.
.
.
EXHIBIT 99.1
VARIAGENICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants 2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and 2002 3
Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002 4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2000, 2001 and 2002 5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002 6
Notes to Consolidated Financial Statements 7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Variagenics, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Variagenics, Inc. and its subsidiary at December 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 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 our opinion.
As described in Note 1, as of January 31, 2003, the Company was merged into
another company and has ceased its existence.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 2, 2003
VARIAGENICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 25,142 $ 27,622
Short-term marketable securities 47,776 28,048
Assets held for sale -- 70
Prepaid expenses and other current assets 2,225 1,088
--------- ---------
Total current assets 75,143 56,828
Restricted cash 750 750
Property and equipment, net 7,785 5,330
Long-term marketable securities 7,111 --
Other assets 143 109
--------- ---------
Total assets $ 90,932 $ 63,017
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,566 $ 1,948
Accrued expenses and other liabilities 2,081 1,796
Deferred revenue 229 258
Capital lease obligations, current portion 1,558 1,936
--------- ---------
Total current liabilities 5,434 5,938
Capital lease obligations, long-term portion 2,515 1,327
--------- ---------
Total liabilities 7,949 7,265
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000 shares authorized,
none issued and outstanding
Common stock, $.01 par value; 70,000 shares authorized, 23,371
and 24,156 shares issued and outstanding 234 242
Additional paid-in capital 171,035 169,942
Accumulated deficit (77,998) (111,761)
Promissory note (110) (121)
Deferred compensation (10,178) (2,544)
Treasury Stock -- (6)
--------- ---------
Total stockholders' equity 82,983 55,752
--------- ---------
Total liabilities and stockholders' equity $ 90,932 $ 63,017
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
VARIAGENICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 2001 2002
---- ---- ----
Revenue:
Research and development collaborations $ 2,254 $ 2,773 $ 980
Product sales -- 210 450
-------- -------- --------
Total revenue 2,254 2,983 1,430
-------- -------- --------
Costs and expenses:
Cost of product sales -- 186 236
Research and development:
Non-cash equity compensation 2,950 2,926 2,692
All other research and development expenses 8,886 16,942 18,366
-------- -------- --------
Total research and development expenses 11,836 19,868 21,058
-------- -------- --------
General and administrative:
Non-cash equity compensation 5,616 3,876 3,300
All other general and administrative expenses 5,723 8,573 8,506
-------- -------- --------
Total general and administrative expenses 11,339 12,449 11,806
-------- -------- --------
Restructure and related charges -- -- 3,228
-------- -------- --------
Loss from operations (20,921) (29,520) (34,898)
Other income (expense):
Interest income 3,362 4,465 1,471
Interest expense (241) (248) (336)
-------- -------- --------
Net loss $(17,800) $(25,303) $(33,763)
======== ======== ========
Dividends on redeemable convertible preferred stock (22,106) -- --
-------- -------- --------
Net loss attributable to common stockholders $(39,906) $(25,303) $(33,763)
======== ======== ========
Net loss attributable to common stockholders per share (basic and diluted) $ (3.69) $ (1.09) $ (1.42)
Weighted average common shares outstanding (basic and diluted) 10,816 23,295 23,798
The accompanying notes are an integral part of these consolidated
financial statements.
4
VARIAGENICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
(IN THOUSANDS)
COMMON STOCK
------------ ADDITIONAL
PAID-IN TREASURY
PAR ------- ACCUMULATED PROMISSORY DEFERRED --------
SHARES VALUE CAPITAL DEFICIT NOTE COMPENSATION STOCK TOTAL
------ ----- ------- ------- ---- ------------ ----- -----
Balance at December 31, 1999 750 $ 8 $ 18,822 $ (34,895) $-- $ (6,325) $-- $ (22,390)
Issuance of common stock 538 5 1,458 -- -- -- -- 1,463
Issuance of common stock in
Initial Public Offering 5,750 58 73,001 -- -- -- -- 73,059
Issuance of common stock in
private placement 536 5 7,211 -- -- -- -- 7,216
Issuance of warrants -- -- 500 -- -- -- -- 500
Conversion of redeemable
convertible preferred stock
to common stock 15,542 155 52,714 -- -- -- -- 52,869
Accretion of issuance costs for
redeemable preferred stock -- -- (95) -- -- -- -- (95)
Dividend on redeemable
preferred stock -- -- (2,106) -- -- -- -- (2,106)
Proceeds from redeemable
preferred stock allocated to
beneficial conversion feature -- -- 19,905 -- -- -- -- 19,905
Dividend on redeemable
preferred stock attributable
to beneficial conversion
feature -- -- (19,905) -- -- -- -- (19,905)
Deferred compensation resulting
from the grant of options -- -- 19,626 -- -- (19,626) -- --
Compensation expense related to
stock options -- -- 1,626 -- -- 6,940 -- 8,566
Net loss for the year ended
December 31, 2000 -- -- -- (17,800) -- -- -- (17,800)
------ ---- --------- --------- ----- -------- --- ---------
Balance at December 31, 2000 23,116 231 172,757 (52,695) -- (19,011) -- 101,282
Issuance of common stock from
stock option exercises and
employee stock purchase plan 255 3 309 -- -- -- -- 312
Deferred compensation resulting
from the grant of options -- -- 517 -- -- (145) -- 372
Compensation expense related to
stock options -- -- (2,548) -- -- 8,978 -- 6,430
Promissory note from scientific
advisor -- -- -- -- (110) -- -- (110)
Net loss for the year ended
December 31, 2001 -- -- -- (25,303) -- -- -- (25,303)
------ ---- --------- --------- ----- -------- --- ---------
Balance at December 31, 2001 23,371 234 171,035 (77,998) (110) (10,178) -- 82,983
Issuance of common stock from
stock option exercises and
employee stock purchase plan 787 8 549 -- -- -- -- 557
Compensation expense related to
stock options -- -- (1,642) -- -- 7,634 -- 5,992
Promissory note from scientific
advisor -- -- -- -- (11) -- -- (11)
Purchase of treasury stock (2) -- -- -- -- -- (6) (6)
Net loss for the year ended
December 31, 2002 -- -- -- (33,763) -- -- -- (33,763)
------ ---- --------- --------- ----- -------- --- ---------
Balance at December 31, 2002 24,156 $242 $ 169,942 $(111,761) $(121) $ (2,544) $(6) $ 55,752
====== ==== ========= ========= ===== ======== === =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
VARIAGENICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2000 2001 2002
---- ---- ----
OPERATING ACTIVITIES:
Net loss $ (17,800) $(25,303) $(33,763)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 1,062 1,836 1,950
Non-cash compensation expense 8,566 6,802 5,992
Impairment of assets held for sale -- -- 2,155
Common stock issued for license agreement 428 -- --
Amortization of premium and accretion of discount on marketable securities (188) (876) 90
Changes in assets and liabilities:
Prepaid expenses and other current assets (1,106) (975) 1,059
Other assets (5) -- --
Accounts payable 265 986 382
Accrued expenses 291 1,050 (285)
Deferred revenue 2,070 (1,383) 29
--------- -------- --------
Net cash used for operating activities (6,417) (17,863) (22,391)
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of marketable securities (51,020) (69,204) (42,034)
Maturity of marketable securities 5,000 63,872 68,783
Acquisition of property and equipment (1,015) (2,257) (1,647)
Proceeds from sale/leaseback of equipment -- 1,159 904
Proceeds from sale of equipment -- -- 16
Proceeds from sale of assets held for sale -- -- 23
Investment in affiliate -- (100) --
--------- -------- --------
Net cash provided by (used for) investing activities (47,035) (6,530) 26,045
--------- -------- --------
FINANCING ACTIVITIES:
Proceeds from public offering of common stock 73,059 -- --
Proceeds from private placement of common stock 7,216 -- --
Proceeds from issuance of preferred stock 19,905 -- --
Proceeds from exercise of warrants 2,570 -- --
Proceeds from exercise of stock options and employee stock purchase plan 135 312 557
Repayment of capital lease obligations (735) (1,234) (1,714)
Repayment of line of credit (209) -- --
Promissory note from scientific advisor -- (110) (11)
Acquisition of treasury stock -- -- (6)
Release of restricted cash for facility lease -- 250 --
--------- -------- --------
Net cash provided by (used for) financing activities 101,941 (782) (1,174)
--------- -------- --------
Increase (decrease) in cash and cash equivalents 48,489 (25,175) 2,480
Cash and cash equivalents at beginning of year 1,828 50,317 25,142
--------- -------- --------
Cash and cash equivalents at end of year $ 50,317 $ 25,142 $ 27,622
========= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
VARIAGENICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Variagenics, Inc. (the "Company") was incorporated in Delaware on
December 7, 1992. The Company was originally formed to develop a pharmacogenomic
approach to cancer therapy. The Company has broadened that focus to discover
genetic variations characterized by SNPs and other genetic differences. The
Company will use this information to optimize drugs in development, develop new
drug targets and bring diagnostic products to market. The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
Variagenics Securities Corporation. All intercompany balances and transactions
have been eliminated.
The accompanying consolidated financial statements have been prepared
on a basis that contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has
generated minimal revenues and has an accumulated deficit of $111.8 million at
December 31, 2002.
The Company is subject to risks common to companies in the industry
including, but not limited to, uncertainty of product development and
commercialization, lack of marketing and sales history, dependence on key
personnel, market acceptance of products, product liability, protection of
proprietary technology, ability to raise additional financing, and compliance
with FDA and other governmental regulations.
As of the close of business on January 31, 2003, the Company was
merged into Hyseq Pharmaceuticals, Inc. ("Hyseq") through a reverse triangular,
stock-for-stock merger. Subsequently, Hyseq changed its legal name to Nuvelo,
Inc. ("Nuvelo"). As a result of the merger, the Company ceased to exist, and
each share of the Company's common stock was exchanged for 1.6451 shares of
Nuvelo, at an approximate purchase price of $48.6 million net of estimated
transaction costs including severance and benefits for employees terminated as
part of the merger plan.
Following the merger, Nuvelo conducted a careful review of all assets
and programs at both Hyseq and the Company. In February 2003, Nuvelo announced a
continued strategic focus dedicated to the discovery and development of novel
biotherapeutics. As part of this plan, Nuvelo will dedicate its resources to
advancing its most promising biopharmaceutical discovery and development
programs. Nuvelo also intends to out-license or partner its immunotherapeutics
portfolio and monetize non-core assets including its microarray business,
pharmacogenomic technology and molecular diagnostic programs, to further support
its biopharmaceutical development programs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant estimates in these
consolidated financial statements include useful lives for depreciation and
amortization and contract revenues and related costs used in estimates to
complete under percentage of completion accounting. Actual results could differ
from those estimates.
7
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid marketable securities purchased
with an initial maturity of three months or less to be cash equivalents.
Investment securities with original maturities of greater than three months and
that mature within 12 months from the balance sheet date are classified as
short-term marketable securities. Investment securities maturing in excess of
one year from the balance sheet date are treated as long-term marketable
securities. The Company's investment policy is to purchase securities with
maturities of no greater than 18 months at the time of purchase. All short- and
long-term marketable securities are classified as held-to-maturity in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" because the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. The Company
maintains all of its marketable securities with three high-quality financial
institutions that serve as the Company's cash managers and investment advisors.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated, once
placed in service, using the straight-line method over their estimated useful
lives. Leasehold improvements are amortized using the straight-line method over
the shorter of the life of the improvement or the remaining term of the lease.
Purchased software is capitalized at cost and amortized over the
estimated useful life, generally three years. Internally developed software is
accounted for in accordance with Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use".
