<PAGE>
As filed with the Securities and Exchange Commission on January 19, 2001
Registration No. 333-47030
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
XENOGEN CORPORATION
(Exact name of Registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 8731 77-0412269
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Xenogen Corporation
860 Atlantic Avenue
Alameda, California 94501
(510) 291-6100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
David W. Carter
Pamela Reilly Contag, Ph.D.
Chief Executive Officers
Xenogen Corporation
860 Atlantic Avenue
Alameda, California 94501
(510) 291-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Karen A. Dempsey, Esq. Donald J. Murray, Esq.
William A. Hines, Esq. Dewey Ballantine LLP
Wilson Sonsini Goodrich & Rosati, 1301 Avenue of the Americas
Professional Corporation New York, New York 10019-6092
One Market (212) 259-8000
Spear Street Tower, Suite 3300
San Francisco, California 94105
(415) 947-2000
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities Amount to be Offering Price Offering Registration
to be Registered Registered Per Share (1) Price (1) Fee (2)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................. 8,050,000 shares $12.00 $96,600,000 $25,358
------------------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Previously paid.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
The information in this preliminary 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
preliminary prospectus is not an offer to sell these securities and is not
soliciting offers to buy these securities in any state where the offer or sale
is not permitted.
<TABLE>
<S> <C> <C>
PRELIMINARY PROSPECTUS Subject to completion January 19, 2001
</TABLE>
--------------------------------------------------------------------------------
7,000,000 Shares
[XENOGEN LOGO]
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of shares of our common stock. No public
market currently exists for 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 approved on the Nasdaq National Market
for quotation under the symbol "XGEN."
Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per share Total
----------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price $ $
----------------------------------------------------------------------------------------
Underwriting discounts and commissions $ $
----------------------------------------------------------------------------------------
Proceeds, before expenses, to Xenogen $ $
----------------------------------------------------------------------------------------
</TABLE>
The underwriters may also purchase up to 1,050,000 shares of common stock from
us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. The underwriters
may exercise this option only to cover over-allotments, if any. If the
underwriters exercise the option in full, the total underwriting discounts and
commissions will be $ , and our total proceeds, before expenses, will be
$ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about , 2001.
UBS Warburg LLC
CIBC World Markets
Dain Rauscher Wessels
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
Biology
<TABLE>
<S> <C> <C> <C>
[Graphic of Bioware Bioware(TM) Cells
Microorganism] and Microorganisms
LPTA(TM) Light-Producing
Transgenic Animals [Graphic of LPTA(TM)]
Hardware Software
[Graphic of Computer Utilizing LivingImage
[Graphic of IVIS(TM) Imaging System] Software]
IVIS(TM) Imaging System LivingImage(TM) Software
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
Through and including , 2001 (the 25th day after commencement of this
offering), federal securities law may require all dealers selling shares of our
common stock, whether or not participating in this offering, 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.
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus summary.................... 3
The offering.......................... 6
Summary financial data................ 7
Risk factors.......................... 9
Forward-looking information........... 21
Use of proceeds....................... 22
Dividend policy....................... 22
Capitalization........................ 23
Dilution.............................. 24
Selected financial data............... 26
Management's discussion and analysis
of financial condition and results
of operations....................... 28
</TABLE>
<TABLE>
<S> <C>
Business.............................. 34
Management............................ 52
Related party transactions............ 62
Principal stockholders................ 66
Description of capital stock.......... 68
Shares eligible for future sale....... 73
Underwriting.......................... 75
Legal matters......................... 78
Experts............................... 78
Where you can find additional
information......................... 79
Index to financial statements......... F-1
</TABLE>
--------------------------------------------------------------------------------
<PAGE>
Prospectus summary
This summary highlights information contained in other parts of this
prospectus. Because it is a summary, it does not contain all of the information
you should consider before investing in our common stock. You should read the
entire prospectus carefully, including "Risk factors" and the financial
statements and related notes, before making an investment decision.
OUR BUSINESS
We have developed and are manufacturing a platform for acquiring, analyzing and
managing complex image data from living animals. This platform is comprised of
an imaging system, software and biological materials, and is designed to
improve the efficiency and productivity of drug discovery and development by
facilitating biological assessment. Our in vivo biophotonic imaging system
measures light emitted from inside a living animal. This system combines our
proprietary technologies in molecular biology and physiology to enable
researchers to track and monitor the dynamic properties associated with the
mechanisms of disease and the impact of drugs on these mechanisms, as they
occur, at the molecular level in live animals. More information about gene
function can be derived from the activity of a gene if it is known when and
where gene activity occurs in the three-dimensional environment of the living
body. We achieve this by using luciferase, a protein capable of emitting light,
as a visual tag for biological activity. By inserting a gene for luciferase
into a tumor cell or disease-causing microorganism, researchers can track and
monitor the progression of disease within a live animal, as well as the
effectiveness of related drugs. Researchers can also insert this gene directly
into the genome of an animal to serve as a reporter of the activity of another
gene, such as a disease-related gene or gene responsible for a liver enzyme
produced in response to a toxic drug. With these capabilities, we believe
pharmaceutical and biotechnology companies will be better able to assess the
clinical relevance of disease targets, predict the efficacy and safety of drugs
in humans and reduce the risk of costly drug failures. As a result, we believe
our system represents not only a significant improvement over conventional
animal models, but a major advance in the way drugs are discovered and
developed.
We license our technology to our customers and sell our instruments, biological
materials and database information separately. We began marketing our current
generation of in vivo imaging systems in January 2000. Each of Pfizer and
Novartis are utilizing our technology under a commercial and research
agreement. In addition, the following companies are assessing our technology
under evaluation agreements: AstraZeneca, Cell Genesys, Chiron, Cubist
Pharmaceuticals, DuPont Pharmaceuticals, Johnson & Johnson, Merck and
SmithKline Beecham Plc.
OUR MARKET OPPORTUNITY
Pharmaceutical and biotechnology companies and biomedical researchers are
seeking insights that facilitate the understanding of the dynamic molecular
mechanisms of disease and drug therapies in human physiology. Biomedical
research is focused on the understanding of normal and disease mechanisms.
These mechanisms are generally complex and comprise a myriad of interrelated
genes, proteins and biological pathways that together govern tissue and organ
function. Pharmaceutical and biotechnology companies generally apply this
knowledge of disease mechanisms to identify optimal points, or targets, for
drug intervention. The Human Genome Project, an international scientific
research effort, is conducting studies to discover genes and their function. It
has identified
3
<PAGE>
a large number of genes, some of which are central to maintaining health. In
addition, mutations in certain genes can trigger the development of a variety
of diseases, including cardiovascular disease, diabetes, disorders of the
central nervous systems such as Parkinson's Disease and Alzheimer's Disease,
and several forms of cancer. The ability to map the function of these genes may
be critical to choosing the most appropriate point of therapeutic intervention.
Drug discovery and development is a long, iterative and expensive process. It
generally requires up to 15 years of committed resources and between $300 and
$500 million of costs per approved drug. As a result, pharmaceutical and
biotechnology companies and others are seeking new technologies that will
accelerate the development of new drugs. Despite the adoption of high
throughput screening systems, or in vitro assays designed to screen large
numbers of drugs quickly, chemical libraries and other technologies that are
increasing the number of potential drug targets and drug leads, productivity,
or the number of new drugs approved each year, has not improved. According to
the US Food and Drug Administration, there were only 83 New Drug Applications
approved in 1999, compared with 90 in 1998 and 121 in 1997.
We believe that there are several reasons why productivity has not improved in
the biomedical research and drug discovery and development processes:
.Limited information on targets. Researchers are developing many drugs around
disease targets that have little relevance to the overall biological processes
involved in disease. As a result, many of the drug candidates arising from
drug discovery ultimately fail.
.Limited physiological context in drug screening. Researchers often use testing
methods that involve cells or molecules on laboratory dishes. These tests,
which are called in vitro assays, screen chemical compounds against disease
targets in an isolated environment, outside the context of physiology. As a
result, researchers may observe interactions between the drug and disease
target that would not otherwise occur in the body.
.Bottlenecks in drug metabolism and toxicity screening. Researchers typically
use conventional animal models for drug metabolism and toxicity screening.
This involves a time-consuming process of collecting, processing and analyzing
large groups of animal tissues over different time intervals to obtain data.
As a result, researchers are unable to keep up with the accelerating number of
potential drug leads.
.Limited predictive value of animal models. Researchers use animal models to
predict human response to drugs. Conventional animal models introduce
increased statistical variation in the data collected because they require the
analysis of different animals at multiple time points and provide only a
snapshot in time of dynamic processes. As a result, conventional animal models
are limited in their ability to predict human response.
THE XENOGEN SOLUTION
We provide an integrated system that facilitates biological assessment, which
we believe will improve the efficiency and productivity of the drug discovery
and development process. We believe our solution provides the following key
benefits over conventional technologies:
.Enables real-time visual analysis of biological and drug activity in live
animals, allowing the quantitative analysis of complex physiologic patterns;
.Generates more predictive models of biological activity in humans and their
response to drugs;
4
<PAGE>
.Addresses a broad range of questions on the molecular role of drugs, genes or
proteins in physiology, promoting the analysis of complex data; and
.Provides higher throughput, increased functionality and decreased cost
relative to alternative imaging technologies.
OUR STRATEGY
Our goal is to establish our technology as the industry standard for biological
assessment. To achieve this goal, we have implemented the following strategy:
.Build on our strengths in tracking and monitoring;
.Apply our technology to the drug metabolism and toxicology markets;
.Develop strategic partnerships to accelerate penetration of target validation
markets;
.Provide easy access to our technology;
.Generate high-margin recurring revenues; and
.Become the premier source of physiological information.
We have had a limited history of offering our products and services and have
generated losses since our inception, including losses of $467,000 in 1997,
$3.2 million in 1998, $7.1 million in 1999 and $9.1 million in the nine months
ended September 30, 2000. Moreover, we face serious competition from other
companies offering technology and products relating to biological assessment,
most of which have substantially greater financial, scientific and human
resources than we have. Consequently, we cannot assure you that we will be
successful in achieving our strategy.
RECENT DEVELOPMENTS
In November 2000, we acquired Chrysalis DNX Transgenic Sciences Corporation, a
wholly-owned subsidiary of MDS Inc., in exchange for 3,500,000 shares of our
Series F preferred stock. Upon the closing of this offering, these shares of
Series F preferred stock will convert into 2,555,000 shares of our common
stock. DNX produces transgenic animals, or animals that have foreign genes
incorporated into their genetic structure, or genome, and performs contract
research and development services for pharmaceutical and biotechnology
companies and biomedical research institutions. This acquisition provides us
with additional proprietary technology and expanded manufacturing capacity for
our light-producing transgenic animals. In connection with the acquisition, we
entered into a five-year strategic relationship agreement with MDS. See
"Management's discussion and analysis of financial condition and results of
operations."
----------------
Our principal executive offices are located at 860 Atlantic Avenue, Alameda,
California 94501, and our telephone number is (510) 291-6100. Our corporate
website is www.xenogen.com. We do not intend the information contained on our
website to be part of this prospectus. We were incorporated in California in
August 1995 and reincorporated in Delaware in September 2000.
5
<PAGE>
The offering
The following information assumes that the underwriters do not exercise their
over-allotment option to purchase additional shares in the offering.
<TABLE>
<C> <S>
Common stock we are offering............... 7,000,000 shares
Common stock to be outstanding after the
offering................................. 26,886,256 shares
Proposed Nasdaq National Market symbol..... XGEN
Use of proceeds............................ To fund our operations, including
continued development and
manufacturing of existing
products, research, development
and commercialization of new
applications for our technology,
hiring of additional personnel to
support our growth, expansion of
our facilities and for other
working capital and general
corporate purposes. See "Use of
proceeds."
</TABLE>
Unless otherwise indicated, all information in this prospectus has been
adjusted to reflect:
.a 0.73-for-1 reverse split of our common stock to be completed prior to the
closing of this offering; and
.the conversion of all outstanding shares of our convertible preferred stock
into 16,552,785 shares of our common stock, which will become effective upon
the closing of this offering.
The number of shares of common stock to be outstanding after the offering in
the table above is based on the number of shares outstanding as of September
30, 2000, adjusted to reflect the subsequent share issuance in the DNX
acquisition, and excludes as of September 30, 2000:
.213,722 shares issuable upon the exercise of outstanding warrants at a
weighted-average exercise price of $2.24 per share;
.1,826,170 shares issuable upon the exercise of outstanding options under our
1996 Stock Plan at a weighted-average exercise price of $1.23 per share; and
.a total of 381,060 shares available for future grant under our 1996 Stock
Plan, 839,500 shares available for future grant under our 2000 Stock Plan and
292,000 shares available for future purchase under 2000 Employee Stock
Purchase Plan.
Subsequent to September 30, 2000, options were granted covering an additional
698,464 shares of our common stock at a weighted-average exercise price of
$2.74 per share.
In addition, we have agreed to issue an additional 1,050,000 shares if the
underwriters exercise their over-allotment option in full, which we describe in
"Underwriting." If the underwriters exercise this option in full, 27,936,256
shares of our common stock will be outstanding after this offering.
Bioware(TM), Xenogen(TM), IVIS(TM) and LivingImage(TM) are trademarks of
Xenogen Corporation. This prospectus also refers to trademarks and trade names
of other organizations.
6
<PAGE>
Summary financial data
The following historical statement of operations data for the years ended
December 31, 1997, 1998 and 1999 are derived from our audited financial
statements. The statement of operations data for the nine months ended
September 30, 1999 and 2000 and the balance sheet data as of September 30, 2000
are derived from our unaudited financial statements included in this
prospectus, and include all adjustments consisting only of normal, recurring
adjustments which we consider necessary for a fair presentation of the data.
The unaudited pro forma statements of operations data are derived from the
Unaudited Pro Forma Combined Condensed Financial Information and reflects our
acquisition of DNX as if that acquisition occurred on January 1, 1999. The
results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal
year, for any other interim period or for any future fiscal year.
<TABLE>
<CAPTION>
Nine months Nine months
Year ended ended ended
Year ended December 31, September 30, September 30,
December 31, 1999 (unaudited) 2000
------------------------ (unaudited ---------------- (unaudited
Statement of operations data 1997 1998 1999 pro forma) 1999 2000 pro forma)
------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License.................. $ 23 $ 47 $ 457 $ 1,243 $ 316 $ 774 $ 1,470
Research and development
services................ 40 37 790 6,199 352 716 5,279
Other revenue............ -- -- 46 46 25 406 406
------ ------- ------- -------- ------- ------- --------
Total revenue............. 63 84 1,293 7,488 693 1,896 7,155
Operating costs and
expenses:
Cost of revenue.......... -- -- -- 3,619 -- 261 2,753
Research and
development............. 189 1,009 4,790 4,766 3,815 6,686 6,641
Selling, general and
administrative.......... 336 2,381 3,757 5,812 2,263 4,578 7,914
Amortization of purchased
intangible assets and
goodwill................ -- -- -- 6,737 -- -- 5,053
------ ------- ------- -------- ------- ------- --------
Total operating costs and
expenses................. 525 3,390 8,547 20,934 6,078 11,525 22,361
Loss from operations...... (462) (3,306) (7,254) (13,446) (5,385) (9,629) (15,206)
Interest income.......... -- 184 355 381 248 917 939
Interest expense......... (5) (122) (237) (245) (147) (375) (389)
------ ------- ------- -------- ------- ------- --------
Net loss before income
taxes.................... (467) (3,244) (7,136) (13,310) (5,284) (9,087) (14,656)
(Provision for) benefit
from income tax.......... -- -- -- (291) -- -- 89
------ ------- ------- -------- ------- ------- --------
Net loss.................. $ (467) $(3,244) $(7,136) $(13,601) $(5,284) $(9,087) $(14,567)
====== ======= ======= ======== ======= ======= ========
Basic and diluted net loss
per common share......... $(0.35) $ (1.81) $ (2.94) $ (2.73) $ (2.26) $ (3.17) $ (2.69)
====== ======= ======= ======== ======= ======= ========
Shares used in computing
basic and diluted net
loss per share........... 1,339 1,789 2,426 4,980 2,339 2,864 5,419
Pro forma basic and
diluted net loss per
common share............. $ (1.10) $ (0.87)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
common share............. 12,418 16,830
</TABLE>
7
<PAGE>
The unaudited pro forma balance sheet data reflect our acquisition of DNX as if
that acquisition had occurred on September 30, 2000, and the unaudited pro
forma as adjusted balance sheet data further reflect the conversion of all
22,675,049 shares of our outstanding preferred stock into 16,552,785 shares of
our common stock upon the closing of this offering, our sale of 7,000,000
shares of our common stock in this offering at an assumed initial public
offering price of $11.00 per share and the receipt of the estimated net
proceeds therefrom. See "Use of proceeds" and "Capitalization."
<TABLE>
<CAPTION>
As of September 30, 2000
(unaudited)
--------------------------------
Pro forma
Balance sheet data Actual Pro forma as adjusted
<S> <C> <C> <C>
--------------------------------------------------------------------------
<CAPTION>
(In thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments.............................. $ 28,100 $ 28,697 $ 98,507
Working capital............................. 25,787 25,013 94,823
Total assets................................ 35,937 73,707 143,517
Long-term obligations, net of current
portion.................................. 3,164 3,282 3,282
Redeemable convertible preferred stock...... 46,502 81,502 --
Accumulated deficit......................... (20,151) (20,151) (20,151)
Total stockholders' equity (net capital
deficiency).............................. (18,088) (18,088) 133,224
</TABLE>
8
<PAGE>
--------------------------------------------------------------------------------
Risk factors
You should carefully consider the risks described below together with all of
the other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business,
financial condition or results of operations could be harmed. In such an event,
the trading price of our common stock could decline, and you may lose all or
part of your investment.
RISKS RELATED TO OUR BUSINESS
We expect to continue to incur substantial losses, and we may never achieve
profitability.
We have incurred net losses every year since our inception in August 1995 and,
as of September 30, 2000, we had an accumulated deficit of $20.2 million. We
had net losses as follows:
.$467,000 in 1997;
.$3.2 million in 1998;
.$7.1 million in 1999; and
.$9.1 million in the nine months ended September 30, 2000.
We expect these losses to continue and anticipate negative cash flow for the
foreseeable future. We expect that our operating expenses will increase
significantly in the near term, due in part to significant investments we
intend to make in research and development. Consequently, we will need to
generate significant additional revenue to achieve profitability. We may never
achieve profitability. Even if we do achieve profitability, we may not be able
to sustain or increase profitability on a quarterly or annual basis.
As a company in the early stage of development with an unproven business
strategy, our limited history of operations makes evaluation of our business
and prospects difficult.
We have had a limited operating history and are at an early stage of
development. Our in vivo biophotonic imaging technology is new. To date, we
have generated limited revenues as follows:
.$84,000 in 1998;
.$1.3 million in 1999; and
.$1.9 million in the nine months ended September 30, 2000.
Moreover, the majority of those revenues were derived from a government grant
and short-term licensing and research and development agreements, most of which
have terminated. As a result of these factors, it is difficult to evaluate our
prospects, and our future success is more uncertain than if we had a longer or
more proven history of operations.
--------------------------------------------------------------------------------
9
<PAGE>
Risk factors
--------------------------------------------------------------------------------
The commercial utility of in vivo biophotonic imaging is uncertain and may
never be realized.
To the best of our knowledge, no drugs have been approved to date using our
imaging technology, and we have not proven our ability to assist in the
development of drugs with commercial potential. Disease progression or response
to a drug in our in vivo assays may not have any correlation to disease
progression or drug response in a human patient. If commercial opportunities
are not realized from the use of in vivo biophotonic imaging, our existing
customers could stop using our products, and we could have difficulty
attracting new customers.
If our products and services do not become widely used by pharmaceutical,
biotechnology, biomedical and chemical researchers, it is unlikely that we will
ever become profitable.
Pharmaceutical, biotechnology, biomedical and chemical researchers have
historically conducted in vivo biological assessment using a variety of
technologies, including a variety of animal models. Compared to these
technologies, our technology is new and unproven, and the use of our technology
by these companies is limited. The commercial success of our products will
depend upon the adoption of our technology as a method to perform in vivo
biological assessment. In order to be successful, our products must meet the
technical and cost requirements for in vivo biological assessment within the
life sciences industry. Market acceptance will depend on many factors,
including:
.the willingness and ability of customers to adopt new technologies;
.our ability to convince prospective strategic partners and customers that our
technology is an attractive alternative to other technologies for in vivo
biological assessment;
.our ability to manufacture products and provide services in sufficient
quantities with acceptable quality and at an acceptable cost; and
.our ability to place and service sufficient quantities of our products.
Because of these and other factors, our products may not gain market
acceptance.
We do not have sufficient commercial customers to achieve profitability.
Our business model provides for entering into evaluation licenses with
prospective customers. Evaluation licenses are not designed to result in
significant revenues or profitability, but rather to lead to longer term
commercial licenses that will generate recurring revenues. Our evaluation
licenses do not create a binding obligation on the part of the customer to
enter into a commercial license of our products. A customer can choose not to
renew and not to enter into a commercial license. Therefore, we cannot be sure
that any evaluation license will result in a commercial license for our
products. To date, we have only one commercial license, one collaborative
research and development agreement, and several evaluation licenses that expire
in the first quarter of 2001. Our inability to convert evaluation licenses into
commercial licenses would have a negative impact on our ability to achieve
profitability and meet our growth objectives.
We depend on a limited number of customers, and the loss of, or a significant
reduction in, sales to any of them could harm our operating results.
If we are not successful in maintaining relationships with our customers and
obtaining new customers, our business and results of operations will suffer. We
sell our products primarily to pharmaceutical
--------------------------------------------------------------------------------
10
<PAGE>
Risk factors
--------------------------------------------------------------------------------
companies and biomedical research institutions. For the year ended December 31,
1999, sales to three of our customers, Defense Advance Research Projects
Agency, Bausch & Lomb Pharmaceuticals and Procter & Gamble Co., collectively
accounted for approximately 73% of our revenue. For the nine months ended
September 30, 2000, sales to four of our customers, Novartis Pharmaceuticals,
Defense Advance Research Projects Agency, Bausch & Lomb Pharmaceuticals and
University of Michigan, collectively accounted for approximately 76% of our
revenue. Bausch & Lomb Pharmaceuticals is no longer one of our customers.
Other than our agreements with Novartis Pharmaceuticals and Pfizer Inc., we do
not have long-term commercial agreements with these customers relating to the
sale of our products, but rather sell our products to them pursuant to short-
term contract research or evaluation agreements. We expect to continue to be
dependent upon a relatively small number of customers for a majority of our
revenue.
If we are unable to successfully integrate DNX, our business may be harmed.
Recently, we acquired DNX, a privately-held corporation that produces
transgenic animals. If we are unable to integrate DNX with our business, we may
incur substantial costs and delays or other operational, technical or financial
problems. In addition, efforts required to integrate DNX may divert
management's attention from our existing strategies and may damage our
relationships with key customers and employees. Furthermore, since we have no
experience operating DNX, we cannot assure you that we will achieve the
expected benefits of this acquisition.
Because we receive revenues principally from pharmaceutical, biotechnology and
chemical companies and biomedical research institutions, the capital spending
policies of these entities may have a significant effect on the demand for our
products.
We market our products to pharmaceutical, biotechnology and chemical companies
and biomedical research institutions, and the capital spending policies of
these entities can have a significant effect on the demand for our products.
These policies are based on a wide variety of factors, including the resources
available for purchasing research equipment, the spending priorities among
various types of research equipment and the policies regarding capital
expenditures. In particular, the volatility of the public stock market for
biotechnology companies has at certain times significantly impacted the ability
of these companies to raise capital, which has directly affected their capital
spending budgets. In addition, continued consolidation within the
pharmaceutical industry will likely delay and may potentially reduce capital
spending by pharmaceutical companies involved in such consolidations. Any
decrease or delay in capital spending by life sciences or chemical companies or
biomedical researchers could cause our revenues to decline and harm our
profitability.
Our limited sources of supply and distribution may affect our ability to
produce and supply our products.
We obtain key components for IVIS from a small number of sources. For example,
we obtain the camera used in IVIS from two sources, and we believe that there
are no alternative sources for this component in the event of a disruption or
discontinuation in supply. We also obtain the luciferase gene we use to create
our transgenic animals from a single source and have historically relied on
Taconic Farms, Inc. to breed and distribute some of our light-producing
transgenic animals, although we believe that we could readily obtain and
qualify alternative sources for these components if necessary. Our reliance on
these outside suppliers and distributors exposes us to risks, including:
.the possibility that one or more of our suppliers or distributors could
terminate their services at any time;
--------------------------------------------------------------------------------
11
<PAGE>
Risk factors
--------------------------------------------------------------------------------
.reduced control over pricing, quality and timely delivery, due to the
difficulties in switching to alternative suppliers or distributors; and
.the potential delays and expense of seeking alternative sources of suppliers
or distributors.
In addition, any interruption or delay in the supply of components or work
performed by our distributors could impair our ability to produce and supply
our products.
We may fail to meet market expectations because of fluctuations in our
quarterly or annual operating results, which could cause our stock price to
decline.
Our quarterly and annual operating results have fluctuated in the past and are
likely to do so in the future. These fluctuations could cause our stock price
to fluctuate significantly or decline. The following are among the factors that
could cause our operating results to fluctuate significantly from period to
period:
.changes in the demand for, and pricing of, our products and services;
.the nature, pricing and timing of other products and services provided by us
or our competitors;
.changes in the research and development budgets of our customers;
.acquisition, licensing and other costs related to the expansion of our
operations;
.the timing of milestones, licensing and other payments under the terms of our
evaluation and license agreements, commercial agreements and agreements
pursuant to which others license technology to us; and
.expenses related to, and the results of, patent filings and other proceedings
relating to intellectual property rights.
A large portion of our expenses, including expenses for our Alameda, California
and Cranbury, New Jersey facilities, equipment and personnel, is relatively
fixed. In addition, we plan to significantly increase operating expenses in
2001 as we increase our research and development activities, add personnel and
expand our facilities. Accordingly, if revenues decline or do not grow as
anticipated, we might not be able to correspondingly reduce our operating
expenses. Failure to achieve anticipated levels of revenues could therefore
significantly harm our operating results for a particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter or annual comparisons of our operating results are not
a good indication of our future performance. Our operating results in some
periods may not meet the expectations of stock market analysts and investors.
In that case, our stock price could decline.
We may be unable to compete effectively because existing in vivo biological
assessment technologies are well established and accepted.
We compete with a variety of established and accepted technologies for in vivo
biological assessment that several competitors and customers may use to analyze
animal models. The technologies have remained relatively unchanged for the past
40 years, are well established and are routinely used by researchers. We
believe it may take several years for researchers to become educated about our
in vivo biophotonic imaging technology.
--------------------------------------------------------------------------------
12
<PAGE>
Risk factors
--------------------------------------------------------------------------------
We believe that in the near term, the market for in vivo biological assessment
will be subject to rapid change and will be significantly affected by new
technology introductions and other market activities of industry participants.
As other companies develop new technologies and products to conduct in vivo
biological assessment, we may be required to compete with many larger companies
that enjoy several competitive advantages, including:
.established distribution networks;
.established relationships with life sciences or chemical companies and
biomedical researchers; and
.greater resources for technology and product development, sales and marketing
and patent litigation.
Our principal competitors that use established technologies for in vivo
biological assessment include Deltagen, Inc., Exelixis, Inc. and Lexicon
Genetics Incorporated. Each of these companies uses animal models in the area
of target validation in drug discovery and utilizes methods of assessment based
upon knockout mice as well as other organisms such as fruit flies, worms and
yeast. At any time, other companies may develop additional directly competitive
products that could achieve greater market acceptance or render our products
obsolete. See "Business - Competition."
If we fail to properly manage our growth, our business could be adversely
affected.
We have experienced significant growth in the number of our employees and the
scope of our operations. As of December 31, 1999, we had 40 full-time
employees, and as of September 30, 2000, we had 72 full-time employees. Through
the DNX acquisition in November 2000, we added another 46 employees. We expect
our number of employees to continue to increase for the foreseeable future. In
addition, we have substantially increased the scale of our operations in the
last year and expect to continue doing so for the foreseeable future. Our
overall growth and need to develop many different areas of our business have
placed, and may continue to place, a strain on our management and operations.
If we are unable to manage our growth effectively, our losses could increase.
The management of our growth will depend, among other things, upon our ability
to improve our operational, financial and management controls, reporting
systems and procedures. In addition, we will have to invest in additional
customer support resources. To provide this support, we may need to open
additional offices, which will result in additional burdens on our systems and
resources and require additional capital expenditures.
We depend on key employees in a competitive market for skilled personnel, and
without additional employees, we cannot grow or achieve profitability.
We are highly dependent on the principal members of our management, operations
and scientific staff, including:
.David W. Carter and Pamela R. Contag, PhD, our Co-Chief Executive Officers;
.Kevin J. Birtchnell, our Chief Financial Officer and Vice President;
.Anthony F. Purchio, PhD, our Chief Scientific Officer and Vice President; and
.Michael D. Cable, PhD, our Chief Technology Officer and Vice President.
--------------------------------------------------------------------------------
13
<PAGE>
Risk factors
--------------------------------------------------------------------------------
The loss of any of their services would harm our business. With the exception
of Mr. Carter and Dr. Contag, none of the principal members of our management
team and scientific staff have entered into employment agreements with us, nor,
with the exception of Mr. Carter and Dr. Contag, do we have any key person life
insurance on such individuals. Additionally, as a practical matter, any
employment agreement we enter into will not ensure the retention of the
employee who is a party to the agreement.
Our future success also will depend in part on the continued service of our key
scientific, consulting and management personnel and our ability to identify,
hire and retain additional personnel. We experience intense competition for
qualified personnel. We may be unable to attract and retain personnel necessary
for the development of our business. Moreover, a significant portion of our
work force is located in the San Francisco Bay Area of California, where demand
for personnel with the scientific and technical skills we seek is extremely
high and is likely to remain high. Because of this competition, our
compensation costs may increase significantly.
We may need to raise additional capital that may not be available, which could
adversely affect our operations.
We may need to raise more money to continue our operations. We may seek
additional funds from public and private stock offerings, corporate
collaborations and licenses, borrowings under lease lines of credit or other
sources. Additional capital may not be available on terms acceptable to us, or
at all. Any additional equity financing may be dilutive to stockholders, and
debt financing, if available, may include restrictive covenants. If we cannot
raise more money when needed, we may have to reduce our capital expenditures,
scale back our development of new products and services, reduce our workforce
or license to others products that we otherwise would seek to commercialize
ourselves. Moreover, our cash used in operations has exceeded cash generated
from operations in each period since our inception. For example, we used
approximately $5.8 million of net cash in operating activities in 1999 and
approximately $6.0 million for the nine months ended September 30, 2000. We
expect net cash used in operations to increase in the near future as we make
significant investments in research and development. We expect that our current
resources, together with the proceeds from this offering and future operating
revenue, will be sufficient to fund operations through 2002.
Our product development efforts may not produce commercially viable products.
We intend to devote significant personnel and financial resources to research
and development activities to develop new products based upon our in vivo
biophotonic imaging technology. We may not be successful in developing new
products, and we may never realize any benefits from such research and
development activities. Our ability to increase our revenues and achieve and
sustain profitability depends upon our ability to successfully develop new and
commercially viable products, which is particularly difficult for us, as the
commercial viability of our technology is unproven.
Our intellectual property rights may not provide meaningful commercial
protection for our products, which could enable third parties to use our
technology, or very similar technology, and could reduce our ability to compete
in the market.
We rely on patent, copyright, trade secret and trademark laws to limit the
ability of others to compete with us using the same or similar technology in
the United States and other countries. However, as described below, these laws
afford only limited protection and may not adequately protect our rights to the
extent necessary to sustain any competitive advantage we may have. The laws of
some foreign
--------------------------------------------------------------------------------
14
<PAGE>
Risk factors
--------------------------------------------------------------------------------
countries do not protect proprietary rights to the same extent as the laws of
the United States, and many companies have encountered significant problems in
protecting their proprietary rights abroad. These problems can be caused by the
absence of rules and methods for defending intellectual property rights.
We will be able to protect our technology from unauthorized use by third
parties only to the extent that they are covered by valid and enforceable
patents or are effectively maintained as trade secrets. The patent positions of
companies developing tools for pharmaceutical, biotechnology, biomedical and
chemical industries, including our patent position, generally are uncertain and
involve complex legal and factual questions, particularly as to questions
concerning the enforceability of such patents against alleged infringement.
Recent judicial decisions are prompting a reinterpretation of the limited case
law that exists in this area, and consequently we cannot assure you that
historical legal standards surrounding questions of infringement and validity
will be applied in future cases. The biotechnology patent situation outside the
United States is even more uncertain, particularly with respect to the
patentability of transgenic animals, and currently is undergoing review and
revision in many countries. Changes in either the patent laws or in
interpretations of patent laws in the United States and other countries may
therefore diminish the value of our intellectual property.
We own, or control through licenses, a variety of issued patents and pending
patent applications. As of January 15, 2001, we owned seven US patents,
controlled nine US patents through licenses, including an exclusive license
with Stanford University, and had several pending US patent applications.
However, the patents on which we rely may be challenged and invalidated, and
our patent applications may not result in issued patents. Moreover, our patents
and patent applications may not be sufficiently broad to prevent others from
practicing our technologies or from developing competing products. We also face
the risk that others may independently develop similar or alternative
technologies or design around our patented technologies.
We have taken security measures to protect our proprietary information,
especially proprietary information that is not covered by patents or patent
applications. These measures, however, may not provide adequate protection of
our trade secrets or other proprietary information. We seek to protect our
proprietary information by entering into confidentiality agreements with
employees, collaborators and consultants. Nevertheless, employees,
collaborators or consultants may still disclose our proprietary information,
and we may not be able to protect our trade secrets in a meaningful way. If we
lose any employees, we may not be able to prevent the unauthorized disclosure
or use of our technical knowledge or other trade secrets by those former
employees despite the existence of nondisclosure and confidentiality agreement
and other contractual restrictions to protect our proprietary technology. In
addition, others may independently develop substantially equivalent proprietary
information or techniques or otherwise gain access to our trade secrets.
Our success will depend partly on our ability to operate without infringing or
misappropriating the proprietary rights of others.
We may be exposed to future litigation by third parties based on claims that
our products infringe the intellectual property rights of others. This risk is
exacerbated by the fact that there are numerous issued and pending patents in
the life sciences industry and the fact that, as described in the prior risk
factor, the validity and breadth of life sciences patents involve complex legal
and factual questions for which important legal principles remain unresolved.
Our competitors may assert that our products and the methods we employ may be
covered by US or foreign patents held by them. In addition, because patent
applications can take many years to issue, there may be currently pending
applications of which we are unaware, which may later result in issued patents
that our products may infringe. There could also be existing patents of which
we are not aware that one or more of our products may inadvertently infringe.
--------------------------------------------------------------------------------
15
<PAGE>
Risk factors
--------------------------------------------------------------------------------
If we lose a patent infringement lawsuit, we could be prevented from selling
our products unless we can obtain a license to use technology or ideas covered
by such patent or are able to redesign the products to avoid infringement. A
license may not be available at all or on terms acceptable to us, or we may not
be able to redesign our products to avoid any infringement. If we are not
successful in obtaining a license or redesigning our products, we may be unable
to sell our products and our business could suffer.
We may be subject to patent litigation, which could be expensive and divert our
management's attention.
There is a substantial amount of litigation over patent and other intellectual
property rights in the life sciences industry generally. For example, two of
our principal competitors, Deltagen, Inc. and Lexicon Genetics Incorporated,
are currently involved in litigation regarding intellectual property claims
relating to the creation of transgenic animals. From time to time, we have
received, and may receive in the future, letters alleging infringement.
Infringement and other intellectual property claims, with or without merit, can
be expensive and time-consuming to litigate and can divert management's
attention from our core business.
Our rights to the use of technologies licensed to us by third parties are not
within our control, and without these technologies, our products and programs
may not be successful and our business prospects could be harmed.
We rely on licenses to use various technologies that are material to our
business, including licenses to the use of certain biologicals, and licenses to
engineer and commercialize transgenic animals. We do not own the patents that
underlie these licenses. Our rights to use these technologies and employ the
inventions claimed in the licensed patents are subject to our licensors abiding
by the terms of those licenses and not terminating them. In most cases, we do
not control the prosecution or filing of the patents to which we hold licenses.
Instead, we rely upon our licensors to prevent infringement of those patents.
Some of the licenses under which we have rights, such as our licenses from
Stanford University and Ohio University, provide us with exclusive rights in
specified fields, but we cannot assure you that the scope of our rights under
these and other licenses will not be subject to dispute by our licensors or
third parties.
Compliance with governmental regulations could increase our operating costs or
adversely affect our customers' ability to obtain governmental approval of
gene-based products, which would adversely affect the commercialization of our
technology.
