AS FILED WITH THEAs filed with the Securities and Exchange Commission on November 30, 2005
Commission File No.: 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
ON JUNE 27, 2000 REGISTRATION NO. 333-32174 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON,Washington, D.C. 20549
---------------- AMENDMENT NO. 3 TOFORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------TRANSGENOMIC, INC.
(Exact name(Exact Name of Registrant
as specified in its charter)As Specified In Its Charter)
DELAWARE 3826Delaware 91-1789357 (State(State of incorporation) (Primary standard (I.R.S. employer industrial identification no.) classification code number)Incorporation)(IRS Employer I.D. Number) 5600 SOUTH 42ND STREET OMAHA, NEBRASKA 6810712325 Emmet Street Omaha, Nebraska 68164 (402)
738-5480 (Address,452-5400(Address, including zip code, and telephone number, including area code, of
Registrant'sregistrant’s principal executive offices)COLLINCollin J.
D'SILVA ChairmanD’SilvaPresident and Chief Executive Officer
5600 South 42nd12325 Emmet Street Omaha, Nebraska6810768164 (402)738-5480 (Name,452-5400(Name, address
including zip code,and telephone numberincluding area code,ofagentAgent forservice) Please address a copy of all communicationsService)Copies 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--------------Steven P. Amen
Kutak Rock LLP
1650 Farnam Street
Omaha, Nebraska 68102
Tel: (402) 346-6000
Fax: (402) 346-1148
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable on orFrom time to time after the effective date of this RegistrationStatement.Statement as determined by market conditions.If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.¨
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.
[ ]xIf this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
[ ]¨If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
[ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]¨If delivery of the
prospectusProspectus is expected to be made pursuant to Rule 434, please check the following box.[ ] THE REGISTRANT HEREBY AMENDS THIS¨CALCULATION OF 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 SECTIONFEE
Title of each class
of securities to be
Registered
Amount
to be
registered
Proposed maximum
offering price
per unit(1)
Proposed Maximum
Aggregate
Offering Price
Amount of
Registration
Fee
Common Stock, par value $0.01
25,038,320(2) $0.885 $22,158,913 $2,371
(1) Calculated pursuant to Rule 457(c) based on the average of the high and low sale price of the shares reported on the Nasdaq Stock Market on November 25, 2005.
(2) Consists of 16,975,743 shares currently outstanding and 8,039,640 shares issuable upon exercise of warrants. We hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until we 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 OFof the Securities Act of 1933OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTIONor until this Registration Statement shall become effective on such date as the Commission, acting according to Section 8(a),MAY DETERMINE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------SUBJECT TO COMPLETION, DATED JUNE 27, 2000 THE INFORMATION IN THISmay determine.The information in this Prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not seeking an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, dated November 30, 2005
PRELIMINARY PROSPECTUS
IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.PROSPECTUS 4,000,000 SHARES [LOGO]25,038,320 Shares
TRANSGENOMIC, INC.
