<PAGE>
As filed with the Securities and Exchange Commission on October 16, 2000
Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
LXN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 3845 33-05807874
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
6325 Lusk Boulevard
San Diego, CA 92121
(858) 546-7500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------
Michael A. Beeuwsaert
President and Chief Executive Officer
LXN Corporation
6325 Lusk Boulevard
San Diego, CA 92121
(858) 546-7500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
Copies to:
<TABLE>
<S> <C>
D. Bradley Peck Christopher D. Mitchell
Christopher J. Kearns Mark Casillas
Daniel P. Dillon Andrew Kim
Cooley Godward LLP Wilson Sonsini Goodrich & Rosati
4365 Executive Drive, Suite 1100 Professional Corporation
San Diego, CA 92121 650 Page Mill Road
(858) 550-6000 Palo Alto, CA 94304
(650) 493-9300
</TABLE>
------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
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 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 Proposed Maximum
Title of Each Class of Amount to Offering Price Per Aggregate Offering Amount of
Securities to be Registered be Registered(1) Share (2) Price (2) Registration Fee
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.01 par value..... shares $ $57,500,000 $15,180
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 16, 2000
[LXN CORPORATION LOGO]
Shares
Common Stock
LXN Corporation is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We have applied for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "LXNC." We anticipate that the initial public
offering price will be between $ and $ per share.
--------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 9.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds to LXN Corporation..................................... $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
LXN has granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
--------------
Robertson Stephens
Prudential Vector Healthcare
a unit of Prudential Securities
Dain Rauscher Wessels
The date of this Prospectus is , 2000.
<PAGE>
[IN CHARGE DIABETES CONTROL SYSTEM]
[PHOTOGRAPH OF PHYSICIAN HOLDING A PATIENT CHART]
[PHOTOGRAPH OF ENLARGED PATIENT CHART WRITTEN IN PHYSICIAN'S HANDWRITING]
[HbA1c laboratory result 8.0%. Improvement from last visit. Patient to continue
GlucoProtein Testing]
[The In Charge Diabetes Control System
. 4 minute GlucoProtein Test for measuring overall Glucose control.
. Rapid glucose test for measuring blood glucose levels at a moment in time.]
[PHOTOGRAPH OF TWO TYPES OF TEST STRIPS APPEARS HERE]
[Performs two important tests for diabetes control on one simple, hand-held
monitor]
[PHOTOGRAPH OF A PATIENT'S HANDS AND ARM AS THE PATIENT PLACES A TEST STRIP ON
AN IN CHARGE MONITOR APPEARS HERE]
["LXN The Diabetes Control Company"]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, "LXN," the
"Company," "we," "us" and "our" refer to LXN Corporation, a Delaware
corporation.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 9
Information Regarding Forward-Looking Statements......................... 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 32
Management............................................................... 44
Related Party Transactions............................................... 52
Principal Stockholders................................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 59
Legal Matters............................................................ 62
Experts.................................................................. 62
Where You Can Find More Information...................................... 62
Index to Financial Statements............................................ F-1
</TABLE>
---------------------
LXN, Duet, GlucoProtein, In Charge and ExpressView are trademarks of LXN
Corporation. This prospectus also includes trademarks owned by other parties,
and all other trademarks mentioned are the property of their respective owners.
Dealer Prospectus Delivery Obligation
Until , 2001, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
3
<PAGE>
SUMMARY
This summary highlights information contained in this prospectus. You should
read the entire prospectus, especially "Risk Factors" and the consolidated
financial statements and notes, before deciding to invest in shares of our
common stock.
Our Company
LXN is a medical technology company that develops, manufactures and markets
products to help people with diabetes better manage their disease. In
Charge(TM), our FDA-cleared consumer product, includes a proprietary home-based
test called GlucoProtein(R), which measures overall glucose control. Our
GlucoProtein test allows patients and health care professionals to better
monitor the overall effectiveness of diabetes treatment and make timely and
effective therapy changes. We launched In Charge regionally in October 1999,
and based on the success of this launch, we plan to aggressively pursue
nationwide sales and marketing. We also market Duet(R), a product for the
health care professional that also performs the GlucoProtein test. We believe
our products and technologies are well-suited to fill an unmet need of a
growing population of diabetes patients with poor glucose control.
The Opportunity
Diabetes is a chronic, progressively debilitating disease in which the human
body loses its ability to maintain a normal level of glucose in the
bloodstream. The disease can result in severe complications such as blindness,
amputation, kidney failure, and cardiac failure. To prevent these
complications, patients attempt to maintain their average glucose levels within
a normal range. As one attempt to monitor this, patients periodically check
their blood glucose to get point-in-time measurements. There were estimated to
be over two billion point-in-time blood glucose tests performed in the U.S. in
1999.
Of the estimated 10.3 million people in the U.S. diagnosed with diabetes,
approximately 90% have a form known as Type 2 diabetes. These patients are
typically not dependent on frequent insulin injections to maintain normal
glucose levels. Rather, their physicians typically treat them with some
combination of oral medications, diet modification, and exercise programs.
Since the majority of these patients do not rely on frequent glucose testing to
adjust their treatment regimen, they tend not to test often enough to get a
true indication of their overall control. Tests for overall glucose control are
more meaningful for Type 2 patients than point-in-time measurements, since
blood glucose can fluctuate widely throughout the day.
Overall blood glucose control may be determined by measuring the level of
glycated proteins in the bloodstream. High levels of blood glucose lead to high
levels of glycated proteins. Two glycated proteins measured are HbA1c and
fructosamine. An HbA1c measurement represents the average level of glucose over
the preceding three months, while fructosamine represents the prior three
weeks. Higher levels of glycated proteins serve as a warning sign that overall
glucose levels are not in control, even if point-in-time glucose tests indicate
a normal level. High levels of glycated proteins have been shown to correlate
with increased risk for the severe complications of diabetes. Despite this,
glycated protein tests have not been widely used because they typically require
a visit to the laboratory, are expensive, and results are not available in time
for a physician to make timely therapy adjustments. In addition, the
three month time window of HbA1c does not allow patients to easily recall
behaviors that could have caused the poor levels of overall glucose control.
4
<PAGE>
GlucoProtein(R)
Our proprietary GlucoProtein test is the only over-the-counter home-based
test that measures the patient's average blood glucose level over three weeks
rather than three months. We believe that our test enables patients to take a
more active role in their therapy and is ideally suited for the large Type 2
population. The feedback from GlucoProtein tests enables patients and their
health care professionals to more meaningfully analyze past behaviors and
treatment regimens, and alter them to achieve better glucose control.
In December 1999 the results from a 25-patient clinical trial demonstrated
that a diabetes treatment regimen using a combination of once-weekly
GlucoProtein testing and regular point-in-time glucose testing resulted in
better blood glucose control than a regimen using only regular point-in-time
glucose testing. The trial measured HbAlc levels, a well-accepted marker of
overall blood glucose control, in patients at the beginning of the trial and at
the end of the trial, three months later. The group of patients using our
GlucoProtein testing achieved a 13% reduction in average HbAlc levels while the
group that did not use GlucoProtein testing did not achieve a statistically
significant change in average HbAlc levels. The chance that these results could
have occurred by accident is less than 1 in 10,000. A 10% reduction in HbAlc
levels has been shown in other studies to reduce the risk of severe
complications such as blindness by up to 45%.
In Charge(TM) and Duet(R)
We currently market two GlucoProtein products: In Charge for use by patients
and Duet for use by health care professionals. In Charge has three components:
a GlucoProtein test strip, a glucose test strip and a hand-held, electronic
monitor. Duet is a similar system designed for in-office use by a health care
professional. The In Charge GlucoProtein test strips are packaged together with
glucose test strips, and the package is covered by Medicare reimbursement. In
addition, several major health care payors and managed care organizations
already cover our products. Typically we sell the full system, then receive
recurring revenues from sales of disposable test strips. Customers can purchase
In Charge as a non-prescription product through multiple channels, including
national retail chains, independent pharmacies, mail-order pharmacies, or
directly from us. We currently have a regional sales force, and we will build a
national sales force to market our products.
Our Strategy
Our strategy has four major components:
. Establish GlucoProtein Home Testing as the Standard of Care for
Management of Type 2 Diabetes. We will sponsor additional clinical
trials to provide further support that GlucoProtein home testing improves
medical outcomes. We intend to present the results to key medical
organizations such as the American Diabetes Association to facilitate
adoption of GlucoProtein home testing as a standard of care. We will
publicize the results to promote the continued adoption of GlucoProtein
and In Charge by managed care and health care payors.
. Aggressively Pursue Nationwide Sales and Marketing Efforts. Our
nationwide sales force will promote In Charge to diabetes-focused
physicians and educators, opinion leaders and pharmacists. We will
promote Duet to physicians because we believe doctors who use Duet in
their office will recommend that their patients use In Charge at home. In
parallel, we plan to market In Charge directly to patients.
. Enhance Technology Leadership Position. We intend to improve our existing
products to meet changing consumer requirements and to measure additional
disease parameters common in diabetes patients. Our goal is to have
GlucoProtein testing accepted as a clinical decision tool in the use of
5
<PAGE>
drug treatments for diabetes. Thus, we target pharmaceutical companies
with diabetes drugs that could use GlucoProtein testing as a clinical
research tool or could incorporate it as part of their drug dosing.
Bristol-Myers Squibb, for example, has incorporated In Charge into two
clinical trials to support its newest Type 2 diabetes drug.
. Broaden Reimbursement Coverage. We will continue to target additional
health care payors and managed care organizations to obtain
reimbursement. Although Medicare already covers our combined package, we
are pursuing reimbursement of our GlucoProtein test strips separately
from the combined product.
Our Address
LXN's principal executive offices are located at 6325 Lusk Boulevard, San
Diego, CA 92121, and our telephone number at that address is (858) 546-7500.
Our website is located at www.inchargenow.com.
6
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by LXN.................. shares
Common Stock to be outstanding after this
offering.................................... shares
Use of proceeds.............................. We intend to use the net
proceeds of this offering for
sales and marketing expenses,
including expanding our sales
force for In Charge and Duet,
product enhancement and
development, and for general
corporate purposes, including
working capital and capital
expenditures.
Proposed Nasdaq National Market symbol....... LXNC
</TABLE>
--------------------
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of October 16, 2000 and
includes 845,832 shares issuable upon exercise of warrants outstanding as of
October 16, 2000, at a weighted average exercise price of $6.49 per share,
which automatically expire upon the closing of this offering if unexercised.
These warrants allow for their net exercise, which, if used, would result in
fewer shares being issued upon exercise depending on the initial public
offering price of the shares sold by us.
The number of shares of common stock to be outstanding after the offering
excludes:
. 1,595,066 shares of common stock issuable upon exercise of options
outstanding as of October 11, 2000, at a weighted average exercise price
of $3.69 per share; and
. 55,269 shares issuable upon exercise of warrants outstanding as of
October 11, 2000, at a weighted average exercise price of $7.00 per
share, which do not automatically expire upon the closing of this
offering.
--------------------
Unless otherwise stated, information in this prospectus is based on the
following assumptions:
. no exercise of the underwriters' over-allotment option;
. a 2 for 1 stock split, to be effected prior to the closing of this
offering to holders of record as of October 16, 2000;
. the conversion of all of our outstanding shares of preferred stock into
8,018,686 shares of common stock, as adjusted for the stock split, upon
the closing of this offering.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------- ----------------------
1997 1998 1999 1999 2000
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 2,508 $ 2,104 $ 756 $ 1,803
Cost of goods sold...... -- 2,938 2,203 1,012 1,681
-------- ---------- ---------- ---------- ----------
Gross (loss) profit... -- (430) (99) (256) 122
-------- ---------- ---------- ---------- ----------
Operating expenses
Selling and
marketing............ 828 6,339 4,195 2,255 2,135
General and
administrative....... 1,819 2,387 3,314 2,174 1,146
Research and
development.......... 2,598 2,141 1,427 1,128 208
Stock-based
compensation......... 290 700 1,143 641 1,409
-------- ---------- ---------- ---------- ----------
Total operating
expenses............ 5,535 11,567 10,079 6,198 4,898
-------- ---------- ---------- ---------- ----------
Operating loss.......... (5,535) (11,997) (10,178) (6,454) (4,776)
-------- ---------- ---------- ---------- ----------
Other
Interest income....... 326 472 368 190 121
Interest expense...... (32) (60) (139) (73) (76)
Other income.......... -- -- 100 97 200
-------- ---------- ---------- ---------- ----------
294 412 329 214 245
-------- ---------- ---------- ---------- ----------
Net loss................ (5,241) (11,585) (9,849) (6,240) (4,531)
Accretion of discount on
redeemable convertible
preferred stock........ -- -- (337) (133) (209)
-------- ---------- ---------- ---------- ----------
Net loss attributable to
common stockholders.... $ (5,241) $ (11,585) $ (10,186) $ (6,373) $ (4,740)
======== ========== ========== ========== ==========
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (5.83) $ (11.36) $ (9.59) $ (6.01) $ (4.36)
======== ========== ========== ========== ==========
Weighted-average number
of common shares
outstanding(1)......... 899,668 1,019,978 1,062,698 1,060,020 1,087,564
======== ========== ========== ========== ==========
Unaudited pro forma net
loss per share
attributable to common
stockholders, basic and
diluted................ $ (1.12) $ (0.99)
========== ==========
Shares used in computing
unaudited pro forma net
loss per share
attributable to common
stockholders, basic and
diluted(1)............. 8,774,332 9,234,484
========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------
ProForma As
Actual Pro Forma(2) Adjusted(3)
-------- ------------ -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................. $ 1,682 $12,170
Working capital............................ 493 10,981
Total assets............................... 5,592 16,080
Long term portion of bank credit
facilities................................ -- -- --
Total redeemable convertible preferred
stock and preferred stock warrants........ 34,934 --
Stockholders' equity (deficit)............. (32,605) 12,817
</TABLE>
--------
(1) Please see Note 2 to our financial statements for an explanation of the
determination of the number of shares used in computing per share data.
(2) The pro forma information gives effect to the sale and issuance in October
2000 of shares of Series F redeemable convertible preferred stock for
aggregate net proceeds to us of $5.0 million and gives effect to the
automatic conversion of all outstanding redeemable convertible preferred
stock into 8,018,686 shares of common stock. The pro forma information also
reflects the exercise of outstanding preferred stock warrants into 845,832
shares of common stock for aggregate net proceeds to us of $5.5 million
before these warrants expire upon the closing of this offering. If any of
these warrants are not exercised as permitted by their terms, the aggregate
net proceeds to us will be reduced.
(3) The pro forma as adjusted information also gives effect to the issuance and
sale of the shares of common stock offered by us in this offering
at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
8
<PAGE>
RISK FACTORS
Any investment in shares of our common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
We are dependent upon In Charge and Duet for our future revenues and growth,
and if we do not achieve adequate sales volumes of these products, our
business, financial condition and operating results will be seriously harmed.
We expect that In Charge and Duet will account for a substantial majority of
our revenues for the foreseeable future. Our ability to generate significant
revenues will be dependent upon our ability to achieve adequate sales volumes
of these products and their acceptance among physicians, patients and health
care payors. We face risks related to our ability to:
. build a sales and marketing organization to support the national
commercial launch of In Charge;
. demonstrate the benefits of our glycated protein monitoring systems to
physicians, patients and diabetes organizations like the American
Diabetes Association, or ADA;
. demonstrate the cost-effectiveness of In Charge to health care payors and
obtain reimbursement approvals from Medicare and private health care
payors; and
. compete in the diabetes home testing market, which is dominated by large,
well financed and established competitors.
If we fail to adequately manage these risks and other risks that we will
encounter, we will likely fail to successfully market In Charge and Duet and
our revenues will not grow or will grow more slowly than we expect. In this
event, our business, financial condition and operating results would be
seriously harmed, and our stock price would likely decline.
We have a limited operating history, have incurred significant operating losses
and may never build a sustainable business or achieve profitability, and if we
fail to do so, our stock price will likely decline.
We were incorporated in 1993 and have a limited operating history. To date,
our operations have been focused primarily on the development of our products
and technologies. We have had only limited commercial sales. Accordingly, our
historical results of operations provide only a limited basis for assessing our
future prospects. In addition, we incurred operating losses of $12.0 million in
1998, $10.2 million in 1999 and $4.8 million in the six months ended June 30,
2000 and we had an accumulated deficit of $36.4 million at June 30, 2000.
We anticipate that our operating expenses will increase significantly for
the foreseeable future as we continue to expand our sales and marketing,
manufacturing, clinical research and product development efforts. Accordingly,
in order for us to achieve profitability, we will need to significantly
increase our revenues. If our revenues do not continue to grow, we may not be
able to achieve or maintain profitable operations in the future. Even if we do
achieve significant revenues, we expect to incur significant net losses over
the next several years and these losses could increase. If we fail to achieve
significant revenue growth or profitability, our stock price will likely
decline.
9
<PAGE>
If In Charge and Duet fail to achieve market acceptance in a timely manner, our
revenues and our business could be seriously harmed.
Because substantially all of our revenues for the foreseeable future will
come from the sale of In Charge and Duet, our future operating results will
depend upon market acceptance of these products among physicians, patients, and
health care payors. If we are unable to convince these parties of the benefits
of glycated protein testing in combination with glucose testing as a more
effective alternative to glucose-only testing, and of the utility of our
products in particular, we may not be able to generate sufficient revenues to
achieve our business objectives.
Physicians and other health care professionals will not recommend or use our
products unless they determine, based on their professional experience, long
term clinical data, relative cost and other factors that our products provide
an effective and attractive method for supplying clinical information useful to
the management of diabetes. To date, In Charge and Duet have been utilized by
only a limited number of customers. In addition, no independent clinical
studies regarding these products have been published and the principal clinical
study seeking to demonstrate the benefits of weekly glycated protein testing
involved only 25 patients and was conducted in December 1999. Furthermore, a
significant factor in our ability to achieve acceptance of our products among
physicians will be endorsements and recommendations from diabetes organizations
and opinion leaders in the field. To date, we have not received any
endorsements or recommendations from these organizations. Finally, we may be
adversely affected by physician tendencies to slowly adopt new products and
treatment practices due to perceived liability risks and concerns relating to
reimbursement from health care payors.
Acceptance among patients will depend upon not only recommendations by
physicians and other health care providers but upon the success of our consumer
marketing programs. We must establish the In Charge brand among diabetes
patients and must also convince diabetes patients of the clinical advantages of
using our products.
Acceptance among health care payors will depend upon their assessments of
the cost-effectiveness and clinical benefits of our products. It may be
necessary for us to generate a significant body of clinical data regarding our
products that we can present to payor organizations in order to achieve such
acceptance. This would be a lengthy, expensive process. In addition, some payor
organizations may conduct their own independent assessments of our products.
For these reasons, we may fail to achieve acceptance of our products among
physicians, patients and health care payors. If we fail to achieve such
acceptance, our revenues would not grow or would decline, our operating losses
would likely increase, and our business and financial condition would be
seriously harmed. Our stock price would also likely decline.
We face significant competition from major medical technology companies with
greater resources than we have, and if we fail to compete effectively, our
business will be seriously harmed.
The home glucose monitoring industry is intensely competitive. Physicians
and patients are accustomed to using other glucose monitoring products sold by
competitors of ours that have significant marketing, technical and financial
resources and well-established products, markets and distribution channels.
Our primary competitors are the manufacturers of home blood glucose tests
and manufacturers of HbA1c tests designed for laboratories and physicians'
offices. Home blood glucose test manufacturers include the Lifescan unit of
Johnson & Johnson, Roche Diagnostics, Bayer AG and Abbott Laboratories. Each of
these companies offers a glucose-only test using a battery-operated, hand-held
monitor with a single-use test strip. Manufacturers of physician's office and
laboratory HbA1c test devices include Roche Diagnostics, Sigma Chemical Co. and
Bayer AG. To date, none of these companies has introduced an in-home glycated
protein test. One company, Metrika, recently announced that it received
regulatory approval for an in-home HbA1c test that requires a prescription,
although this product has not yet been commercially introduced.
10
<PAGE>
Many of our competitors and potential competitors have substantially greater
capital resources, research and development staff and facilities than we have.
In general, our competitors also have greater experience than we have in
research and new product development, obtaining regulatory approvals and
manufacturing and marketing medical devices. As a result, many of our current
competitors could, if they elect to do so, design and develop an in-home
glycated protein test. These companies could represent potential additional
competition for us.
The products offered by our competitors compete with our products based on
price and access to distribution channels. Competition within the glucose
monitoring industry could force us to reduce the price of our products or
implement purchase incentive programs or similar price discounting programs. In
addition, competitors, because of their high sales volumes and broader range of
products, may be more successful in establishing relationships with major
retailers, including national and regional pharmacy and discount store chains.
As a result, these competitors may get better store shelf placement for their
products and other favorable treatment from retailers. Competitors may also be
able to enter into more favorable arrangements with managed care companies and
health care payors. If our competition forces us to reduce the prices for our
products or makes it more difficult to place our products in major retail
outlets or obtain reimbursement from health care payors, our business,
financial condition and operating results would be seriously harmed.
We have limited experience in undertaking major new product introductions, and
we may encounter difficulties in successfully rolling out In Charge on a
national basis.
We have limited sales and marketing experience and have not yet successfully
introduced a new product on a national basis. To date, our sales and marketing
efforts for In Charge have been focused primarily on introduction of In Charge
on a regional basis in discrete geographic markets. In order for us to achieve
our business objectives, we will need to successfully roll out In Charge on a
national basis. This will require us to hire, train and manage a large sales
force deployed in major geographic markets throughout the United States. We
currently have only a limited sales force and have no experience in hiring,
training and managing a large sales force or in selling our products through a
large sales force. There are significant risks involved in building and
managing a sales force. There is intense competition for skilled sales and
marketing employees, especially for people who have experience selling medical
devices to physicians and through consumer marketing channels in our target
markets. We may be unable to hire skilled individuals to sell our products. Any
inability to build our direct sales force will materially and negatively impact
our growth.
In addition, in connection with the national rollout of In Charge, we will
need to successfully penetrate major national and regional discount retail and
pharmacy chains and other retail outlets at which consumer medical products are
sold. We have limited experience in marketing to major retailers and may,
relative to our competitors, be at a disadvantage in this regard due to our
small size, lack of a diversified product portfolio, limited operating history
and limited marketing experience. If we are unable to successfully penetrate
major and regional retailers, our sales of In Charge will be harmed.
Only one clinical study has been completed that validates the benefits of home-
based fructosamine testing. We will need to sponsor additional clinical studies
to validate our GlucoProtein test, and if we are unable to do so, our market
acceptance and revenues will be seriously harmed.
The clinical study that demonstrated the benefits of weekly fructosamine
testing as a means of managing overall glucose control in diabetes patients
involved only 25 patients over a period of three months. This study was
conducted in December 1999. We intend to sponsor additional clinical studies
with the objective of demonstrating the benefits of weekly home fructosamine
testing in larger patient populations. Acceptance of our products would be
seriously harmed if these future clinical studies do not produce results
similar to the initial study. In addition, studies in which patients are
followed for longer time periods may fail to confirm the benefits of weekly
fructosamine testing as compared to glucose-only testing, and this could also
seriously harm acceptance of our products. We also cannot be certain when we
will sponsor our future studies, or when or whether the results of these
studies will be compiled and published. Accordingly, if we do not achieve
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favorable results in these future clinical studies and we are unable to have
these results compiled and published in a timely manner, acceptance of our
products could be seriously harmed. This in turn would harm our revenues,
business, financial condition and operating results.
If health care payors do not reimburse health care providers for use of our
products, purchases of our products could be delayed or curtailed and our
revenues could decline.
Physicians and patients may be reluctant to purchase our products if they do
not receive adequate reimbursement for the cost of our products from health
care payors, such as Medicare, Medicaid and private health insurance plans. To
date, only a limited number of private health care payors have agreed to
reimburse for the cost of our products. Until a sufficient amount of positive
clinical data has been published, insurance companies and other payors may
refuse to provide reimbursement for the cost of our products or may reimburse
at levels that are not acceptable to health care providers. Some payors may
refuse adequate reimbursement even upon publication of this data. Market
acceptance of our products will be limited unless physicians and patients can
obtain adequate levels of reimbursement from governmental and major private
health care payors.
Many health care payors enter into purchasing agreements under which they
agree to purchase particular products or classes of products from a single
vendor in order to obtain more favorable pricing or other terms. For example, a
health care insurance company may have an arrangement with one of our
competitors for the purchase of blood glucose monitors. Health care payors may
find it more advantageous to enter into such agreements with our competitors,
particularly those that offer a broad range of products. Accordingly, health
care payors may not enter into purchasing agreements with us for our products,
even if physicians and patients prefer our products or our products are
demonstrated to be superior to other existing products. If we experience
difficulty in entering into purchasing agreements with health care payors, our
revenues and our business, financial condition and operating results will
likely be harmed.
Even if health care payors provide adequate reimbursement for our products,
adverse changes in health care payors' reimbursement policies generally, or
with respect to blood glucose monitoring products in particular, could preclude
market acceptance of our products and harm our revenue growth. We cannot
predict what changes will be made in reimbursement policies of health care
payors.
Fluctuations in our operating results could negatively impact our stock price.
Our revenues and results of operations have fluctuated significantly in the
past and may fluctuate significantly in the future. For example, our revenues
declined from 1998 to 1999. Factors that may cause our results to fluctuate
significantly in the future include:
. the volume and timing of orders for our products;
. announcements regarding clinical studies involving our products;
. sales and marketing programs and initiatives undertaken by us;
. actions taken by our competitors, including changes in product pricing
and introduction of new products;
. our ability to develop, obtain regulatory clearance for, and
commercialize, new and enhanced products on a timely basis;
. changes in the availability of third party reimbursement to users of our
products; and
. write-offs for unsold inventory.
Many of our operating expenses, including costs of facilities, personnel,
marketing programs and overhead, are relatively fixed in nature. We cannot
adjust these expenses in the short term. If our revenues decline or do not grow
as anticipated, we may not be able to reduce our operating expenses
accordingly.
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Failure to achieve anticipated revenue levels could significantly harm our
results of operations for one or more fiscal periods. Due to the possibility of
fluctuations in our revenues and expenses, we believe that quarter to quarter
comparisons of our operating results are not a good indication of our future
performance. In any event, our operating results in a future fiscal period may
fail to meet the expectations of stock market analysts and investors. In that
case, our stock price would likely decline.
Our revenues depend on a limited number of products, and we need to develop new
products or improve existing products to grow our business successfully.