The federal Animal Welfare Act governs the transportation, purchase, sale,
housing, care, handling and treatment of animals used for research or
experimental purposes. The Animal Welfare Act imposes a wide variety of
specific requirements on producers and users of many research animals,
including requirements related to personnel, facilities, sanitation, cage size,
feeding, watering and shipping conditions. It applies to institutions or
facilities using any regulated live animals for research, testing, teaching or
experimentation, including diagnostic laboratories and private companies in the
pharmaceutical and biotechnology industries. The United States Department of
Agriculture, or USDA, which administers the Animal Welfare Act, has adopted
regulations exempting mice, rats and birds from the requirements of the Animal
Welfare Act. However, in September 2000, the USDA settled a lawsuit filed
against it by agreeing to initiate and complete rulemaking to include mice,
rats and birds within the operation of the Animal Welfare Act. In October 2000,
Congress passed and the President signed into law legislation that prohibits
the USDA from using any funds appropriated to it for fiscal year 2001 to issue
regulations or take other actions to change the definition of animal in the
Animal
--------------------------------------------------------------------------------
16
<PAGE>
Risk factors
--------------------------------------------------------------------------------
Welfare Act regulations. We cannot predict the outcome of these judicial and
legislative actions, and we cannot assure you that the USDA will not decide to
include mice as a covered animal in its regulations. We conduct research on
rabbits, which is a covered animal under the Animal Welfare Act regulations. We
are licensed under the Animal Welfare Act and believe we are in substantial
compliance with its provisions as they apply to currently covered animals. Any
future requirement that we comply with Animal Welfare Act regulations governing
the use of mice could be expensive and could impair our research and production
efforts and make our products and services less attractive to potential
customers.
Since we develop animals containing changes in their genetic make-up, we may
become subject to a variety of laws, guidelines, regulations and treaties
specifically directed at genetically modified organisms. The area of
environmental releases of genetically modified organisms is rapidly evolving
and is currently subject to intense regulatory scrutiny, particularly overseas.
If we become subject to these laws, we could incur substantial compliance
costs. For example, the Biosafety Protocol, a recently adopted treaty, is
expected to cover certain shipments from the United States to countries abroad
that have signed the Biosafety Protocol. The Biosafety Protocol is also
expected to cover the importation of living modified organisms, a category that
could include our transgenic mice. If our mice are not contained as described
in the Biosafety Protocol, our animals could be subject to the potentially
extensive import requirements of countries that are signatories to the
Biosafety Protocol.
Our products have lengthy sales cycles, which could cause our operating results
to fluctuate significantly from quarter to quarter.
Our ability to obtain customers for our products depends in significant part
upon the perception that our products can help accelerate efforts in drug
development. The sale of many of our products typically involves a significant
technical evaluation and commitment of capital by customers. Accordingly, the
initial sales cycles of many of our products are lengthy and subject to a
number of significant risks that are beyond our control, including customers'
budgetary constraints and internal acceptance reviews. Our revenues could
fluctuate significantly from quarter to quarter, due to this lengthy and
unpredictable sales cycle. In particular, our operating results in the first
and third quarters have historically been depressed. A large portion of our
expenses, including expenses for facilities, equipment and personnel, are
relatively fixed. Accordingly, if our revenues decline or do not grow as we
anticipate, we might not be able to correspondingly reduce our operating
expenses. Our failure to achieve our anticipated levels of revenues could
significantly harm our operating results for a particular fiscal period. Due to
the possibility of fluctuations in our operating results, we believe that
quarter-to-quarter comparisons of our operating results are not always a good
indication of our future performance.
Public perception of ethical and social issues may limit or discourage the use
of mice for experimentation using our in vivo biophotonic imaging technology,
which could reduce our revenues and adversely affect our business.
Governmental authorities could, for social or other purposes, limit the use of
genetic modifications or prohibit the practice of our technology. Public
attitudes may be influenced by claims that genetically engineered products are
unsafe for use in research or pose a danger to the environment. The subject of
genetically modified organisms, like genetically altered mice, has received
negative publicity and aroused significant public debate. In addition, animal
rights activists could protest or make threats against our facilities, which
may result in property damage. Ethical and other concerns about our methods,
particularly our use of genetically altered mice, could adversely affect our
market acceptance.
--------------------------------------------------------------------------------
17
<PAGE>
Risk factors
--------------------------------------------------------------------------------
If a natural disaster strikes our manufacturing facility, we would be unable to
manufacture our products for a substantial amount of time and we would
experience lost revenue.
We have relied to date principally on our manufacturing facility in Alameda,
California to produce IVIS and our light-producing cells, microorganisms and
transgenic animals. As a result of our acquisition of DNX, we have also
established a back-up facility for producing transgenic animals in Cranbury,
New Jersey. Both of these facilities and some pieces of manufacturing equipment
would be difficult to replace and could require substantial replacement lead-
time. Our facilities may be affected by natural disasters such as earthquakes
and floods. Earthquakes are of particular significance to our Alameda facility,
as it is located in an earthquake-prone area. In the event our Alameda facility
or equipment were affected by man-made or natural disasters, we would be forced
to shift production of IVIS and many of our light-producing cells,
microorganisms and transgenic animals to our Cranbury facility. We believe that
this production shift would result in a disruption in our operations of
approximately 30 to 60 days, which could harm our business. Although we believe
that we possess adequate insurance for damage to our property and the
disruption of our business from earthquakes, fire and other casualties, such
insurance may not be sufficient to cover all of our potential losses and may
not continue to be available to us on acceptable terms, or at all.
RISKS RELATED TO THIS OFFERING
You will suffer immediate and substantial dilution.
We expect the initial public offering price of our shares to be substantially
higher than the book value per share of the outstanding common stock.
Accordingly, investors purchasing shares of common stock in this offering will:
.pay a price per share that substantially exceeds the value of our assets after
subtracting liabilities; and
.contribute 48% of the total amount invested to date to fund us, but will own
only 26% of the shares of common stock outstanding. To the extent outstanding
stock options or warrants are exercised, there will be further dilution to new
investors.
Our principal stockholders, executive officers and directors own a significant
percentage of our stock, and as a result, the trading price for our shares may
be depressed and these stockholders can take actions that may be adverse to
your interests.
Our executive officers and directors and entities affiliated with them will, in
the aggregate, beneficially own approximately 34.0% of our common stock
following this offering. This significant concentration of share ownership may
adversely affect the trading price for our common stock because investors often
perceive disadvantages in owning stock in companies with controlling
stockholders. These stockholders, acting together, will have the ability to
exert substantial influence over all matters requiring approval by our
stockholders, including the election and removal of directors and any proposed
merger, consolidation or sale of all or substantially all of our assets. In
addition, they could dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination that could be favorable to you.
The future sale of common stock could negatively affect our stock price.
After this offering, we will have approximately 26,886,256 shares of common
stock outstanding, or 27,936,256 shares if the underwriters' over-allotment
option is exercised in full. The 7,000,000 shares
--------------------------------------------------------------------------------
18
<PAGE>
Risk factors
--------------------------------------------------------------------------------
sold in this offering, or 8,050,000 shares if the underwriters' over-allotment
option is exercised in full, will be freely tradable without restriction or
further registration under the federal securities laws unless purchased by our
affiliates. The remaining 19,886,256 shares of common stock outstanding after
this offering will be available for sale in the public market 180 days after
the date of the final prospectus relating to this offering, subject in some
cases to volume and other limitations. The previous sentence assumes the
effectiveness of the lock-up agreements with the underwriters under which
holders of substantially all of our common stock have agreed not to sell or
otherwise dispose of their shares of common stock. Most of the shares that will
be available for sale after the expiration of the lock-up period will be
subject to volume restrictions because they are held by our affiliates. In
addition, UBS Warburg LLC may waive these lock-up restrictions prior to the
expiration of the lock-up period without prior notice.
If our common stockholders sell substantial amounts of common stock in the
public market, or the market perceives that such sales may occur, the market
price of our common stock could fall. After this offering, the holders of
approximately 16,637,015 shares of our common stock will have rights, subject
to some conditions, to require us to file registration statements covering
their shares or to include their shares in registration statements that we may
file for ourselves or other stockholders. Furthermore, if we were to include in
a company-initiated registration statement shares held by those holders
pursuant to the exercise of their registration rights, those sales could impair
our ability to raise needed capital by depressing the price at which we could
sell our common stock. Please see "Shares eligible for future sale."
There may not be an active, liquid trading market for our common stock.
Prior to this offering, there has been no public market for our common stock.
An active trading market for our common stock may not develop following this
offering. You may not be able to sell your shares quickly or at the market
price if trading in our stock is not active. The initial public offering price
may not be indicative of prices that will prevail in the trading market. See
"Underwriting" for more information regarding the factors considered in
determining the initial public offering price.
Our common stock may experience extreme price and volume fluctuations, which
could lead to costly litigation for us and make an investment in us less
appealing.
The market price of our common stock may fluctuate substantially due to a
variety of factors, including:
.announcements of technological innovations or new products by us or our
competitors;
.development and introduction of new products and services;
.media reports and publications about genetics and gene-based products;
.announcements concerning our competitors or the life sciences industry in
general;
.new regulatory pronouncements and changes in regulatory guidelines;
.general and industry-specific economic conditions;
.changes in financial estimates or recommendations by securities analysts; and
.changes in accounting principles.
--------------------------------------------------------------------------------
19
<PAGE>
Risk factors
--------------------------------------------------------------------------------
The market prices of the securities of biotechnology companies, particularly
companies like ours without consistent product revenues and earnings, have been
highly volatile and are likely to remain highly volatile in the future. This
volatility has often been unrelated to the operating performance of particular
companies. In the past, securities class action litigation has often been
brought against companies that experience volatility in the market price of
their securities. Moreover, market prices for stocks of biotechnology-related
and technology companies, particularly following an initial public offering,
frequently reach levels that bear no relationship to the operating performance
of such companies. These market prices generally are not sustainable and are
subject to wide variations. Whether or not meritorious, litigation brought
against us could result in substantial costs, divert management's attention and
resources and harm our financial condition and results of operations.
Our incorporation documents may delay or prevent a change in our management.
Our amended and restated certificate of incorporation and bylaws will contain
provisions that could delay or prevent a change in our management team. Some of
these provisions:
.authorize the issuance of preferred stock that can be created and issued by
the board of directors without prior stockholder approval, commonly referred
to as "blank check" preferred stock, with rights senior to those of common
stock; and
.provide for a classified board of directors.
These provisions could allow the board of directors to affect your rights as a
stockholder since the board of directors can make it more difficult for common
stockholders to replace members of the board. Because the board of directors is
responsible for appointing the members of our management team, these provisions
could in turn affect any attempt to replace the current management team.
--------------------------------------------------------------------------------
20
<PAGE>
--------------------------------------------------------------------------------
Forward-looking information
Some of the statements that we make under "Prospectus summary," "Risk factors,"
"Management's discussion and analysis of financial condition and results of
operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. These statements relate to future events or our future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from those
expressed or implied by any of our forward-looking statements. Some of these
factors are listed under "Risk factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms and other comparable terminology. These statements are only
predictions. Actual events or results may differ materially.
--------------------------------------------------------------------------------
21
<PAGE>
--------------------------------------------------------------------------------
Use of proceeds
Our proceeds from the sale of the 7,000,000 shares of common stock we are
offering are estimated to be $69,810,000, or $80,552,000 if the underwriters'
over allotment option is exercised in full, assuming a public offering price of
$11.00 per share and after deducting the underwriting discounts and commissions
and our estimated offering expenses. We currently intend to use the net
proceeds to fund our operations, including:
.approximately $33 million for continued development and manufacturing of
existing products and research, development and commercialization of new
applications for our technology;
.approximately $8 million for hiring of additional personnel to support our
growth;
.approximately $8 million for expansion of our facilities; and
.the remainder for working capital and general corporate purposes.
We have no current plans, agreements or commitments with respect to any
acquisition. We may, however, if the opportunity arises, use an unspecified
portion of the net proceeds to acquire or invest in products, technologies or
companies. Our management may spend the proceeds from this offering in ways
which our stockholders may not deem desirable.
The timing and amount of our actual expenditures will be based on many factors,
including cash flows from operations and the growth of our business.
Until we use the net proceeds of this offering for the above purposes, we
intend to invest the funds in short-term, investment grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.
Dividend policy
We have never declared or paid cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to
finance the growth and development of our business. Therefore, we do not expect
to pay cash dividends in the foreseeable future. Any future determination
relating to our dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors including future earnings,
capital requirements, financial conditions and future prospectus and other
factors the board of directors may deem relevant.
--------------------------------------------------------------------------------
22
<PAGE>
--------------------------------------------------------------------------------
Capitalization
The following table sets forth our capitalization as of September 30, 2000:
.on an actual basis;
.on a pro forma basis to give effect to the acquisition of DNX and the issuance
of 3,500,000 shares of preferred stock in connection with the DNX acquisition,
as if the acquisition had occurred on September 30, 2000; and
.on a pro forma as adjusted basis to give further effect to the automatic
conversion of all 22,675,049 shares of our preferred stock into 16,552,785
shares of common stock upon the closing of this offering and the receipt of
the estimated net proceeds from the sale of 7,000,000 shares of common stock
offered by this prospectus at an assumed public offering price of $11.00 per
share.
<TABLE>
<CAPTION>
Pro forma
Actual Pro forma as adjusted
(unaudited) (unaudited) (unaudited)
------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
Long-term obligations, including
current portion..................... $ 4,242 $ 4,418 $ 4,418
-------- -------- --------
Redeemable convertible preferred
stocks, $0.001 par value,
20,085,895 shares authorized,
18,914,443 shares issued and
outstanding (13,807,543 common shares
on an as-if converted basis), actual;
23,585,895 shares authorized,
22,414,443 shares issued and
outstanding (16,362,543 common shares
on an as-if converted basis), pro
forma; no shares issued or outstanding
pro forma as adjusted ................ 46,502 81,502 --
Stockholders' equity (net capital
deficiency):
Convertible preferred stock, $0.001
par value, 260,606 shares
authorized, actual and pro forma;
260,606 shares issued and
outstanding (190,242 common shares
on an as-if converted basis), actual
and pro forma; 5,000,000 shares
authorized pro forma as adjusted, no
shares issued or outstanding pro
forma as adjusted................... -- -- --
Common stock, $0.001 par value,
35,000,000 shares authorized,
3,333,471 shares issued and
outstanding actual and pro forma;
150,000,000 authorized pro forma as
adjusted, 26,886,256 shares issued
and outstanding pro forma as
adjusted............................ 3 3 27
Additional paid-in capital............. 11,081 11,081 162,369
Notes receivable from stockholders..... (111) (111) (111)
Deferred stock-based compensation...... (8,910) (8,910) (8,910)
Accumulated deficit.................... (20,151) (20,151) (20,151)
-------- -------- --------
Total stockholders' equity (net
capital deficiency)................. (18,088) (18,088) 133,224
-------- -------- --------
Total capitalization................. $ 32,656 $ 67,832 $137,642
======== ======== ========
</TABLE>
The table above does not include:
.213,722 shares issuable upon the exercise of outstanding warrants at a
weighted-average exercise price of $2.24 per share;
.1,826,170 shares issuable upon the exercise of outstanding options under our
1996 Stock Plan at a weighted-average exercise price of $1.23 per share; and
.a total of 381,060 shares available for future grant under our 1996 Stock
Plan, 839,500 shares available for future grant under our 2000 Stock Plan and
292,000 shares available for future purchase under our 2000 Employee Stock
Purchase Plan.
Subsequent to September 30, 2000, options were granted covering an additional
698,464 shares of our common stock at a weighted-average exercise price of
$2.74 per share.
--------------------------------------------------------------------------------
23
<PAGE>
--------------------------------------------------------------------------------
Dilution
If you invest in our common stock, your interest will be diluted by the
difference between the public offering price per share of our common stock and
the combined pro forma as adjusted net tangible book value per share of our
common stock immediately after this offering. Our combined pro forma net
tangible book value at September 30, 2000 was approximately $30,492,000, or
$1.53 per share of common stock. Combined pro forma net tangible book value per
share represents total tangible assets less total liabilities, divided by the
combined pro forma number of shares of common stock outstanding at September
30, 2000, and the conversion of 19,175,049 shares of our preferred stock into
13,997,785 shares of common stock upon the closing of this offering and the
issuance of 3,500,000 shares of preferred stock (2,555,000 shares of common
stock on an as if converted basis) in connection with the DNX acquisition, as
if the acquisition had occurred on September 30, 2000. Assuming our sale of
7,000,000 shares of common stock at an assumed initial public offering price of
$11.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses, our combined pro forma as adjusted net tangible
book value at September 30, 2000 would have been approximately $100,302,000, or
$3.73 per share. This represents an immediate increase in combined pro forma
net tangible book value of $2.20 per share to existing stockholders and an
immediate dilution of $7.27 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $11.00
Net tangible book value per share as of September 30, 2000...... $1.53
Increase per share attributable to new investors................ 2.20
-----
Combined pro forma net tangible book value per share after the
offering......................................................... 3.73
------
Dilution per share to new investors............................... $ 7.27
======
</TABLE>
The table above assumes no exercise of the underwriters' over-allotment option
and excludes exercises of options after September 30, 2000. The number of
shares outstanding as of September 30, 2000 excludes 1,826,170 shares of common
stock issuable upon exercise of options outstanding as of September 30, 2000,
having a weighted-average exercise price of $1.23 per share and 213,722 shares
of stock issuable upon exercise of warrants outstanding at September 30, 2000,
having a weighted- average exercise price of $2.24 per share. The exercise of
outstanding options and warrants having an exercise price less than the
offering price would increase dilution to new investors.
Assuming exercise in full of all of our outstanding stock options and warrants
totaling 2,039,892 additional shares and approximately $2,725,000 in exercise
proceeds, the combined pro forma net tangible book value would be reduced and
further dilute new investors an additional $0.17 per share, to $7.44 per share.
Subsequent to September 30, 2000, options were granted covering an additional
698,464 shares of our common stock at a weighted-average exercise price of
$2.74 per share. Assuming exercise in full of these options underlying the
698,464 shares and all other options and warrants outstanding at September 30,
2000, as described above, and approximately $1,907,000 in exercise proceeds,
the combined pro forma net tangible book value would be reduced and further
dilute new investors an additional $0.02 per share, to $7.46 per share.
--------------------------------------------------------------------------------
24
<PAGE>
Dilution
--------------------------------------------------------------------------------
The following table sets forth, as of September 30, 2000 and giving effect to
the issuance of stock in the DNX acquisition, the differences between the
number of shares of common stock purchased from us, the total consideration
paid and average price per share paid by existing stockholders and by the new
investors, before deducting expenses payable by us, using an assumed public
offering price of $11.00 per share.
<TABLE>
<CAPTION>
Shares purchased Total consideration
------------------ -------------------- Average price
Number Percent Amount Percent per share
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 19,886,256 74.0% $ 83,440,000 52.0% $ 4.20
New investors.......... 7,000,000 26.0 77,000,000 48.0 $11.00
---------- ----- ------------ -----
Total ................. 26,886,256 100.0% $160,440,000 100.0%
========== ===== ============ =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the following
will occur:
.the number of shares of common stock held by existing stockholders will
decrease to approximately 71% of the total number of shares of common stock
outstanding; and
.the number of shares held by new public investors will be increased to
8,050,000, or approximately 29% of the total number of shares of our common
stock outstanding after this offering.
--------------------------------------------------------------------------------
25
<PAGE>
--------------------------------------------------------------------------------
Selected financial data
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's discussion and
analysis of financial condition and results of operations" included elsewhere
in this prospectus. The statement of operations data for the fiscal years ended
December 31, 1995 and 1996 and the balance sheet data at December 31, 1995,
1996 and 1997 are derived from our audited financial statements not included in
this prospectus. The statement of operations data for the fiscal years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from our audited financial statements included in
this prospectus. The statement of operations data for the nine months ended
September 30, 1999 and 2000 and the balance sheet data at September 30, 2000
derived from our unaudited financial statements included in this prospectus and
include all adjustments consisting only of normal, recurring adjustments, which
we consider necessary for a fair presentation of the data. The pro forma
columns reflect our acquisition of DNX, as if the acquisition had occurred on
January 1, 1999 for the statement of operations and September 30, 2000 for the
balance sheet. The unaudited pro forma statements of operations data are
derived from the Unaudited Pro Forma Combined Condensed Financial Information
and reflects our acquisition of DNX as if that acquisition occurred on January
1, 1999. The results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the results to be expected for the entire
fiscal year, for any other interim period or for any future fiscal year.
<TABLE>
<CAPTION>
Period from Nine months Nine months
inception Year ended ended ended
(August 1, December 31, September 30, September 30,
1995) Year ended December 31, 1999 (unaudited) 2000
Statement of operations to Dec. 31, -------------------------------- (unaudited ---------------- (unaudited
data 1995 1996 1997 1998 1999 pro forma) 1999 2000 pro forma)
-----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License................ $ -- $ -- $ 23 $ 47 $ 457 $ 1,243 $ 316 $ 774 $ 1,470
Research and
development services.. -- -- 40 37 790 6,199 352 716 5,279
Other revenues......... -- -- -- -- 46 46 25 406 406
------ ------ ------ ------- ------- -------- ------- ------- --------
Total revenues.......... -- -- 63 84 1,293 7,488 693 1,896 7,155
Operating costs and
expenses:
Cost of revenue........ -- -- -- -- -- 3,619 -- 261 2,753
Research and
development........... 2 28 189 1,009 4,790 4,766 3,815 6,686 6,641
Selling, general and
administrative........ 55 132 336 2,381 3,757 5,812 2,263 4,578 7,914
Amortization of
purchased intangible
assets and goodwill... -- -- -- -- -- 6,737 -- -- 5,053
------ ------ ------ ------- ------- -------- ------- ------- --------
Total operating costs
and expenses........... 57 160 525 3,390 8,547 20,934 6,078 11,525 22,361
Loss from operations.... (57) (160) (462) (3,306) (7,254) (13,446) (5,385) (9,629) (15,206)
Interest income........ -- -- -- 184 355 381 248 917 939
Interest expense....... -- -- (5) (122) (237) (245) (147) (375) (389)
------ ------ ------ ------- ------- -------- ------- ------- --------
Net loss before income
taxes.................. (57) (160) (467) (3,244) (7,136) (13,310) (5,284) (9,087) (14,656)
(Provision for) benefit
from income tax........ -- -- -- -- -- (291) -- -- 89
------ ------ ------ ------- ------- -------- ------- ------- --------
Net loss................ $ (57) $ (160) $ (467) $(3,244) $(7,136) $(13,601) $(5,284) $(9,087) $(14,567)
====== ====== ====== ======= ======= ======== ======= ======= ========
Basic and diluted net
loss per common share.. $(0.04) $(0.12) $(0.35) $ (1.81) $ (2.94) $ (2.73) $ (2.26) $ (3.17) $ (2.69)
====== ====== ====== ======= ======= ======== ======= ======= ========
Shares used in computing
basic and diluted net
loss per share......... 1,314 1,314 1,339 1,789 2,426 4,980 2,339 2,864 5,419
Pro forma basic and
diluted net loss per
common share........... $ (1.10) $ (0.87)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
common share........... 12,418 16,830
</TABLE>
--------------------------------------------------------------------------------
26
<PAGE>
<TABLE>
<CAPTION>
Selected financial data
------------------------------------------------------------------------------------------------
As of
As of September 30,
As of December 31, September 30, 2000
------------------------------------- 2000 (unaudited
Balance sheet data 1995 1996 1997 1998 1999 (unaudited) pro forma)
-------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments... $ 15 $ 6 $ 175 $ 2,407 $ 5,812 $ 28,100 $ 28,697
Working capital
(deficit).............. (44) (115) (565) 2,271 4,968 25,787 25,013
Total assets.............. 17 10 182 4,736 11,613 35,937 73,707
Long-term obligations, net
of current portion....... -- -- -- 1,360 2,678 3,164 3,282
Redeemable convertible
preferred stock.......... -- -- -- 6,527 17,511 46,502 81,502
Accumulated deficit....... (57) (217) (684) (3,928) (11,064) (20,151) (20,151)
Total stockholders' equity
(net capital deficiency).. (42) (111) (558) (3,733) (10,492) (18,088) (18,088)
------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
--------------------------------------------------------------------------------
Management's discussion and analysis of
financial condition and results of operations
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the notes to
those systems included elsewhere in this prospectus. This discussion may
contain forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under "Risk factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.
OVERVIEW
We commenced marketing of our first generation in vivo biophotonic imaging
system in 1997 and our second generation system, IVIS, in 2000. We began
licensing our technology in 1998 in the form of evaluation licenses. In July
2000, we signed our first commercial license with Novartis.
To date, we have derived our revenues primarily from licensing agreements and
research and development services. Our licensing revenues include fees incurred
during the evaluation process and commercial agreements that we recognize
ratably over the performance period. Our research and development services
include fees from contract research, research collaboration agreements and
grants that we recognize upon performance of underlying activities. Our other
revenues include revenues from the sale of IVIS and light-producing cells and
organisms and leasing of IVIS.
We market our products generally to pharmaceutical, biotechnology and chemical
companies and biomedical researchers. Our products compete with products and
technologies that are well established. As a result, the initial sales cycle
for marketing our products is relatively long. We expect that it will take
approximately 12 to 18 months to progress from initial contact to execution of
a commercial license agreement. To date, we have entered into only one
commercial license. Our marketing programs are designed, in part, to educate
our potential customers on the merits of our products in order to secure
additional commercial license customers and shorten our sales cycle.
Our operating costs and expenses consist primarily of research and development
expenses, and selling, general and administrative expenses. Our costs of
revenues include parts and components associated with the manufacture of IVIS
and related software. These costs have been insignificant to date. We expect
our costs of revenues to increase significantly as a result of the acquisition
of DNX and the commercialization of IVIS and light-producing cells,
microorganisms and transgenic animals.
Our research and development expenses include salary expenses and costs of
supplies incurred pursuant to our research and development collaborations and
internal research and development projects. We expect our research and
development costs to increase as we continue to enhance our existing products
and develop new applications of our technology. We do not expect the
acquisition of DNX to contribute significantly to our research and development
expenses.
Our selling, general and administrative expenses include compensation expenses
related to executive, sales and marketing, finance and other administrative
personnel, the costs of our facility, insurance and legal support as well as
the amortization of deferred stock-based compensation. We expect our selling,
general and administrative expenses to increase as we expand our infrastructure
in support of our
--------------------------------------------------------------------------------
28
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
anticipated increased operations and growing customer base. We expect that the
acquisition of DNX will significantly increase our selling, general and
administrative expenses.
We have a limited history of operations. Since inception, we have incurred
significant losses and, as of September 30, 2000, we had an accumulated deficit
of $20.2 million. We anticipate incurring additional losses, which may
increase, through at least 2002 as we increase the number of commercial
licenses for our products and expand our sales of light-producing cells,
microorganisms and transgenic animals.
Deferred stock-based compensation represents the difference between the fair
value of our common stock and the exercise price of options on their date of
grant. The fair value of our common stock for purposes of this calculation was
determined based on our review of the primary business factors underlying the
value of our common stock on the date such option grants were made, viewed in
light of this offering and the expected initial public offering price per
share. During the year ended December 31, 1999, we recorded deferred stock-
based compensation totaling $904,000. Additional deferred stock-based
compensation totaling $9.4 million was recorded for options granted during the
nine months ended September 30, 2000. We are amortizing the deferred stock-
based compensation to expense on the graded vesting basis over the four-year
vesting period. The graded vesting method was adopted in connection with the
proposed initial public offering and we expect to continue to use this method
in the future. As of September 30, 2000, there was approximately $8.9 million
of deferred stock-based compensation to be amortized in future periods as
follows: $1.4 million for the three months ending December 31, 2000, $4.6
million for the year ending December 31, 2001, $1.9 million for the year ending
December 31, 2002, $818,000 for the year ending December 31, 2003 and $144,000
for the year ending December 31, 2004. Subsequent to September 30, 2000, we
issued to employees additional options to purchase 698,464 shares of our common
stock at a weighted-average exercise price of $2.74 per share. As a result, we
expect additional $5.8 million in deferred stock-based compensation to be
amortized in future periods as follows: $0.5 million in 2000, $3.2 million in
2001, $1.3 million in 2002, $0.6 million in 2003 and $0.2 million in 2004. In
August 2000, we granted non-employee options to purchase 51,100 shares of
common stock at $1.36 per share. The fair value of options granted to non-
employees was determined using the Black-Scholes model. The resulting
compensation expense was $179,000 for the two months ended September 30, 2000.
The value will be periodically remeasured as the underlying options vest.
Recent acquisition of DNX
In November 2000, we acquired Chrysalis DNX Transgenic Sciences Corporation, a
wholly-owned subsidiary of MDS Inc., in exchange for 3,500,000 shares of our
Series F preferred stock. These shares will convert into 2,555,000 shares of
common stock upon the closing of this offering. DNX produces transgenic animals
and performs contract research and development services for pharmaceutical and
biotechnology companies and biomedical research institutions. We believe the
acquisition provides us with additional technology and manufacturing capacity
for our light-producing transgenic animals. DNX has 46 full-time employees
located in their 41,200 square foot facility in Cranbury, New Jersey. For the
year ended December 31, 1999, DNX had total revenues of $6.2 million and net
income of $272,000, and for the nine months ended September 30, 2000, had total
revenues of $5.3 million and a net loss of $427,000. In connection with the
acquisition, we entered into a five-year strategic relationship agreement with
MDS, under which we licensed technology to MDS and agreed to sell products to
them for use in their pre-clinical contract research services, excluding
toxicology services. We agreed not to sell or license our technology to any
other commercial pre-clinical contract research organization for an initial
term of five years. In turn, MDS agreed to assist us with certain marketing
activities for our technology. Under the strategic relationship agreement, we
remain free to use our technology in our own business, including commercial
licenses and sales, and for toxicology testing.
--------------------------------------------------------------------------------
29
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
To date, DNX has derived all of its revenues from contract research and
development services and licensing agreements. DNX's operating costs and
expenses consist primarily of costs incurred to provide contract research and
development services, research and development expenses, and selling, general
and administrative expenses. Costs of revenues include salaries of scientific
personnel and costs of supplies related to providing research and development
services. DNX has had no research and development expenses. Sales and marketing
expenses include salaries and other marketing costs. General and administrative
expenses consist primarily of facility expenses and personnel costs.
We anticipate that our quarterly results of operations will fluctuate for the
forseeable future due to several factors, including market evaluation and
acceptance of our current and new products, which may result in a lengthy sales
cycle, patent conflicts, the introduction of new products by our competitors,
the timing and extent of our research and development efforts, and the timing
of significant orders. Our limited history makes accurate predictions of future
operations difficult.
RESULTS OF OPERATIONS
Nine months ended September 30, 2000 and 1999
Revenues
Total revenues increased to approximately $1.9 million for the nine months
ended September 30, 2000 from approximately $693,000 for the same period in
1999. The increase was attributable to revenue recognized from new commercial
and evaluation licenses, contract research and development agreements, sales of
IVIS and research grants. Revenues from our four largest customers, Novartis
Pharmaceuticals, Defense Advance Research Projects Agency, Bausch & Lomb
Pharmaceuticals and University of Michigan, accounted for approximately 29%,
24%, 12% and 11% of total revenues for the nine months ended September 30,
2000. The remaining 24% of total revenues for the nine months ended September
30, 2000 was derived from a number of customers, none of which accounted for
more than 10% of total revenues. For the nine months ended September 30, 1999,
Defense Advance Research Projects Agency, F. Hoffman-La Roche and Eli Lilly
collectively accounted for approximately 73% of total revenues.
Costs of revenues
Our costs of revenues increased to $261,000 for the nine months ended September
30, 2000 from $0 for the same period in 1999. The increase was attributable to
the sale of IVIS systems in 2000.
Research and development expenses
Our research and development expenses increased to approximately $6.7 million
for the nine months ended September 30, 2000 from approximately $3.8 million
for the same period in 1999. The increase was primarily attributable to an
increase in salaries and employee costs as we expanded our scientific team to
55 individuals as of September 30, 2000 from 27 as of September 30, 1999, as
well as costs related to the development and enhancement of IVIS, Bioware and
light-producing transgenic animals. The increase was also attributable to a
$875,000 increase in amortization of deferred stock-based compensation
associated with the issuance of stock options to our employees and consultants.
Selling, general and administrative expenses
Our selling, general and administrative expenses increased to approximately
$4.6 million for the nine months ended September 30, 2000 from approximately
$2.3 million for the same period in 1999. The increase was attributable to an
increase in employee costs as our administrative headcount increased to 17
individuals as of September 30, 2000 from 12 as of September 30, 1999 and
increased legal, patent
--------------------------------------------------------------------------------
30
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
and public relation costs. The increase was also attributable to a $307,000
increase in amortization of deferred stock-based compensation associated with
the issuance of stock options to our employees.
Net interest income (expense)
Our net interest income (expense) increased to approximately $542,000 for the
nine months ended September 30, 2000 from approximately $101,000 for the same
period in 1999. The increase was primarily attributable to interest earned on
the net proceeds from a $29.0 million Series E financing in May 2000.
Years ended December 31, 1999, 1998 and 1997
Revenues
Total revenues increased to approximately $1.3 million in 1999 from
approximately $84,000 in 1998 and $63,000 in 1997. The increase from 1998 to
1999 was primarily attributable to an increase in revenues recognized from new
licensing agreements, contract research and development agreements and federal
grants. The increase from 1997 to 1998 was primarily attributable to new
licensing agreements into which we entered.
Research and development expenses
Research and development expenses increased to approximately $4.8 million in
1999 from approximately $1.0 million in 1998 and $189,000 in 1997. These
expenses increased each year due to an increase in salaries and employee costs,
as we expanded our scientific team to 28 individuals from 12 as of December 31,
1999 and one as of December 31, 1997, as well as costs related to the
development and enhancement of IVIS, Bioware and light-producing animals. The
increase was also attributable to a $169,000 increase in amortization of
deferred stock-based compensation during 1999 associated with the issuance of
stock options to our employees and consultants.
Selling, general and administrative expenses
Our selling, general and administrative expenses increased to approximately
$3.8 million in 1999 from approximately $2.4 million 1998 and $336,000 in 1997.
Our selling, general and administrative expenses increased each year primarily
due to increases in salaries and employee costs and increased legal, patent and
public relation costs. These increases were also attributable to a $119,000
increase in amortization of deferred stock-based compensation associated with
the issuance of stock options to our employees.
Net interest income (expense)
Our net interest income (expense) increased to approximately $118,000 in 1999
from approximately $62,000 in 1998 and $(5,000) in 1997. These increases were
primarily due to interest earned on the proceeds from our Series D preferred
stock financing in April 1999 and Series C preferred stock financing in January
1998.
Provision for income taxes
As of December 31, 1999, we had approximately $10.0 million of federal and $6.0
million of California state net operating loss carryforwards for tax reporting
purposes available to offset future taxable income. We also had research and
development operating loss carryforwards of approximately $300,000 for federal
income tax purposes. The net operating loss carryforwards will expire at
various dates beginning in 2003 through 2020, if not utilized. We have not
recognized any benefit from the future use of loss carryforwards for these
periods or for any other period since inception because of uncertainty
surrounding their realization. The amount of net operating losses that we can
utilize may be limited under tax regulations in circumstances including a
cumulative stock ownership change of more than 50% over a three-year period. We
do not anticipate any significant adjustments to income taxes as a result of
the recent acquisition of DNX.
--------------------------------------------------------------------------------
31
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception through private sales of
preferred stock, equipment financing arrangements and contracts payments to us
under licenses, government and commercial research and development agreements.
Through September 30, 2000, we had received net proceeds of $46.7 million from
the issuance of common and preferred stock and $4.7 million from licenses,
commercial research and development agreements and government grants and
contracts. In addition, through September 30, 2000, we had $4.2 million in
equipment financing obligations. These obligations are secured by the equipment
financed, bear interest at the rate of 13.2% to 14.8% and are due in monthly
installments through 2005.
As of September 30, 2000, we had $28.1 million in cash, cash equivalents and
short-term investments. For the nine months ended September 30, 2000, we used
$6.0 million in cash for operating activities. This consisted of the net loss
for the period of $9.1 million offset in part by non-cash charges of
$2.2 million that include deferred stock-based compensation of $1.4 million and
amortization and depreciation expenses of $873,000. During 1999, we used $5.8
million, and during 1998, we used $3.6 million for operating activities,
primarily due to operating losses and increased working capital needs. In 1999,
this consisted of the net loss for the period of $7.1 million, offset in part
by non-cash charges of $921,000 related to deferred stock-based compensation of
$288,000 and amortization and depreciation expenses of $633,000. In 1998, this
consisted of the net loss for the period of $3.2 million offset in part by non-
cash charges of $228,000 related to amortization, depreciation expenses of
$163,000 and interest expenses related to warrants of $65,000.
For the nine months ended September 30, 2000, net cash used in investing
activities was $8.9 million. This consisted of $10.1 million used in purchase
of investments, $1.9 million of capital expenditures, offset by $3.1 million of
proceeds from sale of investments. Net cash used in investing activities was
$5.7 million in 1999 and $2.0 million in 1998. In 1999, this consisted of $4.0
million of purchase of certificate of deposits and $1.7 million of capital
expenditures. In 1998, this consisted of $528,000 of purchase of certificate of
deposits and $1.5 million of capital expenditures. As of September 30, 2000, we
did not have any significant capital expenditure commitments.
Net cash provided by financing activities was $7.9 million in 1998, $12.8
million in 1999 and $30.0 million for the nine months ended September 30, 2000.
Our financing activities consisted of sales of our convertible preferred stock
and common stock and proceeds from loans.
We expect to have negative cash flows from operations through at least 2002. We
expect to incur increasing research and development expenses, as well as
expenses for additional personnel and product enhancement efforts. Our future
capital requirements will depend on a number of factors, including market
acceptance of our products, the resources we devote to developing and
supporting our products, continued progress of our research and development of
potential products, the need to acquire licenses to new technology and the
availability of other financing. We believe that our current cash balances,
together with the net proceeds of this offering and revenues to be derived from
additional product licenses and research and development contracts, will be
sufficient to fund our operations through 2002. To the extent our capital
resources are insufficient to meet our future capital requirements, we will
need to raise additional capital or incur new debt to fund our operations.