COMMON STOCK
This
is an initial public offeringProspectus covers 25,038,320 shares (“Shares”) of our common stock that the selling stockholders listed under “Principal and Selling Stockholders” may sell from time to time. These Shares consist of:up to 16,975,743 Shares outstanding held byTransgenomic, Inc. We arethe selling4,000,000shareholders; andup to 8,062,577 Shares that may be issued upon exercise of outstanding warrants.The selling stockholders may sell the shares at the then prevailing market price for the shares at the time of
common stock.the sale, or at other prices. Theestimated initial public offeringlast reported sale priceis between $12.00 and $14.00 per share. -------------- Prior to this offering, there has been no public marketfor our commonstock.stock on November 29, 2005 was $0.96 per share. The selling stockholders are offering the Shares as described under “Plan of Distribution.” Wehave applied for listingwill not receive any ofourthe proceeds from the sale of these shares by the selling stockholders, but will be entitled to the proceeds from the exercise of outstanding warrants.Our common stock is listed on the Nasdaq National Market under the symbol
TBIO. --------------
PER SHARE TOTAL --------- -----------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“TBIO.”Investing in our common
stock. -------------- INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------- 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 , 2000The inside front cover of the prospectus shows a photograph of a technician using the WAVE System and another photograph of a computer monitor, some of the consumable products used with the WAVE System and a compact disk containing the WAVEMaker software. The inside front cover of the prospectus also folds out to reveal a graphic depiction of DNA analysis using the WAVE System. 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. THREE 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 (dsDNA) is performed at lower temperatures. Mutant DNA is separated at intermediate temperatures where DNA is partially denatured or melted. Single strand DNA (ssDNA) 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. Ultraviolet 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 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. The inside back cover of the prospectus shows a photograph of consumable products used with the WAVE System under a heading that reads "WAVE Optimized Molecular Biology Consumables."TABLE OF CONTENTS
PAGE --------Prospectus Summary.......................................... 1 Risk Factors................................................ 7 Forward-Looking Statements.................................. 15 Use of Proceeds............................................. 16 Dividend Policy............................................. 16 Capitalization.............................................. 17 Dilution.................................................... 19 Selected Financial Data..................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Business.................................................... 30 Management.................................................. 43 Principal Stockholders...................................... 49 Related Party Transactions.................................. 51 Description of Capital Stock................................ 52 Shares Eligible for Future Sale............................. 55 U.S. Federal Tax Considerations for Non-U.S. Holders........ 58 Underwriting................................................ 62 Legal Matters............................................... 64 Experts..................................................... 64 Where You Can Find More Information......................... 65 Index to Financial Statements............................... F-1THIS 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 genomics segment of the life sciences industry. These tools enable researchers to discover and understand variations in the human genetic code, or genome. Understanding the role of variations in the human genetic code may lead to the development of new drugs and diagnostic techniques. We believe our WAVE System, which incorporates our proprietary DNASep separation column and associated software, chemical reagents and other consumable items, 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 efforts to sequence the human genome near completion, understanding variations in the genetic sequence, or mutation analysis, is becoming the vital link to the development of new drug products and diagnostics. 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, withstock involves a high degree ofaccuracy and consistency. The WAVE System is basedrisk. You should carefully consider the information under the heading “Risk Factors” beginning onour proprietary micro-bead technology. Our patented micro-beads are packed into our proprietary DNASep separation column, which is the key componentpage 5 of this Prospectus before buying shares of ourWAVE System. Each micro-beadcommon stock.Neither the Securities and Exchange Commission nor any state securities commission has
specific surface chemistry that interacts with DNA molecules. The DNA molecules are then selectively separated fromapproved or disapproved of these securities or passed upon themicro-beads with a mixtureadequacy or accuracy ofour liquid reagents. This process is automated by our proprietary WAVEMaker Software for analysis and interpretation. RESEARCH AND DEVELOPMENT We maintain an active research and development program. Our research and development work is focused on making improvementsthis Prospectus. Any representation to theWAVE System thatcontrary is a criminal offense., 2005
1 5 10 10 12 14 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
15 31 36 45 48 51 52 52 53 Forward-Looking Statements
This Prospectus contains certain forward-looking statements. Many of these forward-looking statements refer to our plans, objectives, expectations and intentions, as well as our future financial results and are
