, or DGCL
Section 203, which regulates corporate acquisitions. DGCL Section 203 prevents
certain Delaware corporations, including those whose securities are listed for
trading on the Nasdaq National Market, from engaging, under certain
circumstances in a "business combination" with any "interested stockholder" for
three years following the date that such stockholder became an interested
stockholder. For purposes of DGCL Section 203, a "business combination"
includes, among other things, a merger or consolidation involving us and the
interested stockholder and the sale of more than ten percent (10%) of our
assets. In general, DGCL Section 203 defines an "interested stockholder" as any
entity or person beneficially owing 15% or more of our outstanding voting stock
and any entity or person affiliated with or controlling or controlled by such
entity or person. A Delaware corporation may "opt out" of DGCL Section 203 with
an express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the corporation's
outstanding voting shares. We have not "opted out" of the provisions of DGCL
Section 203.
Our certificate of incorporation provides that the board of directors is
divided into three classes of directors, with each class serving a three year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain
control of us and may maintain the incumbency of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. The certificate of incorporation also
provides that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. Further, certain provisions of our certificate
of incorporation provide that the stockholders may amend the bylaws or certain
provisions of the certificate of incorporation only by the affirmative vote of
50% of our capital stock. These provisions of the certificate of incorporation
and bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of us. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of MediChem. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal. The provisions
also are intended to discourage certain tactics that may be used in proxy
fights. However, such provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect
of preventing changes in our management.
Our bylaws provide that any action required or permitted to be taken by our
stockholders at an annual meeting of stockholders may only be taken if each
stockholder is given proper advance notice of the action. The bylaws further
provide that special meetings of stockholders may only be called by a majority
of our board of directors or our president. The foregoing provisions could have
the effect of delaying until the next stockholders meeting stockholder actions
which are favored by the holders of a majority of our outstanding voting
securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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Shares eligible for future sale
Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Furthermore, since no shares
will be available for sale shortly after this offering because of contractual
and legal restrictions on resale as described below, sales of substantial
amounts of our common stock in the public market after these restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
25,371,334 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants after
June 30, 2000. Of these shares, all of the shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates. The remaining
18,971,334 shares of common stock held by existing stockholders are restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration described
below under Rules 144, 144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
.no shares will be eligible for sale upon completion of this offering;
.157,788 shares will be eligible for sale if an outstanding warrant to purchase
such shares is exercised, subject to Rule 144 volume limitations; and
.18,644,655 shares will be eligible for sale upon the expiration of the lock-up
agreements, described below, beginning 180 days after the date of this
prospectus, subject to Rule 144 volume limitations.
LOCK-UP AGREEMENTS
All of our officers, directors and some of our stockholders and option holders
have agreed not to transfer or dispose of, directly or indirectly, any shares
of our common stock or any securities convertible into shares or exercisable or
exchangeable for shares of our common stock, for a period of at least 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
only with the prior written consent of UBS Warburg LLC.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus a person or persons whose shares are aggregated, who
has beneficially owned restricted securities for at least one year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
.1% of the number of shares of our common stock then outstanding, which will
equal approximately 254,000 shares immediately after this offering; or
.the average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on Form
144 with respect to the sale.
Sales under Rule 144 are also subject to matter of sale provisions and notice
requirements and to the availability of current public information about
MediChem.
--------------------------------------------------------------------------------
90
<PAGE>
Shares eligible for future sale
--------------------------------------------------------------------------------
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have 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,
including the holding period of any prior owner except an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. No shares of
our common stock will qualify as "144(k) shares" prior to June 14, 2001.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any of
our employees, consultants or advisors, other than affiliates, who purchases or
receives shares from us in connection with a compensatory stock purchase plan
or option plan or other written agreement will be eligible to resell their
shares beginning 90 days after the date of this prospectus, subject only to the
manner of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.
--------------------------------------------------------------------------------
91
<PAGE>
--------------------------------------------------------------------------------
Underwriting
MediChem and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, Chase Securities Inc.
and William Blair & Company, L.L.C. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
--------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC......................................................
Chase Securities Inc.................................................
William Blair & Company, L.L.C. .....................................
---------
Total.............................................................. 6,400,000
=========
</TABLE>
If the underwriters sell more than the total number of shares set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional 960,000 shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up
to an additional shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
--------------------------------------------------------------------------------
<S> <C> <C>
Per share............................................. $ $
Total................................................. $ $
</TABLE>
If the underwriters exercise the option in full, our total proceeds, before
expenses, will be $ . We estimate that the total expenses of the offering
payable by us, excluding underwriting discounts and commissions, will be
approximately $ .
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock to be offered.
MediChem, our directors, officers and certain of our stockholders have agreed
with the underwriters not to offer, contract to sell, hedge or otherwise
dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any of our common stock or
securities
--------------------------------------------------------------------------------
92
<PAGE>
Underwriting
--------------------------------------------------------------------------------
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, without the prior written consent of UBS Warburg LLC.
This consent may be given at any time without public notice. We have entered
into a similar agreement with the representatives of the underwriters. There
are no agreements between the representatives and any of our stockholders or
affiliates releasing them from these lock-up agreements prior to the expiration
of the 180-day period.
The underwriters have reserved for sale, at the initial public offering price,
up to 320,000 shares of our common stock being offered for sale to our
customers and business partners. At the discretion of our management, other
parties, including our employees, may participate in the reserve shares
program. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares in this offering.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:
.the information set forth in this prospectus and otherwise available to the
representatives;
.the history and the prospects for the industry in which we compete;
.the ability of our management;
.our prospects for future earnings, the present state of our development, and
our current financial position;
.the general condition of the securities markets at the time of this offering;
and
.the recent market prices of, and the demand for, publicly traded common stock
of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover 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. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
Short sales may be either "covered short sales" or "naked short sales." 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 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. 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.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
--------------------------------------------------------------------------------
93
<PAGE>
Underwriting
--------------------------------------------------------------------------------
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act and to contribute to payments
that the underwriters may be required to make in respect thereof.
Legal matters
The validity of the shares of common stock offered hereby will be passed upon
for MediChem by Winston & Strawn, Chicago, Illinois. Dewey Ballantine LLP, New
York, New York, is acting as counsel for the underwriters in connection with
various legal matters relating to the shares of common stock offered by this
prospectus.
Experts
The consolidated financial statements of MCR Holdings, Inc. and subsidiary as
of December 31, 1998 and 1999, and for each of the years in the three-year
period ended December 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of ThermoGen, Inc. as of December 31, 1998 and 1999,
and for the years then ended, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Emerald BioStructures, Inc. as of December 31, 1998
and 1999, and for the years then ended, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act of 1933 with
respect to the shares of common stock to be sold in this offering. This
prospectus does not contain all the information set forth in the registration
statement. For further information with respect to us and the shares of common
stock to be sold in this offering, reference is made to the registration
statement. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
Whenever a reference is made in this prospectus to any contract or other
document of ours, the reference may not be complete, and you should refer to
the exhibits that are a part of the registration statement for a copy of the
contract or document.
--------------------------------------------------------------------------------
94
<PAGE>
Where you can find more information
--------------------------------------------------------------------------------
You may read and copy all or any portion of the registration statement or any
other information MediChem files at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings, including the registration statement,
are also available to you on the SEC's web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors
of these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.
--------------------------------------------------------------------------------
95
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------------------------------------------------------------------------------
MCR HOLDINGS, INC. AND SUBSIDIARIES
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)................ F-6
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-8
THERMOGEN, INC.
Independent Auditors' Report............................................. F-27
Balance Sheets........................................................... F-28
Statements of Operations................................................. F-29
Statements of Shareholders' Deficit...................................... F-30
Statements of Cash Flows................................................. F-31
Notes to Financial Statements............................................ F-32
EMERALD BIOSTRUCTURES, INC.
Independent Auditors' Report............................................. F-38
Balance Sheets........................................................... F-39
Statement of Operations.................................................. F-40
Statements of Stockholders' Equity (Deficit)............................. F-41
Statements of Cash Flows................................................. F-42
Notes to Financial Statements............................................ F-43
</TABLE>
--------------------------------------------------------------------------------
F-1
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
MCR Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of MCR Holdings,
Inc. and subsidiaries (Company) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 1999. These consolidated financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MCR Holdings, Inc.
and subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
February 3, 2000
Chicago, Illinois
--------------------------------------------------------------------------------
F-2
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
equity
December 31, June 30, June 30,
1998 1999 2000 2000
-------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash........................ $ 171,462 $ 8,164,730 $ 1,599,754
Accounts receivable, net of
allowance for doubtful
accounts of $0 at December
31, 1998, $13,980 at
December 31, 1999, and $0
at June 30, 2000........... 1,738,453 2,225,706 2,547,610
Accounts receivable--related
party...................... 30,403 620,889 811,247
Inventory................... -- -- 17,354
Prepaid assets.............. 46,226 98,447 319,049
Other current assets........ 11,201 68,567 132,466
---------- ----------- -----------
Total current assets........ 1,997,745 11,178,339 5,427,480
Property and equipment, net.. 1,778,023 6,376,881 9,078,784
Other assets................. 183,894 384,760 752,628
Intangibles, net of
accumulated amortization.... -- -- 31,715,855
Goodwill, net of accumulated
amortization................ -- -- 23,646,619
---------- ----------- -----------
Total assets................ $3,959,662 $17,939,980 $70,621,366
========== =========== ===========
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Revolving line of credit.... $ 580,000 $ -- $ --
Note payable to
shareholder................ -- 3,000,000 --
Current portion of debt and
capital lease obligations.. 359,246 1,954,209 637,935
Accounts payable............ 278,650 607,711 1,364,683
Accrued expenses............ 415,519 1,162,512 947,851
Taxes payable............... 51,393 665,827 1,135
Unearned revenue............ 686,226 396,000 316,370
---------- ----------- -----------
Total current liabilities... 2,371,034 7,786,259 3,267,974
Debt......................... 429,748 4,607,053 7,338,992
Revolving line of credit..... -- -- 1,000,000
Capital lease obligations.... 125,921 307,562 236,534
Redeemable stock warrants.... -- 494,295 2,399,782
Deferred taxes............... 75,281 70,588 12,710,258
---------- ----------- -----------
Total liabilities........... 3,001,984 13,265,757 26,953,540
Redeemable preferred stock:
Class A convertible
preferred stock, $.0005 par
value, none authorized
issued and outstanding at
December 31, 1998;
6,351,120 shares
authorized, issued and
outstanding at December 31,
1999 and June 30, 2000
(unaudited); pro forma--
none issued and outstanding
at June 30, 2000
(unaudited), redemption
value $22,499,458.......... -- 13,230,000 13,884,336 --
Class B 5% redeemable
preferred stock, $.01 par
value, none authorized,
issued and outstanding at
December 31, 1998; 1,000
authorized, none issued and
outstanding at December 31,
1999 and June 30, 2000
(unaudited); pro forma--
none issued and outstanding
at June 30, 2000
(unaudited)................ -- -- -- --
Class C convertible
preferred stock, $.01 par
value, none authorized,
issued and outstanding at
December 31, 1998; 440,000
shares authorized, 400,000
shares issued and
outstanding at December 31,
1999 and June 30, 2000
(unaudited); pro forma--
none issued and outstanding
at June 30, 2000
(unaudited)................ -- 4,000 4,000 --
---------- ----------- ----------- ----------
Total redeemable preferred
stock...................... -- 13,234,000 13,888,336 --
</TABLE>
--------------------------------------------------------------------------------
F-3
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
December 31, June 30, June 30,
1998 1999 2000 2000
-------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Stockholders' equity
(deficit):
Class D preferred stock,
$.01 par value, none
authorized, issued and
outstanding at December
31, 1998; 440,000 shares
authorized, 400,000
shares issued and
outstanding at December
31, 1999 and June 30,