There can be no assurance that additional equity or debt financing, if
required, will be available on acceptable terms, or at all. If we are unable to
obtain additional capital, we may be required to delay, reduce the scope of or
eliminate our research and development programs, reduce our selling and
marketing activities or relinquish rights to technologies or products that we
might otherwise seek to develop or commercialize. In the event that we do raise
additional equity financing, investors in this offering will be further
diluted.
--------------------------------------------------------------------------------
32
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash equivalents and short-term investments are exposed to financial market
risk due to fluctuations in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
our exposure to financial market risk by performing ongoing evaluations of our
investment portfolio. We presently invest in short-term bank market rate
accounts which are exposed to changes in market interest rates, and in
certificates of deposit issued by banks, the value of which does not change
based on changes in interest rates. As our cash balances increase, we
anticipate investing in short-term investment grade government and corporate
securities. These securities will be highly liquid and generally mature within
12 months from our purchase date. Due to the short maturities of our
investments, the carrying value should approximate the fair value. In addition,
we do not use our investments for trading or other speculative purposes. We
have performed an analysis to assess the potential effects of reasonably
possible near term changes in interest and foreign currency exchange rates. The
effects of any change in foreign currency exchange rates is not expected to be
material to our results of operations, cash flows or financial condition. Due
to the short duration of our investment portfolio, an immediate 10% change in
interest rates would not have a material effect on the fair market value of our
portfolio. Therefore, we would not expect our operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on our securities portfolio. We do not enter into
financial investments for speculation or trading purposes and are not a party
to financial or commodity derivatives.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivatives. In July 1999, the
Financial Accounting Standards Board issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB statement No. 133," or SFAS No. 137. SFAS No. 137 deferred the
effective date until the first quarter ending June 30, 2000. We do not expect
the adoption of SFAS No. 133 to have a material impact on our financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition," or SAB 101 which provides
guidance on the recognition, presentation, and disclosure of revenues in
financial statements filed with the SEC. SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition. We
believe our historical revenue recognition policies comply with SAB 101.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," or FIN 44, which contains
rules designed to clarify the application of Accounting Principals Board
Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 became
effective on July 1, 2000. We do not expect the adoption of FIN 44 to have a
material impact on our financial position or results of operations.
--------------------------------------------------------------------------------
33
<PAGE>
--------------------------------------------------------------------------------
Business
OVERVIEW
We have developed and are manufacturing a platform for acquiring, analyzing and
managing complex image data from living animals. This platform is comprised of
an imaging system, software and biological materials, and is designed to
improve the efficiency and productivity of drug discovery and development by
facilitating biological assessment. Our in vivo biophotonic imaging system
combines technologies in biology and physics to enable researchers to track and
monitor the dynamic properties associated with the mechanisms of disease and
the impact of drugs on these mechanisms, as they occur, at the molecular level
in live animals. Where and when gene activity occurs provides clues as to gene
function in the three-dimensional environment of the living body. We achieve
this by using the luciferase gene, which produces a light-emitting enzyme, as a
visual tag for biological activity. When the luciferase gene is inserted into a
tumor cell or pathogen, researchers can track and monitor the progression of
disease within the animal, as well as the effectiveness of related drugs within
a live, intact animal. This gene can also be inserted directly into the genome
of an animal to serve as a reporter of the activity of another gene, such as a
disease-related or toxicity-related gene. With these capabilities, we believe
pharmaceutical and biotechnology companies will be better able to assess the
clinical relevance of disease targets, as well as predict the efficacy and
safety of drugs in humans, thereby reducing the risk of costly drug failures.
As a result, we believe our system represents not only a significant
improvement over conventional animal models, but a major advance in the ways
drugs are discovered and developed.
We license our technology to our customers and sell our instruments, biological
materials and database information separately. We began marketing our current
generation of in vivo imaging systems in January 2000. Each of Pfizer and
Novartis are utilizing our technology under a commercial and research
agreement. In addition, the following companies are assessing our technology
under evaluation agreements: AstraZeneca, Cell Genesys, Chiron, Cubist
Pharmaceuticals, DuPont Pharmaceuticals, Johnson & Johnson, Merck and
SmithKline Beecham Plc.
Acquisition of DNX
In November 2000, we acquired Chrysalis DNX Transgenic Sciences Corporation, a
wholly-owned subsidiary of MDS Inc. DNX produces transgenic animals and
performs contract research and development services for pharmaceutical and
biotechnology companies and biomedical research institutions. The acquisition
provides us with significant, proprietary additional technology and
substantially expanded manufacturing capacity for our light-producing animals.
DNX has 47 full-time employees located in their 41,200 square foot facility in
Cranbury, New Jersey.
In connection with the acquisition, we entered into a five-year strategic
relationship agreement with MDS, under which we licensed to them technology and
agreed to sell products to them for their pre-clinical contract research,
excluding toxicology. We agreed not to sell or license our technology to any
commercial pre-clinical contract research organization, other than MDS, for an
initial term of five years. In turn, MDS agreed to assist us with certain
marketing activities for our technology. Under the strategic relationship
agreement, we remain free to use our technology in our own business, including
commercial licenses and sales, and for toxicology testing.
--------------------------------------------------------------------------------
34
<PAGE>
Business
--------------------------------------------------------------------------------
MARKET OPPORTUNITY
Pharmaceutical and biotechnology companies and biomedical researchers are
seeking insights that facilitate the understanding of genes, proteins and drugs
in the context of human physiology. The human genome project has identified a
large number of genes, some of which are central to maintaining health. In
addition, mutations in certain genes can trigger the development of a variety
of diseases, including cardiovascular disease, diabetes, disorders of the
central nervous systems such as Parkinson's Disease and Alzheimer's Disease,
and several forms of cancer. In order to identify optimal points, or targets,
for drug intervention and better assess the efficacy and safety of potential
drug candidates, pharmaceutical, biotechnology and biomedical researchers need
to understand the underlying biological processes that contribute to disease
pathologies in the context of animal physiology, and ultimately in humans.
Development of a map in which specific functions are assigned to particular
genes is essential for understanding this complex biology. By tracking the
changes in organs, tissues, and cells, functional insights can be gained which
promote a deeper understanding of physiology. This insight can be used to
develop new drugs. Similarly, in order to assess the safety and toxicity of
chemical compounds found in both the workplace and the environment, the
chemical industry requires an equally complex level of biological
understanding.
Biomedical research
Biomedical researchers in academic and non-profit institutions are focused on
understanding normal and disease mechanisms. These mechanisms are generally
complex and comprise a myriad of interrelated genes, proteins and biological
pathways. Although the first draft of the sequence of the human genome was
recently announced, significant work remains to understand the function of
these genes and their protein products, and how they are related in pathways.
This work is complicated by the fact that each gene and protein may have
several functions and thus may be involved in several pathways.
Researchers are investing in a diverse range of technologies that facilitate
and accelerate their understanding of genes, proteins and pathways. These
technologies include instruments known as sequencers that determine the
sequence of DNA base pairs, testing formats called micro-arrays that consist of
reagents organized in a pattern on some sort of substrate and biochip.
Sequencers, micro-arrays, biochip and other testing systems and formats are
used to detect differences in gene expression or level of protein activity in
both normal and diseased tissues. These differences provide valuable clues
about biochemical pathways, regulatory mechanisms and cellular functions that
can be used to determine the causes and consequences of disease and what genes
or proteins may be appropriate targets for drug intervention. Although these
technologies are valuable in that they enable a researcher to analyze a large
number of genes and proteins in parallel, they provide minimal information on
the dynamic role that these genes and proteins serve in the living body.
Researchers are seeking complementary technologies to facilitate a deeper
understanding of the potentially complex role that these genes serve in
physiology and metabolism.
Drug discovery and development
Drug discovery and development is a long, iterative and expensive process. It
generally requires up to 15 years of committed resources and between $300 and
$500 million of costs per approved drug. The drug discovery process begins with
the application of knowledge of disease pathways developed in biomedical
research to identify and validate disease targets. Separately, chemical
compound libraries comprising thousands of compounds are developed and screened
for therapeutic efficacy against the disease target. Researchers synthesize
numerous variants of each compound to find the chemical structure with the
greatest biological potency against the disease target. This iterative process
is
--------------------------------------------------------------------------------
35
<PAGE>
Business
--------------------------------------------------------------------------------
performed almost exclusively in vitro, or in non-living systems. The most
attractive compounds, called drug candidates, are subsequently administered in
animals to evaluate biological activity, toxicity and physiological effects of
the drug candidate in vivo, or in a living system. According to PhRMA, an
industry research group, these pre-clinical studies represent approximately 40%
of pharmaceutical research and development budgets. Successful drug candidates
are then evaluated for safety and efficacy in humans.
Pharmaceutical companies are investing in technologies that accelerate the drug
discovery and development process. These technologies include high throughput
screening systems and combinatorial chemical libraries, which together allow
pharmaceutical and biotechnology companies to identify more targets, and screen
more chemical compounds, faster. Productivity, however, has not improved.
Although screening capacity has increased significantly, according to the US
Food and Drug Administration, there were only 83 New Drug Applications approved
in 1999, compared with 90 in 1998 and 121 in 1997.
We believe there are several reasons why productivity has not improved in the
drug discovery and development process.
.Limited information on targets. Many pharmaceutical and biotechnology
companies are developing drugs around disease targets without fully
understanding the role of the target in human physiology. High throughput
screening technologies are rapidly increasing the number of drug targets.
These technologies rely on in vitro assays that assess only one biological
parameter, and consequently are not representative of the complex biological
systems present in humans. As a result, many of the drug candidates arising
from these early screens fail because the target selected has limited
physiological relevance.
.Limited physiological context in drug screening. Researchers typically rely on
in vitro assays to screen chemical compounds against disease targets. These
assays are typically performed in an isolated environment, such as a micro-
well plate. As a result, interactions between the drug and disease target may
be observed that would not otherwise occur in the body. Accordingly, these in
vitro assays do not consider the impact of tissues and organs that may act as
barriers between the drug and the target. Also, the drug may interact with
other molecules in the body that are not present in the assay. For these
reasons, many drug leads identified in vitro fail when administered to
animals.
.Bottlenecks in drug metabolism and toxicity screening. The FDA mandates drug
metabolism and toxicology tests to be performed in animal models before
entering human clinical trials. Technological advances are expected to result
in a dramatic rise in the number of potential drug leads, driving demand for
subsequent metabolism and toxicology tests. We believe conventional animal
models will be slow to meet this demand. We attribute this to the time-
consuming process of collecting, processing and analyzing large groups of
animal tissues over different time intervals.
.Limited predictive value of animal models. Researchers use animal models to
predict human response to drugs. In order to measure this response, using
conventional methods it is necessary to collect, process and analyze tissues
from different animals at multiple time points. Each tissue sample provides a
snapshot in time of dynamic processes. These snapshots are combined to
generate a model of drug response. This model, however, provides only an
approximation of drug response in animals. Moreover, inherent variations in
each animal creates statistical variation in the data. For these reasons,
conventional animal models are limited in their ability to predict human
response.
--------------------------------------------------------------------------------
36
<PAGE>
Business
--------------------------------------------------------------------------------
Chemical industry
Recent environmental initiatives require toxicology testing of chemical
compounds produced by chemical companies. In order to comply with these new
testing requirements, these companies must have access to chemical toxicology
models that accurately predict the harmful effects of chemicals on humans.
Approximately 15,000 chemicals are subject to these environmental policies.
According to the Environmental Protection Agency, or EPA, the cost of basic
testing for the 2,800 most abundantly produced chemicals will be approximately
$500 million. The EPA hopes that this basic testing will be completed by 2004.
CURRENT TECHNOLOGIES AND THEIR LIMITATIONS
There is a wide range of technologies used by pharmaceutical, biotechnology and
chemical companies and biomedical researchers to assess disease targets, drugs
and chemicals in biological systems. These technologies are broadly classified
as in vitro or in vivo.
In vitro technologies
In vitro technologies, such as biochemical, gene, protein and cellular assays,
enable assessments to be performed using formats including microwells, which
are dishes with wells for containing very small volumes, micro-arrays and
micro-fluidic chips, which are used to combine liquid reagents on a solid
scaffold. These technologies are designed to be high throughput and generally
assess only one biological parameter, and consequently are not representative
of the complex biological systems present in humans. As a result, information
generated has limited predictive value with respect to human physiology.
--------------------------------------------------------------------------------
37
<PAGE>
Business
--------------------------------------------------------------------------------
The table below briefly describes what we consider to be the comparative
advantages and disadvantages of various in vitro technologies.
<TABLE>
<CAPTION>
Key
technologies Description Markets served Advantages Disadvantages
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Biochemical .Characterize and .Biomedical .High throughput .Single test per well
assays quantify reaction .Drug discovery .Ease of use .No information
between two .Broad applications on biochemical
biomolecules pathway
.Performed in .High reagent cost
micro-
well plates,
micro-
fluidic chips or
micro-spheres
--------------------------------------------------------------------------------------------------------
Gene-based .Analyze gene .Biomedical .High throughput .No information
assays expression .Drug discovery .Performs multiple on role gene plays
patterns .Drug development gene analyses in the physiology
.Performed in simultaneously of an animal
micro- .Variable
well plates, information with
micro- high noise level
arrays, micro-
fluidic
chips or micro-
spheres
--------------------------------------------------------------------------------------------------------
Protein .Analyze protein .Biomedical .Performs multiple .Difficult to perform
assays expression and .Drug discovery protein analyses .No direct
activity simultaneously correlation among
.Performed in active proteins;
micro- only inferred
well plates, data
micro-
arrays, micro-
fluidic
chips or micro-
spheres
--------------------------------------------------------------------------------------------------------
Cellular .Characterize and .Biomedical .Cellular information .No information on
assays quantify reaction .Drug discovery .Intracellular role cell plays in
between a .Drug development pathways observed the physiology of
chemical an animal
compound and a .Extracellular
cell signaling lost
.Performed in
micro-well plates
or micro-fluidic
chips
</TABLE>
In vivo technologies
To validate a hypothesis concerning the effects of a drug on, or the role of a
gene or protein in, a biological system, researchers must test the hypothesis
in animal models. These models are commonly referred to as in vivo
technologies. In vivo technologies include conventional animal models, knockout
animals and transgenic animals. Conventional animal models are the simplest
form of an in vivo test. These tests use normal animals to assess a specific
biological activity. A knockout animal is an animal in which the gene of
interest has been disabled. Knockout animals, when studied in comparison with
normal animals, can infer gene function. A transgenic animal is an animal in
which the gene of interest
--------------------------------------------------------------------------------
38
<PAGE>
Business
--------------------------------------------------------------------------------
has been inserted into the genome. Transgenic animals, when studied in
comparison with normal animals, can be used to infer gene function and drug
efficacy.
In vivo models, while slower and more expensive than in vitro technologies,
provide more relevant information. Because in vivo technologies derive
information from intact living systems, they provide information that is more
predictive of the biological function in humans. The predictiveness of in vivo
technologies is limited, however, by the data collection process. To assess
biological activity, researchers must collect, process and analyze tissues from
different animals at multiple time points. Each tissue represents a single
snapshot in time of gene expression, protein activity or drug efficacy in the
animal. These snapshots are combined to generate a model of drug response. This
process does not enable the researcher to observe real-time dynamic or
cascading effects of the drug in the animal. In addition, the inherent
variability in each animal and groups of animals creates statistical variation
in the data that is used to predict human response to the drug. For these
reasons, the animal model may be limited in its ability to predict human
response to a drug.
The table below briefly describes what we consider to be the comparative
advantages and disadvantages of various in vivo technologies.
<TABLE>
<CAPTION>
Key
technologies Description Markets served Advantages Disadvantages
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Conventional .Animals that .Biomedical .Lower cost .Lack real-time
animal measure one or .Drug development .Lower technology information
models more end-points requirements .Low throughput
.Variability in
data impacts
predictiveness
----------------------------------------------------------------------------------------
Knockout .Animals that are .Biomedical .Ability to .Lack real-time
animals genetically .Drug development observe information
modified impact of .Low throughput
to disable or knocked- .Variability in
knockout to out gene on the data impacts
express a gene of physical predictiveness
interest characteristics
----------------------------------------------------------------------------------------
Transgenic .Animals that are .Biomedical .Ability to .Lack real-time
animals genetically .Drug development observe information
modified impact of a new .Low throughput
to express a gene on the .Variability in
human physical data impacts
gene characteristics predictiveness
</TABLE>
Because of the limitations of current in vivo and in vitro assays,
pharmaceutical and biotechnology companies are seeking new technologies that
provide physiologically relevant data. More relevant data would improve the
efficiency and productivity of the drug development process through earlier
detection of potential drug failures. Increased efficiency and production will
enable pharmaceutical and biotechnology companies to focus their efforts on
safer, more effective drugs. Similarly, relevant physiological data will
provide chemical companies with better information regarding the safety of the
chemicals that they produce.
--------------------------------------------------------------------------------
39
<PAGE>
Business
--------------------------------------------------------------------------------
THE XENOGEN SOLUTION
We provide an integrated system that facilitates biological assessment, which
we believe will improve the efficiency and productivity of the drug discovery
and development process. We believe our solution provides the following key
benefits over conventional technologies:
Real-time visual analysis of live animals
Our technology enables researchers to perform real-time visual analysis of live
animals. Visual capabilities enable researchers to track and monitor a diverse
range of molecular and cellular activities, such as gene expression and protein
activity, tumor growth, and progression of infectious diseases across different
tissues or organs within an animal. Researchers can also apply our technology
to visualize the efficacy and safety of a drug within the same animal. Real-
time capabilities enable researchers to observe mechanisms of action or
cascading events within the animal that would not otherwise be detected using
conventional animal models. This is particularly important in drug studies
where biological pathways involving tissues and organs interact with the drug
in a manner that cellular systems or other in vitro systems do not.
Collectively, we believe our real-time visual analysis of live animals provides
more, and significantly higher quality, information.
More predictive models
IVIS enables researchers to observe biological and drug activities throughout
the body of an intact, living animal. This observation occurs in real time as
gene, cellular or drug activities occur. Moreover, researchers can observe
these dynamic processes in the same animal over multiple time points, thereby
increasing statistical significance. As a result, we believe the data generated
from our animals are of higher quality. For these reasons, we believe animal
models generated from our technology have greater predictive value than
conventional animal methods. Further, the quantitative analysis of three-
dimensional data permits the detection of complex patterns that cannot be
revealed through simpler methods. These patterns can then be used to model
physiology and to predict the interaction of potential drugs with metabolic
pathways in the living organism.
Versatile capabilities
Our technology enables researchers to address a broad range of questions on the
molecular roles of drugs, genes or proteins of interest in the context of
physiology. Researchers can aggregate this information to formulate hypotheses
on biological pathways and test them using our technology. These experiments
can be repeated in different species using our technology, and the results
compared to predict gene expression and protein activity in humans. Similarly,
pharmaceutical companies can use our technology to optimize the efficacy,
distribution and safety of a drug more efficiently. Our technology can be used
by pharmaceutical, biotechnology, biomedical and chemical researchers. We store
the data in a common form that facilitates data mining and analysis.
Higher throughput
IVIS enables researchers to quantify and analyze gene expression, protein
activity and disease progression in multiple animals, simultaneously. While
conventional methods typically require several days to extract and analyze
tissues from a single animal, our system eliminates these steps, enabling
researchers to obtain data immediately. For example, traditional magnetic
resonance imaging, or MRI, systems permit the imaging of three-dimensional
structures within a body. However, this imaging approach cannot easily
differentiate between living and dead cells and tissues, and lacks the ability
to track and monitor the locations and movements of molecules and cells in
real-time. Further, current MRI image reconstruction technology requires up to
two days to fully process an image. In contrast, our imaging technology can
differentiate dynamic physiological data in real-time.
--------------------------------------------------------------------------------
40
<PAGE>
Business
--------------------------------------------------------------------------------
OUR STRATEGY
Our goal is to establish our technology as the industry standard for biological
assessment. To achieve this goal, we have implemented the following strategy:
Build on our strengths in tracking and monitoring
We have developed a line of light-producing pathogens and tumor cell lines that
enable researchers to track and monitor the progression of certain infectious
diseases, such as gram positive and negative bacteria, and fungi, and cancers
such as prostate and breast. We are currently licensing this technology to
Novartis, AstraZeneca, Cell Genesys, Chiron, Cubist Pharmaceuticals, DuPont
Pharmaceuticals, Johnson & Johnson, Merck and SmithKline Beecham Plc . We
intend to build on our early success and strengths by adding new pathogens and
tumor cell lines to expand the breadth of application of our technology.
Apply our technology to the drug metabolism and toxicology markets
We are developing light-producing transgenic model animal systems that will
enable researchers to visualize, in real time, the metabolism and toxicity of
drugs in live animals. We accomplish this by inserting a gene that produces
light-emitting proteins when a gene associated with metabolism or toxicity is
expressed. We believe our technology will reduce the number of animals needed
and accelerate testing time, and thus allow a greater number of these tests to
be performed.
Develop strategic partnerships to accelerate penetration of the target
validation markets
We intend to partner with leading manufacturers of in vitro screening systems
to accelerate market penetration of the target validation market. While micro-
plates, micro-arrays and other in vitro screening systems are useful for
identifying potential gene and protein targets for drug therapy, they provide
no information on those targets on the physiology of the animal. As a partner,
we intend to develop complementary systems that will be applied following in
vitro screening and will enable researchers to observe, in real time, the role
that genes and protein targets play in the physiology of an animal. We believe
these strategic partnerships will allow us to quickly and cost-effectively
access our partners' established customer relationships and sales and
distribution infrastructure.
Provide easy access to our technology
We make our technology available through licensing our technology by field or
by therapeutic area. We believe this pricing strategy will lower the hurdle for
adoption among individual groups within large pharmaceutical, biotechnology and
chemical companies, and individuals in academic institutions and non-profit
organizations.
Generate high margin recurring revenues
Our technology is designed to generate a recurring stream of high margin
revenues. We have developed light-producing cells and microorganisms that are
administered in animals to assist researchers in studying the progression of
cancers and infectious diseases. Because these cells and microorganisms are
self-reproducing, they can be generated at low cost, resulting in high margins.
In addition, we have developed light-producing transgenic animals that we are
planning to commercialize for the drug metabolism and toxicology markets. These
light-producing cells, microorganisms and transgenic animals are optimized for
use with IVIS.
Become the premier source of physiological information
We intend to become the premier source of physiological data for
pharmaceutical, biotechnology and chemical companies and biomedical
researchers. We aggregate the information collected from our customers and
internal research activities in a central database. This information will
facilitate data mining and analysis, both internally for our product
development activities, as well as for our customers' research and drug
discovery and development efforts.
--------------------------------------------------------------------------------
41
<PAGE>
Business
--------------------------------------------------------------------------------
OUR TECHNOLOGY
We have developed and are marketing an integrated system that enables real-time
acquisition and analysis of quantitative data regarding physiological processes
in live cells, microorganisms and animals. We use our technology to create
genes that are inserted into cells, microorganisms and animals. Our optical
instrumentation and software allows us to precisely locate and quantify the
light emitted by the cells, microorganisms and transgenic animals we create.
Data collection from IVIS enables researchers to study gene expression, protein
activity and the metabolic pathways genes and proteins combine to form in their
normal physiological context. In addition, our technology enables researchers
to assess drug efficacy and toxicity by measuring the amount of light emitted
to infer the impact of the drug.
Our technology combines applications in molecular biology, light-producing
cells, microorganisms and transgenic animals with sophisticated optical
instrumentation and software.
Molecular biology
Our biologists use molecular biology to genetically modify bacteria, fungi and
viruses, tumor cells and animals by genetically tagging them with the gene that
produces luciferase, an enzyme that emits visible light. Luciferase is
naturally present in certain insects and bacteria. When luciferase is present
in a cell, it can produce light at a sufficient level to pass through animal
tissue for detection by IVIS.
We use luciferase as a reporter for many different kinds of events. The
luciferase gene can be expressed, or "turned on," on a continuous basis so that
there is a consistent production of light coming from the tagged entity. We use
this model with tagged cells, microorganisms and transgenic animals. When
introduced into a laboratory animal, these light-producing cells and
microorganisms can be monitored to determine their distribution and
proliferation within the animal. This would be useful, for instance, in
monitoring the effect of an experimental drug against an infectious
microorganism that has been tagged with luciferase.
Alternatively, we can incorporate the luciferase gene into the genetic make-up
of the cell, microorganism or animal so that it is only expressed when another
specific gene, the research target gene, is turned on. In this model, light
emission represents, or "reports," expression of the target gene. This would be
useful, for instance, in determining whether an experimental drug is capable of
interfering in a disease pathway by turning off a particular gene. This could
also be used to validate specific genes as drug targets by verifying the
function of a gene.
Bioware -- light-producing cells and microorganisms
We have significant expertise in the fields of biochemistry, molecular biology
and genetics that we apply to develop our biological products associated with
our technology, or Bioware, lines of light-producing cells and microorganisms.
We do this by biochemically pasting the luciferase reporter gene into the
genome of the cell or microorganism. Our scientists typically take one day to
create a light-producing bacterial strain, two to three days to produce a
light-producing fungal strain and approximately three weeks to create a line of
light-producing tumor cells.
Light-producing transgenic animals
We make lines of light-producing transgenic mice, rats and other animals by
using a patented microinjection technology to insert the luciferase gene into
the animal embryo. These embryonic cells are then surgically implanted into a
female animal readied for pregnancy. The animal offspring are selected for
their ability to produce light and are bred into colonies. In this model, the
gene for luciferase is present in every cell in the body of the animal.
--------------------------------------------------------------------------------
42
<PAGE>
Business
--------------------------------------------------------------------------------
Instrumentation and software
Once we have developed the light-producing cells, microorganisms or transgenic
animals, we use IVIS to measure photons emitted by luciferase from within the
cell, microorganism or animal. Our imaging system consists of a highly
sensitive charge-coupled device, or CCD, camera and an ultra-dark box in which
model organisms are visualized. A sophisticated cooling system maintains the
temperature of the CCD camera at minus 135 degrees centigrade in order to
minimize background noise. The ultra-dark box is a highly sophisticated chamber
from which all photon sources, other than the model organism, are removed.
Our LivingImage software controls the optical instrumentation as well as the
acquisition and analysis of data. This software permits simple operation of
IVIS and employs sophisticated reconstruction algorithms to translate the
optical output into a visual image. Our LivingImage software takes quantitative
data from the CCD camera and assigns representative colors based on light
intensity to facilitate visualization and interpretation of data. Red signifies
regions of high light intensity and blue signifies regions of low light
intensity.
Data collection procedure
To perform analysis using our system, the researcher places the light-producing
cell, microorganism or animal in the IVIS imaging chamber. If the researcher is
imaging an animal, it is lightly anesthetized or otherwise immobilized. The
researcher then closes the door to the imaging chamber, sets the parameters for
the imaging procedure, including stage height and field of view, filter
position, exposure time, lens aperture and focus, and begins the imaging
procedure.
IVIS first takes a black and white photograph of the cell, microorganism or
animal. The CCD camera then measures the intensity of light emitted from within
the cell, microorganism or animal. Our LivingImage software overlays a color
graphic over a black and white photographic image of the cell, microorganism or
animal to determine both the location and intensity of light emitted by the
cell, microorganism or animal.
While the cell, microorganism or animal is in the imaging chamber, the data
collected by the CCD camera can be instantly viewed by the researcher on a
computer screen. LivingImage quantifies and stores the data generated in a
computer file that can be archived, mined and easily translated or linked to
most computer databases for additional data management and analysis. After the
imaging procedure is complete, the cell, microorganism or animal is removed
from the IVIS imaging chamber. The same cell, microorganism or animal can be
imaged several times over the course of the researcher's experiment.
PRODUCTS AND SERVICES
Our products include IVIS and lines of light-producing cells, microorganisms
and transgenic animals that are optimized for use with IVIS. We also provide
research and development services.
Bioware -- light-producing cells and microorganisms
Our Bioware lines of light-producing cells and microorganisms are designed to
assist researchers in the study of cancer and infectious diseases. We currently
offer approximately 25 lines of light-producing microorganisms. These include
E. coli, Pseudomonas, Salmonella and other gram negative bacteria, as well as
Staphylococcus aureus, Streptococcus pneumonia and other gram positive
bacteria. We have also developed tumor cell lines for breast, melanoma and
prostate cancer and are developing fungal cell lines for the principal fungal
pathogens, Aspergillus, Candida and Cryptococcus. In addition, we create custom
light-producing microorganisms and cells in accordance with the needs of our
customers. All of our Bioware products are optimized to work with IVIS.
--------------------------------------------------------------------------------
43
<PAGE>
Business
--------------------------------------------------------------------------------
Light-producing transgenic animals
Our light-producing transgenic animals are disease-specific model animals that
enable researchers to analyze gene expression, protein activity and disease
progression. We currently have commercially available one type of light-
producing transgenic animal designed to assist researchers in the areas of
blood metabolism and liver failure. We are developing nine other types of
light-producing transgenic animals designed to assist researchers in the areas
of cardiovascular disease, cancer, inflammation, organ systems and toxicity. In
addition, we are able to create customized light-producing transgenic animals
in accordance with customer specifications. All of our light-producing
transgenic animals are optimized to work with IVIS.
IVIS and LivingImage software
IVIS works in conjunction with our LivingImage software to allow researchers to
analyze our light-producing cells, microorganisms and transgenic animals. IVIS
consists of a highly-sensitive camera, an ultra-dark box that serves as the
imaging chamber and a computer equipped with our LivingImage software. We offer
IVIS in two sizes to accommodate both small and large animals, each of which
can be used to analyze multiple animals simultaneously in a single chamber. We
offer IVIS on both a sale and lease basis and have installed IVIS in 11 sites
to date.
Contract research and transgenic animal services
We perform research experiments for our customers on a contract basis,
including compound screening and model research and development. In addition,
we provide professional services relating to the production of transgenic and
gene knockout animals.
DNX products and services
As a result of our recent acquisition of DNX, our product and service offerings
now also include non-light-producing transgenic animals. DNX offers a portfolio
of transgenic animals for use by researchers in a wide range of research and
drug discovery and development areas. DNX also provides contract research
services in the area of transgenic animals.
RESEARCH AND DEVELOPMENT
As of September 30, 2000, we had a total of 55 employees dedicated to research
and development. Our research team includes biologists, physicists and software
engineers. We spent approximately $189,000 in 1997, $1.0 million in 1998 and
$4.8 million in 1999 on the research and development of IVIS and our light-
producing cells, microorganisms and transgenic animals.
Our internal research and development efforts are focused on:
.Developing additional applications for our technology. We are developing
light-producing cells and microorganisms designed to permit researchers to
track and monitor the progression of, and a drug candidate's effect on, cancer
and infectious diseases within a living animal. We are also developing light-
producing transgenic animals to support research and development programs in
the areas of cancer, metabolic disease, cardiovascular disease, inflammation,
organ systems and toxicology.
We plan to build upon our existing technology platforms used in producing
transgenic and genetically modified animals. We also have a program dedicated
to identifying and developing improved methods for genetic manipulation of
animals. We believe these improvements will allow us to produce transgenic
animals more quickly and more reliably than is possible with currently
available techniques.
--------------------------------------------------------------------------------
44
<PAGE>
Business
--------------------------------------------------------------------------------
.Developing enhanced capabilities for IVIS. We are working to improve the
imaging capabilities of IVIS. One extended capability under development is
multi-view imaging, which we anticipate will allow more precise
characterization of the location and improved quantification of the light-
emitting pathogen, tumor cell, or gene promoter placed within an animal. We
believe that improved specificity and greater image resolution will enable
researchers to more fully understand the biological processes in a living
animal and to more clearly target therapies to specific points of therapeutic
intervention. We are also developing multi-reporter imaging capabilities that
would enable researchers to study gene expression, protein activity and by
labelling multiple genes or other therapeutic targets in the animal to better
understand the mechanism of a compound's action.
.Creating a proprietary database of information. In performing our own internal
research and development, we have generated significant quantities of data
regarding in vivo physiology of pathways and organ systems in animal models,
during both normal and diseased states. These data assist researchers in
understanding both safety and efficacy of compounds and the functional roles
of targets in a variety of animal model systems. We are currently compiling
this information in a database that will allow our subscribers to access
physiologic data derived from the use of our technology. These in vivo data
were generated around compounds or targets identified as potentially
interesting by in vitro platform discovery technologies. We believe there will
be value to our customers in confirming in vitro data with in vivo models and
offering that information in a combined database.
.Conducting research with collaborative partners to expand our products,
services and technologies. We collaborate with academic and non-profit
institutions as well as commercial partners to develop new applications of our
technology. Under these collaborations, we generally retain ownership of our
intellectual property or commercial rights generated as a result of these
projects. We have a grant from the Space and Naval Warfare Systems Command.
Under the terms of the grant issued by the Space and Naval Warfare Systems
Command in March 1999, we perform research and development on cell-based
sensors and instrumentation and software.
SALES AND MARKETING
As of September 30, 2000, our direct sales and marketing organization consisted
of five employees. Our team of professionals includes business development
specialists and research scientists, most of whom have PhD degrees in biology,
biochemistry or physics. As a result of our recent acquisition of DNX, we now
have an additional two employees in business development. We generate customer
leads through presentations, exhibiting at and attending scientific and
partnering meetings, publications and advertisements in scientific journals,
our website and targeted promotional efforts to strategic accounts. We sell our
products and services principally through our direct sales and marketing
organization. We offer customer support through our internal and field research
scientists and business development specialists.
We make our technology available through licenses. We have two forms of
licenses, evaluation and commercial. Our evaluation licenses enable researchers
to assess our technology on a field of use basis. Pursuant to the license, we
generally supply IVIS and our light-producing cells and microorganisms.
We are pursuing non-exclusive customer agreements relating to the licensing of
our technology. In addition, we intend to pursue strategic partnerships with
leading companies in the fields of genomics, proteomics and microchips and
whole cell assays providers. In January 2000, we entered into a breeding,
supply and distribution agreement with Taconic Farms, Inc. Under the agreement,
we agreed
--------------------------------------------------------------------------------
45
<PAGE>
Business
--------------------------------------------------------------------------------
to jointly develop and market transgenic animals for a single luminescence
reporter gene compatible with our imaging technology. We granted to Taconic the
right to make, distribute and sell these transgenic animals to our customers.
Taconic granted us a license to make, breed and use these transgenic animals
for distribution by Taconic. We share profits received from the sale of light-
producing transgenic animals. This agreement terminates in January 2010.
CUSTOMERS
We have entered into several licensing and research and development agreements
with pharmaceutical and biotechnology companies. The following table sets forth
our licensing agreements as of January 15, 2001.
<TABLE>
<CAPTION>
Proposed use of our
technology under
Customer Type of agreement agreement Expiration date
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Novartis Commercial license Pre-clinical cancer drug July 2003
agreement development studies
Pfizer Inc. Collaborative research Drug target selection December 2003
agreement
AstraZeneca UK Evaluation license Pre-clinical drug December 2001
Limited agreement development studies
Cell Genesys, Inc. Evaluation license Oncology studies May 2001
agreement
Chiron Corporation Evaluation license Pre-clinical drug December 2001
agreement development studies
Cubist Evaluation license Infectious disease studies February 2001
Pharmaceuticals agreement
DuPont Evaluation license Pre-clinical drug January 2001
Pharmaceuticals agreement development studies
Johnson & Johnson Evaluation license Pre-clinical drug March 2001
agreement development studies
Merck & Co., Inc. Evaluation license Pre-clinical drug December 2001
agreement development studies
SmithKline Beecham Evaluation license Pre-clinical drug October 2001
Plc agreement development studies
</TABLE>
In July 2000, we entered into a commercial license agreement with Novartis,
through its affiliate IRM, LLC. Under the agreement, we granted them the non-
exclusive right to use our technology for in vivo imaging in pre-clinical
development of pharmaceutical products at authorized sites. They are permitted
to use our technology in the fields of drug discovery, lead compound
development, pre-clinical evaluation and development, including efficacy and
safety assessment, such as toxicology, and clinical research and development
for all targets, diseases and indications. Under our commercial agreement with
Novartis, Novartis is obligated to pay $6.0 million which will be recognized
ratably through 2003.
--------------------------------------------------------------------------------
46
<PAGE>
Business
--------------------------------------------------------------------------------
In December 2000, we entered into a collaborative research agreement with
Pfizer Inc., under which we agreed to collaborate with Pfizer in developing new
methods of identifying potential therapeutic drug targets through use of
transgenic mice. The agreement provides for an initial payment by Pfizer to us
of $1.0 million, and up to an additional $1.0 million for staffing,
administrative and equipment acquisition costs we incur in connection with the
agreement. The agreement further provides for additional payments of up to $7.0
million over three years, based upon our work performed and our achievement of
various milestones set forth in the agreement. The agreement terminates in
December 2003, but can be extended at Pfizer's option for two successive one-
year periods.
We recognize revenues from each of these agreements ratably over the period of
performance. We do not anticipate material amounts of revenue from any of the
AstraZeneca, Cell Genesys, Chiron, Cubist Pharmaceuticals, DuPont
Pharmaceuticals, Johnson & Johnson, Merck and SmithKline Beecham Plc agreements
beyond 2000. In addition, we are negotiating a three-month extension of the
DuPont Pharmaceuticals agreement.