Under the provisions of SOP 98-1, Variagenics capitalizes costs of internally
developed software after the preliminary project stage has been completed. Costs
eligible for capitalization have not been significant. Therefore, the Company
has not capitalized any internal software development costs.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment by comparing the
cumulative undiscounted cash flows for groups of assets for which there are
identifiable cash flows independent of the cash flows of other groups of assets
with their carrying amount. Impairment is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Quoted market
prices, if available, are used as the basis for the measurement. If quoted
market prices are not available, the estimate of fair value is based on the best
information available in the circumstances. Any writedowns are treated as
permanent reductions in the carrying amount of the assets. Management's policy
regarding long-lived assets is to evaluate the recoverability of its assets when
the facts and circumstances suggest that these assets may be impaired. This
analysis relies on a number of factors, including operating results, business
plans, budgets, economic projections and changes in management's strategic
direction or market emphasis.
REVENUE RECOGNITION
The Company generates revenue from collaborations, license fees and,
beginning in the first quarter of 2001, product sales.
The Company accounts for revenue from collaborations in accordance with
SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Revenue is recognized when the following criteria have been met:
1. Persuasive evidence of an arrangement exists
2. Delivery has occurred and risk of loss has passed
8
3. The seller's price to the buyer is fixed or determinable
4. Collectibility is reasonably assured
Payments received for research and development services performed by
the Company are recognized as revenue over the development period as the related
services are performed.
License fee, milestone and royalty revenues are generated through
agreements with third parties that plan to develop and sell products based on
Variagenics' technology. The Company records license fee revenues when the
earnings process has been completed and there are no ongoing performance
obligations. The Company records milestone revenues when the associated earnings
process is complete and, to the extent the milestone amount relates to the
Company's performance obligation, when the customer confirms that the Company
has met the requirements under the terms of the agreement and when payment is
reasonably assured. The Company records royalty revenues when they can be
reliably estimated and collectibility is reasonably assured..
Revenue from product sales is generally recognized upon the Company's
receipt of the customer's signed acceptance of the installed product.
Payments received in advance of being earned are recorded as deferred
revenue.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to its employees using the
intrinsic value based method as prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company has adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," for disclosure only (Note 9). The
SFAS No. 123 disclosures include pro forma net income and earnings per share as
if the fair value-based method of accounting had been used.
Had compensation cost been determined based on the fair value at the
date of grant consistent with the method prescribed by SFAS No. 123, the
Company's pro forma net loss attributable to common stockholders per share for
the years ended December 31, 2000, 2001 and 2002 would have been as follows (in
thousands except per share data):
2000 2001 2002
---- ---- ----
Net loss attributable to common stockholders $(39,906) $(25,303) $(33,763)
Add: employee stock-based compensation
expense included in reported net loss 8,566 6,802 5,992
Deduct: total employee stock-based
compensation expense determined under fair (9,549) (9,378) (8,476)
value-based method for all awards
-------- -------- --------
Pro forma net loss attributable to common $(40,889) $(27,879) $(36,247)
stockholders
======== ======== ========
Reported net loss attributable to common
stockholders per share basic and diluted $(3.69) $(1.09) $(1.42)
9
Pro forma net loss attributable to common
stockholders per share basic and diluted $(3.78) $(1.20) $(1.52)
The fair value of options granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
2000 2000 2001 2002
---- ---- ---- ----
(pre-IPO (post-IPO
grants) grants)
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 0% 100% 100% 100%
Risk-free interest rate 6.2% 6.2% 4.6% 3.8%
Expected option term in years 5 5 5 5
Because options vest over several years, additional option grants are
expected to be made in the future and the determination of fair value of option
grants made after the Company's initial public offering has included a
volatility factor, the pro forma effects of applying the fair value method are
not representative of future pro forma results.
All stock-based awards to non-employees are accounted for in accordance
with SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A deferred tax asset is established for
the expected future benefit of net operating loss and credit carryforwards. A
valuation reserve against net deferred tax assets is required if, based upon
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
BUSINESS SEGMENTS
The Company operates as a single business segment as defined in SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
NET LOSS PER SHARE
Net loss per share is computed under SFAS No. 128 "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding, excluding unvested restricted stock. Diluted net
loss per share does not differ from basic net loss per share since potential
common shares are anti-dilutive for all periods presented and, therefore, are
excluded from the calculation of diluted net loss per share.
10
The following potentially dilutive common shares were excluded from the
calculation of net loss per share because their effect was anti-dilutive (in
thousands):
AS OF DECEMBER 31,
------------------
2000 2001 2002
---- ---- ----
Stock options 2,907 3,743 2,883
Warrants 1,311 1,277 1,270
Employee stock purchase plan 12 19 25
Comprehensive loss is equal to net loss for all years presented.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized at its
fair market value when the liability is incurred, rather than at the date of an
entity's commitment to an exit plan. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, FASB Emerging Issues Task Force reached consensus
with respect to Issue 00-21 ( EITF 00-21 ), Accounting for Revenue Arrangements
with Multiple Deliverables. EITF 00-21 addresses the accounting for
multiple-element revenue arrangements. Specifically, EITF 00-21 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how arrangement consideration should be measured
and allocated to the separate units of accounting. This EITF is effective for
the revenue arrangements entered into in fiscal periods beginning after June 15,
2003. At the present time, this EITF is not expected to have material impact on
our financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.
34." FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of certain
guarantees. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statement periods ending after December 15, 2002.
The Company's bylaws provide for the indemnification of officers and
directors for certain events or occurrences while the officer is, or was,
serving at the Company's request in such capacity. The maximum potential amount
of future payments that the Company could be required to make under the bylaws
is unlimited; however, the Company has Director and Officer insurance policies
that, in most cases, would limit its exposure and enable it to recover a portion
of any future amounts paid. As a result of the insurance policy coverage, the
estimated fair value of these indemnification provisions is minimal. All of
these indemnification provisions were grandfathered under the provisions of FIN
45 as they were in effect prior to December 31, 2002. Accordingly, the Company
has no liabilities recorded for these provisions as of December 31, 2002.