We currently derive all our revenues from the sale of three products. We may
not be able to grow our revenues sufficiently solely from sales of our existing
products. Our future success will depend in part on our ability to continue to
improve our existing products and develop, market and sell new products for
diabetes monitoring. We cannot assure you that we will be successful in
improving our existing products or developing new products, that we can obtain
regulatory clearance to market new products or that we can manufacture these
new products at an acceptable cost. If we fail to successfully develop, market
and sell improved or new products, our business, financial condition and
operating results could be harmed.
New products and technologies could prove to be superior to ours and could
render them obsolete, in which case physicians and patients may reduce or
eliminate the use of our products.
Our competitors and potential competitors may succeed in developing or
marketing products and technologies that will be more acceptable in the
marketplace than our diabetes monitoring devices. New products and technologies
could render ours obsolete or noncompetitive. New products and technologies
could include HbA1c monitoring devices for home use or minimally invasive or
non-invasive tests for accurately measuring blood glucose levels. In addition,
numerous researchers are investigating alternative treatments or cures for
diabetes. If any of these research efforts are successful in reducing diabetes
complications, the demand for our products could be reduced.
Patents and other proprietary rights provide uncertain protections, and if we
are unable to protect our intellectual property rights, our business could be
seriously harmed.
Our commercial success will depend, in large part, on our ability to obtain
patent protection on many aspects of our business, including the products and
methods we develop. Patents issued to us or under which we are licensed may not
provide us with substantial protection or be commercially beneficial to us. The
issuance of a patent is not conclusive as to its validity or its
enforceability. In addition, our pending U.S. and international patent
applications, which contain claims relating to material aspects of our products
that are not currently protected by issued patents, may not result in issued
patents. If our patent applications do not result in issued patents, our
competitors may obtain rights to commercialize our discoveries which would harm
our competitive position.
Competitors may be able to design around our patents or develop products
which are comparable to ours. In addition, the laws of some foreign countries
may not protect our intellectual property rights to the same extent as do the
laws of the U.S. In the event a competitor infringes upon our patent or other
intellectual property rights, enforcing those rights may be costly, difficult
and time consuming. Even if successful, litigation to enforce our intellectual
property rights or to defend our patents against challenge could be expensive
and time consuming and could divert our management's attention. We may not have
sufficient resources to enforce our intellectual property rights or to defend
our patents against a challenge.
Our success also depends upon the skills, knowledge and experience of our
scientific and technical personnel. The confidentiality agreements required of
our employees and that we enter into with other parties may not provide
adequate protection for our trade secrets, know-how or other confidential
information or prevent any unauthorized use or disclosure or the unlawful
development of competing products by others. If any of our intellectual
property is disclosed, our business may suffer. In addition, many of our
scientific and management personnel were previously employed by other medical
device, pharmaceutical or biotechnology
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companies, where they were conducting research in areas similar to those that
we now pursue. As a result, we could be subject to allegations of trade-secret
violations and other claims relating to the intellectual property rights of
these companies.
If we are unable to continue to license the intellectual property of third
parties necessary to develop and commercialize our products, our business will
be seriously harmed.
We license and may continue to license technologies relevant to our
products. In particular, we have licensed certain technologies relating to the
GlucoProtein strip under a non-exclusive license with one of our competitors in
the home glucose monitoring market and the office- and lab-based glycated
protein testing market. We depend, and will continue to depend, on these and
other licensing arrangements for intellectual property rights that are
important to our business. Our rights may be terminated if we do not perform as
required under these arrangements. In addition, these third parties may also
breach or terminate their agreements with us or otherwise fail to conduct their
activities in connection with our relationships in a timely manner. In
particular, the licensor may terminate its license agreement with us if we fail
to make royalty payments or comply with other requirements under the license in
a timely manner or otherwise materially breach the agreement. If any of our
licenses or relationships are terminated or breached, we may:
. lose our rights to develop and market our products;
. lose patent and/or trade secret protection for our products;
. experience significant delays in the development or commercialization of
our products; and
. not be able to obtain any other licenses to alternative technologies on
acceptable terms.
Further, the non-exclusive nature of our license agreement leaves open the
possibility for a third party or competitor to license the same technology and
develop competing products. In addition, the license does not preclude this
competitor from introducing a competing product for in-home glycated protein
testing. If this were to occur, the resulting additional competition could
reduce the market for our products, reduce our revenues and growth and harm our
business and financial condition.
We may face significant expense and liability as a result of litigation or
other proceedings relating to patents and other intellectual property rights of
others.
The medical technology industry has in the past been characterized by a
substantial amount of litigation and related administrative proceedings
regarding patents and intellectual property rights. In addition, major medical
device companies have used litigation against emerging growth companies as a
means of gaining a competitive advantage.
Should third parties file patent applications or be issued patents claiming
technology also claimed by us in pending applications, we may be required to
participate in interference proceedings in the U.S. Patent and Trademark Office
to determine the relative priorities of our inventions and the third parties'
inventions. We or our licensors could also be required to participate in
interference proceedings involving our issued patents and pending applications
of another entity. An adverse outcome in an interference proceeding could
require us to cease using the technology or to license rights from prevailing
third parties. There is no guarantee that any prevailing party would offer us a
license or that such a license could be acquired on commercially acceptable
terms.
Third parties may claim that we are using their patented inventions and may
go to court to stop us from engaging in our normal operations and activities.
Such lawsuits are expensive to defend and conduct and would also consume and
divert the time and attention of our management. A court may decide that we are
infringing a third party's patents and may order us to cease the infringing
activity. The court could also order us to pay damages for the infringement.
These damages could be substantial and could harm our business, financial
condition and operating results. Moreover, we cannot guarantee you that the
prevailing patent owner would offer us a license so that we could continue to
engage in activities claimed by the patent, or that such a license, if made
available to us, could be acquired on commercially acceptable terms.
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If we were unable to obtain any necessary license following an adverse
determination in litigation or in interference or other administrative
proceedings, we could have to redesign our products to avoid infringing a third
party's patent and could temporarily or permanently have to discontinue
manufacturing and selling some of our products. If this were to occur, it would
seriously harm our business, financial condition and operating results.
If we are unable to increase our manufacturing capabilities to meet customer
demand, our business could suffer.
To be successful, we must manufacture our products in commercial quantities
at acceptable costs and in compliance with regulatory requirements. If we are
unable to establish reliable, cost-effective manufacturing of our products at
levels sufficient to meet customer requirements, we could lose customers and
our business could suffer. At the present time, we have limited manufacturing
experience. Our manufacturing operations are currently focused on the
manufacturing of glucose and GlucoProtein test strips. As we increase our
manufacturing volume and the number of product designs for our devices, the
complexity of our manufacturing processes will increase. Successful
manufacturing operations require scaling up production of existing and new
products, controlling production yields, quality control and assurance,
component supply management and avoiding material and personnel shortages. In
addition, we have to remain in compliance with regulatory requirements for the
manufacture of our products. If we are unable to successfully expand or
properly manage our manufacturing operations or are otherwise unable to meet
customer demand for our products, our business, financial condition and
operating results would suffer.
We are dependent on a single manufacturer for the production of our In Charge
and ExpressView monitors, and any material disruption in our relationship with
that manufacturer could harm our business.
We use one third party manufacturer in Germany to manufacture all of our
monitors for In Charge and ExpressView. We have limited control over this
manufacturer, and if it fails to manufacture these monitors with the desired
quality and in a timely manner as our sales volume increases, our business
could be negatively affected. If we or this manufacturer terminate our existing
agreement, finding a replacement manufacturer could be a time-consuming and
expensive process and our sales could decrease during any transition period.
These events would harm our business, financial condition and operating
results.
If we or our suppliers fail to comply with the FDA Quality System Regulations,
manufacturing operations could be delayed and our business could be harmed.
Our manufacturing processes are required to comply with the Quality System
Regulations, or QSR, which covers the methods and documentation of the design,
testing, production, control, quality assurance, labeling, packaging and
shipping of our products. The U.S. Food and Drug Administration, or FDA,
enforces the QSR through periodic unannounced inspections. We have never been
through a QSR inspection, and we cannot assure you that we would pass such an
inspection. Our manufacturing lines at our outside manufacturer have also not
been inspected to date. If we or any of our suppliers fail a QSR inspection,
our operations could be disrupted and our manufacturing delayed. Failure to
take corrective action in response to an adverse QSR inspection could force a
shut-down of our manufacturing operations or those of our suppliers, and a
recall of our products, which would have a material adverse effect on our
product sales, revenues, and expected revenues. Furthermore, we cannot assure
you that our key component suppliers are or will continue to be in compliance
with applicable QSR requirements or will not encounter any manufacturing
difficulties. Any such event could have a material adverse effect on our
available inventory and product sales.
We are dependent on single-source suppliers for a number of components in our
test strips, and any disruption in the supply of these components could
negatively affect our business.
Because a number of components of our test strips are supplied to us by
single-source suppliers, a disruption in the supply of these components could
negatively affect revenues. If we were unable to resolve any disruption, we
could be required to redesign our products which could significantly impair our
ability to sell
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them. In addition to marketing any products containing new materials, we may be
required to make amended or new filings with regulatory authorities. This
clearance process may take a substantial period of time, and we may be unable
to obtain necessary regulatory clearance or approvals for any new material to
be used in our products on a timely basis, if at all. This could also create
supply disruptions that could negatively affect our business.
We depend on key employees in a competitive market for skilled personnel, and
without additional sales personnel and other employees, we cannot grow or
achieve profitability.
We are highly dependent on the principal members of our management,
operations and research and development staff. Our future success will depend
in part on the continued service of these individuals and our ability to
identify, hire and retain additional personnel. In particular, in order to
implement our strategy for the nationwide launch of In Charge, we will need to
significantly increase the size of our sales force over the next 12 months. If
we are unable to hire and train enough sales personnel, our ability to
successfully launch In Charge will be impaired. The market for qualified sales,
technical and management personnel in Southern California, where our offices
are located, is extremely competitive and is expected to continue to be highly
competitive. Because the environment for qualified personnel is so competitive,
costs related to compensation may increase significantly. If we are unable to
attract and retain the personnel we need to support and grow our business, our
business will suffer.
We may need to raise additional capital in the future, which could result in
dilution to our stockholders.
We anticipate that our existing capital resources, together with cash from
operations and the net proceeds from this offering, will be sufficient to fund
our operating and capital requirements for at least the next 12 months.
Nevertheless, we may need to raise additional capital. The amount of additional
capital that we will need to raise will depend on many factors, including the
extent to which In Charge and Duet gain market acceptance. In addition, we may
require additional financing in less than 12 months if we decide to expand more
rapidly than planned, develop new or enhanced products ahead of schedule, need
to respond to competitive pressures or decide to acquire complementary
products, businesses or technologies. If we raise additional funds through the
sale of equity, convertible debt or other equity-linked securities, it will
reduce your percentage ownership of our company. We may issue securities that
have rights, preferences and privileges senior to our common stock. If we raise
additional funds through collaborations or licensing arrangements, we may have
to relinquish rights to certain of our technologies or products, or grant
licenses to third parties on terms that are unfavorable to us. If future
financing is not available to us or is not available on terms acceptable to us,
we may not be able to fund our future needs which would have a material adverse
effect on our operating results and financial condition.
Our failure to obtain or maintain necessary FDA clearances or approvals could
hurt our ability to commercially distribute and market our products in the U.S.
Our current products and products under development are medical devices and
are subject to extensive regulation in the U.S. and in foreign countries where
we intend to do business. Unless an exemption applies, each medical device that
we wish to market in the U.S. must first receive either 510(k) clearance or
premarket approval from the FDA. Either process can be lengthy and expensive.
The FDA's 510(k) clearance process usually takes from four to twelve months,
but may take longer. The premarket approval, or PMA, process is much more
costly, lengthy and uncertain. It generally takes from one to three years or
even longer. Delays in obtaining regulatory clearance or approval will
adversely affect our revenues and profitability. Although we have obtained
510(k) clearance for In Charge, Duet and ExpressView, our clearance can be
revoked if postmarketing data demonstrates safety issues or lack of
effectiveness. More generally, we cannot assure you that the FDA will ever
grant 510(k) clearance or premarket approval for any additional products we
propose to market. If the FDA withdraws or refuses to grant clearances or
approvals, we will be unable to market such products in the U.S.
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Modifications to our marketed devices may require new 510(k) clearances or PMA
approvals or require us to cease marketing or recall the modified devices until
such clearances or approvals are obtained.
Any modification to an FDA-cleared device that could significantly affect
its safety or effectiveness, or that would constitute a major change in its
intended use, requires a new FDA 510(k) clearance or possibly PMA approval. The
FDA requires every manufacturer to make this determination in the first
instance, but the FDA can review any such decision. We have modified aspects of
In Charge, Duet and ExpressView, but we believe that new 510(k) clearances are
not required. We may modify future products after they have received clearance
or approval, and, in appropriate circumstances, we may determine that new
clearance or approval is unnecessary. We cannot assure you that the FDA would
agree with any of our decisions not to seek new clearance or approval. If the
FDA requires us to seek 510(k) clearance or PMA approval for any modification
to a previously cleared product, we also may be required to cease marketing or
recall the modified device until we obtain such clearance or approval. Also, in
such circumstances, we may be subject to significant regulatory fines or
penalties.
Complying with FDA and other regulations is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.
Our products are medical devices that are subject to extensive regulation.
FDA regulations are wide-ranging and govern, among other things, product
design, development, manufacture and testing, labeling, storage, premarket
clearance or approval, advertising and promotion, and sales and distribution.
Noncompliance with applicable regulatory requirements can result in enforcement
action which may include recalling products, ceasing product marketing, paying
significant fines and penalties, and similar FDA actions which could limit
product sales, delay product shipment, and adversely affect our profitability.
Sales of our products outside the U.S. are subject to foreign regulatory
requirements that vary from country to country. The time required to obtain
approvals from foreign countries may be longer than that required for FDA
clearance or approval, and requirements for foreign licensing may differ from
FDA requirements.
We are substantially dependent on one distributor for the sale of Duet, and in
the event this distributor does not perform satisfactorily, Duet sales and our
revenues and growth will be harmed.
We have entered into a distribution agreement with PSS World Medical for
U.S. distribution of Duet. This agreement is exclusive through August 2002 and,
accordingly, we will be dependent on PSS for Duet sales. Although the
distribution agreement does provide for minimum sales commitments, our only
recourse if PSS does not meet these sales levels is to terminate this
agreement. If they fail to adequately support Duet, sales of Duet could fail to
grow or could decline. In addition, PSS may terminate the distribution
agreement upon specified notice. If this agreement was terminated, we would
have to make alternative arrangements to support Duet sales and marketing and
would likely lose sales until we either commenced marketing Duet on our own or
entered into arrangements with a new distributor.
We may be subject to costly and time-consuming product liability actions.
Since our products are designed to be used by patients and health care
providers themselves, we may be subject to product liability lawsuits. We have
not been subject to any product liability claims; however, any product
liability claim brought against us, with or without merit, could result in the
increase of our product liability insurance rates or the inability to secure
coverage in the future. In addition, our insurance may not be adequate to cover
damages that we are required to pay. Finally, even a meritless or unsuccessful
product liability claim could be time consuming and expensive to defend and
could result in the diversion of management's attention.
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Because we use biological and hazardous materials, we may be liable for
damages.
Our activities involve the controlled use of potentially harmful biological
materials as well as hazardous materials and various chemical compounds. In
particular, we perform quality assurance activities internally that require us
to use human blood samples. Accordingly, there is a risk that our employees or
other personnel in our facility will be exposed to blood-borne pathogens. We
cannot completely eliminate the risk of accidental contamination or injury from
the use, storage, handling or disposal of blood and other hazardous materials.
In the event of contamination or injury, we could be held liable for damages
that result, and any liability of this kind could exceed our resources. We are
subject to federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and specified waste products.
The cost of compliance with these laws and regulations could be significant.
Our stock price may fluctuate significantly and the value of your investment
may decline.
Our stock price may fluctuate for a number of reasons, including:
. the publication of results of outside studies;
. our ability to successfully manufacture and sell our products;
. announcements of technological or competitive developments by others;
. announcements regarding patent litigation or the issuance of patents to
us or our competitors;
. regulatory developments regarding us or our competitors;
. changes in reimbursement policies of Medicare or private payors that
affect reimbursement for our products;
. acquisitions or strategic alliances by us or our competitors;
. quarterly fluctuations in our results of operations;
. changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
. general market conditions, particularly for medical technology companies.
If our future quarterly operating results are below the expectations of
securities analysts or investors, the price of our common stock would likely
decline. Stock price fluctuations may be exaggerated if the trading volume of
our common stock is low. Securities class action litigation may be brought
against a company after a period of volatility in the market price of its
stock. Any securities litigation claims brought against us could result in
substantial expense and diversion of management's attention.
The concentration of ownership among our existing officers, directors and
principal stockholders may prevent other stockholders from influencing
significant corporate decisions.
Following the completion of this offering, our executive officers, directors
and current stockholders with at least 5% of our stock will control
approximately % of our outstanding common stock. If these officers,
directors and principal stockholders act together, they will be able to
influence significantly and possibly control matters requiring approval by our
stockholders, including approvals of amendments to our certificate of
incorporation, mergers, a sale of all or substantially all of our assets, or
other transactions requiring stockholder approval. These stockholders may be
able to control the election of our board of directors.
There is no prior public market for our common stock, and you may not be able
to sell your shares at or above the initial public offering price.
Prior to this offering, there has been no public market for shares of our
common stock. An active, liquid trading market may not develop following
completion of this offering, or if developed, may not be maintained.
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We will determine the initial public offering price for the shares through
negotiations between us and representatives of the underwriters. This price may
not be indicative of prices that will prevail later in the trading market. The
market price of our common stock may decline below the initial public offering
price, and you may not be able to resell your shares at or above the initial
public offering price.
We are subject to anti-takeover provisions in our certificate of incorporation,
bylaws and Delaware law that could delay or prevent an acquisition of our
company, even if the acquisition would be beneficial to you.
Our certificate of incorporation, our bylaws and Delaware law could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to you. These provisions could discourage potential takeover
attempts and could adversely affect the market price of our common stock.
Because of these provisions, you might not be able to receive a premium on your
investment. Among other things, these provisions:
. authorize our board of directors, without stockholder approval, to issue
up to 5,000,000 shares of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and prevent a takeover attempt;
. provide that only our Chairman, President or entire board of directors
may call a special meeting of our stockholders and that our stockholders
may not call special meetings;
. prohibit stockholder action by written consent, requiring stockholder
actions to be taken at stockholder meetings; and
. establish advance notice requirements for nominations for election to our
board of directors and for proposals to be acted upon at stockholder
meetings.
Any of the provisions described above could delay or make transactions
involving a change in control of us or our management more difficult.
Future sales of our common stock could cause our stock price to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of our common stock in the public market
after the closing of this offering, or the perception that these sales could
occur. Upon expiration of 180-day lockup agreements entered into in connection
with this offering, approximately 9.3 million shares of our common stock will
be eligible for immediate sale in the public markets. In addition to causing
our stock price to decline, sales of these shares could make it more difficult
for us to sell equity securities in the future at a time and price that we deem
appropriate. In addition, the market price of our common stock could decline if
we sell additional equity securities in connection with financings or
collaborative arrangements.
Your investment will be immediately and substantially diluted.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, if you
purchase shares of our common stock in this offering, you will incur immediate
and substantial dilution in pro forma net tangible book value of $ per
share (based on an assumed initial public offering price of $ ). You may
incur additional dilution if the holders of outstanding options or warrants
exercise those options or warrants. Additional information regarding the
dilution to investors in this offering is included in this prospectus under the
heading "Dilution."
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the forward-
looking statements. Forward-looking statements include, but are not limited to
statements about:
.our estimates of future revenue and profitability;
.the progress of clinical trials involving our products;
.the progress of our research and development programs, including our
clinical research programs;
.the receipt of regulatory clearances and approvals;
.the mix of revenues between In Charge and Duet sales;
.our estimates regarding our capital requirements and our need for
additional financing; and
.the benefits to be derived from relationships with other companies.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus completely and with the understanding that our actual future results
may be materially different from what we expect. We qualify all of our forward-
looking statements by these cautionary statements.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
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USE OF PROCEEDS
The proceeds from the sale of shares of common stock we are
offering are estimated to be approximately $ million (approximately
$ million if the underwriters' over-allotment option is exercised in
full), after deducting underwriting discounts and commissions and our estimated
offering expenses. We intend to use the net proceeds from this offering for
sales and marketing expenses including to expand our sales force for In Charge
and Duet, product enhancement and development, and for general corporate
purposes including working capital and capital expenditures. We may also use a
portion of the proceeds to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies; however, we
have no present plans, agreements or commitments and are not currently engaged
in any negotiations with respect to any such transactions. Pending use of the
net proceeds for the above purposes, we intend to invest these funds in short-
term, interest-bearing, investment grade obligations.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently
anticipate retaining all of our future earnings for the expansion and operation
of our business and do not anticipate paying any cash dividends in the
foreseeable future.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. See
"Use of Proceeds." The capitalization information in the table below should be
read in conjunction with our financial statements and notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(2)
-------- ------------ --------------
(dollars in thousands,
except share and per share data)
<S> <C> <C> <C>
Redeemable convertible preferred stock,
$0.01 par value; 5,695,246 shares
authorized, actual and pro forma;
5,000,000 shares authorized, pro forma
as adjusted; 3,650,544 issued and
outstanding, actual; no shares issued
and outstanding pro forma and pro forma
as adjusted............................. $ 33,050 $ -- $ --
Preferred stock warrants............... 1,884 -- --
-------- -------- --------
34,934 -- --
-------- -------- --------
Total stockholders' equity (deficit):
Common stock, $0.01 par value;
8,000,000 shares authorized, 1,109,672
shares issued and outstanding, actual;
9,974,190 shares issued and
outstanding, pro forma; 35,000,000
shares authorized, shares
issued and outstanding, pro forma as
adjusted (3).......................... 11 100
Additional paid-in capital............. 6,961 52,317
Unearned stock-based compensation...... (3,163) (3,163) (3,163)
Accumulated deficit.................... (36,414) (36,437) (36,437)
-------- -------- --------
Total stockholders' equity (deficit)..... (32,605) 12,817
-------- -------- --------
Total capitalization..................... $ 2,329 $ 12,817 $
======== ======== ========
</TABLE>
--------
(1) The pro forma information gives effect to the sale and issuance in October
2000 of shares of Series F redeemable convertible preferred stock for
aggregate net proceeds to us of $5.0 million and gives effect to the
automatic conversion of all outstanding redeemable convertible preferred
stock into 8,018,686 shares of common stock. The pro forma information also
reflects the exercise of outstanding preferred stock warrants into 845,832
shares of common stock for aggregate net proceeds to us of $5.5 million
before these warrants expire upon the closing of this offering. If any of
these warrants are not exercised as permitted by their terms, the aggregate
net proceeds to us will be reduced.
(2) The pro forma as adjusted information also gives effect to the issuance and
sale of the shares of common stock offered by us in this offering
at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
(3) The outstanding share information excludes outstanding options to purchase
a total of 1,595,066 shares of common stock at a weighted-average exercise
price of $3.69 per share. The outstanding share information also excludes
common stock warrants to purchase a total of 55,269 shares of common stock
at a weighted-average exercise price of $7.00 per share.
22
<PAGE>
DILUTION
Our net tangible book value as of June 30, 2000 was $2.3 million or $2.10
per share of common stock. Net tangible book value per share is determined by
dividing the net tangible book value (total tangible assets less total
liabilities) by the number of outstanding shares of common stock at that date.
Assuming the issuance and sale by us of 358,799 shares of Series F preferred
stock in October 2000, the conversion of all outstanding shares of preferred
stock into 8,018,686 shares of common stock as of the closing of this offering,
and the conversion of all outstanding common and preferred stock warrants into
901,101 shares of common stock as of the closing of this offering, our pro
forma net tangible book value as of June 30, 2000 would have been approximately
$13.2 million or $1.32 per share of common stock. Without taking into account
any other changes in pro forma net tangible book value other than the sale of
shares of our common stock in this offering (after deducting
underwriting discounts and offering expenses), the pro forma net tangible book
value at June 30, 2000 would be $ million or $ per share. Upon the
completion of this offering, there will be an immediate increase in net
tangible book value to existing shareholders of $ per share and an
immediate dilution to new investors of $ per share. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
--------
Net tangible book value per share as of June 30, 2000......... $2.10
-----
Pro forma effect of the transactions referenced above......... 0.78
-----
Pro forma net tangible book value per share as of June 30,
2000......................................................... 1.32
-----
Increase in pro forma net tangible book value per share
attributable to new investors................................
-----
Pro forma net tangible book value per share after offering......
--------
Dilution per share to new investors............................. $
========
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 2000 the
difference between the number of shares of common stock purchased from us, the
total consideration paid, and the average price per share paid by the existing
stockholders and by the new investors (before deducting underwriting discounts
and our estimated offering expenses):
<TABLE>
<CAPTION>
Average
Price
Shares Purchased Total Consideration Per Share
------------------ ------------------- ---------
Number Percent Amount Percent
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 10,009,912 $46,500,518 $4.65
New investors..................
---------- ---- ----------- ---- -----
Total........................ 100% 100%
========== ==== =========== ==== =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option and no exercise of common stock options and warrants outstanding at June
30, 2000. As of October 16, 2000, there were options outstanding to purchase a
total of 1,595,066 shares of common stock at a weighted average exercise price
of $3.69 per share. As of October 16, 2000, there were warrants outstanding to
purchase a total of 19,547 shares of common stock at a weighted average
exercise price of $7.00 per share. To the extent that any of these options are
exercised, there will be further dilution to new investors.
