AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TRANSGENOMIC, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 3826 91-1789357
(State of incorporation) (Primary standard (I.R.S. employer
industrial identification no.)
classification code number)
5600 SOUTH 42ND STREET
OMAHA, NEBRASKA 68107
(402) 738-5480
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
COLLIN J. D'SILVA
Chairman and Chief Executive Officer
5600 South 42nd Street
Omaha, Nebraska 68107
(402) 738-5480
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Please address a copy of all communications to:
STEVEN P. AMEN, ESQ. ROBERT B. WILLIAMS, ESQ.
Kutak Rock LLP Milbank, Tweed, Hadley & McCloy LLP
1650 Farnam Street One Chase Manhattan Plaza
Omaha, Nebraska 68102 New York, New York 10005
(402) 346-6000 (212) 530-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
Common Stock, par value $0.01
share............................ 4,600,000 $14.00 $64,400,000 $17,002
(1) Includes 600,000 shares of Common Stock that the Underwriters have the
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED MARCH 10, 2000
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 BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
4,000,000 SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by Transgenomic, Inc. We
are selling 4,000,000 shares of common stock. The estimated initial public
offering price is between $12.00 and $14.00 per share.
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Prior to this offering, there has been no public market for our common
stock. We have applied for listing of our common stock on the Nasdaq National
Market under the symbol TBIO.
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PER SHARE TOTAL
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Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Transgenomic, before expenses................... $ $
Transgenomic has granted the underwriters an option for a period of 30 days
to purchase up to 600,000 additional shares of common stock.
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
, 2000
The inside front cover of the prospectus contains a graphic depiction of DNA
analysis using the WAVESystem. The various steps of a sample analysis described
in the picture include the following:
SEPARATION
The DNA separation, analysis, and collection processes performed on our
instrument are completely automated. The DNASep Column is key to our process. A
sample is placed into our DNASep Column and DNA fragments are separated
according to size, mutation, or other properties. The process can be analytical
or if pure DNA material is desired the separation can be performed on a
preparative basis.
3 MODES OF OPERATION
DNA can be separated according to three different modes. Changing the
temperature at which DNA is separated on the DNASep Column controls these modes.
Sizing of double strand DNA is performed at lower temperatures. Mutant DNA is
separated at intermediate temperatures where DNA is partially denatured or
melted. Single strand DNA and RNA are separated at higher temperatures.
DETECTION AND ANALYSIS
DNA fragments flow from the DNASep Column directly into a detection and
measurement device. The type and amount of DNA material is identified using two
different detection measurements. UV detection is used for most applications.
Fluorescence detection is used when measurement of very small amounts of DNA is
desired.
COLLECTION
If desired, highly purified DNA can be collected by our fragment
collector. Purified DNA can be used for cloning, sequencing, PCR, or in any
process where purified fragments of DNA are needed. Cloning, for example, is
much more efficient if a highly purified fragment is used in the cloning
process.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 24
Management.................................................. 35
Principal Stockholders...................................... 41
Related Party Transactions.................................. 43
Description of Capital Stock................................ 44
Shares Eligible for Future Sale............................. 48
U.S. Federal Tax Considerations for Non-U.S. Holders........ 50
Underwriting................................................ 54
Legal Matters............................................... 56
Experts..................................................... 56
Where You Can Find More Information......................... 56
Index to Financial Statements............................... F-1
THIS PROSPECTUS CONTAINS REFERENCES TO OUR REGISTERED TRADEMARKS
WAVE-REGISTERED TRADEMARK- AND DNASEP-REGISTERED TRADEMARK-. WAVEMAKER-TM-, WAVE
OPTIMIZED-TM- AND THE TRANSGENOMIC NAME AND THE TRANSGENOMIC LOGO ARE OUR
TRADEMARKS FOR WHICH REGISTRATION APPLICATIONS HAVE BEEN FILED WITH THE UNITED
STATES PATENT AND TRADEMARK OFFICE. ALL OTHER TRADEMARKS OR TRADE NAMES REFERRED
TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
PROSPECTUS SUMMARY
THE SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR CONSOLIDATED HISTORICAL
AND PRO FORMA FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS
BEGINNING ON PAGE F-1, BEFORE MAKING AN INVESTMENT DECISION.
TRANSGENOMIC
OUR BUSINESS
We provide innovative research tools to the life sciences industry.
These tools enable researchers to discover and understand variation in the human
genetic code, or genome, in order to accelerate and improve drug development and
diagnostics. We believe our WAVE System, which incorporates our proprietary
DNASep separation column and associated software, consumables and reagents, will
become a leading tool to analyze genetic mutations. The WAVE System allows
researchers to analyze both known and unknown genetic mutations faster, with
more accuracy and at a lower cost than other commercially available techniques.
As of March 1, 2000, we have sold over 240 WAVE Systems in 20 countries to
academic research centers and biopharmaceutical companies. In 1999, sales of our
WAVE Systems and related consumables accounted for approximately $14 million in
revenues.
As efforts to sequence the human genome near completion, understanding
genetic variation, or mutation analysis, is becoming the vital link to the
development of new drug products and diagnostics. These genetic mutations can
include single nucleotide polymorphisms, or SNPs, among others. By comparing
genetic mutations in the genome to the occurrence of diseases or particular
traits, correlations can be made between genes and specific diseases or traits.
Our WAVE System, unlike tools employing more conventional technologies, can
detect these genetic mutations without previous knowledge of their existence or
position. As a result, the WAVE System provides researchers a more accurate and
efficient means of performing the experiments necessary to identify mutations
and to correlate the relationships between mutations and diseases.
OUR TECHNOLOGY AND PRODUCTS
Our WAVE System is designed to perform high-speed, automated analyses of
DNA molecules to identify the type, location and frequency of DNA mutations,
with a high degree of accuracy and consistency. The WAVE System is based on our
proprietary micro-bead technology. Our patented micro-beads are packed into our
proprietary DNASep separation column, which is the key component of our WAVE
System. Each micro-bead has specific surface chemistry that interacts with DNA
molecules. The DNA molecules are then selectively separated from the micro-beads
with a mixture of our liquid reagents. This process is automated by our
proprietary WAVEMaker Software for analysis and interpretation.
CUSTOMERS
Our customers include numerous core laboratory facilities and a number
of other leading academic and medical institutions in the U.S. and abroad,
including Harvard University, Stanford University, Baylor University, University
of Chicago, Fred Hutchison Cancer Research Facility, Mayo Clinic, National
Cancer Institute, National Institutes of Health, Institut Curie, University of
Cambridge, Wellcome Trust-Oxford University and Institut Gustave Roussy.
Customers also include a number of large, established U.S. and foreign
pharmaceutical and biotech companies including SmithKline Beecham,
Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck & Company, Novartis and
Eli Lilly and Company.
1
OUR STRATEGY
We intend to be the leading provider of technology platforms which
enable life sciences researchers to discover and understand variations in the
human genome, in order to accelerate and improve drug development and
diagnostics. Key elements of this strategy include:
- FOCUS ON THE GENETIC VARIATION DISCOVERY MARKET;
- ESTABLISH THE WAVE SYSTEM AS THE INDUSTRY STANDARD;
- INCREASE CONSUMABLE SALES;
- PENETRATE NEW MARKETS BY PROVIDING A DIVERSIFIED PORTFOLIO OF
PRODUCTS; AND
- BUILD A SUBSTANTIAL INTELLECTUAL PROPERTY ESTATE.
RECENT DEVELOPMENTS
We were incorporated in Delaware on March 6, 1997 for the purpose of
conducting our DNA separation and analysis business, in addition to the non-life
sciences businesses which were being conducted by CETAC Holding Company, Inc.
and its subsidiaries, CETAC Technologies, Inc., Sarasep, Inc. and Interaction
Chromatography, Inc. On July 1, 1997, we merged CETAC Holding Company, Inc. and
its subsidiaries into Transgenomic.
We have since decided to focus our resources on our life sciences
business. We have recently entered into a letter of intent to sell the assets
related to our non-life sciences instrument product line and expect this sale to
close prior to the closing of this offering.
Our principal office is located at 5600 South 42nd Street, Omaha,
Nebraska 68107 (telephone: 402-738-5480). We maintain manufacturing facilities
and our principal research and development office in San Jose, California
(telephone: 408-432-3230). Our website is located at
http://www.transgenomic.com. The information contained in our website is not
part of this prospectus, and you should rely only on the information contained
in this prospectus in deciding whether to invest in our common stock.
2
THE OFFERING
Common stock offered........................................ 4,000,000 shares
Common stock to be outstanding after this offering.......... 20,037,200 shares
Use of proceeds............................................. For expansion of manufacturing
capacity, sales and marketing costs,
research and development costs, debt
reduction and general working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...................... TBIO
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The number of shares to be outstanding after this Offering includes all shares
outstanding as of March 10, 2000 plus 2,712,200 shares that will be issued upon
the assumed conversion of $12.0 million aggregate principal amount of our
convertible notes plus accrued interest at $5.00 per share, and 300,000 shares
that will be issued at $5.00 per share upon the exercise of warrants that will
expire at the closing of this offering.
The number of shares to be outstanding after this offering does not include the
following:
- 152,450 shares issuable upon exercise of outstanding warrants with an
exercise price of $5.00 per share;
- 6,000,000 shares that we could issue under our employee stock option
plan. As of the date of this prospectus, we have issued options to
purchase 3,724,250 shares of common stock at an exercise price ranging
from $5.00 to $10.00 per share, except that options to acquire 15,000
shares of common stock issued to one of our non-employee directors may
be exercised at a price equal to the lower of $5.00 or 50% of the
public offering price for this offering. We may issue options to
acquire up to 2,275,750 additional shares of our common stock under
this plan; and
- an undetermined number of additional shares we are obligated to issue
to some of our existing stockholders if the public offering price for
this offering is less than $10.00 per share. The number of additional
shares we will have to issue will depend on the offering price. In
addition, we will have to adjust the number of shares we will have to
issue upon exercise of the warrants and conversion of the notes
described above if the public offering price for this offering is less
than $10.00 per share.
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UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS:
- ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OVERALLOTMENT
OPTION; AND
- ASSUMES THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK WILL BE
$13.00 PER SHARE.
3
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated historical financial data for our 1997, 1998
and 1999 fiscal years is derived from our consolidated financial statements for
these years. You should read this summary data along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
consolidated financial statements and the unaudited pro forma financial
information, and the related notes thereto, included elsewhere in this
prospectus.
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE
DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales................................................. $11,577 $18,935 $23,035
Gross profit.............................................. 5,241 9,345 10,945
Operating expenses........................................ 8,459 11,320 17,829
Loss from operations...................................... (3,218) (1,975) (6,884)
Net loss.................................................. $(2,410) $(1,576) $(9,827)
Basic and diluted loss per share.......................... $ (0.22) $ (0.13) $ (0.76)
Basic and diluted weighted average shares
outstanding(1).......................................... 11,145 12,279 13,000
AS OF DECEMBER 31,
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1998 1999
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital........................................... $ 1,845 $ 3,494
Total assets.............................................. 14,736 19,964
Long-term debt, less current portion...................... 695 12,538
Stockholders' equity (deficit)............................ 6,649 (2,099)
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(1) See Note A of notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing
per share data.
4
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma statement of operations data
for the year ended December 31, 1999 reflects the sale of assets related to our
non-life sciences instrument product line (Transgenomic as adjusted) and the
issuance of 300,000 shares of common stock at $5.00 per share upon the exercise
of warrants that will expire at the closing of this offering, as if each had
occurred on January 1, 1999, and the assumed conversion at $5.00 per share of
our outstanding convertible notes and accrued interest into 2,712,200 shares of
common stock as of March 23, 1999, the date the convertible notes were issued.
The summary unaudited pro forma balance sheet data reflects these transactions
and the sale of 25,000 shares of common stock at $10.00 per share in March 2000
as if each had been completed on December 31, 1999.
The pro forma as adjusted balance sheet data additionally reflects the
sale of 4,000,000 shares of common stock offered by us in this offering at an
assumed initial public offering price of $13.00 per share, less underwriting
discounts and commissions and estimated offering expenses. The unaudited pro
forma financial data are intended for informational purposes only and are not
intended to be indicative of our results of operations or financial position had
these transactions occurred on the dates specified, nor are they indicative of
our future results of operations or financial position.
You should read this summary along with our consolidated financial
statements and notes thereto, our unaudited pro forma financial information and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Use of Proceeds" included elsewhere in this
prospectus.
YEAR ENDED DECEMBER 31, 1999
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ADJUSTMENTS FOR
SALE OF
NON-LIFE ADJUSTMENTS
SCIENCES FOR
TRANSGENOMIC INSTRUMENT TRANSGENOMIC CONVERTIBLE
(HISTORICAL) PRODUCT LINE AS ADJUSTED NOTES PRO FORMA
------------ --------------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales................... $ 23,035 $ 8,794 $ 14,241 -- $ 14,241
Gross profit................ 10,945 3,869 7,076 -- 7,076
Operating expenses.......... 17,829 3,576 14,253 -- 14,253
Loss from operations........ (6,884) 293 (7,177) -- (7,177)
Other expense............... (1,198) -- (1,198) 859 (339)
Loss before income taxes.... (8,082) 293 (8,375) 859 (7,516)
Net loss.................... $ (9,827) $ 293 $(10,120) $ 859 $ (9,261)
Basic and diluted loss per
share..................... $ (0.76) $ (0.78) $ (0.60)
Basic and diluted weighted
average shares
outstanding............... 13,000 13,000 15,334
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................................. $ 3,494 $ 8,523 $55,883
Total assets................................................ 19,964 21,914 69,274
Long-term debt, less current portion........................ 12,538 117 117
Stockholders' equity (deficit).............................. (2,099) 12,385 59,745
5
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY AS A COMPANY FOCUSED ON LIFE SCIENCES TECHNOLOGIES
AND APPLICATIONS SUBJECTS US TO RISKS INHERENT IN THE DEVELOPMENT OF A NEW
BUSINESS ENTERPRISE.
We have a limited operating history as a company focused on life
sciences technologies and applications and are at a relatively early stage of
development in this business. Our future financial performance will depend on
the growth in demand for automated DNA separation and analysis enabling
technologies. The genomics market is new and emerging, is rapidly evolving, is
characterized by an increasing number of market entrants, and will be subject to
frequent and continuing changes in standards, customers' preferences and
technology. As a result, our business is subject to all of the risks inherent in
the development of a new business enterprise, such as the need:
- to develop a market for our products;
- to obtain enough capital to support the expenses of developing and
commercializing our products; and
- to attract and retain qualified management, sales, technical and
scientific staffs.
We expect that it will be a number of years, if ever, before we will
achieve profitability from the sale of our products. Our future operating
results will depend on a number of factors, including the market acceptance of
our products, the introduction of new products by our competitors, our ability
to adapt our technology to the commercial needs of our customers and to
developments in the genomics industry, and the timing and extent of our research
and development efforts. Our limited operating history in the life sciences
industry makes accurate prediction of future operations difficult. If our
operating results fail to meet the expectations of securities analysts or
investors, our stock price could decline.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We experienced losses from operations of $6.9 million in 1999,
$2.0 million in 1998 and $3.2 million in 1997. These losses were mostly due to
research and development expenses and sales and marketing expenses related to
the development and marketing of our WAVE System. As of December 31, 1999, we
had an accumulated deficit of $12.3 million. In order to continue to enhance our
WAVE System and related products, develop new products, increase the pace of
installations and expand our marketing, sales and customer support service
staffs, we expect to incur significant increases in our expenses over the next
several years. As a result, we could continue to incur losses for the forseeable
future and may never be profitable.
OUR TECHNOLOGY AND PRODUCTS ARE RELATIVELY NEW AND MAY NOT GAIN MARKET
ACCEPTANCE AMONG GENOMICS RESEARCHERS.
Our WAVE System and other automated DNA separation and analysis products
are relatively new products and have had limited use in commercial applications.
As a result, it is possible that previously unrecognized defects could emerge.
We have developed our WAVE System technology for a number of applications in the
area of life sciences research. We may not be able to successfully adapt our
products to the commercial requirements of these fields. A number of potential
uses of our WAVE System
6
in these fields will require significant enhancements in its technology,
including adaptation of our software. Increased market acceptance of our
products is dependent upon factors, some of which are not in our control, such
as continued growth in the genomics industry, the availability and price of
competing products and technologies, the success of our sales efforts, and the
acceptance of our product by the academic and research community, such as
biologists, geneticists and biochemists, who are more familiar with the
existing, traditional methods of DNA separation and analysis. Our products must
compete against well-established techniques, such as gel and capillary
electrophoresis and sequencing-based technologies. We cannot be certain that our
products will replace or compete successfully against existing products or that
our products will achieve market acceptance. If we are unable, for technological
or other reasons, to complete the development, introduction or scale-up of our
product manufacturing, or if our products do not achieve market acceptance, our
business could be seriously harmed.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION BECOME
WIDESPREAD, WE MAY HAVE LESS DEMAND FOR OUR PRODUCTS.
Genetic testing has raised ethical issues regarding confidentiality and
the appropriate uses of the resulting information. For these reasons,
governmental authorities may call for limits on or regulation of the use of
genetic testing or prohibit testing for genetic predisposition to certain
conditions, particularly for those that have no known cure. Any of these
scenarios could reduce the potential markets for our products, which could
seriously harm our business.
WE HAVE A LIMITED SALES FORCE AND LIMITED EXPERIENCE WITH DIRECT MARKETING OF
OUR PRODUCTS WHICH COULD LIMIT OUR ABILITY TO EFFECTIVELY PENETRATE NEW MARKETS.
Our direct sales force may not be sufficiently large or knowledgeable to
successfully penetrate the market. We may not be able to expand our direct sales
force to meet our commercial objectives. In addition, our sales force may not be
able to address complex scientific and technical issues raised by our customers.
Our customer support personnel may also lack the broad range of technical
expertise required to adequately service and support our products in the field.
THE SALE OF OUR PRODUCTS INVOLVES A LENGTHY SALES CYCLE WHICH MAKES OUR REVENUES
DIFFICULT TO FORECAST.
Our ability to obtain customers for our WAVE System and related
accessories depends in large part on the perception that our products can help
accelerate basic genomics research, diagnostic testing and related applications
such as drug discovery and development efforts. The purchase of a WAVE System
often represents a large capital outlay for potential customers, who are often
constrained by limited research budgets. Additionally, the sales cycle is long
due to the need to educate potential customers as to the benefits and use of our
WAVE System. We also need to effectively communicate the benefits of our WAVE
System to a variety of constituencies within potential customer groups,
including research and development personnel and key management. We may expend
substantial funds and sales effort with no assurance that a sale will result.
Due to the lengthy sales cycle required, our revenues could be difficult to
forecast.
OUR BUSINESS MAY EXPERIENCE LONG COLLECTION PERIODS WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR LIQUIDITY.
We have experienced in the past, and may experience in the future,
collection periods of up to a year or more in connection with sales of our WAVE
System. Some customers delay payment due to the large capital outlay associated
with a purchase of the WAVE System. Other clients in the academic and research
fields are accustomed to longer payment periods than commercial buyers. In
general, our overseas customers pay less promptly than is customary in the
United States. In addition, because we are in the early stages of
commercialization of the WAVE System, we sometimes agree to provide extended
7
payment terms in order to make a sale. Longer collection periods may have a
negative impact on our liquidity.
WE MAY NEED TO RAISE ADDITIONAL FUNDING WHICH MAY NOT BE AVAILABLE.
We have historically financed our operations primarily through debt and
equity financings, including offerings of common stock, convertible notes and
bank financings. We will continue to need substantial amounts of cash for
research and development and to expand our sales and marketing infrastructure.
We expect our capital and operating expenses to increase over the next several
years as we expand this infrastructure and our research and development
activities. The amount of additional capital which we will need to raise will
depend on many factors, including:
- the level of our research and development activities;
- market acceptance of our products and technologies;
- the level of our sales and marketing expenses;
- expenditures in connection with alliances and license agreements and
in acquiring new businesses and technologies;
- costs incurred in enforcing and defending our patent claims and other
intellectual property rights; and
- the cost of financing the purchase of additional capital equipment and
development tools.
We may need to raise the additional capital in the future through bank
financings or strategic investments. Additional financing may not be available
to us when we need it, or, if available, we cannot assure that we will be able
to obtain such financing on terms favorable to us or our stockholders. If we
raise additional capital by issuing equity securities, the issuance of such
securities would result in ownership dilution to our stockholders.
OUR WAVE SYSTEM INCLUDES HARDWARE COMPONENTS AND INSTRUMENTS MANUFACTURED BY A
SINGLE SUPPLIER AND IF WE WERE NO LONGER ABLE TO OBTAIN THESE COMPONENTS AND
INSTRUMENTS OUR BUSINESS COULD BE HARMED.
We currently rely on a single supplier, Hitachi Instruments, Inc., to
provide the basic instrument used in our WAVE System. While other suppliers of
instrumentation and computer hardware are available, we believe that our
arrangement with Hitachi offers strategic advantages. If we were required to
seek alternative sources of supply, it could be time consuming or expensive or
require significant and costly modification of our WAVE System. Also, if we were
unable to obtain instruments from Hitachi in sufficient quantities or in a
timely manner, our ability to supply our products could be impaired, which could
harm our business.
OUR CHROMATOGRAPHIC COLUMNS, A CORE COMPONENT OF THE WAVE SYSTEM, ARE
MANUFACTURED AT A SINGLE FACILITY WHICH IS LOCATED IN AN EARTHQUAKE-PRONE AREA.
All of our proprietary DNASep columns are manufactured at our
manufacturing facility in San Jose, California, which is located in an
earthquake-prone area. In the event our manufacturing facility or equipment was
affected by man-made or natural disasters, we would be unable to manufacture our
products for sale or meet customer demand or sales projections. If our
manufacturing operations were curtailed or ceased, it would seriously harm our
business.
8
WE FACE, AND WILL CONTINUE TO FACE, INTENSE COMPETITION, BOTH IN THE U.S. AND
ABROAD, FROM COMPANIES THAT ARE ENGAGED IN THE DEVELOPMENT OF PRODUCTS THAT
ANALYZE DNA AND PROVIDE GENETIC INFORMATION.
The market for our products is highly competitive. Our principal
competitors include other biotechnology companies that provide alternative
technologies and products for the separation and analysis of DNA. Many of our
competitors have greater financial, operational, sales and marketing resources
and more experience in research and development and commercialization than we
have. Moreover, some of our competitors have greater name recognition than we do
and provide more conventional technologies and products with which some of our
customers and potential customers may have more familiarity or experience. In
order to effectively compete against alternative technologies we will need to
demonstrate the superior performance, speed, capabilities and cost effectiveness
of our WAVE System.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. To remain competitive, we will be required to
continue to expand and enhance the functionality of our DNA separation and
analysis equipment and to offer comprehensive DNA analysis, and complimentary
applications and solutions, with greater ease of use. This will include the need
to increase the WAVE System's throughput capacity and to develop new
instrumentation, software and application kits to allow the system to provide a
broader range of DNA and RNA separation and analysis applications. New products
may require additional development work, enhancement, testing, or further
refinement before they can be made commercially available and, therefore, we
could experience significant delays in the development and manufacture of our
products. Even after new products are made commercially available, unforeseen
technical difficulties could arise, requiring additional expenditures by us to
correct such difficulties and possibly resulting in further delays. We cannot be
certain that new products will be successfully developed at all. If our products
have performance, reliability or quality shortcomings, then we may experience
reduced orders, higher development costs, delays in collecting accounts
receivable and additional warranty and service expenses, and our reputation as a
reliable provider of quality products could be harmed. In addition, new
developments are expected to continue in DNA analysis, and we cannot assure you
that our WAVE System will not be made obsolete by more effective or less
expensive technologies. Because of rapid technological change, we may be
required to expend greater amounts in the development of new products, which in
turn will require greater revenues to recoup such expenditures. We cannot assure
you that we will be able to make the necessary enhancements to our technology or
products to compete successfully with new technologies that may emerge.
WE ARE IN THE PROCESS OF SELLING THE ASSETS RELATED TO OUR NON-LIFE SCIENCES
INSTRUMENT PRODUCT LINE WHICH HAVE HISTORICALLY CONTRIBUTED TO OUR REVENUES AND
EARNINGS.
In addition to our DNA separation and analysis products, we have
produced and sold various non-life sciences products. Until 1999, most of our
revenues and profits came from these non-life sciences products. We have
recently decided to focus our resources on our new automated DNA separation and
analysis products and technologies and have decided to sell the assets related
to our non-life sciences product line. As a result, we will no longer generate
revenues from the sale of these products. The future growth of our company will
be entirely dependent on the sale of our WAVE System and associated DNA
separation products and technologies. You should keep this fact in mind when
reviewing our financial statements. Because of the change in our product
offerings, our historic financial statements will not necessarily indicate our
future financial performance.
WE MAY EXPERIENCE DIFFICULTY IN COLLECTING ACCOUNTS RECEIVABLE FROM CUSTOMERS OF
OUR NON-LIFE SCIENCES INSTRUMENT PRODUCT LINE AFTER ITS SALE.