neededsubject toadapt it to commercial applicationsrisk and uncertainty. You can identify these forward-looking statements by words such asdiagnostics research“expects,” “anticipates,” “intends,” “plans,” “may,” “believes,” “seeks,” “estimates” anddrug development. CUSTOMERS Sincesimilar expressions. Because these forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under “Risk Factors” in this Prospectus or described in reports that we file from time to time with theproduct launch in August 1997Securities andthrough December 31, 1999, we sold 210 WAVE Systems in 20 countries to core laboratory facilities, academic research centers, medical institutionsExchange Commission, such as our Forms 10-K andbiopharmaceutical companies. We sold an additional 88 WAVE Systems in 2000, 46 in the first quarter and 42 in the second quarter through June 9, 2000. Customers that have purchased at least one WAVE System include Harvard University, Stanford University, Baylor College of Medicine, University of Chicago, Fred Hutchison Cancer Research Facility, Mayo Clinic, National Cancer Institute, National Institutes of Health, 1Institut Curie, University of Cambridge, Wellcome Trust-Oxford University, Institut Gustave Roussy, SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck & Company, Novartis and Eli Lilly and Company. 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; AND - BUILD A SUBSTANTIAL INTELLECTUAL PROPERTY ESTATE. RECENT DEVELOPMENTS We were incorporated in Delaware on March 6, 1997 to develop, manufacture and market our DNA separation and analysis products in addition to continuing to manufacture and sell the non-life sciences instrumentation products that were being manufactured and sold by our predecessor company, 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 products and recently sold the assets related to our non-life sciences instrument product line. See "Related Party Transactions." 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 you10-Q, as amended.You should rely only on the information contained in this
prospectusProspectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The information in this Prospectus is current as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.The items in the following summary are described in more detail later in this Prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider. Therefore, you should also read the more detailed information set out in this Prospectus, including the consolidated financial statements and related notes appearing elsewhere in this Prospectus, before investing in our common stock. In particular, you should carefully consider the information discussed under “Risk Factors.” All references to “we,” “us” or the “Company” in this Prospectus mean Transgenomic, Inc.
TRANSGENOMIC, INC.
Our Business
We develop, manufacture and sell innovative products for the analysis, synthesis and purification of nucleic acids through two operating segments, BioSystems and Nucleic Acids.
The BioSystems operating segment develops, assembles, manufactures and markets versatile products and provides analytical services to the medical research, clinical and pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in the United States and throughout much of Western Europe. For the rest of the world, products and services are sold through more than 25 dealers and distributors located in those local markets. Net sales from this operating segment are categorized as bioinstruments, bioconsumables and discovery services.
Bioinstruments. The flagship product of the BioSystems operating segment is the WAVE system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of 1,269 WAVE systems as of September 30, 2005. Additionally, this operating segment utilizes its sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.Bioconsumables. The installed WAVE base generates a demand for consumables that are required for the system’s continued operation. These products are developed, manufactured and sold by this operating segment. In addition, the BioSystems operating segment manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of HPLC separation columns.Discovery Services. The BioSystems operating segment provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.The Nucleic Acids operating segment develops, manufactures and markets chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical, oligonucleotide synthesis companies and research institutions throughout the world. These products are produced primarily in this operating segment’s only facility, in Glasgow, Scotland. Prior to November 11, 2004, this operating segment also manufactured synthesized segments of nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, the assets associated with this facility were sold to an unaffiliated
third party. As a result, the Nucleic Acids operating segment no longer manufactures and sells these specialized oligonucleotides. A substantial portion of this operating segment’s revenues during 2005 and 2004 have been derived from one customer.
We have experienced recurring net losses resulting in an accumulated deficit of $110.88 million at September 30, 2005 and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. We instituted significant changes during the fourth quarter of 2004 designed to, among other things, better align our cost structure with projected revenues, focus on opportunities in our BioSystems operating segment, and minimize the adverse financial effect of our Nucleic Acids operating segment. Specifically, during the fourth quarter of 2004, we sold our manufacturing facility in Boulder, Colorado and implemented a restructuring plan. While the primarily goals of these changes were to provide the foundation for a self-sustaining, growth-oriented company with positive cash flows and earnings, there can be no assurance that we can achieve these goals. Our business strategy going forward is to achieve revenue growth in our BioSystems operating segment and to better align our cost structure with anticipated revenues in both of our operating segments.
Recent Financing Activities
On October 31, 2005, we closed on a private placement of securities to institutional investors (the “2005 Private Placement”). The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the securities sold was $1.01 per share of common stock initially being sold or $15.08 million. In conjunction with this transaction, we issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.