23
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our statements
of operations for the years ended December 31, 1997, 1998 and 1999 and with
respect to our balance sheets at December 31, 1998 and 1999 are derived from
our audited financial statements which are included elsewhere in this
prospectus. The selected statement of operations data for the years ended
December 31, 1995 and 1996 and the selected balance sheet data at December 31,
1995, 1996 and 1997 have been derived from our audited financial statements
which are not included in this prospectus. You should read the following
selected financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes appearing elsewhere in this prospectus. The
selected statement of operations data for the six months ended June 30, 1999
and 2000 and the selected balance sheet data as of June 30, 2000 are unaudited,
have been prepared on the same basis as the audited financial statements and,
in our opinion, reflect all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial information in
accordance with accounting principles generally accepted in the United States
of America.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------ ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- ---------- -------- ---------- ---------- ---------- ----------
(dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ -- $ -- $ 2,508 $ 2,104 $ 756 $ 1,803
Cost of goods sold...... -- -- -- 2,938 2,203 1,012 1,681
-------- ---------- -------- ---------- ---------- ---------- ----------
Gross (loss) profit.... -- -- -- (430) (99) (256) 122
-------- ---------- -------- ---------- ---------- ---------- ----------
Operating expenses
Selling and
marketing............. -- -- 828 6,339 4,195 2,255 2,135
General and
administrative........ 353 1,251 1,819 2,387 3,314 2,174 1,146
Research and
development........... 920 1,326 2,598 2,141 1,427 1,128 208
Stock-based
compensation.......... -- 223 290 700 1,143 641 1,409
-------- ---------- -------- ---------- ---------- ---------- ----------
Total operating
expenses............ 1,273 2,800 5,535 11,567 10,079 6,198 4,898
-------- ---------- -------- ---------- ---------- ---------- ----------
Operating loss.......... (1,273) (2,800) (5,535) (11,997) (10,178) (6,454) (4,776)
-------- ---------- -------- ---------- ---------- ---------- ----------
Other
Interest income........ 69 160 326 472 368 190 121
Interest expense....... -- -- (32) (60) (139) (73) (76)
Other income........... -- -- -- -- 100 97 200
-------- ---------- -------- ---------- ---------- ---------- ----------
69 160 294 412 329 214 245
-------- ---------- -------- ---------- ---------- ---------- ----------
Net loss................ (1,204) (2,640) (5,241) (11,585) (9,849) (6,240) (4,531)
Accretion of discount on
redeemable convertible
preferred stock........ -- -- -- -- (337) (133) (209)
-------- ---------- -------- ---------- ---------- ---------- ----------
Net loss attributable to
common stockholders.... $ (1,204) $ (2,640) $ (5,241) $ (11,585) $ (10,186) $ (6,373) $ (4,740)
======== ========== ======== ========== ========== ========== ==========
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (1.34) $ (2.58) $ (5.83) $ (11.36) $ (9.59) $ (6.01) $ (4.36)
======== ========== ======== ========== ========== ========== ==========
Weighted-average number
of common shares
outstanding(1)......... 896,668 1,025,434 899,668 1,019,978 1,062,698 1,060,020 1,087,564
======== ========== ======== ========== ========== ========== ==========
Unaudited pro forma net
loss per share
attributable to common
stockholders, basic and
diluted................ $ (1.12) $ (0.99)
========== ==========
Shares used in computing
unaudited pro forma net
loss per share
attributable to common
stockholders, basic and
diluted(1)............. 8,774,332 9,234,484
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 1,055 $ 4,620 $ 5,994 $ 4,348 $ 4,991 $ 1,682
Working capital......... 979 4,429 10,922 2,081 4,373 493
Total assets............ 1,163 5,252 12,860 7,867 8,232 5,592
Long term portion of
bank credit
facilities............. -- -- 331 -- 949 --
Total redeemable
convertible preferred
stock and preferred
stock warrants......... 3,095 9,470 21,187 24,678 34,725 34,934
Total stockholders'
deficit................ (2,009) (4,412) (9,365) (20,245) (29,282) (32,605)
</TABLE>
-------
(1) Please see Note 2 to our financial statements for an explanation of the
determination of the number of shares used in computing per share data.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this discussion together with the financial statements and
other financial information included in this prospectus. Please refer to
"Special Note Regarding Forward-Looking Statements" and "Risk Factors".
Overview
We are a medical technology company that develops, manufactures and markets
products for people with diabetes. Our products allow patients and health care
professionals to better monitor the effectiveness of treatment regimens and
make therapy changes to improve overall glucose control. From our inception in
1993 through 1997, our operations consisted primarily of various start-up
activities, including developing of our proprietary technology and testing
formats, conducting clinical studies, recruiting personnel, and raising capital
to fund operations.
In January 1998, we began commercial shipment of our first product, Duet.
Duet is marketed to health care professionals through an exclusive distributor
serving the U.S. physician office market. In October 1999, we introduced In
Charge in selected regions of the U.S. In Charge is sold primarily to
wholesalers that serve national and regional retail pharmacy chains as well as
local pharmacies. Duet and In Charge each include a hand-held monitor that
performs our GlucoProtein test on a single-use disposable test strip. In
addition, they also measure blood glucose, on a separate test strip. Patients
can purchase the In Charge monitor and disposable test strips at their pharmacy
without a prescription. Our third product, ExpressView, was introduced in
December 1999. ExpressView uses the same monitor platform as In Charge, but
performs only the glucose test. ExpressView is sold primarily to mail-order
firms serving Medicare patients.
We derive our revenues from the sale of monitors and disposable test strips.
The test strips provide us with a recurring revenue stream. The sales of the
test strips will increase as a percentage of our total revenues as the base of
installed monitors increases in both the health care professional and consumer
markets.
We recognize revenue when all of the following criteria have been met:
. persuasive evidence of an arrangement exists between us and our customer;
. we have delivered our product to our customer;
. our price for the products sold is fixed or determinable; and
. collectibility of the sales price is reasonably assured.
We offer certain rights of return to our customers. Since we lack sufficient
history to make reliable accurate estimates of product returns at the time of
shipment, we defer the recognition of revenue until customers' return rights
have expired. In the case of sales to distributors, this occurs when the
distributors have sold the product to their customers. In the case of direct
sales to medical equipment suppliers and end users, this generally occurs 30
days after products have been shipped.
Manufacturing costs for our proprietary disposable test strips consist of
raw materials, such as membranes, chemicals, and plastic parts, direct labor to
assemble the strips, general production overhead, and royalties we pay on
licensed technology used in the design of the GlucoProtein test strip. Cost of
goods sold also includes the cost of purchasing assembled monitors that are
manufactured in Germany exclusively for us. Sales and marketing expenses relate
primarily to our sales force, our customer service function, corporate staff,
advertising and promotions. General and administrative expenses consist
primarily of the cost of corporate operations and related personnel, legal,
accounting, information systems and other general operating expenses. Research
and development expenses consist primarily of personnel cost and general
laboratory supplies.
25
<PAGE>
In the second and third quarters of 1999, we consolidated the distribution
of Duet through one wholesaler, PSS, and terminated distribution arrangements
with all of our other distributors in order to be able to better manage our
distribution network. We also discontinued the sale of Duet in retail channels
and concentrated solely on the U.S. physician office market. Our distribution
agreement with PSS is exclusive through August 2002 and includes minimum sales
commitments. As part of this change in business strategy, in June 1999 we
terminated some of our management team and other employees. This allowed us to
reduce our operating costs until In Charge was introduced and rolled out. The
severance and other employee-related charges associated with these terminations
totaled $810,000 and were recorded in June 1999.
Results of Operations
Six months ended June 30, 1999 and 2000
Revenues
Revenues increased by 139% from $756,000 during the six months ended June
30, 1999 to $1.8 million during the six months ended June 30, 2000. The
increase in revenues resulted primarily from the commercial launch of two new
products, In Charge and ExpressView, during the fourth quarter of 1999.
Revenues from In Charge and the related test strips and revenues from
ExpressView and the related test strips totaled $372,000 and $576,000,
respectively, during the six months ended June 30, 2000. In addition, revenues
from Duet increased from $756,000 in the six months ended June 30, 1999 to
$855,000 in the six months ended June 30, 2000. As of June 30, 2000, we had
shipped $585,000 of products which, based on our revenue recognition policy,
had not yet been recorded as revenues.
Gross (loss) profit
We improved from a gross loss of 34% of revenues during the first six months
of 1999, to a gross profit of 7% of revenues during the six months ended June
30, 2000. The improvement was primarily due to increased production of test
strips, which resulted in reduced direct labor costs; increased purchases of
monitors, which resulted in a lower cost per unit from our supplier; and
decreased cost of printed packaging material. In addition, in June 1999, we
terminated our agreement with our manufacturer of Duet monitors. We purchased
$615,000 of monitors and recorded an inventory reserve for excess quantities of
$182,000 during the six months ended June 30, 1999. We expect that our gross
profit will continue to increase in the foreseeable future, primarily as a
result of economies of scale achieved due to our increased volume of
production.
Selling and marketing expenses
Selling and marketing expenses decreased 5% from $2.3 million during the six
months ended June 30, 1999 to $2.1 million during the six months ended June 30,
2000. The decrease is primarily due to the decrease of $342,000 in compensation
and related costs associated with a reduction in our sales force during 1999.
This decrease was partially offset by the higher marketing costs of $222,000
related to the commercial launch of In Charge. We intend to significantly
expand our sales and marketing teams in order to penetrate more retail markets.
As a result, we expect that selling and marketing expenses will increase as a
percentage of revenues through at least 2001.
General and administrative expenses
General and administrative expenses decreased 47% from $2.2 million during
the six months ended June 30, 1999 to $1.1 million during the six months ended
June 30, 2000. The decrease resulted primarily from a decrease in personnel
expenses of $810,000 related largely to employee terminations in June 1999.
26
<PAGE>
Research and development expenses
Research and development expenses decreased 82% from $1.1 million during the
six months ended June 30, 1999 to $208,000 during the six months ended June 30,
2000. The decrease is primarily due to the winding down of development and
regulatory expenses of InCharge and ExpressView. The major components of this
decrease include a decrease in personnel costs of $200,000 related primarily to
employee terminations in June 1999; a decrease of $213,000 related to the
termination of a co-development agreement during the six months ended June 30,
1999; and a decrease in costs of $188,000 resulting from a transition to
manufacturing following regulatory approval of InCharge and ExpressView. We
intend to continue to develop additional products for the diabetes market as
well as improve existing products. As a result, research and development
expenses are expected to increase on an absolute basis for the foreseeable
future.
Stock-based compensation
In connection with the grant of stock options to employees, directors and
consultants, we recorded unearned stock-based compensation as a component of
stockholders' deficit and are amortizing the recorded amounts as charges to
operations over the vesting periods of the options using an accelerated method.
We recorded amortization of stock-based compensation of $641,000 during the six
month period ending June 30, 1999 as compared to $1.4 million for the same
period in 2000. Our total unearned stock-based compensation at June 30, 2000
was $3.2 million, which will be amortized over the vesting period of the
respective options.
Interest income
Interest income decreased 36% from $190,000 during the six months ended June
30, 1999 to $121,000 during the six months ended June 30, 2000. The decrease
resulted from lower average cash balances during the six months ended June 30,
2000, partially offset by higher interest rates during this period.
Other income
Other income increased 106% from $97,000 in the six months ended June 30,
1999 to $200,000 in the six months ended June 30, 2000. Other income for both
these periods relates to the licensing of certain technology to a third party.
Income taxes
As a result of our net losses as well as the full valuation allowance
recorded against our deferred tax assets, we did not incur any income tax
expense in either the six months ended June 30, 1999 or the six months ended
June 30, 2000.
Years ended December 31, 1998 and 1999
Revenues
Revenues decreased 16% from $2.5 million during 1998 to $2.1 million in
1999. The decrease resulted primarily from lower sales of Duet in retail
pharmacies, as we prepared to replace it with InCharge, and from the
termination of our previously existing distribution agreements during the
transition to an exclusive distribution agreement with PSS in July 1999.
Gross (loss) profit
Gross loss decreased from 17% of revenues during 1998 to 5% of revenues in
1999. This reduction was due primarily to improved production yields resulting
in less manufacturing waste, improved efficiencies in certain manufacturing
processes during our second year of production. In addition, in June 1999, we
terminated our agreement with our manufacturer of Duet monitors. We purchased
approximately $615,000 of monitors and recorded an inventory reserve for excess
quantities of $182,000 during 1999.
27
<PAGE>
Selling and marketing expenses
Selling and marketing expenses decreased 34% from $6.3 million in 1998 to
$4.2 million in 1999. The decrease resulted primarily from a decrease in
expenses related to the termination of a contract with an outside sales
organization for the sale of Duet and a decrease in marketing expenses related
to the commercial launch of Duet, which were partially offset by marketing
expenses related to the commercial launch of In Charge in late 1999.
General and administrative expenses
General and administrative expenses increased 39% from $2.4 million in 1998
to $3.3 million 1999. Lower personnel costs resulting primarily from employee
terminations in June 1999 were partially offset by increased facility costs
following our move to a new facility in December 1998.
Research and development expenses
Research and development expenses decreased 33% from $2.1 million in 1998
to $1.4 million in 1999. The decrease resulted primarily from lower personnel
costs resulting largely from employee terminations in June 1999 and lower
regulatory expenses following our 510(k) submission to the FDA for In Charge
in early 1999.
Stock-based compensation
We amortized unearned stock-based compensation of $700,000 in 1998 compared
to $1.1 million in 1999.
Interest income
Interest income decreased 22% from $472,000 during 1998 to $368,000 during
1999. The decrease resulted from lower average cash balances during 1999.
Interest expense
Interest expense increased 132% from $60,000 during 1998 to $139,000 during
1999. The increase resulted from higher average borrowings under a credit
facility in 1999.
Other income
Other income during 1999 consisted of $100,000 related to the licensing of
certain technology to a third party.
Income taxes
No income tax expense was recorded during 1998 or 1999 due to our
cumulative net losses as well as the full valuation allowance recorded against
our deferred tax assets of $8.3 million and $11.6 million, respectively, since
it is more likely than not that such assets will not be realized.
Years ended December 31, 1997 and 1998
Revenues
We had no revenues until the launch of Duet in January 1998.
Gross (loss) profit
Gross loss of $430,000 in 1998 was primarily due to costs associated with
initiating production of Duet and the related inefficiencies of the
manufacturing processes during our first year of production.
Selling and marketing expenses
Selling and marketing expenses increased from $828,000 during 1997 to $6.3
million during 1998. The increase resulted from the marketing and sales
expenses related to the commercial launch of Duet, including the establishment
of a sales force, distribution channels and various marketing campaigns.
28
<PAGE>
General and administrative expenses
General and administrative expenses increased from $1.8 million during 1997
to $2.4 million during 1998. The increase resulted primarily from our hiring of
executive, administrative, accounting and information systems personnel to
support the commercial launch of Duet.
Research and development expenses
Research and development expenses decreased from $2.6 million during 1997 to
$2.1 million during 1998. The decrease resulted primarily from lower
development expenses for Duet, which was launched in January 1998.
Stock-based compensation
We recorded amortization of stock-based compensation of $290,000 for 1997
compared to $700,000 for 1998.
Interest income
Interest income increased from $326,000 during 1997 to $472,000 during 1998.
The increase resulted from higher average cash balances during 1998.
Income taxes
No income tax expense was recorded during 1997 or 1998 due to our cumulative
net losses as well as the full valuation allowance recorded against our
deferred tax assets since it is more likely than not that such assets will not
be realized.
Liquidity and Capital Resources
Since inception, we have funded our operations and capital investments from
the private sale of preferred stock and preferred stock warrants, including
Series F preferred stock and warrants in October 2000, totaling $39.9 million
(net of financing expenses), a $750,000 credit facility with a bank during 1997
and a credit facility from a bank initiated during 1998 and amended in 1999,
which included a $2 million term loan, a $500,000 equipment line of credit and
a $1 million accounts receivable line of credit. At June 30, 2000, $1.2 million
remained outstanding under the term loan. This debt is being paid off under an
arrangement maturing in March 2003 and is collateralized by all of the assets
of the Company. The promissory note evidencing the term loan provides for
monthly principal payments of $35,155. Interest is payable monthly at the
bank's prime rate plus 0.5% (10% as of June 30, 2000). The $500,000 line of
credit is available through March 21, 2001 for equipment purchases. The
interest rate for advances on the equipment line of credit is the same as the
term loan. Interest only is due monthly through September 21, 2000, and the
outstanding principal balance is payable in 30 equal payments of principal plus
accrued interest beginning October 21, 2000. At June 30, 2000, $500,000 was
outstanding on the equipment line of credit. The interest rate for advances on
the accounts receivable line of credit is the bank's prime rate, and advances
are payable upon the earlier of March 21, 2000 or a demand from the bank. We
took no advances on the accounts receivable line of credit during 1999 or the
six months ended June 30, 2000. At October 16, 2000 we were in default of
certain covenants contained in the term loan and equipment line of credit
agreements noted above, as amended in October 2000. As a result, the entire
remaining principal balances of the bank credit facilities are due on demand
and have been classified as current liabilities. At June 30, 2000, we had
$493,000 in working capital and our primary source of liquidity was $1.7
million in cash and cash equivalents.
In August and September 2000, we entered into convertible promissory notes
with an aggregate principal amount of $2,500,000. The notes provided for
interest payments at 8% per annum. In addition, the holders of the notes
received warrants to purchase 17,861 shares of Series F preferred stock at a
purchase price of $14 per share. The fair value of the warrants on the date of
issuance was estimated to be $379,000 and was recorded as
29
<PAGE>
debt issuance costs and amortized to interest expense over the life of the
notes. In October 2000, we issued 178,569 shares of Series F redeemable
convertible preferred stock at a price of $14 per share for total gross
proceeds of $2,500,000. Upon the completion of the Series F preferred stock
financing, the outstanding convertible promissory notes and unpaid accrued
interest thereon automatically converted into 180,230 shares of Series F
preferred stock. We will record a charge for the beneficial conversion feature
embedded in these securities in October 2000. The value of the beneficial
conversion feature was measured using its intrinsic value, i.e., the excess of
the aggregate fair value of the common stock into which the Series F preferred
stock is convertible over the proceeds allocated to the security. The intrinsic
value of the beneficial conversion feature of approximately $5.8 million
exceeded the proceeds allocated to the Series F preferred stock of
approximately $4.6 million; therefore, we limited recognition of the beneficial
conversion feature to the approximately $4.6 million proceeds allocated to the
Series F preferred stock. We accreted the entire amount of the beneficial
conversion feature at the date of issuance because the Series F preferred stock
is immediately convertible.
Net cash used in operating activities was $4.7 million, $10.1 million, $8.2
million and $3.4 million in 1997, 1998, 1999 and the six months ended June 30,
2000, respectively. Net cash used in each period is primarily due to our net
losses and, in the six months ended June 30, 2000, an increase in accounts
payable.
Net cash used in investing activities was $6.2 million in 1997. Net cash
provided by investing activities was $3.9 million in 1998. Net cash used in
investing activities was $660,000 in 1999 and $226,000 during the six months
ended June 30, 2000, respectively. During 1997, the net cash used included
primarily the purchase of short-term investments of $4.9 million, fixed assets
of $805,000 and restricted cash of $500,000 to collateralize a credit facility
with a bank. During 1998, the short-term investments were sold to provide funds
for the Company's operations. The funds were partially offset by the purchase
of $1.5 million of fixed assets. During 1999 and the six months ended June 30,
2000, net cash used included the purchase of fixed assets totaling $660,000 and
$226,000, respectively.
Net cash provided by financing activities was $12.2 million, $4.6 million,
$9.5 million and $297,000 in 1997, 1998, 1999 and the six months ended June 30,
2000, respectively. During 1997, the net cash provided included the sale of
preferred stock for net proceeds of $11.7 million and borrowings of $497,000.
During 1998, the net cash provided included the sale of preferred stock for net
proceeds of $3.5 million and borrowings of $1.6 million. The cash provided from
these sources was partially offset by the repayment of the $497,000 borrowed
under a credit facility with a bank in 1998. During 1999, the net cash provided
included the sale of preferred stock for net proceeds of $9.7 million and
borrowings of $128,000. The cash provided from these sources was partially
offset by the repayment of $316,000 on a bank credit facility. During the six
months ended June 30, 2000, net cash provided was primarily due to borrowings
of $500,000 partially offset by repayments of $211,000 on a bank credit
facility.
We will expend substantial funds in the future for research and development,
clinical testing, capital expenditures, and the manufacturing, marketing, and
sale of our products. We cannot accurately predict the timing and amount of
these expenses, which depend on several factors, including:
. the effectiveness of our various planned sales and marketing activities;
. the progress of our research and development efforts related to our
second generation products;
. the continued successful results of our current product lines; and
. competing technological and market developments.
We believe that cash from operations, our existing cash and cash equivalents
and net proceeds from the sale of our Series F preferred stock in October 2000
and the net proceeds from this offering will be sufficient to meet our
anticipated cash requirements for at least the next 12 months. If we do not
sell the shares in this offering, we would need to generate significant
additional revenues or raise additional capital in order to meet our
anticipated cash requirements for the next 12 months. The failure to generate
significant additional revenues or raise additional capital will have a
significant adverse impact on our business and operations. We cannot assure you
that additional financing will be available on a timely basis on terms
acceptable to us, or that such financing will not be dilutive to our
stockholders.
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Impact of Inflation
Inflation generally affects us by increasing our cost of labor, equipment
and production supplies. We do not believe that the relatively low rates of
inflation experienced in the U.S. in recent years has had any material effect
on our business.
Interest Rate and Foreign Currency Risk
We are subject to changes in the prime interest rate for our term loan
arrangement, which accrues interest at the bank's prime rate plus 0.5%. To
minimize the market rate risk of our cash we have in the past and will continue
to invest primarily in U.S. government securities, AAA-rated corporate bonds
and A-1/P-1 rated commercial paper. We do not utilize derivative financial
instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions in any material fashion.
We have a contract with a German supplier for our In Charge and ExpressView
monitors. To minimize the effect of changes in the exchange rate, we have
negotiated a sliding scale pricing model based on the exchange rate. Since we
began purchasing the monitor from the supplier in July 1999, the exchange rate
has increased about 12%. Although the change in the exchange rate has been in
our favor, it has not had a material effect on our business or results of
operations.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards 133, or SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
SFAS 133 as amended by SFAS 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of SFAS 133," an amendment of
SFAS 133, is effective for fiscal years beginning after June 15, 2000. To date,
we have not engaged in derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, or SAB 101 "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The adoption of the principles of SAB
101 has not had a significant impact on our financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, called FIN 44
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25." The Interpretation clarifies:
.the definition of an employee for purposes of applying Opinion 25;
. the criteria for determining whether a stock option or award plan
qualifies as a non-compensatory plan;
. the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 became effective on July 1, 2000, with certain provisions effective
earlier. We do not expect FIN 44 to have a significant impact on our financial
statements.
In August 2000, the FASB Emerging Issues Task Force, or EITF, issued EITF
00-14, "Accounting for Certain Sales Incentives," which addresses the
recognition, measurement, and classification for sales incentives offered
voluntarily by vendors without charge. We believe that our current policy for
accounting for sales incentives is in compliance with EITF 00-14.
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BUSINESS
Background
Diabetes is a chronic, progressively debilitating disease in which the human
body loses its ability to maintain a normal level of glucose in the
bloodstream. In the body's normal digestive process, carbohydrates in food are
broken down into glucose, which is then circulated in the bloodstream and
converted into energy. Glucose levels are naturally controlled by insulin, a
hormone produced by the pancreas. Diabetes develops when pancreatic cells
produce insufficient amounts of insulin or when the body loses the ability to
properly respond to insulin. If left untreated, diabetes often results in
severe complications that include kidney failure, blindness, amputation and
cardiac disease. Diabetes is the fourth leading cause of death by disease in
the U.S. with an annual cost of treatment of the disease and related
complications approximately $100 billion, or 10% of total U.S. health care
spending. In the U.S. there are an estimated 10.3 million individuals diagnosed
with diabetes, as well as an estimated six million people who have not yet been
diagnosed. The ADA estimates that approximately 800,000 new cases of diabetes
were diagnosed in 1999.
Diabetes is generally classified into two types. Type 1 diabetes, formerly
called insulin-dependent or juvenile-onset diabetes, is the more severe form of
the disease in which the pancreas loses the ability to produce insulin. As a
result, Type 1 patients require life-long daily insulin injections to control
their blood glucose levels. In the U.S. about one million individuals, or
approximately 10% of the identified population of diabetes patients, have been
diagnosed with Type 1 diabetes. Type 2 diabetes, formerly called non-insulin
dependent or adult-onset diabetes, comprises the vast majority of the diagnosed
diabetes population. There are estimated to be currently more than nine million
Type 2 patients. Type 2 diabetes is generally characterized by a combination of
insufficient insulin production by the pancreas and the body's insufficient
response to insulin, resulting in high levels of blood glucose.
Diabetes is not curable but it is manageable. Ineffective management can
result in serious complications. For example, diabetic eye disease is the most
common cause of blindness in working age adults, with an estimated 24,000
diabetic patients becoming blind each year. In addition, more than 50% of lower
limb amputations in the U.S. occur among people with diabetes, resulting in an
estimated 80,000 amputations performed each year. The goal of diabetes
management is to continuously maintain a blood glucose level within a normal
range in order to avoid or minimize these complications. A generally accepted
marker of overall glucose control is the glycated protein hemoglobin A1c,
commonly referred to as HbA1c. In 1993, the Diabetes Control and Complications
Trial, or DCCT, sponsored by the National Institutes of Health, established
that a 10% reduction in an average patient's HbA1c level resulted in a 45%
reduction in the risk of blindness, a 40% reduction in the risk of loss of a
limb by amputation and a 30% reduction in the risk of kidney damage.
Blood glucose monitoring is critical to effective management of diabetes.
Type 1 patients typically manage their blood glucose levels with daily
monitoring and insulin injections. In contrast, Type 2 diabetes ranges widely
in severity and patients have a complex menu of treatment options. There are
currently over 250 therapeutic regimens, made up of varying combinations of
diet and exercise, drugs and, in some cases, insulin injections. Because of
these various treatment options, patients with Type 2 diabetes also require
blood glucose monitoring in order to measure the effectiveness of their
therapy. The following diagram depicts an understanding of the typical
progression in treatment of a given patient with Type 2 diabetes over several
years:
[ARTWORK APPEARS HERE]
Three Squares, ordered horizontally, separated by two arrows. The top of the
artwork is labelled "Progression of Diabetes Treatment of Type 2 Patients." The
first box is labelled "Diet & Exercise - 20% of patients." The second box is
labelled "Oral Medicine - 39% of patients." The third box is labelled
"Combination Orals and Insulin- 41% of patient."
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Blood Glucose Monitoring
The goal of glucose monitoring is to avoid the complications of diabetes by
allowing patients and their health care providers to determine a treatment
regimen, to monitor the effectiveness of the regimen and to alter it as needed
for better overall glucose control. There are various testing methods to
monitor glucose levels. These tests either measure the amount of glucose in the
patient's blood at a particular point in time, or measure the level of a
glycated protein to determine the average amount of glucose present within the
patient's blood over a period of time.
Point-In-Time Blood Glucose Measurements. A patient's glucose level may be
measured directly with a non-prescription test. The test can be performed in a
physician's office or by a patient at home. Typically, a patient must prick a
finger and then apply a drop of blood to a test strip. The test strip is then
analyzed by a commercially available monitor that displays the result,
providing a "snapshot" of the patient's glucose level at the moment that the
test is performed. The U.S. market for home point-in-time blood glucose tests
was $1.1 billion in 1999, compared to $760 million in 1996, an annual
compounded growth rate of 13%. It is estimated that in 1999 there were over two
billion point-in-time blood glucose tests performed in the U.S.