2000 (unaudited); pro
forma--none issued and
outstanding at June 30,
2000 (unaudited)......... -- 4,000 4,000 --
Common stock, no par
value, 7,462,228 shares
issued and outstanding at
December 31, 1998;
retired in 1999.......... 1,000 -- -- --
Class A common stock,
$.0005 par value, none
authorized, issued and
outstanding at December
31, 1998; 18,655,570
shares authorized,
7,462,228 shares issued
and outstanding at
December 31, 1999 and
12,491,732 shares issued
and outstanding at June
30, 2000 (unaudited); pro
forma--none issued and
outstanding at June 30,
2000 (unaudited)......... -- 4,000 6,695 --
Class B common stock,
$.0005 par value, none
authorized issued and
outstanding at December
31, 1998; 1,650,234
shares authorized, none
issued and outstanding at
December 31, 1999 and
June 30, 2000
(unaudited); pro forma--
none issued and
outstanding at June 30,
2000 (unaudited)......... -- -- -- --
Class C common stock,
$.0005 par value, none
authorized, issued and
outstanding at December
31, 1998; 315,577 shares
authorized, none issued
and outstanding at
December 31, 1999 and
June 30, 2000
(unaudited); pro forma--
none issued and
outstanding at June 30,
2000 (unaudited)......... -- -- -- --
Preferred stock, $.01 par
value, none authorized
issued and outstanding at
December 31, 1998 and
1999, and June 30, 2000
(unaudited); pro forma--
10,000,000 authorized;
none issued and
outstanding at June 30,
2000 (unaudited)......... -- -- -- --
Common stock, $.01 par
value, none authorized,
issued and outstanding at
December 31, 1998 and
1999, and June 30, 2000
(unaudited); pro forma--
100,000,000 authorized;
18,971,334 issued and
outstanding at June 30,
2000 (unaudited)......... -- -- -- 189,000
Additional paid-in
capital.................. 3,165 21,542 41,378,146 43,588,000
Retained earnings
(accumulated deficit).... 953,513 (8,589,319) (11,609,351) (12,681,000)
---------- ----------- ----------- -----------
Total stockholders' equity
(deficit)................ 957,678 (8,559,777) 29,779,490 31,096,000
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit)................ $3,959,662 $17,939,980 70,621,366
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-4
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six-month period
Year ended December 31, ended June 30,
1997 1998 1999 1999 2000
-----------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Contract revenues:
Contract revenue........ $4,683,560 $7,327,261 $11,255,534 $4,834,944 $ 7,533,945
Contract revenue--
related party.......... 1,205,948 1,497,055 2,476,829 1,202,895 1,356,485
---------- ---------- ----------- ---------- -----------
Total contract and grant
revenues............... 5,889,508 8,824,316 13,732,363 6,037,839 8,890,430
Contract service costs:
Contract service costs.. 2,077,238 3,681,044 5,281,963 2,350,259 3,735,659
Contract service costs--
related party.......... 450,574 466,893 1,089,960 427,255 599,407
---------- ---------- ----------- ---------- -----------
Total contract service
costs.................. 2,527,812 4,147,937 6,371,923 2,777,514 4,335,066
---------- ---------- ----------- ---------- -----------
Gross profit............ 3,361,696 4,676,379 7,360,440 3,260,325 4,555,364
Milestones and
intellectual property
revenue................. -- -- -- -- 222,000
Milestones and
intellectual property
revenue--related party.. -- -- 1,787,612 -- 350,000
Operating expenses:
Selling, general and
administrative......... 2,641,414 3,621,621 6,005,993 2,716,307 4,245,278
Depreciation and
amortization........... 317,913 458,722 787,810 312,706 985,009
---------- ---------- ----------- ---------- -----------
Total operating
expenses............... 2,959,327 4,080,343 6,793,803 3,029,013 5,230,287
---------- ---------- ----------- ---------- -----------
Income (loss) from
operations............. 402,369 596,036 2,354,249 231,312 (102,923)
---------- ---------- ----------- ---------- -----------
Other expense, net
Interest expense........ 101,561 124,818 587,813 132,787 427,577
Interest income......... -- (1,350) (175,209) (11,903) (70,291)
Other................... (98,539) (48,068) -- -- --
Increase in value of
redeemable stock
warrant................ -- -- -- -- 1,905,487
---------- ---------- ----------- ---------- -----------
Total other expense,
net.................... 3,022 75,400 412,604 120,884 2,262,773
---------- ---------- ----------- ---------- -----------
Income (loss) before
income taxes........... 399,347 520,636 1,941,645 110,428 (2,365,696)
Income taxes............. 132,382 200,987 871,285 57,814 --
---------- ---------- ----------- ---------- -----------
Net income (loss)....... 266,965 319,649 1,070,360 52,614 (2,365,696)
Less:
Allocation of income to
participating
securities............ (103,983) (124,503) (282,512) (1,072) --
Accretion to redemption
value of preferred
stock................. -- -- (623,498) (50,918) (654,336)
---------- ---------- ----------- ---------- -----------
Net income (loss)
available to common
stockholders........... $ 162,982 $ 195,146 $ 164,350 $ 624 $(3,020,032)
========== ========== =========== ========== ===========
Per share data:
Basic net income (loss)
available to common
stockholders........... $ 0.01 $ 0.02 $ 0.02 $ -- $ (0.36)
========== ========== =========== ========== ===========
Diluted net income
(loss) available to
common stockholders.... $ 0.01 $ 0.02 $ 0.02 $ -- $ (0.36)
========== ========== =========== ========== ===========
Weighted average number
of common shares
outstanding--basic..... 11,696,296 11,696,296 7,462,228 7,462,228 8,291,263
Weighted average number
of common shares
outstanding--diluted... 11,696,296 11,879,774 7,861,009 7,718,425 8,291,263
Pro forma per share data
(unaudited):
Basic net income
(loss)................. $ 0.02 $ 0.02 $ 0.07 -- $ (0.14)
========== ========== =========== ========== ===========
Diluted net income
(loss)................. $ 0.02 $ 0.02 $ 0.07 -- $ (0.14)
========== ========== =========== ========== ===========
Weighted average number
of common shares
outstanding--Basic..... 14,093,052 14,093,052 15,235,680 16,210,105 17,039,139
Weighted average number
of common shares
outstanding--Diluted... 14,093,052 14,276,529 15,634,468 16,466,302 17,039,139
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-5
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997, 1998 and 1999 and the six-month period ended
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Class Class Class Retained Total
Class D A B C Additional earnings stockholders'
Preferred Common common common common paid-in (accumulated equity
Stock stock stock stock stock capital deficit) (deficit)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $ -- $1,000 $ -- $-- $-- $ -- $ 366,899 $ 367,899
Net income.............. -- -- -- -- -- -- 266,965 266,965
------ ------ ------ --- --- ----------- ------------ ------------
Balance at December 31,
1997................... -- 1,000 -- -- -- -- 633,864 634,864
Stock options granted to
consultant............. -- -- -- -- -- 3,165 -- 3,165
Net income.............. -- -- -- -- -- -- 319,649 319,649
------ ------ ------ --- --- ----------- ------------ ------------
Balance at December 31,
1998................... -- 1,000 -- -- -- 3,165 953,513 957,678
Exchange of shares under
recapitalization of
company................ 4,000 (1,000) 4,000 -- -- (3,165) (10,007,835) (10,004,000)
Spin-off of Advanced
Life Sciences.......... -- -- -- -- -- -- 18,141 18,141
Stock options granted to
consultant............. -- -- -- -- -- 21,542 -- 21,542
Accrection of preferred
stock.................. -- -- -- -- -- -- (623,498) (623,498)
Net income.............. -- -- -- -- -- -- 1,070,360 1,070,360
------ ------ ------ --- --- ----------- ------------ ------------
Balance at December 31,
1999................... 4,000 -- 4,000 -- -- 21,542 (8,589,319) (8,559,777)
Accrection of preferred
stock (unaudited)...... -- -- -- -- -- -- (654,336) (654,336)
Stock options granted to
consultant
(unaudited)............ -- -- -- -- -- 4,154 -- 4,154
Issuance of 3,452,909
shares of Class A
common stock for
Thermogen, Inc.
purchase (unaudited)... -- -- 1,850 -- -- 29,363,724 -- 29,365,574
Issuance of 1,576,602
shares of Class A
common stock for
Emerald BioStructures,
Inc. purchase
(unaudited)............ -- -- 845 -- -- 11,988,726 -- 11,989,571
Net loss (unaudited).... -- -- -- -- -- -- (2,365,696) (2,365,696)
------ ------ ------ --- --- ----------- ------------ ------------
Balance at June 30, 2000
(unaudited)............ $4,000 $ -- $6,695 $-- $-- $41,378,146 $(11,609,351) $ 29,779,490
====== ====== ====== === === =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-6
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six-month period ended
Year ended December 31, June 30,
1997 1998 1999 1999 2000
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating
activities: (unaudited) (unaudited)
Net income (loss).... $266,965 $ 319,649 $1,070,360 $ 52,614 $(2,365,696)
Adjustments to
reconcile net
income (loss) to
net cash provided
by (used in)
operating
activities:
Depreciation and
amortization...... 317,913 458,722 787,810 312,706 985,009
Bad debt expense.... 23,887 -- 47,707 -- (13,980)
Non cash interest
expenses.......... -- -- 39,255 -- 39,597
Noncash compensation
expenses.......... -- 3,165 21,542 -- 4,154
Warrant
appreciation...... -- -- -- -- 1,905,487
Changes in assets
and liabilities:
Accounts
receivable....... 345,864 (1,241,827) (1,125,446) (503,789) (247,220)
Prepaid and other
current assets... (7,078) (32,672) (109,587) (87,760) (190,358)
Other assets....... (3,158) (114,827) 95,180 (218,957) (587,416)
Accounts payable... (63,502) (5,517) 310,920 379,207 207,044
Accrued expenses... (11,393) 385,842 627,798 161,551 (1,069,786)
Other liabilities.. 73,900 547,926 (197,699) (248,796) (742,677)
-------- ---------- ---------- ----------- -----------
Net cash provided
by (used in)
operating
activities..... 943,398 320,461 1,567,840 (153,224) (2,075,842)
-------- ---------- ---------- ----------- -----------
Net cash used in
investing
activities:
Capital
expenditures...... (666,872) (726,158) (4,224,589) (2,856,548) (3,021,015)
Cost of purchased
businesses, net of
cash acquired..... -- -- -- -- (336,744)
-------- ---------- ---------- ----------- -----------
Net cash used in
investing
activities..... (666,872) (726,158) (4,224,589) (2,856,548) (3,357,759)
-------- ---------- ---------- ----------- -----------
Cash flows from
financing
activities:
Deferred financing
costs.............. -- -- (330,428) (330,428) --
Net borrowings
(repayments) under
revolving line of
credit............. (184,656) 380,000 (580,000) (580,000) 2,000,000
Proceeds from
issuance of debt to
shareholder........ -- -- 3,000,000 3,000,000 --
Proceeds from
issuance of loans
payable............ 862,954 232,423 6,998,000 6,998,000 --
Repayment of notes to
stockholders....... (63,777) -- -- -- (3,000,000)
Repayments under
loans payable...... (667,291) (226,036) (688,537) (518,914) (21,749)
Repayment of capital
lease obligations.. (22,736) (47,209) (355,520) (32,029) (109,626)
Proceeds from
issuance of
preferred stock,
net of issuance
costs.............. -- -- 2,606,502 2,606,502 --
-------- ---------- ---------- ----------- -----------
Net cash provided
by (used in)
financing
activities..... (75,506) 339,178 10,650,017 11,143,131 (1,131,375)
-------- ---------- ---------- ----------- -----------
Net increase
(decrease) in
cash........... 201,020 (66,519) 7,993,268 8,133,359 (6,564,976)
Cash at beginning of
period.............. 36,961 237,981 171,462 171,462 8,164,730
-------- ---------- ---------- ----------- -----------
Cash at end of
period.............. $237,981 $ 171,462 $8,164,730 $ 8,304,821 $ 1,599,754
======== ========== ========== =========== ===========
Supplemental
disclosure of cash
flow information:
Interest paid........ $101,561 $ 111,511 $ 485,426 $ 34,872 $ 423,263
Income taxes......... 73,315 55,263 233,700 -- 664,692
Supplemental
disclosure of
noncash investing
and financing
activities:
Equipment acquired
under capital
lease.............. -- 143,432 455,006 446,235 --
Class A convertible
preferred stock
issued to
shareholder under
equity
recapitalization... -- -- 10,012,000 10,012,000 --
The company purchased
all of the capital
stock of ThermoGen
and Emerald for
$43,055,299.
Liabilities were
assumed as follows:
Fair value of assets
acquired........... -- -- -- -- 44,896,769
Class A common stock
issued for capital
stock.............. -- -- -- -- 42,718,555
Cash paid, net....... -- -- -- -- 336,744
Liabilities assumed.. -- -- -- -- 1,841,470
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-7
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Description of Business
Originally founded in 1987, MCR Holdings, Inc. and subsidiary (the Company),
provides contract chemistry research services specializing in chemical
synthesis for new drug discovery and development for the global pharmaceutical,
biotechnology, agricultural, chemical, and personal care industries. The
Company's operations are focused on providing Conventional Synthesis,
Combinatorial Chemistry, cGMP Synthesis, and Analytical Chemistry services
designed to enable its customers to reduce overall drug development time and
costs. The Company operates in one business segment and all of its assets are
located in the United States.
On December 31, 1997, the Company's Board of Directors and Stockholders
approved an amendment to the Articles of Incorporation to increase the total
number of authorized shares to 1,000,000 shares, no par value, and approved a
400 to 1 stock split of outstanding common stock. The accompanying consolidated
financial statements retroactively reflect the impact of the increase in the
number of authorized shares and the stock split.
On January 1, 1999, the Company contributed all the net assets of its contract
chemistry research services business to a wholly-owned subsidiary that assumed
the name MediChem Research, Inc. and all the net assets of its proprietary drug
development business, including the Company's 50% interest in Sarawak MediChem
Pharmaceuticals, Inc. to a wholly-owned subsidiary, Advanced Life Sciences,
Inc. In conjunction with this legal entity restructuring, the Company changed
its name from MediChem Research, Inc. to MCR Holdings, Inc. The Company's 50%
investment in Sarawak MediChem Pharmaceuticals has been accounted for using the
equity method of accounting.
On June 14, 1999, the Company exchanged its investment in 100% of the
outstanding common stock of Advanced Life Sciences for nonvoting preferred
stock issued by Advanced Life Sciences effecting a spin-off of Advanced Life
Sciences. No gain or loss was recognized in the accompanying consolidated
statement of operations upon the spin-off of Advanced Life Sciences. The
accompanying consolidated statement of stockholders' equity reflects an
increase to retained earnings of $18,141 related to net liabilities of Advanced
Life Sciences derecognized by the Company in the spin-off. The historical
carrying value of the net liabilities recorded by the Company was used because
Advanced Life Sciences was transferred to a common controlling stockholder.
Subsequent to the spin-off, the Company provides services to Advanced Life
Sciences under a master services agreement. See note 4--Related-party
transactions.
Prior to the spin-off this stockholder owned 100% of the Company and Advanced
Life Sciences, then a wholly owned subsidiary of the Company. As a result of
the spin-off of Advanced Life Sciences, this stockholder became the sole common
stockholder of Advanced Life Sciences. The Company holds 100% of the preferred
stock of Advanced Life Sciences which was issued to the Company in exchange for
common stock held at the June 14, 1999 spin-off. The Class D nonvoting
preferred stock, which tracks the net realizable value of the Company's
investment in Advanced Life Sciences' preferred stock, is owned by this
stockholder. The common controlling stockholder's ownership of the Company was
reduced from 100% ownership to approximately 60% ownership upon the issuance of
the Class A convertible preferred stock which occurred concurrently with the
spin-off of Advanced Life Sciences. The Company accounts for its investment in
Advanced Life Sciences' preferred stock on the cost method and established its
initial carrying value based upon the historical carrying value of its
investment in the common stock of Advanced Life Sciences which was zero. At
December 31, 1999 and March 30, 2000 the carrying value of the Company's
investment in Advanced Life Sciences' preferred stock was zero.
--------------------------------------------------------------------------------
F-8
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In conjunction with the board of directors' authorization to reincorporate the
Company in Delaware and file a registration statement with the Securities and
Exchange Commission to register shares of common stock in connection with a
proposed public offering, the board of directors approved a stock split of
18.65557 of outstanding capital stock to take effect upon the closing of the
initial public offering. The accompanying consolidated financial statements
retroactively reflect the impact of this stock split.
The Company has elected to present unaudited pro forma stockholders' equity at
June 30, 2000 to reflect the impact of conversion of multiple classes of
capital stock to common stock as if such conversion occurred on June 30, 2000.
Additionally, the Company has elected to present unaudited pro forma per share
data as if multiple classes of stock had converted to common stock at January
1, 1997.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of MCR Holdings,
Inc. and its wholly owned subsidiary MediChem Research, Inc. All intercompany
balances and transactions have been eliminated in consolidation.