The net proceeds from the 2005 Private Placement were $13.90 million after transaction costs of $1.18 million. These proceeds were partially used to repay all outstanding principal and accrued interest on our convertible line of credit (the “Credit Line”) and convertible term note (the “Term Note”) to Laurus Master Fund, Ltd. (“Laurus”) (collectively, the “Laurus Loans”) including fees to facilitate the 2005 Private Placement and prepayment penalties to Laurus in the sum of $0.82 million. As a result, our Laurus Loans have been cancelled and are no longer available to us. The remaining proceeds of $5.35 million will be used for future working capital needs.
Shares to be sold by Selling Stockholders
This Prospectus covers 25,038,320 shares of our common stock that the selling stockholders listed under “Principal and Selling Stockholders” may offer and resell from time to time. These shares consist of (i) 14,925,743 shares issued in conjunction with the 2005 Private Placement; (ii) 6,903,156 shares issuable upon the exercise of warrants that were also issued in conjunction with the 2005 Private Placement; (iii) 2,050,000 shares in conjunction with a private placement that closed in the fourth quarter of 2003; and (iv) 1,159,421 shares issuable upon the exercise of outstanding warrants that were issued primarily in conjunction with our past indebtedness to Laurus. The exercise price of these warrants range from $1.20 to $3.18 per share. The selling stockholders are offering the common stock as described under “Plan of Distribution.”
At November 29, 2005, we had 49,172,079 shares issued and outstanding. The number of shares outstanding does not include (i) the 8,062,577 shares issuable upon the exercise of outstanding warrants and (ii) up to 6,246,231 shares of our common stock that we could issue under our employee stock option plan of which 5,541,015 options are outstanding.
Use of Proceeds
This Prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. This Prospectus also relates to common stock issuable upon the exercise of warrants held by certain selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. We will, however, receive proceeds from the exercise of the warrants, if exercised. The proceeds from the exercise of warrants, if any, will be used for working capital purposes.
Summary Consolidated Financial Information
The following tables present our summary consolidated historical financial information for the periods indicated. You should read this information together with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Prospectus. The summary consolidated balance sheet data at December 31, 2004 and 2003 and the summary consolidated statements of operations data for each year ended December 31, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements that are included elsewhere in this Prospectus. The summary consolidated balance sheet data at September 30, 2005 and the summary consolidated statements of operations data for the nine months ended September 30, 2005 and 2004 are derived from our unaudited condensed consolidated financial statements included elsewhere in this Prospectus. The unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements. Historical results are not necessarily indicative of the results to be expected in the future. The as adjusted balance sheet data as of September 30, 2005 and the as adjusted statements of operations data for the nine months ended September 30, 2005 and the year ended December 31, 2004 give effect to the 2005 Private Placement and simultaneous repayment of the Laurus Loans as if is such transactions had occurred as of September 30, 2005 for purposes of the balance sheet data and as of January 1, 2004 for purposes of the statement of operations data. Such amounts have been derived from our as adjusted unaudited condensed consolidated financial statements that are not included in this Prospectus. For a detailed description of the related adjustments refer to “Capitalization Table” on page 14. Dollar amounts, except per share data, are presented in thousands.