Average Blood Glucose Measurements. A patient's average blood glucose level
over a period of time, as opposed to at a point-in-time, may be determined by
measuring the level of glycated proteins in the patient's bloodstream. Glycated
proteins are formed when glucose attaches to protein molecules. High levels of
blood glucose lead to high levels of glycated proteins in the bloodstream,
where the proteins remain until they are metabolized by the body. The two
glycated proteins most commonly measured in these tests are HbA1c, which
results from glucose attaching to red blood cells, and fructosamine, which
results from glucose attaching to other circulating serum proteins. Because red
blood cells have a circulating lifespan within the bloodstream of approximately
90-120 days, an HbA1c measurement represents the average level of glucose
present within the patient's bloodstream over approximately the preceding three
months. In contrast, since circulating serum proteins remain in the bloodstream
for approximately 20 days, a fructosamine measurement indicates the average
level of glucose present in the patient's blood over the prior two to three
weeks.
The following table summarizes the currently available glucose monitoring
techniques:
<TABLE>
<CAPTION>
Period of Measurement Testing Frequency
<S> <C> <C>
Glucose At a point in time Once to several times daily
Fructosamine 2--3 week average Once weekly
HbA1c 3 month average Once quarterly
</TABLE>
-----------------------------------------------------------------------
Limitations of Conventional Glucose Monitoring Techniques
Point-In-Time Blood Glucose Measurements. Patients with Type 1 diabetes can
use point-in-time blood glucose test results to determine the appropriate
timing and amount of insulin injections. However, the test provides a snapshot
of the patient's glucose level during only one minute of the 1,440 minutes in
an entire day. As a result, the point-in-time test cannot measure blood glucose
fluctuations over time. Blood glucose levels in patients with diabetes can
fluctuate dramatically during each day based on numerous factors, including
diet, exercise and overall health. This problem is magnified if patients do not
perform the recommended number of daily tests. However, even testing four or
five times can only give results from four or five minutes of the 1,440-minute
day. Moreover, persons with Type 2 diabetes who do not need insulin injections
generally are infrequent testers since their treatment regimens are not likely
to be modified by data from point-in-time glucose testing. Type 2 patients
typically do not perform multiple point-in-time glucose tests per day, because
the testing can be inconvenient, frequent collection of blood samples can be
painful, and the aggregate cost of testing can be expensive.
Average Blood Glucose Measurements. Measuring levels of glycated proteins
such as HbA1c and fructosamine is a better indicator of a patient's average
blood glucose levels than point-in-time glucose testing.
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The HbA1c test was the first test for average blood glucose levels, but some
characteristics of HbA1c testing have limited its potential value. Because the
HbA1c measurement represents an average level over the preceding three months,
its use in therapy guidance and compliance is limited. This quarterly timeframe
makes it difficult for patients to detect weekly changes in glucose control,
reducing the ability of physicians to make timely therapy changes. In addition,
patients are less likely to accurately remember behavior patterns over specific
periods within a three month timeframe. HbA1c tests have also historically been
laboratory-based tests, which makes them inconvenient for patients because of
the difficulties of going to a lab each time a test is necessary. Laboratory-
based tests are also less useful for physicians since the test results are not
available during a patient's visit, and thus cannot be easily incorporated into
treatment modification or patient feedback. Fructosamine testing has
historically had similar limitations, since it too has been generally
laboratory-based.
As a result of these limitations, prior to the introduction of our products,
patients and physicians have not had access to a home-based test to effectively
monitor overall glucose control that provides timely feedback and allows for
rapid therapy adjustment.
Our Solution
We have developed and commercialized our GlucoProtein(R) test, the only
over-the-counter home-based test for fructosamine. This proprietary
GlucoProtein test addresses the limitations of existing testing methods by
enabling persons with diabetes to perform glycated protein testing at home
rather than wait for the results from laboratory-based tests. In addition,
because our GlucoProtein test analyzes fructosamine rather than HbA1c, it
measures the patient's average blood glucose level over the prior two to three
weeks. Understanding average glucose levels during the recent past enables
patients and their health care professionals to more meaningfully analyze past
behaviors and treatment regimens and alter them as necessary. For these
reasons, we believe that our test enables patients to take a more active role
in their therapy. Additionally, In Charge and Duet combine our GlucoProtein
test with a point-in-time blood glucose test, providing users with the ability
to measure either blood glucose levels at that moment as well as their average
over the prior few weeks. This combination gives them an ongoing option to
obtain different types of data as they or their health care provider see fit.
In December 1999, a clinical trial demonstrated that a combination of once-
weekly GlucoProtein testing and regular point-in-time blood glucose testing
resulted in a greater reduction of HbA1c levels in patients as compared to a
regimen of point-in-time glucose testing alone. The average person without
diabetes has an HbA1c level of 4% to 6%, while the average person with diabetes
has an HbA1c level of 9% or 10%. Doctors become concerned when a patient's
HbA1c level is 8% or above. In this clinical trial, 25 patients with HbA1c
levels above 8% were randomized into two groups. One of the groups was
instructed to perform point-in-time blood glucose testing up to four times per
day, but no GlucoProtein testing at all. The other group was instructed to
perform point-in-time glucose testing up to four times per day in addition to a
once-weekly GlucoProtein test. Both groups were instructed to report to the
clinician if they had indications of poor glucose control to receive the proper
treatment. Both groups were also asked to return after three months at which
time their HbA1c levels were tested again. In the test group using both point-
in-time blood glucose tests and our GlucoProtein tests, the average HbA1c
levels dropped by 13.0%, while the average HbA1c levels of a test group using
only point-in-time blood glucose tests dropped by only 3.2%. The results are
summarized below:
<TABLE>
<CAPTION>
Starting Ending
HbA1c HbA1c % Drop Significance
<S> <C> <C> <C> <C>
Glucose & GlucoProtein test 9.2 8.0 13.0% P< 0.0001
Glucose testing only 9.4 9.1 3.2% Not Significant
</TABLE>
-----------------------------------------------------------------------
The probability that the observed drop in HbA1c levels did not occur by
chance when using glucose testing together with GlucoProtein testing was
statistically significant at the 99.99% or greater level, or what is referred
to as p <0.0001. This means that by applying widely-used statistical methods,
the chance that these
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<PAGE>
results could have occurred by accident is less than 1 in 10,000. On the other
hand, the drop in HbA1c levels observable with glucose only testing was not
statistically significant.
The difference in the percentage declines in each group's average HbA1c
levels is particularly meaningful considering that the DCCT indicated that for
each 10% reduction in HbA1c levels in a diabetes patient, that patient will
have a 45% reduction in the risk of losing eyesight, a 40% reduction in the
risk of losing a limb by amputation and a 30% reduction in the risk of kidney
damage.
Our Strategy
Our goal is to become the leader in the development and commercialization of
diabetes products that improve medical outcomes by better managing patients'
overall glucose control. There are four basic elements to our business
strategy:
Establish GlucoProtein Home Testing as the Standard of Care for Management
of Type 2 Diabetes. We will sponsor additional clinical trials to further
support that the use of GlucoProtein home testing improves medical outcomes. We
intend to present the results of these studies to key medical organizations
such as the ADA to facilitate adoption of GlucoProtein home testing as a
standard of care. We will publicize the results of these trials to facilitate
the continued adoption of GlucoProtein and In Charge by managed care and health
care payors. We also intend to conduct studies of additional patient
populations, such as children, to expand the use and labeling claims for
GlucoProtein home testing.
Aggressively Pursue Nationwide Sales and Marketing Efforts. We launched In
Charge on a regional basis in October 1999. Based on the success of this
launch, we plan to aggressively pursue nationwide sales and marketing efforts.
We will build a nationwide sales force, which will promote In Charge to
diabetes-focused physicians, diabetes educators, respected opinion leaders and
pharmacists. In addition, we will promote Duet to physicians because we believe
doctors who use Duet in their office practice will recommend that their
patients use In Charge at home. In parallel, we plan to market In Charge
directly to patients.
Enhance Technology Leadership Position. Initially, we will focus on
improving our existing products to meet the future needs of the consumer
market. We also plan to develop new products to meet changing consumer
requirements and to measure additional disease parameters common in patients
with diabetes. We continually examine opportunities to acquire or in-license
new products that improve diabetes treatment or therapy management. We target
pharmaceutical companies with diabetes drugs on the market or in development
that can benefit from fructosamine testing as a clinical research tool or could
incorporate fructosamine testing into the drug regimen. Bristol-Myers Squibb,
for example, has incorporated In Charge into several clinical trials to support
the continued development of one of its drugs for the treatment of Type 2
diabetes.
Broaden Reimbursement Coverage. To accelerate health care payor acceptance
of In Charge, we combined GlucoProtein test strips and glucose test strips in
the same package. We have successfully obtained reimbursement from a number of
managed care organizations and we will continue to target additional managed
care organizations to obtain reimbursement.
Our Products
We currently market three FDA-cleared products: In Charge, Duet and
ExpressView. Each product consists of a hand-held monitoring device that uses
single-use disposable strips to perform specific tests. It is estimated that
patients use their monitoring device for an average of three years and perform
tests at regular intervals during that period. We target each of our products
to a distinct segment of the diabetes management market.
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In Charge(TM) Diabetes Control System--For Home Use
We launched our first consumer product, In Charge, in October 1999. This
system performs both GlucoProtein and blood glucose tests. In Charge has three
components: a GlucoProtein test strip, a glucose test strip and a hand-held
electronic monitor. We package the GlucoProtein test strips either with glucose
test strips or separately for patients wishing to perform only GlucoProtein
testing. We recommend that patients perform a GlucoProtein test weekly. Glucose
testing frequency is based on the direction of the patient's health care
professional.
The GlucoProtein test strip is multilayered and contains a proprietary
combination of membranes and chemicals. The strip incorporates our expertise in
blood separation technology and is manufactured using our patented process. The
different layers on the strip, which we call reaction layers, are crucial to
obtaining accurate results. The test strip reacts by color changes as the
chemicals act upon a blood sample, and varying degrees of color generation
indicate different concentrations of fructosamine.
[ARTWORK APPEARS HERE]
Schematic of test strip with relevant parts of the artwork labelled
"GlucoProtein test strip," "Blood" and "Blood Separation and Reaction Layers."
Our In Charge glucose test strip is also manufactured using our patented
technology. Our glucose strip measures results in as little as five seconds.
The rapid performance of the In Charge glucose test strip is the result of
proprietary features built into the strip itself and proprietary algorithms
used in the monitor.
The In Charge monitor is a lightweight hand-held monitor that detects and
reads concentrations of glucose from a glucose test strip and fructosamine from
a GlucoProtein test strip. The In Charge monitor provides a digital read-out
number and is designed to interpret the results for the patient by
characterizing the fructosamine concentrations as "good," "intermediate" or
"poor" overall glucose control, which helps patients understand the results and
take corrective action as necessary. The GlucoProtein test takes approximately
four minutes to obtain results. In Charge and Duet are the only products
available that measure both blood glucose and fructosamine. They incorporate
our proprietary technology.
Duet(R) Diabetes Control System--For the Health Care Professional
We launched Duet in January 1998. It is designed for use by health care
professionals for in-office testing. Like In Charge, Duet has three components:
a GlucoProtein test strip, a glucose test strip and a hand-held monitor. The
monitor calculates the blood concentration of either fructosamine or glucose.
The GlucoProtein test strips utilize the same patented test strip technology as
the GlucoProtein test strips used for In Charge.
ExpressView(TM) Monitor--Glucose-Only Testing
We also market our proprietary glucose testing technology for selected
glucose-only market segments. We launched ExpressView in December 1999. It is
targeted to mail-order distributors servicing the Medicare market, as well as
to opportunities in the emerging store-brand segment where retailers package
products under their store name brand. We do not expend significant sales and
marketing resources on ExpressView. The ExpressView monitor and test strips use
the same core glucose testing technology as the In Charge product line.
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Sales and Marketing
Our sales and marketing strategy targets the following audiences:
. health care professionals and pharmacists;
. persons with diabetes; and
. health care payors, including managed care providers.
We market In Charge for use by consumers and Duet for use by health care
providers. We are in the process of building a national sales force to market
our products.
In Charge Sales and Marketing Strategy
National Retail Distribution. We have developed a broad based national
distribution strategy in order to make it easier for our customers to purchase
In Charge and its testing supplies. Currently, customers can purchase In Charge
through multiple channels including: national retail chains, independent retail
pharmacies, mail-order pharmacies, durable medical equipment suppliers, as well
as internet retailers such as Drugstore.com. They can also purchase our
products directly from us, either through our website or through an 800
telephone number. We primarily sell directly to national drug wholesalers,
which in turn supply retail pharmacies.
Health Care Professionals. Our sales efforts for In Charge are aimed at
health care professionals such as diabetes educators, physicians treating large
populations of diabetes patients, and pharmacists who provide enhanced diabetes
services. An important part of our promotional selling message is the value of
GlucoProtein testing and its ability to improve medical outcomes. We promote
the quality of the clinical outcomes of our test rather than the features of
our monitors. We promote In Charge as the system of choice for patient self-
monitoring. We also believe that promoting Duet to physicians for in-office
testing will help both doctors and patients see the potential benefits of home
testing with In Charge. To complement our sales initiative, we expect to
advertise in journals and circulate direct mail advertisements. We will also
sponsor exhibits at local, regional and national meetings, and participate in
educational symposia to communicate the benefits of fructosamine testing.
Direct Marketing to People with Diabetes. Patients with diabetes play a
major role in the decision to purchase brand specific systems, and ultimately
determine personal testing frequency and thus volume of test strip use. As a
result, direct-to-consumer communications and selling efforts play an important
role in increasing product sales as well as test strip use and are an integral
part of our marketing strategy. These selling efforts are aimed at diabetic
patient health fairs which afford an opportunity to educate, promote and sell
the In Charge system. On a targeted basis, we also give physicians free sample
monitors to give more patients and health care providers exposure to our
products. Additionally, we will create retail based direct-to-consumer
promotions to increase monitor sales and encourage test strip usage.
We spend considerable resources to maintain our customer base. We also
encourage peer and patient referrals. We also focus on maintaining this
customer base and increasing revenue by promoting regular testing frequency. To
accomplish this, we intend to implement a series of frequent communications
with our customers to make them special offers for our products. Our customer
service representatives help to ensure that our In Charge customers are
satisfied with our product's performance and have all of their technical
questions addressed. Our customer service representatives are trained in direct
selling techniques intended to convert product inquiries into product sales.
Health Care Payors and Managed Care. It is important that patients'
insurance cover our products and that health care payors agree to reimburse for
the use of our products. To achieve these objectives we have priced our
products similarly to other point-in-time glucose-only home tests and promoted
the potential clinical advantage of our GlucoProtein test over point-in-time
glucose-only testing. We believe that our combined
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packaging of GlucoProtein test strips with glucose test strips has facilitated
health care payor acceptance. We will continue to pursue acceptance by health
care payors because we believe we can more easily convince physicians to
recommend In Charge to their patients if health care payors cover the product.
Duet Sales and Marketing Strategy
Health Care Professional Market. We have entered into an exclusive
distribution agreement with PSS World Medical. Under the agreement, which will
terminate in August 2002, PSS has committed to market, sell and distribute our
Duet products, with our support. We understand that PSS' sales representatives
are primarily focused on increasing and maintaining the revenue generated from
test strip sales to Duet users. As a secondary objective PSS' sales
representatives focus on increasing our base of Duet customers. Our own sales
representatives will focus on increasing our base of Duet customers among
physicians who manage large practices of diabetic patients and who currently
are staffed to perform in-office testing of various laboratory measurements. We
have positioned Duet as an in-office clinical decision tool for physicians. We
expect that if health care providers use Duet in their own practice, their
patients will be more likely to begin using In Charge for home monitoring.
Health Care Payor and Managed Care. Medicare and select private insurers
currently reimburse health care professionals for GlucoProtein testing. We will
seek to maximize reimbursement for GlucoProtein testing over the long term
through the generation of supportive clinical data demonstrating an economic
benefit to the clinical value.
Third Party Relationships
We seek to enter into relationships with third parties to gain access to
their medical, marketing and sales capabilities and to incorporate GlucoProtein
testing as an integral part of the new advances and innovative drugs for the
treatment of diabetes. For example, Bristol-Myers Squibb recently agreed to
purchase In Charge for use in connection with two trials involving 800 patients
for their diabetes drug Glucovance.
Manufacturing
We currently manufacture both our GlucoProtein test strip and our glucose
test strip at our facility in San Diego. Our monitors are produced and
assembled by outside suppliers. In Charge and ExpressView use the same monitor
housing and internal components. We perform final packaging of the monitors and
the test strips at our facility in San Diego.
We obtain our In Charge and ExpressView monitors from a single supplier
based in Germany. While we have terminated our agreement with the former
manufacturer of our Duet monitor, we maintain an inventory of monitors that we
believe is sufficient to meet demand for at least the next two years. Our
monitors have been designed to use both standard off-the-shelf components and
customized components which meet our quality and performance specifications.
The customized components consist of the molded plastic parts, optics and
integrated circuits. Monitors are subject to inspection and testing processes,
which are performed at our San Diego facility to ensure suitability for use.
Some critical components for our test strips are also obtained from single
suppliers. These include molded plastic parts, various fabrics, papers, and
membranes, as well as specific active components. These suppliers are
significant sources of materials for our industry and many of the items are
commodity off-the-shelf products for these vendors.
Production consists of the following manufacturing processes and steps: test
strip manufacture, monitor testing and customization, and final packaging. Each
process has integrated quality control steps. Test strip manufacture is an
automated process that includes formulation of the active components,
conversion to dry reagent format and assembly into functional units. Standard
equipment is used in the early phases of processing, with custom assembly
equipment used in the construction of the test strip. Testing of test strips
and monitors ensures that performance and quality standards are met in the
final product.
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We are required to manufacture in compliance with regulatory requirements in
addition to meeting our internal quality, quantity and cost targets. We have
implemented quality assurance systems which we believe comply with FDA Quality
System Regulations, or QSRs. Our facility is registered with the FDA and the
California Department of Health Services to manufacture medical devices. We
believe that we are in compliance with applicable QSRs. However, we have never
been through a QSR inspection, nor have our manufacturing lines at our outside
manufacturer been inspected for compliance with QSR regulations. If we or our
outside manufacturer fail to maintain our compliance, that failure could have a
material adverse effect on our business, results of operations and financial
condition.
We utilize a company-wide enterprise resource planning system to control our
material and product inventories, as well as to manage other elements of the
supply chain. Our facility has been designed to optimize production flow and
manufacturing processes. Our overall plant capacity exceeds current demand.
Competition
We are not aware of any other commercially available fructosamine self-tests
designed for home use. As a result, we consider our primary competitors in the
diabetes market to be manufacturers of point-in-time blood glucose monitoring
products for use in either the home, in the physician's office or in the
laboratory. The blood glucose monitoring market is characterized by intense
competition and is currently dominated by four major companies with established
products and distribution channels: LifeScan a subsidiary of Johnson & Johnson;
Roche Diagnostics; Abbott Laboratories; and Bayer Diagnostics, a division of
Bayer AG. Additional competitors in this market offer or are developing
products designed to give the patient the ability to monitor blood glucose
levels without the need for a fingerstick, either by drawing blood from a
different site on the body or by testing body fluids other than blood, such as
interstitial fluid or saliva. These competitors include TheraSense, Amira
Medical, Cygnus, Inverness Medical Technology, Integ and SpectRx.
In addition, we compete with manufacturers of physicians' office and
laboratory-based glycated protein tests. Competitors in this market include
Roche Diagnostics, Sigma Chemical Company, Bio-Rad Laboratories and Bayer
Diagnostics. The most widely used glycated protein test is the HbA1c test,
which is available through laboratories and at physicians' offices. One
company, Metrika, recently announced that it received regulatory approval for
an in-home HbA1c test that requires a prescription, although this product has
not yet been commercially introduced.
We also compete with companies that currently market or are developing
continuous blood glucose monitoring systems. These products seek to
continuously monitor a patient's blood glucose levels. The primary competitors
in this market include MiniMed, Animas Corporation, TheraSense and SpectRx.
This category of products is not intended to be available over the counter,
however, and some may require invasive surgical procedures to implant and
remove.
Many of our competitors have significantly greater financial, research,
product development, marketing and sales, distribution and manufacturing
resources than us, as well as an installed base of customers and relationships
with diabetes educators, physicians and pharmacists. In addition, many of these
companies and their products have stronger brand recognition than us and their
products are more widely accepted than ours. We believe that the primary
competitive factors in our market include, among others:
. price;
. distribution capabilities;
. customer service;
. ease of use;
. size of product; and
. product quality and performance.
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<PAGE>
Price competition for the placement of blood glucose monitors is intense and
involves marketing tactics such as rebates, trade-in offers and volume purchase
incentive programs. Our success will depend on our ability to:
. educate health care professionals and diabetes patients about the value
of our GlucoProtein tests;
. establish national retail distribution relationships;
. market our products;
. obtain reimbursement for our products;
. maintain our proprietary position with regard to our core technologies;
and
. develop new products and innovative technologies.
Patents and Proprietary Rights
Our success will depend in part on our ability to maintain patent protection
for our products, to preserve our trade secrets and to operate without
infringing the proprietary rights of third parties. We have sought patent
protection for each of the areas of invention embodied in our products. We have
been issued eight patents by the U.S. Patent and Trademark Office relating to
various aspects of the technology underlying InCharge, the Duet, and
ExpressView monitors and testing strips. These technologies include:
. our multilayer test strip technology for both GlucoProtein and glucose;
. the two-test basis of the In Charge and Duet monitors;
. certain electrochemical measurement processes for the determination of
fructosamine;
. certain blood separation technologies particularly suited to multilayer
strips;
. improved methods for timing reaction measurements which improve
performance and shorten test time; and
. sonically treated test strips which decrease the volume of blood sample
needed.
Our patent for the two-test basis of the In Charge and Duet monitor is
fundamental to our current business, and covers a system for measuring the
glycemic condition of a patient by measuring glucose and fructosamine on the
same monitor.
The integrated assay system application is directly applicable to broadly
monitoring the treatment of people with diabetes, especially those with Type 2
diabetes who may be taking oral drugs. We have filed corresponding
international patent applications seeking similar patent protection outside the
U.S.
We have licensed and may continue to license other technologies that may be
relevant to the In Charge, Duet and ExpressView products. In particular, we
have licensed technologies relating to our GlucoProtein test strips under a
non-exclusive license. This license will remain in effect under certain
conditions, primarily payment of an ongoing royalty for the life of the patent
and for the life of each related foreign country patent application.
We also rely upon trade secrets and proprietary know-how in our
manufacturing processes. We require each of our employees, consultants,
advisors and vendors to execute a confidentiality agreement upon the
commencement of their relationship with us.
We cannot be certain that the patents we own and license will prove to be
enforceable, that additional patents will be issued, that we will be able to
maintain our rights under the license, or that we will be able to procure
additional licenses as necessary in the future on reasonable terms, if at all.
In addition, we cannot assure you that the technologies we utilize do not
infringe upon the proprietary rights of others. Nor can we
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<PAGE>
assure you that we will be able to maintain and enforce our existing patent
protections. Moreover, others could independently develop similar or superior
technologies, and our trade secrets and know-how could become known to others.
Any litigation relating to our intellectual property rights could result in
substantial costs to and a diversion of effort by us, but may be necessary to
enforce any patents issued to us, protect trade secrets or know-how owned by
us, defend us against claimed infringement of the rights of others or determine
the scope and validity of the proprietary rights of others.
Third Party Reimbursement
Private insurance companies, self-insured employers, health maintenance
organizations, pharmacy benefit managers and governmental payors under Medicare
and Medicaid programs are a source of reimbursement to users of blood glucose
monitoring systems and related products. Sales of our products in some markets
will be dependent in part on availability of adequate physician reimbursement
and insurance coverage for patients from these health care payors.
Sales of In Charge are also significantly dependent upon third party
acceptance and coverage. To facilitate acceptance and coverage, we have
combined both glucose test strips and GlucoProtein test strips into one
package. Currently, Medicare covers our In Charge monitor as well as our In
Charge combination test strip package since their respective retail prices are
within Medicare's coverage limit for glucose test strips and glucose monitors.
Medicare at present does not cover GlucoProtein test strips if purchased
separate from our combination package. Our longer-term goal is to have
GlucoProtein test strips recognized and covered separately for consumers
eligible for Medicare benefits. The Office of the Inspector General of the U.S.
Department of Health and Human Services is currently conducting a survey to
determine more economical methods of providing blood glucose test strips to
Medicare beneficiaries. These payment limits and initiatives may lead to
increased pricing pressures among manufacturers of existing blood glucose
monitors and test strips.
Private insurance, pharmacy benefit management companies administering
benefits on behalf of managed care organizations, and managed care
organizations themselves, have begun to recognize In Charge as clinically
unique from glucose testing and as a result have accepted our monitor and test
strips. Both our combination GlucoProtein and glucose test strip package and
our separate GlucoProtein-only package have been granted reimbursement coverage
by national and regional managed care and health care payors. We expect this
acceptance in the private sector of GlucoProtein test strips separate from our
combination package to facilitate acceptance within Medicare. Our strategy is
to begin the process of application to additional health care payors within
specific regional areas to ensure reimbursement ahead of our sales force
expansion, lessening potential barriers to our products' acceptance.
Health care professionals performing in-office testing with Duet are
reimbursed at specified rates under Medicare. Private insurance companies as
well as most state Medicare programs have routinely adopted this Federal
reimbursement level. Our long-term strategy is to maximize the reimbursement
level for in-office GlucoProtein testing among these audiences.
Government Regulation
Our products are medical devices subject to extensive regulation by the FDA
and other regulatory bodies. FDA regulations govern, among other things, the
following activities that we will perform:
. product design and development;
. product testing;
. product labeling;
. product storage;
. premarket clearance or approval;
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<PAGE>
. advertising and promotion; and
. product sales and distribution.
FDA's premarket clearance and approval requirements
Unless an exemption applies, each medical device we wish to commercially
distribute in the U.S. will require either prior 510(k) clearance or prior PMA
approval from the FDA under the Federal, Food, Drug, and Cosmetic Act. Devices
deemed to pose relatively minimal risk are placed in either class I or II,
which requires the manufacturer to submit a premarket notification requesting
permission for commercial distribution; this is known as 510(k) clearance. Some
low risk devices are exempted from this requirement. Devices deemed by FDA to
pose the greatest risk, such as life-sustaining, life-supporting or implantable
devices, or devices deemed not substantially equivalent to a previously cleared
510(k) device or a preamendment class III device for which PMA applications
have not been called for by the FDA, are placed in class III, requiring PMA
approval.
510(k) Clearance Pathway. To obtain 510(k) clearance, we must submit a
premarket notification demonstrating that the proposed device is substantially
equivalent in intended use and in safety and effectiveness to a previously
cleared 510(k) device or a device that was in commercial distribution before
May 28, 1976 for which the FDA has not yet called for the submission of PMA
applications. The FDA's 510(k) clearance pathway usually takes from four to
twelve months, but it can take significantly longer.