MANUFACTURING AND DISTRIBUTION
We manufacture IVIS and LivingImage software in-house and rely upon outside
suppliers for components. We also create light-producing cells, microorganisms
and transgenic animals in-house and have relied upon DNX and Genomic Systems to
inject and develop founder animals, which we analyze for quality control at our
facility. Taconic colonizes and distributes all of our light-producing
transgenic animals to our customers. As a result of our acquisition of DNX, we
believe we will significantly expand our production capacity for light-
producing transgenic animals.
We have designed our manufacturing facility to optimize manufacturing flow and
personnel movement. We adhere to access and safety standards required by
federal, state and local health ordinances, such as standards for the use,
handling and disposal of hazardous substances.
INTELLECTUAL PROPERTY
We seek to protect our commercially-relevant proprietary technologies through
patents both in the United States and abroad. We have patent applications
pending in a number of areas which we believe will be valuable to our business,
including gram positive bacterial vectors, animal models of disease, transgenic
animals useful in drug discovery research, imaging systems and computer-
implemented methods for image acquisition and analysis.
As of January 15, 2001, we owned seven US patents, controlled nine US patents
through licenses, including an exclusive license with Stanford University, and
had several pending US patent applications. In July 1997, we entered into an
agreement with Stanford University for an exclusive license of the technology
related to in vivo imaging. This license was superceded by a second exclusive
license agreement for the same technology, effective as of May 5, 2000. This
exclusive license gives us rights to all uses in all fields under the in vivo
imaging technology and expires in July 2014. We have also licensed other
patents that we believe may apply to our current business or that we may
incorporate into future products. The licenses to which we are party impose
various milestone, commercialization, sublicensing, royalty and other
obligations on us and contain customary termination provisions. We intend to
continue to license technologies to strengthen our competitive position.
In addition, as a result of our acquisition of DNX, we have obtained an
exclusive license to a patented method of pronuclear microinjection, one of the
most widely-used methods for making transgenic animals.
--------------------------------------------------------------------------------
47
<PAGE>
Business
--------------------------------------------------------------------------------
We cannot assure you, however, that any of these patent applications will
result in the issuance of any patents, or that any patents that do issue will
offer any protection against others who seek to practice the claimed methods.
Any patents that we obtain may be circumvented, challenged or invalidated by
our competitors. We have obtained licenses for certain technologies that we
use, but we cannot assure you that we will be able to maintain these licenses
or that we will be able to secure additional licenses in the future. Thus, we
may need to cease operation in certain product areas or develop costly methods
for designing around issued patents.
In addition to patents, we rely on copyright protection, trade secrets,
proprietary know-how and trademarks to maintain our competitive position. Our
success will depend in part on our ability to preserve our copyrights and trade
secrets. Although our employees are required to sign agreements obligating them
to not disclose our confidential information, we cannot guarantee these
employees will in fact not disclose such information and erode our trade
secrets.
Our technologies may infringe the patents or violate other proprietary rights
of third parties. In the event of infringement or violation, we may be
prevented from pursuing further licensing, product development or
commercialization. Such a result would materially adversely affect our
business, financial condition and results of operations.
If we become involved in any litigation, interference or other administrative
proceedings, we will incur substantial expenses and the efforts of our
technical and management personnel will be significantly diverted. An adverse
determination may subject us to significant liabilities or require us to seek
licenses that may not be available from third parties. We may also be
restricted or prevented from manufacturing and selling our products, if any, in
the event of an adverse determination in a judicial or administrative
proceeding or if we fail to obtain necessary licenses.
GOVERNMENT REGULATION
Our products do not require regulatory approval by governmental agencies. Our
pharmaceutical and biotechnology licensees will employ our technology to
perform pre-clinical animal testing and research on therapeutic candidates that
may be submitted to governmental agencies as part of a regulatory application
to begin human clinical testing or commercialize their products. Therapeutic
candidates that are intended for human use are subject to rigorous pre-clinical
and clinical testing requirements and extensive review and approval procedures
by the Food and Drug Administration in the United States and similar health
authorities in other countries. There can be no assurance our technology will
be accepted by these regulatory authorities as a satisfactory means by which
our licensees can collect and present data on therapeutic candidates, and which
will provide the basis for regulatory approval to begin clinical trials or
commercialization of therapeutic products.
The federal Animal Welfare Act governs the transportation, purchase, sale,
housing, care, handling and treatment of animals used for research or
experimental purposes. The Animal Welfare Act imposes a wide variety of
specific requirements on producers and users of many research animals,
including requirements related to personnel, facilities, sanitation, cage size,
feeding, watering and shipping conditions. It applies to institutions or
facilities using any regulated live animals for research, testing, teaching or
experimentation, including diagnostic laboratories and private companies in the
pharmaceutical and biotechnology industries. Currently, mice, rats and birds
are not regulated under the Animal Welfare Act. We conduct research on rabbits,
which is a covered animal under the Animal Welfare Act regulations. We are
licensed under the Animal Welfare Act and believe we are in
--------------------------------------------------------------------------------
48
<PAGE>
Business
--------------------------------------------------------------------------------
substantial compliance with its provisions as they apply to currently covered
animals. Compliance with any future changes in Animal Welfare Act regulations
to include mice as covered animals could be expensive and could impair our
research and production efforts. There have been recent proposals to extend the
Animal Welfare Act regulations to include mice, rats and birds. See "Risk
Factors -- Compliance with governmental regulations could increase our
operating costs or adversely affect our customers' ability to obtain
governmental approval of gene-based products, which would adversely affect the
commercialization of our technology."
Our research and development activities involve the controlled use of hazardous
materials and chemicals. We are subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of such materials
and certain waste products. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal laws and regulations, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
such contamination or injury, we could be held liable for any damages,
including cleanup costs which result, and any liability could exceed our
resources.
COMPETITION
We consider the major competitive technologies to be the conventional methods
for evaluation of animal models that consist of ex vivo biochemical or
biomolecular analysis and histopathology. Two non-invasive technologies are
magnetic resonance imaging, or MRI, and positron emission tomography, or PET.
Both of these imaging technologies are very high cost diagnostics and require
skills not normally found in a typical biopharmaceutical laboratory. PET and
MRI, whether used in animals or for human diagnostics, reveal mainly structural
information, although there are limited chemistries available for some
functional analysis.
The biotechnology and pharmaceutical industries are highly competitive and
characterized by rapid technological change. Our industry competition, or
companies that use or may develop in vivo assessment technologies, include
Deltagen, Inc. and Lexicon Genetics Incorporated, each of which uses animal
models based upon knockout mice technology, as well Exelixis, Inc., whose
method of assessment focuses on other organisms such as fruit flies, worms and
yeast. These companies have all recently completed an initial public offering,
and therefore have access to substantially greater financial resources than we
have. Additionally, each of these companies is at least as advanced in the
development of its respective products as we are in our own product development
efforts. Moreover, each such company has entered into a collaborative
arrangement with one or more major pharmaceutical companies that we consider to
be a potential customer for our products, which could limit the appeal of our
products and services to such companies. We may also face significant
competition from others new to the market sector in which we have customers
that adopt existing technologies and provide them in an alternative format to
our business model. New competition may quickly gain substantially greater
financial, scientific and human resources. To compete effectively, we will need
to demonstrate the advantages of our technology and products over conventional
methods for biological assessment. We will also need to demonstrate the
potential economic value of our technology and products relative to
conventional methods for biological assessment. Our future success will depend
in large part on our ability to establish and maintain a competitive position
with respect to conventional methods for biological assessment and future
technology that may develop.
--------------------------------------------------------------------------------
49
<PAGE>
Business
--------------------------------------------------------------------------------
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board provides specific expertise in areas of research
and development relevant to our business and meets with our senior scientific
and management personnel from time to time to discuss our present and long-term
research and development activities. Scientific Advisory Board members include:
.Anton Berns, PhD, Executive Director, Division of Molecular Genetics and
Centre of Biomedical Genetics, The Netherlands Cancer Institute. Dr. Berns is
an expert in the areas of transgenic animals and oncology.
.Stanley Cohen, PhD, Professor, Department of Genetics, Stanford University
Medical Center. Dr. Cohen is an expert in molecular genetics and oncology.
.Christopher H. Contag, PhD, Assistant Professor, Department of Pediatrics,
Neonatal and Developmental Medicine, Stanford University School of Medicine.
Dr. Contag is an expert in virology and molecular imaging.
.Ashley Haase, MD, Chairman and Head, Department of Microbiology, University of
Minnesota. Dr. Haase is an expert in viral infectious diseases.
.Sidney Hecht, PhD, John W. Mallet Professor of Chemistry, University of
Virginia. Dr. Hecht is an expert in the synthesis and characterization of
organic compounds.
.Jamey Marth, PhD, Associate Professor, Department of Cellular & Molecular
Medicine, University of California, San Diego, Howard Hughes Medical
Institute. Dr. Marth is an expert in cell and molecular biology and transgenic
animals.
.Wolf Seka, PhD, Professor, The Laboratory for Laser Energetics, University of
Rochester. Dr. Seka is an expert in physics instrumentation and software.
.Bruce Tromberg, PhD, Associate Professor, LAMMP, Beckman Laser Institute and
Medical Clinic. Dr. Tromberg is an expert in physics and imaging.
.George Weinstock, PhD, Associate Professor, Department of Microbiology and
Molecular Genetics, University of Texas, Houston Health Science Center. He is
Director of the Baylor College of Medicine NHI Center for human genome
sequencing. Dr. Weinstock is an expert in molecular genetics and genomics.
EMPLOYEES
As of September 30, 2000, we had a total of 72 full-time employees located at
our facility in Alameda, California. Of these employees, 55 are in research and
development, and 21 hold PhD degrees. As a result of our recent acquisition of
DNX, we now have an additional 46 employees, 7 of which hold PhD degrees. None
of our employees is represented by a collective bargaining agreement, and we
have never experienced any work stoppage. We believe that our employee
relations are good.
--------------------------------------------------------------------------------
50
<PAGE>
Business
--------------------------------------------------------------------------------
FACILITIES
We have leased approximately 25,600 square feet of laboratory and office space
in Alameda, California under a lease expiring in January 2003. In addition, we
have agreed to lease approximately 20,000 square feet of laboratory and office
space in another location in Alameda, California. This lease expires in
February 2006. DNX has a 41,200 square foot facility in Cranbury, New Jersey.
This lease expires in October 2009. We believe that we have adequate space to
accommodate our business plans for at least the next 12 months.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation that arises through the
normal course of business. As of the date of this prospectus, we are not a
party to any litigation we believe could reasonably be expected to have an
material adverse effect on our business or results of operations. We are not
subject to any material legal proceedings.
--------------------------------------------------------------------------------
51
<PAGE>
--------------------------------------------------------------------------------
Management
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information with respect to each of our executive officers
and directors.
<TABLE>
<CAPTION>
Name Age Position(s)
-------------------------------------------------------------------------------
<S> <C> <C>
David W. Carter............. 61 Co-Chief Executive Officer and Chairman of the
Board
Pamela R. Contag, PhD....... 43 Co-Chief Executive Officer, President and
Director
Anthony F. Purchio, PhD..... 52 Chief Scientific Officer and Vice President
Michael D. Cable, PhD....... 45 Chief Technology Officer and Vice President
Kevin J. Birtchnell, ACA.... 32 Chief Financial Officer and Vice President
Paulette A. Dillon.......... 38 Vice President, Commercial Development
Brian M. Sager, PhD......... 36 Vice President, Corporate Development
Brian G. Atwood............. 47 Director
Alan M. Goldberg, PhD....... 60 Director
Raymond J. Whitaker, PhD.... 53 Director
Debra Yu, MD................ 36 Director
</TABLE>
--------
Mr. Atwood, Dr. Goldberg and Dr. Whitaker are members of the audit committee.
Dr. Whitaker and Dr. Yu are members of the compensation committee.
David W. Carter has served as our Chairman of the Board of Directors since
November 1997 and as our Co-Chief Executive Officer since January 1998. From
May to November 1997, Mr. Carter was a consultant for us. From 1991 to May
1997, Mr. Carter was Chairman of the Board, President and Chief Executive
Officer of Somatix Therapy Corporation, a publicly-held gene therapy company,
which merged with Cell Genesys Inc. in 1997. Since June 1997, Mr. Carter has
been a director of Cell Genesys. Since July 1998, Mr. Carter has served as a
director of ImmunoGen Inc. Mr. Carter received an AB in History and an MBA from
Indiana University.
Pamela R. Contag, PhD is one of our co-founders and has served as our President
and Chief Executive Officer since August 1995, Co-Chief Executive Officer since
January 1998 and as a director since July 1995. Since January 1998, Dr. Contag
has served as a Consulting Professor at Stanford University. From September
1996 to January 1998, Dr. Contag was a research associate at Stanford
University. Dr. Contag received a BA in Biology from College of St. Catherine
and a MS and a PhD in Microbiology from the University of Minnesota. Dr. Contag
was a Postdoctoral Fellow of the Department of Microbiology and Immunology at
Stanford University.
Anthony F. Purchio, PhD has served as our Chief Scientific Officer since May
1999 and as Vice President since December 1999. From June 1998 to May 1999, Dr.
Purchio was a consultant for Morthogen, Inc. and Regenics. From November 1995
to June 1998, Dr. Purchio served as Vice President of Research & Development at
Hepatix, Inc., a biotechnology company engaged in developing bio-artificial
liver tissues. Dr. Purchio received a PhD in Experimental Pathology from
University of Colorado Medical Center and completed postdoctoral training at
the Molecular Biology Institute, University of California, Los Angeles.
--------------------------------------------------------------------------------
52
<PAGE>
Management
--------------------------------------------------------------------------------
Michael D. Cable, PhD has served as our Chief Technology Officer since October
1998 and as Vice President since December 1999. From March 1986 to September
1998, Dr. Cable was a staff scientist at the University of California,
Berkeley. Dr. Cable received a BS in Chemistry from Iowa State University and a
PhD in Nuclear Chemistry and Physics from the University of California,
Berkeley.
Kevin J. Birtchnell, ACA has served as our Chief Financial Officer and Vice
President since January 2000. From June 1999 to December 1999, Mr. Birtchnell
was Chief Financial Officer and Vice President at Nhancement Technologies,
Inc., a software application and service company. From June 1997 to April 1999,
Mr. Birtchnell was Chief Financial Officer, Vice President, Finance and
Secretary at Diva Communications, a wireless communications company. From June
1992 to June 1997, Mr. Birtchnell was Director of Finance and Investor
Relations at Somatix Therapy Corporation, a publicly-held biotechnology
company. Mr. Birtchnell received a BS in Biological Sciences from London
University and qualified as a Chartered Accountant with the Institute of
Chartered Accountants in England and Wales.
Paulette A. Dillon has served as our Vice President, Commercial Development
since November 2000. From August 1995 to November 2000, Ms. Dillon served as
Vice President, Strategic Marketing and Business Development and Director of
Strategic Marketing of Roche Bioscience. Ms. Dillon received a BS in
Kinesiology from the University of California, Los Angeles.
Brian M. Sager, PhD has served as our Vice President, Corporate Development
since November 2000. From July 2000 to November 2000, he was a consultant to
us. From April 1998 to May 2000, Dr. Sager was the practice leader for the life
sciences strategic consulting practice for the high-growth market at Ernst &
Young LLP. From January 1997 to April 1998, Dr. Sager was a management
consultant at Cambridge Management Consulting. From March 1995 to January 1997,
he was at the Rowland Institute for Science. Dr. Sager received a BS with
Honors in Molecular Biology from the University of Wisconsin-Madison and a PhD
in Biochemistry from Stanford University, where he was a National Science
Foundation predoctoral fellow. Dr. Sager was a Helen Hay Whitney Post-Doctoral
Fellow at Harvard University.
Brian G. Atwood has served as a director since January 1998. Since November
1998, he has served as General Partner, and from November 1995 to October 1998
served as a Venture Partner, of Brentwood Venture Capital, a private venture
capital firm. Mr. Atwood also serves as a director of Coulter Pharmaceuticals
Inc., a publicly-held pharmaceutical company engaged in development of drugs
and therapies for cancer and autoimmune diseased treatment, and several private
companies. Mr. Atwood received a BS in Biology from the University of
California, Irvine, an MS from the University of California, Davis and an MBA
from Harvard Business School.
Alan M. Goldberg, PhD has served us as a director since February 1998. Dr.
Goldberg has been a Director of The Johns Hopkins Center for Alternatives to
Animal Testing since 1981 and a Professor at The Johns Hopkins University since
1969. Since August 1999, Dr. Goldberg has been a director of Baltimore
BioMedical Corporation. Dr. Goldberg received a BS in from Long Island
University, Brooklyn College of Pharmacy and a PhD in Pharmacology from the
University of Minnesota.
Raymond J. Whitaker, PhD has served us as a director since April 1999. Since
January 1997, Dr. Whitaker has served as Vice President of S.R. One Ltd., the
venture investment affiliate of SmithKline Beecham. Dr. Whitaker serves as a
director of several private companies. From June 1992 to December 1996, Dr.
Whitaker was Director, Worldwide Business Development, SmithKline Beecham
Pharmaceuticals. Dr. Whitaker received a BS in Biochemistry and Mathematics, an
MBA and a PhD in Biochemistry from the National University of Ireland,
University College Dublin.
--------------------------------------------------------------------------------
53
<PAGE>
Management
--------------------------------------------------------------------------------
Debra Yu, MD has served us as a director since January 1998. From March 1999 to
the present, Dr. Yu has been a Managing Director of Bay City Capital, a
merchant banking firm focused on life science companies. Since March 1999, Dr.
Yu has also served as acting President and Chief Executive Officer of Molecular
Applications Group, a bioinformatics data analysis company. From October 1995
to January 1999, Dr. Yu was a General Partner of Delphi Ventures, a venture
fund focusing on the health care industry. From March 1992 to October 1995, Dr.
Yu was a consultant at McKinsey & Co., Inc. Dr. Yu serves as a director of
several private companies. Dr. Yu received a BA in Molecular Biology from
Princeton University and an MD from Harvard University.
EXECUTIVE OFFICERS
Executive officers are appointed by our board of directors and serve until
their successors have been duly elected and qualified. Dr. Pamela R. Contag, a
director and our Co-Chief Executive Officer and President, is married to Dr.
Christopher H. Contag, a member of our Scientific Advisory Board. There are no
other family relationships among any of our directors, executive officers or
key employees.
BOARD OF DIRECTORS
We currently have seven authorized directorships, of which one is vacant and
will be occupied by a person to be designated by MDS. In accordance with the
terms of our amended and restated 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 Dr. Whitaker and Mr. Atwood, the Class II directors
are Dr. Contag and Dr. Yu and the Class III directors are Dr. Goldberg and Mr.
Carter. The MDS-designated director will be a Class III director. 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 or a super-majority vote of the
stockholders. 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.
BOARD COMMITTEES
The compensation committee was established in June 1999 and reviews and
recommends to the board of directors the salaries, incentive compensation and
benefits of our officers and employees, and administers our stock plans and
employee benefit plans. The members of the compensation committee are Dr. Yu
and Dr. Whitaker, with Dr. Yu serving as Chairperson.
Our audit committee was established in September 2000 and reviews, acts on and
reports to the board of directors with respect to various auditing and
accounting matters, including the selection of our
--------------------------------------------------------------------------------
54
<PAGE>
Management
--------------------------------------------------------------------------------
auditors, the scope of the annual audits, the fees to be paid to the auditors,
the performance of our independent auditors and our accounting practices. The
members of the audit committee are Mr. Atwood, Dr. Goldberg and Dr. Whitaker,
with Mr. Atwood serving as Chairperson.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors
performed the functions that are now delegated to the compensation committee.
No member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any other entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee.
DIRECTOR COMPENSATION
We reimburse our non-employee directors for expenses incurred in connection
with attending board and committee meetings but do not compensate them for
their services as board or committee members. We have in the past granted non-
employee directors options to purchase our common stock under our 1996 Stock
Plan, and our board will continue to have discretion to grant options to non-
employee directors from time to time under our 2000 Stock Plan. Each non-
employee director who joins our board following this offering will receive a
nondiscretionary, automatic grant of options to purchase 32,850 shares of our
common stock upon joining the board of directors and nondiscretionary,
automatic grants of options to purchase 10,950 shares of our common stock each
year pursuant to the 2000 Stock Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our amended and restated certificate of incorporation and 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, our amended and restated
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 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 that insures
our directors and officers against specified losses and which insures us
against specific obligations to indemnify our directors and officers.
--------------------------------------------------------------------------------
55
<PAGE>
Management
--------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
The following table sets forth all compensation including salary, bonuses,
stock options and other compensation earned during the year ended December 31,
1999 by our Co-Chief Executive Officers and our four other highest-paid
executive officers, collectively referred to as the named executive officers.
There was no other compensation paid to the named executive officers in 1999.
We may refer to these officers as our named executive officers in other parts
of this prospectus.
Summary compensation
<TABLE>
-----------------------------------------------------------------------------------------------
<CAPTION>
1999 annual Long-term
compensation compensation awards
---------------- -----------------------
Securities
underlying Other
Name and principal position Salary Bonus options compensation
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David W. Carter.................................... $201,566 $45,000 36,500 $50,000(1)
Co-Chief Executive Officer and Chairman of the
Board of Directors
Pamela R. Contag, PhD ............................. 223,348 45,000 36,500 24,336(3)
Co-Chief Executive Officer, President and Director
Michael D. Cable, PhD ............................. 165,626 10,500 73,000 --
Chief Technology Officer
Anthony Purchio, PhD .............................. 104,816 -- 109,500 --
Chief Scientific Officer
Brian Dunn (2)..................................... 152,597 -- -- --
Former Chief Financial Officer
</TABLE>
--------
(1) Represents payment of life insurance premiums of $50,000. Mr. Carter is the
beneficiary of the life insurance policy.
(2) Mr. Dunn resigned as Chief Financial Officer in September 1999. He
continued to receive his monthly salary until September 2000.
(3) Includes forgiveness of debt of $15,000 and expenses related to a company
provided automobile in the amount of $6,915.
The following table shows information regarding options granted to the named
executive officers during the year ended December 31, 1999.
Each option represents the right to purchase one share of our common stock. The
options generally become vested over four years. See "Management -- Employee
Benefit Plans" for more details regarding these options. In the year ended
December 31, 1999, we granted options to purchase an aggregate of 500,415
shares of our common stock to various officers, employees and directors.
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 initial public offering
price (assuming an initial public offering price of $11.00 per share). 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.
--------------------------------------------------------------------------------
56
<PAGE>
Management
--------------------------------------------------------------------------------
Option grants in last fiscal year
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potential realizable
Percent value at assumed
Number of of total annual rates of
securities options stock price appreciation
underlying granted for option term
options to Exercise Expiration ------------------------
Name granted employees price date 5% 10%
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David W. Carter......... 36,500 7.46% $0.41 06/04/09 $ 639,001 $ 1,026,388
Pamela R. Contag, PhD .. 36,500 7.46 0.41 06/04/09 639,001 1,026,388
Michael D. Cable, PhD .. 36,500 7.46 0.41 06/04/09 639,001 1,026,388
36,500 7.46 0.41 12/02/09 639,001 1,026,388
Anthony Purchio, PhD ... 73,000 14.91 0.41 06/04/09 1,278,002 2,052,775
36,500 7.46 0.41 12/02/09 639,001 1,026,388
Brian Dunn.............. -- -- -- -- -- --
</TABLE>
The following table shows information as of December 31, 1999, concerning the
number and value of unexercised options held by each of the named executive
officers. Options shown as exercisable in the table are immediately
exercisable. There was no public trading market for our common stock as of
December 31, 1999. Accordingly, the value of the unexercised in-the-money
options listed below has been calculated on the basis of the 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.
Aggregated option exercises in last fiscal year and year end option values
<TABLE>
-----------------------------------------------------------------------------------------------
<CAPTION>
Number of securities
underlying unexercised Value of unexercised
Shares options at in-the-money options at
acquired December 31, 1999 December 31, 1999
upon Value ------------------------- -------------------------
Name exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David W. Carter......... -- $ -- -- 36,500 $ -- $ 386,535
Pamela R. Contag, PhD .. -- -- -- 36,500 -- 386,535
Michael D. Cable, PhD .. -- -- 11,406 98,094 120,790 1,038,816
Anthony F. Purchio,
PhD ................. -- -- -- 109,500 -- 1,159,605
Brian Dunn.............. 62,050 -- -- -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS
In January 1998, we entered into an agreement with David W. Carter that
provided for a starting base annual salary of $175,000. If we terminate Mr.
Carter's employment without cause, he is entitled to receive his salary and
benefits until the earlier of one year anniversary of the date of termination
or Mr. Carter's acceptance of new employment. The agreement defines "cause" as
failure to substantially perform duties, engaging in conduct that is unlawful
or injurious to our business or an intentional breach of a proprietary
information agreement. Upon termination without cause, our right to repurchase
Mr. Carter's outstanding options and restricted common stock will be measured
as if the termination occurred one year following the actual date of
termination. Our right to repurchase 182,500 shares of restricted common stock
issued to Mr. Carter in January 1998, however, will be determined as of the
actual date of his termination. See "Related party transactions -- Common Stock
Sales."
In January 1998, we entered into an agreement with Pamela R. Contag, PhD, which
provided for a starting base annual salary of $175,000. If we terminate Dr.
Contag's employment without cause, she is
--------------------------------------------------------------------------------
57
<PAGE>
Management
--------------------------------------------------------------------------------
entitled to receive her salary and benefits until the earlier of one year
anniversary of the date of termination or Dr. Contag's acceptance of new
employment. The agreement defines "cause" as failure to substantially perform
duties, engaging in conduct that is unlawful or injurious to our business or an
intentional breach of a proprietary information agreement. Upon termination
without cause, our right to repurchase Dr. Contag's outstanding options and
restricted common stock will be measured as if the termination occurred one
year following the actual date of termination. Our right to repurchase these
shares, however, will be determined as of the actual date of termination. As
part of her employment agreement, in September 1998 we loaned Dr. Contag
$100,000 to assist in the purchase of her home near our principal offices. See
"Related party transactions -- Loans to Directors and Executive Officers" and
"-- Common Stock Sales."
EMPLOYEE BENEFIT PLANS
1996 Stock Plan
Our 1996 Stock Plan was adopted by our board of directors in August 1996 and
approved by our stockholders in August 1996. This plan provides for the grant
of incentive stock options, which may provide for preferential tax treatment,
to our employees, and for the grant of nonstatutory stock options to our
employees, directors and consultants.
We have reserved an aggregate of 3,285,000 shares of our common stock for
issuance under this plan. As of September 30, 2000, 566,770 shares had been
issued pursuant to the exercise of options and stock purchase rights and
options to purchase 1,826,170 shares of common stock were outstanding.
381,060 shares were available for future grant. As of the effective date of
this offering, this plan will terminate, no additional stock options will be
granted and any shares reserved for issuance and any shares returned to the
plan shall be reserved for issuance under the 2000 Stock Plan.
This plan provides that in the event of a merger each outstanding option or
stock purchase right will be assumed or an equivalent option may be substituted
by the successor corporation. If the options are not assumed or substituted,
the options will terminate as of the date of the closing of the merger. In
addition, this plan provides that in the event of a proposed dissolution or
liquidation of us the optionee will be provided notice at least 15 days prior
to such proposed action. To the extent it has not been previously exercised,
the option will terminate immediately prior to the consummation of a proposed
dissolution or liquidation.
2000 Stock Plan
Our 2000 Stock Plan was adopted by our board of directors in September 2000 and
will be submitted for approval by our stockholders prior to the completion of
this offering. This plan provides for the grant of incentive stock options to
our employees and nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. A total of 839,500 shares of our common
stock plus any reserved but unissued shares under our 1996 Plan as of the
effective date of this offering and any shares returned to the 1996 Plan are
reserved for issuance under this plan.
The number of shares reserved for issuance under our 2000 Stock Plan will
increase annually on the first day of our fiscal year beginning in 2001 by an
amount equal to the lesser of 4% of the outstanding shares of our common stock
on the first day of the fiscal year, 839,500 shares or such lesser amount as
our board of directors may determine.
Our board of directors or a committee of our board serves as the administrator
of this plan. The administrator has the power to determine the terms and
conditions, not inconsistent with the plan, of
--------------------------------------------------------------------------------
58
<PAGE>
Management
--------------------------------------------------------------------------------
the options or stock purchase rights granted, including the exercise price, the
number of shares subject to each option or stock purchase right, the
exercisability of the options and the form of consideration payable upon
exercise. The administrator determines the exercise price of options granted
under this plan. However, the exercise price of incentive stock options must be
equal to at least the fair market value of our common stock on the date of
grant. Additionally, the term of an incentive stock option may not exceed ten
years. The administrator determines the term of all other options. No optionee
may be granted an option to purchase more than 730,000 shares in any fiscal
year. In connection with his or her initial service, an optionee may be granted
an additional option to purchase up to 839,500 shares of our common stock.
After one of our employees, directors or consultants, terminates his or her
relationship with us, he or she may exercise his or her option for the period
of time stated in the option agreement. If termination is due to death or
disability, the option will generally remain exercisable for 12 months
following such termination to the extent such option was exercisable at the
time of termination. In all other cases, the option will generally remain
exercisable for three months. However, an option may never be exercised later
than the expiration of its term.
The administrator determines the exercise price of stock purchase rights
granted under this plan. Unless the administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option that we
may exercise upon the voluntary or involuntary termination of the purchaser's
relationship with us for any reason, including death or disability. The
purchase price for shares we repurchase will generally be the original price
paid by the purchaser. The administrator determines the rate at which our
repurchase option will lapse. This plan generally does not allow for the
transfer of options or stock purchase rights and only the optionee may exercise
his or her option and stock purchase rights during his or her lifetime.
The 2000 Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute for each option or stock purchase right.
If the successor corporation refuses to assume or substitute for the option or
stock purchase right, the optionee will be notified that his or her options or
stock purchase rights will become fully vested and exercisable for a period of
15 days from the date of notice. The options and stock purchase rights will
terminate at the end of this period. In the event of a change in control of us,
each outstanding option held by a non-employee director will vest and become
exercisable in full as to all optioned stock, including shares as to which the
non-employee director would not otherwise be vested or exercisable. If an
option becomes fully vested and exercisable in such event, we will notify the
optionee that the option will be fully vested and exercisable for a period of
15 days from the date of such notice, and the option will terminate upon the
expiration of such period. This plan will automatically terminate in 2010,
unless we terminate it sooner. In addition, our board of directors has the
authority to amend, suspend or terminate the plan, provided it does not
adversely affect any option previously granted under the plan.
Director option program
Our director option program is part of our 2000 Stock Plan and provides for the
periodic grant of nonstatutory stock options to our non-employee directors.
All grants of options to our non-employee directors under this program are
automatic. We will grant to each individual who first becomes a non-employee
director on or after this offering an option to purchase 32,850 shares of our
common stock, except for those directors who become non-employee directors by
ceasing to be employee directors. Twenty-five percent of the shares subject to
the option become exercisable 12 months after the date of grant, and 1/48th of
the shares subject to the option vest each month thereafter, provided the
individual remains a director on such dates.
--------------------------------------------------------------------------------
59
<PAGE>
Management
--------------------------------------------------------------------------------
Each non-employee director will automatically be granted, on each annual
meeting of our stockholders occurring after the end of our fiscal year 2000, a
subsequent option to purchase 10,950 shares if immediately after such meeting,
he or she continues to serve on the board and has been a director for at least
six months prior to the annual stockholders meeting. Twenty-five percent of the
shares subject to the option become exercisable 12 months after the date of
grant, and 1/48th of the shares subject to the option vest each month
thereafter, provided the individual remains a director on such dates.
All options granted under this program have a term of 10 years and an exercise
price equal to fair market value on the date of grant. After termination as a
non-employee director, an optionee must exercise an option at the time set
forth in his or her option agreement. If termination is due to death or
disability, the options will remain exercisable for 12 months after the date of
grant. In all other cases, the options will remain exercisable for a period of
three months. However, an option may never be exercised later than the
expiration of its term. A non-employee director may not transfer options
granted under this program other than by will or the laws of descent and
distribution. Only the non-employee director may exercise the option during his
or her lifetime.
In the event of a merger, the sale of substantially all of our assets or
similar change of control event, the non-employee director will be notified
that each outstanding option granted pursuant to this program is fully vested
and exercisable for a period of 15 days from the date of such notice. The
options shall terminate at the end of this period.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an employee stock
purchase plan. A total of 292,000 shares of our common stock will be made
available for sale under this plan. In addition, this plan provides for an
annual increase in the number of shares available for issuance under the plan
on the first day of our fiscal year beginning in 2001 in an amount equal to the
lesser of 2% of the outstanding shares of our common stock on such date,
730,000 shares or such other lesser amount as may be determined by our board of
directors or its designated committee. Our board of directors or a committee of
our board will serve as the administrator of this plan. The administrator will
have full and exclusive authority to interpret the terms of the plan and
determine eligibility. All of our employees will be eligible to participate if
they are customarily employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year.
However, an employee may not be granted an option to purchase stock under the
plan if the employee:
.immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of our capital stock; or
.whose rights to purchase stock under all of our employee stock purchase plans
accrues at a rate that exceeds $25,000 worth of stock for each calendar year.
Our plan is intended to qualify for preferential tax treatment and contains
consecutive, overlapping 24 month offering periods. Each offering period
includes four six-month purchase periods. The offering periods generally start
on the first trading day on or after February 1 and August 1 of each year,
except for the first offering period, which will commence on the first trading
day on or after the effective date of this offering and will end on the last
trading day on or before January 31, 2003. For the first offering period,
eligible employees shall not be eligible to enroll in the plan until a
registration statement on Form S-8 with respect to the shares under the plan is
effective.
The plan permits participants to purchase common stock through payroll
deductions of up to 15% of their eligible compensation, which includes base
straight time gross earnings, commissions, overtime
--------------------------------------------------------------------------------
60
<PAGE>
Management
--------------------------------------------------------------------------------
and shift premium but excludes all other compensation. A participant may
purchase no more than 7,300 shares during any six-month purchase period.
Amounts deducted and accumulated by the participant are used to purchase shares
of our common stock at the end of each six-month purchase period. The price is
85% of the lower of the fair market value of our common stock at the beginning
of an offering period or after a purchase period ends. If the fair market value
at the end of a purchase period is less than the fair market value at the
beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in the immediately following offering
period. Participants may end their participation at any time during an offering
period, and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
A participant may not transfer rights granted under this plan other than by
will, the laws of descent and distribution or as otherwise provided under the
plan.
In the event of our merger with or into another corporation the sale of
substantially all of our assets or similar change of control event, a successor
corporation may assume or substitute for each option. If the successor
corporation refuses to assume or substitute for the option, the purchase period
then in progress will be shortened by setting a new exercise date and any
offering periods then in progress will end on the new exercise date.
This plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate the plan, except that, subject to certain
exceptions described in the plan, no such action may adversely affect any
outstanding rights to purchase stock under our plan.
401(k) Plan
Effective January 1998, we established a tax-qualified, employee savings and
retirement plan, or 401(k) Plan, for which our employees will generally be
eligible. Under the 401(k) Plan, employees may elect to reduce their current
compensation and have the amount of the reduction contributed to the
401(k) Plan. To date, we have made no matching contributions. The 401(k) Plan
is intended to qualify under Section 401 of the Internal Revenue Code, so that
contributions to the 401(k) Plan and income earned on plan contributions are
not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by us, if any, will be deductible by us when made.
--------------------------------------------------------------------------------
61
<PAGE>
--------------------------------------------------------------------------------
Related party transactions
COMMON STOCK SALES
In October 1995, we sold Dr. Pamela R. Contag, our Co-Chief Executive Officer
and President, 731,460 shares of common stock at a purchase price of $0.001 per
share pursuant to a restricted stock purchase agreement. Our right to
repurchase these shares has lapsed.
In April 1997, we entered into an agreement with our founders, Dr. Pamela R.
Contag, Dr. Christopher H. Contag and David Benaron, which redistributed the
common stock held by each founder in the aggregate amounts of 1,095,000 shares
to Dr. Pamela R. Contag, 438,000 shares to Mr. Benaron and 657,000 shares to
Dr. Christopher H. Contag. Our right to repurchase these shares has lapsed.
In June 1997, we sold 292,000 shares of restricted common stock at a price of
$0.0684 per share to David W. Carter, our Co-Chief Executive Officer and
Chairman of the Board of Directors. As of August 31, 2000, our right to
repurchase these shares has lapsed as to 38/48th of the shares and will lapse
as to 1/48th of the shares each month until June 2001. Upon the merger or
consolidation of us with or into another corporation, entity or person, or the
sale of all or substantially all of our assets to another corporation, entity
or person, our right to repurchase will lapse as to all of the shares, so long
as our stockholders, determined immediately before such merger, consolidation
or sale, own less than 50% of the voting securities of the surviving or
acquiring corporation, entity or person, or its parent, immediately after such
transaction.
In January 1998, we sold 182,500 shares of common stock to David W. Carter at a
purchase price of $0.1780 per share. These shares are subject to a repurchase
option by us at their original purchase price that lapses pursuant to certain
milestones, but in any event lapses in full on December 31, 2002 if Mr. Carter
is an employee on that date. In January 1998, we also sold to Mr. Carter
365,000 shares of common stock at a price of $0.1780 per share. We have the
right to repurchase these shares at their original purchase price in the event
of his voluntary or involuntary termination of employment with us. Our right to
repurchase these shares lapsed as to 31/48th of the shares as of August 31,
2000 and will continue to lapse as to 1/48th of the shares each month until
January 2002. Mr. Carter paid for the shares with two full-recourse promissory
notes in the aggregate amount of $97,500, which pay interest at a rate of 6%
per year, are due upon the earlier of December 31, 2002 or termination of his
employment and are secured by a pledge of the underlying shares. See " -- Loans
to Directors and Executive Officers."