We expect to sell assets related to our non-life sciences instrument
product line prior to the completion of this offering. The agreement for the
sale is expected to provide that we will retain all accounts receivable
outstanding as of the date of the sale. Our accounts receivable associated with
sales from this product line were approximately $1.5 million at December 31,
1999. After the sale, we may
9
experience difficulty in collecting the remaining accounts receivable due to the
lack of a continuing relationship with some customers.
OUR PATENTS MAY NOT PROTECT US FROM OTHERS USING OUR TECHNOLOGY WHICH COULD HARM
OUR BUSINESS AND COMPETITIVE POSITION.
Our business and competitive position are dependent upon our ability to
protect our proprietary technology. While we currently hold a number of domestic
and foreign patents and licenses, the issuance of a patent is not conclusive as
to its validity or enforceability, nor does it provide the patent holder with
freedom to operate without infringing the patent rights of others. Our patents
or licenses could be challenged by litigation and, if the outcome of such
litigation were adverse to us, our competitors could be free to use our
technology. As a result, the invalidation of key patents owned by or licensed to
us or non-approval of pending patent applications could increase competition and
materially harm our business.
We may not be able to obtain additional patents for our technology, or
if we are able to do so, patents may not provide us with substantial protection
or be commercially beneficial. Our patent applications may not protect our
products because of the following reasons:
- we cannot be certain that any of our pending patent applications will
result in additional issued patents;
- we may develop additional proprietary technologies that are not
patentable;
- we cannot be certain that any patents issued or licensed to us will
provide a basis for commercially viable products;
- we cannot be certain that any patents issued or licensed to us will
not be challenged or circumvented or invalidated by third parties; and
- we cannot be certain that any patents issued to others will not have
an adverse effect on our ability to do business.
Patent law relating to the scope of claims in the technology fields in
which we operate is still evolving. The degree of future protection for our
proprietary rights is uncertain. Furthermore, we cannot be certain that others
will not independently develop similar or alternative products or technology,
duplicate any of our products, or, if patents are issued to us, design around
the patented products developed by us. In addition, we could incur substantial
costs in litigation if we are required to defend ourselves in patent suits
brought by third parties or if we initiate such suits.
WE CANNOT BE CERTAIN THAT OTHER MEASURES TAKEN TO PROTECT OUR INTELLECTUAL
PROPERTY WILL BE EFFECTIVE.
We rely upon trade secret protection, copyright and trademark laws,
non-disclosure agreements and other contractual provisions for some of our
confidential and proprietary information that is not subject matter for which
patent protection is being sought. Such measures, however, may not provide
adequate protection for our trade secrets or other proprietary information. If
they do not protect our rights, third parties could use our technology and our
ability to compete in the market would be reduced. While we require employees,
academic collaborators and consultants to enter into confidentiality and/or
intellectual property assignments where appropriate, any of the following could
still occur:
- proprietary information could be disclosed or others may gain access
to such information;
- others may independently develop substantially equivalent proprietary
information and techniques;
- we may not have adequate remedies for any breach; or
- we may not be able to meaningfully protect our trade secrets.
10
WE ARE DEPENDENT UPON OUR LICENSED TECHNOLOGIES AND MAY NEED TO OBTAIN
ADDITIONAL LICENSES IN THE FUTURE TO OFFER OUR PRODUCTS AND REMAIN COMPETITIVE.
We have acquired or licensed key components of our technologies from
third parties. If these agreements were to terminate prematurely or if we breach
the terms of any licenses or otherwise fail to maintain our rights to such
technology, it could harm our business. In addition, we may need to obtain
licenses to additional technologies in the future in order to keep our products
competitive. Failure to license or otherwise acquire necessary technologies
could harm our business, financial condition and results of operations.
THE PROTECTION OF INTELLECTUAL PROPERTY IN FOREIGN COUNTRIES IS UNCERTAIN.
We have sold approximately 50% of our WAVE Systems to customers located
outside the U.S. The patent and other intellectual property laws of some foreign
countries may not protect our intellectual property rights to the same extent as
U.S. laws. We may need to bring proceedings to defend our patent rights or to
determine the validity of our competitors' foreign patents. These proceedings
could result in substantial cost and diversion of our efforts. Finally, some of
our patent protection in the U.S. is not available to us in foreign countries
due to the laws of those countries.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS WHICH
COULD REQUIRE US TO PAY SUBSTANTIAL ROYALTIES.
There are a significant number of U.S. and foreign patents and patent
applications submitted for technologies in, or related to, our area of business.
As a result, any application or exploitation of our technology could infringe
patents or proprietary rights of others and any licenses that we might need as a
result of such infringement might not be available to us on commercially
reasonable terms, if at all. This may lead others to assert patent infringement
or other intellectual property claims against us. We may have to pay substantial
damages, including treble damages, for past infringement if it is ultimately
determined that our products infringe on another party's intellectual property
rights. We could also be prohibited from selling our products before we obtain a
license, which, if available at all, may require us to pay substantial
royalties. Even if a claim is without merit, defending a lawsuit takes
significant time, may be expensive and may divert management attention from
other business concerns. Any public announcements related to litigation or
interference proceedings initiated or threatened against us could harm our
business and cause our stock price to decline.
WE DEPEND ON ATTRACTING AND RETAINING KEY EMPLOYEES.
We are highly dependent on the principal members of our management staff
and research and development group, including Collin J. D'Silva, our Chief
Executive Officer and a co-founder, and Douglas T. Gjerde, Ph.D., our Chief
Scientific Officer and a co-founder. We have entered into employment agreements
with Mr. D'Silva and Dr. Gjerde, but not with all of our other key employees.
The loss of services of any of these individuals could seriously harm our
product development and commercialization efforts and could harm our business.
Our future success will also depend on our ability to attract, hire and
retain additional personnel, including sales and marketing personnel, technical
support and customer service staff and application scientists. There is intense
competition for qualified personnel in our industry, especially for experienced
personnel in the areas of chemistry and molecular biology, software and electric
engineering, manufacturing and marketing, and there can be no assurance that we
will be able to continue to attract and retain such personnel. Failure to
attract and retain key personnel could materially harm our business.
11
WE WILL NEED TO EFFECTIVELY MANAGE OUR GROWTH IF WE ARE TO SUCCESSFULLY
IMPLEMENT OUR STRATEGY.
The number of employees and scope of our business operations are
expected to grow as we continue the commercialization of our WAVE System. This
growth may place a strain on our management and operations. Our ability to
manage our growth will depend on the ability of our officers and key employees
to continue to implement and improve our operational, management information and
financial control systems and to expand, train and manage our work force both in
the U.S. and abroad. We may be required to open non-U.S. offices in addition to
our current U.K., Japan and satellite European offices, which could result in
additional burdens on our systems and resources. Our inability to manage our
growth effectively could harm our business.
OUR FAILURE TO COMPLY WITH ANY APPLICABLE GOVERNMENT REGULATIONS OR OTHERWISE
RESPOND TO CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF
HAZARDOUS CHEMICALS WHICH WE USE MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our research and development and manufacturing activities involve the
controlled use of hazardous materials and chemicals. We are subject to federal,
state and local laws and regulations governing the use, storage, handling and
disposal of such materials and certain waste products. If we fail to comply with
applicable laws or regulations we could be required to pay penalties or be held
liable for any damages that result and this liability could exceed our financial
resources. We cannot assure you that accidental contamination or injury will not
occur. Any such accident could damage our research and manufacturing facilities
and operations, resulting in delays and increased costs.
RISKS RELATED TO THIS OFFERING
WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS.
Our directors, executive officers and principal stockholders and certain
of their affiliates beneficially own approximately 79% of the outstanding equity
securities, and after the offering will beneficially own approximately 64% of
our outstanding equity securities. Accordingly, they collectively will have a
significant influence in determining the outcome of any corporate transaction or
other matter submitted to the stockholders for approval, including mergers,
acquisitions, consolidations and the sale of all or substantially all of our
assets, and also the power to prevent or cause a change in control. The
interests of these stockholders may differ from the interests of the other
stockholders.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price will be substantially higher than the
book value per share of our common stock. Investors purchasing common stock in
this offering will, therefore, incur immediate dilution of $10.12 in pro forma
net tangible book value per share of common stock, based on an assumed public
offering price of $13.00 per share. In addition, investors will incur additional
dilution upon the exercise of outstanding stock options and warrants. See
"Dilution" for a more detailed discussion of the dilution new investors will
incur in this offering.
PROVISIONS IN OUR CHARTER MAY INHIBIT A TAKEOVER, WHICH COULD LIMIT THE PRICE
INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change in control or changes in our
management that stockholders consider favorable or beneficial. If a change of
control or change in management is delayed or prevented, the market price of our
common stock could decline.
12
OUR COMMON STOCK MAY HAVE A VOLATILE PUBLIC TRADING PRICE.
Prior to this offering, there will have been no public market for our
common stock. An active public market for our common stock may not develop or be
sustained after this offering. We and the underwriters, through negotiations,
will determine the initial public offering price. The initial public offering
price is not necessarily indicative of the market price at which the common
stock will trade after this offering. The market prices for securities of
companies comparable to us have been highly volatile, and the market has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of the individual companies. Many factors have a
significant adverse effect on the market price of the common stock.
WE HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK AND DO NOT INTEND TO DO SO FOR
THE FORSEEABLE FUTURE.
We have never paid dividends on our capital stock and do not intend to
pay any dividends for the foreseeable future. We have agreed not to pay
dividends without the consent of our lenders. See "Dividend Policy."
THE SALE OF A SUBSTANTIAL NUMBER OF OUR COMMON SHARES AFTER THIS OFFERING MAY
AFFECT OUR SHARE PRICE.
The market price of our common shares could decline as a result of sales
of substantial amounts of our common stock in the public market after the
closing of this offering or the perception that substantial sales could occur.
These sales also might make it difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.
After this offering, we will have outstanding 20,037,200 shares of
common stock, assuming conversion of our convertible notes and accrued interest
on such notes and the exercise of warrants to acquire 300,000 shares of common
stock that will expire at the closing of this offering. This includes the
4,000,000 shares of common stock that we are selling in this offering and which
may be resold in the public market immediately. A substantial majority of the
remaining outstanding shares will be subject to lock-up agreements and will
become available for sale 180 days after this offering. The remaining shares
will become available for sale at various times following the date of this
offering. See "Shares Eligible for Future Sale" on page 48 for more information
regarding common stock that may be sold in the market after the closing of this
offering.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus that are
subject to risks and uncertainties. Many of these forward-looking statements
refer to our plans, objectives, expectations and intentions, as well as our
future financial results. You can identify these forward-looking statements by
forward-looking words such as "expects," "anticipates," "intends," "plans,"
"may," "will," "believes," "seeks," "estimates" and similar expressions. Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors" and other factors identified by cautionary language used
elsewhere in this prospectus. Before you invest in our common stock, you should
be aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could materially and adversely affect our business,
financial condition and results of operations.
13
USE OF PROCEEDS
We expect to receive net proceeds of $47.4 million from the sale of
4,000,000 shares of common stock, assuming a public offering price of
$13.00 per share and after deducting underwriting discounts and commissions of
$3.6 million and estimated expenses of $1.0 million. If the underwriters
exercise their over-allotment option in full, we will receive net proceeds of
this offering of approximately $54.6 million.
We intend to use the net proceeds of this offering for the expansion of
the manufacturing capacity of our San Jose, California manufacturing facility,
continuing product development and technology research, costs related to
building our sales and marketing organization, reduction in our outstanding debt
and other general working capital needs and for general corporate purposes.
We have not determined the specific amounts we plan to spend on any of
the areas listed above or the timing of these expenditures. Our management will
have broad discretion in allocating and utilizing the net proceeds from this
offering. The amounts and timing of our actual expenditures will depend on many
factors, including the status of our product development and commercialization
efforts, the amount of proceeds actually raised in this offering, the amount of
cash generated by our operations, the efforts of our competitors, and marketing
and sales activities. We may also use a portion of the proceeds for the
acquisition of, or investment in, companies, technologies or assets that
complement our business. However, we have no present understandings, commitments
or agreements to enter into any potential acquisitions and investments. Pending
application of the net proceeds as described above, we intend to invest the net
proceeds of the offering in short-term, investment-grade, interest-bearing
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock
and we do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently expect to retain all earnings, if any, for
investment in our business. In addition, the terms of our current credit
facilities prohibit us from paying cash dividends without our lenders' consent.
Dividends on our common stock will be paid only if and when declared by
our board of directors. The board's ability to declare a dividend is subject to
limits imposed by Delaware corporate law. In determining whether to declare
dividends, the board may consider our financial condition, results of
operations, working capital requirements, future prospects and other relevant
factors.
14
CAPITALIZATION
The following table describes our capitalization as of December 31,
1999:
- on an actual basis;
- on a pro forma basis, giving effect to the sale of the assets related
to our non-life sciences instrument product line, the assumed
conversion at $5.00 per share of $12.0 million aggregate principal
amount of our convertible notes plus accrued interest into 2,712,200
shares of common stock, the issuance of 300,000 shares of common stock
at $5.00 per share upon the exercise of warrants that will expire at
the closing of this offering and the sale of 25,000 shares of common
stock at $10.00 per share in March 2000; and
- on a pro forma as adjusted basis reflecting the sale of the common
stock offered by us at an assumed initial public offering price of
$13.00 per share after deducting the underwriting discounts and
commissions and estimated offering expenses.
You should read this table together with the consolidated financial
statements and the related notes and our unaudited pro forma financial
information and the related notes appearing at the end of this prospectus and
the information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Use of Proceeds."
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
Long-term obligations, less current portion................. $ 117 $ 117 $ 117
Convertible notes payable................................... 12,421 -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 15,000,000 shares
authorized,
no shares issued and outstanding.......................... -- -- --
Common stock, $0.01 par value; 30,000,000 shares authorized,
13,000,000 shares issued and outstanding, actual;
16,037,200 shares issued and outstanding pro forma; and
20,037,200 shares issued
and outstanding pro forma as adjusted(1).................. 130 160 200
Additional paid-in capital.................................. 10,232 24,372 71,692
Other capital items......................................... (117) (117) (117)
Accumulated deficit......................................... (12,344) (12,030) (12,030)
-------- -------- --------
Total stockholders' equity (deficit)...................... (2,099) 12,385 59,745
-------- -------- --------
Total capitalization...................................... $ 10,439 $ 12,502 $ 59,862
======== ======== ========
- ------------------------
(1) The number of outstanding shares (actual, pro forma and pro forma, as
adjusted) does not include the following:
- 152,450 shares that we could issue upon exercise of outstanding
warrants with an exercise price of $5.00 per share;
- 6,000,000 shares that we could issue under our employee stock option
plan. As of the date of this prospectus, we have issued options to
purchase 3,724,250 shares of common stock at an exercise price ranging
from $5.00 to $10.00 per share, except that options relating to 15,000
shares issued to one of our non-employee directors may be exercised at
a price equal to the lower of $5.00 or 50% of the public offering
price for this offering. We may issue options to acquire up to
2,275,750 additional shares of our common stock under this plan; and
15
- an underdetermined number of additional shares we are obligated to
issue to existing stockholders if the public offering price for this
offering is less than $10.00 per share. The number of additional
shares we will have to issue will depend on the offering price. In
addition, we will have to adjust the number of shares we will have to
issue upon exercise of the warrants and conversion of the notes
described above if the public offering price for this offering is less
than $10.00 per share.
16
DILUTION
Our pro forma net tangible book value as of December 31, 1999,
reflecting the sale of the assets related to our non-life sciences instrument
product line, the assumed conversion at $5.00 per share of our convertible notes
and accrued interest into 2,712,200 shares of common stock, the issuance of
300,000 shares of common stock at $5.00 per share upon the exercise of warrants
that will expire prior to the closing of this offering and the sale of 25,000
shares of common stock at $10.00 per share in March 2000 was approximately
$10.4 million, or approximately $0.65 per share. We have calculated this amount
by:
- subtracting our pro forma total liabilities from our pro forma total
tangible assets; and
- then dividing the difference by the total pro forma number of shares
of common stock outstanding.
If we give effect to our receipt of the net proceeds from our sale of
4,000,000 shares of common stock at an assumed public offering price of $13.00
per share, after deducting estimated underwriting discounts and estimated
offering expenses, our pro forma as adjusted net tangible book value at
December 31, 1999 would have been approximately $57.8 million, or $2.88 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.23 per share to existing stockholders and an immediate dilution of
$10.12 per share to new investors. The following table illustrates this dilution
on a per share basis:
Assumed initial public offering price per share............. $13.00
Actual net tangible book value per share as of December
31, 1999, before this offering and pro forma
adjustments............................................. $(0.47)
Increase per share attributable to sale of assets related
to our non-life sciences instrument product line........ 0.18
Increase per share attributable to the assumed conversion
of convertible notes and accrued interest, exercise of
warrants and issuance of 25,000 shares of common
stock................................................... 0.94
------
Pro forma net tangible book value per share as of December
31, 1999................................................ 0.65
Pro forma as adjusted increase in net tangible book value
attributable to this offering........................... 2.23
------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.88
------
Dilution per share to new investors......................... $10.12
======
The following table summarizes, on a pro forma as adjusted basis, as of
December 31, 1999, the total number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and to be paid by the new investors in this offering at an assumed
initial public offering price of $13.00 per share, before deducting estimated
underwriting discounts and offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION
--------------------------- ---------------------- AVERAGE PRICE
PRO FORMA NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------------- -------- ----------- -------- -------------
Existing stockholders............... $16,037,200 80.0% $24,532,605 32.1% $1.53
New investors....................... 4,000,000 20.0 52,000,000 67.9 13.00
----------- ----- ----------- -----
Total........................... $20,037,200 100.0% $76,532,605 100.0%
=========== ===== =========== =====
If all outstanding options and warrants having an exercise price less
than the offering price had been exercised as of December 31, 1999, the dilutive
effect to new investors would decrease to $9.79 per share. See "Capitalization,"
"Management--Stock Option and Other Compensation Plans" and "Description of
Capital Stock."
17
If the underwriters exercise their over-allotment option in full:
- the number of shares of common stock held by existing stockholders
will decrease to approximately 77.7% of the total number of shares of
our common stock outstanding; and
- the number of shares held by new investors will increase to 4,600,000
shares, or approximately 22.3% of the total number of our common stock
outstanding.
18
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are
derived from our historical consolidated financial statements and notes thereto
included elsewhere in this prospectus, which have been audited by Deloitte &
Touche LLP, independent auditors. The statement of operations data for the years
ended December 31, 1995 and 1996 and the balance sheet data as of December 31,
1995, 1996 and 1997 are derived from our audited historical consolidated
financial statements which are not included in this prospectus.
The following selected financial data should be read in conjunction with
our consolidated financial statements and the related notes thereto appearing
elsewhere in this prospectus and the information under "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995(1) 1996(1) 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $7,933 $12,535 $11,577 $18,935 $23,035
Cost of good sold................................ 3,516 6,760 6,336 9,590 12,090
------ ------- ------- ------- -------
Gross profit..................................... 4,417 5,775 5,241 9,345 10,945
Selling, general and administrative expenses..... 2,042 4,751 6,412 8,160 11,532
Research and development expenses................ 1,518 1,385 2,047 3,159 6,297
------ ------- ------- ------- -------
Operating expenses............................... 3,560 6,136 8,459 11,319 17,829
Income (loss) before income taxes................ 728 (644) (3,646) (2,506) (8,082)
Net income (loss)................................ $ 494 $ (415) $(2,410) $(1,576) $(9,827)
====== ======= ======= ======= =======
Basic and diluted net income (loss) per share.... $ 0.05 $ (0.04) $ (0.22) $ (0.13) $ (0.76)
====== ======= ======= ======= =======
Basic and diluted weighted average shares
outstanding(2)................................. 10,000 11,000 11,145 12,279 13,000
====== ======= ======= ======= =======
AS OF DECEMBER 31,
----------------------------------------------------
1995(1) 1996(1) 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)........................ $1,272 $ 324 $(1,669) $ 1,845 $ 3,494
Total assets..................................... 5,774 9,527 10,010 14,736 19,964
Long-term debt, less current portion............. 626 1,597 1,128 695 12,538
Total stockholders' equity (deficit)............. 2,429 2,114 991 6,649 (2,099)
- ------------------------
(1) Financial information prior to July 1, 1997 is that of our predecessor
corporation, CETAC Holding Company, Inc. and its subsidiaries.
(2) See Note A of notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing
per share data.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We provide innovative research tools to the life sciences industry.
These tools enable researchers to discover and understand variations in the
human genetic code, or genome, in order to accelerate and improve drug
development and diagnostics. We generate revenues from the sale of our WAVE
System and associated consumable products and reagents. Through March 1, 2000,
we have sold over 240 WAVE Systems to major academic research centers and
commercial biopharmaceutical companies in 20 countries. During 1999, revenues
from the sale of consumable products represented approximately 19% of our net
sales derived from our life sciences business. We expect that over the next five
years, sales from consumable products will increase as a percentage of our net
sales.
The following graph displays sales of WAVE System units during each
calendar quarter from July 1, 1997 through December 31, 1999:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
UNITS SOLD
Date
Q397 Q497 Q198 Q298 Q398 Q498 Q199 Q299 Q399 Q499
3 2 4 17 21 30 24 32 38 39
Before July 1, 1997, we produced and sold a number of non-life sciences
instruments and consumable products through CETAC Holding Company, Inc. and its
subsidiaries. On July 1, 1997, we merged these companies into a new Delaware
corporation known as Transgenomic, Inc. for the purpose of pursuing our new life
sciences business, but continue to produce our non-life sciences product lines.
Financial information for periods ending before July 1, 1997 is that of CETAC
Holding Company, Inc. and its subsidiaries. Net sales from our non-life sciences
instrument and consumables product lines were $9.4 million, $11.6 million, and
$9.1 million, respectively, for the years ended 1997, 1998 and 1999,
representing approximately 81%, 61% and 39% of our net sales, respectively, for
these periods. We have decided to divest ourselves of our non-life sciences
product lines. Accordingly, we recently signed a letter of intent to sell the
assets related to our non-life sciences instrument product line.
Since our decision to focus on our life sciences business, we have
incurred significant losses, and as of December 31, 1999, we had an accumulated
deficit of $12.3 million. Our losses have resulted principally from costs
incurred in research and development, marketing and sales, and from general and
administrative costs associated with our operations. We expect to continue to
incur substantial research and development, marketing and sales, and general and
administrative costs. As a result, we will need to generate significantly higher
revenue to achieve profitability.
20
Our operating results may fluctuate significantly depending upon many
factors. These include the market acceptance of our products, the success and
timing of sales of our WAVE System, the introduction of new products by our
competitors, the timing of commercial availability of new applications for our
technology, and the timing and extent of our research and development efforts.
Our limited operating history in the life sciences industry makes accurate
prediction of future operations difficult. If our operating results fail to meet
the expectations of securities analysts or investors, it could cause our stock
price to decline. See "Risk Factors."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NET SALES. Net sales increased 22%, from $18.9 million for the year
ended 1998 to $23.0 million for the year ended 1999. Sales from our life
sciences business increased 91%, from $7.3 million in 1998 to $13.9 in 1999.
This increase was primarily related to an increase in WAVE Systems sold. Total
revenues from sales of WAVE Systems increased 107%, from $5.4 million in 1998 to
$11.2 million in 1999. Life science consumables sales increased 42%, from
$1.9 million in 1998 to $2.7 million in 1999. This increase was due primarily to
a larger installed base of WAVE Systems. In addition, we acquired another
manufacturer of life science reagents during the year and began including sales
of these products in our revenues. Sales of our non-life sciences instruments
and related consumables decreased 22%, from $11.6 million in 1998 to
$9.1 million in 1999. This decrease was primarily related to an industry wide
consolidation and a reorganization of our dealer and distributor network.
COST OF GOODS SOLD. Cost of goods increased 26% from $9.6 million in
1998 to $12.1 million in 1999, representing 51% of net sales in 1998, as
compared to 52% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 41%, from $8.2 million in 1998 to
$11.5 million in 1999. The increase was primarily the result of building an
initial direct sales and marketing staff in the United States for our entry into
the life sciences market. We also expanded our life sciences sales and support
efforts in Europe, along with the opening of our marketing and technical support
office in Japan. We paid a one-time advisory services fee of $550,000 in 1999 in
connection with consulting and financial advisory services. We expect selling,
general and administrative expenses to continue to increase over the next
several years to support our growing business activities and to continue
expansion of our sales and marketing efforts, and due to the costs associated
with operating a public company.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 97%, from $3.2 million in 1998 to $6.3 million in 1999. These expenses
represented 17% of net sales in 1998 versus 27% of net sales in 1999. Research
and development expenses consisted primarily of salaries and related personnel
costs of researchers and software developers, material costs for prototypes and
test units, legal expenses from intellectual property research activities, and
testing and enhancement of our products, primarily the WAVE System. We expense
our research and development costs in the year in which they are incurred. The
increase from 1998 to 1999 in these expenses was primarily attributable to an
increase in our life science research, which was approximately 70% of total
research and development costs in 1999. We expect research and development
spending to increase significantly over the next several years as we expand our
research and product development efforts.