Blood glucose testing systems have generally qualified for clearance under
510(k) procedures. In 1999, we received 510(k) clearances for In Charge and
ExpressView.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, generally requires a new 510(k) clearance or
could require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any such decision.
If FDA disagrees with a manufacturer's decision not to seek a new 510(k)
clearance, the Agency may retroactively require a manufacturer to seek 510(k)
clearance or PMA approval. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or PMA
approval is obtained. We have made and plan to continue to make additional
product enhancements to In Charge, Duet and ExpressView that we believe do not
require new 510(k) clearances. We cannot assure you, however, that the FDA will
agree with any of our determinations. If the FDA requires us to obtain new
510(k) clearances for any of our enhancements, we may be prohibited from
marketing the modified device until the 510(k) notification is cleared by the
FDA. In addition, we cannot assure you that the FDA will grant such clearance.
If the FDA determines the changes are not eligible for 510(k) clearance, we
will need to seek PMA approval. We cannot assure you that we will submit a PMA
application for any such changes or that once submitted, the PMA application
will be accepted for filing, found approvable, or if found approvable, will not
include unfavorable labeling restrictions.
PMA Approval Pathway. If the FDA denies 510(k) clearance for one of our
products, we must follow the PMA approval pathway for that product before
marketing commences. A PMA application requires proof of the safety and
effectiveness of the device to the FDA's satisfaction. A PMA application
generally contains extensive preclinical and clinical trial data and also
information about the device and its components including, among other things,
device design, manufacturing and labeling. After approval of a PMA, a new PMA
or PMA supplement is required in the event of a significant modification to the
device, its labeling or its manufacturing process. The PMA pathway is much more
costly, lengthy and uncertain than 510(k) clearance. It generally takes from
one to three years, or even longer.
Pervasive and continuing FDA regulation
After a device is placed on the market, numerous regulatory requirements
apply. These include: the quality system regulations, or QSR, which requires
manufacturers to follow elaborate design, testing, control,
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documentation and other quality assurance procedures during the manufacturing
process; labeling regulations; the FDA's general prohibition against promoting
products for unapproved or "off-label" uses; and the Medical Device reporting
regulations, which require that manufacturers report to the FDA if their device
may have caused or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or serious injury if it
were to recur. In June, 1999, we received a notice of violation letter from the
FDA regarding information on our website and a promotional brochure for the
Duet Glucose Control Monitoring System, which the FDA found to be misleading.
Among other things, we removed the information from our website and labeling.
In August, 1999, we received a response from the FDA that our corrections were
acceptable.
We are subject to inspection by the FDA and the Food and Drug Branch of the
California Department of Health Services, or CDHS. The FDA has not inspected
our manufacturing facilities, and we cannot assure you that we will
successfully pass such an inspection or maintain compliance in the future.
Failure to comply with applicable regulatory requirements can result in
enforcement action by the FDA, which may include the following sanctions:
. fines, injunctions, and civil penalties;
. recall or seizure of our products;
. operating restrictions, partial suspension or total shutdown of
production;
. refusing our request for 510(k) clearance or PMA approval of new
products;
. withdrawing 510(k) clearance or PMA approvals already granted; and
. criminal prosecution.
Employees
As of September 30, 2000, we had 53 employees on a full or part-time basis.
Of these 53 people employed by us, 3 are engaged in research and development
activities, 24 are engaged in sales and marketing activities, 3 are engaged in
regulatory affairs and quality assurance, 15 are engaged in manufacturing and
development, and 8 are engaged in administration, finance and information
systems. No employees are covered by collective bargaining agreements, and we
believe we maintain good relations with our employees.
Facilities
We lease approximately 31,850 square feet in San Diego, California which
comprise our administrative, research and development and our manufacturing
facility. Our lease expires in November 2003. We believe that our existing
facility is sufficient to meet our foreseeable needs.
Legal Proceedings
We are not a party to any legal proceedings.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information regarding our current executive
officers, directors and key employees as of October 11, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Michael Beeuwsaert...... 44 President, Chief Executive Officer and Director
George Pache............ 52 Vice President, Finance and Chief Financial
Officer
David Kelemen, Jr....... 42 Vice President, Marketing
Jeff McKnight........... 37 Vice President, Sales
Lowry Messenger, Ph.D... 51 Vice President, Product Development
Christopher Matoske..... 47 Vice President, Business Development
Jeff Anglin............. 37 Product Director, In Charge
Michael Imrich.......... 36 Senior Director, Operations
Bernadette Raymond...... 37 Product Director, Duet
Sandra Selvaggi......... 41 Senior Director, Regulatory Affairs
Annette Choi............ 43 Controller
John Burd(1)............ 54 Chairman of the Board
Gary Stroy(1)........... 57 Director
Charles Hsu(2).......... 42 Director
Ansbert Gadicke(2)...... 42 Director
Clint Severson(2)....... 52 Director
Nancy Katz(1)........... 41 Director
</TABLE>
--------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Michael Beeuwsaert has been a director since October 2000. He has been our
President since June 1999 and our Chief Executive Officer since November 1999.
He joined us in August 1996 as our Chief Financial Officer. From December 1988
until joining LXN Corporation, Mr. Beeuwsaert was with Ansys Diagnostics, Inc.,
a medical diagnostic company acquired through a management-led buyout from
Marion Merrill Dow, a Fortune 500 pharmaceutical company, serving as Vice
President of Finance. Mr. Beeuwsaert received a B.A. in accounting from
California State University, Fullerton and a M.B.A. from Pepperdine University.
George Pache has been our Vice President, Finance and Chief Financial
Officer since October 2000. Prior to joining LXN Corporation, Mr. Pache served
as Vice President of Finance and Administration and Chief Financial Officer of:
EduPoint.com from November 1999 to October 2000, INC Research, Inc. from July
1997 to November 1999, and SenDx Medical, Inc. from March 1995 to July 1996.
Mr. Pache previously served from January 1994 to March 1995 as Executive Vice
President and Chief Financial Officer of Advanced Materials Group, a publicly
held high technology materials company, and from February 1989 to February 1993
as Senior Vice President and Chief Financial Officer of PSICOR, Inc., a then
publicly held cardiovascular technology company. Prior to 1989, Mr. Pache was
Vice President and Chief Financial Officer of Kasler Corporation, a then
publicly held construction company, and was a practicing certified public
accountant with Arthur Young & Co. Mr. Pache holds both a bachelors and a
masters degree in business administration and accounting from the University of
Houston and is a certified public accountant.
David Kelemen, Jr. has been our Vice President, Marketing since August 1999.
Prior to joining LXN Corporation, from February 1998 to August of 1999, Mr.
Kelemen served as the Managing Director for Clinical Communications Group. From
May 1997 to February 1998, he served as the Director of Marketing at Gen-Probe
Diagnostics, an in-vitro diagnostic manufacturer. From April 1985 to May 1997,
Mr. Kelemen held sales and marketing positions including Director of Marketing
for Metabolic and Cardiovascular Products at Bayer Corporation Pharmaceutical
Division. Mr. Kelemen received a B.S. in biology from Fairfield University and
a M.B.A. in marketing from the University of New Haven.
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Jeff McKnight joined LXN in February 2000 as Vice President Sales. Prior to
joining LXN, Mr. McKnight served as Director, Hospital Business Group for MD
DataDirect, a medical internet company, from October 1999 to February 2000, and
prior to this, as Business Manager for Roche Diagnostics from July 1996 to June
1999. There he managed the diabetes sales activities in Southern California and
led contracting conversions for many health systems and managed care plans.
Before his tenure at Roche, Mr. McKnight was Vice President & Regional Director
of Mitchell International, a health care consulting firm from March 1995 to
June 1996. He also spent nine years at Baxter Corporation, where he held
various sales and sales management positions, including director of national
accounts/multi-hospital systems. Mr. McKnight holds a B.S. in business
administration from the University of Southern California.
Lowry Messenger, Ph.D. has been our Vice President, Research and Development
since March 2000. From 1978 until joining LXN Corporation, Dr. Messenger was
with Bayer Corporation Diagnostics serving as the Director of New Products in
the self-testing segment since July 1997, as Project Manager for the DCA 2000
System from 1992 to July 1997, as Manager of Chemistry from 1990 to 1992, and
holding other research positions from 1978 to 1990. Dr. Messenger received a
Ph.D. in biochemistry from Purdue University and a B.A. in biology from the
University of Texas at Austin.
Christopher Matoske has been our Vice President, Business Development since
December 1999. Mr. Matoske was promoted to Eastern Regional Sales Director in
1998 and joined us as Director of Marketing and Sales in December 1997. Prior
to joining LXN Corporation, from November 1995 to December 1997, Mr. Matoske
served as Director of Sales and Marketing at ChemTrak Inc. From 1983 to 1995,
he held various sales and marketing positions within Bayer Diagnostics in the
clinical laboratory and over-the-counter markets. Mr. Matoske received a B.A.
in chemistry and geo-chemistry from Bridgewater State College and a M.S. in
geo-chemistry from the Colorado School of Mines.
Jeff Anglin has been our Product Director of In Charge since December 1999
and joined us in July 1998 as Senior Director of Customer Experience. From 1991
until joining LXN Corporation, Mr. Anglin was with LifeScan Inc., a Johnson &
Johnson company, serving as the Senior Manager of Customer Loyalty since August
1997, as Worldwide Customer Service Development Manager from 1995 to August
1997, as International Customer Services Manager from 1994 to 1995 and as
Senior Customer Services Supervisor from 1991 to 1993. Mr. Anglin received a
B.S. in biology from Loyola Marymount University and an M.B.A. from the
University of Notre Dame.
Michael Imrich has been our Senior Director of Operations since January 2000
and joined us in April 1998 as Director of Manufacturing. From 1987 until
joining LXN Corporation, Mr. Imrich was with Quidel Corporation, serving as
Director of Manufacturing over the company's largest volume product line from
January 1995 to April 1998, and serving in various R&D, process improvement,
and chemistry manufacturing positions from 1987 to 1998. Mr. Imrich received a
B.A. in animal physiology from the University of California, San Diego.
Bernadette Raymond has been our Director of Sales of the Duet since
September 1999 and joined us in August 1998, as Regional Director of Sales for
the eastern region of the U.S. From 1988 until joining LXN Corporation, Ms.
Raymond was with Mckesson HBOC, previously McKesson General Medical, serving as
Area Vice President, Eastern Region since January 1997, as Area Sales Manager
from March 1995 to January 1997, as Regional Manger from March 1994 to March
1995, and held other sales positions from 1988 to 1994. Ms. Raymond received a
B.S. in business from Western Michigan University.
Sandra Selvaggi has been our Senior Director of Corporate Quality Systems
and Regulatory Affairs since April 1999 and joined us in November 1997 as
Director, Quality Systems. From 1988 until joining LXN Corporation, Ms.
Selvaggi was with Quidel Corporation, where she held various manufacturing and
quality management positions, most recently as the Director of Manufacturing.
Ms. Selvaggi received a B.S. in biology from the University of California at
Davis.
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Annette Choi has been our Controller since September 2000. From 1993 until
joining LXN Corporation, Ms. Choi was with Overland Data, Inc. serving as the
Controller since April 1997 and as Accounting Manager from 1993 to April 1997.
From 1983 to 1993, she held various accounting and finance positions, including
Accounting Manager, at Orincon Corporation. Ms. Choi received a B.S. in
business administration and an M.B.A. from San Diego State University.
John Burd is also one of our co-founders and served as our President and
Chief Executive Officer from our inception in 1993 to November 1997. Dr. Burd
was appointed Chairman of the Board in March 1998. Dr. Burd has been General
Partner of Windamere Venture Partners since January 2000 and has been President
and Chief Executive Officer of Dexcom, a company developing an implanted blood
glucose censor, since August 2000. Prior to joining us, Dr. Burd began his
medical products research and development career at Miles Laboratories (now
part of Bayer). In addition to more than 15 issued patents and more than 35
scientific publications, Dr. Burd has continued to research, develop and
commercialize innovative medical testing products at MAST Immunosystems, a
medical diagnostics company, and Quidel Corporation, where he held general
management responsibilities. He received his Ph.D. in biochemistry from the
University of Wisconsin in 1975.
Gary Stroy is currently Chairman and Chief Executive Officer of LabVelocity,
Inc. He is also an investor, consultant and board member to several medical
products and ehealth companies, including MedicalHost, Avocet and
MedicalWireless. From 1980 to 1996 he co-founded and held the positions of
Executive Vice President, Chief Executive Officer and/or Chairman of Sicca
Laboratories, LifeScan, Biotrack, Apprise, ChemTrak, Abaxis and LXN. Mr. Stroy
holds a B.S. in biochemistry from Colorado State University and an M.S. in
industrial pharmacy from the University of Nebraska.
Charles Hsu, a director since July 1996, has been a partner at the venture
capital firm Advent International. He has been a founder of, or investor in,
over twenty-five healthcare and life sciences companies, and currently serves
on the board of directors of several of these companies. Dr. Hsu obtained his
A.B. degree at Harvard University, and his Ph.D. and M.B.A. degrees from
Stanford University.
Ansbert Gadicke, a director since April 1999, has served as the Chairman of
the Board and Managing Director of MPM Capital, L.P., an investment company
specializing in the health care industry, since July 1992. From 1989 to 1992,
Dr. Gadicke was a consultant with Boston Consulting Group. Dr. Gadicke
currently serves on the boards of BioMarin Pharmaceutical, Inc. MediGene AG,
and Novirio Pharmaceuticals, Ltd. Dr. Gadicke received a Ph.D. and an M.D. from
J.W. Goethe Universitat, Frankfurt, Germany.
Clint Severson, a director since October 2000, has served as President,
Chief Executive Officer and Director of Abaxis, Inc., a medical diagnostic
company, since June 1996. He was appointed Chairman of the Board of Abaxis in
May 1998. From February 1989 to May 1996, Mr. Severson served as President and
Chief Executive Officer of MAST Immunosystems, Inc., a medical diagnostic
company.
Nancy Katz, a director since October 2000, has served as President, Chief
Operating Officer, Chief Financial Officer and Director of Calypte BioMedical
Corporation, a public health care company developing diagnostic products and
servers for HIV-1, sexually transmitted diseases and other chronic illnesses,
since October 1999. Prior to joining Calypte, Ms. Katz served as President of
Zila Pharmaceutical Inc., a prescription and non-prescription oral health care
products company. From April 1995 to December 1998, Ms. Katz led sales and
marketing efforts for LifeScan. Ms. Katz also served as Vice President of U.S.
Marketing, directing LifeScan's marketing and customer call center departments.
Board Composition
Upon the closing of this offering, in accordance with the terms of our
certificate of incorporation, the terms of office of the board of directors
will be divided into three classes:
. Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2001;
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. Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2002; and
. Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2003.
Our Class I directors will be Nancy Katz and Clint Severson, our Class II
directors will be John Burd, Michael Beeuwsaert and Gary Stroy and our Class
III directors will be Ansbert Gadicke and Charles Hsu. At each annual meeting
of stockholders, after the initial classification, 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. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This classification of
the board of directors may have the effect of delaying or preventing changes in
control or management of our company.
Committees of the Board of Directors
The audit committee of the board of directors reviews our internal
accounting procedures and consults with and reviews the services provided by
our independent accountants.
Our compensation committee reviews and makes recommendations to the board
concerning compensation and benefits of all of our executive officers,
administers our stock option plan and establishes and reviews general policies
relating to compensation and benefits of our employees.
Director Compensation
Our directors do not currently receive any cash compensation for services on
the board of directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. In addition, all directors are eligible to participate in
our 2000 Equity Incentive Plan.
The 2000 Equity Incentive Plan also provides for automatic stock option
grants to non-employee directors serving on the board. Each person who is
elected or appointed for the first time to be a non-employee director
subsequent to the adoption of the Equity Incentive Plan will be granted an
initial grant on the date of his or her election or appointment to the board to
purchase 10,000 shares of our common stock.
The 2000 Equity Incentive Plan also provides that eligible non-employee
directors will, on the day following each annual meeting, automatically receive
an annual grant to purchase 5,000 shares of our common stock commencing, as
applicable, with the annual meeting in 2001; provided, however, that if the
person has not been serving as a non-employee director for the entire period
since the preceding annual meeting, then the number of shares subject to the
annual grant shall be reduced pro rata for each full quarter prior to the date
of grant during which such person did not serve as a non-employee director.
The non-employee director stock options will have a maximum term of ten
years and generally must be exercised prior to the earliest of 18 months
following the death of the non-employee director, 12 months from the
termination of service on the board by the non-employee director due to a
disability, 3 months from the termination of the service of the non-employee
director for any other reason, or the expiration of the original term of the
stock option. One-thirty sixth of shares pursuant to each initial grant of a
non-employee director option vest each month following the date of grant. One
twelfth of the shares pursuant to each annual grant of a non-employee director
option vest each month following the date of grant. All options granted to non-
employee directors will be granted at the fair market value of the common stock
on the date of grant.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving on our board of directors or compensation committee.
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Executive Compensation
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the year
ended December 31, 1999 by:
. Michael Beeuwsaert, our Chief Executive Officer and President;
. Randall Nelson, who served as our Chief Executive Officer and President
from November 1997 to June 1999; and
. Ms. Shaunna Salzetti, our Vice President of Sales until January 2000.
These individuals are referred to in this compensation discussion and in
"Principal Stockholders" as our "Named Executive Officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------------
Name and Principal Other Annual All Other
Positions Year Salary($) Bonus($) Compensation($) Compensation
------------------ ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Michael Beeuwsaert........ 1999 $159,468 $1,035(1)
President, Chief
Executive Officer and
Chief Financial Officer
Randall Nelson............ 1999 $267,000 $7,500 $ 270(1)
Former Chief Executive
Officer and President
Shaunna Salzetti.......... 1999 $145,477 $1,256(1)
Former Vice President of
Sales
</TABLE>
--------
(1) Value of 401(k) matching contributions and premiums for term life insurance
In addition to Mr. Beeuwsaert and Mr. Nelson, one of our directors, Gary
Stroy, served as our interim Chief Executive Officer from June 1999 until
November 1999, but was not compensated for his services in that capacity.
Options Granted in Year Ended December 31, 1999
The following table sets forth summary information regarding the option
grants made to our Named Executive Officers during 1999. In accordance with the
rules of the Securities and Exchange Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective terms. These gains are based on assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted to the end of the option term using the initial public offering price
of $ per share as the base value.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percentage of at Assumed Annual Rates of
Securities Total Options Exercise Stock Price Appreciation for
Underlying Granted to Price Option Term(2)
Options Employees Per Expiration -----------------------------
Name Granted(#)(1) in 1999 Share($) Date 5% 10%
---- ------------- ------------- -------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael Beeuwsaert...... 210,000 27.6% $4.375 2/09--11/09
Randall Nelson.......... 0 0.0% -- --
Shauna Salzetti......... 60,444 7.9% $4.375 2/09--11/09
</TABLE>
--------
(1) These options generally are incentive stock options that were granted at
fair market value and vest over a four-year period so long as the
individual is employed by us.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.
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Shares Subject to Options Granted to Executive Officers
The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named Executive
Officers at December 31, 1999. Also reported are values of unexercised "in-the-
money" options, which represent the positive spread between the respective
exercise prices of outstanding stock options and the assumed initial public
offering price of $ per share.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Name Options at Year-End at Year-End
---- ------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael Beeuwsaert.......... 44,374 215,626
Randall Nelson.............. 93,750 0
Shauna Salzetti............. 11,000 75,444
</TABLE>
Employee Benefit Plans
2000 Equity Incentive Plan. In September 1996, we adopted our 1996 Stock
Option Plan. In October 2000, we approved an amendment and restatement of the
plan, and re-named the plan the 2000 Equity Incentive Plan. As amended, a total
of 2,400,000 shares of common stock are authorized for issuance under the plan.
The plan includes an "evergreen" provision providing that an additional number
of shares will automatically be added annually to the shares authorized for
issuance under the plan. The amount added each year will be the number of
shares equal to 3% of our outstanding capital stock, or 900,000, or an amount
expressly determined for such year by our board of directors, whichever is
lowest. Shares subject to stock awards that have expired or otherwise
terminated without having been exercised in full again become available for
grant.
The plan permits the grant of options to our directors, officers, other
employees and consultants. Options may be either incentive stock options to
employees within the meaning of Section 422 of the Internal Revenue Code or
non-statutory stock options. In addition, the plan permits the grant of stock
bonuses and rights to purchase restricted stock. Except in specified
circumstances, no person may be granted options covering more than 2,000,000
shares of common stock in any calendar year. See also the discussion under
"Non-Employee Director Stock Option Grants" regarding automatic grants to non-
employee directors in the plan.
The plan is administered by the board of directors or a committee appointed
by the board. The board has delegated the authority to administer the plan to
our compensation committee. Subject to the limitations set forth in the plan,
the administrator has the authority to select the eligible persons to whom
award grants are to be made, to designate the number of shares to be covered by
each award, to determine whether an option is to be an incentive stock option
or a non-statutory stock option, to establish vesting schedules, to specify the
exercise price of options and the type of consideration to be paid upon
exercise and, subject to specified restrictions, to specify other terms of
awards.
The maximum term of options granted under the plan is ten years. Incentive
stock options granted under the plan are generally non-transferable. Non-
statutory stock options are generally non-transferable, although the applicable
option agreement may permit some transfers. Options generally expire three
months after the termination of an optionholder's service. However, if an
optionholder is permanently disabled, or dies, during his or her service, that
person's options generally may be exercised up to 12 and 18 months,
respectively, following disability or death.
The exercise price of options granted under the plan is determined by the
board of directors or committee in accordance with the guidelines set forth in
the plan. The exercise price of an incentive stock option cannot be less than
100% of the fair market value of the common stock on the date of grant. The
exercise price of a non-statutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of grant.
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<PAGE>
Options granted under the plan vest at the rate determined by the board of
directors or committee and specified in the option agreement. The terms of any
stock bonuses or restricted stock purchase awards granted under the plan will
be determined by the board of directors or committee. The purchase price of
restricted stock under any restricted stock purchase agreement will be
determined by the board of directors or committee and will not be less than 85%
of the fair market value of our common stock on the date of grant. Stock
bonuses and restricted stock purchase agreements awarded under the plan are
generally non-transferable, although the applicable award agreement may permit
some transfers.
In the event of a change in control in our ownership as defined in our plan,
all outstanding stock awards under the plan must either be assumed or
substituted by the surviving entity. In the event the surviving entity does not
assume or substitute for the stock awards, then the vesting and exercisability
of outstanding awards will accelerate prior to the change in control and the
awards will terminate to the extent not exercised prior to the change in
control. Pursuant to the terms of individual option agreements, upon a change
of control all of the unvested options held by Mr. Beeuwsaert, our President
and Chief Executive Officer, will automatically fully vest; and one half of the
then-unvested portion of each option held by each of our officers at the
director level and above will automatically vest. Additionally, if within one
month prior to or 13 months following a change of control any employee who
holds options, including directors and above, are terminated, has his job title
or responsibilities materially altered or is asked to move more than 50 miles
as a condition of maintaining employment, that employee's unvested options will
automatically fully vest. The board of directors may amend or terminate the
plan at any time. Amendments will generally be submitted for stockholder
approval to the extent required by applicable law.
As of October 11, 2000, we had issued and outstanding under the plan options
to purchase 1,595,066 shares of common stock and 73,920 shares had been
purchased upon the exercise of previously held options. The per share exercise
prices of these outstanding options range from $0.20 to $7.00.
2000 Employee Stock Purchase Plan. In October 2000, we adopted the 2000
Employee Stock Purchase Plan. A total of 500,000 shares of common stock has
been reserved for issuance under the purchase plan. The plan includes an
"evergreen" provision providing that an additional number of shares will
automatically be added annually to the shares authorized for issuance under the
plan. The amount added each year will be the number of shares equal to 1% of
our outstanding capital stock, or 300,000, or an amount expressly determined
for such year by our board of directors, whichever is lowest. The purchase plan
is intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. Under the purchase plan, the board of
directors may authorize participation by eligible employees, including
executive officers, in periodic offerings following the commencement of the
purchase plan. The initial offering under the purchase plan will commence on
the effective date of this offering and terminate on May 15, 2001.
Unless otherwise determined by the board of directors, employees are
eligible to participate in the purchase plan only if they are employed by us or
one of our subsidiaries designated by the board of directors for at least 20
hours per week and are customarily employed for at least five months per
calendar year. Employees who participate in an offering may have up to 15% of
their earnings withheld pursuant to the purchase plan. The amount withheld is
then used to purchase shares of common stock on specified dates determined by
the board of directors. The price of common stock purchased under the purchase
plan will be equal to 85% of the lower of the fair market value of the common
stock at the commencement date of each offering period or the relevant purchase
date. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically upon termination of
employment.
In the event of a merger, reorganization, consolidation or liquidation, or
other change in control, the board of directors has discretion to provide that
each right to purchase common stock will be assumed or an equivalent rights
substituted by the successor corporation or the board of directors may provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The board of directors
has the authority to amend or terminate the purchase plan, provided however,
that no such action may adversely affect any outstanding rights to purchase
common stock.
50
<PAGE>
401(k) Plan. We sponsor the LXN Corporation 401(k) Plan. Employees who
complete three months of service with us are eligible to participate. These
participants may contribute from 1% up to 15% of their current compensation, up
to a statutorily prescribed annual limit. Participant contributions are held in
trust as required by law. Individual participants may direct the trustee to
invest their accounts in authorized investment alternatives. We may make
discretionary matching contributions to the 401(k) Plan each year in an amount
equal to a percentage of the participant's salary reduction contributions.
Salary reduction contributions in excess of 6% of the participant's
compensation are disregarded for purposes of the match. In addition, we may
make discretionary and special contributions each year, although we have not
done so to date. Each participant is fully vested in his or her salary
reduction contributions and our special contributions to the 401(k) Plan. The
401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue
Code so that contributions to the 401(k) Plan, and income earned on such
contributions, are not taxable to participants until withdrawn or distributed
from the 401(k) Plan.
Severance Agreement
We have entered into an Executive Severance Benefits Agreement with Mr.
Beeuwsaert under which we would be obligated to make a one-time payment to him
equal to 12 months of his base salary and to continue to pay his health
insurance premiums for up to an additional 12 months if we terminate him
without cause or "constructively terminate" him. A "constructive termination"
is defined in the agreement as a substantial reduction in his job title,
responsibilities or reporting level, a relocation of our executive offices more
than 30 miles from San Diego, California, a reduction in his base salary or
benefits or a failure by us to obtain from any successor company a commitment
to assume this agreement.