During 1998, the Company changed its method of computing depreciation from the
double declining balance method to the straight-line method. Management
believes the straight-line method of depreciation better reflects a systematic
and rational method of allocating the cost of a tangible capital asset over its
useful life. As permitted by generally accepted accounting principles, the
Company has elected to present its consolidated financial statements on the
basis the Company had depreciated its assets using the straight-line method for
all periods presented.
Interim Financial Statements
The financial information as of June 30, 2000 and for the six-month periods
ended June 30, 1999 and 2000 is unaudited. These interim financial statements
have been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the financial information set forth therein
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives using the straight-line method. Property and equipment
under capital leases are stated at the present value of the minimum lease
payments. Assets under capital leases and leasehold improvements are amortized
over the shorter of their estimated useful lives or the term of the respective
leases by use of the straight-line method. Maintenance and repair costs are
expensed as incurred.
Long-Lived Assets and long-lived Assets to Be disposed Of
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an assset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
--------------------------------------------------------------------------------
F-9
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Deferred Financing Costs
The cost of obtaining financing through the issuance of long-term debt
obligations is being amortized on the straight-line method over the term of
the obligation, which is six years.
Revenue Recognition
The Company recognizes contract revenue from its negotiated rate contracts on
a per diem basis as services are rendered or on the percentage of completion
method based on the ratio of costs incurred to expected total costs for fixed
fee contracts based upon the terms of the contract entered into. Any losses on
contracts are provided for when they are determinable and estimable. Included
in revenue are billings to customers for the cost of materials purchased for
performance under the contract. Unearned revenue recorded on the accompanying
consolidated balance sheets represents the application of SOP 81-1 to
contracts for services.
The Company recognizes milestone revenue upon confirmation of achievement of a
contract milestone with customers.
Intellectual property income represents revenue from the sale or licensing of
intellectual property developed and maintained by the Company. Revenue is
recognized based upon the legal transfer of intellectual property rights for
sales transactions and as earned for licensing arrangements.
Unbilled Services and Unearned Revenue
In general, prerequisites for billings are established by contractual
provisions including predetermined payment schedules, the achievement of
contract milestones, or submission of appropriate billing detail. Unbilled
services arise when services have been rendered but customers have not been
billed. Similarly, unearned revenue represents prebillings or cash receipts
for services that have not yet been rendered. Unbilled services are included
in accounts receivable. Unearned revenue is recognized as revenue when
services are rendered and in accordance with the provisions of contractual
arrangements.
Contract Service Costs
Contract service costs consist primarily of payroll and payroll related costs,
and direct material costs incurred to provide contractual services to
customers.
Research and Development
Research and development costs are expensed as incurred and were approximately
$209,000, $266,000, and $255,000 in 1997, 1998, and 1999, respectively.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs
charged to operations were approximately $28,000, $80,000 and $243,000 in
1997, 1998 and 1999, respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. This method
also requires the recognition of future tax benefits such as net operating
loss and credit carryforwards, to the extent that realization of such benefits
is more likely than not. Deferred tax assets and liabilities are measured
using enacted tax rates
-------------------------------------------------------------------------------
F-10
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Incentive Stock Plan
The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
No. 123.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, accrued expenses, debt and capital lease obligations. The
carrying amount of these instruments approximates their fair value.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133), which 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. FAS 133 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. If certain
conditions are met, a derivative may be specifically designated as (1) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (2) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (3) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation.
As amended by FAS 137, FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. At the date of initial application, an
entity shall choose to either (1) recognize as an asset or liability in the
statement of financial position all embedded derivative instruments that are
required to be separated from their host contracts or (2) select either January
1, 1998 or January 1, 1999 as a transition date for embedded derivatives. If
the entity chooses to select a transition date, it shall recognize as separate
assets and liabilities only those derivatives embedded in hybrid instruments
issued, acquired, or substantively modified by the entity on or after the
selected transition date. That choice is not permitted to be applied to only
some of an entity's individual hybrid instruments and must be applied on an
all-or-none basis.
The Company is currently evaluating the impact, if any, of adopting the
provisions of FAS 133. Management does not expect the adoption of the
provisions of FAS 133 (and the method of adoption) to have a material impact on
the financial position or results of operations of the Company.
In March 2000, FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation and interpretation of APB Opinion No. 25 (FIN 44),
was issued which provides
--------------------------------------------------------------------------------
F-11
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
clarification of the application of APB Opinion No. 25 for certain issues.
Among other issues, FIN 44 clarifies (1) the definition of an employee for
purposes of applying APB Opinion No. 25, (2) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (3) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (4) the accounting for an exchange of stock compensation
awards in a business combination.
FIN 44 is effective July 1, 2000, but certain items cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
FIN 44 covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying FIN 44 are recognized on a prospective basis from July 1, 2000.
The Company is currently evaluating the impact, if any, of adopting the
provisions of FIN 44. Management does not expect adoption of the provisions of
FIN 44 to have a material impact on the financial position or results of
operations of the Company.
On December 3, 1999 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), which summarizes certain of the SEC staff's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
In general, SAB 101 provides that if a transaction is within the scope of
specific authoritative literature that provides revenue recognition guidance,
that literature should be applied. However, in the absence of authoritative
literature addressing a specific arrangement or a specific industry, the SEC
staff will consider the existing authoritative accounting standards as well as
the broad revenue recognition criteria specified in the FASB's conceptual
framework that contain basic guidelines for revenue recognition.
As amended by SAB 101A, the guidance contained in SAB 101 is effective for
calendar year-end companies no later than the second quarter of 2000. Changes
in the application of accounting principles resulting from the guidance
contained in SAB 101 are reported as accounting changes in interim financial
statements.
The Company is currently evaluating the impact, if any, of adopting the
provisions of SAB 101 on the financial position and results of operations of
the Company, which is not known at this time.
Earnings Per Share Information
A reconciliation of the numerators and the denominators of the basic and
diluted per-share computations for net income follows:
<TABLE>
<CAPTION>
For the year ended December 31,
1997
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income................................ $266,965
Less allocation of income to
participating securities............. 103,983
--------
Common stock.............................. 7,462,228
Add: conversion of participating class A
preferred stock...................... 4,234,068
----------
Basic EPS
Net income available to common
stockholders......................... 162,982 11,696,296 $0.01
=====
Effect of Dilutive Securities
Less dilutive effect of allocation of
income to participating securities... 3,746
--------
Diluted EPS
Net income available to common
stockholders + asumed conversions.... 159,236 11,696,296 $0.01
=====
</TABLE>
--------------------------------------------------------------------------------
F-12
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
For the year ended December 31,
1998
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income................................. $ 319,649
Less allocation of income to
participating securities.............. 124,503
----------
Common stock............................... 7,462,228
Add conversion of participating class A
preferred stock....................... 4,234,068
----------
Basic EPS
Net income available to common
stockholders.......................... $ 195,146 11,696,296 $0.02
=====
Effect of Dilutive Securities
Less dilutive effect of allocation of
income to participating securities.... 3,290
----------
Class B common stock options............. 183,478
----------
Diluted EPS
Net income available to common
stockholders + assumed conversions ... 191,856 11,879,774 $0.02
=====
<CAPTION>
For the year ended December 31,
1999
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income................................. $1,070,360
Less allocation of income to
participating securities.............. 282,512
Less accretion to redemption value of
preferred stock....................... 623,498
----------
Class A common stock....................... 7,462,228
Basic EPS
Net income available to common
stockholders.......................... $ 164,350 7,462,228 $0.02
=====
Effect of Dilutive Securities
Add effect of allocation of income to
participating securities............... 1,825
----------
Class B common stock options............. 230,191
Class C common stock warrants............ 168,590
----------
Diluted EPS
Net income available to common $0.02
stockholders + assumed conversions.... 162,525 7,861,009
=====
</TABLE>
For purposes of calculating earnings per share, $103,983, $124,503, and
$164,350 have been allocated to the Class C preferred stock for the years ended
1997, 1998, and 1999, respectively. For 1999, $118,162 has been allocated to
the Class A convertible preferred stock. For purposes of calculating earnings
per share these amounts have been allocated because the Class C preferred
stockholder and the Class A convertible preferred stockholders participate with
the common stockholders in any dividends declared by the Company. Amounts
allocated are based upon the relative number of shares outstanding for each
class of stock entitled to dividends to the total number of shares outstanding
of all classes of stock entitled to dividends.
Warrants to purchase 157,788 shares of Class B common stock at $2.60 per share
were outstanding during the second half of 1999, but were not included in the
computation of earnings per share because their effect is antidilutive. The
warrants, which expire on June 14, 2004, were still outstanding at December 31,
1999.
--------------------------------------------------------------------------------
F-13
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Options to purchase 709,844 shares of Class B common stock at $2.36 per share
were outstanding during the second half of 1999, but were not included in the
computation of earnings per share because their effect is antidilutive. The
options, which expire on July 1, 2009, were still outstanding at December 31,
1999.
(3) Business and Credit Concentrations
In 1997, the Company had contracts with three third-party customers for amounts
exceeding 10% of total revenues. Contract revenue with these customers was
$1,244,000, $1,062,000, and $704,000 for the year ended December 31, 1997.
In 1998, the Company had contracts with two third-party customers for amounts
exceeding 10% of total contract revenues. Contract revenue with these customers
was $3,121,000 and $1,191,000 for the year ended December 31, 1998.
In 1999, the Company had contracts with two third-party customers for amounts
exceeding 10% of total contract revenues. Contract revenue with these customers
was $2,364,000 and $1,539,000 for the year ended December 31, 1999.
The Company's ten largest customers accounted for approximately 94%, 90% and
87% of total contract revenues in 1997, 1998 and 1999, respectively.
Conventional Synthesis services represented 66%, 68%, and 68% of the Company's
total contract revenues for the years 1997, 1998 and 1999, respectively.
Combinatorial Synthesis services represented 11%, 13%, and 18% of the Company's
total contract revenues for the years 1997, 1998, and 1999, respectively.
GMP Synthesis services represented 21%, 17%, and 6% of the Company's total
contract revenues for the years 1997, 1998, and 1999, respectively.
The Company's exposure to credit loss is equal to its outstanding billed
receivables and unbilled services balance. Management employs a specific
identification methodology to provide for doubtful accounts. Credit losses have
consistently been within management's expectations. Accounts receivable due
from an individual third-party customer of the Company was $753,298 and
$480,977 at December 31, 1998 and 1999, respectively.
(4) Related-party Transactions
The Company provides services to Sarawak MediChem Pharmaceuticals that are
reimbursed based upon negotiated contractual rates. Amounts billed to Sarawak
MediChem Pharmaceuticals are recorded as contract revenue-related party.
Amounts due from Sarawak MediChem Pharmaceuticals were $30,403 and $114,166 at
December 31, 1998 and 1999, respectively.
Subsequent to its spin-off on June 14, 1999, the Company and Advanced Life
Sciences entered into a master services agreement under which the Company
provides various services. Amounts billed under the agreement are recorded as
contract revenue-related party. Amounts due from Advanced Life Sciences were
$506,723 at December 31, 1999. Management believes it provides services under
the master services agreement are on substantially the same terms as it
provides services to third parties. Contract service costs--related party
consist primarily of payroll and payroll related costs, and direct material
costs incurred to provide contractual services to Advanced Life Sciences. No
overhead or other allocated costs are allocated to contract service costs-
related party.
--------------------------------------------------------------------------------
F-14
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Sciences' preferred stock at the carrying value of its investment in the common
stock of Advanced Life Sciences. The historical carrying value of the net
liabilities recorded by the Company was used because Advanced Life Sciences was
transferred to a common controlling stockholder. At December 31, 1999, the
common shareholder of the Company owns 100% of the 400,000 outstanding shares
of common stock of Advanced Life Sciences.
On June 14, 1999, the Company issued a $3,000,000 promissory note to the common
stockholder. The loan is due on January 31, 2000.
The common stockholder is a guarantor of the mortgage loan payable.
The Company has licensed technology from Advanced Life Sciences, under which
the Company is committed to royalty payments ranging from 4-8% of contract
revenues incorporating the licensed technology.
(5) Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Billed receivables....................................... $1,722,924 $2,156,579
Unbilled services........................................ 15,529 83,107
Less allowance for doubtful accounts..................... -- 13,980
---------- ----------
Accounts receivable...................................... $1,738,453 $2,225,706
========== ==========
</TABLE>
(6) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Depreciable life 1998 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Land................................... -- $ -- $2,233,844
Building improvements.................. 10 to 20 years 357,499 357,499
Furniture and fixtures................. 7 years 79,241 101,644
Leasehold improvements................. 5 years 441,741 818,242
Lab equipment and instruments.......... 5 years 1,797,868 2,316,773
Equipment under capital lease.......... 5 years 261,004 692,605
Computer equipment..................... 3 years 125,163 411,535
Construction in process................ -- 12,900 1,480,372
-------------- ---------- ----------
3,075,416 8,412,514
Less accumulated depreciation and
amortization........................ 1,297,393 2,035,633
---------- ----------
Property and equipment, net............ $1,778,023 $6,376,881
========== ==========
</TABLE>
(7) Debt
On June 14, 1999 the Company entered into a credit facility that provided for
revolving credit loans in the aggregate amount of $15,000,000. Loans under this
facility may be made for working capital purposes or acquisitions. Loans for
working capital purposes are limited to $7,500,000 and loans for acquisitions
are limited to the amount available under the facility less outstanding loans
for working capital purposes. Loans for acquisitions are subject to mandatory
repayment schedules, generally over
--------------------------------------------------------------------------------
F-15
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
five years. The facility commitment terminates on June 14, 2001 for acquisition
loans and on June 1, 2005 for working capital loans. All loans under this
facility bear interest at the floating 30 day LIBOR rate plus 4.00%. The
Company incurs an annual commitment fee of 0.25% on the unused portion of the
facility. There were no loans outstanding under this facility at December 31,
1999.
On June 14, 1999, the Company entered into a $5,000,000 term loan note. The
note bears interest at the floating 30 day LIBOR rate plus 5.25%. Interest is
payable monthly. The note is secured by substantially all of the assets of the
Company and is due on June 1, 2005. In conjunction with the note, the Company
issued warrants to the note holder to purchase 315,577 shares of Class C common
stock. The warrants have an estimated fair value of $494,295, which has been
treated as a discount on the term loan note. The discount is being amortized
using the effective interest method over the life of the note.