Nine Months Ended September 30, Year Ended December 31, 2005 2005 2004 2004 2004 2003 2002 As Adjusted As Adjusted Statement of Operations Data:
Net sales
$ 23,711 $ 23,711 $ 25,834 $ 33,789 $ 33,789 $ 33,866 $ 37,554 Cost of good sold
13,609 13,609 18,484 24,596 24,596 24,315 19,569 Gross profit
10,102 10,102 7,350 9,193 9,193 9,551 17,985 Selling, general and administrative
10,023 10,023 12,866 17,499 17,499 17,324 24,199 Research and development
1,696 1,696 5,344 6,685 6,685 9,305 12,201 Restructuring charges(1)
— — — 3,570 3,570 738 3,282 Impairment charges(2)
247 247 11,964 11,965 11,965 4,772 — Gain on sale of facility(3)
— — — (1,466 ) (1,466 ) — — Gain on sale of product line
— — — — — — — Operating expenses
11,966 11,966 30,174 38,253 38,253 32,139 39,682 Other income (expense)(4)
(1,888 ) (611 ) (4,704 ) (5,406 ) (239 ) (305 ) 437 Loss before income taxes
(3,752 ) (2,475 ) (27,528 ) (34,466 ) (29,299 ) (22,893 ) (21,260 ) Income tax (benefit) expense
27 27 (94 ) (94 ) (94 ) 65 105 Net loss
$ (3,779 ) $ (2,502 ) $ (27,434 ) $ (34,372 ) $ (29,205 ) $ (22,958 ) $ (21,365 ) Basic and diluted loss per share
$ (0.12 ) $ (0.05 ) $ (0.95 ) $ (1.19 ) $ (0.66 ) $ (0.94 ) $ (0.91 ) Basic and diluted weighted average shares outstanding
32,837 47,763 28,951 29,066 43,992 24,484 23,583
As of September 30, 2005 As of December 31, Actual As Adjusted 2004 2003 Balance Sheet Data:
Total assets(5)
$ 31,789 $ 37,163 $ 37,458 $ 57,306 Borrowings under credit line
6,935 — 6,514 2,142 Current portion of long-term debt
675 — 825 1,693 Long-term debt, less current portion
1,226 — 2,199 — Total stockholders’ equity
15,577 29,220 16,535 45,058
(1) Restructuring plans were implemented in 2002 and 2004 to reduce and align our expenses with current business prospects. The plans included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. As a result, restructuring charges were recorded and are included in operating expenses. See Note N to the accompanying consolidated financial statements.
(2) Impairment charges relate primarily to the impairment of goodwill, and in 2004, also include a charge of $2,100 related to the impairment of property and equipment. See Note C to the accompanying consolidated financial statements.
(3) Gain on sale of facility relates to the sale of our specialty olignucleotide manufacturing facility in Boulder, Colorado during the fourth quarter of 2004. See note M to the accompanying consolidated financial statements.
(4) Other income (expense) for all years presented primarily includes interest expense and in 2004 it includes a loss on debt extinguishment of $2,859 resulting from certain modifications to our Laurus Loans that were treated as extinguishments for financial reporting purposes. See Note E to the accompanying consolidated financial statements.
(5) The reduction in total assets from December 31, 2003 to December 31, 2004 related primarily to impairment charges of $11,965 in our Nucleic Acids operating segment (see Notes C and K to the accompanying consolidated financial statements) and the sale of our specialty oligonucleotide manufacturing facility in Boulder, Colorado (see Note M to the accompanying consolidated financial statements). The reduction in total assets from December 31, 2002 to December 31, 2003 related primarily to operating losses that were funded by reductions in cash and cash equivalents and short term investments. General Information
We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). We maintain manufacturing facilities in Omaha, Nebraska, San Jose, California, Glasgow, Scotland and Cramlington, England. We maintain research and development offices in Gaithersburg, Maryland and Omaha, Nebraska.
We make reports filed by us with the SEC available free of charge on our website as soon as reasonably practicable after these reports are filed. The address of our website is www.transgenomic.com. Information on our website, including any SEC report, is not part of this Prospectus and you should not rely on it in deciding whether to invest in our common stock.
2THE OFFERING
Common stock offered........................................ 4,000,000 shares Common stock to be outstanding after this offering.......... 17,325,000 shares Use of proceeds............................................. For debt reduction, capital expenditures, acquisition of notes and general working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... TBIO---------------------------- The number of shares to be outstanding after this offering includes all shares outstanding as of the date of this prospectus plus 300,000 shares that will be issued at $5.00 per share upon the exercise of warrants that the holder intends to exercise prior to 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 June 1, 2000, we have issued options to purchase 3,690,550 shares of common stock at an exercise price ranging from $5.00 to $13.00 per share, except that options to acquire shares of common stock with an aggregate fixed cost of $75,000 issued to one of our non-employee directors may be exercised at a price equal to the lower of $5.00 per share for 15,000 shares or 50% of the public offering price for this offering. We may issue options to acquire up to 2,309,450 additional shares ofAn investment in our common stock
underinvolves a number of risks. Before making an investment decision, you should carefully consider all of the risks and other information described in thisplan; - 2,728,200 shares issuable uponProspectus. The risks discussed in this Prospectus could materially adversely affect our business, financial condition and results of operations and cause theconversion of our $12.0 million aggregate principal amount convertible notes plus accrued interest thereon at $5.00 per share, assuming such conversion had occurred on March 31, 2000. We may have to issue additional sharestrading price of our common stock to decline significantly. If this occurs, you may lose all or part of your investment.Risks Relating to Our Business
We may not have adequate financial resources to execute our business plan.