51
<PAGE>
RELATED PARTY TRANSACTIONS
The following is a description of transactions since inception to which we
have been a party and in which any director, executive officer or holder of
more than 5% of our capital stock had or will have a direct or indirect
material interest, other than compensation arrangements which are described
under "Management." See "Principal Stockholders" for more detail regarding the
relationship of these parties to our directors, executive offers and principal
stockholders.
<TABLE>
<CAPTION>
Common Series A Series B Series C Series D Series E Series F
Purchaser Stock Financing Financing Financing Financing Financing Financing Warrants
--------- ------ --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Directors and Principal
Stockholders
John F. Burd............ 290,000 6,667 -- -- -- -- --
Gary H. Stroy........... 50,000 13,263 -- -- -- -- --
Charles Hsu............. -- -- -- -- -- --
Ansbert Gadicke......... -- -- -- -- -- --
Clint Severson.......... -- -- -- -- -- --
Nancy Katz.............. -- -- -- -- -- --
Walden.................. -- 200,624 129,726 -- 74,060 43,022 7,142 21,511
BioAsia Investments LLC
and affiliates......... -- -- -- -- 320,000 34,042 172,805 51,312
Egger & Co.............. -- -- -- 304,000 -- -- --
Burr, Egan, Deleage & Co
and affiliates......... -- 216,667 140,100 30,000 80,000 57,693 42,857 28,847
BB Bio Ventures/MPM
entities............... -- -- -- -- -- 576,923 64,567 292,033
Executive Officers
Michael Beeuwsaert...... 2,000
Other Transaction
Information
Price per share......... $0.005-$0.10 $ 3.00 $ 5.00 $ 10.00 $ 12.50 $ 13.00 $ 14.00 --
</TABLE>
We have entered into a Sixth Amended and Restated Registration Rights
Agreement with each of the purchasers of our preferred stock pursuant to which
these and other stockholders will have registration rights following this
offering with respect to their shares of common stock issued upon conversion of
their preferred stock.
We have entered into, or prior to this offering will enter into,
indemnification agreements with our directors and executive officers for the
indemnification of and advancement of expenses to these persons to the fullest
extent permitted by law. We also intend to enter into these agreement with our
future directors and executive officers.
We entered into a letter agreement with BioAsia dated October 17, 1997,
under which we have agreed to pay BioAsia a monthly consulting fee of $10,000
between November 1997 and November 1998 to explore business opportunities for
us in Asia.
We entered into an employment agreement with John Burd, Chairman of the
Board, dated November 1, 1997, pursuant to which Mr. Burd was paid an annual
salary of $161,000, plus a bonus tied to our achievement of certain milestones.
He was also granted an option to purchase 20,000 shares of our common stock
which fully vested on February 17, 1999. This employment agreement terminated
in August 2000.
We entered into an Executive Severance Benefit Agreement with Michael
Beeuwsaert dated October 11, 2000 under which we are obligated to pay Mr.
Beeuwsaert a one-time payment equal to 12 months of his base salary and to pay
his health benefits for 12 months if we terminate him without cause or
constructively terminate him.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
Except as otherwise noted, the following table sets forth certain
information known to us with respect to beneficial ownership of our common
stock as of October 16, 2000 by each stockholder we know to be the beneficial
owner of more than 5% of our common stock, each of our directors, our Named
Executive Officers and all of our executive officers and directors as a group.
Except where otherwise indicated in the footnotes below, the address of the
stockholders listed below is our address, 6325 Lusk Boulevard, San Diego, CA
92121.
<TABLE>
<CAPTION>
Number of Percentage of Shares
Shares Beneficially Owned
Beneficially ---------------------------------
Name of Beneficial Owner Owned(1) Before Offering After Offering(2)
------------------------ ------------ --------------- -----------------
<S> <C> <C> <C>
MPM(3)......................... 1,881,332 19.97
Burr, Egan, Deleage & Co. and
Affiliates(4)................. 1,178,042 12.86
Walden(5)...................... 952,170 10.41
BioAsia Investments LLC and
affiliates(6)................. 1,156,318 12.60
Egger & Co..................... 608,000 6.66
Ansbert Gadicke(7)............. 1,872,046 19.87
Charles Hsu(8)................. 265,906 2.91
John F. Burd(9)................ 408,334 4.45
Gary Stroy(10)................. 86,526 *
Clint Severson(11)............. 276 *
Nancy Katz(12)................. 276 *
Michael A. Beeuwsaert(13)...... 123,874 1.35
Randall Nelson(14)............. 93,750 1.02
Shaunna K. Salzetti(15)........ 17,500 *
All executive officers and
directors as a
group (13 persons)(16)........ 2,928,134 31.39
</TABLE>
--------
* Represents beneficial ownership of less than 1% of our outstanding common
stock.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of common stock subject to options or warrants that are
currently exercisable or are exercisable within 60 days of October 16,
2000 are deemed to be outstanding and to be beneficially owned by the
person holding such options or warrants for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
(2) See discussion under "Underwriting" regarding the over-allotment option to
the underwriters.
(3) Includes 1,128,688 shares and 508,816 shares issuable upon exercise of a
warrant held by BB Bio Ventures L.P., 155,094 shares and 69,176 shares
issuable upon exercise of a warrant held by MPM BioVentures Parrallel
Fund, L.P., and 13,484 shares and 6,074 shares issuable upon exercise of a
warrant held by MPM Asset Management Investors 1999 LLC which, in the
aggregate, holds greater than five percent of our outstanding capital
stock. The address of each of these stockholders is One Cambridge Center,
9th Floor, Cambridge, MA 02142.
(4) Includes 1,108,696 shares and 57,094 shares issuable upon exercise of a
warrant held by Alta V Limited Partnership and 11,652 shares and 600
shares issuable upon exercise of a warrant held by Customs House Partners.
The address of Burr Egan Deleage & Co. is c/o Alta Partners, One
Embarcadero Center, Suite 4050, San Francisco, CA 94111.
(5) Includes 80,148 shares held by Walden Capital Partners, 198,000 shares and
3,074 shares issuable upon exercise of a warrant held by Walden Capital
Partners II, L.P., 161,594 shares held by Walden International III, C.V.,
176,974 shares and 7,690 shares issuable upon exercise of a warrant held
by Walden Investors, 60,652 shares and 4,180 shares issuable upon exercise
of a warrant held by Walden Technology Ventures II, L.P., 127,102 shares
and 7,326 shares issuable upon exercise of a warrant held by Walden
Ventures, and 104,678 shares and 20,752 shares issuable upon exercise of a
warrant held by Walden-SBIC , L.P. The address of these stockholders is
750 Battery Street, 7th floor, San Francisco, CA 94111.
(6) Includes 354,042 shares and 17,022 shares issuable upon exercise of a
warrant held by Biotechnology Development Fund, L.P., 642,510 shares and
45,602 shares issuable upon exercise of a warrant held by Veron
International Ltd., 14,286 shares held by Dr. Daniel Lee, 28,570 shares
held by Hung Kwon International Limited, and 14,286 shares held by Ha Lin
Yip Huang, which entities are affiliated with BioAsia Investments LLC and
40,000 shares issuable upon exercise of warrant held by BioAsia
Investments LLC, which, in the aggregate, hold greater than five percent
of our outstanding capital stock. The address of these stockholders is 575
High Street, Suite 201, Palo Alto, CA 94301.
53
<PAGE>
(7) Includes 5,000 shares subject to options held by Mr. Gadicke that are
currently exercisable or are exercisable within 60 days of October 16,
2000. And also includes 1,116,402 shares and 509,816 shares issuable upon
exercise of a warrant held by BB Bio Ventures L.P., 153,236 shares and
68,250 shares issuable upon exercise of a warrant held by MPM BioVentures
Parrallel Fund, L.P., and 13,342 shares and 6,000 shares issuable upon
exercise of a warrant held by MPM Asset Management Investors 1999 LLC
(collectively, "MPM"), which, in the aggregate, holds greater than five
percent of our outstanding capital stock. Mr. Ansbert Gadicke is President
of Medical Portfolio Management LLC, a general partner of MPM Capital LP,
which is a direct or indirect parent and/or control person of MPM Asset
Management LLC, funds managed or advised by it, including BB Bio Ventures
L.P., MPM Bio Ventures Parrallel Fund, L.P., and MPM Asset Management
Investors 1999 LLC, or the general partners of such funds. Mr. Gadicke
disclaims beneficial ownership of all LXN securities held by MPM except to
the extent of his proportionate pecuniary interests therein.
(8) Includes 10,000 shares subject to options held by Mr. Hsu that are
currently exercisable or are exercisable within 60 days of October 16,
2000. And also includes 198,000 shares and 3,074 shares issuable upon
exercise of a warrant held by Walden Capital Partners II, L.P., 60,652
shares and 4,180 shares issuable upon exercise of a warrant held by Walden
Technology Ventures II. Mr. Charles Hsu is affiliated with Walden Capital
Partners II, L.P., Walden Technology Ventures II, L.P. Mr. Hsu disclaims
beneficial ownership of all LXN securities held by these entities except
to the extent of his proportionate pecuniary interests therein.
(9) Includes 303,334 shares and 105,000 shares subject to options held by Mr.
Burd that are currently exercisable or are exercisable within 60 days of
October 16, 2000.
(10) Includes 76,526 shares and 10,000 shares subject to options directly held
by Mr. Stroy that are currently exercisable or are exercisable within 60
days of October 16, 2000.
(11) Includes 276 shares subject to options held by Mr. Severson that are
currently exercisable or are exercisable within 60 days of October 16,
2000
(12) Includes 276 shares subject to options held by Ms. Katz that are currently
exercisable or are exercisable within 60 days of October 16, 2000.
(13) Includes 2,000 shares and 121,874 shares subject to options held by Mr.
Beeuwsaert that are currently exercisable or are exercisable within 60
days of October 16, 2000.
(14) Includes 93,750 shares subject to options held by Mr. Nelson that are
currently exercisable or are exercisable within 60 days of October 16,
2000.
(15) Includes 2,000 shares and 15,504 shares subject to options held by Ms.
Salzetti that are currently exercisable or are exercisable within 60 days
of October 16, 2000.
(16) Includes 2,892,774 shares or shares subject to options described in notes
7 through 13. Also includes 35,360 shares subject to options that have
been issued to Mr. Kelemen, Mr. Messenger and Mr. McKnight and are
currently exercisable or are exercisable within 60 days of October 16,
2000.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, our authorized capital stock will
consist of 35,000,000 shares of common stock, $0.01 par value per share, and
5,000,000 shares of preferred stock, $0.01 par value per share. As of October
16, 2000, there were 1,109,672 shares of common stock outstanding, held by
approximately 59 stockholders, and warrants to purchase 19,547 shares of common
stock outstanding. Upon the closing of this offering, an additional 8,018,686
shares of common stock, held by approximately stockholders, will be issued
upon conversion of all outstanding shares of preferred stock, based on the
outstanding shares of preferred stock as of October 16, 2000. In addition, as
of October 16, 2000, there were outstanding warrants to purchase 881,554 shares
of preferred stock, of which warrants to purchase 845,832 shares terminate upon
the closing of this offering if not earlier exercised; and if these warrants
are exercised prior to termination, the issued preferred stock would convert
into an additional 8,900,240 shares of common stock upon the closing of this
offering.
Common Stock
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available at such times and
in such amounts as the board may from time to time determine. Each stockholder
is entitled to one vote for each share of common stock held on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not provided for in our certificate of incorporation, which means
that the holders of a majority of the shares voted can elect all of the
directors then standing for election. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Each
outstanding share of common stock is, and all shares of common stock to be
outstanding upon completion of this offering will be, duly authorized, fully
paid and nonassessable.
Preferred Stock
Following the conversion of our preferred stock into common stock prior to
this offering, our board of directors will have the authority, without further
action by the stockholders, to issue up to 5,000,000 shares of preferred stock
in one or more series and to fix the designations, powers, preferences,
privileges, and relative participating, optional or special rights and the
qualifications, limitations or restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock. The board of directors, without stockholder approval, can issue
preferred stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms calculated to delay or
prevent a change in control or make removal of management more difficult.
Additionally, the issuance of preferred stock may have the effect of decreasing
the market price of the common stock, and may adversely affect the voting and
other rights of the holders of common stock. At present, we have no plans to
issue any of the preferred stock after this offering.
Anti-Takeover Provisions
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales or other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years, did own,
15% or more of the corporation's outstanding voting stock. This provision could
delay, discourage or prohibit transactions not approved in advance by the board
of directors, such as takeover attempts that might result in a premium over the
market price of the common stock.
55
<PAGE>
Charter and Bylaw Provisions
Our certificate of incorporation and bylaws contain certain provisions that
could discourage potential takeover attempts and make attempts by stockholders
to change management more difficult. Our certificate of incorporation provides
that stockholders may not take action by written consent but may only act at a
stockholders' meeting, and that special meetings of our stockholders may only
be called by the chairman of the board or a majority of the board.
Registration Rights
The holders of 8,018,686 shares of common stock and 881,554 shares of common
stock issuable upon exercise of outstanding warrants have certain rights with
respect to the registration of those shares under the Securities Act of 1933.
Beginning 12 months after the date of this offering, if requested by holders of
these registrable securities, we must file up to two registration statements to
register our securities so long as the aggregate offering price of each
offering, net of any underwriting discounts and commissions, is at least $7.5
million. In addition, if we propose to register any of our shares of common
stock under the Securities Act other than in connection with a company employee
benefit plan or certain corporate acquisitions, mergers or reorganizations, the
holders of these registrable securities may require us to include all or a
portion of their shares in such registration, subject to certain rights of the
managing underwriter to limit the number of shares in any such offering.
Further, beginning six months after the date of this offering, the holders of
these registrable securities may require us to register all or any portion of
their registrable securities on Form S-3 when such form becomes available to
us, as long as the aggregate offering price would exceed $500,000, subject to
certain other conditions and limitations. We may be required to effect up to
one Form S-3 registration in any six month period. We will bear all expenses
incurred in connection with these registrations (other than underwriters'
discounts and commissions). These registration rights expire five years after
the closing of this offering. In addition, no holder of registrable securities
will be entitled to registration rights if and so long as such holder can sell
all of its registrable securities in compliance with Rule 144 of the Securities
Act during any three month period.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is .
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial
amounts of our common stock (including shares issued upon exercise of
outstanding options and warrants) in the public market after this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through sale of our equity securities. As
described below, no shares currently outstanding will be available for sale
immediately after this offering due to certain contractual restrictions on
resale. Sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares
of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options that do not expire upon the
closing. Of these shares, the shares sold in this offering will be
freely tradable without restriction under the Securities Act unless purchased
by our "affiliates" as that term is defined in Rule 144 under the Securities
Act. The remaining 10,009,912 shares held by existing stockholders are subject
to various lock-up agreements providing that, with certain limited exceptions,
the stockholder will not offer, sell, contract to sell, grant an option to
purchase, make a short sale or otherwise dispose of or engage in any hedging or
other transaction that is designed or reasonably expected to lead to a
disposition of any shares of common stock or any option to purchase shares of
common stock or any securities exchangeable for or convertible into shares of
common stock for a period of 180 days after the date of this prospectus without
the prior written consent of Robertson Stephens. As a result of these lock-up
agreements, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, none of these shares will be salable
until 181 days after the date of this prospectus. Beginning 181 days after the
date of this prospectus, 9,256,592 of these shares will be eligible for sale in
the public market. Thereafter, 717,598 of these shares will become eligible for
sale starting in October 2001. In addition, as of October 16, 2000, there were
outstanding options to purchase 1,595,066 shares common stock. All of such
options will be subject to lock-up agreements. Robertson Stephens may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned unregistered shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: 1% of the number of shares of common stock then outstanding (which
will equal approximately shares immediately after this offering); or
the average weekly trading volume of the common stock during the four calendar
weeks preceding the filing of a Form 144 with respect to such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of us
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years (including the
holding period of any prior owner except an affiliate), is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any of our employees, officers, directors or consultants who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. All holders of Rule 701
57
<PAGE>
shares are required to wait until 90 days after the date of this prospectus
before selling such shares. However, all shares issued pursuant to Rule 701 are
subject to lock-up agreements and will only become eligible for sale at the
earlier of the expiration of the 180-day lock-up agreements or no sooner than
90 days after the offering upon obtaining the prior written consent of
Robertson Stephens.
58
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
Robertson Stephens, Inc., Prudential Securities Incorporated and Dain Rauscher
Incorporated, have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase and pay for all of these shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Robertson Stephens, Inc. ..........................................
Prudential Securities Incorporated.................................
Dain Rauscher Incorporated.........................................
----
Total............................................................
====
<CAPTION>
International Underwriter
-------------------------
<S> <C>
Robertson Stephens International, Ltd..............................
Prudential-Bache International Limited.............................
Dain Rauscher Incorporated.........................................
----
Total............................................................
====
</TABLE>
The underwriters' representatives have advised us that the underwriters
propose to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession of not more than $ per share, of
which $ may be reallowed to other dealers. After the completion of this
offering, the initial public offering price, concession and reallowance to
dealers may be reduced by the underwriters' representatives. No such reduction
shall change the amount of proceeds to be received by us as set forth on the
cover page of this prospectus. The common stock is offered by the underwriters
as stated herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part.
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to
additional shares of common stock at the same price per share as we will
receive for the shares that the underwriters have agreed to
purchase. To the extent that the underwriters exercise such option, each of the
underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the shares offered hereby. If
purchased, such additional shares will be sold by the underwriters on the same
terms as those on which the shares are being sold. We will be obligated,
under the option, to sell shares to the extent the option is exercised. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the shares of common stock offered hereby. If this
option is exercised in full, the total public offering price, underwriting
discounts and commissions and proceeds to us will be $ , $ and
$ , respectively.
59
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
Total
-------------------------
Without
Per Over- With Over-
Share allotment allotment
------- ------------- -----------
<S> <C> <C> <C>
Underwriting discounts and commissions
payable by us.............................. $ $ $
</TABLE>
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $ .
Indemnity
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement, or to contribute to payments that the underwriters may
be required to make in respect thereof.
Lock-up Agreements
Our directors, executive officers, employees and 1% stockholders have agreed
to the underwriters' representatives that, for a period of 180 days after the
date to this prospectus, they will not offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any option to purchase any
shares of common stock or any securities convertible into, or exchangeable for,
or any rights to purchase or acquire, shares of common stock, now owned or
hereafter acquired directly by such holders or with respect to which they have
the power to disposition, without the prior written consent of Robertson
Stephens, Inc., which may, in its sole discretion and at any time or from time
to time, without notice, release all or any portion of the shares subject to
the lock-up agreements.
Future Sales
We have agreed that, for a period of 180 days after the date of this
prospectus, we will not without prior written consent of Robertson Stephens,
Inc., issue, sell contract to sell or otherwise dispose of any shares of common
stock, any options or warrants to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares of
common stock other than our sale of shares in this offering, the issuance of
common stock upon the exercise of outstanding options and our grant of options
to purchase shares of common stock under existing stock option or stock
purchase plans.
Online Prospectus
One of the underwriters, Prudential Securities Incorporated, also markets
securities online through its PrudentialSecurities.com division. Clients of
Prudential AdvisorSM, a full service brokerage firm program, may view offering
terms and a prospectus online and place orders through their financial
advisors. Other than the prospectus in electronic format, the information on
this Web site is not intended to be part of this prospectus or the registration
statement of which this prospectus forms a part and has not been approved
and/or endorsed by us or any underwriter in such capacity and should not be
relied on by prospective investors.
Directed Share Program
The underwriters have reserved up to 5% of the common stock to be issued by
us and offered for sale in this offering, at the initial public offering price,
to directors, officers, employees, business associates and persons otherwise
connected to us. The number of shares of common stock available for sale to the
general public will be reduced to the extent these individuals purchase
reserved shares. Any reserved shares not purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered by this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed 5% of the total number of shares offered.
60
<PAGE>
Listing
We have applied to list our common stock on the Nasdaq National Market
under the symbol "LXNC."
No Prior Public Market
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the common stock will be
determined by negotiation between us and the representatives. Among the
factors to be considered in determining the initial public offering price are
the prevailing market and economic conditions, our revenues and earnings,
market valuations of other companies engaged in activities similar to ours,
estimates of our business potential and prospects, the present state of our
business operations, our management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and
other factors. A pricing committee of our board of directors will establish
the initial public offering price following such negotiations.
Stabilization
The underwriters' representatives have advised us that, pursuant to
Regulation M under the Securities Exchange Act of 1934 certain persons
participating in the offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the common stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the common
stock on behalf of the underwriters for the purpose of fixing or maintaining
the price of the common stock. A "syndicate covering transaction" is a bid for
or the purchase of the common stock on behalf of the underwriters to reduce a
short position incurred by the underwriters in connection with this offering.
A "penalty bid" is an arrangement permitting the underwriters' representatives
to reclaim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with the offering if the common stock
originally sold by such underwriter or syndicate member is purchased by
underwriters' representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The underwriters' representatives have advised us that such transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.
61
<PAGE>
LEGAL MATTERS
Cooley Godward LLP, San Diego, California, will pass upon the validity of
the common stock offered by this prospectus for us. Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California, will pass upon legal
matters for the underwriters.
EXPERTS
The financial statements at December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 included in this Prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules which are part of the registration statement. For
further information with respect to LXN and the common stock offered by this
prospectus, we refer you to the registration statement and the exhibits and
schedules filed as part of the registration statement. You may read and copy
any document we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's website at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act, and in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the website of the SEC referred to above.
62
<PAGE>
LXN CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit................................................................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of LXN Corporation
The stock split described in Note 1 to the financial statements had not been
consummated at March 17, 2000. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, of redeemable convertible preferred stock and stockholders'
deficit, and of cash flows present fairly, in all material respects, the
financial position of LXN Corporation at December 31, 1999 and 1998, 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 of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above."
PricewaterhouseCoopers LLP
San Diego, California
March 17, 2000, except for
Note 13 to which the date is
October 16, 2000 and except
for the paragraph of Note 1
discussing the stock split to
which the date is , 2000
F-2
<PAGE>
LXN CORPORATION
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Balance
December 31, Sheet
------------------ June 30, June 30,
1998 1999 2000 2000
-------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 4,348 $ 4,991 $ 1,682 $ 12,170
Accounts receivable, net............ 546 13 -- --
Inventories......................... 411 1,050 1,957 1,957
Prepaid expenses and other current
assets............................. 210 159 117 117
-------- -------- -------- --------
Total current assets.............. 5,515 6,213 3,756 14,244
Property and equipment, net........... 2,178 1,919 1,790 1,790
Other assets.......................... 174 100 46 46
-------- -------- -------- --------
$ 7,867 $ 8,232 $ 5,592 $ 16,080
======== ======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................... $ 1,256 $ 804 $ 1,248 $ 1,248
Accrued liabilities................. 519 614 208 208
Deferred revenue.................... 100 -- 147 147
Bank credit facilities, current
portion............................ 1,559 422 1,660 1,660
-------- -------- -------- --------
Total current liabilities......... 3,434 1,840 3,263 3,263
Long term portion of bank credit
facilities........................... -- 949 -- --
-------- -------- -------- --------
Total liabilities................. 3,434 2,789 3,263 3,263
-------- -------- -------- --------
Commitments (Note 10)
Redeemable convertible preferred
stock, $0.01 par value; 5,695,246
shares authorized
Series A--543,334 shares designated;
543,334 shares issued and
outstanding at December 31, 1998,
1999, and June 30, 2000, and 0
shares issued and outstanding at
June 30, 2000 pro forma;
liquidation preference of $1,630... 1,610 1,610 1,610 --
Series B--500,000 shares designated;
500,000 shares issued and
outstanding at December 31, 1998,
1999, and June 30, 2000, and 0
shares issued and outstanding at
June 30, 2000 pro forma;
liquidation preference of $2,500... 2,479 2,479 2,479 --
Series C--600,000 shares designated;
566,200 shares issued and
outstanding at December 31, 1998,
1999, and June 30, 2000, and 0
shares issued and outstanding at
June 30, 2000 pro forma;
liquidation preference of $5,662... 5,381 5,381 5,381 --
Series D--1,440,000 shares
designated; 1,258,260 shares issued
and outstanding at December 31,
1998, 1999, and June 30, 2000, and
0 shares issued and outstanding at
June 30, 2000 pro forma;
liquidation preference of $15,728.. 15,108 15,108 15,108 --
Series E--1,754,769 shares
designated; 0 shares issued and
outstanding at December 31, 1998,
782,750 shares issued and
outstanding at December 31, 1999
and June 30, 2000, and 0 shares
issued and outstanding at June 30,
2000 pro forma; liquidation
preference of $10,176.............. -- 8,263 8,472 --
Series D preferred stock warrants... 100 100 100 --
Series E preferred stock warrants... -- 1,784 1,784 --
-------- -------- -------- --------
Total redeemable convertible
preferred stock and preferred
stock warrants................... 24,678 34,725 34,934 --
-------- -------- -------- --------
Stockholders' deficit:
Common stock, $0.01 par value;
8,000,000 shares authorized;
1,057,878, 1,068,546, 1,109,672,
and 9,974,190 shares issued and
outstanding at December 31, 1998
and 1999, June 30, 2000, and June
30, 2000 pro forma................. 11 11 11 100
Additional paid-in capital.......... 1,740 4,860 6,961 52,317
Unearned stock-based compensation... (508) (2,479) (3,163) (3,163)
Accumulated deficit................. (21,488) (31,674) (36,414) (36,437)
-------- -------- -------- --------
Total stockholders' equity
(deficit)........................ (20,245) (29,282) (32,605) 12,817
-------- -------- -------- --------
$ 7,867 $ 8,232 $ 5,592 $ 16,080
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
LXN CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Years Ended December For the Six Months
31, Ended June 30,
-------------------------------- ----------------------
1997 1998 1999 1999 2000
-------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 2,508 $ 2,104 $ 756 $ 1,803
Cost of goods sold...... -- 2,938 2,203 1,012 1,681
-------- ---------- ---------- ---------- ----------
Gross (loss) profit... -- (430) (99) (256) 122
-------- ---------- ---------- ---------- ----------
Operating expenses
Selling and
marketing............ 828 6,339 4,195 2,255 2,135
General and
administrative....... 1,819 2,387 3,314 2,174 1,146
Research and
development.......... 2,598 2,141 1,427 1,128 208
Stock-based
compensation*........ 290 700 1,143 641 1,409
-------- ---------- ---------- ---------- ----------
Total operating
expenses........... 5,535 11,567 10,079 6,198 4,898
-------- ---------- ---------- ---------- ----------
Operating loss.......... (5,535) (11,997) (10,178) (6,454) (4,776)
-------- ---------- ---------- ---------- ----------
Other
Interest income....... 326 472 368 190 121
Interest expense...... (32) (60) (139) (73) (76)
Other income.......... -- -- 100 97 200
-------- ---------- ---------- ---------- ----------
294 412 329 214 245
-------- ---------- ---------- ---------- ----------
Net loss................ (5,241) (11,585) (9,849) (6,240) (4,531)
Accretion of discount on
redeemable preferred
stock.................. -- -- (337) (133) (209)
-------- ---------- ---------- ---------- ----------
Net loss attributable to
common stockholders.... $ (5,241) $ (11,585) $ (10,186) $ (6,373) $ (4,740)
======== ========== ========== ========== ==========
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (5.83) $ (11.36) $ (9.59) $ (6.01) $ (4.36)
======== ========== ========== ========== ==========
Weighted-average number
of common shares
outstanding............ 899,668 1,019,978 1,062,698 1,060,020 1,087,564
======== ========== ========== ========== ==========
Unaudited pro forma net
loss per share
attributable to common
stockholders, basic and
diluted................ $ (1.12) $ (0.99)
========== ==========
Shares used in computing
unaudited pro forma net
loss per share
attributable to common
stockholders, basic and
diluted................ 8,774,332 9,234,484
========== ==========
* Stock-based
compensation
Selling and
marketing............ $ 35 $ 203 $ 142 $ 4 $ 382
General and
administrative....... 185 446 853 668 825
Research and
development.......... 70 51 148 (31) 202
-------- ---------- ---------- ---------- ----------
$290 $700 $1,143 $641 $1,409
======== ========== ========== ========== ==========
</TABLE>
--------
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
LXN CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B Series C Series E
Preferred Preferred Preferred Series D Preferred Series D Series E
stock stock stock Preferred stock stock Preferred Preferred
-------------- -------------- -------------- ----------------- -------------- Stock Stock
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants Warrants
------- ------ ------- ------ ------- ------ --------- ------- ------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ 543,334 $1,610 500,000 $2,479 566,200 $5,381 -- $ -- -- $ -- $ -- $ --
Issuance of
Series D
preferred
stock........... 976,360 11,617
Issuance of
warrants to
purchase 20,000
shares of Series
D preferred
stock........... 100
Repurchase and
retirement of
unvested common
stock at the
issuance price..