OTHER EXPENSES. Other expenses, which consisted mainly of net interest
expense, increased 126%, from $532,000 in 1998 to $1.2 million in 1999. This
increase was primarily related to our placement of $12.0 million of convertible
notes in March 1999. We also made interest payments under our bank loan
agreements.
INCOME TAXES. The income tax benefit in 1998 was $0.9 million, while in
1999 income tax expense was $1.7 million. A valuation reserve of $4.5 million
was recorded in 1999 due to our cumulative losses in recent years and an
inability to utilize any additional losses as carrybacks. As of December 31,
21
1999, we had federal net operating loss carryforwards of approximately
$11.6 million. We also had federal research and development tax credit
carryforwards of approximately $131,000. The net operating loss and credit
carryforwards will expire at various dates from 2012 through 2019, if not
utilized. We also had state income tax loss carryforwards of $2.9 million. These
carryforwards will also expire at various dates if not utilized.
As of December 31, 1998 and 1999, we had deferred tax assets of
approximately $2.0 million and $4.7 million, respectively. The net deferred tax
asset at December 31, 1999 has been offset by a valuation allowance of
$4.5 million due to our cumulative losses in recent years and an inability to
utilize any additional losses as carrybacks. The net deferred tax assets were
$2.0 million and $180,000 as of December 31, 1998 and 1999, respectively.
Deferred tax assets relate primarily to net operating loss carryforwards.
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 64%, from $11.6 million in 1997 to
$18.9 million in 1998. Of the $7.3 million increase, $5.1 million was due to
increased sales of our WAVE System and related consumable products. Sales of
life sciences consumable products were $1.9 million in each of 1997 and 1998.
Sales of non-life sciences products increased 22%, from $9.4 million in 1997 to
$11.5 million in 1998. This increase was primarily due to the release of an
upgraded laser-based solid sampling product in the first quarter of 1998.
COST OF GOODS SOLD. Cost of goods sold increased 52%, from
$6.3 million in 1997 to $9.6 million in 1998, but decreased from 55% of net
sales in 1997 to 51% of net sales in 1998. This decrease was the result of
higher material costs for the WAVE System being offset by minimal in-house
production costs, and the relatively fixed nature of the expenses related to our
non-life sciences instrument product line being allocated over a larger revenue
base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 27%, from $6.4 million in 1997 to
$8.2 million in 1998. The increase was primarily related to increases in sales
and marketing expenses for the commercialization of our WAVE System.
Administrative staff also grew to support our growing business activities
resulting in higher salary and employee benefit costs.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 54%, from $2.0 million in 1997 to $3.2 million in 1998. The increase
was primarily related to compensation for additional personnel engaged in the
development of the WAVE System.
OTHER EXPENSES. Other expenses, which consisted mainly of net interest
expense, increased 25%, from $427,000 in 1997 to $532,000 in 1998. This increase
was primarily due to the payment of interest on $1.5 million of mezzanine
short-term financing obtained at the end of 1997. This short-term financing was
repaid in 1998. We also made interest payments under our bank loan agreements.
INCOME TAXES. The income tax benefit for 1997 was $1.2 million, while
the benefit for 1998 was $0.9 million. The effective tax rate for 1997 was 34%,
and the effective tax rate for 1998 was 37%. As of December 31, 1998, we had
federal net operating loss carryforwards of approximately $3.9 million. We also
had federal research and development tax credit carryforwards of approximately
$76,000. The net operating loss and credit carryforwards will expire at various
dates from 2012 through 2018, if not utilized. We also had state income tax loss
carryforwards of $1.4 million. These carryforwards will also expire at various
dates if not utilized.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flows from operations
during the past three years. As a result, we had an accumulated deficit of
$12.3 million as of December 31, 1999. We have financed our operations primarily
through the private placements of common stock, the issuance of
22
convertible notes and, to a lesser extent, through bank financings and a
revolving credit facility. As of December 31, 1999, we had received net proceeds
of $10.4 million from issuance of common stock, and $11.4 million from the
issuance of convertible notes. We also sold 25,000 shares of common stock to one
of our directors at $10.00 per share in March 2000 for proceeds of $250,000. In
addition, we anticipate the exercise of warrants to purchase 300,000 shares of
common stock at or before the closing of this offering which will provide an
additional $1.5 million in cash. As of December 31, 1999, we had approximately
$150,000 in cash and cash equivalents.
We have a long sales cycle due to the need to educate potential
customers prior to the purchase of the WAVE System and to communicate the
benefits of our products to a variety of constituencies within potential
customer groups. We may need to expend substantial funds and sales effort with
no assurance that a sale will result. The need to penetrate new markets often
entails extension of our terms of sale. As a result, we may experience
collection periods of up to a year or more in connection with sales of our WAVE
System.
In March 2000, we signed a letter of intent to sell the assets related
to our non-life sciences instrument product line for $6,000,000. Of the total
purchase price, $5,000,000 will be paid in cash at the closing of the asset sale
and $1,000,000 will be paid with a one-year promissory note bearing interest at
a market rate. The sale is expected to provide that we will retain all accounts
receivable outstanding as of the date of the sale. Our accounts receivable from
the product line were approximately $1.5 million at December 31, 1999. After the
sale, we may experience difficulty in collecting the remaining accounts
receivable due to the lack of a continuing relationship with customers.
Our operating activities resulted in net outflows of $2.6 million in
1997, $3.4 million in 1998 and $8.7 million in 1999. The operating cash outflows
for these periods resulted from significant investments in research and
development, sales, marketing and services, which resulted in operating losses.
Net cash used in investing activities was $470,000 for the year ended
December 31, 1997, compared to net cash used in investing activities of
$1.5 million in 1998 and $3.5 million in 1999. The increase was primarily due to
the increase in purchases of property and equipment and the purchase of
technology rights related to our non-life sciences product lines.
Net cash provided by financing activities was $3.2 million for the year
ended December 31, 1997, compared to net cash provided of $4.6 million and
$12.2 million in 1998 and 1999, respectively. The increase was primarily due to
the issuance of convertible notes which netted $11.4 million, compared to the
net proceeds of $7.3 million received in 1998 on the sale of common stock. We
reduced notes payable by $2.7 million in 1998. In 1997 we received $1.7 million
net proceeds from the sale of stock. We also increased notes payable in 1997 by
a net $1.9 million.
At December 31, 1998 and 1999, we had outstanding borrowings under our
revolving credit facility with First National Bank of Omaha in the amounts of
approximately $3.2 million and $4.3 million, respectively. Borrowings under our
revolving credit facility are limited to the lesser of $5.0 million or a
borrowing base calculated from our accounts receivable and inventories. The
facility bears interest based on the prime lending rate and interest is payable
monthly. The interest rate at December 31, 1998 and 1999 was 7.75% and 8.50%,
respectively. This facility expires July 31, 2000, but we anticipate that it
will be extended. Substantially all of our assets and life insurance policies
for our executive officers are pledged as collateral to secure borrowings under
this facility. The loan agreement relating to this facility contains a number of
restrictive covenants, including a prohibition on the payment of dividends, the
repurchase of our stock, and the redemption of stock options and warrants, among
other things, without the written agreement of the lender. As of December 31,
1999, the Company was not in compliance with all of these covenants. However, a
waiver was obtained from the bank as of December 31, 1999.
Our capital expenditures budget for 2000 is approximately $2.0 million.
Capital expenditures for the current year are expected to relate to facility and
equipment improvements related to our life sciences business.
23
Our capital requirements depend on a number of factors, including the
level of our research and development activities, market acceptance of our
products, the resources we devote to developing and supporting our products, and
other factors. We expect to devote substantial capital resources to continue our
research and development efforts, to expand our marketing and sales and customer
support activities, and for other general corporate activities.
We believe that our current cash balances, together with the proceeds
from this offering, from our existing credit lines and from the sale of stock
upon the exercise of outstanding warrants and from cash provided from operations
will be sufficient to fund our operations for the foreseeable future. During or
after this period, if cash generated by operations is insufficient to satisfy
our liquidity requirements, we may need to sell additional equity or debt
securities, or obtain additional credit arrangements. The sale of additional
equity or convertible debt securities may result in additional dilution to our
stockholders. We cannot assure you that any financing arrangement will be
available in amounts or on terms acceptable to us.
IMPACT OF INFLATION
We do not believe that price inflation had a material adverse effect on
our financial condition or results of operations during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS AND FOR HEDGING ACTIVITIES" (SFAS No. 133). This statement, which is
effective for fiscal years beginning after June 15, 2000, requires the
recognition of all derivative financial instruments as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. Management is in the process of determining the
effect, if any, SFAS No. 133 will have on our financial statements.
In 1999, we adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1)
which, on a prospective basis, revised the accounting for software development
costs. SOP 98-1 requires capitalization of certain costs related to internal use
software once certain criteria have been met. The adoption of this statement did
not have a material impact on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. The average
duration of all of our investments in 1999 was less than one year. Due to the
short term nature of these investments, we believe we have no material exposure
to interest rate risk arising from our investments. Therefore, no quantitative
tabular disclosure is presented.
FOREIGN CURRENCY RATE FLUCTUATIONS
Approximately 50% of our net sales have been to customers in the United
States. While we do sell products in many foreign countries, most of these sales
are made in U.S. dollars. Therefore, we do not have a material exposure to
foreign currency rate fluctuations.
24
BUSINESS
OVERVIEW
We provide innovative research tools to the life sciences industry.
These tools enable researchers to discover and understand variations in the
human genetic code, or genome, in order to accelerate and improve drug
development and diagnostics. We believe our WAVE System, which incorporates our
proprietary DNASep separation column and associated software, consumables and
reagents, will become a leading tool to analyze genetic mutations. The WAVE
System allows researchers to analyze both known and unknown genetic mutations
faster, with more accuracy and at a lower cost than other commercially available
techniques. As of March 1, 2000, we had sold over 240 WAVE Systems in 20
countries to major academic research centers and biopharmaceutical companies. In
1999, sales of our WAVE Systems and related consumables accounted for
approximately $14 million in revenues.
Our WAVE System is designed to perform high-speed, automated analyses of
DNA molecules to identify the type, location and frequency of DNA mutations,
with a high degree of accuracy and consistency. The WAVE System is based on our
proprietary micro-bead technology. Our patented micro-beads are packed into our
proprietary DNASep separation column, which is the key component of our WAVE
System. Each micro-bead has specific surface chemistry that interacts with DNA
molecules. The DNA molecules are then selectively separated from the micro-beads
with a mixture of our liquid reagents. This process is automated by our
proprietary WAVEMaker Software for analysis and interpretation.
INDUSTRY BACKGROUND
DNA AND GENOMICS-BASED RESEARCH
The human body is composed of billions of cells each containing
deoxyribonucleic acid, or DNA, which encodes the basic instructions for cellular
function. This complete set of an individual's DNA is called the genome, or
genetic code, and is composed of 23 pairs of chromosomes, which are further
divided into over 100,000 smaller regions called genes. Each gene is comprised
of four nucleotide bases, known as G, C, A and T and the order of these bases is
called the DNA sequence. Genes are used as the templates for the production of
proteins and it is the proteins that direct cell function and ultimately the
development of individual traits. Any variation in any part of a gene, called a
mutation or polymorphism, may result in a change in cell function often leading
to disease.
Genomics is the systematic and comprehensive analysis of the sequence,
structure and function of the genes which comprise the genome with the objective
of identifying and understanding the role of genes in human physiology and
disease. Within a very short period, due to public efforts such as the Human
Genome Project and the efforts of various private companies, the human genome
will be completely sequenced. The efforts of the Human Genome Project have
centered on determining the DNA sequence of a limited number of individuals.
Genomics researchers are now attempting to understand variations in this DNA
sequence information and how it correlates to disease in order to develop new
drugs, treatments and diagnostic methods.
IMPORTANCE OF THE DISCOVERY OF GENETIC VARIATION
There are a variety of mutations known to occur in DNA sequences. The
most common form of genetic mutation involves a change in a single nucleotide
base and is called a single nucleotide polymorphism, or SNP. Other types of
genetic mutation include the insertion or deletion of several nucleotide bases
and translocation or repetition of nucleotide bases. The identification and
understanding of these mutations, including SNPs, are important because they may
indicate predisposition to a variety of diseases. Since even a single mutation
of a nucleotide base can have a major role in human disease, efforts to
understand and analyze genetic mutations have recently intensified.
After SNPs or other mutations are discovered, their potential relevance
to disease must be validated by determining the frequency of mutation in
different segments of the population. Some diseases, such as muscular dystrophy,
are caused by DNA mutations in a single gene. Many common diseases, such as
diabetes, cancer and obesity, are caused by mutations in more than one gene.
Since a single mutation or
25
multiple mutations may be required for a particular disease or trait to manifest
itself, it is necessary to measure a sizable population of these mutations in
order to be able to predict with confidence the association of a mutation with a
particular disease or trait.
As the Human Genome Project nears completion, the amount of sequenced
DNA available for genetic variation discovery has increased dramatically. New
genetic variations will be an ongoing need as different populations or groups of
individuals are studied. Insertions and deletions are particularly difficult to
efficiently detect with current technologies. In addition, diagnostic
applications require the analysis of DNA samples for both known and unknown
mutations. The increased need for the efficient discovery of genetic mutations,
including SNPs, creates a market opportunity for our WAVE System, as the
discovery of SNPs and other mutations, together with validated medical relevance
may lead to the development of new drugs, treatments and diagnostic products. In
order to do this, researchers will need technologies that provide higher sample
throughput, greater accuracy and reliability, and lower costs than current
methods.
CURRENT METHODS FOR MUTATION ANALYSIS
Current widely-used DNA mutation analysis technologies were originally
developed primarily for collecting DNA sequencing information and not for the
discovery of mutation and other genetic variations. As these methods have been
modified for use in SNP and other mutation analysis, several limitations have
become clear. Current methods of analysis include the following:
- GEL ELECTROPHORESIS. Gel electrophoresis is primarily a manual
separation technique for DNA which uses an electrical current to cause
DNA fragments to migrate over a gel. Because different lengths of DNA
will migrate at different speeds, they will be separated by this
process. The gel is transferred to a fluorescence-imaging camera and
photographed or scanned into a computer so that the DNA can be
visualized. If a particular fragment of DNA is required, then it must
be cut from the gel with a scalpel, the section can be melted to a
liquid or the DNA can be drawn out of the gel and into the surrounding
electrolyte with a further application of an electric field. Gel
electrophoresis provides good separation resolution and the cost of
associated equipment is relatively inexpensive.
- CAPILLARY ELECTROPHORESIS. Capillary electrophoresis may be in the form
of long thin capillaries or embodied in a chip. This technology
separates DNA by passing an electric current through a capillary tube
filled with a linear polymer and an electrolyte. DNA is introduced into
the top of the capillary and the current is applied. This method is
generally faster than conventional gel electrophoresis and allows for
simultaneous detection of results.
- CHIP ARRAY. Chip Array technology uses short fragments of single-strand
DNA that are attached to small squares on the surface of a "chip" so
that strands within a square have the same DNA sequence, but this
sequence is different in each separate square. The sample strand of DNA
is introduced to this chip and binds, or hybridizes, specifically only
where it matches the sequence attached to one of the squares. In this
way a match can be found, if it exists, from a very large array of
candidate DNA sequences. The chip primarily identifies sequences which
are known prior to analysis.
- MASS SPECTROMETRY. Mass spectrometry is a technique that applies a
charge to the sample and introduces the ionized sample into a chamber
that measures the mass per charge of each type of molecule. The mass of
the sample and various fragments produced indicate the identity of the
molecule that was introduced into the instrument. Although the sequence
of the DNA is not measured when using mass spectrometry, the
nucleotides making up the molecule bases can be measured.
LIMITATIONS OF CURRENT METHODS
Although these techniques are well accepted and established, none of
these methods is ideally suited to the analysis of sequence mutations. The
limitations of current methods include the following:
- GEL ELECTROPHORESIS. Gel electrophoresis is a time-consuming, labor
intensive process. Sample introduction, pouring of gels, separation,
identification of bands, and recovery of DNA must all
26
be done manually. In addition, there is no real-time monitoring of the
process. For example, if an insufficient sample were used for the
analysis, a researcher would only become aware after several hours of
experimentation.
- CAPILLARY ELECTROPHORESIS. Capillary electrophoresis can automate the
gel electrophoresis process. However, control of the conditions needed
to determine genetic variation is difficult and the quantities of DNA
separated are small. It is difficult to collect DNA material for
further analysis. Another limitation of this technique is the need for
special columns and chemistries to run each different type of sample.
- MASS SPECTROMETRY. Mass spectrometry is only a detection method and
does not incorporate any separation capability, which is essential for
multiple analyses of DNA molecules, as well as for purification. In
addition, this method cannot analyze large DNA fragments or double-
stranded DNA due to its inflexibility and fundamental limitations.
Gel electrophoresis, capillary electrophoresis, chip-based technologies
and mass spectrometry and certain other technologies only measure known SNPs or
mutations. Sequencing can measure unknown SNPs, but it is expensive and labor
intensive. Insertions, deletions, translocations, and repetitions and other
mutations are very difficult to measure using any of these technologies. All of
these basic technologies, when applied to scanning for unknown mutations have
significant disadvantages related to accuracy of results and the cost and time
needed to obtain the results. These disadvantages limit the usefulness of these
techniques for the efficient discovery of genetic variation.
THE TRANSGENOMIC SOLUTION
We believe our WAVE System, which incorporates our proprietary DNASep
technology and associated software, consumables and reagents, will become a
leading tool to analyze genetic variation. The WAVE System allows researchers to
analyze both known and unknown genetic mutations faster, with more accuracy and
at a lower cost than other commercially available techniques. We believe key
benefits of the WAVE System include the following:
- HIGH SPEED. DNA separation and analysis using our WAVE System can be
performed up to 10 times faster than current methods, depending on the
application. Separation times using our DNASep columns average
approximately 5-7 minutes per sample and can be as short as 3 minutes,
depending on the application. After the separation, results are
immediately available for quantification, analysis, reporting and
archiving.
- IMPROVED DATA ACCURACY. Our WAVE System produces more accurate and
consistent data than other existing techniques for mutation analysis.
Accuracy in discovery of known and unknown mutations is greater than
95% with the WAVE System. The higher level of data quality achievable
with the WAVE System is extremely valuable to the life sciences
researcher.
- REDUCED COST. Because our WAVE System is completely automated, the
amount of time per sample spent by a researcher is greatly reduced. The
WAVE System analyzes very small DNA samples and does not require
additional sample purification. This allows samples to be analyzed with
a smaller volume of chemical reagents than other methods. In addition,
the WAVE System can detect DNA mutations directly without the use of
expensive fluorescent tags or markers required by other techniques.
Savings in labor, reagents and tags significantly reduce the costs per
analysis over current methods.
- AUTOMATION AND EASE OF USE. The WAVE System is fully automated and easy
to operate. A multiple number of amplified DNA samples can be loaded
into the WAVE System's autosampler. Once loaded, the appropriate
application is chosen by the researcher and the WAVE System can
automatically introduce the sample, conduct the DNA separation and
analyze the results. Unlike other techniques, no purification or other
additional preparation of the DNA sample is necessary. With the
addition of a fragment collector, the WAVE System will automatically
collect DNA material for further analysis. The entire process is
controlled by our
27
proprietary WAVEMaker software. This aspect of the WAVE System can
significantly enhance the productivity of a genomics researcher.
- DISCOVER NEW MUTATIONS. WAVE System technology can efficiently discover
new mutations in a sample without prior knowledge of the mutation or
its location. The WAVE System is uniquely well-suited to the discovery
of insertions and deletions. Other than sequencing, most genotyping
methods require prior knowledge of the location of the mutation.
Compared to sequencing, which requires the interpretation of complex
reports to detect unknown mutations, the WAVE System displays
mutations, whether previously known or unknown, as a vertical spike, or
peak, on a simple graph. The ability to accurately detect the presence
of mutations allows for the screening of large fragments of DNA without
time-consuming and cumbersome sequencing of the entire fragment.
- SCALABILITY. Our bench top WAVE System is scalable depending on the
research problem to be solved. The DNASep separation columns are
available in different sizes depending on the application required.
STRATEGY
We intend to be the leading provider of technology platforms which
enable life science researchers to discover and understand variations in the
human genetic code, or genome, in order to accelerate and improve drug
development and diagnostics. Key elements of our strategy are as follows:
- FOCUS ON THE GENETIC VARIATION DISCOVERY MARKET. Our current focus is
to promote the use of our WAVE System by researchers involved in the
discovery and analysis of genetic variation. The investment in genomics
research is large and growing, and the corresponding need to analyze
genetic variations has led to increased demand for new technologies
such as the WAVE System. We believe the WAVE System significantly
increases research productivity and may accelerate drug development and
diagnostics.
- ESTABLISH THE WAVE SYSTEM AS THE INDUSTRY STANDARD. We are focusing our
initial marketing efforts on large well-known academic and commercial
research institutions to establish the WAVE System as the industry
standard for mutation analysis. We believe we are the first to bring
high performance DNASep micro-bead technology to the market and have
sold instruments to key genomics researchers to gain validation of our
technology, which has resulted in the publication of over 60 articles
in numerous scientific journals discussing the WAVE System. A key
component of our strategy is to maintain a worldwide sales organization
that provides technical support on a local level. We plan to increase
the number of our sales teams composed of sales personnel, application
scientists and technical support persons. In addition, because we
believe that a major factor in ensuring the success of our products is
to provide qualified technical support on a local level, we expect to
increase the number of technical support representatives and
application scientists.
- INCREASE CONSUMABLE SALES. We expect that our expanding base of
installed WAVE Systems will result in recurring sales of our associated
consumable products which include our proprietary columns and reagents.
Sales of our consumable products over the next five years should
increase as a proportion of our net sales. In order to support the
expected increase in consumable sales, we have dedicated manufacturing
facilities in California, Nebraska and the U.K.
- PENETRATE NEW MARKETS BY PROVIDING A DIVERSIFIED PORTFOLIO OF
PRODUCTS. We believe that our WAVE System has potential applications to
multiple life sciences research markets. We intend to continually
improve the throughput and otherwise expand the capability of our WAVE
System to address the varied and changing needs of academic and
commercial researchers performing specific DNA analysis. We also expect
to develop separation columns to analyze RNA, amino acids, proteins,
peptides and carbohydrates. We further intend to provide a range
28
of product offerings differentiated by price and throughput levels in
order to attract the broadest range of customers.
- BUILD A SUBSTANTIAL INTELLECTUAL PROPERTY ESTATE. We pursue an
intellectual property strategy of licensing patents and pursuing patent
protection for our inventions. We own or hold licenses to 11 issued
U.S. patents and 16 foreign patents. In addition we have pending
applications for 27 U.S. patents and 10 foreign patents. These issued
and pending patents are directed at our DNA and related research
technologies, and cover separation chemistry, molecular biology,
algorithms, instruments and software. We believe that our strong
intellectual property estate will continue to be an important
competitive advantage.
OUR TECHNOLOGY AND PRODUCTS
Our WAVE System is extremely versatile and can essentially eliminate the
use of traditional gels in the molecular biology lab. Our WAVE System can be
utilized in a wide range of applications, including mutation detection,
sized-based double strand DNA analysis and single strand DNA analysis. Our WAVE
System includes the following components:
- an autosampler (automatically introduces the DNA sample into our WAVE
instrument)
- a pump (pumps sample and reagents through the DNASep column and
instrument)
- a DNASep column (separates DNA fragments)
- a column oven (controls the temperature of the DNASep column)
- a detector (detects and measures DNA coming off the column)
- a fragment collector (collects high purity DNA fragments of interest)
- a personal computer and WAVEMaker Software (used for our WAVE
instrument interface control, experiment design, data collection, data
analysis, and reporting)
[DIAGRAM OF COMPONENTS OF WAVE SYSTEM]
DNA SAMPLE PREPARATION. A sample of DNA is first extracted from a
biological sample such as tissue or blood. Extraneous proteins are removed from
the DNA sample and the sample is placed into a
29
multi-well plate. PCR is a process where a target DNA sequence of approximately
500 base pairs is amplified from the biological sample. The DNA sample is
amplified by repeated cycles of heating and cooling, according to a
pre-determined protocol, which normally takes approximately 30 minutes.
WAVE SYSTEM SAMPLE INTRODUCTION AND SEPARATION PROCESS. After the
amplification process is completed, the sample plate is inserted directly into
the WAVE System's autosampler. The autosampler takes a small volume of the
sample and injects it into the DNASep column containing the micro-beads. Due to
the chemical affinity of the DNA to the surface chemistry on the micro-beads in
the column, the DNA attaches itself to the micro-beads. After the sample is
injected into the instrument, a mixture of reagent fluids is pumped into the
column at specified reagent concentrations and temperature conditions.
As the reagents are pumped through the column, DNA fragments are
released and separated from each other. The DNA fragments flow from the DNASep
column and through an ultraviolet or a fluorescence detector, which then
measures and reports the passage of the DNA fragments of interest. Depending on
the application, DNA fragments can be identified and measured to determine
whether they are mutant or normal, or a specific DNA size or type. The
separation and detection process continues until the entire DNA sample mixture
is separated into individual fragments. Any fragment of interest can be
collected for further study.