On April 21, 1999, the Company entered into a mortgage loan to purchase land in
Woodridge, Illinois. The loan bears interest at the prime rate plus 0.50% and
is secured by the land. Principal payments are due in quarterly installments
and interest payments are due in monthly installments. The loan matures on
April 21, 2000.
The Company maintained a revolving credit agreement with a bank under which
there were outstanding borrowings of $580,000 at December 31, 1998. Outstanding
borrowings under this agreement bear interest at the prime rate (8.0% at
December 31, 1998).
The Company has entered into various installment promissory notes, which are
secured by the assets of the Company.
The following is a summary of debt obligations:
<TABLE>
<CAPTION>
December 31,
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Term loan note payable due June 1, 2005, interest at
monthly LIBOR + 5.25%; $5,000,000 face value; net of
unamortized discount of $455,040....................... $ -- $4,544,960
Mortgage loan payable, due April 2000; interest at prime;
due in quarterly principal payments of $83,280,
interest payable monthly............................... -- 1,714,920
Note payable with monthly payments of $9,841 through April
2000; interest at 8.75%................................ 146,945 104,176
Note payable with monthly payments of $1,439; through
October 2001; interest at 6.44%........................ 44,590 --
Note payable with monthly payments of $3,581 through
November 2001; interest at 9.25%....................... 97,142 --
Notes payable with monthly payments ranging from $143 to
$5,105; interest ranging from 8.06% to 8.50% with
maturity dates through November 2002 (repaid in 1999).. 264,006 --
Notes payable with monthly payments ranging from $232 to
$1,180: interest ranging from 7.00% to 7.95% with
maturity dates through March 2003 (repaid in 1999)..... 156,048 --
-------- ----------
708,731 6,364,056
Less:
Current portion of debt................................... 278,983 1,757,003
-------- ----------
Debt, less current portion................................ $429,748 $4,607,053
======== ==========
</TABLE>
--------------------------------------------------------------------------------
F-16
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The agreements related to the term note payable and mortgage loan payable
contain various financial and non-financial covenants. At December 31, 1999,
the Company was in compliance with these debt covenants.
Annual maturities of debt are as follows:
<TABLE>
<CAPTION>
Debt
--------------------------------------------------------------------------------
<S> <C>
2000.......................................................... $1,757,003
2001.......................................................... 45,578
2002.......................................................... 16,516
2003.......................................................... --
2004.......................................................... --
----------
Total....................................................... $1,819,097
==========
</TABLE>
(8) Redeemable Preferred Stock
Class A convertible preferred stock is voting, provides for non-cumulative
dividends at the same rate as the classes of common stock, and has a
liquidation preference upon the dissolution of the Company of a minimum of
$3.54 per share plus declared but unpaid dividends. The liquidation preference
is subordinated to the liquidation preference of the Class D preferred stock.
The Class A convertible preferred stock is redeemable at the election of its
holder for a minimum of $3.54 per share in three equal aggregate installments
commencing June 14, 2005, or upon a merger, sale of substantially all of the
Company's assets, or in the event of a change in control of the Company through
the acquisition of a majority of the outstanding voting classes of stock by a
third party. The difference between the carrying amount and the redemption
amount is accreted using the effective interest method with an interest rate of
9.69%. The Class A convertible preferred stock is convertible into both Class A
common stock on a one-for-one basis and Class B 5% redeemable preferred stock
on a 6,351.12 for one basis at any time upon the election of its holder, and is
automatically convertible into both Class A common stock and Class B 5%
redeemable preferred stock upon a qualifying public offering.
Class B 5% redeemable preferred stock is nonvoting and provides for cumulative
dividends of 5% on the liquidation preference amount of $7,500 per outstanding
share. Except for Class D preferred stock, dividend payments or distributions
may not be made on any other class of stock for the period during which Class B
5% redeemable preferred stock is outstanding. Subject to the liquidation
preference of the Class D preferred stock, the Class B 5% redeemable preferred
stock has a cash liquidation preference of $7,500 per share plus cumulative
dividends payable. The stock is automatically redeemable at the liquidation
preference amount of $7,500 per share plus cumulative dividends payable in the
event of a qualifying public offering, and is redeemable at the election of its
holders in three equal aggregate installments commencing June 14, 2005, or upon
a merger, sale of substantially all of the Company's assets, or in the event of
a change in control of the Company through the acquisition of a majority of the
outstanding voting classes of stock by a third party.
Class C preferred stock is nonvoting, provides for non-cumulative dividends at
the same rate as the classes of common stock, and is convertible to Class A
common stock upon dissolution of the Company, a qualifying public offering, a
merger, sale of substantially all of the Company's assets, or in the event of a
change in control of the Company through the acquisition of a majority of the
outstanding voting classes of stock by a third party. The number of Class A
shares to be received in
--------------------------------------------------------------------------------
F-17
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
conversion is determined by the internal rate of return achieved by the holder
of the Class A convertible preferred stock. In the event of conversion to Class
A common stock as a result of a qualifying public offering, the Company shall
redeem Class A common shares issued to the Class C preferred stockholders at
the initial qualifying public offering price. In the event the Class C
preferred stock is not converted to Class A common stock prior to dissolution,
the stock bears a liquidation preference of $1.
On December 27, 1999, the Company amended its Articles of Incorporation to
increase the authorized shares of Class C preferred stock to 440,000 shares
with a $.01 par value, and approved a 400 for 1 stock split for outstanding
Class C preferred shares. The accompanying consolidated financial statements
retroactively reflect the stock split.
(9) Stockholders' Equity
On June 14, 1999, the Company effected a recapitalization by retiring the
previously issued and outstanding common stock and issuing 4,234,068 shares of
Class A convertible preferred stock, 1,000 shares of Class C preferred stock,
400,000 shares of Class D preferred stock, and 7,462,228 shares of Class A
common stock to its shareholder. Classes of newly authorized Company stock
include: Class A convertible preferred stock, Class B 5% redeemable preferred
stock, Class C preferred stock, Class D preferred stock, Class A common stock,
Class B common stock, and Class C common stock. Except for the Class A
convertible preferred stock, the carryover basis of the common stock retired in
the recapitalization was used in recording the carrying values of the newly
issued classes of stock. The Class A convertible preferred stock was recorded
at its initial carrying value based upon its fair value. The Class A
convertible preferred stock carrying value will be accreted using the effective
interest method to the stated redemption value of $3.54 per share.
Class D preferred stock is nonvoting, but provides for the right of approval
with respect to any action taken affecting the Company's investment in the
preferred stock of Advanced Life Sciences and any amendment to the Articles of
Incorporation that would adversely or disproportionately affect the rights of
the Class D preferred stock. The Class D preferred stock tracks the Company's
investment in the preferred stock of Advanced Life Sciences to segregate the
risks and rewards of ownership of the preferred stock of Advanced Life Sciences
and attribute those risks and rewards to the Class D preferred stockholder. The
Class D preferred stockholder is also the common shareholder of Advanced Life
Sciences. The Company does not allocate any common or overhead costs, in
determining the underlying value of its investment in the preferred stock of
Advanced Life Sciences. At December 31, 1999 the carrying value of the
investment in preferred stock of Advanced Life Sciences was zero. Non-
cumulative dividends are paid only in the event of a distribution or dividend
on Advanced Life Sciences preferred stock. In the event of sale or disposition
of the Company's investment in the preferred stock of Advanced Life Sciences,
the Class D preferred stock is mandatorily redeemable for the net realizable
value of the Advanced Life Sciences preferred stock. The Company may, at its
option, redeem the Class D preferred stock upon a public offering, merger, sale
of substantially all of the Company's assets, or in the event of a change in
control of the Company through the acquisition of a majority of the outstanding
voting classes of stock by a third party by distributing its investment in the
preferred stock of Advanced Life Sciences, net of taxes. In the event of
dissolution of the Company, the Class D preferred stock has a liquidation
preference equal to the net realizable value of the Company's investment in the
preferred stock of Advanced Life Sciences.
Class A common stock is voting and provides for non-cumulative dividends.
--------------------------------------------------------------------------------
F-18
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Class B common stock is nonvoting, provides for non-cumulative dividends and is
automatically convertible into Class A common stock on a one-for-one basis at
the time of a public offering.
Class C common stock is nonvoting, provides for non-cumulative dividends and is
convertible into Class A common stock on a one-for-one basis any time at the
election of its holder.
With respect to Class A, B, and C common stock, the Board of Directors of the
Company may not discriminate among the classes of common stock with respect to
declaration of dividends and other distributions. Accordingly, all outstanding
shares of each class of common stock are treated in the same manner with
respect to dividend payments and other distributions.
On June 14, 1999, the Company effected a private placement of 2,117,052 shares
of Class A convertible preferred stock for $5,000,000 which bears a liquidation
preference and redemption value of $3.54 per share. Together with the 4,234,068
shares issued in the recapitalization, the aggregate redemption value of
outstanding Class A convertible preferred stock is $22,499,458. The difference
between the stock's initial carrying value and its redemption value will be
accreted over the period to redemption using the effective interest method such
that the carrying value of the Class A convertible preferred stock will be its
redemption value at June 14, 2005.
The Company issued immediately exercisable warrants to the placement agent for
the private placement of the Class A convertible preferred stock to purchase
157,788 shares of Class B common stock at an exercise price of $2.60 per share.
The fair value of these warrants have been recorded as offering costs. In the
event the Company sells shares of Class A common stock in a public offering,
the warrants are exercisable for shares of Class A common stock. The warrants
expire on June 14, 2004.
(10) Incentive Stock Plan
Effective January 1, 1998, the Company's Board of Directors and stockholders
adopted and approved the Company's Incentive Compensation Plan (the Plan). The
Plan provides for the grant of stock options and the award of restricted stock
to selected officers, directors, consultants, and employees of the Company and
other eligible persons. A total of 746,222 shares of common stock were reserved
for issuance under the Plan. Options are granted at estimated fair value as
determined by the Board of Directors and expire 10 years from the date of
grant. Vesting periods of option grants are determined by the Board of
Directors at the time of grant. Awards of restricted stock are subject to
certain terms, conditions, restrictions, and limitations as determined by the
Board of Directors. Options granted through June 30, 1999 under the Plan
provided for graduated vesting whereby options vest in 33% increments on the
third, fourth, and fifth anniversary of the date of grant.
Options outstanding at the recapitalization date were modified to maintain the
option holder's economic position after the recapitalization. Options on a
share of common stock were modified to represent the right to purchase one
share of Class B common stock, one share of Class C preferred stock, and one
share of Class D preferred stock. Exercise of the option on Class B common
stock and Class C preferred stock must be effected concurrently. Other than
proportionally modifying the exercise price to maintain the economic position
of the option holders, terms of the original grant remain the same. No
compensation expense was recorded by the Company as a result of the option
modifications.
Effective January 1, 1999, the Plan was amended to change its name to the MCR
Holdings, Inc. Incentive Compensation Plan, and on July 1, 1999, the Board of
Directors reserved an additional 746,222 shares of Class B common stock and
authorized the issuance of additional stock option grants
--------------------------------------------------------------------------------
F-19
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to management, employees, and directors and certain consultants under the
provisions of the Plan. Options were granted at their estimated fair value and
expire ten years from the date of grant. The options granted to management,
directors, and consultants provide for graduated vesting, whereby options vest
in 33% increments on the first, second, and third anniversary. The options
granted to employees provide for graduated vesting, whereby options vest in 33%
increments on the fourth, fifth and sixth anniversary of the date of grant.
At December 31, 1999, 80,000 shares have been reserved for issuance under the
Plan.
Stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Options Shares price
--------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1997............................ -- $ --
Granted................................................... 497,488 0.53
Exercised................................................. -- --
Terminated................................................ 46,769 0.53
========= =====
Outstanding at December 31, 1998............................ 450,719 0.53
Granted................................................... 755,961 2.25
Exercised................................................. -- --
Terminated................................................ 34,084 0.61
========= =====
Outstanding at December 31, 1999............................ 1,172,596 $1.64
========= =====
</TABLE>
The weighted average minimum value of options granted during the years ended
December 31, 1998 and 1999 were $0.13 and $0.37, respectively.
The minimum value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model using the following assumptions:
no dividend yield, no volatility, risk-free interest rate of 4.64%, and
expected lives of 6 years for 1998 option grants and no dividend yield, no
volatility, risk-free interest rate of 5.93%, and expected lives of between 3
and 5 years for 1999 option grants.
The following table summarizes stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Number Weighted average Number
Exercise outstanding remaining Weighted average exercisable at Weighted average
prices at 12/31/99 contractual life exercise price 12/31/99 exercise price
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.53 462,752 8.0 years $0.53 -- --
$2.36 709,844 9.5 years $2.36 -- --
</TABLE>
Of the 462,752 options with an exercise price of $0.53, 450,718 options
represent the right to acquire one share of Class B common stock, Class C
preferred stock, and Class D preferred stock. The exercise price of $0.53
represents the combined exercise price for all classes of stock. All other
stock options outstanding represent the right to acquire one share of Class B
common stock.
--------------------------------------------------------------------------------
F-20
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized for the Plan.
Had compensation cost for the Company's Plan been determined based on FASB
Statement No. 123, the Company's net income available to common stockholders
for the years ended December 31, 1998 and 1999 would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Net income available to common stockholders:
As reported................................................. $195,146 $164,350
Pro forma................................................... 183,086 100,435
Basic earnings per share:
As reported................................................. $ 0.02 $ 0.02
Pro forma................................................... $ 0.02 $ 0.01
Diluted earnings per share:
As reported................................................. $ 0.02 $ 0.02
Pro forma................................................... $ 0.02 $ 0.01
</TABLE>
(11) Income Taxes
Income tax expense for the years ended December 31, 1997, 1998 and 1999
consists of:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 54,102 $176,283 $716,079
State............................................ 13,943 40,829 168,580
Foreign.......................................... 288 -- --
-------- -------- --------
68,333 217,112 884,659
-------- -------- --------
Deferred:
Federal.......................................... 52,071 (13,055) (11,005)
State............................................ 11,978 (3,070) (2,369)
-------- -------- --------
64,049 (16,125) (13,374)
-------- -------- --------
Total........................................... $132,382 $200,987 $871,285
======== ======== ========
</TABLE>
--------------------------------------------------------------------------------
F-21
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The difference between the U.S. Federal income tax rate of 34% for the years
ended December 31, 1997, 1998 and 1999 and the actual effective tax rates on
earnings from continuing operations for the same periods resulted from the
following:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal income tax rate................................. 34.0% 34.0% 34.0%
Increase (decrease) in income taxes resulting from:
Nondeductible patent costs.................................. 2.6 -- --
State income taxes, net of U.S. Federal tax benefit......... 4.4 4.8 5.6
Valuation of temporary differences.......................... (2.6) (4.0) --
Benefit from the use of graduated federal tax rates......... (0.6) -- --
Other, net.................................................. (3.6) 3.8 4.8
---- ---- ----
Effective tax rate......................................... 34.2% 38.6% 44.4%
==== ==== ====
</TABLE>
The tax effects of temporary differences attributable to continuing operations
that give rise to significant portions of the deferred tax assets and liability
as of December 31, are presented below:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Foreign tax credit carryforwards........................... $ 63,263 $ 63,041
Accrued vacation........................................... 3,364 12,045
-------- --------
66,627 75,086
Valuation allowance......................................... (63,263) (63,041)
-------- --------
Deferred tax assets......................................... 3,364 12,045
Deferred tax liability--property and equipment............. (75,281) (70,588)
-------- --------
Net deferred tax liability................................. $(71,917) $(58,543)
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 was $63,263 and $63,041, respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 and 1999 was a
decrease of $21,091 and $222, respectively. The foreign tax credit
carryforwards expire through 2000. The tax benefit of these carryforwards may
be subject to limitations imposed by the Internal Revenue Code. Accordingly,
due to the uncertainty of the realization of these carryforwards, the Company
has established a corresponding valuation allowance.