The Company enters into indemnification provisions under its agreements
with other companies in its ordinary course of business, typically with business
partners, contractors, clinical sites and customers. Under these provisions the
Company generally indemnifies and hold harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of the Company's
activities. These indemnification
11
provisions generally survive termination of the underlying agreement. The
maximum potential amount of future payments the Company could be required to
make under these indemnification provisions is unlimited. The Company has not
incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements. All of these indemnification provisions were
grandfathered under the provisions of FIN 45 as they were in effect prior to
December 31, 2002. As a result, the estimated fair value of these agreements is
minimal. Accordingly, the Company has no liabilities recorded for these
agreements as of December 31, 2002.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure -- An Amendment of FAS No. 123." SFAS 148
amends SFAS 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for those companies who voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both the annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The transition and annual
disclosure provision of SFAS 148 are effective for fiscal years ending after
December 15, 2002. The Company has not adopted the fair value method of
accounting for stock-based compensation, and will continue to apply APB 25 for
its stock-based compensation plans. The Company has incorporated the disclosure
requirements of SFAS 148 at December 31, 2002, which require a tabular pro forma
presentation of net income had SFAS 123 been adopted by the Company in the
"Summary of Significant Accounting Policies" footnote of the financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 is not expected to
have a material effect on the Company's financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 is not expected to have a material effect on the Company's
financial statements.
12
3. SUPPLEMENTAL CASH FLOW INFORMATION
FOR THE YEARS ENDED
-------------------
DECEMBER 31,
------------
(IN THOUSANDS) 2000 2001 2002
- -------------- ---- ---- ----
Supplemental disclosure of cash flow information and non-cash investing and
financing activities:
Cash paid for interest $ 197 $ 245 $337
Issuance of warrants for common stock 500 -- --
Issuance of common stock for license 428 -- --
Conversion of redeemable preferred stock into common stock 52,869 -- --
Acquisition of machinery and equipment under capital lease agreements 1,080 2,409 --
4. MARKETABLE SECURITIES
At December 31, 2001 and 2002, all marketable securities were
classified as held-to-maturity and carried at amortized cost. Marketable
securities consisted of the following (in thousands):
2001 2002
---- ----
Short-term:
Corporate bonds $18,339 $ 5,494
Commercial paper -- 997
U.S. government securities 29,437 21,557
------- -------
$47,776 $28,048
======= =======
Long-term:
Corporate bonds $ 1,551 $ --
U.S. government securities 5,560 --
------- -------
$ 7,111 $ --
======= =======
Fair values of all marketable securities are based upon quoted market
prices. The carrying amounts and estimated fair values of the Company's
significant financial instruments at December 31 were as follows (in thousands):
2001 2002
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Cash and cash equivalents $25,142 $25,142 $27,622 $27,622
Short-term marketable securities 47,776 47,934 28,048 28,130
Long-term marketable securities 7,111 7,118 -- --
13
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
ESTIMATED
USEFUL LIVES
(YEARS) 2001 2002
------- ---- ----
Machinery and equipment 3-5 $ 1,770 $ 919
Furniture and fixtures 3-7 914 871
Purchased software 3 205 1,526
Machinery and equipment under capital leases 3-5 6,566 4,125
Leasehold improvements lease life 2,097 2,118
Assets not yet placed in service 245 152
------- -------
11,797 9,711
Less -- accumulated depreciation and amortization (4,012) (4,381)
------- -------
$ 7,785 $ 5,330
======= =======
Depreciation and amortization expense was $1.0 million, $1.7 million
and $1.8 million for the years ended December 31, 2000, 2001 and 2002,
respectively. Accumulated amortization of machinery and equipment under capital
leases totaled $2.1 million and $1.9 million at December 31, 2001 and 2002,
respectively.
In 2002, management formulated a restructuring plan which is described
in further detail in Note 21. As part of this restructuring, equipment with a
net book value of $2.3 million was reclassified to assets held for sale. This
equipment had an original cost of $3.7 million and accumulated depreciation of
$1.4 million and consisted primarily of Laboratory Equipment used in Research
and Development activities. A charge of $2.2 million has been recorded to write
this equipment down to its estimated net realizable value.
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following as of
December 31 (in thousands):
2001 2002
---- ----
Payroll related $1,218 $1,154
Professional fees 390 394
Sponsored research and development 55 91
License Fees -- 58
Scientific Advisors -- 48
Clinical research 144 25
Lab supplies and equipment 213 --
Other 61 26
------ ------
$2,081 $1,796
====== ======
14
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon closing of the Company's initial public offering in July 2000, all
mandatorily redeemable convertible preferred stock was converted into 15,542,181
shares of common stock.
While outstanding, mandatorily redeemable convertible preferred stock
was carried at redemption value plus accrued dividends of $0.24 per share per
year beginning July 1999. Issuance costs relating to redeemable convertible
preferred stock were accreted to the value of the stock immediately upon
issuance. Series A, B, C, D, E-2 and E had a par value of $.01 per share and
liquidation value of $2.73 per share.
In March 2000, the Company issued 4,664,705 shares of Series F
redeemable convertible preferred stock, par value $.01, to new investors at
$4.29 per share (liquidation value) for net proceeds of $19.9 million. The
issuance of these shares resulted in a beneficial conversion feature equal to
the total proceeds from the offering. Because the redeemable convertible
preferred stock was immediately convertible, the Company recorded a dividend of
$19.9 million to preferred stockholders in the first quarter of 2000. The
Company also recorded cumulative dividends on this class of stock at a rate of
$0.39 per share per year.
PREFERRED STOCK WARRANTS
In connection with amending a line of credit in 1999, the Company
issued a warrant to purchase 43,920 shares of Series E preferred stock at an
exercise price of $2.73 (Note 13). In connection with the issuance of Series E
preferred stock in 1999, the Company issued warrants for the purchase of
1,265,957 shares of Series E preferred stock at an exercise price of $2.73 per
share. In May 2000, warrants were exercised for the purchase of 610,949 shares
of Series E preferred stock at $2.73 per share. As a result of the public
offering, all outstanding warrants for preferred stock were converted to
warrants for the purchase of common stock.