MODES OF OPERATION. DNA can be separated using three different modes by
controlling the oven temperature. These modes include the following:
- A NON-DENATURING MODE. This mode is for size-based separations and
under nondenaturing temperatures, it performs sized-based, sequence
independent fragment separation of double-stranded DNA. Small
double-strand DNA fragments can be separated and purified from larger
DNA fragments. In this case, the smaller DNA fragments are released
from the column first. Larger fragments of DNA are released in
ascending size order until the entire sample is separated. The
high-resolution separation and purification of fragments can be used
for high purity, cloning, sequencing or PCR amplification. Tests that
are based on fragment length use this mode.
- A PARTIAL-DENATURING MODE. This mode is for mutation detection. This
mode of operation involves the separation of fragments under partially
denaturing, or partially melting, conditions. In this mode the system
becomes a sensitive, accurate and cost-effective means for screening
sequence variation. Sequence variation in PCR product creates mutant
DNA. Mutant and normal DNA melt and separate at different temperatures.
The DNASep column micro-beads separate lower melting mutant DNA from
the column first and then separate the higher melting normal DNA.
Samples that do not contain genetic variation show a single normal DNA
peak. The presence of genetic variation is detected by identifying the
presence of a second mutant DNA peak that is present directly in front
of the normal DNA peak. This mode allows the screening of a large
number of samples to identify variants; then only the variants need be
sequenced instead of indiscriminate sequencing of all samples,
resulting in significant savings of time and cost. Analysis cost for
this technology is low, while the sensitivity has been reported to
exceed 95%. This low cost and high sensitivity justifies using the WAVE
System as a screening tool to replace indiscriminate sequencing of all
samples.
- A FULL-DENATURING MODE. This mode is for single-strand DNA and RNA
analysis. In the full denaturing mode, single-strand DNA or RNA
molecules can be separated at even higher temperatures. Our oven
temperatures allow the separation of single-strand DNA and RNA
according to sequence and size.
DETECTION. The standard WAVE System uses ultraviolet, or UV, detection.
UV detection is highly sensitive and can be used for all applications with
standard PCR amplification. By adding fluorescence detection to our system, we
can further decrease the amount of DNA needed for analysis. This makes it
possible to detect fluorescently labeled DNA fragments from extremely low sample
concentrations or from samples with low PCR amplification.
30
FRAGMENT COLLECTION. Purified DNA fragments can be collected for PCR
amplification, sequencing or for cloning. Cloning is a process where bacteria is
used to grow a large amount of certain specified DNA fragments. It is important
that the DNA material used for cloning is very pure so that only the specified
DNA material is found in the bacteria colonies. Amplification and sequencing
also benefit from highly purified DNA fragments.
WAVEMAKER SOFTWARE. Our WAVEMaker Software integrates the
instrumentation control and data acquisition functions of the WAVE System. The
software performs several functions including the formatting and presentation of
data. Our WAVEMaker Software provides logical input and output of instrument
data that is easily understood by researchers familiar with conventional
gel-based technology. We are working to further refine the software component of
the WAVE System to make it easier to operate for a broader market of end users.
WAVEMaker Software enables the user to choose a specific application.
The clear display allows the user to set up the procedure in a matter of
minutes. Customized protocols can easily be created and saved to facilitate
future analyses. Point mutation detection can be performed by importing the
sequence or size of the DNA fragment of interest into WAVEMaker Software.
The following diagram presents a sample screen taken from our WAVEMaker
Software.
[PICTURE OF COMPUTER SCREEN SHOWING WAVEMAKER SOFTWARE]
PRICING. This integrated WAVE System is priced from $60,000 to $100,000
depending on features and accessories. The price is dependent upon user selected
options, which include fragment collection, various detector configurations and
software versions.
WAVE OPTIMIZED MOLECULAR BIOLOGY CONSUMABLES
We manufacture several types of DNASep columns and WAVE Optimized
reagents and other consumables used with our WAVE System. As more of the systems
are sold, we expect that the DNASep
31
columns, chromatography fluids and other consumable items will become an
increasingly significant source of revenue.
Some consumables are contained and packaged in convenient kits to
increase ease of use and minimize possibility of user error. These kits may be
used in sample preparation or automated instrument operations for particular
applications. By adding different application kits, the WAVE System can perform
various applications.
RESEARCH AND DEVELOPMENT
Research and development expenses are budgeted at approximately
$6.5 million for the year 2000. Our research and development efforts fall into
several classes: development of new separation media, advanced instrumentation,
advanced software, chemistry of molecular biology testing and specific molecular
biology tests.
We are developing a WAVE System specifically tailored for the analysis
and purification of RNA. RNA molecules have a similar structure to DNA and are
used to transmit genetic instructions from DNA for protein synthesis and other
life processes occurring in a cell. In this manner, the functions encoded in DNA
are expressed using RNA. The amounts and types of RNA found in a cell indicate
whether genes are expressed or not. Measurement of types and quantities of RNA
determines the function of genes and their relationship to disease. Also, drug
treatments can be based on direct interaction of the drug on RNA or on the
proteins produced by the RNA. For this reason, many genetic-based drugs being
researched are based on interaction with RNA. Therefore, we believe that RNA
research creates an important opportunity for us in future development of the
WAVE System.
Determining the cause of disease by studying RNA will require better
tools for RNA analysis than those currently available. Since the function of RNA
is either directly or indirectly involved in drug treatment, genetic-based drug
development will also require better tools for the separation and measurement of
RNA. RNA presents special challenges to the researcher because these molecules
are unstable and difficult to separate and collect. Once separated, RNA is
difficult to keep intact. Therefore, the analysis of RNA can be difficult with
current technologies. We believe the RNA fragment analysis and purification
instrument we are developing has the potential to provide a significant
improvement in the ability to measure and purify RNA. Researchers in the field
of gene expression could use this instrument in their attempt to understand the
correlation of disease and the types and number of genes involved.
SALES AND MARKETING
We currently sell our WAVE Systems and related consumables in major
geographical markets. We target the U.S., the U.K. and most countries in Western
Europe with a direct sales staff of 18 persons. For the rest of the world, we
use a combination of dealers and distributors located in local markets. We also
maintain regionally-based technical support staffs and applications scientists
to support our sales and marketing activities throughout the U.S., Europe and
Japan.
Our marketing efforts utilize a variety of promotional channels
including print advertisements, scientific conferences, trade shows, and
Internet browser ads. The primary targets of our marketing efforts are life
sciences researchers and medical geneticists in academic and commercial research
institutions.
CUSTOMERS
As of March 1, 2000, we have sold over 240 WAVE Systems to customers in
20 countries. Our customers include numerous core laboratory facilities and a
number of other leading academic and medical institutions in the U.S. and
abroad, including Harvard University, Stanford University, Baylor University,
University of Chicago, Fred Hutchison Cancer Research Facility, Mayo Clinic,
National Cancer Institute, National Institutes of Health, Institut Curie,
University of Cambridge, Welcome Trust-Oxford University
32
and Institut Gustave Roussy. Customers also include a number of large,
established U.S. and foreign pharmaceutical and biotech companies including
SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck &
Company, Novartis and Eli Lilly and Company. No single customer accounted for
more than 3% of our sales in 1999.
MANUFACTURING
We manufacture all of our consumable products including our proprietary
DNASep separation columns and liquid reagents. We also incorporate our own
modifications into the basic liquid chromatography instrument that we use in our
WAVE System. Our manufacturing facilities are located in San Jose, California,
Omaha, Nebraska, and Crewe, England.
We obtain the basic liquid chromatography instrument for our WAVE System
from Hitachi Instruments, Inc. This relationship allows us to use Hitachi's
significant manufacturing capability to meet potential future increases in
demand for the WAVE System without investing in expanding our own manufacturing
capacity.
Although our relationship with Hitachi has existed since 1997, we have
recently entered into a new supply agreement with Hitachi under which they will
cooperate with us in the co-development of a modified instrument for use in our
WAVE System. Under the agreement, we have the exclusive right to market any
co-developed products for DNA analysis and purification using our DNASep
technologies. In addition, the agreement will provide for fixed pricing of the
liquid chromatography instruments for our WAVE System. Our agreement with
Hitachi has no fixed term and we have retained the right to work with other
vendors for liquid chromatography instruments. Under the agreement, there will
be no transfer of intellectual property rights without a specific agreement to
do so.
LEGAL PROCEEDINGS
We are not a party, nor are any of our assets or properties subject, to
any material legal proceedings.
INTELLECTUAL PROPERTY
To establish and protect our proprietary technologies and products, we
rely on a combination of patent, copyright, trademark and trade-secret laws, as
well as confidentiality provisions in our contracts.
We have implemented an aggressive patent strategy designed to provide us
with freedom to operate and facilitate commercialization of our current and
future products. We currently own 10 issued patents in the United States and
have 27 pending applications, of which we have received notices of allowances
for four. We also own 16 foreign issued patents, with 10 pending foreign
applications. We hold an exclusive license for components of the DNA separation
technology used in our WAVE System under an agreement with the inventors. This
license terminates in 2013. We have also entered into a non-exclusive license
agreement with a U.S. university relating to DNA detection technology.
The DNASep column and the systems with which it is combined are DNA
compatible. The micro-beads used within the DNASep column are covered by U.S.
Patent No. 5,585,236 and corresponding European patents. DNA compatible systems
are free from materials which would bind with DNA and interfere with the
separations. Separating DNA with DNA compatible systems and related processes
are covered by U.S. Patents 5,772,889, 5,997,742, 5,997,222, 6,017,457 and
6,024,878, along with a corresponding foreign patent application pending.
Additional patent applications for the DNA compatible column and system are
pending in the U.S., Europe and Japan. Future products including disposable
nucleic acid separation systems are covered by U.S. Patent 5,986,085 and pending
U.S. and foreign patent applications.
33
Generally, U.S. patents have a term of 17 years from the date of issue
for patents issued from applications filed with the U.S. Patent Office prior to
June 8, 1995, and 20 years from the application filing date or earlier claimed
priority date in the case of patents issued from applications filed on or after
June 8, 1995. Patents in most other countries have a term of 20 years from the
date of filing the patent application. Our issued United States patents will
expire between 2009 and 2017. Our success depends to a significant degree upon
our ability to develop proprietary products and technologies. We intend to
continue to file patent applications as we develop new products and
technologies.
Patents provide some degree of protection for our intellectual property.
However, the assertion of patent protection involves complex legal and factual
determinations and is therefore uncertain. The scope of any of our issued
patents may not be sufficiently broad to offer meaningful protection. In
addition, our issued patents or patents licensed to us may be successfully
challenged, invalidated, circumvented or unenforceable so that our patent rights
would not create an effective competitive barrier. Moreover, the laws of some
foreign countries may not protect our proprietary rights to the same extent as
do the laws of the United States and Canada. In addition, the laws governing
patentability and the scope of patent coverage continue to evolve, particularly
in areas of interest to us. As a result, there can be no assurance that patents
will issue from any of our patent applications or from applications licensed to
us. In view of these factors, our intellectual property positions bear some
degree of uncertainty.
We also rely in part on trade-secret protection of our intellectual
property. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees and consultants also sign agreements requiring that they assign to us
their interests in patents and copyrights arising from their work for us. All
employees sign an agreement not to compete unfairly with us during their
employment and after termination of their employment, through the misuse of
confidential information, soliciting employees, soliciting customers and the
like. However, it is possible that these agreements may be breached or
invalidated and if so, there may not be an adequate corrective remedy available.
Despite the measures we have taken to protect our intellectual property, we
cannot assure you that third parties will not independently discover or invent
competing technologies, or reverse engineer our trade secrets or other
technologies. Therefore, the measures we are taking to protect our proprietary
rights may not be adequate.
We do not believe that our products infringe on the intellectual
property rights of any third party. However, third parties may file claims
asserting that our technologies or products infringe on their intellectual
property. We cannot predict whether third parties will assert claims against us
or against the licensors of technology licensed to us, or whether those claims
will be found to have merit. If we are forced to defend against such claims,
whether they are with or without any merit, whether they are resolved in favor
of or against us or our licensors, we may face costly litigation and diversion
of management's attention and resources. As a result of such disputes, we may
have to develop costly non-infringing technology or enter into licensing
agreements. These agreements, if necessary, may be unavailable on terms
acceptable to us, or at all, which could seriously harm our business or
financial condition.
COMPETITION
The market for our products is highly competitive. Our principal
competitors include those entities that provide alternative technologies and
products for the separation and analysis of DNA in the areas of sample
amplification, analysis process, sample separation and mutation detection and
correlation. They include Affymetrix, Inc., Agilent Technologies, Amersham
Pharmacia Biotech AB, Bio-Rad Laboratories, Inc., BioWhittaker Molecular
Applications, GeneTrace Systems, Inc., Invitrogen Corporation, PE Corporation,
Sequenom, Inc. and Varian Associates Inc. Moreover, competitors have greater
name recognition than we do and provide more conventional technologies and
products with which some of our customers and potential customers may have more
familiarity or experience. In many cases, in order to compete against existing
and alternative technologies, we will need to demonstrate the superior
34
performance, speed and capabilities of our WAVE System, including our
proprietary DNASep column and micro-bead technology. We cannot assure you that
we will be able to make the necessary enhancements to our technology or products
to compete successfully with newly emerging technologies.
EMPLOYEES
As of March 10, 2000, we had 215 full-time employees. Of these
employees, 162 were in life sciences and the remaining 53 were employed in
non-life sciences line product. Of these 215 employees, 41 held Ph.D.s. Upon
closing of the sale of the assets of our non-life sciences instrument product
lines, the non-life sciences instruments employees will become employees of the
purchaser. The following sets forth the number of persons employed in the
principal areas of our operation:
NON-LIFE
SCIENCES
CONSOLIDATED LIFE SCIENCES INSTRUMENT
------------ ------------- ----------
Manufacturing.............................................. 55 28 27
Sales and Marketing........................................ 71 62 9
Research and Development................................... 59 48 11
Administration............................................. 30 24 6
Our future success depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense. Due to the limited number of people
available with the necessary technical skills, we can give no assurance that we
can retain or attract key personnel in the future. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
PROPERTIES
We do not own any real property. We currently lease office and
manufacturing space in the following locations:
LOCATION SQUARE FOOTAGE ANNUAL RENT LEASE TERM EXPIRES
- -------- -------------- ----------------- ------------------
Omaha, Nebraska(1)................................. 71,799 $308,000 2000
San Jose, California............................... 13,660 $213,000 2002
Crewe, England..................................... 7,400 L70,000 2006
Cramlington, England............................... 8,200 L26,000 2001
Tokyo, Japan....................................... 1,000 Y7,293,000 2001
Cambridge, Massachusetts........................... 2,500 $54,000 2002
Gaithersburg, Maryland............................. 2,294 $35,000 2004
Dallas, Texas...................................... 240 $11,000 2000
Houston, Texas..................................... 2,760 $24,000 2003
- ------------------------
(1) In connection with the sale of the assets of our non-life sciences
instrument product line, the lease for the Omaha, Nebraska facility will be
assigned to, and assumed by, the purchaser. We intend to relocate our
headquarters to new administrative offices in the Omaha area.
35
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our executive officers and directors, positions held by them and their
ages, as of March 10, 2000, are as follows:
NAME AGE POSITION
- ---- -------- --------
Collin J. D'Silva......................... 43 Chairman of the Board, Chief Executive
Officer and Director
John L. Allbery........................... 41 Chief Financial Officer, Treasurer and
Managing Director of European Operations
Douglas T. Gjerde, Ph.D................... 46 Chief Scientific Officer and Director
John E. Doyle............................. 56 Executive Vice President of Operations
Andrew T. Zander, Ph.D.................... 54 Vice President of Research and Development
Kraig McKee............................... 42 Vice President of United States Sales
William Walker............................ 64 Vice President of Intellectual Property
Mitchell L. Murphy........................ 44 Controller and Secretary
Stephen F. Dwyer.......................... 57 Director
Jeffrey Sklar, M.D., Ph.D................. 49 Director
Parag Saxena.............................. 44 Director
Gregory J. Duman.......................... 44 Director
Roland J. Santoni......................... 58 Director
COLLIN J. D'SILVA. Mr. D'Silva has served as our Chairman of the Board
and Chief Executive Officer since 1997 and is also a Director. Mr. D'Silva, a
co-founder of Transgenomic, has worked for Transgenomic and its predecessors
since 1988. Prior to that time, Mr. D'Silva was employed by AT&T from 1980. At
AT&T, he held various positions in engineering, materials management, sales
support and business development. His last position at AT&T was Business Unit
Manager and Engineering Manager for a network distribution products division.
Mr. D'Silva holds a B.S. degree and a M.Eng. degree in industrial engineering
from Iowa State University and an M.B.A. from Creighton University.
JOHN L. ALLBERY. Mr. Allbery joined us in March, 2000 as Chief
Financial Officer, Treasurer and Managing Director of European Operations. Prior
to joining us, Mr. Allbery served as the Chief Financial Officer and Managing
Director of the Virtus Group in Central and Eastern Europe since 1999. From 1985
until 1999, Mr. Allbery was with the accounting firm of Deloitte & Touche LLP
and served in various positions including office Partner-In-Charge of Tax and
Legal in Central Europe.
DOUGLAS T. GJERDE, PH.D. Dr. Gjerde joined us in 1996 as Chief
Scientific Officer. Dr. Gjerde has held positions as senior scientist for Exxon
Research and Engineering, Director of Research for Wescan Instruments, and
President and Director of Research & Development for Sarasep, Inc. Sarasep,
which Dr. Gjerde co-founded, was acquired by us in 1996. Dr. Gjerde has authored
12 patents and has more than 40 journal publications, primarily focused on
separation technology. Dr. Gjerde received his B.S. in chemistry in 1976 from
Minnesota State University, Mankato, Minnesota, and his Ph.D. in analytical
chemistry in 1980 from Iowa State University, Ames, Iowa.
JOHN E. DOYLE. Mr. Doyle has been with our company since
September 1997, initially focusing on operations and process improvement. In
1999, Mr. Doyle assumed responsibility for sales, again focusing on process as
well as improvements in staffing. Prior to joining Transgenomic, he was with
Supelco Inc. for 20 years, serving as Chief Executive Officer when it was a
Sigma-Aldrich company; Business Unit Vice President when it was a subsidiary of
Rohm and Haas Corporation; and International Vice President when it was
privately held. Mr. Doyle received his engineering degree from Pennsylvania
State University.
36
ANDREW T. ZANDER, PH.D. Dr. Zander has served as our Vice President of
Research and Development since April 1999. Prior to joining Transgenomic,
Dr. Zander held the position of Director of the Measurements Laboratory in the
corporate research center of Varian Associates, Inc. from November 1987 to
April 1999. Additionally, Dr. Zander just completed 30 years of commissioned
service with the U.S. Naval Reserve, holding the rank of Captain, and including
21 years as Scientific Liaison Officer with the Office of Naval Research in the
Chemistry and Chem/Bio Defense Programs. Dr. Zander holds a Ph.D. from the
University of Maryland.
KRAIG MCKEE. Mr. McKee has served as our Vice President of Sales for
the United States since July 1999. Prior to joining us, he was the Sales
Director from 1997 to 1999 for Bayer Diagnostics. From 1987 through 1997, he
held a number of positions in the sales organization of Chiron Diagnostics. His
last position at Chiron was National Sales Director, ACS Reagent Systems. He
received a Bachelor's degree in marketing from Texas Tech University.
WILLIAM WALKER. Mr. Walker joined us in 1998 as Vice President of
Intellectual Property. Mr. Walker is a corporate attorney with an emphasis in
intellectual property law. Mr. Walker served as Director of Patents and
Licensing for Syntex Corporation (1970-1981) and subsequently provided
intellectual property counseling to new and emerging companies. Mr. Walker has a
law degree from Georgetown University Law Center, a B.S. degree in chemical
engineering from the University of Tennessee and a MFCC degree in psychology
from Santa Clara University. He is a member of the California Bar and is active
in numerous professional organizations.
MITCHELL L. MURPHY. Mr. Murphy joined us in 1992. His current duties
include the overall administration of our finance and accounting functions.
Prior to joining Transgenomic, he held accounting and financial management
positions for companies involved in manufacturing, steel distribution and rebar
fabrication for 15 years. He spent over two years as an auditor for the Omaha,
Nebraska office of Deloitte, Haskins & Sells (now Deloitte & Touche LLP) working
in a broad range of industries. Mr. Murphy graduated with honors from Creighton
University in 1978 with a B.S. degree in business administration with an
accounting major.
STEPHEN F. DWYER. Mr. Dwyer has recently signed a letter of intent to
acquire the assets associated with our non-life sciences instrument product
line, which will be operated as a separate business. Mr. Dwyer is a director and
was a co-founder of Transgenomic. From 1996 until March 2000, Mr. Dwyer was
employed by Transgenomic and its predecessor company, most recently as Vice
Chairman. In 1966, Mr. Dwyer started Sasco Inc., which produced laboratory
animals used in disease research. In 1986, Mr. Dwyer sold Sasco to Charles River
Labs. He continued to run Sasco as a Charles River Labs subsidiary for the next
eight years.
JEFFREY SKLAR, M.D., PH.D. Dr. Sklar is professor of Pathology at
Harvard Medical School, where he has been on the faculty for more than five
years. He also serves as Director of the Divisions of Diagnostic Molecular
Biology and Molecular Oncology, department of Pathology Brigham and Women's
Hospital. Dr. Sklar serves on the Editorial Boards of Numerous Journals in the
area of Pathlogy and Cancer and on Scientific Advisory Committees to the
Dana-Farber Cancer Center, Boston, MA; the Fred Hutchinson Cancer Center,
Seattle, Washington; the New England Regional Primate Center; Harvard
University; and the National Institutes of Health. He is a director of Dianon
Systems, Inc., and has served on the scientific advisory boards of numerous
companies in the biotechnology field. Dr. Sklar holds an M.D. and Ph.D. from
Yale University and an M.A. (honorary) from Harvard University.
PARAG SAXENA. Mr. Saxena is the Chief Executive Officer of INVESCO
Private Capital, Inc. ("IPC") and has held that position for more than five
years. As a founding member of IPC, Parag has been involved in numerous private
capital transactions and has served as a director on a number of venture-backed
healthcare and telecommunications companies. Mr. Saxena began his career in 1978
as a product engineer at Becton Dickinson Corporation. He later joined Booz,
Allen and Hamilton in the Technology Management Services Group where his
responsibilities included market analysis, technology strategy, acquisition
evaluation and business strategy formulation for several Fortune 100
corporations in
37
the healthcare field. Mr. Saxena joined Citicorp Investment Management, Inc. in
1983 as a founding member of the private capital group's predecessor and was
responsible for healthcare private investments and small cap public stocks.
Mr. Saxena received a B. Tech in 1977 from the Indian Institute of Technology
and an M.S. in 1978 in Chemical Engineering from West Virginia College of
Graduate Studies. He earned an M.B.A. in 1982 from the Wharton School of the
University of Pennsylvania.
GREGORY J. DUMAN. Mr. Duman has been a director since March 2000.
Mr. Duman is the Executive Vice President of Transaction Systems
Architects, Inc. (TSAI) a computer software company. He joined TSAI in 1983 as
Director of Administration. He became Controller in 1985 and Vice President of
Finance and Chief Financial Officer in 1991 and served in that role through
February 2000. From 1979 to 1983, he worked for Arthur Andersen & Co. as a
certified public accountant Mr. Duman is a director of Nestor, Inc. (Nasdaq:
NEST) and Digital Courier Technologies, Inc. (Nasdaq: DCTI).
ROLAND J. SANTONI. Mr. Santoni has been a director since March 2000. He
has been Professor of Law at Creighton University School of Law, Omaha, Nebraska
since 1977. He also has been Of Counsel with Erickson & Sederstrom, P.C. since
1978. Mr. Santoni received a B.S. in Economics from The Wharton School,
University of Pennsylvania, in 1963 and a J.D., CUM LAUDE, from the University
of Pennsylvania School of Law in 1966.
SCIENTIFIC ADVISORS
We consult with several leading scientists from around the world, as
part of our ongoing research and development efforts. These advisors assist us
in formulating our research, development, and commercialization strategies. Some
of these advisors include:
- Dennis R. Burton, Ph.D., Professor of Immunology, The Scripps Research
Institute, La Jolla, California.
- R. Alan North, Ph.D., Professor and Director of the Institute of
Molecular Physiology, the University of Sheffield, Sheffield, U.K.
- Eric Hoffman, Ph.D., Director, Research Center for Genetic Medicine,
The Children's National Medical Center, Washington, D.C.
- Leon Yengoyan, Ph.D., Professor of Chemistry, San Jose State
University, San Jose, California.
We do not pay cash remuneration to our scientific advisors, but may
reimburse them for reasonable expenses they incur on our behalf. We may also
award stock options to them under our stock option plan. See "Stock Option and
Other Compensation Plans" below.