In January 1998, we sold 73,000 shares of common stock to Dr. Pamela R. Contag
at a purchase price of $0.1780 per share. These shares are subject to a
repurchase option by us at their original purchase price that lapses in full on
December 31, 2002, if Dr. Pamela R. Contag is still an employee of us or
provides services to us as of that date. Dr. Pamela R. Contag paid for the
shares with a full-recourse promissory note in the amount of $13,000, that pays
interest at a rate of 6% per year, is due upon the earlier of December 31, 2002
or termination of her employment and is secured by a pledge of the underlying
shares. See " -- Loans to Directors and Executive Officers."
--------------------------------------------------------------------------------
62
<PAGE>
Related party transactions
--------------------------------------------------------------------------------
CONSULTING AGREEMENTS
In June 1998, we entered into a consulting agreement with Dr. Christopher H.
Contag, one of our co-founders and a member of our Scientific Advisory Board,
which pays him a fee of $3,000 per month. The agreement has a term of four
years, is terminable by Dr. Christopher H. Contag upon 30 days written notice
and is terminable by us for cause or if Dr. Christopher H. Contag refuses to or
is unable to perform consulting services or breaches the agreement. Dr.
Christopher H. Contag is married to Dr. Pamela R. Contag, our Co-Chief
Executive Officer and President.
In September 1999, we entered into a Settlement Agreement and Release with
Brian Dunn, our former Chief Financial Officer. Under the agreement, Mr. Dunn
continued to receive his monthly base salary until September 2000 in exchange
for consulting services that were not to exceed 16 hours per month. In
addition, the vesting of some of his stock options accelerated, such that
62,050 were immediately exercisable at the date of his termination. This
agreement terminated in September 2000.
Alan M. Goldberg, PhD, one of our directors, also serves us as a consultant. In
1999, we paid Dr. Goldberg fees of $14,000 and travel reimbursement of $11,405.
From January 2000 to August 31, 2000, we paid Dr. Goldberg fees of $17,500 and
travel reimbursement of $9,765. In March 1998, we granted Dr. Goldberg an
option to purchase 18,250 shares of our common stock at a price of $0.1780 per
share and in September 1999 we granted him an option to purchase an additional
10,950 shares of common stock at a price of $0.41 per share. These options each
vest monthly over a period of four years, with the initial 1/4th of the options
vesting one year after the date of grant, and expire ten years from the date of
grant. In March 1998, we entered into a consulting agreement with Dr. Goldberg
to be available for telephone conversations and attend organizational meetings
to discuss, plan and implement our business strategy in exchange for $2,500 per
calendar quarter.
In January 2000, we entered into a consulting agreement with Kevin J.
Birtchnell, our Chief Financial Officer and Vice President, to provide up to
100 hours of services in exchange for $83.14 per hour. The agreement has been
terminated.
In March 2000, we entered into an agreement with Bay City Capital-BD LLC, under
which Bay City Capital acted as an exclusive placement agent in connection with
the issuance of our Series E preferred stock, in exchange for a fee of $1.5
million. This agreement will terminate upon the closing of this offering.
In April 2000, we entered into an agreement with Bay City Capital-BD LLC, under
which Bay City Capital acted as an advisor for the purpose of developing a
business strategy for opportunities in the genomics area, in exchange for a fee
of $150,000. This agreement terminated in June 2000. Debra Yu, MD, one of our
directors, serves as Managing Director of Bay City Capital, LLC, an affiliate
of Bay City Capital-BD LLC.
--------------------------------------------------------------------------------
63
<PAGE>
Related party transactions
--------------------------------------------------------------------------------
SALES OF PREFERRED STOCK
From January 1997 through November 2000, we issued the following securities to
various investors in private placement transactions:
.5,041,539 shares of Series C convertible preferred stock at a purchase price
of $1.30 per share in January 1998;
.6,678,791 shares of Series D convertible preferred stock at a purchase price
of $1.65 per share in April 1999; and
.7,194,113 shares of Series E convertible preferred stock at a purchase price
of $4.25 per share in May 2000.
.3,500,000 shares of Series F convertible preferred stock issued to Phoenix
International Life Sciences (Chrysalis) Inc. in connection with the
acquisition of DNX.
Each share of preferred stock will convert automatically into 0.73 of a share
of common stock upon the closing of this offering. The purchasers of the above
shares of preferred stock are entitled to certain registration rights. See
"Description of capital stock -- Registration Rights." The investors in these
financings included the following directors, executive officers and holders of
more than 5% of our outstanding stock and their affiliates:
<TABLE>
<CAPTION>
Series C
convertible Series C Series D Series E Series F
preferred convertible convertible convertible convertible
stock preferred preferred preferred preferred
Purchaser warrants stock stock stock stock
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Directors and executive
officers --
David W. Carter......... 46,153 92,308 -- -- --
Alan M. Goldberg, PhD... -- -- -- 11,764 --
Principal stockholders
Delphi Ventures IV,
L.P. (1)............. -- 1,384,615 787,879 117,647 --
Harvard Private Capital
Holdings, Inc. ........ -- 1,423,077(2) 1,333,334 941,176 --
Invemed Fund, L.P. (3).. -- -- 1,439,394 117,647 --
Brentwood Associates
VIII, L.P. .......... -- 1,996,800 1,454,546 705,882 --
S.R. One, Limited....... -- -- 1,515,152 705,882 --
Phoenix International
Life Sciences
(Chrysalis) Inc. ...... -- -- -- -- 3,500,000
</TABLE>
--------
(1) Includes: 1,356,646 shares of Series C preferred stock held by Delphi
Ventures IV, L.P. and 27,969 shares of Series C preferred stock held by
Delphi Bioinvestments IV, L.P. Delphi Ventures IV, L.P.; 771,964 shares of
Series D preferred stock held by Delphi Ventures IV, L.P. and 15,915 shares
of Series D preferred stock held by Delphi Bioinvestments IV; and 115,271
shares of Series E preferred stock held by Delphi Ventures IV, L.P. and
2,376 shares of Series E preferred stock held by Delphi Bioinvestments IV,
L.P. Delphi Ventures IV, L.P. and Delphi Bioinvestments IV, L.P. are both
limited partnerships of which Delphi Management Partners IV, L.L.C. is a
general partner.
(2) Includes 115,385 shares issued upon conversion of a $150,000 convertible
promissory note.
(3) Includes: 1,212,121 shares of Series D preferred stock held by Invemed
Fund, L.P. and 227,273 shares of Series D preferred stock held by Invemed
Associates LLC. Invemed Associates LLC is a general partner of Invemed
Fund, L.P.
--------------------------------------------------------------------------------
64
<PAGE>
Related party transactions
--------------------------------------------------------------------------------
LOANS TO DIRECTORS AND EXECUTIVE OFFICERS
In January 1998, we loaned an aggregate of $97,500 to David W. Carter, our Co-
Chief Executive Officer and Chairman of the Board of Directors, in connection
with the purchase of an aggregate of 547,500 shares of restricted common stock.
The loans were made pursuant to two full-recourse promissory notes in the
amounts of $65,000 and $32,500, which each pay interest at a rate of 6% per
year and are secured by the underlying shares of common stock. The notes are
payable upon the earlier of December 31, 2002 or termination of Mr. Carter's
employment with or services to us.
In September 1998, we loaned $100,000 to Pamela R. Contag, PhD, our Co-Chief
Executive Officer and President, at an interest rate of 6% per year. The full-
recourse loan is secured by Dr. Contag's home and is payable in full upon the
earlier to occur of the termination of Dr. Contag's employment, her death,
bankruptcy, failure to execute and deliver the deed of trust to the home,
breach of the promissory note and deed of trust or sale or assignment of the
home without our prior consent. Provided Dr. Contag has not been terminated as
of the applicable date, the loan has and will be forgiven as follows: $15,000
of principal and all accrued interest on January 1, 1999, $15,000 of principal
and all accrued interest on January 1, 2000, $15,000 of principal and all
accrued interest on January 1, 2001 and $55,000 and all accrued interest on
January 1, 2002.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our amended and restated certificate of incorporation and bylaws provide that
we will indemnify each of our directors and officers to the fullest extent
permitted by the Delaware General Corporation Law. Further, we have entered
into indemnification agreements with each of our directors and officers. For
further information, see "Description of capital stock -- Limitation of
Liability and Indemnification Matters."
We believe that we have executed all of the transactions set forth above on
terms no less favorable to us than terms we could have obtained from
unaffiliated third parties. It is our intention to ensure that all future
transactions, including loans, between us and our officers, directors and
principal stockholders and their affiliates, are approved by a majority of the
board of directors, including a majority of the independent and disinterested
members of the board of directors, and are on terms no less favorable to us
than those that we could obtain from unaffiliated third parties.
--------------------------------------------------------------------------------
65
<PAGE>
--------------------------------------------------------------------------------
Principal stockholders
The following table shows information known to us with respect to the
beneficial ownership of our common stock as of September 30, 2000, adjusted to
reflect the subsequent share issuance in the DNX acquisition, and the sale of
the shares of common stock offered under this prospectus by:
.each of our directors;
.each named executive officer;
.each person or group of affiliated persons who is known by us to own
beneficially 5% or more of our common stock; 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 September 30, 2000 adjusted to reflect the issuance of
3,500,000 shares of our preferred stock in connection with the DNX acquisition
and the conversion of all shares of our preferred stock into an aggregate of
16,552,785 shares of our common stock prior to this offering. It is therefore
based on 19,886,256 shares of our common stock outstanding prior to this
offering and 26,886,256 shares outstanding immediately after this offering. The
address for those individuals for which an address is not otherwise indicated
is: c/o Xenogen Corporation, 860 Atlantic Avenue, Alameda, California 94501.
<TABLE>
<CAPTION>
Number of Percent Percent
shares owned owned
Number of underlying before after
shares options or this this
Beneficial owner owned(1) warrants offering offering
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Directors and named executive
officers
David W. Carter(2)................... 839,500 45,859 4.4% 3.3%
Pamela R. Contag, PhD(3)............. 1,825,000 12,167 9.2 6.8
Michael D. Cable, PhD................ -- 31,938 * *
Brian Dunn........................... 62,050 -- * *
Anthony F. Purchio, PhD.............. -- 25,855 * *
Brian G. Atwood(4)................... 3,034,776 -- 15.3 11.3
Alan M. Goldberg, PhD................ 8,588 15,133 * *
Raymond J. Whitaker, PhD(5).......... 1,621,355 -- 8.2 6.0
Debra Yu, MD(6)...................... 1,671,803 -- 8.4 6.2
All executive officers and directors
as a group (11 persons)............. 9,063,072 130,952 45.9 34.0
Five percent stockholders
Brentwood Associates VIII, L.P.(4)... 3,034,776 -- 15.3% 11.3%
Harvard Private Capital Holdings,
Inc.(7)............................. 2,699,239 42,116 13.8 10.2
MDS Inc.(8).......................... 2,555,000 -- 12.8 9.5
Delphi Ventures IV, L.P.(6).......... 1,671,803 -- 8.4 6.2
S.R. One, Limited(5)................. 1,621,355 -- 8.2 6.0
Invemed Fund, L.P.(9)................ 1,136,639 -- 5.7 4.2
</TABLE>
--------------------------------------------------------------------------------
66
<PAGE>
Principal stockholders
--------------------------------------------------------------------------------
* Represents beneficial ownership of less than 1%.
(1) Shares of preferred stock are shown on an as-converted basis.
(2) Includes 620,500 shares of common stock held by David W. Carter and 219,000
shares of common stock held by the Carter Descendants Trust. Mr. Carter is
a trustee of the Carter Descendants Trust. Mr. Carter holds a warrant to
purchase 33,691 shares of Series C preferred and has vested options to
purchase 12,167 shares of common stock as of 60 days from September 30,
2000.
(3) Includes 1,503,800 shares owned by the Christopher H. Contag and Pamela
Reilly Contag, Trustees of the Contag Family Trust Dated 11/23/98; 64,240
shares owned by the Ashyln Grace Contag Irrevocable Trust; 64,240 shares
owned by the Caitlin Ann Contag Irrevocable Trust; 64,240 shares owned by
the Carlos and Ann Contag Irrevocable Trust; 64,240 shares owned by the
John and Juanita Reilly Irrevocable Trust; and 64,240 shares owned by the
Greyson Christopher Contag Irrevocable Trust. Dr. Pamela R. Contag is a
trustee of each of these respective trusts. Dr. Contag disclaims beneficial
ownership to these trusts.
(4) Includes 3,034,776 shares owned by Brentwood Associates VIII, L.P. Mr.
Atwood is a general partner of the General Partner of Brentwood Associates
VIII, L.P. He shares voting and dispositive power over the shares and
disclaims beneficial ownership of these shares except to the extent of his
equity interest therein. Mr. Atwood's business address is Brentwood Venture
Capital, 3000 Sand Hill Road Building #1, Suite 260, Menlo Park, CA 94025.
(5) Includes shares owned by S.R. One, Limited, a fund of which Dr. Whitaker is
a Vice President. He shares voting and dispositive power over the shares
and disclaims beneficial ownership of these shares except to the extent of
his equity interest therein. Dr. Whitaker's business address is S.R. One
Limited, 200 Barr Harbor Drive, Suite 250, Four Tower Bridge, W.
Conshohocken, PA 19428-2977.
(6) Includes 1,638,033 shares owned by Delphi Ventures IV, L.P. and 33,770
shares owned by Delphi BioInvestments IV, L.P. From October 1995 to
December 1998, Dr. Yu was a General Partner at Delphi Ventures. She shares
voting and dispositive power over the shares and disclaims beneficial
ownership of these shares except to the extent of her equity interest
therein. Dr. Yu's business address is Bay City Capital LLC representing
Delphi Ventures, 750 Battery Street, Suite 600, San Francisco, CA 94111.
(7) The business address of Harvard Private Capital Holdings, Inc. is c/o
Charlesbank Capital Partners, LLC, 600 Atlantic Avenue, 6th Floor, Boston,
MA 02210.
(8) Represents 2,555,000 shares owned by Phoenix International Life Sciences
(Chrysalis), Inc., a wholly-owned subsidiary of MDS Inc. The business
address of MDS Inc. is 100 International Boulevard, Toronto, Ontario M9W
6J6.
(9) Includes 970,730 shares owned by Invemed Fund, L.P. and 165,909 shares
owned by Invemed Associates LLC. Invemed Associates LLC is a general
partner of Invemed Fund, L.P. The business address of Invemed Fund, L.P. is
375 Park Avenue, Suite 2205, New York, NY 10152.
--------------------------------------------------------------------------------
67
<PAGE>
--------------------------------------------------------------------------------
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. We intend to amend our certificate of
incorporation and bylaws prior to completion of this offering. This description
is only a summary. You should also refer to our amended and restated
certificate of incorporation and bylaws, which have been filed with the SEC as
exhibits to our registration statement, of which this prospectus forms a part.
The descriptions of our 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 our amended certificate of incorporation.
Upon the closing of this offering, our authorized capital stock will consist of
150,000,000 shares of common stock, $0.001 par value per share, and
5,000,000 shares of preferred stock, $0.001 par value per share.
COMMON STOCK
As of September 30, 2000, there were 3,333,471 shares of our common stock
outstanding and held of record by approximately 60 stockholders. There will be
26,886,256 shares of common stock outstanding upon the closing of this
offering, which gives effect to the issuance of 7,000,000 shares of our common
stock offered by us under this prospectus and the conversion of our preferred
stock discussed below.
Common stock held by certain employees and non-employees is subject to stock
purchase agreements whereby we have the option to repurchase unvested shares
upon termination of employment at the initial issuance price. Our right to
repurchase these shares generally lapses at the rate of 25% per year from the
date of the agreement.
The holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of common stock entitled to vote in any
election of directors can elect all of the directors standing for election, if
they so choose.
Subject to preferences that may be applicable to any then outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends,
if any, as may be declared by the board of directors out of funds legally
available therefor. See "Dividend policy." Upon our liquidation, dissolution or
winding up, the holders of common stock will be entitled to share ratably in
the net assets legally available for distribution to stockholders after the
payment of all of our debts and other liabilities of our company, subject to
the prior rights of any preferred stock then outstanding.
Holders of common stock have no preemptive or conversion rights or other
subscription rights and there are no redemption or sinking funds provisions
applicable to the common stock. All outstanding shares of common stock are, and
the common stock to be outstanding upon completion of this offering will be,
fully paid and nonassessable.
--------------------------------------------------------------------------------
68
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
PREFERRED STOCK
As of September 30, 2000, there were 22,675,049 shares of our convertible
preferred stock outstanding (such number adjusted to reflect shares issued in
the DNX acquisition in November 2000). Upon the closing of this offering, all
outstanding shares of our convertible preferred stock will be automatically
converted into 16,552,785 shares of our common stock. These shares of our
convertible preferred stock will no longer be authorized, issued or
outstanding. Our amended and restated certificate of incorporation, which
becomes effective upon the closing of this offering, authorizes the issuance of
5,000,000 shares of our preferred stock, par value $0.001 per share.
Our board of directors has the authority, without further action by our
stockholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers, and
relative, participating, optional or other special rights and the
qualifications or restrictions thereof. The preferences, powers, rights and
restrictions of different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions, and purchase funds and
other matters. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of common stock or
affect adversely the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control of us.
WARRANTS
In November 1997, in connection with the sale of our Series C preferred stock,
we issued warrants to purchase an aggregate of 115,384 shares of our Series C
preferred stock at an exercise price of $1.30 per share. These warrants will,
if not earlier exercised, convert into warrants for the purchase of 84,230
shares of our common stock upon the completion of this offering. These warrants
expire on November 13, 2007.
In August 1998, we issued to a creditor a warrant to purchase 56,154 shares of
common stock at an exercise price of $1.780 per share. This warrant will expire
on August 14, 2005.
In October 1999, we issued to a creditor a warrant to purchase 44,242 shares of
common stock at an exercise price of $2.260 per share. This warrant will expire
on October 7, 2009.
In February 2000, we issued to a creditor a warrant to purchase 11,061 shares
of common stock at an exercise price of $2.260 per share. This warrant will
expire on February 28, 2010. In April 2000, we issued to a creditor a warrant
to purchase 18,035 shares of common stock at an exercise price of $5.822 per
share. This warrant will expire on April 28, 2010.
REGISTRATION RIGHTS
After this offering, the holders of 16,637,015 shares of common stock issued
upon conversion of our preferred stock and upon exercise of the Series C
preferred stock warrants are entitled to various rights with respect to the
registration of these shares under the Securities Act of 1933. If we propose to
register any of our securities under the Securities Act for our own account,
holders of common stock issuable upon conversion of the preferred stock and
holders of the Series C preferred stock warrants are entitled to notice of such
registration and are entitled to include their shares in that registration
subject to various conditions. The underwriters of any such offering have the
right to limit the number of shares included in such registration.
In addition, commencing 180 days after the effective date of the registration
statement of which this prospectus is a part, holders of at least 35% of the
common stock issuable upon conversion of the
--------------------------------------------------------------------------------
69
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
Series A, B, C, D and E preferred stock may require us to prepare and file a
registration statement under the Securities Act at our expense covering at
least 35% of the common stock issuable upon conversion of the preferred stock,
provided that the shares to be included in such registration have an
anticipated aggregate net proceeds of at least $10 million. Under these demand
registration rights, we are required to use our best efforts to cause the
shares requested to be included in the registration statement, subject to
customary conditions and limitations. We are not obligated to effect more than
two of these stockholder-initiated registrations.
Once we become eligible to file a registration statement on Form S-3, the
holders of common stock issuable upon conversion of the Series A, B, C, D and E
preferred stock and the holders of the Series C preferred stock warrants may
require us to register all or a portion of their securities on a registration
statement on Form S-3, and all holders of common stock issuable upon conversion
of preferred stock may participate in a Form S-3 registration by us, subject to
certain conditions and limitations. Registration rights terminate no later than
five years after this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS AND DELAWARE LAW
Our amended and restated certificate of incorporation and bylaws effective upon
completion of this offering contain provisions that could discourage, delay or
prevent a tender offer or takeover attempt at a price which many stockholders
may find attractive. The existence of these provisions, which are intended to
enhance the likelihood of continuity and stability in the composition of, and
policies formulated by, our board could limit the price that investors might
otherwise pay in the future for shares of our common stock.
Blank check preferred stock
As noted above, our board of directors, without stockholder approval, will have
the authority under our amended and restated certificate of incorporation to
authorize the issuance of preferred stock, commonly referred to as "blank
check" preferred stock with rights senior to those of common stock. As a
result, preferred stock could be issued quickly and easily, could impair the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change of control of us or make removal of management more
difficult.
Stockholder meetings
Our amended and restated certificate of incorporation provides that
stockholders may not call a special meeting of stockholders. Rather, special
meetings of stockholders may only be called by our Chairman of the Board, Co-
Chief Executive Officers or board of directors. Our amended and restated bylaws
also provide that stockholders may only conduct business at special meetings of
stockholders that was specified in the notice of the meeting. These provisions
may discourage another person or entity from making a tender offer for our
voting stock, even if it acquired a majority of our outstanding voting stock,
because the person or entity could only take action at a duly called
stockholders' meeting relating to the business specified in the notice of
meeting and not by written consent.
Requirements for advance notification of stockholder nominations and proposals
Our amended and restated bylaws provide that a stockholder seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual meeting of stockholders, must provide
timely notice of this intention in writing. To be timely, a stockholder must
deliver or mail the notice and we must receive the notice at our principal
executive offices not less than 60 days nor more than 90 days prior to the
scheduled date of the annual meeting of stockholders. The amended and restated
bylaws also include a similar requirement for making
--------------------------------------------------------------------------------
70
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
nominations at special meetings and specify requirements as to the time, form
and content of the stockholder's notice. These provisions could delay
stockholder actions that are favored by the holders of a majority of our
outstanding stock until the next stockholders' meeting.
Super-majority voting
Delaware law generally provides that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation, unless the certificate of incorporation requires
a greater percentage. We have provisions in our certificate of incorporation
that require a vote of at least 66 2/3% of the stockholders entitled to vote in
the election of directors to amend in any respect or repeal the anti-takeover
provisions of our certificate of incorporation.
Delaware anti-takeover statute
Section 203 of the Delaware General Corporation Law prohibits persons deemed
"interested stockholders" from engaging in a "business combination" with a
Delaware corporation for three years following the date these persons become
interested stockholders. Interested stockholders generally include:
.persons who are the beneficial owners of 15% or more of our outstanding voting
stock; and
.persons who are our affiliates or associates and who hold 15% or more of our
outstanding voting stock at any time within three years before the date on
which such person's status as an interested stockholder is determined.
Subject to certain exceptions, a "business combination" includes, among other
things:
.mergers and consolidations;
.the sale, lease, exchange, mortgage, pledge, transfer or other disposition of
assets having an aggregate market value equal to 10% or more of either the
aggregate market value of all assets of the corporation determined on a
consolidated basis or the aggregate market value of all our outstanding stock;
.transactions that result in our issuance or transfer of any of our stock to
the interested stockholder, except pursuant to certain exercises, exchanges,
conversions, distributions or offers to purchase with respect to securities
outstanding prior to the time that the interested stockholder became such and
that, generally, do not increase the interested stockholder's proportionate
share of any class or series of our stock;
.any transaction involving us that has the effect of increasing the
proportionate share of our stock of any class or series, or securities
convertible into the stock of any class or series, that is owned directly or
indirectly by the interested stockholder; or
.any receipt by the interested stockholder of the benefit (except
proportionately as a stockholder) of any loans, advances, guarantees, pledges
or other financial benefits which we provided.
Section 203 does not apply to a business combination if:
.before a person becomes an interested stockholder, our board approves the
transaction in which the interested stockholder became an interested
stockholder or approves the business combination;
--------------------------------------------------------------------------------
71
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
.upon consummation of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested stockholder
owns at least 85% of our voting stock outstanding at the time the transaction
commences (other than certain excluded shares); or
.following a transaction in which the person became an interested stockholder,
the business combination is approved by our board and authorized at a regular
or special meeting of stockholders (and not by written consent) by the
affirmative vote of the holders of at least two-thirds of our outstanding
voting stock not owned by the interested stockholder.
These provisions of the Delaware General Corporation Law and our amended and
restated certificate of incorporation and bylaws could have the effect of
discouraging others from attempting hostile takeovers and, as a consequence,
they may also inhibit temporary fluctuations in the market price of our common
stock that often result from actual or rumored hostile takeover attempts. Such
provisions may also have the effect of preventing changes in our management. It
is possible that these provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our amended and restated certificate of
incorporation that limit the liability of our directors for monetary damages
for breach of their fiduciary duty as directors, except for liability that
cannot be eliminated under the Delaware General Corporation Law. Delaware law
provides that directors of a company will not be personally liable for monetary
damages for breach of their fiduciary duty as directors, except for liability:
.for any breach of their duty of loyalty to us or our stockholders;
.for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
.for unlawful payment of dividend or unlawful stock repurchase or redemption,
as provided Section 174 of the Delaware General Corporation Law; or
.for any transaction from which the director derived an improper personal
benefit.
Any amendment or repeal of these provisions requires the approval of the
holders of shares representing at least 66 2/3% of our shares entitled to vote
in the election of directors, voting as one class. Our amended and restated
certificate of incorporation and bylaws also provide that we shall indemnify
our directors and officers to the fullest extent permitted by Delaware law. We
have entered into separate indemnification agreements with our directors and
executive officers that could require us, among other things, to indemnify them
against liabilities that may arise by reason of their status or service as
directors and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. We believe that the
limitation of liability provision in our amended and restated certificate of
incorporation and the indemnification agreements will facilitate our ability to
continue to attract and retain qualified individuals to serve as directors and
officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Equiserve, L.P.
--------------------------------------------------------------------------------
72
<PAGE>
--------------------------------------------------------------------------------
Shares eligible for future sale
Upon completion of this offering, we will have 26,886,256 shares of common
stock outstanding based on shares outstanding as of September 30, 2000,
adjusted to reflect the subsequent share issuance in the DNX acquisition. Of
these shares, the 7,000,000 shares sold in this offering will be freely
transferable without restriction under the Securities Act, unless they are held
by our "affiliates" as that term is used under the Securities Act and the
regulations promulgated thereunder.
Of our shares outstanding as of December 15, 2000, 19,906,413 shares had been
sold by us in reliance on exemptions from the registration requirements of the
Securities Act, are restricted securities within the meaning of Rule 144 under
the Securities Act and become eligible for sale in the public market as
follows:
.Approximately 766,605 shares will be immediately eligible for sale in the
public market without restriction pursuant to Rule 144(k), and an additional
2,220,970 shares will become eligible for sale in the public market in April
2001;
.Approximately 8,452,207 shares will become eligible for sale in the public
market 90 days after this offering, and an additional 5,251,702 shares will
become eligible for sale in the public market in May 2001, in each case
subject to volume and manner of sale restrictions, under Rule 144;
.Approximately 2,555,000 shares will become eligible for sale in the public
market in November 2001, subject to volume and manner of sale restrictions,
under Rule 144;
.Approximately 659,927 shares will become eligible for sale in the public
market without restriction 90 days after this offering under Rule 701; and
.Remaining shares will become eligible for sale in the public market pursuant
to Rule 144 from time to time after completion of this offering.
The foregoing does not take into consideration the effect of the lock-up
agreements as described below. Our officers and directors and substantially all
of our stockholders have entered into lock-up agreements pursuant to which they
have agreed, subject to limited exceptions, not to offer or sell any shares of
common stock or securities convertible into or exchangeable or exercisable for
shares of common stock for a period of 180 days from the date of this
prospectus without the prior written consent of UBS Warburg LLC. Any shares
subject to lock-up agreements may be released at any time without notice by UBS
Warburg LLC. UBS Warburg LLC is likely to release shares from the operation of
the lock-up agreements only if it determines, after considering factors such as
the number of shares to be released, the circumstances of the proposed sale and
prevailing market conditions, that releasing the shares would not adversely
affect the market for the common stock. The determination of whether to release
the shares is within the sole discretion of UBS Warburg LLC and may be made for
any of the foregoing or other reasons.
In general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, including an affiliate, who has beneficially owned
restricted shares for at least one year is entitled to sell, within any three-
month period commencing 90 days after the date of completion of this offering,
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock, approximately 268,862 shares immediately
after this offering, or the average weekly trading volume in the common stock
during the four calendar weeks preceding such sale, subject to the filing of
--------------------------------------------------------------------------------
73
<PAGE>
Shares eligible for future sale
--------------------------------------------------------------------------------
a Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been an affiliate
of our company 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, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
Any of our employees, officers, directors or consultants who purchased his or
her shares before the date of completion of this offering or who holds options
as of that date pursuant to a written compensatory plan or contract is entitled
to rely on the resale provisions of Rule 701, which permits non-affiliates to
sell their Rule 701 shares without having to comply with the public-
information, holding-period, volume-limitation or notice provisions of Rule 144
and permits affiliates to sell their Rule 701 shares without having to comply
with Rule 144's holding-period restrictions, in each case commencing 90 days
after the date of completion of this offering. However, as described above, we
and our officers, directors and substantially all of our stockholders have
agreed not to sell or otherwise dispose of any shares of our common stock for
the 180-day period after the date of this prospectus without the prior written
consent of UBS Warburg LLC. See "Underwriting."
We intend to file a registration statement on Form S-8 under the Securities Act
of 1933 to register shares of common stock reserved for issuance under the 2000
Stock Plan and the 2000 Employee Stock Purchase Plan, thus permitting the
resale of such shares by non-affiliates in the public market without
restriction under the Securities Act. Such registration statements will become
effective immediately upon filing.
Before this offering, there has been no public market for our common stock, and
any sale of substantial amounts in the open market may adversely affect the
market price of our common stock offered hereby.
In addition, after this offering, the holders of preferred stock and warrants
convertible into an aggregate of 16,637,015 shares of common stock will be
entitled to certain rights to cause us to register the sale of such shares
under the Securities Act. Registration of these shares under the Securities Act
would result in these shares, other than shares purchased by our affiliates,
becoming freely tradable without restriction under the Securities Act. See
"Description of capital stock -- Registration Rights."
--------------------------------------------------------------------------------
74
<PAGE>
--------------------------------------------------------------------------------
Underwriting
We and the underwriters named below have entered into an underwriting agreement
concerning the shares we are offering. Subject to conditions, each underwriter
has severally agreed to purchase the number of shares indicated in the
following table. UBS Warburg LLC, CIBC World Markets Corp. and Dain Rauscher
Incorporated are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters shares
--------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC......................................................
CIBC World Markets Corp. ............................................
Dain Rauscher Incorporated...........................................
---------
Total.............................................................. 7,000,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to
1,050,000 additional 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 1,050,000 additional shares.
<TABLE>
<CAPTION>
No exercise Full exercise
--------------------------------------------------------------------------------
<S> <C> <C>
Per share............................................ $ $
Total.............................................. $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1,800,000.
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.
--------------------------------------------------------------------------------
75
<PAGE>
Underwriting
--------------------------------------------------------------------------------
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock to be offered.
We, our directors, officers and certain of our stockholders have agreed with
the underwriters not to offer, sell, contract to sell, hedge or otherwise
dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act of 1933 relating to, any of our common stock
or securities convertible into or exchangeable for shares of our common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus offering, subject to certain
exceptions, without the prior written consent of UBS Warburg LLC.
The underwriters have reserved for sale, at the initial public offering price,
up to 350,000 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 reserved share
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.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between us
and the representatives of the underwriters. 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 stabilizing
transactions. Stabilizing transactions consists 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. These transactions may also
include short sales 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. 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 the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. Naked short sales are sales in excess of the over-allotment
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be
--------------------------------------------------------------------------------
76
<PAGE>
Underwriting
--------------------------------------------------------------------------------
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.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of our
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.
--------------------------------------------------------------------------------
77
<PAGE>
--------------------------------------------------------------------------------
Legal matters
Various legal matters with respect to the validity of the common stock offered
by this prospectus will be passed upon for us by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, San Francisco, California. An investment
partnership affiliated with Wilson Sonsini, as well as certain current and
former members of Wilson Sonsini, own an aggregate of 22,121 shares of our
common stock. Karen Dempsey, a member of Wilson Sonsini, serves as our
corporate secretary. Dewey Ballantine LLP, New York, New York, is acting as
counsel for the underwriters in connection with various legal matters relation
to the shares of common stock offered by this prospectus.
Experts
Ernst & Young LLP, independent auditors, have audited our financial statements
as of December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited DNX's financial
statements as of December 31, 1998 and 1999 and for each of the three years in
the period ended December 31, 1999, as set forth in their report. DNX's
financial statements are included in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
--------------------------------------------------------------------------------
78
<PAGE>
--------------------------------------------------------------------------------
Where you can find additional information
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in
the registration statement, or the exhibits which are part of the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the shares of our common stock to be sold in this offering, please refer to the
registration statement and the exhibits which are part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete. Each statement in
this prospectus regarding the contents of the referenced contract or other
document is qualified in all respects by our reference to the copy filed with
the registration statement.
For further information about us and our common stock, we refer you to our
registration statement and its attached exhibits, copies of which may be
inspected without charge at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can request copies of these documents
by writing to the Securities and Exchange Commission and paying a duplicating
fee. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. The Commission maintains
a World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
Upon completion of this offering, we will become subject to the information and
periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and web site
of the Commission referred to above.
We intend to furnish our stockholders with annual reports containing audited
financial statements and an opinion thereon expressed by independent certified
public accountants. We also intend to furnish other reports as we may determine
or as required by law.
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.
--------------------------------------------------------------------------------
79
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------------------------------------------------------------------------------------------
<S> <C>
XENOGEN CORPORATION
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Balance Sheets...................................................................... F-3
Statements of Operations............................................................ F-4
Statement of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Net Capital Deficiency).......................................................... F-5
Statements of Cash Flows............................................................ F-7
Notes to Financial Statements....................................................... F-8
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
Report of Ernst & Young LLP, Independent Auditors................................... F-28
Balance Sheets...................................................................... F-29
Statements of Operations............................................................ F-30
Statement of Stockholders' Equity (Net Capital Deficiency).......................... F-31
Statements of Cash Flows............................................................ F-32
Notes to Financial Statements....................................................... F-33
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Financial Statements......................... F-43
Unaudited Pro Forma Combined Condensed Balance Sheets............................... F-44
Unaudited Pro Forma Combined Condensed Statements of Operations..................... F-45
Notes to Unaudited Pro Forma Combined Condensed Financial Statements................ F-47
</TABLE>
--------------------------------------------------------------------------------
F-1
<PAGE>
--------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Xenogen Corporation
We have audited the accompanying balance sheets of Xenogen Corporation
("Xenogen") as of December 31, 1998 and 1999 and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(net capital deficiency) and cash flows of Xenogen for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of Xenogen's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Xenogen Corporation at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Palo Alto, California
February 4, 2000, except to Notes 1 and 12 for which the date is 2001.
--------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the 0.73-for-one reverse stock split described in notes 1 and 12 to the
financial statements.