Based on the Company's current and historical pre-tax earnings, management
believes it is more likely than not that the Company will realize the benefit
of the existing deferred tax assets at December 31, 1999. Management believes
the existing net deductible temporary differences will reverse during periods
in which the Company will generate taxable income, however, there can be no
assurances that the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning or other strategies
could be implemented, if necessary, to supplement income from operations to
fully realize recorded tax benefits.
--------------------------------------------------------------------------------
F-22
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(12) Benefit Plan
The Company sponsors a contributory savings and investment 401(k) plan in which
employees meeting minimum service requirements are eligible to participate.
Participants may contribute up to 15% of their compensation. For participant
contributions on the first 6% of compensation, the Company contributed an
amount equal to 10%, 20% and 20% of those contributions in 1997, 1998 and 1999,
respectively. The Company's contributions to the plan were $27,804, $42,709,
and $81,762 in 1997, 1998 and 1999, respectively.
(13) Commitments
(a) Leases
The Company leases facilities under four operating leases that expire at
various dates through September 2003. In addition, the Company is obligated
under various capital leases for certain equipment.
Minimum annual payments under operating leases and the present value of minimum
capital lease payments as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital
lease
Operating Leases obligations
--------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 31,
2000............................................. $ 547,110 $236,478
2001............................................. 354,731 214,856
2002............................................. 311,224 104,414
2003............................................. 219,600 38,345
2004............................................. -- 2,850
---------- --------
Total........................................... $1,432,665 596,943
==========
Less amount representing interest................ 92,175
--------
Present value of net minimum lease payments...... $504,768
========
</TABLE>
Rent expense under operating leases amounted to $278,725, $348,390, and
$562,009 in 1997, 1998 and 1999, respectively.
--------------------------------------------------------------------------------
F-23
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of capital lease obligations.
<TABLE>
<CAPTION>
December 31,
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Capital lease obligation with monthly payments of $526
through April 2002; imputed interest rate of 6%........... $ -- $ 8,928
Capital lease obligation with monthly payments of $1,132
through February 2004; imputed interest rate of 11%....... -- 24,287
Capital lease obligation with monthly payments of $917
through February 2004; imputed interest rate of 9%........ -- 38,501
Capital lease obligation with monthly payments of $6,836
through June 2003; imputed interest rate of 9%............ -- 231,363
Capital lease obligation with monthly payments of $2,864
through April 2002; imputed interest rate of 11%.......... -- 69,817
Capital lease obligation with monthly payments of $294
through December 2002; imputed interest rate of 6%........ -- 5,028
Capital lease obligation with monthly payments of $2,985
through September 2001; imputed interest rate of 10.65%... 85,065 54,523
Capital lease obligation with monthly payments of $428
through May 2000; imputed interest rate of 8.52%.......... 6,456 1,666
Capital lease obligation with monthly payments of $481
through June 2000; imputed interest rate of 13.44%........ 7,802 2,360
Capital lease obligation with monthly payments of $572
through July 2000; imputed interest rate of 13.32%........ 9,753 3,344
Capital lease obligation with monthly payments of $3,026
through June 2001; imputed interest rate of 11.00%........ 78,832 54,571
Capital lease obligation with monthly payments of $486
through August 2000; imputed interest rate of 21.00%...... 8,144 3,233
Capital lease obligation with monthly payments of $361
through November 2001; imputed interest rate of 15.00%.... 10,132 7,147
-------- --------
206,184 504,768
Less:
Current portion of capital leases........................... 80,263 197,206
-------- --------
Capital lease obligations, less current portion............. $125,921 $307,562
======== ========
</TABLE>
(b) Land and Building
On April 21, 1999, the Company purchased a 14-acre parcel in an industrial park
located in Woodridge, IL. The land will be used to construct a 100,000 square
foot facility that will house the Company's corporate offices and laboratories.
On September 3, 1999, the Company executed a letter of intent authorizing its
general contractor to excavate and prepare land for the construction.
Authorized expenditures under this letter total $1,063,000, of which $673,000
was incurred in 1999.
(c) Royalties
On July 1, 1999, the Company licensed certain technology from Advanced Life
Sciences. Under the license, the Company is committed to royalty payments in
the amount of 8% of the Company's contract revenues incorporating the licensed
technology. Royalty payments under the license amounted to $12,387 for the year
ended December 31, 1999 and are netted against milestone and intellectual
property revenue in the accompanying consolidated statement of operations.
--------------------------------------------------------------------------------
F-24
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 31, 1999, the Company sublicensed certain technology from a third
party and Advanced Life Sciences. Under the license, the Company is committed
to make royalty payments in amounts ranging from 8-10% of the Company's
contract revenues of the licensed technology. No royalty payments were made
under the license for the year ended December 31, 1999.
(d) Redeemable Stock Warrants
In conjunction with debt financing, the Company issued immediately exercisable
warrants to a financial institution for the purchase of 315,577 shares of Class
C common stock at an exercise price of $.0005 per share. The exercise price of
the warrants and the number of shares issuable under the warrants may be
adjusted from time to time in accordance with anti-dilution and adjustment
provisions of the warrant agreement. The holder of the warrants can require
their redemption after repayment of all amounts borrowed by the Company under
the term loan note and the line of credit facility, a public offering or at
anytime after June 14, 2004 at an amount equivalent to the per share fair value
of the Class C common stock less the exercise price at the date of redemption.
The Company may elect to redeem the warrants at the earliest of the following:
(1) June 14, 2005; (2) twelve months from the date all amounts borrowed under
the term loan note and the credit facility are repaid; or (3) the closing date
of a public offering in which shares are sold for a minimum of $3.00 per share
and the net proceeds from the offering exceeds $25,000,000. The redemption
price is 110% of the per share fair value of the Class C common stock less the
exercise price at the date of redemption except in the case of a redemption
upon a public offering, in which case the redemption price is 100% of the per
share fair value of the Class C common stock less the exercise price at the
date of redemption. Since the holder of these warrants can require their
redemption, the warrants have been classified as liability in the accompanying
consolidated balance sheet. At December 31, 1999, the fair value of the
warrants issued was estimated to be $494,295.
June 30, 2000 (unaudited)--For the six-month period ended June 30, 2000 the
Company recognized expense of $1,905,487 related to adjustment of its
redeemable stock warrants to their estimated fair value at June 30, 2000.
(14) Subsequent Events--(unaudited)
On March 9, 2000, the Company obtained a bank commitment for a $12,000,000
construction loan to be used for the construction of the Woodridge facility.
The Company is required to pay for the first $5,500,000 of construction costs
before it is eligible to draw on the construction loan. The loan bears a
commitment fee of $120,000 and interest is payable monthly at the floating
prime rate. At the earlier of eighteen months from the date of the loan or
completion of construction, the loan will be refinanced through a $12,000,000
commercial mortgage loan. The commercial mortgage loan bears a commitment fee
of $60,000 and will carry interest at the then prevailing rate plus 2.25%. The
term of the commercial mortgage loan is five years with monthly principal and
interest payments due; the last payment will include a balloon payment based
upon a 20-year amortization of the principal balance. Both the construction
loan and the commercial mortgage loan are subject to certain financial and
nonfinancial covenants. $3,000,000 of the construction loan is guaranteed by
the Company's Chief Executive Officer. $3,000,000 of the commercial mortgage
loan will also be guaranteed by the Company's Chief Executive Officer. This
guarantee will be reduced by $500,000 each year of the commercial mortgage loan
is outstanding.
--------------------------------------------------------------------------------
F-25
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On May 31, 2000, the Company acquired all of the outstanding common stock of
ThermoGen, Inc. Under the terms of the merger agreement, the Company issued
3,452,909 shares of Class A common stock in exchange for the issued and
outstanding shares of ThermoGen Inc.'s common stock which shall be accounted
for as a purchase. As additional consideration, outstanding stock options of
ThermoGen, Inc. were converted into options to purchase 475,455 shares of Class
B common stock of the Company. The total purchase price of ThermoGen was
$29,730,000 which has been allocated to the fair values of assets acquired and
liabilities assumed as follows: patents--$6,886,000; trade name--$3,057,000;
contracts and customer base--$15,629,000; net liabilities assumed--$1,365,000;
and goodwill--$15,622,000. Included in goodwill is approximately $10,101,000
related to the establishment of deferred tax liabilities in conjunction with
the purchase.
On May 31, 2000, the Company acquired all of the outstanding common stock of
Emerald BioStructures, Inc. Under the stock purchase agreement, the Company
issued 1,576,602 shares of Class A common stock in exchange for all of the
outstanding common stock of Emerald BioStructures, Inc which shall be accounted
for as a purchase. The total purchase price of Emerald BioStructures was
$12,044,000 which has been allocated to the fair values of assets acquired and
liabilities assumed as follows: patents $1,098,000; trade name--$599,000;
contracts and customer base--$4,437,000; proprietary technology--$289,000; net
assets assumed--$1,000; and goodwill--$8,157,000. Included in goodwill is
approximately $2,537,000 related to the establishment of deferred tax
liabilities in conjunction with the purchase.
The estimated fair value of the Class A common stock issued in connection with
the purchase business combinations of ThermoGen, Inc. and Emerald
BioStructures, Inc. was determined using accepted valuation techniques
performed by a qualified third-party.
On June 1, 2000, the board of directors authorized the reincorporation of the
Company in Delaware and the filing of a registration statement with the
Securities and Exchange Commission to register shares of common stock in
connection with a proposed initial public offering. If the offering
contemplated by this prospectus is consummated, the Company's redeemable stock
warrants, classes of redeemable preferred stock, preferred stock, and common
stock will be either redeemed with the proceeds from the offering or converted
into a single class of common stock.