BOARD OF DIRECTORS
Our Board of Directors is comprised of seven directors and is divided
into three classes. Directors of each class are elected for terms of three
years. Class I directors are Parag Saxena and Collin J. D'Silva. Class II
directors are Stephen F. Dwyer and Jeffrey Sklar. Class III directors are
Douglas T. Gjerde, Gregory Duman and Roland J. Santoni. The current terms of the
Class I, Class II and Class III directors will end at our annual stockholders
meetings held in 2001, 2002 and 2003, respectively.
BOARD COMMITTEES
The audit committee consists of Messrs. Duman, Sklar and Saxena, each of
whom is an independent director. The audit committee reviews the services
provided by our independent auditors, consults with the auditors on audits and
proposed audits, and reviews and evaluates our internal auditing procedures and
control functions.
The compensation committee consists of Messrs. Sklar, Dwyer and Saxena.
The compensation committee reviews the compensation arrangements for our
executive officers, makes recommendations to the Board of Directors regarding
compensation matters and administers our employee stock option plan. See "Stock
Option and Other Compensation Plans" below.
38
DIRECTOR COMPENSATION
Directors who are also our officers are not separately compensated for
serving on the Board of Directors other than reimbursement for out-of-pocket
expenses related to attendance at board and committee meetings. Outside
directors are paid an annual retainer of $12,000. In addition, they receive a
fee of $1,200 for attending meetings in person, or $600 for participating in a
meeting by teleconference, as well as reimbursement for out-of-pocket expenses
related to attendance at board and committee meetings.
Outside directors are issued options to purchase 15,000 shares of common
stock under our 1997 Stock Option Plan upon initial appointment to the board.
The options have exercise prices ranging from the lesser of $5.00 per share or
50% of the price that we issue common stock in this offering to $10.00 per
share. These options vest at the rate of 20% per year of service on the board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION
No member of our compensation committee serves as a member of the board
of directors or compensation committee of any other company that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation we paid during the
year ended December 31, 1999 to our Chief Executive Officer and our next four
most highly compensated executive officers whose salary and bonus for 1999
exceeded $100,000. Also included is the compensation of an executive officer who
resigned prior to the end of the year. These executive officers are referred to
as the named executive officers elsewhere in the prospectus.
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(2)
- --------------------------- -------- -------- ------------ ---------------
Collin J. D'Silva................................... $132,440 $ 0 $6,129 $21,587
Chief Executive Officer
William Walker...................................... 201,466 0 1,889 5,631
Vice President of
Intellectual Property
John E. Doyle....................................... 150,645 4,000 3,615 17,893
Executive Vice President
of Operations
Andrew T. Zander, Ph.D.............................. 117,378 0 2,101 4,695
Vice President of Research and Development
Douglas T. Gjerde, Ph.D............................. 101,216 0 3,074 19,394
Chief Scientific Officer
P. Thomas Pogge..................................... 162,871 0 4,643 8,256
General Counsel(3)
- ------------------------
(1) No long term compensation was awarded or paid to any named executive
officer during 1999.
(2) Consists of accrued vacation to be taken in the future or paid in cash upon
termination of employment.
(3) Mr. Pogge resigned as an executive officer prior to the end of 1999.
All executive officers are eligible to participate in our stock option
plan (described under "Stock Option and Other Compensation Plans") and may
participate in other employee benefit plans and programs, such as health
insurance plans, that we offer to our other employees.
39
OPTION GRANTS IN LAST FISCAL YEAR
None of the named executive officers were awarded any stock options
during 1999.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
None of the named executive officers exercised any stock options during
1999.
STOCK OPTION AND OTHER COMPENSATION PLANS
STOCK OPTION PLAN. Our stock option plan allows us to grant options to
our employees, directors and advisors which give them the right to buy our
common stock at a fixed price, even if the market value of our stock goes up.
Our stock option plan is administered by the compensation committee of our Board
of Directors and it has the sole authority to set the number, exercise price,
term and vesting provisions of the options granted under the plan. Under the
terms of the plan, the exercise price of an option cannot be less than the fair
market value of our common stock on the date the option is granted. In general,
options will expire if not exercised within ten years from the date they are
granted. The committee may also require that an option holder remain employed by
us for a specified period of time before an option may be exercised. These
"vesting" provisions are established on an individual basis by the committee.
The committee will also decide whether options will be nonqualified options or
structured to be qualified options for U.S. income tax purposes. Either
incentive or nonqualified stock options may be granted to employees, but only
nonqualified stock options may be granted to our non-employee directors and
advisors. Options for a maximum of 6,000,000 shares may be granted under the
plan. To date, we have issued options for 3,724,250 shares of our common stock.
All of these options have an exercise price ranging from $5.00 to $10.00 per
share, except that options for 15,000 shares issued to one of our non-employee
directors may be exercised at the lower of $5.00 per share or 50% of the price
of our common stock in this offering. See "Director Compensation" above.
Under the terms of our stock option plan, if the option holder dies,
becomes permanently disabled or retires any options not vested at such time will
become immediately vested. If an option holder voluntarily resigns, any options
not vested as of the date of resignation will terminate and all rights will
cease, unless the compensation committee determines otherwise. In the event an
option holder's employment, board membership or status as an advisor is
terminated for cause, the option holder's right to exercise an option, whether
or not vested, will immediately terminate and all rights will cease, unless the
compensation committee determines otherwise.
EMPLOYEE SAVINGS PLAN. We have also established an employee savings
plan that is intended to qualify as a tax-qualified plan under Section 401(k) of
the Internal Revenue Code. This plan allows for voluntary contributions up to
statutory maximums by eligible employees. We match a specific proportion of
these contributions, subject to limitations imposed by law. We may make
additional contributions to the savings plan on behalf of our employees if our
Board of Directors decides to do so. During the years ended December 31, 1997,
1998 and 1999, we contributed $92,733, $117,923 and $174,973 to the savings plan
on behalf of our employees.
LIMITATION OF DIRECTORS AND OFFICERS LIABILITY
Our certificate of incorporation provides that no director will be
liable for monetary damages for breach of the director's fiduciary duty to the
company or its stockholders, except for liability arising from:
- breach of the director's duty of loyalty to the company or its
stockholders;
- acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law;
- improper distributions to stockholders and improper redemptions of
stock; and
- transactions from which the director derived an improper personal
benefit.
40
This provision of our certificate of incorporation does not eliminate the
directors' fiduciary duties, and in appropriate circumstances, equitable
remedies including an injunction or other forms of non-monetary relief would
remain available under Delaware law. This provision also does not affect a
director's responsibilities under any other laws including federal securities
laws or state or federal environmental laws.
In addition, our bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We are also empowered
under our bylaws to enter into indemnification contracts with our directors and
officers and to purchase insurance on behalf of any person we are required or
permitted to indemnify. We have obtained directors and officers liability
insurance coverage which covers, among other things, liabilities arising under
the Securities Act.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with our Chief Executive
Officer, Collin J. D'Silva, our Chief Financial Officer, John L. Allbery, our
Chief Scientific Officer, Dr. Douglas T. Gjerde and William Walker, our Vice
President of Intellectual Property. Each employment agreement has an initial
term of five years and will automatically renew for an additional three-year
period unless we or the officer gives notice of an intention not to renew. The
employment agreements require our executives to devote their full time to our
business activities; subject to certain reasonable exceptions. Our executives
are not allowed to compete with us while they are our employees and for a year
after they are no longer our employee. If one of our officers dies or becomes
permanently disabled, he will receive an amount equal to six months of salary,
and if an officer's employment is terminated for reasons other than an act of
serious misconduct, the officer will be entitled to severance pay in an amount
equal to his then current base salary plus the amount of the previous year's
bonus, provided that such severance payment does not exceed 299% of his current
salary.
Each of our executive officers has also entered into a separate
confidentiality agreement which prohibits them from disclosing confidential
information about our business to people outside of the company except for
proper business purposes.
41
PRINCIPAL STOCKHOLDERS
The following table provides information concerning beneficial ownership
of our common stock as of March 10, 2000, by:
- each of our named executive officers;
- each of our directors;
- all of our directors and executive officers as a group; and
- each stockholder that we know owns more than 5% of our outstanding
common stock.
The following table assumes conversion of $12.0 million of aggregate
principal amount of our convertible notes plus accrued interest at $5.00 per
share into 2,712,200 shares of common stock and 300,000 shares that will be
issued at $5.00 per share upon the exercise of warrants immediately prior to
completion of this offering.
Based on information furnished by such owners, we believe that the beneficial
owners listed below have sole voting and investment power with respect to such
shares.
PERCENT
BENEFICIALLY OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
- ---- ------------------ -------- --------
EXECUTIVE OFFICERS AND DIRECTORS
Collin J. D'Silva(1)................................. 4,470,000 33.5% 22.3%
John L. Allbery(2)................................... 20,000 * *
Douglas T. Gjerde, Ph.D.(3).......................... 2,500,000 16.9 11.6
John E. Doyle(4)..................................... 45,000 * *
Andrew T. Zander, Ph.D.(5)........................... -- * *
Kraig McKee(6)....................................... -- * *
William Walker(7).................................... 25,000 * *
Mitchell L. Murphy(8)................................ 14,000 * *
Stephen F. Dwyer(9).................................. 2,986,000 22.4 14.9
Jeffrey Sklar, M.D., Ph.D.(10)....................... 9,000 * *
Gregory Duman(11).................................... 25,000 * *
Roland J. Santoni(12)................................ -- * *
Parag Saxena......................................... -- * *
All executive officers and directors as a group
(13 persons)....................................... 10,094,000 57.2 46.6
OTHER STOCKHOLDERS
Arthur P. D'Silva(13)................................ 1,530,000 9.5 7.6
INVESCO Private Capital, Inc.(14).................... 2,260,167 14.1 11.3
- ------------------------
* Less than 1%.
(1) Includes 1,400,000 shares owned by the Arthur P. D'Silva Trust, of which
Collin J. D'Silva is the sole trustee.
(2) Consists of vested options to purchase 20,000 shares at $10.00 per share.
Mr. Allbery holds unvested options to purchase an additional 80,000 shares
at $10.00 per share.
(3) Includes an option to purchase 1,500,000 shares at $5.00 per share.
42
(4) Consists of vested options to acquire 45,000 shares at $5.00 per share.
Mr. Doyle holds unvested options to purchase an additional 30,000 shares at
$5.00 per share.
(5) Mr. Zander holds unvested options to purchase 50,000 shares at $5.00 per
share.
(6) Mr. McKee holds unvested options to purchase 20,000 shares at $5.00 per
share.
(7) Consists of vested options to purchase 25,000 shares at $5.00 per share.
Mr. Walker holds unvested options to purchase an additional 75,000 shares
at $5.00 per share.
(8) Consists of 4,000 shares owned by Mr. Murphy and vested options to purchase
10,000 shares at $5.00 per share. Mr. Murphy holds unvested options to
purchase an additional 40,000 shares at $5.00 per share.
(9) Includes 500,000 shares owned by Nancy A. Dwyer, Mr. Dwyer's wife.
(10) Consists of vested options to acquire 9,000 shares at the lesser of
(a) $5.00 per share or (b) 50% of the initial public offering price.
Dr. Sklar holds unvested options to buy 6,000 additional shares at such
price.
(11) Consists of 25,000 shares owned by Mr. Duman. Mr. Duman holds unvested
options to purchase an additional 15,000 shares at $10.00 per share.
(12) Mr. Santoni holds unvested options to purchase 17,500 shares at $10.00 per
share.
(13) Mr. D'Silva is the father of Collin J. D'Silva. Mr. D'Silva's address is
Transgenomic, Inc., 5600 South 42nd Street, Omaha, Nebraska 68107.
(14) INVESCO's address is 1166 Avenue of the Americas, New York, New York 10036
43
RELATED PARTY TRANSACTIONS
In March 2000, we signed a letter of intent with Stephen F. Dwyer, a
director and a principal stockholder of ours, under which Mr. Dwyer has agreed
to acquire the assets related to our non-life sciences instrument product lines
for a total purchase price of $6,000,000, of which $5,000,000 will be paid in
cash and $1,000,000 will be paid with an interest-bearing promissory note due on
March 31, 2001. The note bears interest at a market rate. The sale of these
assets is expected to occur on March 31, 2000, subject to the approval of our
stockholders. The purchase price and other terms of the transaction were
determined through negotiation between us and Mr. Dwyer and was approved by our
disinterested directors. An unaffiliated party recently made a written offer of
$4,000,000 for these assets.
Collin J. D'Silva, Stephen F. Dwyer and Douglas T. Gjerde were partners
of CT Partners, an Iowa general partnership, along with various other
individuals, some of whom are relatives of Mr. D'Silva and Mr. Dwyer.
Mr. D'Silva, Mr. Dwyer and Dr. Gjerde held partnership interests of 28.6%, 23.8%
and 4.8%, respectively, in CT Partners. In 1997, our predecessor company agreed
to provide CT Partners with research and development services to assist CT
Partners in the development of certain miniature solid-state optical
spectrometry technologies to which it held the rights. Our predecessor company
was entitled to a fee for these services and for reimbursement of its expenses.
In addition, our predecessor company entered into a royalty agreement with CT
Partners under which it received an exclusive license to manufacture and market
this technology and agreed to pay CT Partners a royalty of up to $6,500,000
based on the sales of products employing this technology. On June 3, 1999, we
acquired the rights to this technology from CT Partners for a purchase price of
$2,000,000. The purchase price was offset by the cancellation of principal and
interest due on promissory notes given to us by CT Partners in payment of the
fees and expense reimbursements owed to us by it. Principal and interest on
these notes plus additional accrued expenses equaled $1,085,931. The sale price
was based on the present value of anticipated future net income from the sale of
products associated with the technology. The royalty agreement was cancelled as
a result of the sale of the technology rights by CT Partners to us. We will sell
the rights to this technology in connection with the sale of assets related to
the non-life sciences instrument product line described above.
44
DESCRIPTION OF CAPITAL STOCK
GENERAL
We can issue up to 60,000,000 shares of our common stock and 15,000,000
shares of our preferred stock. There are currently 13,025,000 shares of our
common stock outstanding. This number will increase to 16,037,200 assuming
conversion of our convertible notes and accrued interest thereon and the
exercise of 300,000 warrants to purchase our common stock that will expire at
the closing of this offering. We have not issued any shares of preferred stock.
You should read the following summary description of our capital stock in
conjunction with our certificate of incorporation and our bylaws, each of which
is available upon request.
COMMON STOCK
The holders of our common stock are entitled to
- one vote per share on all matters submitted to a vote of our
stockholders;
- the payment of any dividends declared by the Board of Directors out of
legally available funds, after the superior rights of any preferred
stock holders have been satisfied; and
- share ratably in company assets available for distribution to them in
the event of the liquidation, dissolution, distribution of assets or
winding up of the company.
The holders of common stock do not have cumulative voting rights. As a
result, the holders of a majority of the outstanding common stock can elect all
the directors of the company. The remaining common stock holders will not be
able to elect any directors. The holders of common stock have no preemptive or
other subscription rights, and there are no conversion, redemption or sinking
fund provisions with respect to the common stock. All outstanding shares of
common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and non-assessable. The common
stock has a par value of $0.01 per share.
PREFERRED STOCK
The Board of Directors is authorized to issue up to 15,000,000 shares of
preferred stock in one or more series and to fix the rights, powers,
preferences, qualifications, limitations and restrictions granted to or imposed
on the preferred stock. The authority of the Board of Directors includes the
right to fix dividend rights, conversion rights, terms of redemption,
liquidation preference, sinking fund terms and the number of shares constituting
any series or the designation of a series, without any further vote or action by
the stockholders. The preferred stock may be issued with a preference over the
common stock as to the payment of dividends. The Board of Directors, without
stockholder approval, can issue preferred stock with voting and conversion
rights that could adversely affect the voting power of the holders of common
stock. The issuance of preferred stock could have the effect of delaying,
deferring or preventing a change in control of Transgenomic. For the foregoing
reasons, any preferred stock we issue could adversely affect your rights as a
holder of our common stock. We do not have any present plans to issue preferred
stock.
WARRANTS
As of the date of this prospectus, we have issued 452,450 warrants to
purchase common stock at an exercise price equal to the lower of $5.00 per share
or 50% of the offering price of the common stock in this offering. Of this
total, 300,000 warrants will expire upon the closing of this offering and the
rest will expire in 2003. All of the warrants contain provisions for the
adjustment of the exercise price and the aggregate number of shares that may be
issued upon the exercise of the warrant if a stock dividend, stock split,
reorganization, reclassification or consolidation occurs.
45
OPTIONS
As of the date of this prospectus, we have issued options to purchase
3,724,250 shares of our common stock at an exercise price ranging from $5.00 to
$10.00 per share, except that options for 15,000 shares issued to one of our
non-employee directors may be exercised at the lower of $5.00 per share or 50%
of the price of our common stock in this offering. Additional options to acquire
2,275,750 shares of common stock may be issued in the future under our Stock
Option Plan.
CONVERTIBLE NOTES
In March 1999, we issued $12,000,000 of our convertible notes to a group
of investors. The convertible notes will be due and payable in March 2002.
Interest on the notes compounds at 6% per annum until maturity or until we
complete an underwritten public offering of our common stock which provides us
with net proceeds of not less than $15 million. Interest will be payable either
in cash upon repayment of the notes at or after the maturity date, or if
elected, upon the completion of this offering all accrued and unpaid interest
shall be converted into shares of common stock. The interest rate after this
offering for notes that are not converted shall be reduced to 3.6%, and interest
shall become due for the remainder of the term through the maturity date at the
closing of this offering.
The convertible notes may be converted into shares of our common stock
at or after the time we make an underwritten public offering of our common stock
which provides us with net proceeds of not less than $15 million. Accordingly,
these conversion rights may be exercised by the holders of the convertible notes
when we close this offering. If this offering is completed before September 25,
2000, the conversion price per share will be the lower of (i) $5.00 or (ii) 50%
of the public offering price of shares in this offering. If this offering is
completed after that date, the conversion price may be reduced depending on the
length of the delay. In addition, if certain events were to occur prior to the
completion of this offering, the note holders will have the right to convert
their notes into stock. These events include a merger, a sale of all assets,
certain change of control events and a liquidation of the company. The number of
shares to be issued upon a conversion in one of these cases will be the greater
of (i) the number determined by dividing principal and accrued interest on the
notes by $5.00 or (ii) the number determined having an aggregate value equal to
200% of principal and accrued interest on the notes. The value of our common
stock used in this calculation will be determined by the amount realized by our
stockholders from the merger, sale of assets, change of control or liquidation
transaction. Finally, if Collin D'Silva were to sell any of his shares before
this offering, the note holders have the right to convert notes into common
stock at $5.00 per share. We do not anticipate that any merger, sale of assets,
change of control or liquidation transaction will occur prior to the closing of
this offering or that Mr. D'Silva will sell any shares of his stock prior to
that time.
If the note holders do not convert their convertible notes after the
completion of this offering, we may elect to convert their notes if at any time
the total of (i) the average closing bid price for our common stock over 20
consecutive trading days and (ii) accrued interest on the notes (when converted
into an amount per share using the conversion price then in effect) equals or
exceeds $13.72 per share.
In connection with the issuance of the convertible notes, Collin D'Silva
has agreed to vote his shares at any meeting of the stockholders to cause a
person designated by the holders of the convertible notes to be elected to our
Board of Directors. We have also agreed that the director designated by the
convertible note holders will be a member of our compensation and audit
committees.
46
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
DELAWARE LAW.
In general, Section 203 of the Delaware General Corporation Law
prohibits a publicly held Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder unless:
- prior to that date, the Board of Directors of the corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding those
shares owned by persons who are directors and also officers, and
employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held under the plan
will be tendered in a tender or exchange offer; or
- on or subsequent to that date, the business combination is approved by
the Board of Directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
- in general, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as any entity
or person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
CHARTER PROVISIONS.
Our Certificate of Incorporation and Bylaws include a number of
provisions that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of Transgenomic. First, our
certificate of incorporation provides that all stockholder actions must be
effected at a duly called meeting of holders and not by a consent in writing.
Second, our bylaws provide that special meetings of the holders may be called
only by the chairman of the Board of Directors, the Chief Executive Officer or
our Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors. Third, our certificate of incorporation
provides that our Board of Directors can issue up to 15,000,000 shares of
preferred stock, as described under "Preferred Stock" above. Fourth, our
certificate of incorporation and the Bylaws provide for a classified Board of
Directors in which approximately one-third of the directors would be elected
each year. Consequently, any potential acquirer would need to successfully
complete two proxy contests in order to take control of the Board of Directors.
As a result of the provisions of the certificate of incorporation and Delaware
law, stockholders will not be able to cumulate votes for directors. Finally, our
bylaws establish procedures, including advance notice procedures with regard to
the nomination of candidates for election as directors and stockholder
proposals.
47
These provisions of our certificate of incorporation and bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
or management of our company.
TRANSFER AGENT AND REGISTRAR
Norwest Bank, Omaha, Nebraska, has been appointed as the transfer agent
and registrar for our common stock.
NATIONAL MARKET LISTING
We have applied for listing of our common stock on the Nasdaq Stock
Market's National Market under the symbol TBIO.
48
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
after the offering could adversely affect the market price of our common stock
and our ability to raise equity capital in the future on terms favorable to us.
After this offering, 20,037,200 shares of our common stock will be
outstanding, assuming conversion of our convertible notes and accrued interest
thereon and the exercise of warrants to acquire 300,000 shares of common stock
that will expire at the closing of this offering and also assuming that the
underwriters do not exercise the over-allotment option. Of these shares, all of
the 4,000,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. The remaining 16,037,200 shares of common stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.
The following table indicates approximately when the 16,037,200 shares
of our common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES
FOR SALE IN THE PUBLIC MARKET
At effective date...........................................
At or before 90 days after the effective date...............
At or before 180 days after the effective date..............
Most of the restricted shares that will become available for sale in the
public market starting 180 days after the effective date will be subject to
volume and other resale restrictions under Rule 144 because the holders are our
affiliates.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares of
our common stock for at least one year, including any affiliate of ours, is
entitled to sell, within any three-month period, a number of shares that is not
more than the greater of:
- 1% of the number of shares of common stock then outstanding, which
will equal approximately 200,372 shares immediately after this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
49
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us under a stock option plan or
other written agreement can resell those shares 90 days after the effective date
of this offering in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
LOCK-UP AGREEMENTS
Our directors, officers and some of our existing stockholders, including
persons entitled to obtain stock upon the exercise of warrants or conversion of
our convertible notes, are subject to lock-up agreements under which they have
agreed not to transfer or dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable or exchangeable
for shares of common stock, for a period of 180 days after the date of this
prospectus, subject to some exceptions. Transfers or dispositions can be made
sooner with the prior written consent of Chase Securities Inc. or its
successors.
REGISTRATION RIGHTS AND STOCK PLANS
Some of our existing stockholders have the right to require us to
register under the Securities Act up to 2,300,000 shares of their common stock
at any time. Any stockholder who requests registration will be subject to the
lock-up agreements described above. Once we register these shares, they can be
freely sold in the public market, subject to these lock-up agreements.
Immediately after this offering, we intend to file a registration
statement under the Securities Act covering 6,000,000 shares of our common stock
issuable upon the exercise of stock options under our 1997 Employee Stock Option
Plan. This registration statement is expected to be filed and become effective
as soon as practicable after the completion of this offering. As of the date of
this prospectus, options to purchase 3,724,250 shares of common stock were
issued and outstanding, 2,089,150 of which are currently vested and exercisable.
As a result, shares registered under those registration statements will, subject
to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market after the expiration of any
applicable lock-up agreement.
50
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal
income and estate tax consequences of the ownership and disposition of common
shares by a beneficial owner that is a non-U.S. holder. As used in this
prospectus, a non-U.S. holder is defined as a holder that for U.S. federal
income tax purposes is an individual or entity other than:
- a citizen or individual resident of the United States;
- a corporation or partnership created or organized in or under the laws
of the United States or of any political subdivision thereof, other
than a partnership treated as foreign under U.S. Treasury regulations;
- an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
- a trust if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
This discussion does not address all aspects of U.S. federal income and
estate taxes that:
- may be relevant to non-U.S. holders in light of their personal
circumstances, including the fact that in the case of a non-U.S.
holder that is a partnership, the U.S. tax consequences of holding and
disposing of common shares may be affected by determinations made at
the partner level, or
- may be relevant to non-U.S. holders which may be subject to special
treatment under U.S. federal income tax laws such as insurance
companies, tax-exempt organizations, financial institutions, dealers
in securities and holders of securities held as part of a "straddle,"
"hedge" or "conversion transaction."
This discussion also does not address any tax consequences arising under
the laws of any state, local or foreign jurisdiction. Furthermore, this
discussion is based on provisions of the Internal Revenue Code of 1986, as
amended, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as of the date hereof,
and all of which are subject to change, possibly with retroactive effect. The
following summary is included herein for general information. ACCORDINGLY,
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL,
STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING,
HOLDING AND DISPOSING OF COMMON SHARES.