8. PREFERRED STOCK
Under the terms of the Company's certificate of incorporation that was
restated upon completion of the initial public offering, the Board of Directors
is authorized to issue up to 5,000,000 shares of preferred stock, $.01 par
value, in one or more series without stockholder approval. The Board of
Directors also has discretion to determine the rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences of each series of preferred
stock.
9. COMMON STOCK
STOCK OPTIONS
In January 1997, the Company adopted the 1997 Employee, Director and
Consultant Stock Option Plan, which provides for the granting of incentive and
non-qualified stock options to employees, directors and consultants of the
Company. The number of options available for grant was increased from 1,903,200
in 1999 to 4,758,000 in 2000 (in connection with the Company's initial public
offering) and to 5,908,000 in 2002 (as a result of a shareholder vote in June
2002). Options granted by the Company generally vest ratably over three- to
five-year periods and have a term of ten years.
In accordance with APB No. 25, no compensation cost has been recognized
for options granted to employees by the Company with exercise prices equal to or
greater than fair value of the underlying common stock at grant date. The
Company granted to employees options to purchase 1,376,095 and 175,500 shares of
common stock in 2000 and 2001, respectively, at exercise prices less than the
fair value of the underlying common stock at grant date. The Company recorded
deferred compensation relating to these options representing the aggregate
difference between the estimated fair market value of Variagenics common stock
15
on the grant date and the exercise price of each option. This deferred
compensation is being amortized on a straight line basis over the related
vesting period. Options cancelled in 2000, 2001 and 2002 resulted in reductions
in deferred compensation of $1.7 million, $2.0 million and $1.6 million,
respectively. At December 31, 2002, the Company has $2.5 million of deferred
compensation relating to employee and director grants.
In 2000, 2001 and 2002, the Company granted stock options to employees
and directors to purchase 295,244, 1,152,394 and 743,000 shares of common stock,
respectively, at an exercise price equal to the fair market value of common
stock on the grant date.
The Company has granted options to non-employees that vest in future
periods. The Company applies EITF No. 96-18 to account for these non-employee
grants. Under EITF 96-18, the expense that will ultimately be recognized for
these options will be the fair value at the vesting dates of the underlying
options. As these options vest over periods up to five years, the Company will
be required to remeasure the fair value of these options at each reporting
period prior to vesting and then finally at the vesting date of the option. In
2000 and 2002, the Company granted options to purchase 43,712 and 218,000 shares
of common stock, respectively, to non-employees. The Company recorded
compensation expense of $1.4 million in 2000, and a decrease of expense of $0.2
million and $0.1 million in 2001 and 2002, respectively, relating to
non-employee option grants.
The weighted average fair value of options granted in 2002 and 2001 was $1.72
and $4.30, respectively.
Option activity for the years ended December 31 was as follows (in
thousands, except per share amounts):
2000 2001 2002
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ----- --------- ----- --------- -----
Outstanding at beginning of year 1,573 $0.53 2,907 $2.49 3,743 $3.46
Granted 1,715 4.16 1,328 5.55 961 1.62
Exercised (132) 0.54 (216) 0.65 (741) 1.37
Canceled (249) 2.66 (276) 5.54 (1,080) 4.71
----- ----- ----- ----- ----- -----
Outstanding at end of year 2,907 $2.49 3,743 $3.46 2,883 $3.10
Options exercisable at year end 855 $1.17 1,484 $2.64 1,607 $3.25
The following table summarizes information about stock options
outstanding at December 31, 2002 (in thousands, except per share amounts and
lives):
16
WEIGHTED-AVERAGE
REMAINING
EXERCISE SHARES WEIGHTED-AVERAGE CONTRACTUAL LIFE SHARES WEIGHTED-AVERAGE
PRICES OUTSTANDING EXERCISE PRICE (IN YEARS) EXERCISABLE EXERCISE PRICE
------ ----------- -------------- ---------- ----------- --------------
$0.01 to $0.80 573 $0.53 6.34 486 $0.52
$1.05 to $3.90 1,829 1.98 8.56 840 2.18
$4.03 to $9.75 311 7.94 8.12 154 8.12
$11.25 to $23.63 170 14.96 7.62 127 14.86
----- ----- ---- ----- -----
2,883 $3.10 8.02 1,607 $3.25
----- ----- ---- ----- -----
COMMON STOCK WARRANTS
In 2000 and 2001, respectively, 367,254 and 33,855 warrants were
exercised for the purchase of 363,679 and 5,681 shares of common stock at $2.73
per share. The exercise of 37,288 and 33,855 of these warrants in 2000 and 2001,
respectively, was cashless, resulting in a lower number of shares issued.
STOCK RESTRICTION AGREEMENTS
The Company has executed stock restriction agreements with certain of
its common stockholders. Each agreement gives the Company the right to
repurchase, at prices from $0.01 to $0.54 per share, a certain number of shares
held by each individual if the respective stockholder ceases to be a director,
employee or consultant, as appropriate, of the Company. The purchase option
rights originally lapsed at various dates through March 2003. The repurchase
option on all restricted stock terminated in its entirety upon completion of the
Company's initial public offering in July 2000. In connection with restricted
stock issued to non-employees, the Company recorded compensation expense of
$10,000 in 2000.
STOCK ISSUANCE
In conjunction with a license agreement in 2000, the Company issued
35,685 shares of common stock and recorded related expense of $428,000.
10. INITIAL PUBLIC OFFERING
On July 26, 2000, the Company completed an initial public offering in
which it sold 5,000,000 shares of common stock at $14.00 per share. Concurrent
with the closing of the offering, the underwriters exercised an over-allotment
option to purchase an additional 750,000 shares at $14.00 per share. Net
proceeds from the offering and over-allotment option were approximately $73.1
million, net of underwriting discounts, commissions and other offering costs.