Unearned stock-
based
compensation
Amortization of
unearned stock-
based
compensation for
employees.......
Amortization of
unearned stock-
based
compensation for
consultants.....
Unrealized loss
on investments
available-for-
sale............
Net loss........
------- ------ ------- ------ ------- ------ --------- ------- ------- ------ ---- ------
Balance at
December 31,
1997............ 543,334 1,610 500,000 2,479 566,200 5,381 976,360 11,617 -- -- 100 --
Issuance of
Series D
preferred
stock........... 281,900 3,491
Exercise of
stock options...
Unearned stock-
based
compensation
Amortization of
unearned stock-
based
compensation for
employees.......
Amortization of
unearned stock-
based
compensation for
consultants.....
Realized loss on
investments
available-for-
sale............
Net loss........
------- ------ ------- ------ ------- ------ --------- ------- ------- ------ ---- ------
Balance at
December 31,
1998............ 543,334 1,610 500,000 2,479 566,200 5,381 1,258,260 15,108 -- -- 100 --
Issuance of
Series E
preferred
stock........... 782,750 7,926
Issuance of
warrants to
purchase 402,916
shares of Series
E preferred
stock........... 1,784
Accretion on
Series E
preferred
stock........... 337
Exercise of
stock options...
Unearned stock-
based
compensation
Amortization of
unearned
stock-based
compensation for
employees.......
Amortization of
unearned stock-
based
compensation for
consultants.....
Net loss........
------- ------ ------- ------ ------- ------ --------- ------- ------- ------ ---- ------
Balance at
December 31,
1999............ 543,334 1,610 500,000 2,479 566,200 5,381 1,258,260 15,108 782,750 8,263 100 1,784
January 1, 2000
to June 30, 2000
(unaudited):
Issuance of
warrants to
purchase 5,384
shares of common
stock...........
Accretion on
Series E
preferred stock
................ 209
Exercise of
stock options...
Unearned stock-
based
compensation....
Amortization of
unearned stock-
based
compensation for
employees.......
Amortization of
unearned stock-
based
compensation for
consultants.....
Net loss........
------- ------ ------- ------ ------- ------ --------- ------- ------- ------ ---- ------
Balance at June
30, 2000
(unaudited)..... 543,334 $1,610 500,000 $2,479 566,200 $5,381 1,258,260 $15,108 782,750 $8,472 $100 $1,784
======= ====== ======= ====== ======= ====== ========= ======= ======= ====== ==== ======
<CAPTION>
Total
Redeemable Accumulated
Convertible Common Stock Additional Unearned Other Total
Preferred Stock ----------------- Paid-in Stock-Based Comprehensive Accumulated Stockholders'
and Warrants Shares Amount Capital Compensation Income Deficit Deficit
--------------- ---------- ------ ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ $ 9,470 1,048,376 $11 $ 484 $ (245) $-- $ (4,662) $ (4,412)
Issuance of
Series D
preferred
stock........... 11,617
Issuance of
warrants to
purchase 20,000
shares of Series
D preferred
stock........... 100
Repurchase and
retirement of
unvested common
stock at the
issuance price.. (12,624) -- (1) (1)
Unearned stock-
based
compensation 365 (365)
Amortization of
unearned stock-
based
compensation for
employees....... 262 262
Amortization of
unearned stock-
based
compensation for
consultants..... 28 28
Unrealized loss
on investments
available-for-
sale............ (1) (1)
Net loss........ (5,241) (5,241)
--------------- ---------- ------ ---------- ------------ ------------- ----------- -------------
Balance at
December 31,
1997............ 21,187 1,035,752 11 876 (348) (1) (9,903) (9,365)
Issuance of
Series D
preferred
stock........... 3,491
Exercise of
stock options... 22,126 -- 4 4
Unearned stock-
based
compensation 850 (850)
Amortization of
unearned stock-
based
compensation for
employees....... 690 690
Amortization of
unearned stock-
based
compensation for
consultants..... 10 10
Realized loss on
investments
available-for-
sale............ 1 1
Net loss........ (11,585) (11,585)
--------------- ---------- ------ ---------- ------------ ------------- ----------- -------------
Balance at
December 31,
1998............ 24,678 1,057,878 11 1,740 (508) -- (21,488) (20,245)
Issuance of
Series E
preferred
stock........... 7,926
Issuance of
warrants to
purchase 402,916
shares of Series
E preferred
stock........... 1,784
Accretion on
Series E
preferred
stock........... 337 (337) (337)
Exercise of
stock options... 10,668 -- 6 6
Unearned stock-
based
compensation 2,942 (2,942)
Amortization of
unearned
stock-based
compensation for
employees....... 971 971
Amortization of
unearned stock-
based
compensation for
consultants..... 172 172
Net loss........ (9,849) (9,849)
--------------- ---------- ------ ---------- ------------ ------------- ----------- -------------
Balance at
December 31,
1999............ 34,725 1,068,546 11 4,860 (2,479) -- (31,674) (29,282)
January 1, 2000
to June 30, 2000
(unaudited):
Issuance of
warrants to
purchase 5,384
shares of common
stock........... 51 (51)
Accretion on
Series E
preferred stock
................ 209 (209) (209)
Exercise of
stock options... 41,126 -- 8 8
Unearned stock-
based
compensation.... 1,920 (1,920)
Amortization of
unearned stock-
based
compensation for
employees....... 1,287 1,287
Amortization of
unearned stock-
based
compensation for
consultants..... 122 122
Net loss........ (4,531) (4,531)
--------------- ---------- ------ ---------- ------------ ------------- ----------- -------------
Balance at June
30, 2000
(unaudited)..... $34,934 1,109,672 $11 $6,961 $ (3,163) $-- $(36,414) $(32,605)
=============== ========== ====== ========== ============ ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
LXN CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Six
For the Years Ended Months Ended
December 31, June 30,
-------------------------- ----------------
1997 1998 1999 1999 2000
------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(5,241) $(11,585) $(9,849) $(6,240) $(4,531)
Adjustments to reconcile net
loss to net cash used in
operating activities...........
Non-cash stock-based
compensation expense.......... 290 700 1,143 641 1,409
Depreciation and amortization.. 202 441 676 316 355
Write-off of property and
equipment..................... 13 34 243 -- --
Changes in operating assets and
liabilities:
Accounts receivable.......... -- (546) 533 479 13
Inventories.................. (84) (327) (639) (420) (907)
Prepaid expenses and other
current assets.............. (191) (18) 51 61 42
Other assets................. (10) (140) 74 55 54
Accounts payable............. 94 1,034 (452) (511) 444
Accrued liabilities.......... 254 200 95 1,708 (406)
Deferred revenue............. -- 100 (100) (100) 147
------- -------- ------- ------- -------
Net cash used in operating
activities................ (4,673) (10,107) (8,225) (4,011) (3,380)
------- -------- ------- ------- -------
Cash flows from investing
activities:
Restricted cash................ (500) 500 -- -- --
Purchases of investments....... (4,861) -- -- -- --
Sales of investments........... -- 4,861 -- -- --
Purchases of property and
equipment..................... (805) (1,457) (660) (501) (226)
------- -------- ------- ------- -------
Net cash provided by (used
in) investing activities.. (6,166) 3,904 (660) (501) (226)
------- -------- ------- ------- -------
Cash flows from financing
activities:
Net proceeds from issuance of
common stock.................. -- 4 6 2 8
Repurchases of common stock.... (1) -- -- -- --
Net proceeds from issuance of
preferred stock and warrants.. 11,717 3,491 9,710 9,710 --
Repayments on bank credit
facilities.................... -- (497) (316) (105) (211)
Proceeds from bank credit
facilities.................... 497 1,559 128 128 500
------- -------- ------- ------- -------
Net cash provided by
financing activities...... 12,213 4,557 9,528 9,735 297
------- -------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............ 1,374 (1,646) 643 5,223 (3,309)
Cash and cash equivalents at
beginning of year............... 4,620 5,994 4,348 4,348 4,991
------- -------- ------- ------- -------
Cash and cash equivalents at end
of year......................... $ 5,994 $ 4,348 $ 4,991 $ 9,571 $ 1,682
======= ======== ======= ======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest......... $ 28 $ 19 $ 139 $ 74 $ 72
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. The Company
The Business
LXN Corporation (the "Company") was incorporated in Delaware on July 7,
1993. The Company develops, manufactures and markets products for people with
diabetes, which allow patients and health care professionals to better monitor
the effectiveness of treatment regimens and make therapy changes to improve
overall glucose control. The Company derives all its revenues from the sale of
three products. Duet, which is currently marketed to health care professionals
through an exclusive distributor serving the U.S. physician office market, was
introduced in January 1998. In Charge, which is sold primarily to wholesalers
that serve national and regional retail pharmacy chains as well as local
pharmacies, was introduced in October 1999. ExpressView, which is sold
primarily to mail-order firms serving Medicare patients, was introduced in
December 1999.
The Company's business consists of a single operating segment. Substantially
all revenues are generated from customers located within the U.S., and all
long-lived assets are located in the U.S.
Stock Split
In connection with its proposed initial public offering ("IPO"), the Company
will be effecting a two-for-one stock split. All per share and share amounts in
the financial statements have been retroactively restated to reflect the stock
split.
Capital Resources
The Company has been successful in completing several rounds of private
equity financing with its last round totaling approximately $5 million during
October 2000. However, the Company has incurred substantial losses and negative
cash flows from operations in every fiscal period since inception. The Company
incurred losses from operations of $5,535,000, $11,997,000, and $10,178,000 for
the years ended December 31, 1997, 1998, and 1999, respectively. The Company
incurred negative cash flows from operations of $4,673,000, $10,107,000, and
$8,225,000 for the years ended December 31, 1997, 1998, and 1999, respectively.
As of December 31, 1998 and 1999, the Company had accumulated deficits of
$21,488,000 and $31,674,000, respectively. Management expects operating losses
and negative cash flows from operations to continue for at least the next two
years and anticipates that losses will increase significantly from current
levels because of additional costs and expenses related to brand development,
marketing and other promotional activities, expansion of product offerings and
development of relationships with other businesses. In addition, the Company's
bank credit facilities are due on demand as a result of the current violation
of certain performance covenants. Failure to generate sufficient revenues,
raise additional capital or reduce certain discretionary spending could have a
material adverse effect on the Company's ability to achieve its intended
business objectives. Based on the Company's current business projections and
its current cash available, assuming that the proposed IPO is not completed and
there are no unusual trends in cash expenditures, and assuming that the bank
demands full repayment of its credit facilities, the Company is projected to
exhaust its cash resources in early 2001.
2. Summary of Significant Accounting Policies
Unaudited Financial Statements
The interim financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 are unaudited and have been prepared on the same
basis as the audited financial statements. In the opinion of management, these
unaudited financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
information set forth therein in accordance with accounting principles
generally accepted in the U.S. Operating results for interim periods are not
necessarily indicative of operating results for an entire year. All financial
statement disclosures related to the six months ended June 30, 1999 and 2000
and subsequent to June 30, 2000 are unaudited.
F-7
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Risk
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk include trade accounts receivable and cash
equivalents. The Company manages its credit risk regarding trade accounts
receivable by performing ongoing evaluations of its customers' financial
condition, and maintains an allowance for doubtful accounts for any accounts
that are considered to be uncollectible. The Company has not experienced
material credit losses from its customers.
The Company invests its excess cash in U.S. government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has not experienced any significant losses on its cash
equivalents.
Key Distributor Risk
The Company is dependent on one distributor for the sale of Duet through an
agreement that is exclusive through August 2002. Any failure by the distributor
to adequately support Duet could have a material adverse effect on the
Company's revenues and profitability.
Key Suppliers Risk
The monitors and many components of the test strips used in the Company's
products are manufactured by single source vendors. Any disruptions in supply
or quality problems could have a material adverse impact on the Company's
business and profitability. The Company has not experienced and does not expect
to experience any significant production problems or delays from its vendors.
Cash Equivalents
The Company considers cash equivalents to include highly liquid instruments
purchased with maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market, cost being determined
by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. The useful
life of furniture and fixtures, production equipment, and research and
development equipment is generally five years, and the useful life of computer
equipment is generally three years. Leasehold improvements are amortized over
the shorter of their estimated useful lives or lease terms. Depreciation
expense was $202,000, $441,000, and $676,000 for the years ended December 31,
1997,
F-8
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1998, and 1999, respectively, and $316,000 and $355,000 for the six months
ended June 30, 1999 and 2000, respectively. Expenditures for maintenance and
repairs are charged to operations as incurred. When assets are retired or sold,
the cost and accumulated depreciation are removed from the respective accounts
and any gain or loss is recognized.
Long-Lived Assets
The Company investigates potential impairments of its long-lived assets when
there is evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. An impairment loss is
recognized when an asset's fair value, determined based on undiscounted cash
flows expected to be generated by the asset, is less than its carrying amount.
Any required impairment loss would be measured as the amount by which the
asset's carrying value exceeds its fair value, and would be recorded as a
reduction in the carrying value of the related asset and a charge to results of
operations.
Fair Value of Financial Instruments
The carrying amount of long-term debt approximates fair value based on
interest rates currently available to the Company for borrowings with similar
terms and maturities because it has a variable interest rate indexed to the
prime rate . The carrying amount of cash equivalents approximates fair value
because of the short maturities of these instruments.
Revenue Recognition
The Company recognizes revenue when all of the following criteria have been
met: (1) persuasive evidence of an arrangement exists between the Company and
its customer, (2) the Company has delivered its product to its customer, (3)
the Company's price for the products sold is fixed or determinable, and
(4) collectibility of the sales price is reasonably assured.
The Company offers certain rights of return to its customers. Because of the
relatively recent introduction of the Company's products and the emerging
nature of the market for such products, the Company lacks sufficient history to
make reliable accurate estimates of product returns at the time of shipment,
Therefore, the Company defers the recognition of revenue until customers'
return rights have expired. In the case of sales to distributors, this occurs
when the distributors have sold through the product to their customers. In the
case of direct sales to medical equipment suppliers and end users, this
generally occurs 30 days after products have been shipped.
From time to time, the Company offers sales incentives in the form of mail-
in rebates for its products. A provision for estimated rebates is recorded as a
reduction of revenue in the period in which related sales are recognized. No
significant rebates were offered during 1999 or during the first six months of
2000. A provision of $105,000 was made for estimated rebates at December 31,
1998 for point of sale rebates offered with Duet.
Two customers made up 37% and 8% of total sales for the six months ended
June 30, 2000. The same two customers made up 44% and 28% of total sales in
1999, and 39% and 21% of total sales in 1998.
Warranty Costs
The Company provides for the estimated costs that may be incurred under its
warranty programs at the time of recognizing revenue.
F-9
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Research and development costs
Research and development costs are expensed as incurred.
Employee and director stock-based compensation
The Company measures compensation expense for its employee and director
stock-based compensation plans using the intrinsic value method and provides
pro forma disclosures of net loss and net loss per share as if a fair value
method had been applied in measuring compensation expense. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Company's common stock at the date of grant over the amount
the employee must pay to acquire the stock. Stock-based compensation is
amortized over the related vesting periods using an accelerated method in
accordance with Financial Accounting Standards Board Interpretation ("FIN") No.
28, "Accounting for Stock Appreciation Rights and Other Variable Stock Options
or Award Plans." The amount of stock-based compensation expense to be recorded
in future periods could decrease if awards for which accrued but unamortized
compensation expense has been recorded are forfeited.
Non-employee stock-based compensation
Stock-based awards issued to non-employees for goods or services are
accounted for using fair value methods and are remeasured to fair value at each
period end until the earlier of the date that performance by the non-employee
is complete or the awards are fully vested.
Income taxes
Current income tax expense or benefit is the amount of income taxes expected
to be payable or refundable for the current year. A deferred income tax asset
or liability is computed for the expected future impact of differences between
the financial reporting and tax bases of assets and liabilities and for the
expected future tax benefit to be derived from tax credits and loss
carryforwards. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
Earnings (loss) per share
Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted loss per share is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding during the period increased to include dilutive potential common
shares that were outstanding during the period. The dilutive effect of
outstanding common stock options and preferred stock warrants is reflected in
diluted loss per share by application of the treasury stock method. The Company
has excluded all redeemable convertible preferred stock, outstanding common
stock options, and outstanding preferred and common stock warrants from the
calculation of diluted loss per share for all periods presented because such
securities are antidilutive for these periods.
F-10
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Potential common shares excluded from the calculation of diluted loss per
share for all periods presented in the statements of operations are detailed as
follows:
<TABLE>
<CAPTION>
For the Years Ended December For the Six Months
31, Ended June 30,
----------------------------- -------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Preferred stock (based on a
conversion rate of two for
one)....................... 5,171,788 5,735,588 7,301,088 7,301,088 7,301,088
Common stock options........ 556,500 750,800 1,264,410 762,450 1,433,066
Preferred stock warrants
(based on a conversion rate
of two for one)............ 40,000 40,000 845,832 845,832 845,832
Common stock warrant........ -- -- -- -- 5,384
--------- --------- --------- --------- ---------
5,768,288 6,526,388 9,411,330 8,909,370 9,585,370
========= ========= ========= ========= =========
</TABLE>
Unaudited pro forma net loss per common share, basic and diluted, is
calculated assuming the conversion of all outstanding shares of preferred stock
into common stock (using the as-if converted method) from the respective dates
of issuance of the preferred shares, as well as the exercise of the Series D
and E preferred stock warrants that will expire upon the closing of the
proposed IPO if unexercised. A reconciliation of net loss attributable to
common stockholders and weighted average shares used in computing basic and
diluted net loss per share to unaudited basic and diluted pro forma net loss
per share is as follows:
<TABLE>
<CAPTION>
For the Year For the
Ended Six Months
December 31, Ended June 30,
1999 2000
------------ --------------
(unaudited)
<S> <C> <C>
Numerator (in thousands):
Net loss attributable to common stockholders used
in computing basic and diluted loss per share... $ (10,186) $ (4,740)
Elimination of accretion of discount on
redeemable convertible preferred stock.......... 337 209
Accretion related to beneficial conversion
feature embedded in Series F preferred stock.... -- (4,644)
---------- ----------
Net loss attributable to common stockholders used
in computing basic and diluted pro forma net
loss per share.................................. $ (9,849) $ (9,175)
========== ==========
Denominator:
Shares used in computing basic and diluted loss
per share....................................... 1,062,698 1,087,564
Adjustment to reflect assumed conversion of
convertible redeemable preferred stock.......... 7,013,722 7,301,088
Adjustment to reflect assumed exercise of Series
D and E preferred stock warrants................ 697,912 845,832
---------- ----------
Shares used in computing basic and diluted pro
forma net loss per share........................ 8,774,332 9,234,484
========== ==========
Pro forma net loss per share, basic and diluted.... $ (1.12) $ (0.99)
========== ==========
</TABLE>
F-11
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive income (loss)
Comprehensive income (loss) for all periods presented consists solely of net
income (loss).
Unaudited pro forma balance sheet
If the IPO contemplated by the Company is consummated as presently
anticipated, each share of redeemable convertible preferred stock outstanding
at the date of the closing will automatically convert into two shares of common
stock. In addition, the Series D and Series E preferred stock warrants are
assumed to be exercised into preferred stock, and then immediately converted
into two shares of common stock, upon the IPO, since they are currently in-the-
money and expire upon the closing of the IPO if unexercised. The unaudited pro
forma balance sheet as of June 30, 2000 reflects the conversion of the
preferred stock and the exercise and conversion of the preferred stock warrants
as if such conversion and exercise had occurred as of June 30, 2000. This would
have resulted in the conversion of the preferred stock outstanding at that
date, as well as the 358,799 shares of Series F preferred stock issued in
October 2000 (Note 13), into 8,018,686 shares of common stock, and the
conversion of the preferred stock warrants outstanding at that date into
845,832 shares of common stock.
Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
SFAS 133 as amended by SFAS 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of SFAS 133," an amendment of
SFAS 133, is effective for fiscal years beginning after June 15, 2000. To date,
the Company has not engaged in derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition," or SAB 101, which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The adoption of the principles of SAB
101 has not had a significant impact on the Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25." FIN 44 clarifies the definition of an employee for
purposes of applying APB 25; the criteria for determining whether a stock
option or award plan qualifies as a non-compensatory plan; the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective on July 1, 2000, with
certain provisions effective earlier. The Company does not expect FIN 44 to
have a significant impact on its financial statements.
In August 2000, the FASB Emerging Issues Task Force ("EITF") issued EITF 00-
14, "Accounting for Certain Sales Incentives," which addresses the recognition,
measurement and classification for sales incentives offered voluntarily by
vendors without charge to customers. The Company's accounting policy for sales
incentives is in compliance with EITF 00-14.
F-12
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Balance Sheets Details
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts Receivable, net
(in thousands)
Accounts receivable..... $ 574 $ 32 $ --
Less: Allowance for
doubtful accounts...... (28) (19) --
------- ------- -------
$ 546 $ 13 $ --
======= ======= =======
Additions to the allowance for doubtful accounts were $48,000, $18,000, and
$1,000 in 1998, 1999 and the six months ended June 30, 2000, respectively.
Deductions from the allowance were $20,000, $27,000, and $20,000 in 1998, 1999
and the six months ended June 30, 2000, respectively.
Inventories (in thousands)
Raw materials........... $ 320 $ 652 $ 1,180
Work in process......... 24 130 7
Finished goods at
Company's premises..... 67 137 589
Finished goods at
customers.............. -- 131 181
------- ------- -------
$ 411 $ 1,050 $ 1,957
======= ======= =======
Property and Equipment (in thousands)
Machinery and
equipment.............. $ 976 $ 1,618 $ 1,747
Furniture, office
equipment and other.... 924 1,026 1,203
Leasehold improvements.. 332 405 406
Manufacturing assets not
yet placed in service.. 632 81 --
------- ------- -------
2,864 3,130 3,356
Less accumulated
depreciation and
amortization........... (686) (1,211) (1,566)
------- ------- -------
$ 2,178 $ 1,919 $ 1,790
======= ======= =======
Compensation............ $ 212 $ 481 $ 61
Vacation................ 123 106 114
Sales promotions........ 163 -- 16
Other................... 21 27 17
------- ------- -------
$ 519 $ 614 $ 208
======= ======= =======
</TABLE>
Accrued Liabilities (in thousands)
4. Bank Credit Facilities
In 1999, the Company entered into an amended and restated credit agreement
(the "1999 credit agreement") with a bank that converted the outstanding
balance of $1,687,000 on the existing $2,000,000 credit facility into a term
loan. The promissory note evidencing the term loan provides for monthly
principal payments of $35,000 and interest payments at the bank's prime rate
plus one-half percentage point. The Company owed $1,371,000 and $1,160,000 at
December 31, 1999 and June 30, 2000, respectively, on the term loan. As of June
30, 2000, the interest rate on the promissory note was 10%. The credit
agreement is
F-13
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
collateralized by all of the assets of the Company. Future payments on the term
loan are as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ending December 31,
---------------------------------
<S> <C>
2000............................................................ $ 422
2001............................................................ 422
2002............................................................ 422
2003............................................................ 105
------
1,371
Less current portion............................................ (422)
------
$ 949
======
</TABLE>
The 1999 credit agreement, as amended in March 2000, also provides for a
$500,000 line of credit through March 21, 2001 for equipment purchases only.
The interest rate for advances on the equipment line of credit is the same as
the term loan above. Interest only is due monthly through September 21, 2000,
and the outstanding principal balance is payable in 30 equal payments of
principal plus accrued interest beginning October 21, 2000. The Company took no
advances on the equipment line of credit during 1999. At June 30, 2000,
$500,000 was outstanding on the equipment line of credit. The 1999 credit
agreement also provides for a $1,000,000 line of credit based on the Company's
accounts receivable. The interest rate for advances on the accounts receivable
line of credit is the bank's prime rate, and advances are payable upon the
earlier of March 21, 2001 or a demand from the bank. The Company took no
advances on the accounts receivable line of credit during 1999 or the six
months ended June 30, 2000.
As consideration for extending the 1999 credit agreement, the Company issued
a five-year warrant to purchase 5,384 shares of common stock at $5 per share in
May 2000. The fair value of the warrant on the date of issuance was $51,000 and
was recorded as a deferred facility fee and amortized to interest expense over
the life of the agreement. The fair value was determined by management using
the Black-Scholes option pricing model with the following assumptions: 5 year
contractual life, 6.65% risk-free interest rate, 60% expected volatility, and
0% expected dividend yield.