At October 31, 2005, we had cash and cash equivalents and short-term investment of $6.68 million. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2006, we have experienced recurring net losses and have an accumulated deficit totaling $110.88 million at September 30, 2005 and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the
holdersextent necessary, we believe that we can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of ourconvertible notesbusiness plan. Ultimately, we must achieve sufficient revenues in order to generate positive net earnings and cash flows from operations. However, we cannot assure you that we will be able tostockholders who bought shares from us in a private offering if the public offering price for this offering is less than $10.00 per share. See "Capitalization." ---------------------------- 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. 3SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA The summary consolidated historical financial data forincrease our1997, 1998 and 1999 fiscal years and for the three months ended March 31, 1999 and 2000 is derived from our consolidated financial statements for these periods. 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.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA)STATEMENTS OF OPERATIONS DATA: Net sales..................................... $11,577 $18,935 $23,035 $ 5,227 $ 6,944 Gross profit.................................. 5,241 9,345 10,945 2,524 3,113 Operating expenses............................ 8,459 11,320 17,829 4,044 6,142 Loss from operations.......................... (3,218) (1,975) (6,884) (1,520) (3,029) Net loss...................................... $(2,410) $(1,576) $(9,827) $ (978) $(3,498) ======= ======= ======= ======= ======= Basic and diluted loss per share.............. $ (0.22) $ (0.13) $ (0.76) $ (0.08) $ (0.27) ======= ======= ======= ======= ======= Basic and diluted weighted average shares outstanding(1).............................. 11,145 12,279 13,000 13,000 13,008 ======= ======= ======= ======= =======
AS OF AS OF DECEMBER 31, MARCH 31, ------------------- ---------- 1998 1999 2000 -------- -------- ---------- (IN THOUSANDS)BALANCE SHEET DATA: Total assets.............................................. $14,736 $19,964 $18,830 Long-term debt, less current portion...................... 695 12,538 12,781 Stockholders' equity (deficit)............................ 6,649 (2,099) (4,615)- ------------------------ (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. 4SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA The following summary unaudited pro forma statement of operations data for the three months ended March 31, 2000 and the year ended December 31, 1999 reflects the sale of assets related to our non-life sciences instrument product line on May 19, 2000 as if the sale had occurred on January 1, 1999. The summary unaudited pro forma balance sheet data reflects the sale as if it had been completed on March 31, 2000. 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, and the issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that the holder intends to exercise prior to the closing of this offering. 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.