Upon the closing of the offering, all the Company's redeemable convertible
preferred stock converted into 15,542,181 shares of common stock. A vote of the
Company's stockholders in July 2000 increased the number of authorized shares of
common stock to 70,000,000 and preferred stock to 5,000,000 in anticipation of
this offering.
11. NOVA MOLECULAR, INC.
In December 2000, the Company acquired by way of assignment from Nova
Molecular, Inc. ("NMI") all of NMI's rights, title and interest in and to
certain technology and intellectual property for a purchase price of $0.3
million.
17
12. INCOME TAXES
At December 31, the significant components of the Company's deferred
tax assets consisted of the following (in thousands):
2001 2002
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 24,449 $ 34,747
Stock compensation expense 1,554 1,505
Research and development credit carryforwards 2,488 3,084
Acquired intangible assets 191 174
Restructure reserve -- 848
Other 1,183 1,854
-------- --------
Total gross deferred tax assets 29,865 42,212
Deferred tax asset valuation allowance (29,865) (42,212)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
The Company has provided a valuation allowance for the full amount of
its net deferred tax assets since realization of any future benefit from
deductible temporary differences and net operating loss and tax credit
carryforwards cannot be sufficiently assured at December 31, 2002.
At December 31, 2002, available net operating loss carryforwards for
federal and state tax purposes were approximately $82.7 million and $88.8
million, respectively, which expire through 2022. At December 31, 2002, the
Company has research and development tax credit carryforwards of approximately
$1.8 million available to reduce future federal tax liabilities that expire
through 2022. Approximately $0.9 million of the net operating loss carryforwards
relate to the exercise of non-qualified stock options and disqualifying
dispositions of incentive stock options, the tax benefit from which, if
realized, will be credited to additional paid-in capital.
Under the provisions of Internal Revenue Code Section 382 (Section
382), certain substantial changes in the Company's ownership may limit the
amount of net operating loss and tax credit carryforwards which could be
utilized annually to offset future taxable income and taxes payable. The amount
of the annual limitation is determined based upon the Company's value prior to
the ownership change. In December 2002, Variagenics undertook a study to
determine the limitation of its net operating losses (NOLs) under Section 382.
Section 382 limits the annual rate at which a corporation's NOLs may be utilized
if the corporation has experienced a statutorily defined "ownership change" of
more than 50 percentage points in any three year period. As a result of this
study, the Company determined that approximately $29 million of its NOLs are
limited as a consequence of prior ownership changes to use at rates of up to
approximately $4 million per year, and the remaining NOLs of approximately $60
million are not restricted by this section. The Company has previously recorded
a valuation allowance against its NOLs. Subsequent significant ownership changes
(including the merger with Hyseq as discussed in Note 1) could further affect
the limitation in future years.
Income taxes computed using the federal statutory income tax rate
differ from the Company's effective tax rate primarily due to the following at
December 31 (in thousands):
18
2000 2001 2002
---- ---- ----
Income tax benefit at US federal statutory rate $(6,229) $(8,856) $(11,817)
State income taxes, net of federal tax effect (1,190) (1,844) (1,801)
Permanent items 815 1,781 1,516
Other (96) 29 (110)
Change in deferred tax asset valuation allowance 6,700 8,890 12,212
------- ------- --------
$ -- $ -- $ --
======= ======= ========
13. COMMITMENTS AND CONTINGENCIES
LEASE LINES OF CREDIT
The Company has various equipment leases with repayment terms of 36 to
48 months. During the year ended December 31, 2001, the Company entered into a
lease arrangement to finance equipment additions. In connection with this
agreement, the Company sold and leased back certain equipment for $1.2 million
and $0.9 million in 2001 and 2002, respectively, and financed an additional $2.4
million of capital additions in 2001.
LEASE FOR FACILITY
In June 1998, the Company entered into a ten-year non-cancelable
operating lease, renewable for an additional five years, related to its
facility. Rent expense under this lease is approximately $1.0 million per year,
plus applicable taxes and operating costs. Pursuant to the terms of the lease,
the Company agreed to expend a total of at least $1.5 million over the lease
term related to facility improvements, subject to reimbursements from the
landlord of $273,000 which was received in 1999 and recorded as an offset to
leasehold improvements.
Commitments under the Company's leases obligations as of December 31,
2002 are as follows (in thousands):
OPERATING CAPITAL
LEASES LEASES
------ ------
2003 $975 $1,448
2004 975 1,313
2005 975 801
2006 975 93
2007 975 --
Thereafter 408 --
------ ------
Total minimum lease payments $5,283 $3,655
======
Less amount representing interest (392)
------
Present value of capital lease obligations $3,263
======
Total rent expense (net of sublease income of $225,000 in 2000 and
$75,000 in 2001) under operating leases in effect was $1.2 million, $1.3
million, and $1.4 million for the years ended December 31, 2000, 2001 and 2002,
respectively.
19
LINE OF CREDIT, LETTER OF CREDIT AND RESTRICTED CASH
In order to secure its facility lease, the Company obtained a $2.0
million letter of credit from a bank that is automatically renewable on an
annual basis through June 2009. This obligation was originally secured by $1.0
million of restricted cash, subject to certain reductions after the second year
of the lease. In January 2001, the letter of credit was reduced to $1.5 million
and the related restricted cash was reduced to $750,000.
OTHER AGREEMENTS
The Company has entered into various license agreements and research
and development funding agreements to support its research and development
activities. Certain of these license agreements contain provisions for future
royalties to be paid on sales of products developed under these agreements and
minimum license fees or royalties to be paid annually for the life of the
related patent. As of December 31, 2002, the Company is committed to minimum
license and royalty payments of $45,000 per year through at least 2015.
Additionally, the Company has co-marketing agreements with various parties under
which revenues may be earned by either party.
Funding commitments under research and development agreements with a
university are approximately $90,000 over the next two years.