/s/ Ernst & Young, LLP
Palo Alto, California
January 18, 2001
--------------------------------------------------------------------------------
F-2
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
As of
September 30,
As of As of 2000
December 31, September 30, (unaudited
----------------- 2000 pro forma)
1998 1999 (unaudited) (Note 1)
<S> <C> <C> <C> <C>
------------------------------------------------ ----------------------------
Assets
Current assets:
Cash and cash equivalents.... $ 2,407 $ 3,752 $ 18,819
Short-term investments....... -- 2,060 9,281
Accounts receivable, net of
allowance for doubtful
accounts of $12 at December
31, 1998, $0 at December 31,
1999 and September 30,
2000........................ 14 712 339
Inventories.................. -- -- 372
Prepaid expenses and other
current assets.............. 188 229 1,237
Employee loans............... 232 131 98
------- -------- --------
Total current assets.......... 2,841 6,884 30,146
Property and equipment, net... 1,324 2,150 3,164
Long-term investments......... -- 2,064 1,984
Restricted investments........ 528 469 538
Other noncurrent assets....... 43 46 105
------- -------- --------
Total assets.................. $ 4,736 $ 11,613 $ 35,937
======= ======== ========
Liabilities and stockholders'
equity (net capital
deficiency)
Current liabilities:
Accounts payable............. $ 99 $ 311 $ 1,104
Accrued liabilities.......... 104 587 433
Loans payable--current
portion..................... 273 668 1,078
Deferred revenue............. 94 350 1,744
------- -------- --------
Total current liabilities..... 570 1,916 4,359
Noncurrent liabilities:
Loans payable................ 1,360 2,678 3,164
Other noncurrent
liabilities................. 12 -- --
Commitments
Redeemable convertible
preferred stock, $0.001 par
value; designated in series;
20,085,895 shares authorized;
5,041,539, 11,720,330, and
18,914,443 shares issued and
outstanding at December 31,
1998 and 1999 and September
30, 2000, respectively
(3,680,323, 8,555,841 and
13,807,543, respectively, on
an as-if converted basis)
(none pro forma); liquidation
preference of $17,574 and
$48,149 at December 31, 1999
and September 30, 2000 (none
pro forma)................... 6,527 17,511 46,502 $ --
Stockholders' equity (net
capital deficiency):
Convertible preferred stock,
$0.001 par value; designated
in series; 260,606 shares
authorized; 260,606 shares
issued and outstanding at
December 31, 1998 and 1999
and September 30, 2000,
respectively (190,242 on an
as-if converted basis) (none
pro forma); liquidation
preference of $120 at
December 31, 1999 and
September 30, 2000 (none pro
forma)...................... -- -- -- --
Common stock, $0.001 par
value; 15,000,000,
30,000,000, and
35,000,000 shares authorized
at December 31, 1998 and
1999, and September 30,
2000, respectively;
3,175,500, 3,237,550, and
3,333,471 shares issued and
outstanding at December 31,
1998 and 1999, and September
30, 2000, respectively
(17,331,256 shares pro
forma)...................... 3 3 3 17
Additional paid-in capital... 303 1,355 11,081 57,569
Notes receivable from
stockholders................ (111) (111) (111) (111)
Deferred stock-based
compensation................ -- (675) (8,910) (8,910)
Accumulated deficit.......... (3,928) (11,064) (20,151) (20,151)
------- -------- -------- --------
Total stockholders' equity
(net capital deficiency).... (3,733) (10,492) (18,088) $ 28,414
------- -------- -------- ========
Total liabilities and
stockholders' equity (net
capital deficiency)......... $ 4,736 $ 11,613 $ 35,937
======= ======== ========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-3
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
Year ended December 31, (unaudited)
--------------------------- ------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
--------------------------- ------------------
Revenues:
Licenses..................... $ 23 $ 47 $ 457 $ 316 $ 774
Research and development
services.................. 40 37 790 352 716
Other revenues............... -- -- 46 25 406
------- -------- -------- -------- --------
Total revenues................ 63 84 1,293 693 1,896
------- -------- -------- -------- --------
Operating costs and expenses:
Costs of revenues............ -- -- -- -- 261
Research and development
(Note A).................. 189 1,009 4,790 3,815 6,686
Selling, general and
administrative (Note A)... 336 2,381 3,757 2,263 4,578
------- -------- -------- -------- --------
Total operating costs and
expenses................... 525 3,390 8,547 6,078 11,525
Loss from operations.......... (462) (3,306) (7,254) (5,385) (9,629)
Interest income............... -- 184 355 248 917
Interest expense.............. (5) (122) (237) (147) (375)
------- -------- -------- -------- --------
Net loss...................... $ (467) $ (3,244) $ (7,136) $ (5,284) $ (9,087)
======= ======== ======== ======== ========
Basic and diluted net loss per
common share............... $ (0.35) $ (1.81) $ (2.94) $ (2.26) $ (3.17)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
common share................. 1,339 1,789 2,426 2,339 2,864
======= ======== ======== ======== ========
Pro forma basic and diluted
net loss per common share
(unaudited).................. $ (0.72) $ (0.64)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited).................. 9,863 14,274
======== ========
Includes non-cash charges for
stock-based compensation as
follows:
Research and development.... $ -- $ -- $ 169 $ 94 $ 969
======= ======== ======== ======== ========
Selling, general and
administrative........... $ -- $ -- $ 119 $ 91 $ 398
======= ======== ======== ======== ========
</TABLE>
Note A:
See accompanying notes.
--------------------------------------------------------------------------------
F-4
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(In thousands, except share data)
<TABLE>
<CAPTION>
Redeemable
Convertible Convertible Additional
Preferred Stock Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............. -- $ -- 260,606 $ -- 2,190,000 $ 2 $ 103
Issuance of
common stock in
exchange for
cash and notes.. -- -- -- -- 321,200 -- 22
Net loss........ -- -- -- -- -- -- --
------------------------------- ---------------------------------------------------------
Balance at
December 31,
1997............. -- -- 260,606 -- 2,511,200 2 125
Payment of note
receivable...... -- -- -- -- -- -- --
Issuance of
common stock in
exchange for
notes........... -- -- -- -- 620,500 1 110
Issuance of
common stock
upon exercise of
options......... -- -- -- -- 43,800 -- 3
Issuance of
Series C
redeemable
convertible
preferred stock,
net of issuance
costs of $27.... 4,810,770 6,227 -- -- -- -- --
Issuance of
Series C
redeemable
convertible
preferred stock
upon conversion
of notes
payable......... 230,769 300 -- -- -- -- --
Warrants to
purchase 115,384
shares of Series
C preferred
stock (84,230
shares of common
stock on an
as-if converted
basis).......... -- -- -- -- -- -- 65
Net loss........ -- -- -- -- -- -- --
------------------------------- ---------------------------------------------------------
Balance at
December 31,
1998............. 5,041,539 6,527 260,606 -- 3,175,500 3 303
Issuance of
common stock
upon exercise of
options......... -- -- -- -- 62,050 -- 11
Issuance of
Series D
redeemable
convertible
preferred stock,
net of issuance
costs of $36.... 6,678,791 10,984 -- -- -- -- --
Acceleration of
employee
options'
vesting......... -- -- -- -- -- -- 59
Warrants to
purchase 44,242
shares of
common stock.... -- -- -- -- -- -- 78
Deferred stock-
based
compensation.... -- -- -- -- -- -- 904
Amortization of
deferred
compensation.... -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- --
------------------------------- ---------------------------------------------------------
Balance at
December 31,
1999............. 11,720,330 $17,511 260,606 $ -- 3,237,550 $ 3 $1,355
==========================================================================================
<CAPTION>
Total
Notes Stockholders'
Receivable Deferred Equity (Net
from Stock-Based Accumulated Capital
Stockholders Compensation Deficit Deficiency)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31,
1996............. $ -- $ -- $ (217) $ (112)
Issuance of
common stock in
exchange for
cash and notes.. (2) -- -- 20
Net loss........ -- -- (467) (467)
-------------------------------------------------------------
Balance at
December 31,
1997............. (2) -- (684) (559)
Payment of note
receivable...... 2 -- -- 2
Issuance of
common stock in
exchange for
notes........... (111) -- -- --
Issuance of
common stock
upon exercise of
options......... -- -- -- 3
Issuance of
Series C
redeemable
convertible
preferred stock,
net of issuance
costs of $27.... -- -- -- --
Issuance of
Series C
redeemable
convertible
preferred stock
upon conversion
of notes
payable......... -- -- -- --
Warrants to
purchase 115,384
shares of Series
C preferred
stock (84,230
shares of common
stock on an
as-if converted
basis).......... -- -- -- 65
Net loss........ -- -- (3,244) (3,244)
-------------------------------------------------------------
Balance at
December 31,
1998............. (111) -- (3,928) (3,733)
Issuance of
common stock
upon exercise of
options......... -- -- -- 11
Issuance of
Series D
redeemable
convertible
preferred stock,
net of issuance
costs of $36.... -- -- -- --
Acceleration of
employee
options'
vesting......... -- -- -- 59
Warrants to
purchase 44,242
shares of
common stock.... -- -- -- 78
Deferred stock-
based
compensation.... -- (904) -- --
Amortization of
deferred
compensation.... -- 229 -- 229
Net loss........ -- -- (7,136) (7,136)
-------------------------------------------------------------
Balance at
December 31,
1999............. $(111) $(675) $(11,064) $(10,492)
=============================================================
</TABLE>
F-5
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY) (Continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
Redeemable Notes
Convertible Convertible Additional Receivable
Preferred Stock Preferred Stock Common Stock Paid-In from
Shares Amount Shares Amount Shares Amount Capital Stockholders
------------------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999........ 11,720,330 $17,511 260,606 $ -- 3,237,550 $ 3 $1,355 $(111)
Issuance of common stock
upon exercise of option
(unaudited)..... -- -- -- -- 95,921 -- 30 --
Issuance of Series E
redeemable convertible
preferred stock, net of
issuance costs of $1,584
(unaudited)..... 7,194,113 28,991 -- -- -- -- -- --
Warrants to purchase
11,061 and 18,035
shares of common stock
(unaudited)..... -- -- -- -- -- -- 94 --
Options granted to
consultants for service
rendered (unaudited).. -- -- -- -- -- -- 179 --
Deferred stock-based
compensation
(unaudited)..... -- -- -- -- -- -- 9,423 --
Amortization of deferred
stock-based
compensation
(unaudited)..... -- -- -- -- -- -- -- --
Net loss (unaudited)... -- -- -- -- -- -- -- --
----------------------- ---------------------------------------------------------------------
Balance at September 30,
2000 (unaudited)...... 18,914,443 $46,502 260,606 $ -- 3,333,471 $ 3 $11,081 $(111)
======================= =====================================================================
<CAPTION>
Total
Stockholders'
Deferred Equity
Stock-Based Accumulated (Net Capital
Compensation Deficit Deficiency)
------------------------------------------
<S> <C> <C> <C>
Balance at December 31,
1999......... $ (675) $(11,064) $(10,492)
Issuance of common stock
upon exercise of options
(unaudited)..... -- -- 30
Issuance of Series E
redeemable convertible
preferred stock, net of
issuance costs of $1,584
(unaudited)..... -- -- --
Warrants to purchase
11,061 and 18,035
shares of common stock
(unaudited)..... -- -- 94
Options granted to
consultants for services
rendered (unaudited)..... -- -- 179
Deferred stock-based
compensation
(unaudited)..... (9,423) -- --
Amortization of deferred
stock-based
compensation
(unaudited)..... 1,188 -- 1,188
Net loss (unaudited)..... -- (9,087) (9,087)
------------------------------------------
Balance at September 30,
2000 (unaudited)...... $(8,910) $(20,151) $(18,088)
==========================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months
ended
Year ended September 30,
December 31, (unaudited)
----------------------- -----------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
----------------------- -----------------
Operating activities
Net loss.......................... $(467) $(3,244) $(7,136) $(5,284) $ (9,087)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Noncash stock-based compensation
expense......................... -- -- 288 185 1,367
Noncash interest expense related
to warrants granted............. -- 65 4 -- 25
Depreciation and amortization.... 1 163 633 462 873
Fixed asset write-offs........... -- 272 272 --
Interest income.................. -- (124) (71) (181)
Changes in operating assets and
liabilities:
Accounts receivable.............. -- (14) (698) (176) 373
Inventories...................... -- -- -- -- (372)
Prepaid expenses and other
assets.......................... 1 (231) (44) (40) (1,067)
Employee loans................... -- (232) 101 65 33
Accounts payable................. 74 (25) 212 70 793
Accrued liabilities.............. 168 (135) 483 278 (154)
Deferred revenue................. 77 18 256 (29) 1,394
----- ------- ------- ------- --------
Net cash used in operating
activities..................... (146) (3,635) (5,753) (4,268) (6,003)
Investing activities
Purchase of property and
equipment........................ (5) (1,482) (1,730) (1,394) (1,887)
Purchase of investments........... -- (528) (4,000) (4,000) (10,128)
Sale of investments............... -- 59 59 3,100
----- ------- ------- ------- --------
Net cash used in investing
activities...................... (5) (2,010) (5,671) (5,335) (8,915)
Financing activities
Proceeds from issuance of common
stock............................ 20 3 11 -- 30
Repayment of note receivable from
stockholder...................... -- 2 -- -- --
Proceeds from issuance of
preferred stock.................. -- 6,227 10,984 10,984 28,991
Proceeds from issuance of warrants
and convertible notes payable.... 300 -- -- -- --
Proceeds from loans............... 20 1,763 2,237 453 1,613
Repayment of loans................ (20) (130) (451) (252) (649)
Security deposits................. -- 12 (12) -- --
----- ------- ------- ------- --------
Net cash provided by financing
activities...................... 320 7,877 12,769 11,185 29,985
----- ------- ------- ------- --------
Net increase in cash and cash
equivalents...................... 169 2,232 1,345 1,582 15,067
Cash and cash equivalents, at
beginning of period.............. 6 175 2,407 2,407 3,752
----- ------- ------- ------- --------
Cash and cash equivalents, at end
of period........................ $ 175 $ 2,407 $ 3,752 $ 3,989 $ 18,819
===== ======= ======= ======= ========
Supplemental disclosures of cash
flow information
Cash paid for interest............ $ 1 $ 61 $ 233 $ 147 $ 350
===== ======= ======= ======= ========
Supplemental disclosures of
noncash investing and financing
activities
Issuance of common stock for
notes receivable................ $ 2 $ 111 $ -- $ -- $ --
===== ======= ======= ======= ========
Conversion of convertible notes
payable to shares of Series C
preferred stock................. $ -- $ 300 $ -- $ -- $ --
===== ======= ======= ======= ========
Reclassification of unrestricted
investment into collateral...... $ -- $ -- $ -- $ -- $ 69
===== ======= ======= ======= ========
Deferred stock-based compensation
related to stock options........ $ -- $ -- $ 904 $ 584 $ 9,423
===== ======= ======= ======= ========
Warrants issued.................. $ -- $ 65 $ 78 $ -- $ 94
===== ======= ======= ======= ========
Stock options to consultants..... $ -- $ -- $ -- $ -- $ 179
===== ======= ======= ======= ========
Acceleration of options vesting.. $ -- $ -- $ 59 $ 59 $ --
===== ======= ======= ======= ========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-7
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Xenogen Corporation ("Xenogen") was founded on August 1, 1995 and is a life
sciences company incorporated in the state of California. In September 2000,
the Board of Directors approved Xenogen's reincorporation in the state of
Delaware. The reincorporation was approved by the state of Delaware in the
third quarter of 2000. The accompanying financial statements have been
retroactively restated to give effect to the reincorporation.
Xenogen has developed and is manufacturing a platform for acquiring, analyzing
and managing complex image data. This platform is comprised of an imaging
system, software and biological materials, and is designed to improve the
efficiency and productivity of drug discovery and development by facilitating
biological assessment. Xenogen's in vivo biophotonic imaging system combines
technologies in molecular biology and physiology to enable researchers to track
and monitor the dynamic properties associated with the mechanisms of disease
and the impact of drugs on such mechanisms, as they occur, at the molecular
level in live animals.
Through December 31, 1998, Xenogen was in the development stage. During fiscal
1999, Xenogen commenced commercial operations, and, therefore, it is no longer
considered to be in the development stage. Xenogen will require additional
financial resources to complete development and commercialization of its
products. Management plans to continue to finance Xenogen primarily through the
issuances of equity securities, collaborative research and development
agreements, and debt financing. If the financing arrangements contemplated by
management are not consummated, Xenogen may have to seek other sources of
capital or re-evaluate its operating plans.
Initial Public Offering
In September 2000, the Board of Directors approved the filing of a Registration
Statement with the Securities and Exchange Commission permitting Xenogen to
sell common stock to the public. Upon completion of the initial public
offering, Xenogen's certificate of incorporation will be amended to authorize
150,000,000 shares of common stock and 5,000,000 shares of preferred stock.
Unaudited Interim Financial Statements
The financial information at September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited, but has been prepared on the same
basis as the annual financial statements and, in the opinion of management,
includes all adjustments (consisting of normal recurring adjustments), that
Xenogen considers necessary for a fair presentation of financial position at
that date and the results of operations and cash flows for those periods.
Operating results for the interim periods are not necessarily indicative of
results that may be expected for any future periods.
Unaudited Pro Forma Information
In September 2000, the Board of Directors authorized the management of Xenogen
to file a registration statement with the Securities and Exchange Commission
(the "SEC") permitting Xenogen to sell shares of its common stock to the
public. If the initial public offering is consummated under the terms presently
anticipated, all of the preferred stock outstanding will automatically be
converted into common stock. Unaudited pro forma redeemable convertible
preferred stock and stockholders' equity at September 30, 2000, as adjusted for
the assumed conversion of the preferred stock, is set forth on the balance
sheet.
--------------------------------------------------------------------------------
F-8
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Reverse Stock Split
In December 2000, the Company's board of directors approved a 0.73-for-one
reverse split of its common stock. The accompanying financial statements have
been adjusted retroactively to reflect the reverse split. The conversion ratios
of the respective series of convertible preferred stock were automatically
adjusted to reflect the reverse split.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Reclassifications
Certain amounts reported in the prior period financial statements have been
reclassified to conform with the current period's presentation.
Cash and Cash Equivalents
Xenogen considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
For purposes of the statements of cash flows, cash consists of amounts on
deposit with commercial banks in checking, interest-bearing, and money market
accounts available on demand.
Marketable Securities
Xenogen accounts for its investments in marketable securities in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("Statement 115"). To date,
all marketable securities have been classified as available-for-sale, and are
carried at market value as determined based on quoted market prices. Unrealized
gains and losses have not been material. The amortized cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and
losses and declines in value judged to be other than temporary for available-
for-sale securities are included in interest and other income and have not been
significant to date. Realized gains and losses are computed on a specific
identification basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, generally three to five years.
Amortization of leasehold improvements is determined using the straight-line
method over the lesser of useful life of the assets or the life of the lease.
Software Costs
In January 1999, Xenogen adopted Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 98-1 requires that entities capitalize certain costs related to
internal-use software once certain criteria have been met. Xenogen has not
internally developed any software to date and thus the adoption of SOP 98-1 did
not have any impact on Xenogen's financial statements.
--------------------------------------------------------------------------------
F-9
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost or market. At September 30, 2000, inventories consisted mainly of raw
materials used in manufacturing of imaging systems.
Impairment of Long-Lived Assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), Xenogen reviews long-lived
assets, including property and equipment, for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Under SFAS 121, an impairment loss would
be recognized when estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment, if any, is assessed using discounted cash flows.
Income Taxes
Xenogen utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Revenue Recognition
Xenogen grants evaluation licenses for the use of its in vivo biophotonic
imaging technology and associated biological products to prospective commercial
customers on a nonexclusive, nontransferable basis solely for the purposes of
its evaluation in the fields of drug discovery and/or preclinical drug
development research. Standard terms of the commercial and license agreements,
which require no further active performance by Xenogen, generally include
nonrefundable fees. The fees are recognized in equal monthly installments over
the period to which the license applies.
Contract revenues related to collaboration, research and development
agreements, and government grants are recognized as the related services are
performed. Under these agreements, Xenogen is required to perform specific
research and development activities and is reimbursed based on the costs
associated with each specific contract over the term of the agreement.
Milestone-related revenues are recognized upon the achievement of the specified
milestone.
Other revenue consists mainly of product revenue which is recognized upon
delivery, transfer of title to customers, and installation of equipment, if
necessary under the agreement, net of allowances for estimated returns, if any.
Deferred revenue is recorded when funds are received or when customers are
contractually obligated in advance of services to be performed.
Research and Development
Research and development expenses consist of costs incurred for company-
sponsored, collaborative and contracted research and development activities.
These costs include direct and research-related overhead expenses. Research and
development expenses under collaborative agreements and government grants
approximate the revenue recognized under such agreements. Xenogen expenses
research and development costs as such costs are incurred.
--------------------------------------------------------------------------------
F-10
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Stock-Based Compensation
Xenogen has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options. This election was
made because the alternative fair value accounting provided for under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires the use of option valuation models that
were not developed for use in valuing employee stock options.
Xenogen accounts for options and warrants issued to nonemployees under SFAS 123
and Emerging Issues Task Force Issue No. 96-18. The value of options and
warrants are periodically remeasured over their vesting terms.
Significant Concentrations
Financial instruments that potentially subject Xenogen to concentrations of
credit risk primarily consist of cash equivalents and marketable securities.
Xenogen invests cash, which is not required for immediate operating needs,
primarily in highly liquid instruments, which bear minimal risk.
Xenogen is dependent on the continuing validity of its exclusive license
obtained from a University for the use of licensed patents and certain
materials as a core to its proprietary-developed products and technologies.
Xenogen relies on several companies as the sole source of various materials
used in its manufacturing process. Any interruption in the supply of these
materials could result in the failure to meet customer demand.
Revenue from customers representing 10% or more of the total revenue for the
years ended December 31, 1997, 1998, and 1999, and for the nine months ended
September 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
Nine months
ended
September 30,
Year ended December 31, (unaudited)
------------------------------- -----------------
Customer 1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------- -----------------
A...................... 68% 27% 4% 8% --
B...................... 32% 28% -- -- --
C...................... -- 29% 8% 14% --
D...................... -- 16% 5% 5% 29%
E...................... -- -- 28% 8% 12%
F...................... -- -- 35% 45% 24%
G...................... -- -- 1% -- 11%
H...................... -- -- -- -- 10%
I...................... -- -- 8% 14% --
J...................... -- -- 10% 5% --
</TABLE>
Xenogen does not require collateral or other security for accounts receivable.
--------------------------------------------------------------------------------
F-11
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Comprehensive Income (Loss)
As of January 1, 1998, Xenogen adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes rules for the reporting and display of comprehensive income (loss)
and its components; however, the adoption of this statement had no material
impact on Xenogen's net loss or stockholders' equity (net capital deficiency)
for the years ended December 31, 1998 and 1999 and the nine months ended
September 30, 1999 and 2000.
Net Loss Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less the weighted-average number of shares of common stock that are
subject to repurchase. Diluted net loss per share includes the impact of
options and warrants to purchase common stock, if dilutive. There is no
difference between the basic and diluted net loss per share as Xenogen incurred
a net loss for each period presented. Pro forma basic and diluted net loss per
share, as presented in the statements of operations, has been computed as
described above and also gives effect, under SEC guidance, to the conversion of
the convertible preferred stock (using the if-converted method) from the
original date of issuance.
The following table presents the computation of basic and diluted and pro forma
basic and diluted net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Nine months
ended
September 30,
Year ended December 31, (unaudited)
------------------------- ----------------
1997 1998 1999 1999 2000
------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C> <C>
Net loss allocable to common
stockholders.................. $ (467) $(3,244) $(7,136) $(5,284) $(9,087)
======= ======= ======= ======= =======
Basic and diluted:
Weighted-average shares of
common stock outstanding.... 2,370 3,136 3,191 3,175 3,270
Less weighted-average shares
subject to repurchase....... (1,031) (1,347) (765) (836) (406)
------- ------- ------- ------- -------
Weighted-average shares used in
computing basic and diluted
net loss per common share..... 1,339 1,789 2,426 2,339 2,864
======= ======= ======= ======= =======
Basic and diluted net loss per
share......................... $ (0.35) $ (1.81) $ (2.94) $ (2.26) $ (3.17)
======= ======= ======= ======= =======
Pro forma:
Shares used above................ 2,426 2,864
Pro forma adjustment to reflect
weighted-average effect of the
assumed conversion of
convertible preferred stock
(unaudited)..................... 7,437 11,410
------- -------
Shares used in computing pro
forma basic and diluted net loss
per common share (unaudited).... 9,863 14,274
======= =======
Pro forma basic and diluted net
loss per common share
(unaudited)..................... $ (0.72) $ (0.64)
======= =======
</TABLE>
--------------------------------------------------------------------------------
F-12
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
During all periods presented, Xenogen had securities outstanding which could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per share, as their effect would have
been antidilutive. These outstanding securities consist of the following:
<TABLE>
<CAPTION>
As of September 30,
As of December 31, (unaudited)
--------------------------- --------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------- --------------------
Convertible preferred stock
(as-if-converted basis)... 190,242 3,870,565 8,746,083 8,746,083 13,997,785
Stock options................ 94,900 444,205 780,735 684,375 1,826,170
Warrants to purchase common
stock..................... -- 56,154 100,396 56,154 129,492
Warrants to purchase
preferred stock
(as-if-converted basis)..... 84,230 84,230 84,230 84,230 84,230
------- --------- --------- --------- ----------
Total........................ 369,372 4,455,154 9,711,444 9,570,842 16,037,677
======= ========= ========= ========= ==========
Weighted-average exercise
price of options.......... $ 0.068 $ 0.298 $ 0.374 $ 0.345 $ 1.228
======= ========= ========= ========= ==========
Weighted-average exercise
price of warrants......... $ 1.78 $ 1.78 $ 1.89 $ 1.78 $ 2.24
======= ========= ========= ========= ==========
</TABLE>
Segment Reporting
Effective in January 1998, Xenogen adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Xenogen has
determined that it operates in only one segment and, accordingly, the adoption
of SFAS 131 had no impact on the financial statements.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS 133, as amended
by SFAS 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000, with earlier application encouraged. Xenogen does not
currently nor does it intend in the future to use derivative instruments and
therefore does not expect that the adoption of SFAS 133 will have any impact on
its financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes the SEC's
views in applying generally accepted accounting principles to revenue
recognition. The adoption of SAB 101 had no impact on Xenogen's historical
revenue recognition policy.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which contains
rules designed to clarify the application of APB 25. FIN 44 became effective on
July 1, 2000 at which time Xenogen adopted the interpretation. The impact of
the adoption of FIN 44 was not material to Xenogen's operating results and
financial position.
--------------------------------------------------------------------------------
F-13
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
2. License
Xenogen entered into a license agreement with a third party (the "University")
dated July 1, 1997 superseded by a new agreement dated May 5, 2000 (the
"License"). The License provides Xenogen with the exclusive worldwide right to
use the inventions, certain materials, and related patents in all fields of
use, including Xenogen's right to sublicense all or a portion of the rights
pursuant to the License, until the expiration of the last to expire licensed
patents.
Under the terms and conditions of the License, if prior to July 1, 2000,
Xenogen had neither sublicensed the leased patents nor made the licensed
products available for commercial sale, the University could exercise its right
to terminate the License. Xenogen had sublicensed the leased patents at that
point of time. Also, in the event that Xenogen fails to make available for a
commercial sale the licensed products based on particular licensed materials
for a certain specified period after July 1, 2000, the University has a right
to convert the exclusive license solely with respect to that particular
licensed material to a nonexclusive license.
In accordance with the License, Xenogen shall pay the University certain earned
royalties subject to a specified minimum amount payable each year as a
nonrefundable royalty payment.
In addition, Xenogen shall pay the University certain specified percentages of
amounts received from the licensed patents and from Xenogen sublicense, if any.
Included in the accompanying statements of operations for the years ended
December 31, 1997, 1998, and 1999, and the nine months ended September 30, 1999
and 2000, is approximately $3,000, $17,000, $39,000, $10,000, and $97,000 of
royalties resulting from the license, respectively.
3. Marketable Securities
The following is a summary of Xenogen's investment portfolio as of December 31,
1998 and 1999 and September 30, 2000, including $2,390,000, $3,439,000, and
$18,602,000 of cash equivalents (in thousands):
<TABLE>
<CAPTION>
Amortized cost
as of As of
December 31, September 30,
--------------- 2000
1998 1999 (unaudited)
-------------------------------------------------------------------------------
---------
<S> <C> <C> <C>
Money market funds............................... $ 2,390 $ 3,439 $18,602
Certificates of deposit.......................... 528 4,593 1,613
------- ------- -------
$2,918 $ 8,032 $20,215
======= ======= =======
</TABLE>
At December 31, 1998 and 1999, approximately $528,000 and $469,000 held in
certificates of deposit represented restricted investments (see Note 6) with
the average maturity exceeding one year. At December 31, 1999, approximately
$2,060,000 and $2,064,000 of the certificates of deposit mature in 6 months and
18 months.
--------------------------------------------------------------------------------
F-14
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Unrealized gains and losses related to all marketable available-for-sale
securities are not material, and have, therefore, not been shown separately.
4. Employee Loans and Notes Receivable From Stockholders
The amount of employee loans consists of the following:
<TABLE>
<CAPTION>
As of
December 31,
---------------
1998 1999
--------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Travel advances................................................. $ 20 $ --
Management loans................................................ 207 120
Accrued interest................................................ 5 11
------- -------
$232 $ 131
======= =======
</TABLE>
The principal and accrued interest on management loans are to be forgiven in
equal yearly amounts over the period of two to four years. The loan forgiveness
arrangement is subject to continuous employment with Xenogen.
During 1998, Xenogen issued 620,500 shares of common stock to officers in
exchange for full-recourse notes receivable of approximately $111,000 which
bear interest at 6% and are due at the earlier of December 31, 2002 or
cessation of employment. The 620,500 shares of common stock are subject to
Xenogen's lapsing right to repurchase (see Note 7).
--------------------------------------------------------------------------------
F-15
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As of
December 31,
--------------
1998 1999
--------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Furniture, telecommunications, and office equipment............. $ 611 $ 651
Laboratory equipment............................................ 519 1,814
Leasehold improvements.......................................... 358 482
------ ------
1,488 2,947
Less accumulated depreciation and amortization.................. (164) (797)
------ ------
$1,324 $2,150
====== ======
</TABLE>
Effective January 1, 1999, management has revised its estimate of the useful
lives for furniture and office equipment to 60 months and for
telecommunications and laboratory equipment to 36 months. This change resulted
in an increase in annual depreciation expense of approximately $115,000 in the
year ended December 31, 1999.
Xenogen evaluates the recoverability of its long-lived assets in accordance
with SFAS 121. SFAS 121 requires an evaluation of indicators of impairment and
future discounted cash flows to be generated by those assets. Impairment is
measured as the amount by which the asset's carrying amounts exceed the future
discounted cash flows estimated to be generated by those assets. Certain of
Xenogen's long-lived assets were written off during 1999 in accordance with
SFAS 121, which resulted in impairment loss of $197,000 reported in the
accompanying financial statements in general and administrative costs.
6. Loans Payable
Business Loan
In May 1998, Xenogen obtained a business loan of $500,000. Under the terms of
the secured loan between the bank and Xenogen, repayment of the outstanding
principal amount and accrued interest should be made in 84 equal monthly
installments beginning June 10, 1998 and continuing until May 10, 2005. The
loan bears interest at 8% per annum. At December 31, 1998 and 1999, as
collateral for the loan, Xenogen was required to hold certificates of deposit
of $528,000 and $469,000, respectively. Under the security agreement entered
into with the bank, Xenogen shall not withdraw funds from the deposit account
without prior written consent of the bank. Upon maturity of the certificates of
deposit, Xenogen shall renew the security agreement at the rate of return
prevailing at that date.
Equipment Line
In July 1998, Xenogen entered into an agreement with a lender to finance the
acquisition of equipment in the amount of $2,000,000. Amounts drawn under the
facility bear an interest rate of 13.2% to 13.7%, have a term of 48 months, and
are secured by the financed equipment.
--------------------------------------------------------------------------------
F-16
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
In October 1999, Xenogen entered into an agreement with another lender to
finance the acquisition of equipment in the amount of $2,000,000, which was
increased to $5,500,000 in February and April 2000. As of September 30, 2000,
Xenogen had drawn funds under this agreement approximately $3,100,000. The
lender's commitment to make available the unused amount of $2,400,000
terminates in May 2001. Amounts drawn bear an interest rate of 14.4% to 14.8%,
have a term of 48 months from the date of withdrawal, and are secured by the
financed equipment.
The aggregate amount of required payments on loans payable at December 31, 1999
is as follows:
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
(In thousands)
<S> <C>
2000.......................................................... $1,057
2001.......................................................... 1,144
2002.......................................................... 1,176
2003.......................................................... 809
2004.......................................................... 121
Thereafter.................................................... 43
------
Total minimum payments........................................ 4,350
Less amount representing interest............................. (931)
Less amount representing deferred charge associated with
warrants issued............................................ (73)
------
Present value of minimum payments............................. 3,346
Current portion............................................... (668)
------
Long-term portion............................................. $2,678
======
</TABLE>
Interest expense under these loans for the year ended December 1998, and 1999,
and the nine months ended September 30, 1999 and 2000 was approximately
$55,000, $233,000, $147,000 and $350,000, respectively. There was no interest
expense under these loans for the year ended December 31, 1997.
7. Redeemable Convertible Preferred Stock and Stockholders' Equity (Net Capital
Deficiency)
Common Stock
In September 2000, Xenogen registered with the Delaware Secretary of State its
amended and restated articles of incorporation under which Xenogen is
authorized to issue 35,000,000 shares of common stock and 20,346,501 shares of
preferred stock.
Common Stock Subject to Repurchase
Common stock issued to certain of Xenogen's employees is subject to Xenogen's
right of repurchase which lapses over varying periods. From inception (August
1, 1995) through September 30, 2000, Xenogen's officers purchased 1,817,700
restricted shares of common stock, of which 506,741 and 346,141 shares are
subject to repurchase at a weighted-average price per share of $0.136 and
$0.150 at December 31, 1999 and September 30, 2000, respectively.
--------------------------------------------------------------------------------
F-17
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Convertible Preferred Stock
Convertible preferred stock is issuable in series, with rights and preferences
designated by series. The shares designated and outstanding are as follows:
<TABLE>
<CAPTION>
As of As of
December 31, 1999 September 30, 2000
--------------------------------- ----------------------------------
"As-if" "As-if"
Shares Converted Redemption/ Shares Converted Redemption/
Issued and Common Liquidation Issued and Common Liquidation
Outstanding Shares Value Outstanding Shares Value
(Unaudited)
---------------------------------------------------------- ----------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Convertible preferred
stock:
Series A.............. 60,606 44,242 $ 20 60,606 44,242 $ 20
Series B.............. 200,000 146,000 100 200,000 146,000 100
---------- --------- ------- ---------- ---------- -------
260,606 190,242 120 260,606 190,242 120
---------- --------- ------- ---------- ---------- -------
Redeemable convertible
preferred stock:
Series C.............. 5,041,539 3,680,323 6,554 5,041,539 3,680,323 6,554
Series D.............. 6,678,791 4,875,518 11,020 6,678,791 4,875,518 11,020
Series E.............. -- -- -- 7,194,113 5,251,702 30,575
---------- --------- ------- ---------- ---------- -------
11,720,330 8,555,841 17,574 18,914,443 13,807,543 48,149
---------- --------- ------- ---------- ---------- -------
Total................... 11,980,936 8,746,083 $17,694 19,175,049 13,997,785 $48,269
========== ========= ======= ========== ========== =======
</TABLE>
The holders of each share of convertible preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which such
shares of preferred stock could be converted.
The holders of Series A, B, C, D, and E convertible preferred stock are
entitled to receive noncumulative dividends out of any assets legally
available, prior and in preference to any declaration or payment of any
dividend (payable other than in common stock or other securities) on the common
stock of Xenogen, at the rate of $0.0264, $0.04, $0.104, $0.132, and $0.34 per
share per annum, respectively ($0.036 $0.055, $0.142, $0.180, and $0.466 per
common shares, respectively, on an as-if converted basis), as and if declared
by the Board of Directors. No dividends have been declared to date.
In the event of any liquidation, dissolution, or winding up of Xenogen, the
holders of convertible preferred stock are entitled to receive prior and in
preference to any distribution of any of the assets or surplus funds of Xenogen
to the holders of common stock, an amount equal to $0.33, $0.50, $1.30, $1.65,
and $4.25 per share of the Series A, B, C, D, and E convertible preferred stock
plus any declared but unpaid dividends.
Each share of preferred stock is convertible into shares of common stock at any
time after the date of issuance. Each share of preferred stock is initially
convertible into one share of common stock (subject to adjustment for
antidilution, stock splits, or dividends). Each share of preferred stock is
automatically convertible into common stock immediately upon the closing of a
firm commitment underwritten
--------------------------------------------------------------------------------
F-18
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, in which the aggregate gross proceeds to
Xenogen exceeds $15,000,000 and the per share price to the public is at least
$8.00.
Xenogen's Series C, D, and E shares of convertible preferred stock are
redeemable. Holders of the majority of the then outstanding Series C and/or
Series D and/or Series E convertible preferred stock may give written notice to
Xenogen of a demand for redemption of the respective shares of convertible
preferred stock at any time after December 31, 2004. The price per share to be
paid to the holders of the Series C, D, and E convertible preferred stock is
$1.30, $1.65, and $4.25, respectively, plus an additional amount equal to any
dividends declared but unpaid on such series.
1996 Stock Plan
In 1996, the Board of Directors adopted the 1996 Stock Plan (the "1996 Plan").
In December 1999 and September 2000, Xenogen's Board of Directors authorized
additional 730,000 and 584,000 options, respectively, for grants under the 1996
Plan for a total of up to 2,774,000 shares of common stock. The 1996 Plan
provides for the granting of incentive and nonstatutory stock options to
employees, officers, directors, and consultants of Xenogen. Incentive stock
options may be granted with exercise prices not less than fair value, and
nonstatutory stock options may be granted with an exercise price not less than
85% of the fair value of the common stock on the date of grant. Stock options
granted to a stockholder owning more than 10% of voting stock of Xenogen may be
granted with an exercise price of not less than 110% of the fair value of the
common stock on the date of grant. The Board of Directors determines the fair
value of common stock. Stock options are generally granted with terms of up to
ten years and vest over a period of four years under the 1996 Plan.
In August 2000, the Board of Directors approved a proposed amendment to the
existing stock options granted under the 1996 Plan which, upon acceptance by
the optionee, would permit the optionee to exercise unvested options and enter
into a restricted stock purchase agreement with respect to the underlying
shares of common stock. The Board of Directors also approved, in August 2000,
that such early exercise rights will also be provided for subsequent options
granted under the 1996 Plan. Through September 30, 2000, no optionee has made
an early-exercise.