--------------------------------------------------------------------------------
F-26
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ThermoGen, Inc.:
We have audited the accompanying balance sheets of ThermoGen, Inc. (the
Company) as of December 31, 1998 and 1999, and the related statements of
operations, shareholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ThermoGen, Inc. as of December
31, 1998 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG LLP
March 21, 2000
Chicago, Illinois
--------------------------------------------------------------------------------
F-27
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
BALANCE SHEETS
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999 2000
-------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash...................................... $ -- $ 68,237 $ --
Accounts receivable....................... 65,044 9,070 84,212
Grants receivable......................... 56,549 54,818 21,519
Inventory................................. 3,694 -- --
--------- --------- -----------
Total current assets..................... 125,287 132,125 105,731
Equipment, net............................. 67,832 52,321 49,310
--------- --------- -----------
Other assets............................... 11,299 10,899 10,899
--------- --------- -----------
Total assets............................. $ 204,418 $ 195,345 $ 165,940
========= ========= ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Current installment of notes payable...... $ 39,846 $ 15,991 $ 150,442
Due to shareholders....................... -- -- 351,155
Bank overdraft............................ -- -- 10,409
Accounts payable.......................... 233,697 206,675 486,843
Accrued payroll........................... 95,504 85,980 141,154
Accrued interest.......................... 2,802 -- 57,904
Contract advance.......................... -- -- 100,000
Deferred revenue.......................... -- 40,000 40,000
--------- --------- -----------
Total current liabilities................ 371,849 348,646 1,337,907
Accrued interest........................... 42,337 54,066 --
Due to shareholders........................ 303,033 341,065 --
Notes payable.............................. 75,000 139,451 --
--------- --------- -----------
Total liabilities........................ 792,219 883,228 1,337,907
--------- --------- -----------
Shareholders' deficit:
Class A common stock; no par; 3,500,000
shares authorized, issued, and
outstanding at December 31, 1998 and
1999 and March 31, 2000 (unaudited).... 4,000 4,000 4,000
Class B, non-voting common stock; no par;
500,000 shares authorized; none issued
and outstanding at December 31, 1998
and 1999 and March 31, 2000
(unaudited)............................ -- -- --
Additional paid-in capital................ 3,850 3,850 3,850
Accumulated deficit....................... (595,651) (695,733) (1,179,817)
--------- --------- -----------
Total shareholders' deficit.............. (587,801) (687,883) (1,171,967)
--------- --------- -----------
Total liabilities and shareholders'
deficit............................... $ 204,418 $ 195,345 $ 165,940
========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-28
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December Three-month period
31, ended March 31,
1998 1999 1999 2000
-------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues and sales:
SBIR grant revenue......... $ 435,872 $ 430,925 $250,329 $ 91,811
STTR contract revenue...... 276,924 64,489 81,826 --
Contract revenue........... 1,016,939 1,520,792 367,385 343,268
Product sales.............. 29,974 51,126 4,503 3,104
---------- ---------- -------- ---------
Total revenues and sales.. 1,759,709 2,067,332 704,043 438,183
---------- ---------- -------- ---------
Operating costs:
Costs reimbursed under SBIR
grants.................. 435,872 430,925 250,329 91,811
Costs reimbursed under STTR
contracts............... 276,924 64,489 81,826 --
Professional compensation
costs................... 388,058 584,439 65,722 272,054
Material costs............. 38,595 116,088 19,445 29,145
General and
administrative.......... 838,980 933,949 191,849 515,329
Gain on disposal of
equipment............... (35,873) -- -- --
---------- ---------- -------- ---------
Total operating costs..... 1,942,556 2,129,890 609,171 908,339
---------- ---------- -------- ---------
Income (loss) from
operations............. (182,847) (62,558) 94,872 (470,156)
---------- ---------- -------- ---------
Non operating expense--
interest expense......... (43,000) (57,524) (12,556) (13,928)
---------- ---------- -------- ---------
Net loss before
extraordinary item..... (225,847) (120,082) 82,316 (484,084)
---------- ---------- -------- ---------
Extraordinary item--
extinguishment of
accounts payable......... -- 20,000 20,000 --
---------- ---------- -------- ---------
Net income (loss)......... $ (225,847) $ (100,082) $102,316 $(484,084)
========== ========== ======== =========
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-29
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDERS' DEFICIT
Years ended December 31, 1998 and 1999 and three-month period ended March 31,
2000 (unaudited)
<TABLE>
<CAPTION>
Class A Class B Additional Total
common stock common stock paid-in Accumulated shareholders'
Shares Amount Shares Amount capital deficit deficit
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................. 3,500,000 $4,000 -- $-- $3,850 $ (369,804) $ (361,954)
Net loss................ -- -- -- -- -- (225,847) (225,847)
--------- ------ --- --- ------ ----------- -----------
Balance at December 31,
1998................. 3,500,000 4,000 -- -- 3,850 (595,651) (587,801)
Net loss................ -- -- -- -- -- (100,082) (100,082)
--------- ------ --- --- ------ ----------- -----------
Balance at December 31,
1999................. 3,500,000 4,000 -- -- 3,850 (695,733) (687,883)
Net loss (unaudited).... -- -- -- -- -- (484,084) (484,084)
--------- ------ --- --- ------ ----------- -----------
Balance at March 31,
2000 (unaudited)..... 3,500,000 $4,000 -- $-- $3,850 $(1,179,817) $(1,171,967)
========= ====== === === ====== =========== ===========
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-30
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three-month period
Year ended December 31, ended March 31,
1998 1999 1999 1998
-------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $ (225,847) $ (100,082) $102,316 $(484,084)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation............. 12,193 17,760 4,427 4,411
Gain on disposal of
equipment............. (35,873) -- -- --
Gain on extinguishment of
accounts payable...... -- (20,000) (20,000) --
Changes in assets and
liabilities:
Accounts receivable..... 20,810 55,974 33,544 (75,142)
Grants receivable....... (28,179) 1,731 (20,662) 33,299
Inventory............... 883 3,694 3,694 --
Other assets............ (11,299) 400 299 --
Accounts payable........ 130,462 74,497 1,213 280,168
Accrued payroll......... 68,490 (9,524) (38,959) 55,174
Accrued interest........ 14,029 8,927 3,607 3,838
Contract advance........ -- -- 100,000
Deferred revenue........ -- 40,000 22,380 --
----------- ----------- -------- ---------
Net cash (used in)
provided by operating
activities............. (54,331) 73,377 91,859 (82,336)
----------- ----------- -------- ---------
Cash flows from investing
activities:
Proceeds from the disposal
of equipment........... 75,000 -- -- --
Equipment purchases....... (74,640) (2,249) (1,351) (1,400)
----------- ----------- -------- ---------
Net cash provided by (used
in) investing
activities............. 360 (2,249) (1,351) (1,400)
----------- ----------- -------- ---------
Cash flows from financing
activities:
Increase in cash
overdraft.............. -- -- -- 10,409
Proceeds from issuance of
debt to shareholders... 27,471 38,032 10,449 10,090
Proceeds from notes
payable................ 7,346 -- -- --
Repayments of notes
payable................ (8,155) (40,923) (6,500) (5,000)
----------- ----------- -------- ---------
Net cash provided by (used
in) financing
activities............. 26,662 (2,891) 3,949 15,499
----------- ----------- -------- ---------
Net increase (decrease) in
cash................... (27,309) 68,237 94,457 (68,237)
Cash at beginning of
period................. 27,309 -- -- 68,237
----------- ----------- -------- ---------
Cash at end of period..... $ -- $ 68,237 $ 94,457 $ --
=========== =========== ======== =========
Supplemental disclosure of
cash flow information--
cash paid for
interest............... $ 863 $ 10,583 $ -- $ --
=========== =========== ======== =========
Non-cash financing
activities:
Issuance of note payable
in satisfaction of
accounts payable....... $ -- $ 81,519 $ 81,519 $ --
Issuance of note payable
in satisfaction of note
payable................ -- 34,000 34,000 --
=========== =========== ======== =========
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-31
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Nature of Business
ThermoGen, Inc. (the Company) was incorporated in Illinois on November 15,
1988. Since its inception, ThermoGen has been engaged in the advanced research
and development of thermostable enzymes and their applications. ThermoGen
obtains the majority of its funding though contract services, Small Business
Innovation Research (SBIR) grants, strategic alliances, and product sales.
ThermoGen's products, ThermoCat(R) kits and bulk enzymes, are designed for
rapid development of practical biocatalytic processes.
(b) Interim Financial Statements
The financial information as of March 31, 2000 and for the three-month periods
ended March 31, 1999 and 2000 is unaudited. These interim financial statements
have been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the financial information set forth therein.
(c) Liquidity
The Company incurred losses in 1998 and 1999 and as of December 31, 1999 has
current liabilities in excess of current assets. The Company intends to finance
its operations in fiscal year 2000 using funds generated from contract services
provided to third parties. There is no assurance that such contracts will be
negotiated on acceptable terms to the Company, if at all. Should the plans
contemplated by management not be consummated, the Company may have to seek
alternative sources of capital or reevaluate its operating plans. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(e) Inventory
Inventory consists of completed ThermoCat(R) kits and is valued at the lower of
cost (first-in first-out) or market value.
(f) Equipment
Equipment is recorded at cost and depreciated using the straight-line method
over the estimated useful lives of the assets, ranging from five to ten years.
Expenditures for repairs and maintenance are charged to operations as incurred.
(g) Revenue Recognition
Revenue from SBIR and Small Business Technology Transfer (STTR) grants is
recorded as allowable research expenses are incurred under the terms of the
respective grants. Revenue from contract research is recorded as earned based
on the terms of the respective contract agreements. Contract revenue is
recognized either on a per diem basis as services are rendered or on the
percentage of completion method based on costs incurred to expected total costs
for fixed fee contracts. Any losses on contracts
--------------------------------------------------------------------------------
F-32
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
are provided for when they are determinable and estimable. Revenue is recorded
for product sales when the respective products are shipped. No amounts
recognized as revenue are refundable. Deferred revenue on the accompanying
balance sheets represent the application of SOP 81-1 to contracts for services.
(h) Research and Development Costs
Research and development costs are charged to expense when incurred. Research
and development costs reimbursed under SBIR grants amounted to $435,872 and
$430,925 for the years ended December 31, 1998 and 1999, respectively, and
research and development costs reimbursed under the STTR contract were $276,924
and $64,489 for the years ended December 31, 1998 and 1999, respectively. In
addition, research and development costs of $56,544 and $56,325 for the years
ended December 31, 1998 and 1999, respectively, are included in professional
compensation costs in the accompanying statements of operations.
(i) Stock Option Plan
The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
No. 123.
(2) Business and Credit Concentrations
In 1998, the Company had contracts with two customers for amounts exceeding 10%
of total revenues. Contract revenue with these two customers was $750,000 and
$235,939 for the year ended December 31, 1998.
In 1999, the Company had contracts with two customers for amounts exceeding 10%
of total revenues. Contract revenue with these two customers was $750,000 and
$480,000 for the year ended December 31, 1999.
During 1998 and 1999, the Company was awarded SBIR grants totaling $437,980 and
$312,020, respectively. Available funding for research work to be completed
under all SBIR grants as of December 31, 1999 was $305,848.
The Company derived 41% and 24% in 1998 and 1999, respectively, of its revenue
from grants with the federal government. Such revenue is dependent upon the
government's continuance of these programs.
--------------------------------------------------------------------------------
F-33
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(3) Equipment
Equipment is summarized at December 31, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Equipment..................................................... $96,336 $98,585
Less accumulated depreciation................................ (28,504) (46,264)
------- -------
$67,832 $52,321
======= =======
</TABLE>
(4) Notes Payable
Notes payable at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Unsecured demand note payable to vendor, $75,000 face value,
interest accrues at prime (7.5% at December 31, 1998) plus
1.0%...................................................... $4,346 $ --
Unsecured note payable to vendor, $34,000 face value,
interest accrues at prime plus 1.0%, due on January 31,
1999...................................................... 34,000 --
Unsecured note payable to vendor, $4,800 face value, interest
accrues at 5.0%, due July 15, 2000........................ 1,500 --
Unsecured note payable to vendor, $34,000 face value,
interest accrues at prime (8.5% at December 31, 1999) plus
1.0%, due December 31, 2000............................... -- 15,991
Unsecured note payable to vendor, $81,519 face value,
interest accrues at prime plus 1.0%, due January 31,
2001...................................................... -- 64,451
Unsecured demand note payable, $75,000 face value, interest
accrues at 12.5%.......................................... 75,000 75,000
------- --------
114,846 155,442
Less current maturities.................................... 39,846 15,991
------- --------
$75,000 $139,451
======= ========
</TABLE>
The holder of the $75,000 unsecured demand note payable has signed an agreement
indicating that the principal and interest amounts owed by the Company will not
become payable before January 1, 2001; accordingly, these amounts have been
classified as non current liabilities. The $75,000 unsecured demand note
payable is convertible into common or preferred stock at the time and under the
same terms that such stock is issued to shareholders, other than the current
shareholders.
On January 1, 1999 the holder of the $34,000 unsecured note payable due on
January 31, 1999 cancelled the note and reissued a note in the same amount with
the same terms due on December 31, 2000.
On February 1, 1999 the Company executed an unsecured note payable with a
vendor in the amount of $81,519 in satisfaction of $101,519 of legal fees
payable. The gain on extinguishment of the payable is recorded as an
extraordinary item in the accompanying 1999 statement of operations. The note
accrues interest at the prime rate plus 1.0% and is due on January 31, 2001.
--------------------------------------------------------------------------------
F-34
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Annual maturities of notes payable as of December 31, 1999 are as follows:
2000--$15,991; 2001--$139,451.
(5) Related-party Transactions
The shareholders have provided loans to the Company to meet ongoing operating
expenses. The related party notes payable are due on demand and bear interest
currently at annual rates ranging from 10% to 12%. Each of the shareholders has
signed agreements indicating that the principal and interest amounts owed by
the Company will not become payable before January 1, 2001. Amounts due to
shareholders consist of the following:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Notes payable................................................ $173,978 $173,978
Interest..................................................... 129,055 167,087
-------- --------
Due to shareholders........................................ $303,033 $341,065
======== ========
</TABLE>
The holder of the $75,000 unsecured demand note payable is a related party of
an officer of the Company.
(6) Stock Option Plan
Effective January 1, 1997 the Board of Directors approved a plan for the
creation and implementation of a stock option plan (Plan) and reserved 500,000
shares of Class B common stock for issuance under the Plan. Under the Plan, key
full-time employees of ThermoGen, Inc. are entitled to stock options which vest
over periods from three to six years. In addition, nonemployees are entitled to
stock options as compensation for services rendered.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plan. Accordingly, no compensation cost has been recorded.
Had compensation cost for the Plan been determined consistent with SFAS No.
123, the Company's net loss would have been the proforma amounts reported
below:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Net loss:
As reported............................................ $(225,847) $(100,082)
Pro forma.............................................. (228,157) (102,602)
========= =========
</TABLE>
The compensation cost of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998 and 1999:
<TABLE>
<S> <C>
Dividend yield.............................................................. 0%
Risk-free interest rate..................................................... 6%
Expected term in years...................................................... 3
</TABLE>
--------------------------------------------------------------------------------
F-35
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Stock option activity during 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Number of average
shares exercise price
--------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1997.......................... 380,000 $.25
Granted............................................. 20,000 .25
------- ----
Balance at December 31, 1998.......................... 400,000 .25
Granted............................................. 15,000 .40
------- ----
Balance at December 31, 1999.......................... 415,000 $.26
======= ====
</TABLE>
The weighted average minimum value of options on the date of grant was $.05 in
1998 and $.07 in 1999.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Average Weighted Weighted
Number remaining average Number average
Exercise outstanding contractual exercise exercisable exercise
price 12/31/99 life price 12/31/99 price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.25 380,000 2.33 $.25 239,000 $.25
.40 35,000 4.43 .40 4,000 .40
==== ------- ==== ==== ------- ====
415,000 243,000
======= =======
</TABLE>
(7) Income Taxes
The Company is classified as a Subchapter S corporation for Federal income tax
purposes and is therefore not subject to Federal income taxes; however, the
Company is subject to a state replacement tax in the state in which it conducts
business. No state replacement tax has been provided for in the accompanying
financial statements because of net operating losses incurred and utilized.
(8) Shareholders' Agreement
Pursuant to the terms of a shareholders' agreement dated April 28, 1989, there
are certain restrictions on the sale, transfer, or encumbrance of any kind
relating to the common stock outstanding of the Company. In addition, the
Company has the right of first refusal to repurchase outstanding common stock
at a price equal to the greater of the original issuance price or fair market
value (determined by mutual agreement of the buyer and seller).
(9) Commitments
The Company leases its offices and research laboratories under a three year
operating lease with two one-year renewal option periods. The lease expires on
January 17, 2001 unless the option is exercised. Future minimum rental
commitments are: $130,801--2000; $5,977--2001. Rent expense charged to
--------------------------------------------------------------------------------
F-36
<PAGE>
THERMOGEN, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
operations totaled $85,900 and $130,801 for the years ended December 31, 1998
and 1999, respectively.
(10) Subsequent Events (Unaudited)
On April 1, 2000, the Board of Directors granted options to purchase 83,100
shares of the Company's Class B common stock under the Company's stock option
plan at an exercise price of $7.50. The options vest in equal installments over
three years.
On April 30, 2000 all of the existing shareholder notes and accrued interest of
$352,433 were converted into two shareholder notes bearing interest at the
applicable rate published in the U.S. Department of Treasury Federal Bulletin.
In the event of a proposed merger with MCR Holdings, Inc. the notes are due at
the earlier of an initial public offering of MCR Holdings, Inc.'s capital stock
or at the end of the six month period following the proposed merger. In the
event no such merger occurs, the principal amount and all accrued interest is
due on April 30, 2001.