In December 2001, the Company made an investment of $100,000 in the
equity of a private Korean corporation with which the Company also has a
research collaboration agreement. This investment is accounted for under the
cost method and is included in other assets at December 31, 2001 and 2002.
In 2001, the Company entered into separation agreements with two of its
officers. In connection with these agreements the Company recorded compensation
expense related to severance totaling $225,000, of which $113,000 was accrued at
December 31, 2001. Under one of these agreements, the vesting of the officer's
outstanding unvested options under three option grants was accelerated,
resulting in a non-cash compensation charges of $943,000 in 2001 and $628,000 in
2002. In 2001, the Company also entered into a retention agreement with one of
its officers. In connection with this agreement, the vesting of the officer's
unvested options has been accelerated, resulting in a non-cash compensation
charge of $503,000 in 2001 and $2.3 million in 2002. As part of the retention
agreement, upon accomplishment of certain service-related milestones, the
officer received an additional 109,688 options to purchase shares of common
stock at $2.26.
14. EMPLOYEE SAVINGS PLAN
In December 1995, the Company adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). In December
2000, the Board of Directors amended the 401(k) Plan via an adoption agreement
effective January 1, 2001, which, among other things, changes the 401(k) Plan's
trustee and provides that future employer matching contributions be
non-discretionary. The 401(k) Plan covers substantially all employees of the
Company and allows them to defer a portion of their annual compensation on a
pre-tax basis. Company contributions under the 401(k) Plan are made at the
discretion of the Board of Directors in amounts determined by the Board. No
employer contributions were made to the 401(k) Plan by the Company during the
year ended December 31, 2000. The Company contributed a total of $101,000 and
$115,000 of matching contributions to the Plan in 2001 and 2002, respectively.
15. EMPLOYEE STOCK PURCHASE PLAN
In July 2000, the Company's stockholders approved the Variagenics, Inc.
2000 Employee Stock Purchase Plan. This plan allows employees of the Company to
purchase common stock through payroll deductions for 85% of fair market value. A
total of 475,800 shares of common stock are reserved for issuance
20
under this plan. A total of 33,688 and 46,838 shares were issued in connection
with this plan in 2001 and 2002, respectively.
16. RELATED PARTY TRANSACTIONS
The Company maintains certain consulting agreements under which
advisory services are provided to the Company by several individual
stockholders. Cash expenses under these contracts totaled $74,000, $280,000 and
$228,000 in each of the years ended December 31, 2000, 2001 and 2002,
respectively. The Company also granted options to these advisors in 1998 and
2000.
In connection with entering into an amended and restated consulting
agreement, in March 2001, the Company made a loan to one of its scientific
advisors in the principal amount of $200,000. The note bears interest at an
annual rate of 10% and will be repaid over a period of two years. Because the
note is collateralized by shares of the Company's common stock owned by the
scientific advisor, the principal balance of the note and related accumulated
interest has been classified as contra-equity in the Company's balance sheet at
December 31, 2002.
In July 2002, the Company entered into an exclusive license agreement
with Renegade Therapeutics, Inc. ("Renegade"). Under this agreement, the Company
will license to Renegade certain of the Company's intellectual property in
exchange for: an upfront license fee in the amount of $75,000 payable in
Renegade fully-vested founders' stock and a $20,000 reimbursement for the
Company's patent prosecution expenses and valuation report expenses. No cash or
stock has been received to date in connection with this agreement. The agreement
contains provisions for royalty and milestone payments based on the
commercialization of related technology and the issuance of the first U.S.
patent with respect to the technology, among others. One of the officers and
stockholders of Renegade is a Director and stockholder of the Company. In
addition the scientific advisor to whom the Company has extended a promissory
note is also an officer and stockholder of Renegade.
17. COMMERCIAL COLLABORATIONS
Covance, Inc. ("Covance"), a contract research organization, selected
the Company as their provider of genotyping assays. The Company targeted Covance
to be a user of its NuCleave(TM) DNA testing and analysis technology. The
Company's August 1999 alliance agreement with Covance provides funding to the
Company for assay development and royalties payable to the Company for
laboratory tests performed at Covance. From the commencement of the
collaboration through December 31, 2002, the Company has recorded $1.9 million
in sponsored research fees and no royalties under its agreement with Covance.
Under this agreement, Covance is the only contract research organization which
can directly license the Company's technologies for providing pharmacogenomic
lab services in clinical trials. In September 2000, Covance increased its
funding commitment to Variagenics to develop genotyping assays. The Company's
agreement with Covance is for a five-year term. Covance may terminate the
agreement if (i) the Company fails to achieve assay production targets, or (ii)
the Company has a change in control. Either party may terminate the agreement
upon material breach, misconduct or insolvency of the other party. After the
five-year term expires, the agreement may be automatically renewed for
additional one-year terms.
The Company's arrangement with Quintiles Transnational Corporation
("Quintiles") is a preferred provider co-marketing arrangement under which
Quintiles' worldwide business development group will incorporate the Company's
SNP discovery and clinical design services into the Quintiles selling cycle. The
Company's December 1998 agreement with Quintiles is for a five-year term. The
Company will receive revenues from this marketing agreement based on the types
of pharmacogenomic services performed under the contract. For the periods
presented, the Company has not received any revenues under its arrangement with
Quintiles. The agreement may be terminated by either party upon a material
breach of the agreement.
21
In May 2000, the Company entered into a collaboration with Bruker
Daltonics, Inc. ("Bruker") to manufacture and develop mass spectrometers for its
NuCleave(TM) DNA testing and analysis system. Under the terms of the agreement,
the Company would use the resulting system and also market and sell the system
to its pharmaceutical and drug-development collaborators to identify genetic
variances including genotypes and haplotypes. In 2002, the Company extended its
collaboration with Bruker through March 31, 2003. The agreement provides for
termination by either party for any reason upon 90 days notice. The parties may
agree to renew the agreement for additional one-year terms. As part of its 2002
restructuring (Note 21), the Company discontinued its NuCleave(TM) product.