For purposes of this discussion, dividends and gain on the sale,
exchange or other disposition of common stock will be considered to be "U.S.
trade or business income" if the income or gain is:
(1) effectively connected with a United States trade or business, or
(2) if a treaty applies, attributable to a permanent establishment (or, in the
case of an individual, a fixed base) in the United States.
DIVIDENDS
We do not anticipate paying cash dividends on our common shares in the
foreseeable future. In the event, however, that dividends are paid on our common
shares, dividends paid to a non-U.S. holder of common shares generally will be
subject to withholding of U.S. federal income tax at a 30% rate, or such lower
rate as may be provided by an applicable income tax treaty. Non-U.S. holders
should consult their tax advisors regarding their entitlement to benefits under
a relevant income tax treaty.
Dividends that are U.S. trade or business income are generally subject
to U.S. federal income tax on a net income basis at regular graduated rates, but
are not generally subject to the 30% withholding tax
51
if the non-U.S. holder provides a Form 4224 (or successor Form W-8ECI) to the
payor. These forms under U.S. Treasury regulations generally require the
non-U.S. holder to provide a U.S. taxpayer identification number. Any such U.S.
trade or business income received by a non-U.S. holder that is a corporation may
also be subject to an additional "branch profits tax" at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty.
Under currently applicable U.S. Treasury regulations, dividends paid to
an address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability of
a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000; however, a non-U.S. holder of our common
shares who wishes to claim the benefit of an applicable treaty rate generally
will need to satisfy applicable certification requirements, including filing a
Form W-8BEN or Form W-8IMY and providing a document issued by foreign
governmental authorities as proof of residence in a foreign country. In
addition, under these regulations, in the case of our common shares held by a
foreign partnership or other pass-through entity, the certification requirement
will generally be applied to the partners of the partnership and the partnership
will be required to provide specified information, including filing a
Form W-8IMY. The regulations generally effective for payments made after
December 31, 2000 also provide look-through rules for tiered partnerships.
Further, the Internal Revenue Service intends to issue regulations under which a
foreign trustee or foreign executor of a U.S. or foreign trust or estate,
depending on the circumstances, will be required to furnish the appropriate
withholding certificate on behalf of the beneficiaries, trust or estate, as the
case may be.
A non-U.S. holder of our common shares that is eligible for a reduced
rate of U.S. withholding tax under an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
The U.S. Treasury regulations generally effective for payments made
after December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, income tax treaty benefits are denied to
foreigners receiving income derived through a partnership, or otherwise fiscally
transparent entity, in certain circumstances. Prospective investors should
consult with their own tax advisors concerning the effect, if any, of these new
Treasury regulations and this recent legislation on an investment in our common
shares.
GAIN ON DISPOSITION OF COMMON SHARES
A non-U.S. holder generally will not be subject to U.S. federal income
tax in respect of gain realized on a disposition of our common shares unless:
- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S.
holder;
- the non-U.S. holder is an individual who holds our common shares as a
capital asset within the meaning of Section 1221 of the Internal
Revenue Code, is present in the United States for 183 or more days in
the taxable year of the disposition and meets other requirements;
- the non-U.S. holder is subject to tax under the provisions of the U.S.
tax law applicable to certain United States expatriates; or
- we are or have been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the
five-year period preceding such disposition or the period that the
non-U.S. holder held our common shares.
52
We believe that we have not been, are not currently, and do not
anticipate becoming, a "U.S. real property holding corporation" for U.S. federal
income tax purposes.
If a non-U.S. holder who is an individual is subject to tax on gain
which is U.S. trade or business income, such individual generally will be taxed
on the net gain derived from a sale of common shares under regular graduated
U.S. federal income tax rates. If an individual non-U.S. holder is subject to
tax because such individual holds our common shares as a capital asset, is
present in the United States for 183 or more days in the taxable year of the
disposition and meets other requirements, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale. This gain may be
offset by U.S. capital losses, notwithstanding the fact that the individual is
not considered a resident alien of the United States. Thus, individual non-U.S.
holders who have spent, or expect to spend, more than a DE MINIMIS period of
time in the United States in the taxable year in which they contemplate a sale
of common shares are urged to consult their tax advisors prior to the sale
concerning the U.S. tax consequences of such sale.
If a non-U.S. holder that is a foreign corporation is subject to tax on
gain which is U.S. trade or business income, it generally will be taxed on its
net gain under regular graduated U.S. federal income tax rates and, in addition,
will be subject to the branch profits tax equal to 30% of its "effectively
connected earnings and profits," within the meaning of the Internal Revenue Code
for the taxable year, as adjusted for specific items, unless it qualifies for a
lower rate under an applicable tax treaty.
FEDERAL ESTATE TAX
Common shares owned or treated as owned by an individual who is neither
a U.S. citizen nor a U.S. resident, as defined for U.S. federal estate tax
purposes, at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax, unless an applicable estate tax or other treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to
these holders, the name and address of the recipient and the tax withheld with
respect to such dividends. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the non-U.S. holder is a resident under the provisions of
an applicable income tax treaty or agreement.
Currently, U.S. backup withholding, which generally is a withholding tax
imposed at the rate of 31% on payments to persons that fail to furnish specified
information under the U.S. information reporting requirements, generally will
not apply:
- to dividends paid to non-U.S. holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or
- before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual
knowledge that the payee is a U.S. person.
Backup withholding and information reporting generally will apply to dividends
paid to addresses inside the United States on our common shares to beneficial
owners that are not "exempt recipients" and that fail to provide identifying
information in the manner required.
The payment of the proceeds of the disposition of our common shares by a
holder to or through the U.S. office of a broker or through a non-U.S. branch of
a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common shares to or through a non-U.S. office of a
53
non-U.S. broker will not be subject to backup withholding or information
reporting unless the non-U.S. broker has particular types of U.S. relationships.
In the case of the payment of proceeds from the disposition of our common shares
effected by a foreign office of a broker that is a U.S. person or a U.S. related
person, existing regulations require information reporting on the payment unless
the broker maintains documentary evidence that the holder is a non-U.S. holder
and that certain conditions are met. For this purpose, a U.S. related person is
defined as:
- a "controlled foreign corporation" for U.S. federal income tax
purposes; or
- a foreign person 50% or more of whose gross income from all sources
for the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business.
The U.S. Treasury regulations generally effective for payments made
after December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification in the form of either Form W-8BEN or Form W-8IMY from the
holder of non-U.S. status. Depending on the circumstances, this certification
will need to be provided:
- directly by the non-U.S. holder;
- in the case of a non-U.S. holder that is treated as a partnership,
trust or estate, or by the partners or beneficiaries of such entity;
or
- by qualified financial institutions or other qualified entities on
behalf of the non-U.S. holder.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a payment to a non-U.S. holder will be
refunded, or credited against the holder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the Internal Revenue
Service.
54
UNDERWRITING
Subject to the terms and conditions contained in an underwriting
agreement dated , 2000, the underwriters named below, through their
representatives, Chase Securities Inc., Bear, Stearns & Co. Inc. and Dain
Rauscher Incorporated have severally agreed to purchase from us the respective
number of shares of common stock set forth opposite their names below.
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
Chase Securities Inc.
Bear, Stearns & Co. Inc.
Dain Rauscher Incorporated
---------
Total................................................ 4,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us, our counsel and the independent auditors. The
underwriters are obligated to purchase all shares of common stock offered by us
(other than those shares covered by the over-allotment option described below)
if they purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.
NO EXERCISE FULL EXERCISE
----------- -------------
Per Share........................................ $ $
Total............................................ $ $
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1,000,000.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may reallow
a concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The representatives have informed us
that the underwriters do not intend to confirm discretionary sales of more than
5% of the shares of common stock offered in this offering.
55
We have granted to the underwriter an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to 600,000 additional
shares of common stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of common stock to be purchased by it shown in the
above table bears to the total number of shares of common stock offered hereby.
We will be obligated, pursuant to the option, to sell shares to the underwriters
to the extent the option is exercised. The underwriters may exercise this option
solely to cover over-allotments, if any, made in connection with the sale of
shares of common stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act and to contribute to
payments the underwriters may be required to make in respect of these
liabilities.
Our executive officers and directors and a majority of our stockholders
who will own in the aggregate shares of common stock after the offering, have
agreed not to, without the prior written consent of Chase Securities Inc. or its
successors, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
common stock or any securities convertible into or exchangeable or exercisable
for shares of common stock for a period of 180 days from the date of this
prospectus, subject to some exceptions. We have agreed that we will not, without
the prior written consent of Chase Securities Inc. or its successors, sell,
offer, contract to sell, transfer the economic risk of ownership in, make any
short sale, pledge or otherwise dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 180 days following the date of this prospectus, except
that we may issue shares upon the exercise of warrants or options granted prior
to the date hereof or pursuant to outstanding convertible notes and may grant
additional options under our stock option plan. Shares issued upon exercise of
the options that are subject to lock up agreements may not be sold for 180 days
after the closing of this offering without the prior written consent of Chase
Securities Inc. or its successors.
At our request, the underwriters have reserved up to 5% of the total
shares of common stock offered hereby for sale in the United States at the
initial public offering price to our directors, officers, employees, business
associates and related persons. The number of shares of common stock available
for sale to the general public will be reduced by the number of reserved shares
such persons purchase. Any reserved shares which are not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus. Persons who purchase reserved shares may be
required to agree that they will not, without the prior written consent of Chase
Securities Inc. or its successors, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of common stock or any securities convertible into or exchangeable
or exercisable for shares of common stock for a period of 180 days from the date
of this prospectus.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiation among us and the representatives of the underwriters. Among the
factors considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenues and operating results,
market valuations of other companies engaged in activities similar to ours,
estimates of our business potential and our prospects, the present state of our
business operations, our management and other factors deemed relevant.
We have applied for quotation of the common stock on the Nasdaq National
Market under the symbol TBIO.
56
In March 1999, we privately placed $12,000,000 aggregate principal
amount of our convertible subordinated notes due March, 2000. Hambrecht & Quist
LLC acted as a placement agent in connection with the transaction and was paid a
fee for its services of $530,000. Hambrecht & Quist California and some of its
employees purchased convertible subordinated notes in the aggregate principal
amount of $180,000. Hambrecht & Quist Employee Venture Fund, L.P. II purchased
convertible subordinated notes in the amount of $120,000. Hambrecht & Quist
California was the parent company of Hambrecht & Quist LLC prior to February 1,
2000. Hambrecht & Quist California is a subsidiary of The Chase Manhattan
Corporation. On February 1, 2000, Hambrecht & Quist LLC merged into Chase
Securities Inc., a wholly owned subsidiary of The Chase Manhattan Corporation.
The limited partnership interests of Hambrecht & Quist Employee Venture Fund,
L.P. II are held by employees of Hambrecht & Quist California or Chase
Securities Inc. (formerly, Hambrecht & Quist LLC), and the general partner of
this fund is H&Q Venture Management LLC, a subsidiary of Hambrecht & Quist
California. The purchases described above were made on the same terms as those
made by other investors in the private placement. At any time at or after the
consummation of this offering, each convertible note may be converted into
shares of common stock.
Chase Securities Inc. has from time to time provided financial advisory
and consulting services to us, for which we paid a one-time fee of $550,000 in
March, 1999.
Persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. This
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be
passed upon for us by Kutak Rock LLP, Omaha, Nebraska. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Milbank, Tweed, Hadley & McCloy LLP, New York, New York.
EXPERTS
The financial statements included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus is only a part of the registration
statement and does not contain all of the information included in the
registration statement. Further information with respect to Transgenomic, Inc.
and the common stock offered hereby can be found in the registration statement
and the exhibits and schedules thereto. Statements made in this prospectus as to
the contents of any contract, agreement or other documents are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. The registration
statement and the exhibits and schedules thereto may be
57
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: Seven World Trade Center, Room
1400, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, Room 1024, at prescribed rates. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, we are required to file electronic versions of
these documents with the Commission through the Commission's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains an
internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. Information concerning Transgenomic, Inc. is also available
for inspection at the offices of the Nasdaq Stock Market, Reports Section, 1735
K Street, N.W., Washington, D.C. 20006.
We intend to furnish to our stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial data.
58
TRANSGENOMIC, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Consolidated Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit)............................................... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Pro Forma Financial Information:
Unaudited Pro Forma Balance Sheet......................... F-22
Unaudited Pro Forma Statement of Operations............... F-23
Notes to Unaudited Pro Forma Financial Information........ F-24
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Transgenomic, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of
Transgenomic, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1999 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Transgenomic, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 7, 2000
F-2
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
1998 1999
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 187,455 $ 153,336
Accounts receivable, net.................................. 4,425,419 6,199,059
Inventories............................................... 4,183,509 6,043,025
Prepaid expenses and other current assets................. 292,926 527,461
Deferred income taxes..................................... 114,000 --
Refundable income taxes................................... 34,000 96,000
----------- ------------
Total current assets.................................... 9,237,309 13,018,881
PROPERTY AND EQUIPMENT:
Equipment................................................. 3,272,132 4,695,785
Furniture and fixtures.................................... 1,070,569 1,567,370
----------- ------------
4,342,701 6,263,155
Less--accumulated depreciation............................ 2,931,886 3,682,016
----------- ------------
1,410,815 2,581,139
OTHER ASSETS................................................ 4,087,940 4,363,490
----------- ------------
$14,736,064 $ 19,963,510
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable--bank........................................ $ 3,150,000 $ 4,340,000
Current portion of notes payable--other................... 432,338 579,724
Accounts payable.......................................... 2,287,451 2,827,186
Accrued compensation...................................... 533,680 666,219
Other accrued expenses.................................... 988,950 1,111,871
----------- ------------
Total current liabilities............................... 7,392,419 9,525,000
NOTES PAYABLE--OTHER, LESS CURRENT MATURITIES............... 694,536 116,958
CONVERTIBLE NOTES PAYABLE................................... -- 12,421,010
COMMITMENTS AND CONTINGENCIES (NOTES H, J, L, M AND N)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 15,000,000 shares
authorized, none outstanding............................ -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 13,000,000 shares issued and outstanding in
1998 and 1999........................................... 130,000 130,000
Additional paid-in capital................................ 10,119,095 10,231,595
Note receivable related party............................. (1,085,931) --
Unearned compensation..................................... -- (112,500)
Accumulated deficit....................................... (2,517,189) (12,344,075)
Accumulated other comprehensive income (loss)............. 3,134 (4,478)
----------- ------------
Total stockholders' equity (deficit).................... 6,649,109 (2,099,458)
----------- ------------
$14,736,064 $ 19,963,510
=========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
----------- ----------- -----------
NET SALES................................................... $11,576,677 $18,935,440 $23,034,954
COST OF GOODS SOLD.......................................... 6,335,986 9,590,663 12,090,036
----------- ----------- -----------
Gross profit............................................ 5,240,691 9,344,777 10,944,918
OPERATING EXPENSES:
General and administrative................................ 2,444,398 2,795,199 3,771,663
Marketing and sales....................................... 3,967,574 5,364,953 7,759,997
Research and development.................................. 2,047,057 3,159,377 6,296,859
----------- ----------- -----------
8,459,029 11,319,529 17,828,519
----------- ----------- -----------
LOSS FROM OPERATIONS........................................ (3,218,338) (1,974,752) (6,883,601)
OTHER INCOME (EXPENSE):
Interest expense, net of interest income of $53,527,
$59,147 and $126,215 in 1997, 1998 and 1999,
respectively............................................ (412,755) (516,366) (1,198,378)
Other--net................................................ (14,634) (15,282) 366
----------- ----------- -----------
(427,389) (531,648) (1,198,012)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES.................................... (3,645,727) (2,506,400) (8,081,613)
INCOME TAX EXPENSE (BENEFIT):
Current................................................... (348,702) 19,993 (27,727)
Deferred.................................................. (887,486) (950,000) 1,773,000
----------- ----------- -----------
(1,236,188) (930,007) 1,745,273
----------- ----------- -----------
NET LOSS.................................................... $(2,409,539) $(1,576,393) $(9,826,886)
=========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE............................ $ (0.22) $ (0.13) $ (0.76)
=========== =========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING....... 11,144,583 12,279,042 13,000,000
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
RETAINED
ADDITIONAL EARNINGS
COMMON PREFERRED PAID-IN NOTE UNEARNED (ACCUMULATED
STOCK STOCK CAPITAL RECEIVABLE COMPENSATION DEFICIT)
-------- --------- -------------- ----------- ------------ ------------
BALANCE, JANUARY 1, 1997........... $ 110 $ 41,000 $ 1,242,940 $ (650,782) $ -- $ 1,479,904
Net loss......................... -- -- -- -- -- (2,409,539)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... -- -- -- -- -- --
Comprehensive income
(loss)..................... -- -- -- -- -- --
Note receivable from related
party.......................... -- -- -- (369,062) -- --
Preferred stock dividends........ -- -- -- -- -- (11,161)
Redeem 410 shares of preferred
stock.......................... -- (41,000) -- -- -- --
1,000 to 1 stock exchange........ 109,890 -- (109,890) -- -- --
Sale of 351,500 common shares.... 3,515 -- 1,620,354 -- -- --
Issuance of warrants to purchase
300,000 common shares.......... -- -- 82,117 -- -- --
-------- -------- -------------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1997......... 113,515 -- 2,835,521 (1,019,844) -- (940,796)
Net loss......................... -- -- -- -- -- (1,576,393)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... -- -- -- -- -- --
Comprehensive income
(loss)..................... -- -- -- -- -- --
Note receivable from related
party.......................... -- -- -- (66,087) -- --
Sale of 1,648,500 common
shares......................... 16,485 -- 7,283,574 -- -- --
-------- -------- -------------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1998......... 130,000 -- 10,119,095 (1,085,931) -- (2,517,189)
Net loss......................... -- -- -- -- -- (9,826,886)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... -- -- -- -- -- --
Comprehensive income
(loss)..................... -- -- -- -- -- --
Issuance of 22,500 stock
options........................ -- -- 112,500 -- (112,500) --
Note receivable from related
party.......................... -- -- -- 1,085,931 -- --
-------- -------- -------------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1999......... $130,000 $ -- $ 10,231,595 $ -- $(112,500) $(12,344,075)
======== ======== ============== =========== ========= ============
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS) TOTAL
------------- -----------
BALANCE, JANUARY 1, 1997........... $ 768 $ 2,113,940
Net loss......................... (2,409,539) (2,409,539)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... 1,348 1,348
-----------
Comprehensive income
(loss)..................... (2,408,191)
-----------
Note receivable from related
party.......................... -- (369,062)
Preferred stock dividends........ -- (11,161)
Redeem 410 shares of preferred
stock.......................... -- (41,000)
1,000 to 1 stock exchange........ -- --
Sale of 351,500 common shares.... -- 1,623,869
Issuance of warrants to purchase
300,000 common shares.......... -- 82,117
----------- -----------
BALANCE, DECEMBER 31, 1997......... 2,116 990,512
Net loss......................... (1,576,393) (1,576,393)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... 1,018 1,018
-----------
Comprehensive income
(loss)..................... (1,575,375) --
-----------
Note receivable from related
party.......................... -- (66,087)
Sale of 1,648,500 common
shares......................... -- 7,300,059
----------- -----------
BALANCE, DECEMBER 31, 1998......... 3,134 6,649,109
Net loss......................... (9,826,886) (9,826,886)
Other comprehensive income
(loss):
Foreign currency translation
adjustment................... (7,612) (7,612)
-----------
Comprehensive income
(loss)..................... (9,834,498) --
-----------
Issuance of 22,500 stock
options........................ -- --
Note receivable from related
party.......................... -- 1,085,931
----------- -----------
BALANCE, DECEMBER 31, 1999......... $ (4,478) $(2,099,458)
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
TRANSGENOMIC INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,409,539) $(1,576,393) $(9,826,886)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization........................... 918,214 798,708 1,364,246
Deferred income taxes................................... (887,486) (950,000) 1,773,000
Gain on sale of assets.................................. (72,250) (8,411) (16,105)
Accrued interest and redemption premium................. -- -- 858,665
Amortization of deferred financing costs................ -- -- 149,960
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................... 318,646 (2,029,247) (1,635,316)
Inventories........................................... (174,192) (1,717,595) (1,775,273)
Prepaid expenses and other current liabilities........ 52,704 (81,250) (233,686)
Refundable income taxes............................... (54,000) 388,000 (62,000)
Accounts payable...................................... (342,096) 1,392,087 481,068
Accrued expenses...................................... 39,600 340,178 178,793
----------- ----------- -----------
Net cash flows from operating activities............ (2,610,399) (3,443,923) (8,743,534)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (486,190) (682,674) (1,828,047)
Proceeds from asset sales................................. 153,305 10,000 21,425
Increase in other assets.................................. (152,373) (813,405) (1,461,250)
Purchase of business, net of cash acquired................ -- -- (187,294)
Note receivable........................................... 15,560 22,946 --
----------- ----------- -----------
Net cash flows from investing activities............ (469,698) (1,463,133) (3,455,166)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and common stock warrants........ 1,705,986 7,300,059 --
Net change in note payable--bank.......................... 750,000 (800,000) 1,190,000
Proceeds from notes payable--other........................ 1,467,918 100,000 --
Payments on notes payable--other.......................... (361,343) (1,964,555) (430,192)
Proceeds from convertible notes payable................... -- -- 12,000,000
Deferred financing costs.................................. -- -- (587,615)
Increase in related party receivables..................... (369,062) (66,087) --
----------- ----------- -----------
Net cash flows from financing activities............ 3,193,499 4,569,417 12,172,193
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH.... 1,348 1,018 (7,612)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 114,750 (336,621) (34,119)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 409,326 524,076 187,455
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 524,076 $ 187,455 $ 153,336
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 424,501 $ 472,579 $ 318,856
=========== =========== ===========
Cash paid for taxes....................................... $ 17,026 $ 30,120 $ 37,630
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION.
Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the
"Company") provide innovative research tools to the life sciences industry.
These tools enable researchers to discover and understand variation in the human
genetic code, or genome, in order to accelerate and improve drug development and
diagnostics. The Company also manufactures and designs sample preparation and
monitoring instruments, which are primarily used with various types of optical
and mass spectrometers to analyze the chemical makeup of samples. The Company
markets and sells these platforms primarily throughout North America, Europe and
the Pacific Rim.
PRINCIPLES OF CONSOLIDATION.
The consolidated financial statements include the accounts of
Transgenomic, Inc. and its wholly-owned subsidiaries Transgenomic, Ltd. (fka
CETAC Technologies, Ltd.), which provides sales and customer support outside the
United States and Transgenomic St. Thomas, Inc., which is organized as a foreign
sales corporation. All material intercompany balances and transactions have been
eliminated. On July 1, 1997 the Company merged with CETAC Holding Company, Inc.
in a 1000 to 1 stock exchange. Before and after the merger, the companies had
identical ownership structures. Accordingly, this transaction was between
companies under common control and was accounted for similar to a pooling of
interests. The Company had no assets, liabilities or operations prior to its
merger with CETAC Holding Company, Inc.
SALES AND DISTRIBUTION STRATEGY.
The Company sells and distributes its product lines in three major ways:
1) DIRECT--The Company serves the United States market through direct sales
efforts from the Company headquarters in Omaha. The Company has direct
salespeople strategically located to cover all sections of the United
States and Europe.
2) DISTRIBUTORS--The Company has contracted with distributors in its major
European and Pacific Rim markets for all products.
3) ORIGINAL EQUIPMENT MANUFACTURERS (OEM)--The Company distributes its
sample preparation and monitoring instruments through major ICP
(intra-coupled plasma) spectrometer manufacturers and their authorized
representatives.
The Company has sales offices in the United States, United Kingdom and
Japan. These offices function mainly as service and support centers and also as
sales resources for OEM and distributor customers in Europe.
CASH AND CASH EQUIVALENTS.
For purposes of reporting cash flows, cash and cash equivalents include
cash and temporary investments with maturities at acquisition of three months or
less.
F-7
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE.
Accounts receivable are shown net of allowance for doubtful accounts of
approximately $561,645 and $160,593 in 1998 and 1999, respectively.
INVENTORIES.
Inventories are stated at the lower of cost (first-in, first-out method)
or market. The Company has certain finished goods inventory it provides as
demonstration units to potential customers for evaluation, as well as to certain
universities and original equipment manufacturers for testing and demonstration.
These demonstration units are included in inventory at cost. If the instrument
is not purchased by the customer or institution, it is retrieved, and, if
necessary, reconditioned for sale. If these instruments remain in demonstration
mode and/or exhibit wear, they are removed from inventory, capitalized into
property and depreciated.
PROPERTY AND EQUIPMENT.
Property and equipment are carried at cost. Depreciation and
amortization are computed by the straight-line and accelerated methods over the
estimated useful lives of the related assets as follows:
Furniture and fixtures...................................... 5 to 7 years
Production equipment........................................ 5 to 7 years
Computer equipment.......................................... 5 years
Research and development equipment.......................... 3 to 5 years
GOODWILL.
Goodwill arising from the excess of cost over the fair value of net
assets at dates of acquisition is being amortized using the straight-line method
over 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS.