THREE MONTHS ENDED MARCH 31, 2000 --------------------------------------------- ADJUSTMENTS FOR SALE OF NON-LIFE SCIENCES TRANSGENOMIC INSTRUMENT TRANSGENOMIC (HISTORICAL) PRODUCT LINE PRO FORMA ------------ --------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA)STATEMENT OF OPERATIONS DATA: Net sales.......................................... $ 6,944 $2,171 $ 4,773 Gross profit....................................... 3,113 738 2,375 Operating expenses................................. 6,142 1,408 4,734 Loss from operations............................... (3,029) (670) (2,359) Other expense...................................... (469) -- (469) Loss before income taxes........................... (3,498) (670) (2,828) Net loss........................................... $(3,498) $ (670) $(2,828) ======= ====== ======= Basic and diluted loss per share............................................ $ (0.27) $ (0.22) ======= ======= Basic and diluted weighted average shares outstanding...................................... 13,008 13,008 ======= =======5
YEAR ENDED DECEMBER 31, 1999 --------------------------------------------- ADJUSTMENTS FOR SALE OF NON-LIFE SCIENCES TRANSGENOMIC INSTRUMENT TRANSGENOMIC (HISTORICAL) PRODUCT LINE PRO FORMA ------------ --------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA)STATEMENT OF OPERATIONS DATA: Net sales.......................................... $23,035 $8,794 $ 14,241 Gross profit....................................... 10,945 3,869 7,076 Operating expenses................................. 17,829 3,576 14,253 (Loss) income from operations...................... (6,884) 293 (7,177) Other expense...................................... (1,198) -- (1,198) (Loss) income before income taxes.................. (8,082) 293 (8,375) Net (loss) income.................................. $(9,827) $ 293 $(10,120) ======= ====== ======== Basic and diluted loss per share............................................ $ (0.76) $ (0.78) ======= ======== Basic and diluted weighted average shares outstanding...................................... 13,000 13,000 ======= ========
AS OF MARCH 31, 2000 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(1) -------- ------------ -------------- (IN THOUSANDS)BALANCE SHEET DATA: Total assets........................................... $18,830 $19,578 $67,938 Long-term debt, less current portion................... 12,782 12,782 12,782 Stockholders' equity (deficit)......................... (4,615) (3,866) 44,494- ------------------------ (1) We have the right to cause our convertible notes to be converted into common stock when the sum of (a) the average trading price of our stock over 20 consecutive trading days and (b) all accrued interest on the notes (when converted to an amount per share using the conversion price) equals $13.72 per share. The conversion price is equal to the lower of $5.00 per share or 50% of the public offering price per share for this offering. We intend to convert the notes at the earliest possible date after completion of this offering. Assuming the conversion of $12.0 million aggregate principal amount of our convertible notes plus accrued interest at an assumed conversion price of $5.00 per share and the exercise of the warrants to purchase 300,000 shares of our common stock at $5.00 per share each occurred as of March 31, 2000, our pro forma stockholders' equity and total assets, prior to giving effect to the sale of the 4,000,000 shares of common stock offered by us in this offering, would be $10.4 million and $21.1 million, respectively. Assuming the conversion of the convertible notes occurred as of March 31, 2000, our pro forma as adjusted stockholders' equity and total assets after this offering and the exercise of the warrants would be $57.2 million and $67.9 million, respectively. 6RISK 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 AND TO THE RISK THAT WE MAY NOT ACHIEVE PROFITABILITY.revenues.We have a
limitedhistory of operatinghistory as a company focused on life sciences technologieslosses andapplications 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 inherentmay incur losses in thedevelopment 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.future.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. Wehave experienced losses from operations since inception of$3.0our operations. Our loss from operations for the years ended December 31, 2004, 2003 and 2002 were $29.06 million,during$22.59 million and $21.70 million, respectively, and for thethreefirst nine monthsended March 31, 2000, $6.9 million in fiscal 1999, $2.0 million in fiscal 1998 and $3.2 million in fiscal 1997.of 2005 were $1.86 million. These losseswere mostlyhave been due principally to the high levels of research and development expenses and sales and marketing expensesrelated to the development and marketing of our WAVE System. As of March 31, 2000,that wehad an accumulated deficit of $15.8 million. Inhave incurred in order to develop and market our products, restructuring charges and impairment charges. In addition, markets for our products have developed more slowly than expected in many cases and may continue toenhance 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.do so. As a result, wecould continuemay incur operating losses in the future.Markets for our products and services may develop slowly.