--------------------------------------------------------------------------------
F-19
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
A summary of Xenogen's stock option activity and related information under the
1996 Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------
Shares Weighted-
Available Average
for Future Exercise Exercise
Grants Shares Price Price
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996... 1,394,300 65,700 $0.068 $0.068
Options/rights granted....... (29,200) 29,200 $0.068 $0.068
---------- --------- ------------- ------
Balance at December 31, 1997... 1,365,100 94,900 $0.068 $0.068
Options/rights granted....... (809,205) 809,205 $0.178-$0.356 $0.244
Options/rights exercised..... -- (408,800) $0.068-$0.178 $0.166
Options/rights forfeited..... 51,100 (51,100) $0.068 $0.068
---------- --------- ------------- ------
Balance at December 31, 1998... 606,995 444,205 $0.178-$0.356 $0.298
Shares authorized............ 730,000 -- -- --
Options/rights granted....... (500,415) 500,415 $0.356-$0.411 $0.411
Options/rights exercised..... -- (62,050) $0.178 $0.178
Options/rights forfeited..... 101,835 (101,835) $0.178-$0.411 $0.342
---------- --------- ------------- ------
Balance at December 31, 1999... 938,415 780,735 $0.178-$0.411 $0.374
Shares authorized
(unaudited)............... 584,000 -- -- --
Options/rights granted
(unaudited)............... (1,149,348) 1,149,348 $0.178-$2.739 $1.727
Options/rights exercised
(unaudited)............... -- (95,920) $0.178-$0.411 $0.312
Options/rights forfeited
(unaudited)............... 7,993 (7,993) $0.411 $0.411
---------- --------- ------------- ------
Balance at September 30, 2000
(unaudited)................. 381,060 1,826,170 $0.178-$2.739 $1.228
========== ========= ============= ======
</TABLE>
Most of the options granted vest 25% at the end of one year following the
vesting commencement date and an additional 1/48th at the end of each full
month thereafter based upon such individuals' continued employment or service
to Xenogen.
The following table summarizes information about the stock options outstanding
under the 1996 Plan at December 31, 1999.
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------
Weighted-
Average
Number Remaining Number of
of Contractual Options
Exercise Price Options Life Exercisable
--------------------------------------------------------------------------------
(In years)
<S> <C> <C> <C>
$0.178......................................... 69,350 8.18 31,935
$0.356......................................... 221,920 8.85 67,062
$0.411......................................... 489,465 9.65 --
------- ---- ------
780,735 9.29 98,997
======= ==== ======
</TABLE>
--------------------------------------------------------------------------------
F-20
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
The following table summarizes information about the stock options outstanding
under the 1996 Plan at September 30, 2000 (unaudited):
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------
Weighted-
Average
Remaining Number of
Number of Contractual Options
Exercise price Options Life Exercisable
--------------------------------------------------------------------------------
(In years)
<S> <C> <C> <C>
$0.178....................................... 40,835 7.47 16,424
$0.356....................................... 173,423 8.14 58,048
$0.411....................................... 710,216 9.09 83,723
$0.616....................................... 95,995 9.68 --
$1.369....................................... 280,101 9.92 15,208
$2.739....................................... 525,600 9.99 --
--------- ---- -------
1,826,170 9.38 173,403
========= ==== =======
</TABLE>
The options granted and outstanding as of December 31, 1999 and September 30,
2000, if not exercised within the period of 10 years from the vesting
commencement date, will expire.
Stock-Based Compensation
During the year ended December 31, 1999 and the nine months ended September 30,
2000, in connection with stock option grants to employees, deferred stock
compensation was recorded totaling approximately $904,000 and $9,423,000,
representing the difference between the deemed fair value of the common stock
for financial reporting purposes and the exercise price of the underlying
options. This amount is recorded as a reduction of stockholders' equity (net
capital deficiency) and is being amortized over the vesting period of the
individual options, generally four years, using the graded vesting method.
Xenogen recorded amortization of deferred stock compensation of $229,000 for
the year ended December 31, 1999 and $126,000 and $1,188,000 for the nine-month
periods ended September 30, 1999 and September 30, 2000, respectively. At
September 30, 2000, Xenogen had a total of $8,910,000 remaining to be amortized
over the corresponding vesting period of each respective option, generally four
years.
The remaining deferred stock compensation at September 30, 2000 will be
amortized as follows: $1,404,000 for the three months ending December 31, 2000,
$4,644,000 for the year ending December 31, 2001, $1,900,000 for the year
ending December 31, 2002, $818,000 for the year ending December 31, 2003 and
$144,000 for the year ending December 31, 2004. The graded vesting method has
been consistently applied in prior years and Xenogen will continue to do so in
the future. Subsequent terminations of option holders may reduce future stock-
based compensation.
In 1999, Xenogen recorded compensation expense of $59,000 in connection with
the acceleration of the vesting period for stock options previously granted to
Xenogen's officer upon termination of employment with Xenogen. This amount
represents the deemed fair value of unvested stock options which were
exercisable under the employment termination agreement.
--------------------------------------------------------------------------------
F-21
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
During 1996 and 1997, Xenogen granted nonemployees options to purchase 94,900
common shares at $0.068 per share. The fair value of options granted to
nonemployees were determined using the Black-Scholes model with the following
weighted-average assumptions: risk-free interest rate of 5.65% per annum,
contractual life of 4 years; dividend yield of zero, and an expected volatility
of 60%. The resulting compensation expense was immaterial. The value will be
periodically remeasured as the underlying options vest.
In August 2000, Xenogen granted non-employee options to purchase 51,100 shares
of common stock at $1.369 per share in exchange for services. The fair value of
options granted to non-employees was determined using the Black-Scholes model
with the following weighted average assumptions: risk-free interest rate of
5.5%, contractual life at 2.25 years, dividend yield at zero and expected
volatility of 65%. In connection with these options to purchase common stock,
Xenogen recorded a non-cash charge of $179,000 in its statement of operations
for the nine months ended September 30, 2000. The value will be periodically
remeasured as the underlying options vest.
Pro Forma Information
SFAS 123 requires pro forma information regarding net loss, which has been
determined as if Xenogen accounted for its employee stock options under the
fair value method of SFAS 123. Xenogen estimates the fair value of these
options at the date of grant using the minimum value method at zero volatility
with the following weighted-average assumptions: risk-free interest rate of
5.65%; a weighted-average expected life of the option from grant date of four
years; and a dividend yield of zero. The weighted-average fair value of stock
options granted, in the years ended December 31, 1997, 1998, and 1999, and in
the nine months ended September 30, 1999 and 2000 was $0.01, $0.05, $1.76,
$1.76, and $8.15, respectively. Pro forma amounts are not representative of
future years.
For pro forma purposes, the estimated fair value of Xenogen's stock-based
awards to its employees is amortized using the graded-vesting method over the
options vesting period. Xenogen's pro forma information is as follows:
<TABLE>
<CAPTION>
Nine months
ended
September 30,
Year ended December 31, (unaudited)
<S> <C> <C> <C> <C> <C>
--------------------------- ----------------
<CAPTION>
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
--------------------------- ----------------
<CAPTION>
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
As reported:
Net loss...................... $ (467) $ (3,244) $ (7,136) $(5,284) $(9,087)
Net loss per common share..... $ (0.35) $ (1.81) $ (2.94) $ (2.26) $ (3.17)
Pro forma:
Net loss...................... $ (467) $ (3,260) $ (7,161) $(5,302) $(9,142)
Net loss per common share..... $ (0.35) $ (1.82) $ (2.94) $ (2.26) $ (3.19)
</TABLE>
Warrants
In connection with the issuance of convertible notes payable in November 1997,
Xenogen granted warrants to purchase 115,384 shares of Series C redeemable
convertible preferred stock with an exercise price of $1.30 per share to an
officer and a stockholder. The warrants are exercisable through November 13,
2007. In the accompanying financial statements, these warrants were valued at
--------------------------------------------------------------------------------
F-22
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
approximately $65,000 which was charged to interest expense. These warrants, if
not earlier exercised, convert into warrants for the purchase of 84,230 shares
of common stock at an exercise price of $1.780 upon the completion of initial
public offering.
In connection with a debt financing, Xenogen, in August 1998, issued warrants
to purchase 56,154 shares of common stock at an exercise price per share equal
to $1.780. The term of the warrant extends for seven years and expires on
August 14, 2005. The value of the warrants was deemed insignificant, therefore,
no value was recorded.
In connection with a financing in October 1999, Xenogen granted a lender
warrants to purchase 44,242 shares of common stock at an exercise price per
share equal to $2.260. The term of the warrant extends for the longer of 10
years after the grant date or 5 years after the closing of Xenogen's initial
public offering. In the accompanying financial statements, these warrants were
valued at $78,000 and recorded as deferred interest charge to be amortized to
expense straight-line over the loan's repayment period of 48 months from the
date of withdrawal.
In connection with extensions in amounts available under one of the financing
arrangements in February 2000 and April 2000, Xenogen granted a lender warrants
to purchase 11,061 and 18,035 shares of common stock at an exercise price per
share equal to $2.260 and $5.822. The term of the warrants extends for the
longer of 10 years after the grant date or 5 years after the closing of
Xenogen's initial public offering. In the accompanying financial statements,
these warrants were valued at $20,000 and $74,000. Related deferred interest is
amortized to expense straight-line over the loans' repayment periods of 48
months from the date of withdrawal.
Reserved Shares
As of December 31, 1999 and September 30, 2000, Xenogen has reserved shares of
common stock for future issuance as follows:
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
1999 2000
(unaudited)
<S> <C> <C>
---------------------------------------------------------------- ----------
Stock options........................................ 1,719,150 2,207,230
Warrants............................................. 184,626 213,722
Preferred stock -- issued and outstanding............ 8,746,083 13,997,785
---------- ----------
10,649,859 16,418,737
========== ==========
</TABLE>
2000 Employee Stock Purchase Plan
In September 2000, Xenogen's Board of Directors approved the adoption of the
2000 Employee Stock Purchase Plan (the "Purchase Plan"), to become effective
upon the closing of the initial public offering. A total of 292,000 of common
stock has been reserved for issuance under the Purchase Plan. On each January
1, starting in 2001, the number of shares will be automatically increased by
the lessor of (i) 2% of the then outstanding shares of common stock, (ii)
584,000 shares or (iii) an amount determined by the Plan administrator.
--------------------------------------------------------------------------------
F-23
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
2000 Stock Plan
In September 2000, Xenogen's Board of Directors approved the 2000 Stock Plan
(the "2000 Plan"), to become effective upon the closing of the initial public
offering. A total of 839,500 shares of common stock has been reserved under the
2000 Plan. On each January 1, starting 2001, the number of shares will be
automatically increased by the lesser of (i) 4% of the then outstanding shares,
(ii) 839,500 shares or (iii) such amount determined by the Board.
8. Income Taxes
As of December 31, 1999, Xenogen had federal and state net operating loss
carryforwards of approximately $10,000,000 and $6,000,000, respectively. The
federal net operating loss carryforwards will expire in 2010 through 2020, if
not utilized. The state of California net operating losses will start to expire
in the year 2003 through 2004, if not utilized.
Utilization of net operating loss may be subject to a substantial limitation
due to the ownership change limitations provided by the Internal Revenue Code
of 1986 and similar state provisions. The annual limitation may result in the
expiration of the net operating loss before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of Xenogen's deferred tax
assets for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
As of
December 31,
----------------
1998 1999
--------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Net operating loss carryforwards.............................. $ 3,800 $ 1,600
Research and other credit carryforwards....................... 300 --
Other -- Net.................................................. 300 100
------- -------
Total deferred tax assets..................................... 4,400 1,700
Valuation allowance for deferred tax assets................... (4,400) (1,700)
------- -------
Net deferred tax assets....................................... $ -- $ --
======= =======
</TABLE>
To date, Xenogen has no history of earnings. As such, the Company cannot
anticipate any sources of taxable income as outlined in SFAS 109. Therefore,
the deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $300,000, $1,300,000 and $2,700,000 during the
years ended December 31, 1997, 1998 and 1999.
--------------------------------------------------------------------------------
F-24
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
9. Operating Leases
Xenogen leases certain real property under a noncancelable operating lease
agreement in Alameda, California. The following is a schedule of minimum rental
commitments under operating lease agreement as of December 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Years ended December 31,
2000.................................................................. $ 511
2001.................................................................. 526
2002.................................................................. 531
2003.................................................................. 44
------
$1,612
======
</TABLE>
During the years ended December 31, 1997, 1998, 1999, and nine months ended
September 30, 1999 and 2000, Xenogen incurred rent expenses net of sublease
income of approximately $18,000, $420,000, $454,000, $339,000 and $508,000,
respectively. Sublease income for the years ended December 31, 1998 and 1999,
and nine months ended September 30, 1999 was $86,000 and $181,000, and
$134,000, respectively.
During June 2000, Xenogen leased additional facilities at a nearby location for
a term of 68 months commencing June 15, 2000. Minimum annual rental commitments
under the new operating lease is $87,000, $502,000, $544,000, $565,000 and
$1,303,000 for the years ending December 31, 2000, 2001, 2002, 2003 and
thereafter, respectively.
10. Related Party Transactions
In September 1999, Xenogen entered into a Settlement agreement with its former
Chief Financial Officer, under which the party will continue to receive his
monthly base salary until September 2000 in exchange for consulting services
that were not to exceed 16 hours per month. In addition, Xenogen recorded
compensation expense related to the accelerated vesting of some of the party's
stock options (see Note 7).
In March and April 2000, Xenogen entered into agreements with a shareholder and
board representative, under which the party provided advisory services for a
$150,000 fee and Bay City Capital-BD LLC acted as an exclusive placement agent
in the issuance of the Series E redeemable convertible preferred stock for a
fee of $1,520,000. This amount was recorded against the Series E proceeds.
11. Defined Contribution Plan
Xenogen has a qualified defined contribution plan (the "Plan") under Section
401(k) of the Internal Revenue Code. Substantially, all full-time employees
qualify for participation in the Plan. Under the Plan, Xenogen does not make
matching contributions.
--------------------------------------------------------------------------------
F-25
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
12. Subsequent Event
In December 2000, the board of directors approved a 0.73-for-one reverse split
of its common stock. All common stock, options and warrants to purchase common
stock and par value amounts in the accompanying financial statements have been
adjusted retroactively to reflect the split. The conversion ratios of the
respective convertible stock were automatically adjusted to reflect the reverse
split.
13. Subsequent Events (Unaudited)
In November 2000, the Company acquired substantially all the assets and
liabilities of Chrysalis DNX Transgenic Sciences Corporation ("DNX"), a wholly-
owned subsidiary of MDS, Inc. As consideration for the acquisition, MDS Inc.
received 3,500,000 shares of the Company's Series F preferred stock, or
2,555,000 shares of common stock on an as-if converted basis. The redeemable
preferred stock issued to DNX Stockholders was valued at $10.00 per share,
which was the fair market value per share of Xenogen redeemable convertible
preferred stock on the effective date of the agreement. Upon completion of the
initial public offering, these shares of preferred stock will convert to common
shares.
Based upon a preliminary valuation of tangible and intangible assets acquired,
Xenogen has allocated the total cost of the acquisition to assets as follows
(in thousands):
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
Purchase price allocation:
Tangible net assets acquired......................................... $ 4,867
Intangible net assets acquired:
Patent............................................................ 3,019
Assembled workforce............................................... 777
Current contracts................................................. 498
Goodwill.......................................................... 28,628
-------
Total.................................................................. $37,789
=======
</TABLE>
The acquisition of DNX will be accounted for as a purchase, with the results of
DNX's operations included in the Company's results of operations from the date
of acquisition. The unaudited pro forma information, had the acquisition of DNX
occurred on January 1, 1999, is as follows (in thousands, except per share
amounts, unaudited):
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
1999 2000
-------------------------------------------------------------------------------
<S> <C> <C>
Revenue........................................... $ 7,488 $ 7,155
Net loss.......................................... $(13,601) $(14,567)
Net loss per common share, basic and diluted...... $ (2.73) $ (2.69)
</TABLE>
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred had the transaction been completed at the beginning of the earliest
period presented, nor is it necessarily indicative of future operating results.
--------------------------------------------------------------------------------
F-26
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited)
Subsequent to September 30, 2000 Xenogen's Board of Directors authorized an
additional 511,000 options, for grants under the 1996 Plan for a total of up to
3,285,000 shares of common stock.
Subsequent to September 30, 2000 we issued to employees additional options to
purchase 698,464 of our common stock at a weighted-average exercise price of
$2.74 per share. As a result, we expect additional $5.8 million in deferred
stock-based compensation to be amortized in future periods as follows: $0.5
million in 2000, $3.2 million in 2001, $1.3 million in 2002, $0.6 million in
2003 and $0.2 million in 2004.
--------------------------------------------------------------------------------
F-27
<PAGE>
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Chrysalis DNX Transgenic Sciences Corporation
We have audited the accompanying balance sheets of Chrysalis DNX Transgenic
Sciences Corporation ("DNX") as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of DNX's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 Chrysalis DNX Transgenic
Sciences Corporation at December 31, 1998 and 1999, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young, LLP
September 15, 2000
MetroPark, New Jersey
--------------------------------------------------------------------------------
F-28
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
BALANCE SHEETS (Note 1)
(In thousands)
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
------------- 2000
1998 1999 (unaudited)
<S> <C> <C> <C>
------------- ------
Assets
Current assets:
Cash and cash equivalents........................ $ 229 $ 345 $ 597
Accounts receivable, net of allowance............ 1,300 653 1,156
Prepaid expenses and other current assets........ 39 68 55
Due from related party........................... 105 -- --
Income tax receivable............................ -- -- 89
------ ------ ------
Total current assets............................... 1,673 1,066 1,897
Property and equipment, net........................ 923 1,995 2,034
Intangible assets, net............................. -- 2,307 2,750
Other noncurrent assets............................ 352 952 936
------ ------ ------
Total assets....................................... $2,948 $6,320 $7,617
====== ====== ======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................. $ 482 $ 349 $ 228
Accrued liabilities.............................. 149 457 706
Income taxes payable............................. 716 291 --
Due to related party............................. -- 3,362 5,141
Capital lease obligations........................ 15 30 58
Deferred revenue................................. 967 926 929
------ ------ ------
Total current liabilities.......................... 2,329 5,415 7,062
Capital lease obligations, less current portion.... 27 41 118
Commitments
Stockholders' equity:
Common stock..................................... -- -- --
Retained earnings................................ 592 864 437
------ ------ ------
Total stockholders' equity......................... 592 864 437
------ ------ ------
Total liabilities and stockholders' equity......... $2,948 $6,320 $7,617
====== ====== ======
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-29
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (Note 1)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30, (unaudited)
------------------------------------------------- -----------------------------------------------
1999 1999
--------------------------------- -----------------------------------
Chrysalis Post Chrysalis Post
Predecessor Acquisition Predecessor Acquisition
Basis of Basis of Basis of Basis of
Accounting Accounting Accounting Accounting
January 1, April 30, January 1, April 30,
1999 to 1999 to 1999 to 1999 to
April 29, December 31, April 29, September 30,
1997 1998 1999 1999 Total 1999 1999 Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract
revenues....... $2,066 $ 4,735 $1,765 $3,668 $5,433 $1,765 $2,385 $4,150
Licenses....... 693 847 236 550 786 236 372 608
------ ------- ------ ------ ------ ------ ------ ------
Total revenues.. 2,759 5,582 2,001 4,218 6,219 2,001 2,757 4,758
Operating costs
and expenses:
Costs of
revenues....... 1,734 2,903 1,389 2,230 3,619 1,389 1,361 2,750
Selling,
general and
administrative
(includes
amortization
of
intangibles)... 794 936 314 1,741 2,055 314 766 1,080
------ ------- ------ ------ ------ ------- ------- -------
Total operating
costs and
expenses........ 2,528 3,839 1,703 3,971 5,674 1,703 2,127 3,830
------ ------- ------ ------ ------ ------- ------- -------
Income (loss)
from
operations...... 231 1,743 298 247 545 298 630 928
Interest
income.......... -- -- 4 22 26 4 15 19
Interest
expense......... -- (2) (3) (5) (8) (3) (4) (7)
------ ------- ------ ------ ------ ------- ------- -------
Income (loss)
before income
taxes........... 231 1,741 299 264 563 299 641 940
Provision
(benefit) for
income taxes.... 95 706 154 137 291 154 274 428
------ ------- ------ ------ ------ ------- ------- -------
Net income
(loss).......... $ 136 $ 1,035 $ 145 $ 127 $ 272 $ 145 $ 367 $ 512
====== ======= ====== ====== ====== ======= ======= =======
Basic and
diluted net
income (loss)
per common
share.......... $1,360 $10,350 $1,450 $1,270 $2,720 $1,450 $3,670 $5,120
====== ======= ====== ====== ====== ======= ======= =======
Shares used in
computing: basic
and diluted net
income (loss)
per common
share........... 100 100 100 100 100 100 100 100
====== ======= ====== ====== ====== ======= ======= =======
<CAPTION>
Nine months ended September 30, (unaudited
-----------------------------------------------
2000
------------------------------------
Phoenix Post-MOS
Predecessor Acquisition
Basis of Basis of
Accounting Accounting
January 1, April 6,
2000 to 2000 to
April 5, September 30,
2000 2000 Total
------------------------------------------
<C> <C> <C>
Revenues:
Contract
revenues....... $ 1,487 $ 3,121 $ 4,608
Licenses....... 212 484 696
------- ------- -------
Total revenues.. 1,699 3,605 5,304
Operating costs
and expenses:
Costs of
revenues....... 808 1,684 2,492
Selling,
general and
administrative
(includes
amortization
of
intangibles)... 1,065 2,271 3,336
-------- ------- -------
Total operating
costs and
expenses........ 1,873 3,955 5,828
------- ------- -------
Income (loss)
from
operations...... (174) (350) (524)
Interest
income.......... 5 17 22
Interest
expense......... (2) (12) (14)
-------- ------- -------
Income (loss)
before income
taxes........... (171) (345) (516)
Provision
(benefit) for
income taxes.... (50) (39) (89)
-------- ------- -------
Net income
(loss).......... $ (121) $ (306) $ (427)
======== ======= =======
Basic and
diluted net
income (loss)
per common
share.......... $(1,210) $(3,060) $(4,270)
======== ======= =======
Shares used in
computing: basic
and diluted net
income (loss)
per common
share........... 100 100 100
======= ======= =======
</TABLE>
Note A The accompanying financial statements for the year ended December 31,
1999 and nine months ended September 30, 1999 reflect the combined
operations of the Chrysalis Predecessor (for the period from January 1,
1999 to April 29, 1999) and the post acquisition operations of DNX
following the Phoenix Acquisition (for the periods from April 30, 1999
to December 31, 1999 and September 30, 1999, respectively).
Note B The accompanying financial statements for the nine months ended
September 30, 2000 reflect the combined operations of DNX (for the
period from January 1, 2000 to April 5, 2000), reflecting the Phoenix
Predecessor basis of accounting and the post acquisition operations of
DNX following MDS Acquisition (for the period from April 6, 2000 to
September 30, 2000).
See accompanying notes.
F-30
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (Note 1)
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
(Accumulated Stockholders'
Deficit) Equity
Common Stock Retained (Net Capital
Shares Amount Earnings Deficiency)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997......... 100 $ -- $ (579) $ (579)
Net income....................... -- -- 136 136
--- ---- ------ ------
Balance at December 31, 1997....... 100 -- (443) (443)
Net income....................... -- -- 1,035 1,035
--- ---- ------ ------
Balance at December 31, 1998....... 100 -- 592 592
Net income....................... -- -- 272 272
--- ---- ------ ------
Balance at December 31, 1999....... 100 -- 864 864
Net loss (unaudited)............. -- -- (427) (427)
--- ---- ------ ------
Balance at September 30, 2000
(unaudited)..................... 100 $ -- $ 437 $ 437
=== ==== ====== ======
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-31
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1999
--------------------------------
Chrysalis Post
Predecessor Acquisition
Basis of Basis of
Accounting Accounting
January 1, April 30,
1999 to 1999 to
April 29, December 31,
1997 1998 1999 1999 Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income
(loss).......... $ 136 $ 1,035 145 127 $ 272
Adjustments to
reconcile net
income (loss) to
net cash (used
in) provided by
operating
activities:
Deferred tax
benefit........ (2) (10) -- -- --
Depreciation
expense........ 147 250 93 202 295
Amortization
expense........ -- -- -- 243 243
Fixed assets
write-off...... -- -- -- 92 92
Changes in
operating
assets and
liabilities:
Accounts
receivable... 9 (697) (333) 980 647
Prepaid
expenses and
other current
assets....... (14) 5 (8) (21) (29)
Income tax
receivable... -- -- -- -- --
Other
noncurrent
assets....... 39 (334) -- (600) (600)
Accounts
payable...... (80) 409 (259) 126 (133)
Accrued
liabilities.. 41 50 482 (174) 308
Income taxes
payable...... 97 620 154 (579) (425)
Deferred
revenue...... 286 404 265 (306) (41)
------- ------- ---- ------ -------
Net cash (used
in) provided by
operating
activities...... 659 1,732 539 90 629
Investing
activities
Purchase of
property and
equipment....... (725) (472) (96) (1,313) (1,409)
Purchase of
Company, net of
cash acquired... -- -- -- (2,550) (2,550)
------- ------- ---- ------ -------
Net cash used in
investing
activities...... (725) (472) (96) (3,863) (3,959)
Financing
activities
Repayment of
capital lease
obligations..... -- (7) (7) (14) (21)
Proceeds from
loans -- related
party........... 1,578 2,584 97 5,369 5,466
Repayment of
loans -- related
party........... (1,134) (4,042) (351) (1,648) (1,999)
------- ------- ---- ------ -------
Net cash
provided by
(used in)
financing
activities...... 444 (1,465) (261) 3,707 3,446
------- ------- ---- ------ -------
Net increase
(decrease) in
cash and cash
equivalents..... 378 (205) 182 (66) 116
Cash and cash
equivalents, at
beginning of
period.......... 56 434 229 411 229
------- ------- ---- ------ -------
Cash and cash
equivalents, at
end of period... $ 434 $ 229 411 345 $ 345
======= ======= ==== ====== =======
Supplemental
disclosures
Cash paid for
interest........ $ -- $ 2 3 5 $ 8
======= ======= ==== ====== =======
Supplemental
schedule of
noncash
investing and
financing activities
Capital lease
obligations for
laboratory
equipment....... $ -- $ 49 25 25 $ 50
======= ======= ==== ====== =======
<CAPTION>
Nine months ended September 30, (unaudited)
-------------------------------------------------------------------
1999 2000
---------------------------------- --------------------------------
Chrysalis Post Phoenix Post-MOS
Predecessor Acquisition Predecessor Acquisition
Basis of Basis of Basis of Basis of
Accounting Accounting Accounting Accounting
January 1, April 30, January 1, April 6,
1999 to 1999 to 2000 to 2000 to
April 29, September 30, April 15, September
1999 1999 Total 2000 30, 2000 Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net income
(loss).......... 145 367 $ 512 (121) (306) $ (427)
Adjustments to
reconcile net
income (loss) to
net cash (used
in) provided by
operating
activities:
Deferred tax
benefit........ -- -- -- -- -- --
Depreciation
expense........ 93 123 216 89 161 250
Amortization
expense........ -- 152 152 91 250 341
Fixed assets
write-off...... -- -- -- -- -- --
Changes in
operating
assets and
liabilities:
Accounts
receivable... (333) 949 616 (708) 205 (503)
Prepaid
expenses and
other current
assets....... (8) (102) (110) (136) 149 13
Income tax
receivable... -- -- -- -- (89) (89)
Other
noncurrent
assets....... -- (615) (615) 3 13 16
Accounts
payable...... (259) 103 (156) 5 (126) (121)
Accrued
liabilities.. 482 (94) 388 245 4 249
Income taxes
payable...... 154 (442) (288) (50) (241) (291)
Deferred
revenue...... 265 (342) (77) 152 (148) 4
----------- ------------- -------- ----------- ----------- --------
Net cash (used
in) provided by
operating
activities...... 539 99 638 (430) (128) (558)
Investing
activities
Purchase of
property and
equipment....... (96) (889) (985) (74) (75) (149)
Purchase of
Company, net of
cash acquired... -- (2,550) (2,550) -- (3,000) (3,000)
----------- ------------- -------- ----------- ----------- --------
Net cash used in
investing
activities...... (96) (3,439) (3,535) (74) (3,075) (3,149)
Financing
activities
Repayment of
capital lease
obligations..... (7) (9) (16) (9) (27) (36)
Proceeds from
loans -- related
party........... 97 5,327 5,424 490 3,853 4,343
Repayment of
loans -- related
party........... (351) (1,478) (1,829) (180) (168) (348)
----------- ------------- -------- ----------- ----------- --------
Net cash
provided by
(used in)
financing
activities...... (261) 3,840 3,579 301 3,658 3,959
----------- ------------- -------- ----------- ----------- --------
Net increase
(decrease) in
cash and cash
equivalents..... 182 500 682 (203) 455 252
Cash and cash
equivalents, at
beginning of
period.......... 229 411 229 345 142 345
----------- ------------- -------- ----------- ----------- --------
Cash and cash
equivalents, at
end of period... 411 911 $ 911 142 597 $ 597
=========== ============= ======== =========== =========== ========
Supplemental
disclosures
Cash paid for
interest........ 3 4 $ 7 2 12 $ 14
=========== ============= ======== =========== =========== ========
Supplemental
schedule of
noncash
investing and
financing activities
Capital lease
obligations for
laboratory
equipment....... 25 -- $ 25 94 46 $ 140
=========== ============= ======== =========== =========== ========
</TABLE>
Note A The accompanying financial statements for the year ended December 31,
1999 and nine months ended September 30, 1999 reflect the combined
operations of the Chrysalis Predecessor (for the period from January 1,
1999 to April 29, 1999) and the post acquisition operations of DNX
following the Phoenix Acquisition (for the periods from April 30, 1999
to December 31, 1999 and September 30, 1999, respectively.)
Note B The accompanying financial statements for the nine months ended
September 30, 2000 reflect the combined operations of DNX (for the
period from January 1, 2000 to April 5, 2000), reflecting the Phoenix
Predecessor basis of accounting and the post acquisition operations of
DNX following MDS Acquisition (for the period from April 6, 2000 to
September 30, 2000).
See accompanying notes.
F-32
<PAGE>
Chrysalis DNX Transgenic Sciences Corporation
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
1. Basis of Presentation and Description of the Business
Chrysalis DNX Transgenic Sciences Corporation ("DNX") is a life sciences
company incorporated in the state of Ohio. DNX is a contract research
organization providing a broad portfolio of integrated drug development
services primarily to the pharmaceutical and biotechnology industries in the
United States. This portfolio of drug development services includes transgenic
discovery research and preclinical development capabilities that enables DNX to
manage a comprehensive drug development program to a client's specific
requirements.
DNX generates substantially all of its revenues from its drug development
service business. DNX is the exclusive commercial licensee of the pronuclear
microinjection process which is the commonly used method of producing
transgenic animals. Additionally, DNX provides murine gene-targeting
capabilities and holds a license to the Positive-Negative Selection method for
introducing genetic modifications by homologous recombination.
Prior to April 30, 1999, DNX was a wholly owned subsidiary of Chrysalis
International Corporation (the "Chrysalis Predecessor"). On April 30, 1999,
Phoenix International Life Sciences, Inc. ("Phoenix") acquired the outstanding
common stock of Chrysalis International Corporation in exchange for 998,968
shares of Phoenix (the "Phoenix Acquisition") valued at $8.32 per share based
upon the average value of the common shares for the five trading days before
and five trading days after the transaction on the Toronto and Montreal Stock
Exchanges. Subsequent to the Phoenix Acquisition, Chrysalis International
Corporation became a wholly owned subsidiary of Phoenix.
The Phoenix Acquisition was accounted for using the purchase method, and
accordingly, at such date, the assets acquired and liabilities assumed were
recorded at their estimated fair values. Phoenix management determined the best
indicator of the relative value assigned to the Chrysalis Predecessor is based
on revenue, and accordingly, the allocation to DNX is based upon the relative
revenues of the companies that comprise the Chrysalis Predecessor. It is the
opinion of management that this method is the most reasonable indicator of
relative fair value among the companies acquired. The excess of the purchase
price allocated to DNX over the fair value of DNX's net tangible and intangible
assets acquired was allocated to goodwill, which was amortized on a straight
line basis over seven years.
The portion of the purchase price specifically related to DNX was allocated to
the historical assets and liabilities of DNX as follows (in thousands):
<TABLE>
<CAPTION>
Allocated Purchase Price
<S> <C>
Allocation of adjusted purchase price:
Net assets acquired, at fair values................................... $ 429
Goodwill.............................................................. 2,550
------
Total purchase price allocation......................................... $2,979
======
</TABLE>
--------------------------------------------------------------------------------
F-33
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
The accompanying financial statements for the year ended December 31, 1999
reflect the combined operations of the Chrysalis Predecessor (for the period
from January 1, 1999 to April 29, 1999) and the post acquisition operations of
DNX following the Phoenix Acquisition (for the period from April 30, 1999 to
December 31, 1999) as follows:
<TABLE>
<CAPTION>
Post
Chrysalis Predecessor Acquisition
Basis of Accounting Basis of
------------------------ Accounting
January 1, April 30,
Year ended 1999 to 1999 to
December 31, April 29, December 31,
1998 1999 1999
---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenues:
Contract revenues...................................................................... $4,735 $1,765 $3,668
License fees........................................................................... 847 236 550
------ ------ ------
Total revenues........................................................................... 5,582 2,001 4,218
Operating costs and expenses:
Costs of revenues...................................................................... 2,903 1,389 2,230
Selling, general and administrative (includes amortization of intangibles)............. 936 314 1,741
------ ------ ------
Total operating costs and expenses....................................................... 3,839 1,703 3,971
------ ------ ------
Income from operations................................................................... 1,743 298 247
Interest income.......................................................................... -- 4 22
Interest expense......................................................................... (2) (3) (5)
------ ------ ------
Income before income taxes............................................................... 1,741 299 264
Provision for income taxes............................................................... 706 154 137
------ ------ ------
Net income............................................................................... $1,035 $ 145 $ 127
--------------------------------------------------
====== ====== ======
</TABLE>
On April 6, 2000, MDS Inc. ("MDS") acquired the outstanding common stock of
Phoenix in exchange for shares of MDS and cash, valued at approximately $330
million (the "MDS Acquisition"). Subsequent to the MDS Acquisition, Phoenix
became a wholly owned subsidiary of MDS.
The MDS Acquisition was accounted for using the purchase method, and
accordingly, at such date, the assets acquired and liabilities assumed were
recorded at their estimated fair values. The excess of the purchase price
allocated to DNX over the fair value of DNX's net tangible and intangible
assets acquired was allocated to goodwill, which is amortized on a straight-
line basis over six years.
--------------------------------------------------------------------------------
F-34
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
The portion of the purchase price specifically related to DNX was allocated to
the historical assets and liabilities of DNX as follows (in thousands,
unaudited):
Allocated Purchase Price
<TABLE>
<S> <C>
Allocation of adjusted purchase price:
Net assets acquired, at fair values................................... $4,484
Goodwill.............................................................. 3,000
------
Total purchase price allocation......................................... $7,484
======
</TABLE>
The accompanying unaudited financial statements for the nine months ended
September 30, 2000 reflect the operations of DNX (for the period from January
1, 2000 to April 5, 2000), reflecting the Phoenix basis of accounting and the
post acquisition operations of DNX following the MDS Acquisition (for the
period from April 6, 2000 to September 30, 2000) as follows:
<TABLE>
<CAPTION>
Phoenix Post-MDS
Predecessor Acquisition
Basis of Basis of
Accounting Accounting
January 1, April 6,
2000 to 2000 to
April 5, September 30,
2000 2000
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Revenues:
Contract revenues.................................................................................. $1,487 $3,121
License fees....................................................................................... 212 484
------ ------
1,699 3,605
Operating costs and expenses:
Costs of revenues.................................................................................. 808 1,684
Selling, general and administrative (includes amortization of intangibles)......................... 1,065 2,271
------ ------
Total operating costs and expenses................................................................... 1,873 3,955
------ ------
Loss from operations................................................................................. (174) (350)
Interest income...................................................................................... 5 17
Interest expense..................................................................................... (2) (12)
------ ------
Loss before income taxes............................................................................. (171) (345)
Benefit from income taxes............................................................................ (50) (39)
------ ------
Net loss............................................................................................. $ (121) $ (306)
====== ======
</TABLE>
Our accounting policies have been consistently applied in all predecessor
financial statements.
--------------------------------------------------------------------------------
F-35
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Interim Financial Information
The financial information as of September 30, 2000 and for the nine months
ended September 30, 1999 and 2000 is unaudited and includes all adjustments,
consisting only of normal recurring adjustments, that DNX's management
considers necessary for the fair presentation of DNX's operating results and
cash flows for such periods. Results for the nine month period ended September
30, 2000 are not necessarily indicative of results to be expected for the full
fiscal year 2000 or any future period.
Cash and Cash Equivalents
DNX considers all highly liquid investments with an initial maturity of three
months or less to be cash equivalents.
For purposes of the statement of cash flows, cash consists of amounts on
deposit with commercial banks in checking, interest-bearing, and money market
accounts available on demand.
Concentration of Credit Risk
DNX invests its excess cash, which is not required for immediate operating
needs, in a money market account, which bears minimal risk. DNX has established
guidelines relating to diversification and maturities that maintain safety and
liquidity. To date, DNX has not experienced any losses on its cash equivalents.
Significant Customers
Major customers responsible for 10% or more of revenues include collaborative
partners and pharmaceutical and biotechnology companies. The percentages of
revenues and accounts receivable of each of these third party major customers
to total revenue derived from third parties and accounts receivable were as
follows (no customer accounted for 10% or more of total revenues for the year
ended December 1997):
<TABLE>
<CAPTION>
Nine months
ended
Year ended September 30,
Revenue: December 31, (unaudited)
-------- --------------- -------------
Customer 1998 1999 1999 2000
<S> <C> <C> <C> <C>
--------------------------------------------------------
------
A....................................... 36% 34% -- --
B....................................... -- 18% 31% 41%
C....................................... -- -- 15% 22%
D....................................... -- -- -- 13%
</TABLE>
--------------------------------------------------------------------------------
F-36
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
<TABLE>
<CAPTION>
Accounts Receivable: December 31, September 30,
-------------------- --------------- 2000
Customer 1998 1999 (unaudited)
<S> <C> <C> -------------
--------------------------------------------------------- ---
A........................................ 37% -- --
B ....................................... 10% 47% --
C........................................ -- -- 44%
D........................................ -- -- --
</TABLE>
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities are carried at cost, which
management believes approximates fair value.