On May 1, 2000 the Company converted $134,250 in notes payable and accrued
interest into 17,900 shares of Class B common stock at a conversion rate of
$7.50 per share.
On May 12, 2000, the Company entered into an agreement and plan of merger
(Merger) with MCR Holdings, Inc. Under the terms of the Merger, each of the
issued and outstanding shares of the Company's common stock shall be canceled,
extinguished and converted into the right to receive 0.052613 shares of Class A
common stock of MCR Holdings, Inc. Outstanding stock options of the Company
will be converted into options to purchase 25,486 shares of Class B common
stock of MCR Holdings, Inc.
Prior to March 31, 2000, MCR Holdings, Inc. had advanced $100,000 to ThermoGen,
Inc. in anticipation entering into a definitive merger agreement. This amount
is refundable to MCR Holdings, Inc. in the event merger negotiations fail. This
amount has been recorded as a contract advance liability in the accompanying
balance sheet at March 31, 2000
--------------------------------------------------------------------------------
F-37
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Emerald BioStructures, Inc.:
We have audited the accompanying balance sheets of Emerald BioStructures, Inc.
as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Emerald BioStructures, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Seattle, Washington
April 28, 2000
--------------------------------------------------------------------------------
F-38
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
BALANCE SHEETS
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999 2000
--------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash......................................... $ 20,332 $ 47,310 $ 28,389
Accounts receivable.......................... 9,642 35,760 97,432
Inventories.................................. 5,649 7,151 13,043
Stockholder receivable....................... 9,590 8,780 8,820
-------- -------- --------
Total current assets......................... 45,213 99,001 147,684
Property and equipment, net................... 108,181 139,148 158,263
Capitalized software costs, net of accumulated
amortization of $3,056 and $6,723 at
December 31, 1999 and March 31, 2000
(unaudited), respectively.................. -- 40,944 37,277
Other assets.................................. -- 66,741 71,991
-------- -------- --------
Total assets................................. $153,394 $345,834 $415,215
======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................. $ 14,917 $ 29,406 $ 35,198
Accrued liabilities.......................... 16,936 64,238 115,553
Loan from stockholder........................ 6,694 17,095 17,095
Current portion of capital lease and long-
term obligations.......................... 20,870 18,244 25,594
Deferred revenue............................. 11,800 103,760 87,742
-------- -------- --------
Total current liabilities.................... 71,217 232,743 281,182
-------- -------- --------
Capital lease obligations, excluding current
portion.................................... 34,008 27,439 36,068
Long-term obligation, excluding current
portion.................................... 12,449 10,947 7,681
Stockholders' equity (deficit):
Common stock, no par value. Authorized
10,000,000 shares; issued and outstanding
4,712,500 shares at December 31, 1998,
4,762,500 shares at December 31, 1999 and
4,787,500 shares at March 31, 2000
(unaudited)............................... 101,500 107,500 110,500
Additional paid-in capital................... 4,551 4,551 4,551
Deferred stock compensation.................. (569) -- --
Accumulated deficit.......................... (69,762) (37,346) (24,767)
-------- -------- --------
Total stockholders' equity................... 35,720 74,705 90,284
-------- -------- --------
Total liabilities and stockholders' equity... $153,394 $345,834 $415,215
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-39
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
1998 1999 1999 2000
-------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales...................... $ 30,171 $150,928 $ 15,007 $ 69,479
Research grants............ 112,490 340,654 38,972 125,571
Contract service revenues.. 5,700 12,065 4,300 42,500
Sale of products under
contract services....... -- 42,000 15,000 29,400
----------- ----------- -------- --------
Total revenues............ 148,361 545,647 73,279 266,950
----------- ----------- -------- --------
Operating expenses:
Cost of sales.............. 24,266 113,852 7,751 60,608
Research and development... 92,335 225,372 36,388 110,011
Selling, general and
administrative.......... 75,252 155,093 38,131 79,114
----------- ----------- -------- --------
Total operating expenses.. 191,853 494,317 82,270 249,733
----------- ----------- -------- --------
Income (loss) from
operations............. (43,492) 51,330 (8,991) 17,217
Interest expense............ 8,739 18,914 5,515 4,638
----------- ----------- -------- --------
Net income (loss)......... $ (52,231) $ 32,416 $(14,506) $ 12,579
=========== =========== ======== ========
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-40
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1998 and 1999 and
the three-month period ended March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Total
Additional Deferred stockholders'
Common stock paid-in stock Accumulated equity
Shares Amount capital compensation deficit (deficit)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................. -- $ 16,000 $ -- $ -- $(17,531) $ (1,531)
Sale of common stock.... 4,712,500 85,500 -- -- -- 85,500
Grant of stock options
to non-employees..... -- -- 4,551 (4,551) -- --
Amortization of deferred
stock compensation... -- -- -- 3,982 -- 3,982
Net loss................ -- -- -- -- (52,231) (52,231)
--------- -------- ------ ------- -------- --------
Balance at December 31,
1998................. 4,712,500 101,500 4,551 (569) (69,762) 35,720
Exercise of non-employee
stock option......... 50,000 6,000 -- -- -- 6,000
Amortization of deferred
stock compensation... -- -- -- 569 -- 569
Net income.............. -- -- -- -- 32,416 32,416
--------- -------- ------ ------- -------- --------
Balance at December 31,
1999................. 4,762,500 107,500 4,551 -- (37,346) 74,705
Exercise of non-employee
stock options
(unaudited).......... 25,000 3,000 -- -- -- 3,000
Net income (unaudited).. -- -- -- -- 12,579 12,579
--------- -------- ------ ------- -------- --------
Balance at March 31,
2000 (unaudited)..... 4,787,500 $110,500 $4,551 $ -- $(24,767) $ 90,284
========= ======== ====== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-41
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Three-month period
December 31, ended March 31,
1998 1999 1999 2000
-------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............... $(52,231) $ 32,416 $(14,506) $12,579
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization.. 28,635 47,554 8,150 18,401
Amortization of deferred stock
compensation................ 3,982 569 569 --
Changes in assets and
liabilities:
Accounts receivable........... (9,642) (26,118) (15,694) (61,672)
Inventories................... (5,649) (1,502) (6,947) (5,892)
Accounts payable and accrued
liabilities................ 24,631 61,791 29,495 57,107
Deferred revenue.............. 11,800 91,960 (11,800) (16,018)
Other assets.................. -- (66,741) -- (5,250)
-------- -------- -------- -------
Net cash provided by (used in)
operating activities......... 1,526 139,929 (10,733) (745)
-------- -------- -------- -------
Cash flows from investing
activities:
Loan to stockholder............. (9,590) 810 (890) (40)
Purchases of property and
equipment.................... (81,732) (64,762) (2,581) (12,125)
Increase in capitalized software
costs........................ -- (44,000) -- --
-------- -------- -------- -------
Net cash used in investing
activities................... (91,322) (107,952) (3,471) (12,165)
-------- -------- -------- -------
Cash flows from financing
activities:
Proceeds from long-term
obligation................... 23,000 -- -- --
Repayments of long-term
obligation................... -- (10,551) -- (1,290)
Proceeds from loan from
stockholder.................. 6,694 10,401 1,210 --
Capital lease payments.......... (5,151) (10,849) (1,806) (7,721)
Sales of common stock........... 85,500 -- -- --
Exercise of stock options....... -- 6,000 -- 3,000
-------- -------- -------- -------
Net cash provided by (used in)
financing activities......... 110,043 (4,999) (596) (6,011)
-------- -------- -------- -------
Increase (decrease) in cash..... 20,247 26,978 (14,800) (18,921)
Cash at beginning of period..... 85 20,332 20,332 47,310
-------- -------- -------- -------
Cash at end of period........... $ 20,332 $ 47,310 $ 5,532 $28,389
======== ======== ======== =======
Supplemental disclosures of cash
flow information--cash paid
during the period for
interest..................... $ 2,036 $ 22,507 $ 2,642 $ 6,354
======== ======== ======== =======
Supplemental schedule of non-
cash investing and financing
activities--equipment
obtained through capital
leases....................... $ 46,439 $ 10,703 $ -- $21,724
======== ======== ======== =======
</TABLE>
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-42
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
Emerald BioStructures, Inc. (Company) is engaged in the development and
commercialization of novel crystallization research tools and sophisticated
crystallization data management software, and performing its own in-house
structure-based drug design projects. In addition, the Company performs
research services through collaborative agreements with other companies or
institutions that wish to know the atomic structures of proteins and nucleic
acids that have defined roles in human disease or in disease therapy, or are of
unique biotechnological value.
The Company's activities involve inherent risks. These risks include, among
others, dependence on key personnel, availability of raw materials, and
determination of patentability of the Company's products and processes.
(b) Interim Financial Statements
The financial information as of March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited. These interim financial statements have
been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the financial information set forth therein.
(c) Concentrations
The Company's customers are concentrated in the biotechnology and
pharmaceutical industries and include private and governmental entities. Credit
is granted in the ordinary course of business.
Accounts receivable at December 31, 1998 include 30%, 11% and 11% from single
customers. Accounts receivable at December 31, 1999 include 11% from a single
customer.
Revenues in 1998 include 49% and 27% from two single customers. Revenue in 1999
includes 62% from a single customer.
(d) Inventories
Inventories, consisting primarily of finished goods, are stated at the lower of
cost, as determined by the first-in, first-out method, or market value.
(e) Property and Equipment
Equipment, consisting of lab equipment, computers, and other office equipment,
is depreciated or amortized using the straight-line method over the assets'
estimated useful lives of three to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of the assets'
estimated useful lives or the remaining term of the lease.
(f) Capitalized Software Costs
Software development costs incurred in conjunction with product development are
charged to research and development expense until technological feasibility has
been established. Thereafter, all software development costs are capitalized
and reported at the lower of unamortized cost or net realizable value.
Amortization of capitalized software costs begins when the related product is
available for general release to customers and is provided for using the
straight-line method or based on expected sales levels
--------------------------------------------------------------------------------
F-43
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
over the product's estimated economic life of three years, whichever results in
a greater expense. Included in cost of sales in 1999 and the three months ended
March 31, 2000 is $3,056 and $3,667, respectively, related to amortization of
capitalized software costs.
(g) Revenues
Research grant revenues are recognized as research and development activities
are performed under the terms of related agreements. Included in accounts
receivable is unbilled revenue related to research grants of $0, $0, and
$13,868 at December 31, 1998, 1999, and March 31, 2000, respectively.
Revenues related to products other than software are recognized upon shipment,
pursuant to the terms of sale. Revenues from software arrangements where the
Company has continuing obligations to customers are deferred and recognized
ratably over the arrangement period as services are performed.
Contract service revenues included in other revenues are recognized upon
completion of the services provided under the related contract. Also included
in other revenues are revenues from products sold under service contracts.
No amounts recognized as revenue are refundable. Deferred revenue at December
31, 1998 represents the application of SOP 81-1 to contracts for services.
Deferred revenue at December 31, 1999 is comprised of $58,000 of revenue
deferred on the sale of software which will be recognized over the term of the
maintenance agreement and $45,760 of deferred revenue related to the
application of SOP 81-1 to contracts for services.
(h) Research and Development Costs
Research and development costs are charged to expense as incurred.
(i) Income Taxes
The Company has elected under the Internal Revenue Code to be an S corporation.
In lieu of corporation income taxes, the stockholders of an S corporation are
taxed on their proportionate share of the Company's taxable income. Therefore,
no provision or liability for federal income taxes has been recorded in the
financial statements.
(j) Fair Value of Financial Instruments
The Company has financial instruments consisting of cash, accounts receivable,
loans to and from stockholders', accounts payable and its long-term obligation.
The fair value of these financial instruments approximates their carrying
amount based upon market rates of interest or their short-term nature.
(k) Stock-Based Compensation
The Company accounts for its stock option grants to employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation expense related to employee stock options is recorded
if, on the date of grant, the fair value of the underlying stock exceeds the
exercise price. The Company applies the disclosure only requirements of
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation, which allows entities to continue to apply the
provisions of APB 25 for transactions with employees, and to provide pro forma
results of operations disclosures for employee stock option grants as if the
fair-value-based method of accounting in SFAS No. 123 had been applied to these
transactions.
--------------------------------------------------------------------------------
F-44
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(l) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(m) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less costs to sell.
(n) Business Segments
The Company's operations are confined to one business segment, the development
and commercialization of novel crystallization technology.
(2) Stockholder Receivable
The stockholder receivable is noninterest bearing and due on demand.
(3) Property and Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment...................................... $138,694 $204,104
Leasehold improvements....................................... -- 10,055
-------- --------
138,694 214,159
Less accumulated depreciation and amortization............... 30,513 75,011
-------- --------
$108,181 $139,148
======== ========
</TABLE>
(4) Accrued Liabilities
Accrued liabilities at December 31 is comprised of:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation........................................... $ 8,343 $27,282
Accrued consulting fees........................................ -- 28,000
Other.......................................................... 8,593 8,956
------- -------
$16,936 $64,238
======= =======
</TABLE>
--------------------------------------------------------------------------------
F-45
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(5) Long-Term Obligation
During 1998, the Company obtained $23,000 in financing from investors
specifically related to the development of a product. The Company guaranteed
the investors a return of the invested funds and up to a 100% return on the
investment based on a percentage of sales of the related product. The Company
has accrued interest expense based on the expected repayment schedule which
includes a final payment on June 1, 2001. As of December 31, 1998 and 1999, the
balance outstanding on the obligation was $23,000 and $12,449, respectively.
The Company's estimated repayment schedule includes principal payments of
$1,502 in 2000 and $10,947 in 2001.
(6) Stock Options
The stockholders of the Company have authorized the grant of options for the
acquisition of up to 1,200,000 shares to employees or non-employees of which
425,000 remain available for grant at December 31, 1999. Options are granted at
an exercise price equal to the estimated fair value of the Company's common
stock at the date of grant. Options granted to employees were vested
immediately upon grant and have expiration dates of 4-2/3 years from date of
grant.
A summary of employee stock option activity follows:
<TABLE>
<CAPTION>
Stock options
Weighted
average
exercise
price
per
Shares share
-------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1997.............................. -- $ --
Granted....................................................... 700,000 0.12
------- -----
Outstanding at December 31, 1998.............................. 700,000 0.12
Granted....................................................... -- --
------- -----
Outstanding at December 31, 1999.............................. 700,000 $0.12
======= =====
</TABLE>
At both December 31, 1998 and 1999, options to purchase 700,000 shares were
vested and exercisable. The weighted average remaining contractual life of
stock options outstanding at December 31, 1999 is approximately three years.