The Company assesses the recoverability of long-lived assets held for
use, including certain intangible assets and goodwill, whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In such cases, if the sum of the expected cash flows
(undiscounted and without interest) resulting from the use of the asset are less
than the carrying amount, an impairment loss is recognized based on the
difference between the carrying amount and the fair value of the assets. No
impairment loss has been recognized to date.
OTHER ASSETS.
Other assets include patents, capitalized software and intellectual
property. The Company capitalizes the external and in-house legal costs and
filing fees associated with obtaining patents on its new discoveries and
amortizes these costs using the straight-line method over the shorter of the
legal life of the patent or its economic life, generally 17 years, beginning in
the first full year of production utilizing the new discovery after the patent
is awarded.
F-8
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company develops software as an integral component of their
instruments. After functional design is completed and economic viability is
determined, the Company capitalizes the development cost. The software is
amortized over the estimated life of the product, generally three years.
Intellectual property is amortized over its estimated useful life of between 5
and 10 years.
DEFERRED FINANCING COSTS.
Deferred financing costs are amortized over the term of the related
financing using the effective interest method.
STOCK BASED COMPENSATION.
The Company accounts for its stock-based compensation under the
provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, which utilizes the intrinsic value method.
UNEARNED COMPENSATION.
Unearned compensation represents the unamortized difference between the
option exercise price and the deemed fair market value of the Company's common
stock at the option grant date, for options issued under the Company's Stock
Option Plan (Note L). The unearned compensation is charged to operations over
the vesting period of the respective options.
INCOME TAXES.
The liability method is used to measure deferred tax assets and
liabilities based on temporary differences between financial and taxable income
existing at each balance sheet date using enacted tax rates.
REVENUE RECOGNITION.
Sales of products and services are recorded based on shipment of product
or performance of services.
RESEARCH AND DEVELOPMENT.
Research and development costs are charged to expense when incurred.
TRANSLATION OF FOREIGN CURRENCY.
Financial statements of subsidiaries outside the U.S. are measured using
the local currency as the functional currency. The adjustments to translate
those amounts into U.S. dollars are accumulated in a separate account in
stockholders' equity and are included in other comprehensive income. Foreign
currency transaction gains or losses resulting from changes in currency exchange
rates are included in the determination of net income. For the periods
presented, foreign currency transaction adjustments were not significant.
F-9
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME.
Comprehensive income for all periods presented consists of net income
and foreign currency translation adjustments. The Company deems its foreign
investments to be permanent in nature and does not provide for taxes on currency
translation adjustments arising from converting its investments in a foreign
currency to U.S. dollars. There were no reclassification adjustments to be
reported in the periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS.
Unless otherwise specified, the Company believes the book value of
financial instruments approximates fair value.
EARNINGS PER SHARE.
Basic earnings per share are calculated based on the weighted-average
number of common shares outstanding during each period. Diluted earnings per
share include shares issuable upon exercise of outstanding stock options and
warrants, where dilutive. Potentially dilutive securities have been excluded
from the computation of diluted earnings per share as they have an antidilutive
effect due to the Company's net loss. Weighted-average shares outstanding
reflects the 1,000 to 1 stock exchange which occurred on July 1, 1997, in
connection with the merger of Transgenomic, Inc. and CETAC Holding Company, as
if such exchange occurred at the beginning of the earliest period presented.
ACCOUNTING PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, (SFAS No. 133). This statement, which is effective for
fiscal years beginning after June 15, 2000, requires the recognition of all
derivative financial instruments as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. Management is in the process of determining the effect, if any, SFAS No.
133 will have on the Company's financial statements.
In 1999, the Company adopted Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, (SOP
98-1) which, on a prospective basis, revised the accounting for software
development costs. SOP 98-1 requires the capitalization of certain costs related
to internal use software once certain criteria have been met. The adoption of
this statement did not have a material impact on the Company's financial
statements.
USE OF ESTIMATES.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS.
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform with the 1999 presentation.
B. ACQUISITION
On January 26, 1999, the Company, through its UK subsidiary, acquired
substantially all of the assets of Kramel Biotech International, Limited
(Kramel) for approximately $187,000 in cash and the assumption of certain
liabilities of Kramel, and entered into employment agreements with the two
principals. Kramel manufactures laboratory consumables used in the field of
molecular biology. The acquisition was accounted for as a purchase and resulted
in goodwill of approximately $66,000. All identifiable assets acquired and
liabilities assumed were allocated a portion of the cost, equal to their fair
values.
C. INVENTORIES
At December 31, 1998 and 1999 inventories consist of the following:
1998 1999
---------- ----------
Finished goods....................................... $1,888,173 $3,256,067
Raw materials and work in process.................... 2,295,336 2,786,958
---------- ----------
$4,183,509 $6,043,025
========== ==========
Within the total inventory above, the Company has demonstration
inventory of approximately $1,631,000 and $3,098,851 for 1998 and 1999,
respectively.
D. OTHER ASSETS
At December 31, 1998 and 1999, other assets consist of the following:
1998 1999
------------------------------------- -------------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST RESERVE VALUE COST RESERVE VALUE
---------- ----------- ---------- ---------- ----------- ----------
Deferred income taxes.......... $1,839,000 $ -- $1,839,000 $ 180,000 $ -- $ 180,000
Goodwill....................... 843,446 235,435 608,011 909,492 306,463 603,029
Intellectual property.......... 534,852 160,455 374,397 2,534,852 447,273 2,087,579
Patents........................ 815,934 8,010 807,924 1,076,384 21,107 1,055,277
Software....................... 369,678 118,558 251,120 503,730 227,079 276,651
Other.......................... 309,103 101,615 207,488 160,954 -- 160,954
---------- -------- ---------- ---------- ---------- ----------
Total...................... $4,712,013 $624,073 $4,087,940 $5,365,412 $1,001,922 $4,363,490
========== ======== ========== ========== ========== ==========
F-11
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
E. NOTE PAYABLE--BANK
At December 31, 1998 and 1999, note payable--bank consisted of
borrowings in the amounts of $3,150,000 and $4,340,000, respectively, against a
revolving line of credit of $5,000,000. The note carries an interest rate equal
to the national prime. The interest is payable monthly. The interest rate at
December 31, 1998 and 1999 was 7.75% and 8.50%, respectively. The line matures
July 31, 2000. Substantially all of the Company's assets and certain life
insurance policies are pledged as collateral on this note payable. The loan
contains certain restrictive covenants, including a prohibition on the payment
of dividends, the purchase of its stock, and the redemption of stock options and
warrants, among other things, without the written agreement of the lender. As of
December 31, 1999, the Company was not in compliance with these covenants.
However, a waiver was obtained from the bank as of December 31, 1999.
F. NOTES PAYABLE--OTHER
Notes payable--other at December 31, 1998 and 1999 consists of the
following:
1998 1999
---------- --------
Installment note payable to a bank maturing on December
1, 2000; payable in monthly installments of $15,618,
which includes interest of 9.0%; collateralized by
all equipment and furnishings........................ $ 342,194 $179,711
Installment note payable to a bank maturing on August
13, 2001; payable in monthly installments of $15,123
which includes interest of 9.0%; collateralized by
all equipment and furnishings........................ 429,516 280,436
Note payable to a living trust, payable in monthly
installments of $11,000 including interest at 5.33%
per year, due March 1, 2000 secured by certain assets
of the Company's California division................. 355,164 236,535
---------- --------
Total notes payable--other............................. 1,126,874 696,682
Less current portion................................... 432,338 579,724
---------- --------
Notes payable--other excluding current portion......... $ 694,536 $116,958
========== ========
Aggregate maturities of notes payable--other at December 31, 1999
consist of the following:
YEAR ENDING DECEMBER 31,
2000........................................................ $579,724
2001........................................................ 116,958
--------
$696,682
========
In connection with certain installment notes payable to a bank, the
Company must comply with certain restrictive covenants. As of December 31, 1999,
the Company was not in compliance with these covenants. However, a waiver was
obtained from the bank as of December 31, 1999.
F-12
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
G. CONVERTIBLE NOTES PAYABLE
On March 23, 1999, the Company received approximately $11.4 million of
net proceeds from the placement of $12 million aggregate principal amount 6%
convertible notes due March 25, 2002. Interest on the notes compounds at 6% per
annum until maturity or a Designated Offering (as defined) ("Offering") and
either will be payable in cash upon repayment of the note at or after the
maturity date, or if elected upon the completion of an Offering all accrued and
unpaid interest shall be converted into shares of common stock. The interest
after an Offering shall be reduced to 3.6%, and shall become due for the
remainder of the term through the maturity date at the time of an Offering.
The holder shall have the right to convert the principal amounts due
under these notes into shares of the Company's common stock. If the Company
completes an Offering prior to September 25, 2000, the conversion price shall be
either the lesser of $5.00 per share or 50% of the per share offering price. If
the Offering is completed between September 25, 2000 and the maturity date, the
conversion price shall be the lesser of $5.00 per share, or between 35% and 50%
of the per share offering price to the public, calculated on a declining
straight-line basis, through the day on which an offering is completed. If an
Offering is not completed before the maturity date, the holder may elect to
convert at $5.00 per share but the price will be adjusted to 35% of the Offering
price if less than $5.00 per share, and additional shares, if any, will be
issued to reduce the conversion price to such lesser amount.
If prior to consummation of an Offering, the Company enters into a
merger, consolidation, the sale of substantially all of its assets, change of
control, or the dissolution of the Company or other event causing final
liquidation, the holders of the notes shall have the right to elect to either
receive payment in full of all principal of the notes and accrued interest
earned through date of payment, or convert all outstanding principal and unpaid
interest on the notes into common stock. The holders will be entitled to receive
the greater of the number of shares derived by dividing the balance due by $5.00
per share, or the number of shares having an aggregate value equal to 200% of
the outstanding unpaid principal, plus all accrued interest.
If the note holders elect not to convert the notes to stock at maturity,
the Company will be required to repay all principal amounts, all accrued and
unpaid interest, if any, and a redemption premium equal to 10% of the face value
of the notes. The Company can require conversion after an Offering provided
specific closing prices are achieved for twenty consecutive trading days.
The notes contain numerous covenants with which the Company is in
compliance.
At December 1999, the convertible notes payable balance is comprised of
the following:
Principal................................................... $12,000,000
Accrued interest and redemption premium..................... 858,665
-----------
12,858,665
Deferred financing costs (net of accumulated amortization of
$149,960)................................................. (437,655)
-----------
$12,421,010
===========
F-13
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
H. LEASE COMMITMENTS
The Company leases certain equipment, vehicles and operating facilities.
The Company's leases related to its operating facilities currently expire on
various dates ranging from 1999 through 2006. However, one lease allows for
cancellation at either 36 or 48 months upon 60 days advanced written notice. At
December 31, 1999, the future minimum lease payments required under
noncancellable lease provisions are approximately $830,000 in 2000; $591,000 in
2001; $304,000 in 2002; $148,000 in 2003; $128,000 in 2004; and a total of
approximately $188,000 in rental payments for the years 2005 through 2006.
Net rental expense related to all operating leases for the years ended
December 31, 1997, 1998 and 1999 was approximately $441,000, $655,000 and
$984,000, respectively.
I. INCOME TAXES
The Company's provision for income taxes for the years ended December 31
differs from the amounts determined by applying the statutory Federal income tax
rate to income before income taxes for the following reasons:
1997 1998 1999
----------- --------- -----------
Benefit at Federal Rate................................... $(1,239,547) $(852,176) $(2,747,748)
Increase (decrease) resulting from:
State income taxes--net of federal benefit.............. (45,004) (85,805) (62,520)
Intangible amortization................................. 46,804 39,020 42,925
Research and development tax credit..................... (15,319) (23,534) (54,231)
Meals and entertainment................................. 16,999 27,037 38,687
Other--net.............................................. (121) (34,549) 37,160
Valuation allowance..................................... -- -- 4,491,000
----------- --------- -----------
Total income tax expense (benefit)........................ $(1,236,188) $(930,007) $ 1,745,273
=========== ========= ===========
The Company's deferred income tax asset at December 31, 1998 and 1999 is
comprised of the following temporary differences:
1998 1999
---------- ----------
Net operating loss carryforward...................... $1,497,000 $4,289,000
Allowance for doubtful accounts...................... 221,000 60,000
Fixed asset depreciation............................. 121,000 124,000
Accrued vacation..................................... 114,000 137,000
Intellectual property amortization................... -- 61,000
---------- ----------
1,953,000 4,671,000
Less valuation allowance............................. -- (4,491,000)
---------- ----------
$1,953,000 $ 180,000
========== ==========
At December 31, 1999, the Company has unused tax net operating loss
carryforwards of approximately $2,106,000 which expire in 2012, $1,828,000 which
expire in 2018 and $7,638,000 which will
F-14
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
I. INCOME TAXES (CONTINUED)
expire in 2019. Additionally, at December 31, 1999, the Company has unused
general business credits earned primarily through increased research
expenditures of approximately $131,000. These credits expire at various times
between 2010 and 2019. The Company's management believes that it is more likely
than not that the deferred tax asset of $180,000 will be realized through the
sale of the business discussed in Note R. A valuation allowance has been
provided in 1999 for the remaining deferred tax assets, due to the Company's
cumulative losses in recent years and an inability to utilize any additional
losses as carrybacks.
J. EMPLOYEE BENEFIT PLAN
The Company maintains an employee savings plan which allows for
voluntary contributions into designated investment funds by eligible employees.
The Company matches the employees' contributions at the rate of 50% on the first
6% of contributions. The Company may at the discretion of its Board of
Directors, make additional contributions on behalf of the Plan's participants.
Company contributions were $92,733, $117,923 and $174,973 for the years ended
December 31, 1997, 1998 and 1999, respectively.
K. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT
The Company issued 2,000,000 shares of the Company's common stock, par
value $.01 per share (the "Stock"), at a price of $5.00 per share in a private
placement during 1997 and 1998 for net proceeds of $1,623,869 and $7,300,059,
respectively. A total of 1,524,500 shares of the 2,000,000 shares of common
stock were placed by Placement Agents pursuant to selling agent agreements. A 9%
commission was paid to each Placement Agent on all sales of the common stock
made by it and broker-dealers.
The Company also issued warrants to the Placement Agents with an
exercise price of $5.00 per share (subject to certain cashless exercise rights)
which will have terms of five years expiring in 2003. Total shares eligible to
be purchased through these warrants were 152,450 at December 31, 1999 (see Note
L).
In 1999, the Company issued convertible notes which can be converted
into a minimum of 2,400,000 common shares (see Note G).
PREFERRED STOCK.
The Company's Board of Directors is authorized to issue up to 15,000,000
shares of preferred stock in one or more series, from time to time, with such
designations, powers, preferences and rights and such qualifications,
limitations and restrictions as may be provided in a resolution or resolutions
adopted by the Board of Directors. The authority of the Board of Directors
includes, but is not limited to, the determination or fixing of the following
with respect to shares of such class or any series thereof: (i) the number of
shares; (ii) the dividend rate, whether dividends shall be cumulative and, if
so, from which date; (iii) whether shares are to be redeemable and, if so, the
terms and amount of any sinking fund providing for the purchase or redemption of
such shares; (iv) whether shares shall be convertible and, if so, the terms and
provisions thereof; (v) what restrictions are to apply, if any, on the issue or
reissue of any additional preferred stock; and (vi) whether shares have voting
rights. The preferred stock may be issued with a preference over the common
stock as to the payment of dividends.
F-15
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
The Company has no current plans to issue any series of preferred stock.
Classes of stock such as the preferred stock may be used, in certain
circumstances, to create voting impediments on extraordinary corporate
transactions or to frustrate persons seeking to effect a merger or otherwise to
gain control of the Company. For the foregoing reasons, any preferred stock
issued by the Company could have an adverse effect on the rights of the holders
of the common stock.
COMMON STOCK.
In March 2000, the Company's Board of Directors approved an increase in
the number of authorized common shares to 60,000,000, subject to the approval of
the Company's stockholders.
L. STOCK OPTIONS AND WARRANTS
The Company adopted the 1997 Stock Option Plan in June of 1997 which was
last amended and restated on October 14, 1998. The Company's 1997 Stock Option
Plan (the "Stock Option Plan") allows the Company to grant both incentive stock
options and nonqualified stock options to acquire shares of the Company's common
stock to employees and directors of the Company and to nonemployee advisors.
Either incentive or non-qualified stock options may be granted to employees of
the Company, but only nonqualified stock options may be granted to nonemployee
directors and advisors. The maximum number of shares for which options may be
granted under the Stock Option Plan is 4,000,000. The Stock Option Plan is
administered by the Compensation Committee of the Board of Directors (the
"Committee") which has the authority to set the number, exercise price, term and
vesting provisions of the options granted under the Stock Option Plan, subject
to the terms thereof. The options must be granted at exercise prices not less
than the fair market value of the common stock on the date of the grant.
Generally, the stock options vest at a rate of 20% per year over a five year
period and expire 10 years after the date the option was granted. If the option
holder ceases to be employed by the Company, the Company will have the right to
terminate any outstanding but unexercised options. In March 2000, the Company's
Board of Directors approved an amendment to the Stock Option Plan to increase
the number of shares for which options can be granted to 6,000,000, subject to
the approval of the Company's stockholders.
F-16
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
L. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes activity under the Stock Option Plan
during the three years ended December 31, 1999:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Balance at Inception (June 1997):....................... -- $ --
Granted............................................... 1,515,000 5.00
Exercised............................................. -- --
Canceled.............................................. -- --
---------
Balance at December 31, 1997:........................... 1,515,000 5.00
Granted............................................... 1,690,250 5.00
Exercised............................................. -- --
Canceled.............................................. -- --
---------
Balance at December 31, 1998:........................... 3,205,250 5.00
Granted............................................... 590,250 5.00
Exercised............................................. -- --
Canceled.............................................. (257,750) 5.00
---------
Balance at December 31, 1999............................ 3,537,750
=========
Exercisable at December 31, 1999........................ 2,028,650
=========
The weighted average fair value of options granted in 1997, 1998 and
1999 was $1.34, $1.02 and $1.00, respectively. At December 31, 1999, the
weighted average remaining contractual life of options outstanding was 8.4
years.
In 1997, the Company granted options to purchase 1.5 million shares at
$5.00 per share to an officer of the Company which are fully vested and
exercisable at December 31, 1997 and expire in 2007. The Company has also
granted options to purchase 15,000 shares to a member of the Company's Board of
Directors at an exercise price which is the lower of (a) $5.00 per share or (b)
50% of the price per share at which the Company offers common stock in an
initial public offering, of which 9,000 shares are vested and exercisable at
December 31, 1999. The remaining options issued in 1997 vest over two years and
expire in 2002.
The Company has elected to follow the measurement provisions of
Accounting Principles Board Opinion No. 25, under which no recognition of
expense is required in accounting for stock options granted to employees for
which the exercise price equals or exceeds the deemed fair market value of the
stock at the grant date. In those cases where options have been granted with an
exercise price below the deemed fair market value, the Company recognizes
compensation expense over the vesting period using the aggregated percentage of
compensation accrued method as prescribed by Financial Accounting Standards
Board Interpretation No. 28. During December 1999, the Company recorded unearned
compensation of $112,500 for options granted with exercise prices less than the
deemed fair market value at the date of grant.
F-17
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
L. STOCK OPTIONS AND WARRANTS (CONTINUED)
Pro forma information regarding net income and income per share is
required by Statement of Financial Accounting Standard No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, (SFAS No. 123) assuming the Company accounted for its
employee stock options using the fair value method. The fair value of each stock
option granted is estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for options
granted in 1997, 1998 and 1999, respectively: no common stock dividends,
risk-free interest rates ranging from 5.44% and 5.74% to 6.33% and 5.51% to
6.13%; no volatility (prior to becoming a public company); and an expected
option life of five years. Pro forma net income and income per share assuming
compensation expense for the Stock Option Plan had been determined under SFAS
No. 123, are as follows:
1997 1998 1999
----------- ----------- -----------
Net Loss:
As reported........................... $(2,409,539) $(1,576,393) $(9,826,886)
Pro forma............................. (4,421,148) (1,662,641) (9,974,172)
Basic and diluted loss per share:
As reported........................... (0.22) (0.13) (0.76)
Pro forma............................. (0.40) (0.14) (0.77)
In the first quarter of fiscal 2000, the Company granted 212,500
options, including 72,000 options with exercise prices at $5.00 per share and
will record unearned compensation in connection with these grants.
During 1998, the Company issued warrants to purchase 152,450 shares of
common stock pursuant to placement agent agreements (see Note K). On December
16, 1997, the Company issued a warrant to purchase 300,000 shares of common
stock pursuant to a Securities Purchase Agreement (see Note M).
M. RELATED PARTY TRANSACTIONS
CT PARTNERS.
The Company and CT Partners were related parties through common
ownership. The Company provided research and development services for CT
Partners at cost. The cost of these services amounted to $650,782 and $318,800
for the years ended December 31, 1996 and 1997, respectively. There were no
research and development services provided subsequent to 1997 as the technology
involved was fully developed. These amounts are included in note
receivable--related party, along with accrued interest and administration fees
of $116,349 at December 31, 1998. The Company also performs contract research
and development services for unaffiliated entities.
On June 27, 1997 the Company entered into a royalty agreement with CT
Partners in which the Company received an exclusive license to manufacture and
market a miniature solid-state optical spectrometer developed by CT Partners.
This agreement was amended on December 1, 1997. Under the terms of the amended
royalty agreement, the Company would pay a royalty to CT Partners equal to a
maximum of $6.5 million. The first $1.5 million would be paid upon achieving $3
million in sales of products employing the licensed technology or from a sale of
the technology. Subsequent royalty payments
F-18
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
M. RELATED PARTY TRANSACTIONS (CONTINUED)
would equal 10% of gross revenues received by the Company from the licensed
technology, payable quarterly. At December 31, 1998, CT Partners owed the
Company $1,085,931 for contract research and development expenses incurred in
connection with this agreement.
In June 1999, the Company and CT Partners entered into an Asset Purchase
Agreement whereby the parties terminated the royalty agreement and the Company
purchased all intellectual property previously developed for CT Partners for $2
million in cash, less the outstanding note receivable of $1,085,931 and certain
related expenses. The Company is amortizing the intellectual property over 5
years.
SECURITIES PURCHASE AGREEMENT.
On December 16, 1997, the Company entered into a Securities Purchase
Agreement with a private investor who subsequently was elected as a director of
the Company, pursuant to which the private investor purchased from the Company a
secured promissory note in the principal amount of $1,500,000 (the "$1,500,000
Note") and a warrant to purchase 300,000 shares of common stock (the "300,000
Share Warrant"), subject to adjustment. The agreement allowed the purchase of
additional debt securities from the Company. In February 1998, the Company was
informed, as allowed by the agreement, that no additional debt securities would
be purchased. Therefore, in accordance with the terms of the agreement, in 1998
the Company paid the $1,500,000 Note plus interest and other agreed-to expenses.
The private investor is no longer a director of the Company.
The 300,000 Share Warrant entitles the holder to acquire 300,000 shares
of common stock at the lower of (a) $5.00 per share or (b) 50% of the price per
share at which the Company offers common stock in an initial public offering.
The 300,000 Share Warrant will expire if it has not been exercised on or before
the Company's initial public offering. The warrants were valued at $82,117 at
December 31, 1997 using the Black-Scholes pricing model with the following
assumptions: no common stock dividends, risk free interest rate of 5.71%;
expected life of 12 months; and no volatility. These warrants were completely
amortized as of December 31, 1998.
N. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any material legal proceedings.
In May 1998, the Company elected to self-insure the majority of its
employees' health care coverage with lifetime coverage up to $2,000,000 and
$5,000,000 per person at December 31, 1998 and 1999, respectively. In place are
reinsurance policies limiting losses for any individual within the plan of
$10,000 per year, and a total company aggregate stop-loss limit at December 31,
1999 of approximately $282,000, with coverage up to $2,282,000 of aggregated
total claims. Based on estimated claims and the reinsurance in place, management
believes the costs are reasonably estimated in the financial statements.