The 1999 credit agreement, as amended, contained performance covenants
requiring the Company to maintain a minimum quick ratio, incur no more than a
maximum quarterly loss, and to raise a minimum of $3,000,000 of equity by
September 30, 2000. The Company was in default of the maximum quarterly loss
covenant at December 31, 1999, and was in default of both the minimum quick
ratio and the maximum quarterly loss covenants at June 30, 2000. The bank
waived compliance with these defaulted covenants as of December 31, 1999 and
June 30, 2000. The 1999 credit agreement with the bank also restricts the
Company from declaring or paying any dividends, or from making any other
distribution of capital stock.
In October 2000, the 1999 credit agreement was further amended to modify
certain performance covenants. The Company was in default of certain of these
covenants at October 16, 2000. As a result, the entire remaining principal
balances of the bank credit facilities have been classified as current
liabilities.
In October 2000, as consideration for amending the 1999 credit agreement,
the Company issued a five-year warrant to the bank to purchase 6,000 shares of
common stock at $5 per share. The fair value of the warrant on the date of
issuance was estimated by management to be $69,000 and was recorded as a
deferred facility fee and amortized to interest expense over the life of the
agreement. The fair value was estimated using the Black-Scholes option pricing
model with the following assumptions: 5 year contractual life, 5.85% risk-free
interest rate, 60% expected volatility, and 0% expected dividend yield.
F-14
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Common Stock
The holders of common stock are entitled to noncumulative dividends if and
when such dividends are declared by the Company's board of directors.
6. Redeemable Convertible Preferred Stock
Rights and Preferences
The holders of all series of convertible preferred stock are entitled to
noncumulative dividends if and when such dividends are declared by the
Company's board of directors, and have the same voting rights as the common
stockholders.
Upon a liquidation, dissolution, or winding up of the Company, including a
consolidation or merger with another company, a sale of more than 50% of the
Company's common stock or the sale of substantially all of the assets of the
Company, the holders of all series of preferred stock have a preference in
liquidation over the common stockholders. The liquidation value for all series
of preferred stock is the sum of the issuance price plus an amount equal to all
declared but unpaid dividends (subject to appropriate adjustment in the event
of any stock dividend, stock split, combination, or other similar
recapitalization affecting such shares). The Series E preferred stock has
preference in liquidation over the Series A, B, C and D preferred stock and the
common stock. If the assets of the Company are not sufficient to fulfill the
liquidation amount, the preferred stockholders will share in the distribution
of the assets on a pro rata basis based on the liquidation amount.
The Series E preferred stock is redeemable upon a majority vote of the
holders after the earlier of five years from the issue date or failure by the
Company to meet its obligations to the holders of Series E preferred stock.
All series of preferred stock are convertible into common stock, at the
option of the holder, on a two-for-one basis, subject to adjustment for
dilution. Additionally, all series of preferred stock will automatically
convert into common stock concurrent with the closing of an underwritten public
offering of common stock under the Securities Act of 1933 in which the Company
receives at least $25 million in net cash proceeds and the price per share is
at least $10.00, subject to adjustment for dilution. The Company has reserved
11,390,492 shares of common stock for issuance upon conversion of the preferred
stock.
Because the redemption of all series of preferred stock is outside of the
control of the Company, the preferred stock and related preferred stock
warrants have been classified on the balance sheets as redeemable securities.
Preferred Stock Warrants
In connection with the Series D preferred stock offering in 1997, the
Company issued to a consultant warrants to purchase 20,000 shares of Series D
preferred stock at $12.50 per share in exchange for services related to this
transaction. Such warrants may be exercised at any time prior to the earlier of
September 2002 or the closing of an underwritten public offering of common
stock under the Securities Act of 1933, but not thereafter. The aggregate fair
value of these warrants at their grant date was determined by management to be
$100,000 and was recorded as issuance costs. The fair value of the warrants was
determined using the Black-Scholes option pricing model with the following
assumptions: 5 year contractual life, 6.00% risk-free interest rate, 40%
expected volatility, and 0% expected dividend yield.
In connection with the Series E preferred stock offering in 1999, the
Company issued to the Series E investors warrants to purchase 402,916 shares of
Series E preferred stock at $13.00 per share. Such warrants may be exercised at
any time prior to the earlier of five years from the issue date or the closing
of an underwritten public offering of common stock under the Securities Act of
1933, but not thereafter. The
F-15
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
proceeds from the sale of the Series E preferred stock were allocated between
the preferred stock and the warrants based on their relative fair values. The
separate fair value of the warrants was determined by management using the
Black-Scholes option pricing model with the following assumptions: 5 year
contractual life, 5.50% risk-free interest rate, 40% expected volatility, and
0% expected dividend yield. The Series E preferred stock is being accreted to
its redemption value of $10,176,000 over a period of five years.
7. Stock-Based Compensation
Under the 2000 Equity Incentive Plan (the "Plan"), 1,600,000 shares of the
Company's common stock are reserved for issuance pursuant to stock options. In
October 2000, the board of directors increased the number of shares reserved
for issuance under the Plan to 2,400,000 shares. Incentive stock options may be
granted to employees, while nonstatutory stock options may be granted to
employees, directors, and consultants to the Company. The Plan is administered
by the board of directors and provides generally that, for incentive stock
options, the exercise price must not be less than the fair value of the
Company's common stock at the date of grant and, for nonstatutory stock
options, the exercise price must not be less than 85% of the fair value of the
Company's common stock at the date of grant. Options granted under the Plan
generally vest ratably over four years and are exercisable for a period of ten
years from the date of the grant.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Range of Weighted-
Nunber of Exercise Average
Options Prices Exercise Prices
--------- ------------ ---------------
<S> <C> <C> <C>
Balance at December 31,
1996..................... 115,000 $0.20 $0.20
Granted................. 448,900 $0.20--$0.50 $0.41
Canceled/forfeited...... (7,400) $0.20--$0.50 $0.26
---------
Balance at December 31,
1997..................... 556,500 $0.20--$0.50 $0.37
Granted................. 274,500 $3.75--$4.38 $4.09
Exercised............... (22,126) $0.20 $0.20
Canceled/forfeited...... (58,074) $0.20--$4.38 $1.34
---------
Balance at December 31,
1998..................... 750,800 $0.20--$4.38 $1.66
Granted................. 760,660 $4.38 $4.38
Exercised............... (10,668) $0.20--$4.38 $0.55
Canceled/forfeited...... (236,382) $0.20--$4.38 $1.47
---------
Balance at December 31,
1999..................... 1,264,410 $0.20--$4.38 $3.34
Granted ................ 315,000 $4.38 $4.38
Exercised .............. (41,126) $0.20--$0.50 $0.21
Canceled/forfeited ..... (105,218) $0.20--$4.38 $4.09
---------
Balance at June 30, 2000
(unaudited) ............. 1,433,066 $0.20--$4.38 $3.60
=========
</TABLE>
F-16
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes information concerning outstanding and exercisable
options as of December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
-------------------------------------------- -----------
Weighted-
Average
Exercise Number Remaining Number
Prices Outstanding Life (Years) Exercisable
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.20 177,000 7.06 124,376
$0.50 127,650 7.90 113,700
$3.75 120,000 8.04 47,500
$4.38 839,760 9.57 92,100
--------- ---- -------
1,264,410 8.90 377,676
========= ==== =======
</TABLE>
The following table summarizes information about the number of options and
the weighted-average exercise price of options exercisable at December 31,
1997, 1998, and 1999:
<TABLE>
<CAPTION>
For the Years
Ended December 31,
-------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Options exercisable.................................. 59,876 147,636 377,676
Weighted-average exercise price...................... $ 0.23 $ 1.12 $ 1.76
</TABLE>
Had compensation expense for the employee and director stock options been
determined based on the fair value of the options at the grant date, net loss
and net loss per share would have been as follows:
<TABLE>
<CAPTION>
For the Years
Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders (in
thousands)
As reported.................................... $(5,241) $(11,585) $(10,186)
Pro forma...................................... (5,245) (11,638) (10,335)
Net loss per share (diluted)
As reported.................................... $ (5.83) $ (11.36) $ (9.59)
Pro forma...................................... (5.83) (11.41) (9.73)
</TABLE>
The weighted-average grant-date fair value per share of options granted
during 1997, 1998, and 1999 was as follows:
<TABLE>
<CAPTION>
For the Years
Ended December 31,
------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Exercise price equal to fair value of common stock on the
grant date:
Weighted-average exercise price.......................... $ -- $8.75 $ --
Weighted-average option fair value....................... -- 2.04 --
Exercise price less than fair value of common stock on the
grant date:
Weighted-average exercise price.......................... $0.82 $7.50 $ 8.75
Weighted-average option fair value....................... 5.14 3.00 10.59
</TABLE>
F-17
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of the options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected life..................................... 5 years 5 years 5 years
Risk-free interest rate........................... 6.11% 5.32% 5.69%
Expected volatility............................... 0.00% 0.00% 0.00%
Expected dividend yield........................... 0.00% 0.00% 0.00%
</TABLE>
The volatility of the Company's common stock underlying the options was not
considered because the Company's stock was not publicly traded as of December
31, 1999.
8. Income Taxes
No current income tax provision was recorded during 1997, 1998 or 1999 due
to cumulative net losses of the Company.
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
For the Years
Ended December
31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 7,323 $ 10,222
Research and development credit carryforwards............ 429 506
Research expenses capitalized for California purposes.... 304 322
Accrued liabilities and other............................ 212 430
Nonqualified stock options............................... 15 84
------- --------
8,283 11,564
Valuation allowance...................................... (8,283) (11,564)
------- --------
$ -- $ --
======= ========
</TABLE>
Based upon the lack of prior earnings history of the Company and based upon
other available evidence, management recorded a full valuation allowance for
deferred tax assets as it is more likely than not that such assets will not be
realized.
The reconciliation of the income tax benefit computed by applying the
statutory federal income tax rate (34%) to loss before income taxes to the
Company's actual income tax benefit is as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Benefit amount computed at statutory federal
rate........................................... $ 1,782 $ 3,939 $ 3,349
State income tax benefit, net of federal
effect......................................... 345 428 319
Stock-based compensation related to incentive
stock options.................................. (89) (235) (330)
Federal research and development tax credit..... 72 77 37
Other........................................... 0 0 (79)
Permanent differences........................... (4) (16) (15)
Change in valuation allowance................... (2,106) (4,193) (3,281)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-18
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $27,800,000 and $13,733,000 respectively,
which amounts expire beginning in 2008 and 2000, respectively. The difference
between the federal and California tax loss carryforwards is attributable to
the capitalization of research and development expenses for California tax
purposes. The Company also has federal and California research and development
tax credit carryforwards of approximately $325,000 and $281,000 respectively,
which begin expiring in 2008.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of
the Company's net operating loss and credit carryforwards may be limited due to
changes in the Company's stock ownership of more than 50%. As a result of
certain changes in the Company's stock ownership which occurred during 1999 and
prior years, portions of the above described carryforwards may be subject to
annual income offset limitations on a prospective basis.
9. Related Party Transactions
During 1998, the Company signed an agreement with its then President and
Chief Executive Officer outlining terms and conditions of his employment. Upon
initiation of his employment, he received a loan in the amount of $150,000
bearing an annual interest rate of 6%. The agreement stipulated that the loan
would be forgiven over a three year period provided he was still employed by
the Company. This individual was terminated in 1999; the entire amount of the
loan was written off in 1999.
A director of the Company acted as a consultant to the Company and received
an aggregate of $80,000 for his consulting services in 1998.
10. Commitments
Leases
In December 1998, the Company entered into a lease agreement for its new
corporate offices under a noncancelable operating lease agreement which expires
in December 2003. The Company has an option to extend the lease for an
additional five years. Rent expense under noncancelable operating leases, which
is recorded ratably over the lease term, was $112,000, $213,000, and $496,000
for the years ended December 31 1997, 1998 and 1999, respectively, and $233,000
and $244,000 for the six months ended June 30, 1999 and 2000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ending December 31,
---------------------------------
<S> <C>
2000............................................................ $ 493
2001............................................................ 513
2002............................................................ 533
2003............................................................ 554
------
$2,093
======
</TABLE>
Licensing Agreement
During 1997, the Company entered into a licensing agreement with a
pharmaceutical company under which it obtained a non-exclusive license to
technology. The Company is required to make royalty payments ranging from the
lower of (1) from 4% to 7% of sales dollars or (2) from $.05 to $.12 per unit
of fructosamine products sold, as defined in the agreement. The Company
incurred royalty expense of $23,000 and $28,000 under this agreement during the
years ended December 31, 1998 and 1999, respectively, and $16,000 and $16,000
during the six months ended June 30, 1999 and 2000, respectively. This expense
is included in cost of goods sold.
F-19
<PAGE>
LXN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Employee Benefit Plan
In 1998, the Company established a voluntary deferred compensation plan
under Section 401(k) of the Internal Revenue Code. Eligible participants may
contribute portions of their salaries to the plan subject to IRS limits.
Company matching contributions are made on a discretionary basis, and vest
ratably over three years. The Company made contributions of $9,000 and $15,000
during the years ended December 31, 1998 and 1999, respectively, and $11,000
and $7,000 during the six months ended June 30, 1999 and 2000, respectively.
12. Technology License Agreement
The Company has granted a third party a non-exclusive, worldwide license to
manufacture, distribute, market and sell certain technology developed by the
Company. The Company received $100,000 upon the commencement of the agreement.
The agreement calls for royalty payments to be made to the Company based on a
percentage of net revenues on the licensed technology sold by the third party.
The Company is guaranteed minimum royalties of $200,000 each year through 2004.
The Company records revenue, classified as other income, when due as there is
no future involvement or obligation due on the part of the Company. The
agreement expires in 2008.
13. Subsequent Financing
In August and September 2000, the Company entered into convertible
promissory notes with an aggregate principal amount of $2,500,000. The notes
provided for interest payments at 8% per annum. In addition, the holders of the
notes received warrants to purchase 17,861 shares of Series F preferred stock
at a purchase price of $14 per share. The fair value of the warrants on the
date of issuance was estimated by management to be $379,000 and was recorded as
debt issuance costs and amortized to interest expense over the life of the
notes. The fair value was estimated using the Black-Scholes option pricing
model with the following assumptions: 5 year contractual life, 5.85% risk-free
interest rate, 60% expected volatility, and 0% expected dividend yield.
In October 2000, the Company issued 178,569 shares of Series F redeemable
convertible preferred stock at a price of $14 per share for total gross
proceeds of $2,500,000. Upon the completion of the Series F preferred stock
financing, the outstanding convertible promissory notes and unpaid accrued
interest thereon automatically converted into 180,230 shares of Series F
preferred stock. The holders of Series F preferred stock have rights and
privileges identical to those of the holders of Series E preferred stock as
disclosed in Note 6. The Company will record a charge for the beneficial
conversion feature embedded in these securities in October 2000. The value of
the beneficial conversion feature was measured using its intrinsic value, i.e.,
the excess of the aggregate fair value of the common stock into which the
Series F preferred stock is convertible over the proceeds allocated to the
security. The intrinsic value of the beneficial conversion feature of
approximately $5.8 million exceeded the proceeds allocated to the Series F
preferred stock of approximately $4.6 million; therefore, the Company limited
recognition of the beneficial conversion feature to the approximately $4.6
million proceeds allocated to the Series F preferred stock. The Company
accreted the entire amount of the beneficial conversion feature at the date of
issuance because the Series F preferred stock is immediately convertible.
F-20
<PAGE>
[Patients can assess their overall control with GlucoProtein testing.]
[Real time qualitative interpretation of overall glucose control.]
[2 test system that measures GlucoProtein and glucose.]
[PHOTOGRAPH OF AN "IN CHARGE" MONITOR WITH ARROWS POINTING TO VARIOUS FACETS
OF ITS DISPLAY WINDOW APPEARS HERE]
[Rapid quantitative results for patient compliance.]
[Date & Time]
[Memory feature stores 200 glucose and 50 GlucoProtein results. Includes date
& time stamp as well as qualitative analysis of GlucoProtein results.]
[PHOTOGRAPH OF IN CHARGE MONITOR, TEST STRIPS AND RELATED PRODUCTS AS SOLD TO
CONSUMERS]
[The In Charge Diabetes Control System Kit]
["IN CHARGE" LOGO APPEARS HERE]
[The first monitor to offer glucose and GlucoProtein testing in one simple to
use meter for patient self testing.]
["DUET" LOGO APPEARS HERE]
[The first system designed for the health care professional that performs both
Glucose and GlucoProtein testing allowing physicians to modify treatment
regimens during patient visits.]
["EXPRESSVIEW" LOGO APPEARS HERE]
[The ExpressView Glucose Monitor is among the world's fastest, providing
reliable results in as little as 5 seconds.]
<PAGE>
[LXN CORPORATION LOGO]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 16, 2000
[LXN CORPORATION LOGO]
Shares
Common Stock
LXN Corporation is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We have applied for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "LXNC." We anticipate that the initial public
offering price will be between $ and $ per share.
--------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 9.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds to LXN Corporation..................................... $ $
</TABLE>
The United States Securities and Exchange Commission has not approved or
disapproved these securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
LXN Corporation has granted the underwriters a 30-day option to purchase up
to an additional shares of common stock to cover over-allotments.
--------------
Robertson Stephens International
Prudential-Bache International
Dain Rauscher Wessels
The date of this prospectus is , 2000.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount To
Be Paid
----------
<S> <C>
Registration fee.................................................... $
NASD fee............................................................
Nasdaq National Market listing fee..................................
Printing and engraving..............................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Blue sky fees and expenses..........................................
Transfer agent fees miscellaneous...................................
Total............................................................. $1,500,000
</TABLE>
Item 14. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, we have broad
powers to indemnify our directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act.
The underwriting agreements the form of which is filed as Exhibit 1.1 to
this registration statement, provides for the indemnification of our officers
and directors, for certain liabilities arising under the Securities Act, the
Securities Exchange Act or otherwise.
We maintain director's and officer's insurance providing indemnification for
our directors and certain of our officers.
We have also entered into indemnification agreement with our officers and
directors. Our bylaws include indemnification provisions covering our directors
and executive officers.
Item 15. Recent Sales of Unregistered Securities
Since August 30, 1997, we have sold and issued the following unregistered
securities:
1. On August 30, 1997, we issued a warrant to purchase an aggregate of
20,000 shares of our Series D Preferred Stock to one accredited investor.
2. Between September 5, 1997 and January 30, 1998, we sold an aggregate
of 1,258,260 shares of our Series D Preferred Stock for an aggregate
purchase price of $15,728,250 to 41 accredited investors.
3. On March 8, 1999, we sold an aggregate of 782,750 shares of our
Series E Preferred Stock and warrants to purchase 402,916 shares of our
Series E Preferred Stock for an aggregate purchase price of $10,175,750 to
18 accredited investors.
4. Between August 28, 2000 and September 3, 2000 we issued two
Convertible Promissory Notes in an aggregate principal amount of $2,500,000
to two accredited investors.
5. On October 11, 2000, we issued a warrant to purchase a variable
number of shares of our Common Stock to one accredited investor.
II-1
<PAGE>
6. Between March and October, 2000 we issued two warrants to purchase a
total of 11,384 shares of our Common Stock to one accredited investor.
7. On October 16, 2000, we sold an aggregate of 358,799 shares of our
Series F Preferred Stock and warrants to purchase 17,861 shares of our
Series F Preferred Stock for an aggregate purchase price of $5,023,186 to
13 accredited investors.
8. As of October 16, 2000, we have granted options to purchase an
aggregate of 1,682,060 shares of our Common Stock, including options
subsequently cancelled that then became available for new option grants, to
directors, employees and consultants under our 2000 Equity Incentive Plan.
The exercise price for such options ranges from $0.20 to $4.38 per share.
As of October 16, 2000, we have issued an aggregate of 73,920 shares of its
Common Stock upon the exercise of stock options under our 2000 Equity
Incentive Plan.
Each outstanding share of our Preferred Stock will convert, upon the closing
of this offering, into two shares of our Common Stock. The offers, sales and
issuances of these securities were deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, and/or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions under compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through employment or other relationships, to information
about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
3.1 Registrant's Amended and Restated Certificate of Incorporation, as currently in
effect
3.2 Form of Registrant's Amended and Restated Certificate of Incorporation, to be
filed and become effective prior to the closing of this offering
3.3 Form of Registrant's Amended and Restated Certificate of Incorporation, to be
filed and become effective after the closing of this offering
3.4 Registrant's Restated Bylaws, as currently in effect
3.5 Form of Registrant's Amended and Restated Bylaws, to be effective upon the
closing of this offering
4.1 Sixth Amended and Restated Registration Rights Agreement dated October 16, 2000,
as amended, by and among the Registrant and the investors named therein
4.2 Form of common stock certificate of Registrant(1)
4.3 Form of Warrant to purchase Common Stock
4.4 Form of Warrant to purchase Common Stock
4.5 Form of Warrant to purchase Series F Preferred Stock
5.1 Opinion of Cooley Godward LLP(1)
10.1 Form of Indemnification Agreement for directors and officers
10.2 2000 Equity Incentive Plan and forms of agreements thereunder
10.3 2000 Employee Stock Purchase Plan and forms of agreements thereunder
10.4 Letter Agreement, dated November 1, 1997, between the Registrant and John Burd
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.5 Licensing Agreement, dated November 24, 1998, between the Registrant and
Chronimed Inc.+
10.6 Licensing Agreement, dated August 17, 1994, between the Registrant and Bayer AG
(formerly known as Miles Inc.)+
10.7 Service Agreement, dated December 1, 1998, between the Registrant and ACCESS
Sales and Marketing LLC+
10.8 Development and Supply Agreement, dated January 16, 1998, between the Registrant
and LRE Technology Partner GmbH(1)
10.9 Distributorship Agreement, dated August 20, 1999, between the Registrant and PSS
World Medical+
10.10 Distribution Agreement, dated January 12, 2000, between the Registrant and Poly
Medical Corporation/Liberty Medical Supply+
10.11 Distribution Agreement, dated April 20, 2000, between the Registrant and GEM
Edwards Wholesale+
10.12 First Amendment to Credit Agreement and Promissory Note and Security Agreement,
each dated March 22, 1999, between the Registrant and Imperial Bank and Second
Amendment thereto dated October 5, 2000
10.13 Industrial Real Estate Lease, dated June 1, 1998, between the Registrant and
Steve and Barbara Keeling, as amended
10.14 Executive Severance Benefits Agreement between Registrant and Michael Beeuwsaert
dated October 11, 2000
23.1 Consent of Independent Accountants
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1)(1)
24.1 Power of Attorney (see page II-6)
27.1 Financial Data Schedule (available in EDGAR format only)
</TABLE>
--------
(1) To be filed by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) Financial Statement Schedule
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of LXN pursuant
to provisions described in Item 14 or otherwise, we have been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or
controlling person
II-3
<PAGE>
of LXN in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the registration
statement 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.
(2) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof
II-4
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933, the Registrant has duly caused this
registration statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on this 16th day of October, 2000.
LXN CORPORATION
/s/ Michael A. Beeuwsaert
By: _________________________________
Michael A. Beeuwsaert
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael Beeuwsaert, David Kelemen, Jr. and
Annette Choi, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments, exhibits thereto and other
documents in connection therewith) to this registration statement and any
subsequent registration statement filed by the registrant pursuant to Rule
462(b) of the Securities Act of 1933, as amended, which relates to this
registration statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Michael A. Beeuwsaert President, Chief October 16, 2000
______________________________________ Executive Officer, and
Michael Beeuwsaert Director (Principal
Executive Officer)
/s/ George Pache Vice President, Finance October 16, 2000
______________________________________ and Chief Financial
George Pache Officer (Principal
Financial and
Accounting Officer)
/s/ John Burd Chairman of the Board October 16, 2000
______________________________________
John Burd
/s/ Gary Stroy Director October 16, 2000
______________________________________
Gary Stroy
/s/ Clint Severson Director October 16, 2000
______________________________________
Clint Severson
/s/ Charles Hsu Director October 16, 2000
______________________________________
Charles Hsu
/s/ Nancy Katz Director October 16, 2000
______________________________________
Nancy Katz
/s/ Ansbert Gadicke Director October 16, 2000
______________________________________
Ansbert Gadicke
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
3.1 Registrant's Amended and Restated Certificate of Incorporation, as currently in
effect
3.2 Form of Registrant's Amended and Restated Certificate of Incorporation, to be
filed and become effective prior to the closing of this offering
3.3 Form of Registrant's Amended and Restated Certificate of Incorporation, to be
filed and become effective after the closing of this offering
3.4 Registrant's Restated Bylaws, as currently in effect
3.5 Form of Registrant's Amended and Restated Bylaws, to be effective upon the
closing of this offering
4.1 Sixth Amended and Restated Registration Rights Agreement dated October 16, 2000,
as amended, by and among the Registrant and the investors named therein
4.2 Form of common stock certificate of Registrant(1)
4.3 Form of Warrant to purchase Common Stock
4.4 Form of Warrant to purchase Common Stock
4.5 Form of Warrant to purchase Series F Preferred Stock
5.1 Opinion of Cooley Godward LLP(1)
10.1 Form of Indemnification Agreement for directors and officers
10.2 2000 Equity Incentive Plan and forms of agreements thereunder
10.3 2000 Employee Stock Purchase Plan and forms of agreements thereunder
10.4 Letter Agreement, dated November 1, 1997, between the Registrant and John Burd
10.5 Licensing Agreement, dated November 24, 1998, between the Registrant and
Chronimed Inc.+
10.6 Licensing Agreement, dated August 17, 1994, between the Registrant and Bayer AG
(formerly known as Miles Inc.)+
10.7 Service Agreement, dated December 1, 1998, between the Registrant and ACCESS
Sales and Marketing LLC+
10.8 Development and Supply Agreement, dated January 16, 1998, between the Registrant
and LRE Technology Partner GmbH(1)
10.9 Distributorship Agreement, dated August 20, 1999, between the Registrant and PSS
World Medical+
10.10 Distribution Agreement, dated January 12, 2000, between the Registrant and Poly
Medical Corporation/Liberty Medical Supply+
10.11 Distribution Agreement, dated April 20, 2000, between the Registrant and GEM
Edwards Wholesale+
10.12 First Amendment to Credit Agreement and Promissory Note and Security Agreement,
each dated March 22, 1999, between the Registrant and Imperial Bank and Second
Amendment thereto dated October 5, 2000
10.13 Industrial Real Estate Lease, dated June 1, 1998, between the Registrant and
Steve and Barbara Keeling, as amended
10.14 Executive Severance Benefits Agreement between Registrant and Michael Beeuwsaert
dated October 11, 2000
23.1 Consent of Independent Accountants
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1)(1)
24.1 Power of Attorney (see page II-6)
27.1 Financial Data Schedule (available in EDGAR format only)
</TABLE>
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(1) To be filed by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