Property and Equipment
Property and equipment consists of furniture, office and laboratory equipment,
and leasehold improvements which are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets, generally
three to seven years. Equipment held under capital leases is amortized using
the straight-line method over the shorter of the lease term or estimated useful
life of the asset. Amortization of leasehold improvements is determined using
the straight-line method over the estimated useful lives of the assets or the
term of the lease, whichever is shorter.
Intangible Assets
Goodwill consists of the excess of cost over fair value of net tangible assets
acquired in purchase acquisitions. At December 31, 1999, goodwill is amortized
by the straight-line method over seven years. Goodwill at September 30, 2000 is
amortized by the straight-line method over six years. There was no goodwill at
December 31, 1998. Goodwill of $2,550,000 and $3,000,000 at December 31, 1999
and September 30, 2000 is net of accumulated amortization of $243,000 and
$250,000, respectively.
Impairment of Long-Lived Assets
DNX reviews long-lived assets, including property, equipment and goodwill, for
impairment whenever events or changes in business circumstance indicate that
the carrying amount of the assets may not be fully recoverable. An impairment
loss would be recognized when estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
its carrying amount. Impairment, if any, is assessed using discounted cash
flows. No impairments have occurred.
Income Taxes
DNX utilizes the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
--------------------------------------------------------------------------------
F-37
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
Revenue Recognition
Revenues are comprised of one or more of the following sources:
Contract Revenues: Recognized using the percentage-of-completion method
determined by reference to work performed. Customer advances and billings
in excess of costs and estimated profits on contracts in progress are shown
as liabilities. Losses, if any, are provided for in full as soon as they
are anticipated. The percentage-of-completion method necessarily requires
the use of estimates to determine the recorded amount of revenues and
contracts in progress. Given this estimation process, it is reasonably
possible that changes in future conditions could require a change in the
recognized amount of revenue and contracts in progress.
License Fees: License fee revenues are recognized ratably over the term of
the agreement. Additionally, licenses of DNX's proprietary DNA
Microinjection technology entitle DNX to receive royalty payments, which
amounts are recognized as revenue when earned.
Earnings Per Share
Basic earnings per share and diluted earnings per share are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". DNX has no securities outstanding which could potentially dilute
basic earnings per share; therefore, both basic and diluted earnings per share
are the same.
Comprehensive Income (Loss)
DNX has adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting comprehensive
income and its components in the financial statements. To date, DNX's
comprehensive income (loss) has equaled its net income (loss).
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information", establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosure about its products, services, geographic areas, and major customers.
DNX has determined that it operates in one segment.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, with earlier application encouraged. DNX does not currently, nor does it
intend in the future, to use derivative instruments, and therefore does not
expect that the adoption of SFAS 133 will have any impact on its financial
position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition and Financial Statements" ("SAB 101"). SAB 101 summarizes the SEC's
views in applying generally accepted accounting principles to revenue
recognition. The adoption of SAB 101 had no impact on DNX's historical revenue
recognition policy.
--------------------------------------------------------------------------------
F-38
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
3. Accounts Receivable
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
-------------- 2000
1998 1999 (unaudited)
-------------------------------------------------------------------------------
---------
(In thousands)
<S> <C> <C> <C>
Accounts receivable -- billed...................... $ 1,317 $ 630 $1,108
Accounts receivable -- unbilled.................... 13 53 78
------- ----- ------
1,330 683 1,186
Less allowance for doubtful accounts............... 30 30 30
------- ----- ------
$1,300 $ 653 $1,156
======= ===== ======
</TABLE>
Accounts receivable -- unbilled relates to revenue earned on services when the
related services have been rendered and costs incurred, but which were not
billed to the customer as of the end of the reporting period.
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
------------- 2000
1998 1999 (unaudited)
------------------------------------------------------------------------------
--------
(In thousands)
<S> <C> <C> <C>
Furniture, telecommunications, and office
equipment...................................... $ 339 $ 186 $ 170
Laboratory equipment.............................. 450 529 653
Leasehold improvements............................ 473 1,422 1,413
Construction in progress.......................... 334 -- --
------ ------ ------
1,596 2,137 2,236
Less accumulated depreciation and amortization.... 673 142 202
------ ------ ------
$ 923 $1,995 $2,034
====== ====== ======
</TABLE>
As of December 31, 1998, 1999, and September 30, 2000, equipment held under
capital leases totaled $49,000, $99,000 and $239,000, respectively, with
related accumulated amortization of $5,000, $21,000 and $53,000, respectively.
Amortization of assets acquired under capital leases is included in
depreciation expense.
--------------------------------------------------------------------------------
F-39
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
5. Related Parties
Amounts due to related parties represent temporary cash advances from DNX's
respective parent company (Chrysalis International Corporation, Phoenix or MDS)
which are non-interest bearing, are continually revolving, and due on demand.
There are no costs that should be allocated from the respective parents to DNX,
as DNX included all costs (officers' and employees' salaries and wages, rent,
depreciation, etc.) on a separate company basis.
6. Stockholders' Equity
DNX has authorized 750,000, no par value, shares of common stock. At December
31, 1998 and 1999 and September 30, 2000, 100 shares of common stock, with a
stated value of $1, were issued and outstanding.
7. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1997 1998 1999
----------------
(In thousands)
<S> <C> <C> <C>
Current income taxes:
Federal taxes............................................... $75 $555 $240
State taxes................................................. 22 161 51
Deferred income tax benefit................................... (2) (10) --
--- ---- ----
$95 $706 $291
=== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. DNX's deferred tax assets as of
December 31, 1998, 1999 and September 30, 2000 result from the allowance for
doubtful accounts.
A reconciliation setting forth the differences between the actual effective tax
rate for the years ended December 31, 1997, 1998 and 1999 of DNX, and the U.S.
federal statutory tax rate for the years ended December 31, 1997, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate............................. 34.0% 34.0% 34.0%
State taxes, net of federal tax benefits........... 6.0 6.0 6.0
Permanent differences, including goodwill
amortization.................................... 1.0 0.5 11.7
------- ------- -------
Effective tax rate................................. 41.0% 40.5% 51.7%
======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
F-40
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
8. Commitments and Contingencies
In November 1999, DNX moved its facilities from Princeton, New Jersey to
Cranbury, New Jersey. At December 31, 1999, DNX recorded an accrual of $37,000
for early termination of its Princeton lease and associated costs incurred to
relocate. DNX leases its Cranbury facility under a noncancelable operating
lease which expires November 30, 2009.
Annual future minimum lease obligations, including property and equipment under
capital leases, as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
-------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
2000......................................................... $ 1,618 $38
2001......................................................... 1,616 27
2002......................................................... 1,702 7
2003......................................................... 1,702 7
2004......................................................... 1,727 6
Thereafter................................................... 8,902 --
------- ---
Total minimum lease payments................................. $17,267 85
=======
Less amount representing interest............................ 14
---
Total present value of minimum lease payments................ 71
Less current portion......................................... 30
---
Non-current portion.......................................... $41
===
</TABLE>
Rent expense under all operating leases amounted to approximately $178,000,
$274,000 and $560,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, and $263,000 and $1,366,000 for the nine months ended September
30, 1999 and 2000, respectively.
In November 1999, Phoenix established two letters of credit to secure DNX's
Cranbury facility rental agreement with a lending company for approximately
$120,000 and $447,000. The $120,000 letter of credit expired on September 22,
2000 and was renewed by Phoenix through September 21, 2001 and the $447,000
letter of credit expires on November 2, 2000.
On June 13, 1985, DNX entered into a license agreement with Ohio University.
The agreement grants to DNX an exclusive worldwide license to certain
technology described as embryonic nuclear insertion gene transfer technology.
The agreement shall continue until the expiration of the last patent on the
technology and its improvements. DNX is required to pay a royalty based upon
sales and other income earned related to the technology. Royalty payments made
to Ohio University were $15,000, $17,000, $17,000, $12,000 and $14,000,
respectively, for the years ended December 31, 1997, 1998 and 1999 and the nine
months ended September 30, 1999 and 2000.
--------------------------------------------------------------------------------
F-41
<PAGE>
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(Information as of September 30, 2000 and for the
nine months ended September 30, 1999 and 2000 is unaudited)
9. Defined Contribution Plan
DNX maintains a 401(k) retirement savings plan that includes all eligible
employees. Each participant in the Plan may elect to contribute up to 15% of
his or her annual salary to the Plan, subject to statutory limitations. DNX
matches 50% of the first 6% of the salary contributed by the employee. The
related expense incurred by DNX for the years ended December 31, 1997, 1998 and
1999 and the nine months ended September 30, 1999 and 2000 was $30,000,
$47,000, $46,000, $35,000 and $36,000, respectively.
10. Subsequent Event (unaudited)
In November 2000, MDS sold 100% of the outstanding common stock of DNX to
Xenogen Corporation. As consideration, the stockholders of DNX will receive
3,500,000 shares of Xenogen Series F preferred stock, or 2,555,000 shares of
common stock on an as-if converted basis.
--------------------------------------------------------------------------------
F-42
<PAGE>
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Condensed Financial Statements for
Xenogen Corporation ("Xenogen") have been prepared to illustrate the effects of
the acquisition of Chrysalis DNX Transgenic Sciences Corporation ("DNX"). In
exchange for the net assets of DNX, Xenogen issued 3,500,000 of Series F
redeemable convertible preferred shares, or 2,555,000 shares of common stock on
an as-if converted basis to DNX.
Pro forma amounts have been derived by applying pro forma adjustments to the
historical financial information of Xenogen and DNX.
As required by accounting principles, generally accepted in the United States,
the purchase price of DNX was estimated at approximately $37.8 million based
upon the estimated fair value of Xenogen redeemable convertible Preferred Stock
issued and assumed liabilities and included $750,000 of estimated direct
acquisition costs. The excess of the purchase price over the fair value of net
assets acquired has been allocated to goodwill and identified intangibles. The
goodwill will be amortized over five years and the intangibles over two to six
years.
The Unaudited Pro Forma Combined Condensed Statements of Operations for the
year ended December 31, 1999 and the nine months ended September 30, 2000,
combine Xenogen's historical results of operations with DNX's historical
results of operations and have been prepared as if the DNX acquisition had
occurred on January 1, 1999. The Unaudited Pro Forma Combined Condensed Balance
Sheet combines Xenogen's historical balance sheet at September 30, 2000 with
DNX's historical balance sheet at September 30, 2000 and has been prepared as
if the DNX acquisition occurred on September 30, 2000.
The unaudited pro forma financial information should not be considered
indicative of actual results that would have been achieved had the acquisition
been consummated on the dates indicated and does not purport to indicate
balance sheet data or results of operations of any future date or any future
period. The unaudited pro forma financial information should be read in
conjunction with the historical financial statements of Xenogen and DNX and the
related notes thereto included elsewhere in this prospectus.
--------------------------------------------------------------------------------
F-43
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
September 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Xenogen
Pro Forma Pro Forma
Xenogen DNX Adjustments Combined
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $ 18,819 $ 597 $ -- $ 19,416
Short-term investments..................................... 9,281 -- -- 9,281
Accounts receivable........................................ 339 1,156 (19)(A) 1,476
Inventories................................................ 372 -- -- 372
Prepaid expenses and other current assets.................. 1,237 144 -- 1,381
Employee loans............................................. 98 -- -- 98
-------- ------ ------- --------
Total current assets......................................... 30,146 1,897 (19) 32,024
Property and equipment, net.................................. 3,164 2,034 -- 5,198
Goodwill and purchased intangible assets..................... -- 2,750 32,922 (B) 32,922
(2,750)(D)
Long-term investments........................................ 1,984 -- -- 1,984
Restricted investments....................................... 538 -- -- 538
Other non current assets..................................... 105 936 -- 1,041
-------- ------ ------- --------
Total assets................................................. $ 35,937 $7,617 $30,153 $ 73,707
======== ====== ======= ========
Liabilities and stockholders' equity (net capital deficiency)
Current liabilities:
Accounts payable........................................... $ 1,104 $ 228 $ (19)(A) $ 1,313
Accrued liabilities........................................ 433 706 750 (E) 1,889
Loans payable, current portion............................. 1,078 -- -- 1,078
Due to related party....................................... -- 5,141 (5,141)(F) --
Capital lease obligations.................................. -- 58 -- 58
Deferred revenue........................................... 1,744 929 -- 2,673
-------- ------ ------- --------
Total current liabilities.................................... 4,359 7,062 (4,410) 7,011
Noncurrent liabilities:
Loans payable.............................................. 3,164 -- -- 3,164
Capital lease obligations.................................. -- 118 -- 118
Commitments
Redeemable convertible preferred stock....................... 46,502 -- 35,000 (G) 81,502
Stockholders' equity (net capital deficiency):
Convertible preferred stock................................ -- -- -- --
Common stock............................................... 3 -- -- 3
Additional paid-in capital................................. 11,081 -- -- 11,081
Notes receivable........................................... (111) -- -- (111)
Deferred stock-based compensation.......................... (8,910) -- -- (8,910)
Retained earnings (accumulated deficit).................... (20,151) 437 (437)(H) (20,151)
-------- ------ ------- --------
Total stockholders' equity (net capital deficiency).......... (18,088) 437 (437) (18,088)
-------- ------ ------- --------
Total liabilities and stockholders' equity (net capital
deficiency)............................................... $ 35,937 $7,617 $30,153 $ 73,707
======== ====== ======= ========
</TABLE>
See unaudited pro forma combined condensed financial statements.
--------------------------------------------------------------------------------
F-44
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Year ended December 31, 1999
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
DNX (note 1)
-------------------------
Chrysalis Post
Predecessor Acquisition
Basis of Basis of
Accounting Accounting
January 1, April 30,
1999 to 1999 to Xenogen
April 29, December 31, Pro Forma Pro Forma
Xenogen 1999 1999 Adjustments Combined
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses.............. $ 457 $ 236 $ 550 $ -- $ 1,243
Research and
development
services........... 790 1,765 3,668 (24)(I) 6,199
Other................. 46 -- -- -- 46
------- ------ ------ ------- --------
Total revenues........ 1,293 2,001 4,218 (24) 7,488
Operating costs and
expenses:
Costs of revenues..... -- 1,389 2,230 -- 3,619
Research and
development........ 4,790 -- -- (24)(I) 4,766
Selling, general and
administrative..... 3,757 314 1,741 -- 5,812
Amortization of
purchased intangible
assets and goodwill.. -- -- -- 6,737 (C) 6,737
------- ------ ------ ------- --------
Total operating costs
and expenses......... 8,547 1,703 3,971 6,713 20,934
Income (loss) from
operations........... (7,254) 298 247 (6,737) (13,446)
Interest income......... 355 4 22 -- 381
Interest expense........ (237) (3) (5) -- (245)
------- ------ ------ ------- --------
Net income (loss) before
income taxes......... (7,136) 299 264 (6,737) (13,310)
Provision for income
tax.................. -- 154 137 -- 291
------- ------ ------ ------- --------
Net income (loss)....... $(7,136) $ 145 $ 127 $(6,737) $(13,601)
======= ====== ====== ======= ========
Basic and diluted net
loss per common share.. $ (2.73)
========
Shares used in computing
basic and diluted net
loss per common share.. 4,980
========
Pro forma basic and
diluted net loss per
common share........... $ (1.10)
========
Shares used in computing
pro forma basic and
diluted net loss per
common share........... 12,418
========
</TABLE>
Note 1 The accompanying financial statements for the year ended December 31,
1999 reflect the combined operations of the Chrysalis Predecessor (for
the period from January 1, 1999 to April 29, 1999) and the post
acquisition operations of DNX following the Phoenix Acquisition (for the
period from April 30, 1999 to December 31, 1999).
See unaudited pro forma combined condensed financial statements.
--------------------------------------------------------------------------------
F-45
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Nine months ended September 30, 2000
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
DNX (note 2)
-----------------------------
Phoenix
Predecessor Post-MDS
Basis of Acquisition
Accounting Basis of
January 1, Accounting
2000 to April 6, 2000 to Xenogen
April 5, September 30, Pro Forma Pro Forma
Xenogen 2000 2000 Adjustments Combined
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses.............. $ 774 $ 212 $ 484 $ -- $ 1,470
Research and
development
services........... 716 1,487 3,121 (45)(I) 5,279
Other revenues........ 406 -- -- -- 406
------- ------ ------ ------- --------
Total revenues 1,896 1,699 3,605 (45) 7,155
Operating costs and
expenses:
Costs of revenues..... 261 808 1,684 -- 2,753
Research and
development........ 6,686 -- -- (45)(I) 6,641
Selling, general and
administrative .... 4,578 1,065 2,271 -- 7,914
Amortization of
purchased intangible
assets and goodwill.. -- -- -- 5,053 (C) 5,053
------- ------ ------ ------- --------
Total operating costs
and expenses......... 11,525 1,873 3,955 5,008 22,361
Loss from operations.... (9,629) (174) (350) (5,053) (15,206)
Interest income......... 917 5 17 -- 939
Interest expense........ (375) (2) (12) -- (389)
------- ------ ------ ------- --------
Net loss before income
taxes................ (9,087) (171) (345) (5,053) (14,656)
Benefit from income
tax.................. -- (50) (39) -- (89)
------- ------ ------ ------- --------
Net loss................ $(9,087) $ (121) $ (306) $(5,053) $(14,567)
======= ====== ====== ======= ========
Basic and diluted net
loss per common share.. $ (2.69)
========
Shares used in computing
basic and diluted net
loss per common share.. 5,419
========
Pro forma basic and
diluted net loss per
common share .......... $ (0.87)
========
Shares used in computing
pro forma basic and
diluted net loss per
common share........... 16,830
========
</TABLE>
Note 2 The accompanying financial statements for the nine months ended
September 30, 2000 reflect the combined operations of DNX (for the
period from January 1, 2000 to April 5, 2000), reflecting the Phoenix
Predecessor basis of accounting and the post acquisition operations of
DNX following the MDS Acquisition (for the period from April 6, 2000 to
September 30, 2000).
See unaudited pro forma combined condensed financial statements.
--------------------------------------------------------------------------------
F-46
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. Basis of Pro Forma Presentation
The Unaudited Pro Forma Combined Condensed Financial Statements give effect to
Xenogen Corporation's ("Xenogen") acquisition of Chrysalis DNX Transgenic
Sciences Corporation ("DNX") on September 28, 2000. At that date, the holder of
outstanding common stock of DNX became entitled to received Xenogen Series F
redeemable convertible preferred stock. The aggregate number of Xenogen Series
F redeemable convertible preferred stock issuable upon consummation of the
acquisition was approximately 3,500,000, or 2,555,000 shares of common stock on
an as-if converted basis. Each share of preferred stock is initially
convertible into 0.73 of a share of common stock (subject to adjustment for
antidilution, stock splits, or dividends). Each share of preferred stock is
automatically convertible into common stock immediately upon the closing of a
firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, in which
the aggregate gross proceeds to Xenogen exceeds $15,000,000 and the per share
price to the public is at least $8.00.
The Unaudited Pro Forma Combined Condensed Financial Statements have been
prepared on the basis of assumptions described in the following notes and
include assumptions relating to the allocation of the consideration paid for
the assets and liabilities of DNX based on preliminary estimates of their fair
value. The actual allocation of the consideration to be paid may differ from
those assumptions reflected in the Unaudited Pro Forma Combined Condensed
Financial Statements after final valuation and other procedures to be performed
have been completed. Xenogen does not expect that the final allocation of the
purchase price will differ materially from the preliminary allocation. In the
opinion of Xenogen's management, all adjustments made based on the terms and
structure of the DNX acquisition. The Unaudited Pro Forma Combined Condensed
Statements of Operations for the year ended December 31, 1999 and the nine
months ended September 30, 2000 give effect to this transaction as if it had
taken place on January 1, 1999. The Unaudited Pro Forma Combined Condensed
Balance Sheet as of September 30, 2000 gives effect to the transactions as if
it had taken place on September 30, 2000.
The unaudited pro forma financial information should not be considered
indicative of actual results that would have been achieved had the acquisition
been consummated on the dates indicated and does not purport to indicate
balance sheet data or results of operations as of any future date or any future
period.
The former DNX stockholder became entitled to receive approximately 3,500,000
Series F redeemable convertible preferred shares in the merger, valued at
$10.00 per share, the fair market value per share of Xenogen redeemable
convertible preferred stock on the merger announcement date of September 28,
2000. The total consideration including acquisition related expenses was $37.8
million.
Tangible assets of DNX acquired principally include cash and cash equivalents,
accounts receivable, fixed assets and other assets. Liabilities of DNX assumed
principally include accounts payable, accrued expenses, and deferred revenue.
--------------------------------------------------------------------------------
F-47
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(continued)
Below is a table of the estimated merger consideration, purchase price
allocation and annual amortization of the intangible assets and goodwill
acquired (in thousands):
<TABLE>
<CAPTION>
Amortization Annual
Period Amortization
-------------------------------------------------------------------------------
(years)
<S> <C> <C> <C>
Purchase price allocation:
Tangible net assets acquired............... $ 4,867 $ --
Intangible net assets acquired:
Patent.................................. 3,019 6 503
Assembled workforce..................... 777 3 259
Current contracts....................... 498 2 249
Goodwill................................ 28,628 5 5,726
------- ------
Total........................................ $37,789 $6,737
======= ======
</TABLE>
The value allocated to the assembled workforce is attributable to the DNX
workforce in place after the acquisition which eliminates the need to hire new
replacement employees. The value was determined by estimating the cost involved
in assembling a new workforce including costs of salaries, benefits, training,
and recruiting.
The present value of the future cash flows attributable to existing contracts
was allocated to the current contracts.
Goodwill was determined based on the residual difference between the amount of
consideration to be paid on the values assigned to identified net tangible and
intangible assets.
2. Pro Forma Net Loss Per Share
Pro forma basic and diluted net loss per share has been computed using the
weighted-average number of Xenogen common shares outstanding during the period,
less the weighted-average number of Xenogen common shares that are subject to
repurchase, and the number of Xenogen Series F redeemable convertible preferred
shares issued in connection with the DNX acquisition. Pro forma basic and
diluted net loss per share, as presented in the statement of operations, has
been computed as described above and also gives effect, under SEC guidance, to
the conversion of the convertible preferred stock (using the if-converted
method) from the original date of issuance.
--------------------------------------------------------------------------------
F-48
<PAGE>
XENOGEN CORPORATION
--------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(continued)
3. Pro Forma Adjustments
A. To eliminate intercompany balances.
B. To record goodwill and other intangible assets related to the DNX
acquisition.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Tangible assets acquired............................................... $ 4,867
Intangible assets, net................................................. 4,294
Goodwill............................................................... 28,628
-------
Total purchase price................................................... $37,789
=======
</TABLE>
Xenogen anticipates to incur $750,000 in direct costs related to the
acquisition which has been allocated to accrued liabilities.
The purchase consideration was allocated as follows:
<TABLE>
<S> <C>
Series F redeemable convertible preferred shares....................... $35,000
Assumed liabilities.................................................... 2,039
-------
Total consideration.................................................... 37,039
Acquisition costs...................................................... 750
-------
Total consideration and costs.......................................... $37,789
=======
</TABLE>
C. To record the amortization of acquired intangible assets and goodwill.
D. To eliminate goodwill on the books of DNX prior to the acquisition.
E. To record Xenogen's anticipated direct costs related to the acquisition.
F. To eliminate liability to DNX's parent, not assumed by Xenogen.
G. To reflect the issuance of Xenogen Series F redeemable convertible preferred
stock to be exchanged for the net assets of DNX.
H. To reflect the elimination of DNX's retained earnings.
I. To eliminate intercompany revenue and research and development expenses.
--------------------------------------------------------------------------------
F-49
<PAGE>
[LOGO OF XENOGEN CORPORATION]
<PAGE>
Part II
Information not required in prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all fees and expenses payable by Xenogen in
connection with the registration of the common stock hereunder. All of the
amounts shown are estimates except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Amount
To Be Paid
--------------------------------------------------------------------------------
<S> <C>
SEC registration fee................................................ $ 25,358
NASD filing fee..................................................... 10,160
Nasdaq National Market listing fee.................................. 95,000
Printing and engraving expenses..................................... 300,000
Legal fees and expenses............................................. 500,000
Accounting fees and expenses........................................ 500,000
Transfer agent and registrar fees and expenses...................... 100,000
Blue sky fees and expenses.......................................... 5,000
Miscellaneous expenses.............................................. 274,482
----------
Total............................................................. $1,810,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article IX of our Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
Article VI of our Bylaws provides for the indemnification of officers,
directors and third parties acting on our behalf if such person acted in good
faith and in a manner reasonably believed to be in and not opposed to our best
interest, and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.
We intend to enter into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our Bylaws,
and intend to enter into indemnification agreements with any new directors and
executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by
the Underwriters of our company and our executive officers and directors, and
by us of the underwriters for certain liabilities, including liabilities
arising under the Securities Act, in connection with matters specifically
provided in writing by the Underwriters for inclusion in the Registration
Statement.
--------------------------------------------------------------------------------
II-1
<PAGE>
We intend to purchase and maintain insurance on behalf of any person who is or
was a director or officer against any loss arising from any claim asserted
against him or her and incurred by him or her in any such capacity, subject to
certain exclusions.
Item 15. Recent Sales of Unregistered Securities
(a) Within the last three years, and through September 30, 2000, we have issued
and sold the following unregistered securities:
Common Stock
(1) Since our inception in August 1995, we have granted options to purchase
2,553,868 shares of common stock to employees, directors and
consultants under our 1996 stock plan at exercise prices ranging from
$0.068 to $2.739 per share. Of the 2,553,868 shares granted, 1,826,170
remain outstanding, 566,770 shares of common stock have been purchased
pursuant to exercises of stock options and 160,928 shares have been
canceled and returned to the 1996 Stock Plan. Each transaction pursuant
to our 1996 stock plan was exempt from registration requirements in
reliance on Rule 701 under Section 3(b) of the Securities Act.
(2) In July 1997, we sold 292,000 shares of restricted common stock at a
price of $0.068 per share to David W. Carter. This transaction was
exempt from registration in reliance on Section 4(2) of the Securities
Act.
(3) In January 1998, we sold an aggregate of 620,500 shares of restricted
common stock at a price of $0.178 per share to David W. Carter and
Pamela R. Contag, Ph.D. These transactions were exempt from
registration in reliance on Section 4(2) of the Securities Act.
The sales of the above securities were deemed to be exempt from registration in
reliance on Rule 701 promulgated under Section 3(b) under the Securities Act as
transactions pursuant to a compensatory benefit plan or a written contract
relating to compensation in the case of (1), and Section 4(2) of the Securities
Act in the case of (2) and (3) as transactions by an issuer not involving any
public offering. All recipients were either accredited or sophisticated
investors, as those terms are defined under the Securities Act. The recipients
of securities in each such transaction were located through nonpublic means.
Each recipient represented his or her intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. We determined
that each such recipient had enough knowledge and experience in finance and
business matters to evaluate the risks and merits of the investment or was able
to bear the investment's economic risk based on written information from each
recipient. In addition, based on information provided by us to the recipients
in each transaction we determined that all recipients had either adequate
information about us or had access through employment or other relationships,
to such information.
Preferred Stock
(1) In August 1996, we sold an aggregate of 60,606 shares of Series A
preferred stock at a price of $0.33 per share to Robert D. Brownell,
Albert P. Halluin, Pennie & Edmonds Ventures, and WS Investment Company
95B. These transactions were exempt from registration in reliance on
Regulation D under the Securities Act.
(2) Between April and August 1996, we sold an aggregate of 200,000 shares
of Series B preferred stock at a price of $.50 per share to Michael and
Terri Fayer, Mark and Penny
--------------------------------------------------------------------------------
II-2
<PAGE>
Kermit, Timothy MacHold, State Bank and Trust Company Trust, Eng C.
Ong, Plan A, H. Alan and Judith L. Schwettman and the Smith Family
Trust. These transactions were exempt from registration in reliance on
Regulation D under the Securities Act.
(3) In January 1998, we sold an aggregate of 5,041,539 shares of Series C
preferred stock at a price of $1.30 per share to ten accredited
investors, including Brentwood Affiliates Fund, Brentwood Associates
VIII, L.P., David W. Carter, Delphi BioInvestments IV, L.P., Delphi
Ventures IV, L.P., and Harvard Private Capital Holdings, Inc. These
transactions were exempt from registration in reliance on Regulation D
under the Securities Act.
(4) In April 1999, we sold an aggregate of 6,678,791 shares of Series D
preferred stock at a price of $1.65 per share to fourteen accredited
investors, including Brentwood Affiliates Fund, Brentwood Associates
VIII, L.P., Delphi BioInvestments IV, L.P., Delphi Ventures IV, L.P.,
Harvard Private Capital Holdings, Inc., Invemed Fund, L.P., Invemed
Associates LLC, and S.R. One, Ltd. These transactions were exempt from
registration in reliance on Regulation D under the Securities Act.
(5) In May 2000, we sold an aggregate of 7,194,113 shares of Series E
preferred stock at a price of $4.25 per share to thirteen accredited
investors, including Brentwood Associates VIII, L.P., Chevron
Technology Ventures LLC, Delphi BioInvestments IV, L.P., Delphi
Ventures IV., L.P., Harvard Private Capital Holdings, Inc., HSBC
Investment Bank Plc, Invemed Fund, L.P., Lombard Oldier + Cie, and S.R.
One, Ltd. These transactions were exempt from registration in reliance
on Regulation D under the Securities Act.
(6) In November 2000, we issued 3,500,000 shares of Series F preferred
stock to Phoenix International Life Sciences (Chrysalis) Inc. in
connection with the acquisition of DNX. This transaction was exempt
from registration in reliance on Section 4(2) of the Securities Act.
The sales of the above securities were deemed to be exempt from registration in
reliance on Regulation D under the Securities Act in the case of (1), (2), (3),
(4) and (5) and Section 4(2) of the Securities Act in the case of (6)
promulgated thereunder as transactions by an issuer not involving any public
offering. All recipients were either accredited or sophisticated investors, as
those terms are defined under the Securities Act. The recipients of securities
in each such transaction were located through nonpublic means. Each recipient
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
investments issued in such transactions. We determined that each such recipient
had enough knowledge and experience in finance and business matters to evaluate
the risks and merits of the investment or were able to evaluate the
investment's economic risk based on written information from each recipient. In
addition, based on information provided by us to the recipients we determined
that all recipients had either adequate information about us or had access,
through employment or other relationships, to such information.
(b) There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).
--------------------------------------------------------------------------------
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement
2.1**+ Agreement and Plan of Reorganization relating to the acquisition of
DNX dated September 28, 2000
3.1(i)** Certificate of Incorporation of Xenogen as currently in effect
3.1(ii)** Amended and Restated Certificate of Incorporation of Xenogen to be
effective upon completion of the offering
3.2(i)** Bylaws of Xenogen as currently in effect
3.2(ii)** Bylaws of Xenogen as in effect upon completion of the offering
4.1** Specimen Common Stock Certificate
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Amended and Restated Investors' Rights Agreement dated May 15, 2000
10.2** 1996 Stock Plan
10.3** Form of 2000 Stock Incentive Plan
10.4** Form of 2000 Employee Stock Purchase Plan
10.5** Form of Director and Executive Officer Indemnification Agreement
10.6** Agreement between Xenogen and Pamela R. Contag, Ph.D. dated as of
January 21, 1998
10.7** Agreement between Xenogen and David W. Carter dated as of January
21, 1998
10.8(i)** Lease Agreement for 860 Atlantic Avenue, Alameda, California
10.8(ii)** Lease Agreement for 2061 Challenger Drive, Alameda, California
10.9** Stock Subscription Warrant dated August 14, 1998
10.10** Form of Series C Preferred Stock Purchase Warrant dated November
13, 1997
10.11** Common Stock Purchase Warrant dated April 28, 2000
10.12**+ License Agreement between Xenogen and The Board of Trustees of the
Leland Stanford Junior University dated May 5, 2000
10.13** Promissory Notes by David W. Carter dated January 15, 1998
10.14** Promissory Note Secured by Deed of Trust by Pamela R. Contag, Ph.D.
dated September 18, 1998
10.15**+ Commercial License Agreement between Xenogen and IRM, LLC dated
July 12, 2000
10.16**+ License Agreement between Xenogen and Taconic Farms, Inc. dated
January 13, 2000
10.17**+ License Agreement between Ohio University and Embryogen, Inc. dated
June 13, 1985, as amended on July 1, 1991
10.18**+ Sponsored Research Agreement between Xenogen Biosciences and Pfizer
Inc. dated as of December 28, 2000
23.1 Consent of Ernst & Young LLP, independent accountants
23.2* Consent of Counsel (included in exhibit 5.1)
24.1** Power of Attorney (See page II-5)
27.1** Financial Data Schedule
</TABLE>
--------
* To be filed by amendment
** Previously filed
+ Confidential treatment has been requested for portions of this exhibit
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
--------------------------------------------------------------------------------
II-4
<PAGE>
Item 17. Undertakings
Insofar as indemnification by Xenogen for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Xenogen, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Xenogen of expenses incurred or paid by a director, officer or controlling
person of Xenogen in the successful defense of any action, suit or proceeding)
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by Xenogen
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
We hereby undertake that:
(a) We will provide to the underwriters at the closing as specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(b) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by Xenogen pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
--------------------------------------------------------------------------------
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, Xenogen
Corporation has duly caused this Amendment No. 4 to the Registration Statement
on Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Alameda, State of California, on the 19th day of
January, 2001.
Xenogen Corporation
/s/ David W. Carter
By: _________________________________
David W. Carter
Co-Chief Executive Officer and
Chairman of the Board
/s/ Pamela R. Contag
By: _________________________________
Pamela R. Contag, Ph.D.
Co-Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David W. Carter Co-Chief Executive Officer January 19, 2001
____________________________________ and Chairman of the Board
David W. Carter (Co-Principal Executive
Officer)
/s/ Pamela R. Contag Co-Chief Executive Officer, January 19, 2001
____________________________________ President and Director
Pamela R. Contag, Ph.D. (Co-Principal Executive
Officer)
* Chief Financial Officer January 19, 2001
____________________________________ and Vice President
Kevin J. Birtchnell (Principal Financial and
Accounting Officer)
* Director January 19, 2001
____________________________________
Brian G. Atwood
* Director January 19, 2001
____________________________________
Alan M. Goldberg, Ph.D.
* Director January 19, 2001
____________________________________
Raymond J. Whitaker, Ph.D.
* Director January 19, 2001
____________________________________
Debra Yu, M.D.
</TABLE>
/s/ Pamela R. Contag
By:____________________________
Pamela R. Contag, Ph.D.
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement
2.1**+ Agreement and Plan of Reorganization relating to the acquisition of
DNX dated September 28, 2000
3.1(i)** Certificate of Incorporation of Xenogen as currently in effect
3.1(ii)** Amended and Restated Certificate of Incorporation of Xenogen to be
effective upon completion of the offering
3.2(i)** Bylaws of Xenogen as currently in effect
3.2(ii)** Bylaws of Xenogen as in effect upon completion of the offering
4.1** Specimen Common Stock Certificate
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Amended and Restated Investors' Rights Agreement dated May 15, 2000
10.2** 1996 Stock Plan
10.3** Form of 2000 Stock Incentive Plan
10.4** Form of 2000 Employee Stock Purchase Plan
10.5** Form of Director and Executive Officer Indemnification Agreement
10.6** Agreement between Xenogen and Pamela R. Contag, Ph.D. dated as of
January 21, 1998
10.7** Agreement between Xenogen and David W. Carter dated as of January
21, 1998
10.8(i)** Lease Agreement for 860 Atlantic Avenue, Alameda, California
10.8(ii)** Lease Agreement for 2061 Challenger Drive, Alameda, California
10.9** Stock Subscription Warrant dated August 14, 1998
10.10** Form of Series C Preferred Stock Purchase Warrant dated November
13, 1997
10.11** Common Stock Purchase Warrant dated April 28, 2000
10.12**+ License Agreement between Xenogen and The Board of Trustees of the
Leland Stanford Junior University dated May 5, 2000
10.13** Promissory Notes by David W. Carter dated January 15, 1998
10.14** Promissory Note Secured by Deed of Trust by Pamela R. Contag, Ph.D.
dated September 18, 1998
10.15**+ Commercial License Agreement between Xenogen and IRM, LLC dated
July 12, 2000
10.16**+ License Agreement between Xenogen and Taconic Farms, Inc. dated
January 13, 2000
10.17**+ License Agreement between Ohio University and Embryogen, Inc. dated
June 13, 1985, as amended on July 1, 1991
10.18**+ Sponsored Research Agreement between Xenogen Biosciences and Pfizer
Inc. dated as of December 28, 2000
23.1 Consent of Ernst & Young LLP, independent accountants
23.2* Consent of Counsel (included in exhibit 5.1)
24.1** Power of Attorney (See page II-5)
27.1** Financial Data Schedule
</TABLE>
--------
* To be filed by amendment
** Previously filed
+ Confidential treatment has been requested for portions of this exhibit
--------------------------------------------------------------------------------