O. SALES AND PRODUCT INFORMATION
The Company believes it is advantageous to operate on a fully integrated
basis in one operating segment. Accordingly, management of the Company evaluates
performance and determines the allocation
F-19
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
O. SALES AND PRODUCT INFORMATION (CONTINUED)
of resources on an entity-wide basis. There are no material long-lived assets
held outside the United States. The following is supplemental information for
net sales by geographic area and product group:
1997 1998 1999
----------- ----------- -----------
Sales by Geographic Area:
North America........................ $ 6,714,473 $10,414,492 $10,402,434
Europe............................... 3,009,936 6,248,695 9,286,394
Pacific Rim.......................... 1,620,735 1,704,190 2,992,099
Other................................ 231,533 568,063 354,027
----------- ----------- -----------
Total.................................. $11,576,677 $18,935,440 $23,034,954
=========== =========== ===========
Sales by Product Group:
Bio-Systems.......................... $ 295,000 $ 5,460,684 $11,218,887
Bio-Consumables...................... 2,275 209,814 1,435,702
Scientific Instruments............... 9,410,072 11,496,105 8,794,165
Other Consumables.................... 1,869,330 1,768,837 1,586,200
----------- ----------- -----------
Total.................................. $11,576,677 $18,935,440 $23,034,954
=========== =========== ===========
P. SUPPLEMENTAL CASH FLOW INFORMATION
1997 1998 1999
-------- -------- ----------
Noncash investing and financing activities:
Exchange of note receivable for intellectual
property........................................ $ -- $ -- $1,085,931
Liabilities assumed in connection with business
acquisitions.................................... $ -- $ -- $ 135,333
Q. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a summary of activity for the allowance for doubtful
acounts during each of the three years ended December 31, 1999:
ADDITIONAL
BEGINNING CHARGES DEDUCTIONS ENDING
BALANCE TO INCOME FROM RESERVE BALANCE
--------- ---------- ------------ --------
Year Ended December 31, 1997....................... $ -- $102,495 $ (2,495) $100,000
Year Ended December 31, 1998....................... 100,000 462,698 (1,053) 561,645
Year Ended December 31, 1999....................... 561,645 121,609 (522,661) 160,593
R. SUBSEQUENT EVENTS
On March 7, 2000, the Company signed a letter of intent for the sale of
the assets of its non-life sciences instrument product line to a director of the
Company for $6,000,000, of which $5,000,000 will be paid in cash and $1,000,000
will be paid with an interest-bearing promissory note due on March 31, 2001. The
non-life science instrument product line contributed revenues of $8,794,165 in
1999. The Company expects this transaction to close on March 31, 2000, subject
to the approval of the Company's stockholders.
F-20
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of operations for the year
ended December 31, 1999 reflects the sale of assets related to our non-life
sciences instrument product line (The Company as adjusted) and the issuance of
300,000 shares of common stock at $5.00 per share upon the exercise of warrants
that will expire at the close of this offering, as if each had occurred on
January 1, 1999 and the assumed conversion at $5.00 per share of the $12.0
million aggregate principal amount of our convertible notes and accrued interest
into 2,712,200 shares of common stock as of March 23, 1999, the date of issuance
of our convertible notes. The following unaudited pro forma balance sheet
reflects these transactions and the sale of 25,000 shares of common stock at
$5.00 per share in March 2000 as if each had been completed on December 31,
1999.
The unaudited pro forma statement of operations and balance sheet data
reflect all adjustments necessary in the opinion of the Company's management
(consisting only of normal recurring adjustments) for a fair presentation of
such data. The unaudited pro forma financial data reflects the preliminary
identification of the non-life science instruments assets to be sold by the
Company. We expect to finalize the identification of the assets to be sold at
the time of closing.
The unaudited financial data are intended for informational purposes
only and are not intended to be indicative of our results of operations or
financial position had these transactions occurred on the dates specified, nor
are they indicative of our future results of operations or financial position.
The unaudited pro forma financial data, including notes thereto, should
be read in conjunction with our historical consolidated financial statements,
including notes thereto, appearing elsewhere in this Prospectus.
F-21
TRANSGENOMIC, INC.
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1999
ADJUSTMENTS
FOR SALE OF
NON-LIFE ADJUSTMENTS FOR
SCIENCES CONVERTIBLE
INSTRUMENT NOTES,
THE PRODUCT THE WARRANTS
COMPANY LINE COMPANY & STOCK PRO
(1) (2A) AS ADJUSTED (2B,C,D) FORMA
------------ ----------- ------------ --------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..... $ 153,336 $5,000,000 $ 5,153,336 $ 1,750,000 $ 6,903,336
Accounts receivable, net...... 6,199,059 -- 6,199,059 -- 6,199,059
Note receivable............... 1,000,000 1,000,000 -- 1,000,000
Inventories................... 6,043,025 (2,833,354) 3,209,671 -- 3,209,671
Prepaid expenses and other
current assets.............. 527,461 -- 527,461 -- 527,461
Refundable income taxes....... 96,000 -- 96,000 -- 96,000
------------ ----------- ------------ ------------ ------------
Total current assets........ 13,018,881 3,166,646 16,185,527 1,750,000 17,935,527
PROPERTY AND EQUIPMENT, Net..... 2,581,139 (704,478) 1,876,661 -- 1,876,661
OTHER ASSETS.................... 4,363,490 (2,261,389) 2,102,101 -- 2,102,101
------------ ----------- ------------ ------------ ------------
$ 19,963,510 $ 200,779 $20,164,289 $ 1,750,000 $ 21,914,289
============ =========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable--bank........... $ 4,340,000 $ -- $ 4,340,000 -- $ 4,340,000
Current portion of notes
payable--other.............. 579,724 -- 579,724 -- 579,724
Accounts payable.............. 2,827,186 -- 2,827,186 -- 2,827,186
Accrued compensation.......... 666,219 -- 666,219 -- 666,219
Other accrued expenses........ 1,111,871 (112,285) 999,586 -- 999,586
------------ ----------- ------------ ------------ ------------
Total current liabilities... 9,525,000 (112,285) 9,412,715 -- 9,412,715
NOTES PAYABLE--other, less
current maturities............ 116,958 -- 116,958 -- 116,958
CONVERTIBLE NOTES PAYABLE....... 12,421,010 -- 12,421,010 (12,421,010) --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock............... -- -- -- --
Common stock.................. 130,000 -- 130,000 30,372 160,372
Additional paid-in capital.... 10,231,595 -- 10,231,595 14,140,638 24,372,233
Unearned compensation......... (112,500) -- (112,500) -- (112,500)
Accumulated deficit........... (12,344,075) 313,064 (12,031,011) -- (12,031,011)
Accumulated other
comprehensive loss.......... (4,478) -- (4,478) -- (4,478)
------------ ----------- ------------ ------------ ------------
Total stockholders' equity
(deficit)................. (2,099,458) 313,064 (1,786,394) 14,171,010 12,384,616
------------ ----------- ------------ ------------ ------------
$ 19,963,510 $ 200,779 $20,164,289 $ 1,750,000 $ 21,914,289
============ =========== ============ ============ ============
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION.
F-22
TRANSGENOMIC, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
ADJUSTMENTS
FOR SALE OF
NON-LIFE ADJUSTMENTS
SCIENCES FOR
THE INSTRUMENT THE CONVERTIBLE
COMPANY PRODUCT COMPANY NOTES PRO
(1) LINE AS ADJUSTED (4) FORMA
----------- ----------- ------------ ----------- -----------
NET SALES....................... $23,034,954 $8,794,165 (3a) $ 14,240,789 -- $14,240,789
COST OF GOODS SOLD.............. 12,090,036 4,924,757 (3a,b) 7,165,279 -- 7,165,279
----------- ---------- ------------ -------- -----------
Gross profit................ 10,944,918 3,869,408 7,075,510 -- 7,075,510
OPERATING EXPENSES
General and administrative.... 3,771,663 236,808 (3b,c) 3,534,855 -- 3,534,855
Marketing and sales........... 7,759,997 1,610,369 (3b) 6,149,628 -- 6,149,628
Research and development...... 6,296,859 1,728,827 (3b) 4,568,032 -- 4,568,032
----------- ---------- ------------ -------- -----------
17,828,519 3,576,004 14,252,515 -- 14,252,515
----------- ---------- ------------ -------- -----------
LOSS FROM OPERATIONS............ (6,883,601) 293,404 (7,177,005) -- (7,177,005)
OTHER INCOME (EXPENSE)
Interest expense, net......... (1,198,378) -- (1,198,378) 858,665 (339,713)
Other, net.................... 366 -- 366 -- 366
----------- ---------- ------------ -------- -----------
(1,198,012) -- (1,198,012) 858,665 (339,347)
----------- ---------- ------------ -------- -----------
LOSS BEFORE INCOME TAXES........ (8,081,613) 293,404 (8,375,017) 858,665 (7,516,352)
INCOME TAX EXPENSE.............. 1,745,273 -- 1,745,273 -- 1,745,273
----------- ---------- ------------ -------- -----------
NET LOSS........................ $(9,826,886) $ 293,404 $(10,120,290) $858,665 $(9,261,625)
=========== ========== ============ ======== ===========
BASIC AND DILUTED LOSS PER
SHARE......................... $ (0.76) $ (0.78) $ (0.60)
=========== ============ ===========
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES OUTSTANDING
(5)........................... 13,000,000 13,000,000 15,334,150
=========== ============ ===========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION.
F-23
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
On March 7, 2000, we signed into a letter of intent for the sale of
assets related to our non-life sciences instrument product line for a total
purchase price of $6 million, of which $5 million will be paid in cash and $1
million will be paid with an interest-bearing promissory note due on March 31,
2000. The note will bear interest at a market rate. The unaudited pro forma
statement of operations for the year ended December 31, 1999 reflects this sale
and the issuance of 300,000 shares of common stock at $5.00 per share upon the
exercise of warrants that will expire at the close of this offering, as if each
had occurred on January 1, 1999 and the assumed conversion at $5.00 per share of
our $12.0 million aggregate principal amount of our convertible notes and
accrued interest into 2,712,200 shares of common stock as of March 23, 1999
(date of issuance). The unaudited pro forma balance sheet reflects these
transactions and the sale of 25,000 shares of common stock at $5.00 per share in
March 2000, as if each had been completed on December 31, 1999. The unaudited
pro forma financial data are based on the following:
1. The December 31, 1999 historical consolidated financial statements of the
Company.
2. The pro forma balance sheet adjustments are as follows:
a. The adjustments to reflect the sale of the Company's non-life sciences
instrument product line as follows:
Inventories........................................... $2,833,354
Property, net......................................... 704,478
Other assets.......................................... 2,081,389
Accrued liabilities................................... (112,285)
----------
Net assets sold....................................... 5,506,936
Purchase Price:
Cash................................................ 5,000,000
Note Receivable..................................... 1,000,000 6,000,000
---------- ---------
Preliminary gain on sale............................ 493,064
Utilization of deferred tax benefit................. (180,000)
---------
Net adjustment to equity.............................. $ 313,064
=========
b. The assumed conversion at $5.00 per share of our convertible notes and
accrued interest into 2,712,200 shares of common stock and elimination of
related interest and redemption premium.
c. The receipt of $1.5 million in cash upon issuance of 300,000 shares of
common stock at $5.00 per share upon exercise of warrants.
d. The receipt of $250,000 in cash upon sale of 25,000 shares of common
stock at $10.00.
3. The pro forma statement of operations adjustments for the sale of the
Company's non-life sciences instrument product line are as follows:
a. Elimination of the actual historical revenues and direct cost of goods
sold.
b. Elimination of indirect manufacturing and operating expenses. The
elimination of these expenses is based on an allocation of all department
expenses based on the ratio of actual individual employees' wages for
such department in proportion to total Company wages. The Company's
management believes such method is reasonable.
c. An increase in general and administrative expenses to reflect $200,000
of anticipated increased rental costs, which will be incurred by the
Company as a result of the sale of the non-life
F-24
sciences instrument product line. The Company will be required to
relocate to a separate facility subsequent to the sale. This adjustment
is reflected as follows:
Elimination of the non-life sciences instrument product
line's proportionate share of general and administrative
expenses.................................................. $ 436,808
Anticipated increased rental costs.......................... (200,000)
----------
Net reduction in general and administrative expenses........ $ 236,808
==========
d. No tax adjustment has been made due to the Company's current net
operating loss position.
4. The elimination of historical interest and redemption premium associated
with the convertible notes. (See Note G to the historical consolidated
financial statements.)
5. The weighted average shares outstanding are computed as follows:
Historical weighted average shares.......................... 13,000,000
Shares issued upon conversion of notes and accrued interest
(2,712,200 x 9/12)........................................ 2,034,150
Shares issued upon exercise of warrants..................... 300,000
----------
15,334,150
==========
F-25
A picture depicting the WAVE System components
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4,000,000 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
------------------
CHASE H&Q
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
--------------------
, 2000
--------------------
YOU SHOULD RELY ONLY ON 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.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON SHARES OR POSSESSION OR DISTRIBUTION
OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SHARES OF COMMON STOCK MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATIONS TO
DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than the underwriting
discount and commissions) expected to be incurred by us while issuing and
distributing the securities registered pursuant to this Registration Statement.
All amounts other than the SEC registration fee, NASD filing fee and Nasdaq
National Market listing fee are estimates.
SEC registration fee........................................ $ 17,002
NASD filing fee............................................. 6,940
Nasdaq National Market listing fee.......................... *[ ]
Legal fees and expenses..................................... *[ ]
Accounting fees and expenses................................ *[ ]
Printing and engraving...................................... *[ ]
Blue sky fees and expenses (including legal fees)........... *[ ]
Transfer agent fees......................................... *[ ]
Miscellaneous...............................................
--------------------------
Total..................................................... $
==========================
- ------------------------
* To be provided by amendment.
ITEM 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court
to award, or a corporation to grant, indemnity to directors and officers in
terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act of 1933.
As permitted by the Delaware General Corporation Law, our Restated
Certificate of Incorporation eliminates the personal liability of its directors
for monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to us or its
stockholders, (2) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the Delaware General Corporation Law (regarding unlawful dividends and stock
purchases) or (4) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is amended to
authorize further elimination or limiting of directors' personal liability, then
the Restated Certificate provides that the personal liability of directors will
be eliminated or limited to the fullest extent provided under the Delaware
General Corporation Law.
As permitted by the Delaware General Corporation Law, our Restated
Certificate of Incorporation and our Bylaws provide that (1) we are required to
indemnify our directors and officers to the fullest extent permitted by the
Delaware General Corporation Law, subject to certain very limited exceptions,
(2) we may indemnify our other employees and agents as set forth in the Delaware
General Corporation Law, (3) we are required to advance expenses, as incurred,
to its directors and executive officers in connection with a legal proceeding to
the fullest extent permitted by the Delaware General Corporation Law, subject to
certain conditions and (4) the rights conferred by the Restated Certificate of
Incorporation and Bylaws are not exclusive.
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The Delaware General Corporation Law authorizes a corporation to
indemnify its directors and officers provided that the corporation shall not
eliminate or limit the liability of a director as follows:
(a) for any action brought by or in the right of a corporation where the
director or officer is adjudged to be liable to the corporation, except where a
court determines the director or officer is entitled to indemnity;
(b) for acts or omissions not in good faith or which involve conduct that
the director or officer believes is not in the best interests of the
corporation;
(c) for knowing violations of the law;
(d) for any transaction from which the directors derived an improper
personal benefit; and
(e) for payment of dividends or approval of stock repurchases or redemptions
leading to liability under Section174 of the Delaware General Corporation Law.
The Delaware General Corporation Law requires a corporation to indemnify
a director or officer to the extent that the director or officer has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding for which indemnification is lawful.
We maintain a director and officer insurance policy which insures our
directors and officers against damages, judgments, settlements and costs
incurred by reason of certain wrongful acts committed by such persons in their
capacities as directors and officers.
Reference is also made to the form of Underwriting Agreement filed as
Exhibit 1 to this Registration Statement for our and the Underwriters'
respective agreements to indemnify each other, and to provide contribution in
circumstances where indemnification is unavailable.
ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES
We have sold and issued the following securities since January 1, 1997:
A. On July 1, 1997, we issued a total of 11,000,000 shares of our Common
Stock to the shareholders of CETAC Holding Company, Inc. in connection with a
merger of that corporation with and into the Registrant.
B. On December 16, 1997, we issued a $1,500,000 promissory note and a
warrant to purchase 300,000 shares of our Common Stock to a venture capital
investor. Principal and interest on the promissory note was paid in full in June
1998. The warrant remains outstanding and has an exercise price of equal to the
lower of (i) $5.00 per share or (ii) 50% of the offering price of our Common
Stock in our initial public offering, subject to certain adjustments.
C. At various times between July 3, 1997 and December 31, 1998, we issued a
total of 2,000,000 shares of our Common Stock for an aggregate consideration of
$10,000,000 to various institutional and individual investors. We paid aggregate
cash commissions of $781,600 to various placement agents in connection with this
private offering.
D. In connection with the private offering of Common Stock described in
Item C above, we issued warrants for the purchase of a total of 152,450 shares
of our Common Stock to various placement agents that participated in such
offering. All warrants have an exercise price of equal to the lower of (i) $5.00
per share or (ii) 50% of the offering price of our Common Stock in our initial
public offering, subject to certain adjustments.
E. On March 23, 1999, we issued Convertible Notes in an aggregate principal
amount of $12,000,000 to various institutional and individual investors. The
Convertible Notes and interest accrued thereon are convertible into shares of
our Common Stock at a price equal to the lower of (i) $5.00 per
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share or (ii) 50% of the offering price of our Common Stock in our initial
public offering, subject to certain adjustments.
F. On March 4, 2000, we issued 25,000 shares of Common Stock to a newly
elected director for a total purchase price of $250,000.
G. We have granted stock options to employees, directors and advisors under
our Employee Stock Option Plan as follows:
NUMBER OF SHARES(1) EXERCISE PRICE
------------------- --------------
January 1, 1997 to December 31, 1997...................... 1,515,000 $5.00(2)
January 1, 1998 to December 31, 1998...................... 1,690,250 $5.00
January 1, 1999 to December 31, 1999...................... 590,250 $5.00
January 1, 2000 to present................................ 212,500 $5.00 to $10.00
---------
Total..................................................... 4,008,000
- ------------------------
(1) Prior to cancellations of options to acquire 283,750 shares.
(2) Except that options for 15,000 shares issued to one of our non-employee
directors may be exercised at the lower of $5.00 per share or 50% of the
price of our common stock in this offering.
The above securities were offered and sold by us in reliance upon the
exemptions from registration pursuant to either (1) Section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering or
(2) Rule 701 promulgated under the Securities Act of 1933. No underwriters were
involved in connection with the sales of securities referred to in this Item 15.
ITEM 16: EXHIBITS AND FINANCIAL STATEMENTS; SCHEDULES
(a) Exhibits.
1 Form of Underwriting Agreement*
2 Asset Purchase Agreement between the Registrant and Stephen
F. Dwyer*
3.1 First Amended and Restated Certificate of Incorporation of
the Registrant
3.2 Bylaws of the Company
4 Form of Certificate of the Company's Common Stock
5 Opinion of Kutak Rock LLP*
10.1 Warrant for Purchase of Common Stock, dated December 16,
1997, between the Registrant and G.S. Beckwith Gilbert
10.2 Registration Rights Agreement, dated December 16, 1997,
between the Registrant and G.S. Beckwith Gilbert
10.3 Form of Warrant for Purchase of Common Stock between the
Registrant and various Placement Agents and Schedule of
Warrants Issued
10.4 First Amended and Restated Shareholder Agreement, dated
July 1, 1997, between the Registrant and each holder of its
Common Stock
10.5 Subscription Agreement, dated March 23, 1999, between the
Registrant and each purchaser of Registrant's Convertible
Notes due March 25, 2002, including form of Convertible Note
10.6 Second Amended and Restated 1997 Stock Option Plan of the
Registrant
10.7 1999 UK Approved Stock Option Sub Plan of the Registrant
10.8 Employment Agreement, dated March 4, 2000, between the
Registrant and Colin J. D'Silva
10.9 Employment Agreement, dated March 4, 2000, between the
Registrant and John L. Allbery
10.10 Employment Agreement, dated March 4, 2000, between the
Registrant and Douglas T. Gjerde
10.11 Employment Agreement, dated November 16, 1998, between the
Registrant and William B. Walker
10.12 Letter Agreement, dated February 18, 2000, between the
Registrant and Gregory J. Duman
10.13 Amended and Restated Revolving Loan Agreement, dated
March 8, 2000, between the Registrant and First National
Bank of Omaha
II-3
10.14 License Agreement, dated September 1, 1994, between
Registrant and Professor Dr. Gunther Bonn, et. al. and
Amendment thereto, dated March 14, 1997+
10.15 License Agreement, dated August 20, 1997, between the
Registrant and Leland Stanford Junior University+
10.16 Supply Agreement, dated January 1, 2000, between the
Registrant and Hitachi Instruments*+
10.17 Lease Agreement, dated November 2, 1998, between the
Registrant and Westlake Development Company, Inc.
10.18 Lease Agreement, dated May 15, 1996, between Interaction
Chromatography Inc. and Westlake Development Co., Inc.
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Kutak Rock LLP (included in Exhibit 5)*
24 Powers of Attorney
27 Financial Data Schedule
- ------------------------
* To be filed by amendment.
+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit has been filed separately with
the Secretary of the Commission with the redacted text pursuant to the
Registrant's Application Requesting Confidential Treatment under Rule 406 of
the Securities Act.
(b) Financial Statement Schedules:
All financial statement schedules have been omitted because the required
information is included in the consolidated financial statements of the
Registrant or related notes thereto.
ITEM 17: UNDERTAKINGS The following undertakings correspond to the
specified paragraph designation from Item 512 of Regulation S-K.
(f) EQUITY OFFERING OF NONREPORTING REGISTRANT. We hereby undertake to
provide to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
(h) ACCELERATION OF EFFECTIVENESS. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(i) RULE 430A. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Omaha and State of
Nebraska, on the 10th day of March 2000.
TRANSGENOMIC, INC.
By: /s/ COLLIN J. D'SILVA
-----------------------------------------
Collin J. D'Silva
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of the 10th day of March 2000.
SIGNATURE TITLE
--------- -----
/s/ COLLIN J. D'SILVA Chairman of the Board, Director and Chief
------------------------------------------- Executive Officer (Principal Executive
Collin J. D'Silva Officer)
/s/ JOHN L. ALLBERY
------------------------------------------- Chief Financial Officer (Principal Financial
John L. Allbery Officer)
/s/ MITCHELL L. MURPHY
------------------------------------------- Controller (Chief Accounting Officer)
Mitchell L. Murphy
/s/ STEPHEN F. DWYER*
------------------------------------------- Director
Stephen F. Dwyer
/s/ DOUGLAS T. GJERDE*
------------------------------------------- Director
Douglas T. Gjerde, Ph.D.
/s/ JEFFREY SKLAR*
------------------------------------------- Director
Jeffrey Sklar, M.D., Ph.D.
/s/ ROLAND J. SANTONI*
------------------------------------------- Director
Roland J. Santoni
/s/ GREGORY J. DUMAN*
------------------------------------------- Director
Gregory J. Duman*
------------------------------------------- Director
Parag Saxena
*By Collin J. D'Silva, as attorney-in-fact
/s/ COLLIN J. D'SILVA
--------------------------------------
Collin J. D'Silva
ATTORNEY-IN-FACT
FOR THE INDIVIDUALS AS INDICATED.
II-5
SIGNATURE TITLE
--------- -----
1 Form of Underwriting Agreement*
Asset Purchase Agreement between the
2 Registrant and Stephen F. Dwyer*
First Amended and Restated Certificate of
3.1 Incorporation of the Registrant
3.2 Bylaws of the Company
Form of Certificate of the Company's Common
4 Stock
5 Opinion of Kutak Rock LLP*
Warrant for Purchase of Common Stock, dated
10.1 December 16, 1997, between the Registrant and
G.S. Beckwith Gilbert
Registration Rights Agreement, dated
10.2 December 16, 1997, between the Registrant and
G.S. Beckwith Gilbert
Form of Warrant for Purchase of Common Stock
10.3 between the Registrant and various Placement
Agents and Schedule of Warrants Issued
First Amended and Restated Shareholder
10.4 Agreement, dated July 1, 1997, between the
Registrant and each holder of its Common Stock
Subscription Agreement, dated March 23, 1999,
between the Registrant and each purchaser of
10.5 Registrant's Convertible Notes due March 25,
2002, including form of Convertible Note
Second Amended and Restated 1997 Stock Option
10.6 Plan of the Registrant
1999 UK Approved Stock Option Sub Plan of the
10.7 Registrant
Employment Agreement, dated March 4, 2000,
10.8 between the Registrant and Colin J. D'Silva
Employment Agreement, dated March 4, 2000,
10.9 between the Registrant and John L. Allbery
Employment Agreement, dated March 4, 2000,
10.10 between the Registrant and Douglas T. Gjerde
Employment Agreement, dated November 16, 1998,
10.11 between the Registrant and William B. Walker
Letter Agreement, dated February 18, 2000,
10.12 between the Registrant and Gregory J. Duman
Amended and Restated Revolving Loan Agreement,
10.13 dated March 8, 2000, between the Registrant
and First National Bank of Omaha
License Agreement, dated September 1, 1994,
between Registrant and Professor Dr. Gunther
10.14 Bonn, et. al. and Amendment thereto, dated
March 14, 1997+
License Agreement, dated August 20, 1997,
10.15 between the Registrant and Leland Stanford
Junior University+
Supply Agreement, dated January 1, 2000,
10.16 between the Registrant and Hitachi
Instruments*+
Lease Agreement, dated November 2, 1998,
10.17 between the Registrant and Westlake
Development Company, Inc.
Lease Agreement, dated May 15, 1996, between
10.18 Interaction Chromatography Inc. and Westlake
Development Co., Inc.
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
Consent of Kutak Rock LLP (included in Exhibit
23.2 5)*
24 Powers of Attorney
27 Financial Data Schedule
- ------------------------
* To be filed by amendment.
+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit has been filed separately with
the Secretary of the Commission with the redacted text pursuant to the
Registrant's Application Requesting Confidential Treatment under Rule 406 of
the Securities Act.
II-6