18. ALLIANCE AGREEMENT
In June 2000, the Company entered into an alliance agreement with
Waters Technologies Corporation ("Waters"), a life science company, whereby
Waters will manufacture, distribute and sell consumable reagent kits for use in
the Company's NuCleave(TM) DNA analysis system. Pursuant to this agreement, on
July 26, 2000, the Company received $7.5 million from Waters for the purchase of
535,714 shares of the Company's common stock and $3.0 million paid upon receipt
of approval under the Hart-Scott-Rodino Act. Concurrent with the share purchase,
the Company issued to Waters a warrant to purchase 80,357 shares of common stock
at $14.00 per share, the IPO price. These warrants expire in July 2005. The $3.0
million payment was recorded as deferred revenue, and the warrants were valued
at $500,000, which was recorded as a reduction of deferred revenue. In December
2000, the Company achieved a milestone under the alliance agreement by placing
its first NuCleave(TM) system with a customer; a $500,000 milestone payment was
received from Waters in connection with this placement and was recorded as
deferred revenue. The net deferred revenue is being recognized in revenue over
the development period of the alliance. The alliance agreement further provides
for payments to the Company based on the achievement of certain milestones and
royalties on annual sales of product. For the years ended December 31, 2000 and
2001, $1.5 million and $1.5 million, respectively, was recognized as revenue
under this agreement.
As part of its 2002 restructuring (Note 21), the Company discontinued
its NuCleave(TM) product.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ---------------------------------------- ------- ------- ------- ------- ----------
2001:
Revenue $ 1,102 $ 915 $ 574 $ 392 $ 2,983
Loss from operations (5,110) (6,771) (7,660) (9,979) (29,520)
Net loss (3,704) (5,566) (6,624) (9,409) (25,303)
Net loss per share (basic and fully diluted) $ (0.16) $ (0.24) $ (0.28) $ (0.40) $ (1.09)
2002:
Revenue $ 706 $ 158 $ 178 $ 388 $ 1,430
Loss from operations (10,287) (10,088) (6,772) (7,751) (34,898)
Net loss (9,870) (9,797) (6,533) (7,563) (33,763)
Net loss per share (basic and fully diluted) $ (0.42) $ (0.42) $ (0.27) $ (0.31) $ (1.42)
20. LITIGATION
On or about December 6, 2001, the Company was sued in a complaint
naming as defendants the Company and certain of its officers and its
underwriters. The complaint purportedly is filed on behalf of persons purchasing
the Company's stock between July 21, 2000 and December 6, 2000, and alleges
22
violations of certain sections of the Securities Act of 1933, as amended, and
Section 10(b) and the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder.
The complaint alleges that, in connection with the Company's July 21,
2000 initial public offering, the defendants failed to disclose additional and
excessive commissions purportedly solicited by and paid to the underwriter
defendants in exchange for allocating shares of the Company's stock to preferred
customers and alleged agreements among the underwriter defendants and preferred
customers tying the allocation of IPO shares to agreements to make additional
aftermarket purchases at pre-determined prices. Plaintiffs claim that the
failure to disclose these alleged arrangements made the Company's registration
statement on Form S-1 filed with the SEC in July 2000 and the prospectus, a part
of the registration statement, materially false and misleading. Plaintiffs seek
unspecified damages. On or about April 19, 2002, an amended complaint was filed
which makes essentially the same allegations. On or about July 15, 2002, the
Company and the individuals filed a motion to dismiss.
In an opinion issued on February 19, 2003, the court ruled to
dismiss the 10b-5 claims as to Variagenics and several other issuers in the
consolidated suit. Plaintiffs have voluntarily dismissed all claims against the
Variagenic's officers named in the suit. As a result, only claims relating to
Section 11 and Section 15 of the Securities Act of 1933 remain in the suit
against Variagenics. Currently, the Company is in the process of approving a
settlement by and between the issuers, the insurers of those issuers, and the
plaintiffs in the consolidated case. This settlement is being proposed by the
plaintiffs and all of the issuers' insurers are strongly in favor of this
proposal. A special committee formed by the Company to evaluate and recommend
any settlement proposals has recommended that the Company accept the plaintiffs'
proposal. The details of the proposal have not been released publicly. The
Company believes that any loss or settlement amount will not be material to its
financial statements and believes that any settlement payment and all attorney's
fees accrued on a going forward basis with respect to the suit will be paid by
the Company's insurance provider.
21. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS
In 2002, management formulated a restructuring plan in order to
conserve cash and focus resources on the Company's oncology molecular diagnostic
development programs. The Company has also discontinued its NuCleave(TM)
product, which had been the source of revenue from product sales.
In connection with this restructure, a charge of $3.2 million was
recorded, which consisted of $1.0 million related to employee separation costs
and $2.2 million related to impairment of fixed assets which were taken out of
service and held for sale. In December 2002, equipment with an original cost of
$325,000 was sold for gross proceeds of $23,000.
The restructuring reduced headcount by 44 positions, representing
approximately 30% of the Company's workforce. Approximately half the reductions
were in the high-throughput DNA sequencing group; the other half were spread
throughout the organization, representing both research and development
positions as well as general and administrative staff.
The employee separation costs were accounted for under EITF 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" and
include amounts to be paid for severance and related benefits. As of December
31, 2002, all the employees to be terminated subject to the restructuring plan
had ceased active employment with the Company and all $1.0 million of severance
and related benefits had been paid out.
In refocusing the business, management identified certain laboratory
equipment with a net book value of $2.3 million that will no longer be required
by the Company. This equipment has been decommissioned and is expected to be
disposed of by the end of 2003. Certain of this equipment was purchased under
capital leases, and costs associated with the early termination of the related
obligations have been accrued. The debt
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associated with these assets has been reclassified to the current portion of
capital lease obligations. An impairment charge of $2.2 million related to this
equipment was recorded in 2002 to write the asset down to its estimated net
realizable value in accordance with FAS 144 "Accounting for Impairment or
Disposal of Long-Lived Assets".
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