Had compensation cost for the employee options been determined consistent with
SFAS No. 123, the Company's net loss in 1998 would have been adjusted to a pro
forma loss of $84,052.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%; expected volatility of 100%; risk-free interest rate of
6.0%; and expected lives of 4.67 years. Using these assumptions, the fair value
of options granted was estimated as $0.09 per share.
Options are granted to nonemployees primarily for services provided.
Nonemployee options have varying terms with vesting occurring from immediately
upon grant to up to 1 year from grant and
--------------------------------------------------------------------------------
F-46
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
expirations occurring from 1.5 years from date of grant to up to 2 years from
date of grant. The fair value of the options is charged to expense in the
period or periods the related services are provided.
In 1998, the Company granted to non-employees options to purchase 75,000 shares
of which 25,000 remain unexercised at December 31, 1999. No options were
granted to nonemployees in 1999.
The fair value of each nonemployee option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: expected dividend yield of 0%; expected volatility of 100%; risk-
free interest rate of 6.0%; and expected lives of 1.5 and 2 years. Using these
assumptions, the weighted average fair value of options was estimated as $0.06
per share.
(7) Commitments
(a) Leases
The Company leases office and lab facilities under a noncancelable operating
lease which expires in 2001. In addition, the Company is obligated under
various capital leases for certain equipment.
Minimum annual payments under operating leases and the present value of future
minimum capital lease payments as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 31:
2000....................................................... $22,762 $18,000
2001....................................................... 22,461 15,000
2002....................................................... 9,555 --
------- -------
Total minimum lease payments................................ 54,778 $33,000
=======
Less amounts representing interest (at rates ranging from
12.84% to 30.48%)........................................ 10,597
-------
Present value of net minimum capital lease payments......... 44,181
Less current installments under capital lease obligations... 16,742
-------
Capital lease obligations, excluding current installments... $27,439
=======
</TABLE>
Rent expense for 1998 and 1999 was $13,700 and $18,000, respectively.
At December 31, the gross amount of equipment and related accumulated
amortization recorded under capital leases included in property and equipment
were as follows:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Equipment...................................................... $49,732 $60,435
Less accumulated amortization.................................. 10,107 21,609
------- -------
$39,625 $38,826
======= =======
</TABLE>
--------------------------------------------------------------------------------
F-47
<PAGE>
EMERALD BIOSTRUCTURES, INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(b) Royalties
The Company has an obligation to pay 30% of the gross revenues from sales of a
software product. Included in cost of goods sold in 1999 is $800 related to
this royalty. Beginning October 2000, this royalty will be based on 50% of net
profit from the software product as defined in the agreement. There was no
revenue from sales of the software in 1998. This royalty lasts in perpetuity.
(8) Benefit Plan
The Company has a plan whereby it makes a contribution of 15% of employee wages
into an individual retirement account in that employee's name. Company
contributions amounted to $7,325 and $18,338 in 1998 and 1999, respectively.
(9) Liquidity
During 1998, the Company incurred a net loss of $52,231. Additionally, current
liabilities at December 31, 1999 exceed current assets by $133,742. Management
plans to take action to obtain needed capital through an agreement to be
acquired by MCR Holdings, Inc. (note 10), and to reduce operating expenses
which it believes will enable the Company to meet its obligations during 2000.
(10) Subsequent Event (Unaudited)
In May 2000, the Company entered an agreement to be acquired by MCR Holdings,
Inc. If consummated, the acquisition would be completed through the exchange of
common shares.
If the Company is acquired, options to acquire 187,994 shares of the Company's
common stock will be granted to certain employees and nonemployees under
agreements reached in May 2000.
--------------------------------------------------------------------------------
F-48
<PAGE>
--------------------------------------------------------------------------------
[MEDICHEM LOGO]
Harnessing the power of chemistry and biology through technology and
innovation.
MediChem Life Sciences, Inc. is a drug discovery technology and service company
that offers a broad range of technology-based chemistry capabilities to
pharmaceutical and biotechnology companies. Our multidisciplinary teams of
scientists and dedicated client communications allow us to effectively manage
complete drug discovery and development programs, helping our clients to
advance more lead candidates.
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all
dealers selling shares of our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth fees payable by us in connection with the
issuance and distribution of our common stock in this offering. All such fees
and expenses, except the Securities and Exchange Commission registration fee,
are estimated:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................. $23,316
NASD Filing Fee..................................................... 9,332
Nasdaq Stock Market Listing Fee..................................... --
Transfer Agent Fees and Expenses.................................... --
Printing Engraving Fees and Expenses................................ --
Legal Fees and Expenses............................................. --
Accounting Fees and Expenses........................................ --
Miscellaneous....................................................... --
-------
Total............................................................. $ --
=======
</TABLE>
MediChem Life Sciences, Inc. will bear all of the expenses shown above.
Item 15. Indemnification of directors and officers
Subsection (a) of Section 145 of the Delaware General Corporation Law ("DGCL")
provides that a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding whether civil, criminal or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor, against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or such other court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
The Company's Restated Certificate of Incorporation and By-Laws provide that
indemnification shall be to the fullest extent permitted by the DGCL for all
current or former directors or officers of the Company.
--------------------------------------------------------------------------------
II-1
<PAGE>
--------------------------------------------------------------------------------
As permitted by the DGCL, the Restated Certificate of Incorporation provides
that directors of the Company shall have no personal liability to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except (i) for any breach of a director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violations of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction in which a director derives
an improper personal benefit.
Recent Sales of Unregistered Securities
Since January 1, 1997 we have issued the following securities which were not
registered under the Securities Act:
(i) On June 14, 1999, in connection with our recapitalization, we issued
2,117,052 shares of Class A preferred stock to Peachtree Medichem Partners,
LLC, ChaseMedichem Partners, LLC, MedEquity Investors Partners, LLC and
Banc of America Management Corporation in exchange for a purchase price of
$2.36 per share.
(ii) On June 14, 1999, in connection with our recapitalization, we issued
7,462,228 shares of our Class A common stock, 4,234,068 shares of our
Class A preferred stock, 1,000 shares of our Class C preferred stock and
400,000 shares of our Class D preferred stock to Michael T. Flavin, as
trustee of the Michael T. Flavin Revocable Trust, in exchange for all of
our common stock that was outstanding at that time.
(iii) 1998 Incentive Compensation Plan Issuances. Since January 1, 1998, we
have issued options to purchase 1,932,418 shares of our Class B common
stock to employees of the company, at exercise prices ranging from $0.42
to $7.61 per share. In addition, during the same period we issued options
to purchase 24,564 shares of our Class C preferred stock, with no
exercise price per share, and 24,564 shares of our Class D preferred
stock, with an exercise price of $.99 per share, to employees of the
Company.
(iv) On June 14, 1999, in connection with our recapitalization, we issued
warrants to purchase 315,577 shares of our common stock to NationsCredit
Commercial Corporation, and 157,788 shares of our common stock to Merchant
Capital, Inc., at exercise prices of $0.0005 per share and $2.60 per
share, respectively.
(v) On May 31, 2000, in connection with the ThermoGen and Emerald BioStructures
acquisitions, we issued 3,452,909 shares and 1,576,602 shares of our common
stock to the former shareholders of ThermoGen and Emerald BioStructures,
respectively. In addition, in connection with the ThermoGen acquisition, we
assumed options to purchase 475,456 shares of our common stock.
In each of the above instances, exemption from registration was claimed on the
grounds that the issuance of such securities did not involve any public
offering within the meaning of Section 4(2) of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a)Exhibits
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
Exhibit
No. Description
------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement**
2.1 Form of Agreement and Plan of Merger, among MediChem Life Sciences,
Inc. and MCR Holdings, Inc.**
3.1 Form of Certificate of Incorporation of MediChem Life Sciences, Inc.*
</TABLE>
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II-2
<PAGE>
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<TABLE>
<CAPTION>
Exhibit
No. Description
-------------------------------------------------------------------------------
<C> <S>
3.2 Form of By-Laws of MediChem Life Sciences, Inc.*
Specimen Certificate for MediChem Life Sciences, Inc.'s common
4.1 stock**
4.2 Registration Rights Agreement between MCR Holdings, Inc. and the
stockholders named therein, dated as of June 14, 1999*
5.1 Opinion of Winston & Strawn**
10.1 MCR Holdings, Inc. Incentive Compensation Plan, dated as of January
1, 1998 and subsequently amended*
10.2 MediChem Life Sciences, Inc. 2000 Stock Incentive Plan, dated as of
October , 2000**
10.3 Employment Agreement between MediChem and each of Michael T. Flavin,
John L. Flavin, Jeffrey A. Whitnell, David E. Zembower and Ze-Qi Xu*
10.4 Joint Venture Agreement dated as of December 21, 1996, by and between
MediChem Research, Inc. and Craun Research Sendirian Berhad, a
company incorporated in Sarawak, Malaysia*
10.5 Warrant Agreement between MCR Holdings, Inc. and Merchant Capital,
Inc., dated as of June 14, 1999*
10.6 Warrant Agreement between MCR Holdings, Inc. and NationsCredit
Commercial Corporation, dated as of June 14, 1999*
10.7 Agreement and Plan of Merger dated as of May 12, 2000, by and among
ThermoGen, Inc., MCR Holdings, Inc., MCR Acquisition Corp. and the
shareholders named therein*
10.8 Stock Purchase Agreement dated as of May 12, 2000, by and between
Emerald BioStructures, Inc. and MCR Holdings, Inc.*
10.9 Lease Agreements between MCR Holdings, Inc. and High Hopes, Inc. (for
property located in Lemont, Illinois)*
10.10 Lease Agreement between MCR Holdings, Inc. and The Institute of Gas
Technology, dated October 1, 1997 (for property located in Des
Plaines, Illinois)*
10.11 Agreement of Purchase and Sale between MCR Holdings, Inc. and
Catellus Development Corporation, dated as of November 12, 1998 and
most recently amended on April 12, 1999*
10.12 Construction Agreement between MCR Holdings, Inc. and Walsh
Construction Company, dated August 11, 1999*
10.13 License Agreement between MediChem Research, Inc. and Regis
Technologies, dated August 6, 1999*
10.14 License Agreement between MediChem Research, Inc. and Advanced Life
Sciences, Inc., dated May 18, 2000*
10.15 License Agreement between MediChem Research, Inc. and Advanced Life
Sciences, Inc. dated May 4, 2000*
10.16 Master Laboratory Services Agreement between MediChem Research, Inc.
and Advanced Life Sciences, Inc., dated March 22, 1999*
10.17 Agreement between MediChem Research, Inc. and Advanced Life Sciences,
Inc., dated August 31, 1999, related to the License Agreement with
Regis Technologies*
21.1 Subsidiaries of the Company*
23.1 Consent of KPMG LLP with respect to consolidated financial statements
of MCR Holdings, Inc.
23.2 Consent of KPMG LLP with respect to financial statements of
ThermoGen, Inc.
23.3 Consent of KPMG LLP with respect to financial statements of Emerald
BioStructures, Inc.
23.4 Consent of Winston & Strawn (contained in the opinion filed as
Exhibit 5.1)**
27.1 Financial data schedule*
</TABLE>
--------
* Previously filed
** To be filed by amendment
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II-3
<PAGE>
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(b)Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
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II-4
<PAGE>
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Securities
Act"), the Registrant has duly caused this Amendment No. 2 to Registration
Statement (No. 333-39548) to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago, in the State of Illinois, on
the 2nd day of October, 2000.
MEDICHEM LIFE SCIENCES, INC.
/s/ Michael T. Flavin
By: _________________________________
Name: Michael T. Flavin
Title: Chairman of the Board of
Directors, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
Registration Statement (No. 333-39548) has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael T. Flavin Chairman of the Board of October 2, 2000
____________________________________ Directors, President and
Michael T. Flavin Chief
Executive Officer
/s/ John L. Flavin* Executive Vice President and October 2, 2000
____________________________________ Chief Operating Officer and
John L. Flavin Director
/s/ R. Richard Wieland, II* Executive Vice President and October 2, 2000
____________________________________ Chief Financial Officer
R. Richard Wieland, II
/s/ Jeffrey A. Whitnell* Vice President of Finance October 2, 2000
____________________________________ and Treasurer
Jeffrey A. Whitnell
/s/ Michael J. Cogan Controller (Principal October 2, 2000
____________________________________ Accounting Officer)
Michael J. Cogan
/s/ David C. Demirjian* Vice President of Technology October 2, 2000
____________________________________ Strategy and Director
David C. Demirjian
/s/ Darsh T. Wasan* Director October 2, 2000
____________________________________
Darsh T. Wasan
/s/ Robert D. Weist* Director October 2, 2000
____________________________________
Robert D. Weist
/s/ Bro. James Gaffney* Director October 2, 2000
____________________________________
Bro. James Gaffney
/s/ Peter R. Gates* Director October 2, 2000
____________________________________
Peter R. Gates
</TABLE>
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<PAGE>
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<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Damion E. Wicker* Director October 2, 2000
____________________________________
Damion E. Wicker
/s/ W. Brett Ingersoll* Director October 2, 2000
____________________________________
W. Brett Ingersoll
/s/ Larry C. Hansen* Director October 2, 2000
____________________________________
Larry C. Hansen
</TABLE>
/s/ Michael T. Flavin
*By: _________________________
Michael T. Flavin
Attorney-in-fact
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II-6
<PAGE>
MCR HOLDINGS, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at charged to
beginning of costs and Balance at
Description period expenses Deductions end of period
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable
Year Ended December 31,
1997....................... $ -- $ 23,887 $(23,887) $ --
Year Ended December 31,
1998....................... $ -- $ -- $ -- $ --
Year Ended December 31,
1999....................... $ -- $ 47,707 $(33,727) $ 13,980
Valuation allowance for
deferred tax assets
Year Ended December 31,
1997....................... $97,227 $ -- $(12,873) $ 84,354
Year Ended December 31,
1998....................... $84,354 $ -- $(21,091) $ 63,263
Year Ended December 31,
1999....................... $63,263 $ -- $ (222) $ 63,041
Discount on term loan note
Year Ended December 31,
1997....................... $ -- $ -- $ -- $ --
Year Ended December 31,
1998....................... $ -- $ -- $ -- $ --
Year Ended December 31,
1999....................... $ -- $494,295 $(39,255) $455,040
</TABLE>
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