There are many factors that affect the market demand for our products and services that we cannot control. This is especially true in our Nucleic Acids operating segment where the demand for our products depends to
incur lossesa large degree on the success that our customers and potential customers have in developing useful pharmaceutical products based on genetic intervention. A central strategy for our Nucleic Acids operating segment is to sell synthetic nucleic acid products to biopharmaceutical and pharmaceutical companies that are seeking to develop commercially viable genomic-based diagnostic and therapeutic products. We have invested a significant amount of capital into acquiring and developing manufacturing facilities and other assets to allow us to pursue this market. However, this is a new field of commercial development, and many of these biopharmaceutical and pharmaceutical companies are in theforseeable futureearly stages of their efforts to develop genomic-based diagnostics and therapeutics and have encountered difficulties in these efforts. As a result, the demand for our synthetic nucleic acid products is difficult to forecast and maynever be profitable. OUR TECHNOLOGY AND PRODUCTS ARE RELATIVELY NEW AND MAY NOT GAIN MARKET ACCEPTANCE AMONG GENOMICS RESEARCHERS. Ourdevelop slowly or sporadically. In addition, we cannot assure you that these companies will not internally develop the chemistries and manufacturing capabilities to produce the products they could buy from us. Demand for our WAVE System is similarly affected by the needs andother automated DNA separationbudgetary resources of research institutions, universities, hospitals andanalysis products are relatively new products. Market acceptanceothers who use the WAVE System for genetic-variation research. The WAVE System represents a significant expenditure by these types ofcustomers and often requires a long sales cycle. If revenues from the sales of our products
is dependent upon factors, some of which are not in our control, such as continued growth in the genomics industry, the availabilityandprice of competing products and technologies, the success of our sales efforts, and the acceptance of our product by the 7academic 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 our products do not achieve market acceptance,services continue at current levels, we maynot achieve profitability. WE WILL NEED TO REFINE OUR WAVE SYSTEM TO ALLOW IT TO MEET THE REQUIREMENTS OF COMMERCIAL USERS. Our WAVE System is relatively new and has been developed primarily for basic genomics research applications. The WAVE System will require significant enhancementsneed toits capacity and software in order for ittake steps tobe adapted to commercial applications such as diagnostic research and drug development. The adaptation of the current WAVE System for these commercial applications will requirefurther reduce operating expenses or raise additionalresearch and development work that may be expensive and time-consuming.working capital. We cannot assure you that sales will increase or that we will be able tomakereduce operating expenses or raise additional working capital.Two customers account for a significant portion of sales in our BioSystems and Nucleic Acids operating segments.
During nine months ended September 30, 2005, sales to Geron Corporation (“Geron”) totaled $1.73 million and represented 54%, of net sales within our Nucleic Acids operating segment and 7% of our total consolidated net sales. During the
necessary improvementsyear ended December 31, 2004, sales to Geron Corporation totaled $4.15 million and represented 49% of total net sales within our Nucleic Acids operating segment and 12% of total consolidated net sales. Sales to Geron are governed by a supply agreement that does not require Geron to purchase any minimum quantity of our products. Accordingly, theWAVE System for use in commercial applications. Ifamount of nucleic acid products weare unablesell tocomplete the further development of the WAVE System we may notGeron is subject to change. Revenues from our Nucleic Acids operating segment business would beable to successfully market it for commercial applications and this will limit our future revenues. 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 disease, particularly for those that have no known cure. Any of these scenarios could reduce the potential marketssubstantially reduced if Geron’s need for our productswhich could limitdeclined or if it decided to obtain these products from other suppliers.During the nine months ended September 30, 2005, sales to a large pharmaceutical company totaled $2.0 million and represented 10% of net sales within our
future revenues. WE HAVEBioSystems operating segment and 9% of our total consolidated net sales. During the year ended December 31, 2004, sales to this customer totaled $1.66 million and represented 7% of total net sales within our BioSystems operating segment and 5% of total consolidated net sales. Sales to this customer are governed by a non-binding master services agreement that does not require the customer to purchase any minimum quantity of our services. Accordingly, the amount of sales to this customer is subject to change.Customer clinical trials may be delayed or discontinued.
A
LIMITED SALES FORCE AND LIMITED EXPERIENCE WITH DIRECT MARKETING OF OUR PRODUCTS WHICH COULD LIMIT OUR ABILITY TO EFFECTIVELY PENETRATE NEW MARKETS.significant percentage of our Nucleic Acids operating segment and discovery services revenues are generated by sales to customers involved in drug development. Ourdirect 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 scientificproducts andtechnical issues raisedservices are generally used byour customers. Our customer support personnel may also lack the broad range of technical expertise required to adequately service and support our productsthese customers in thefield. 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 dependsmanufacture of drug candidates inlarge partvarying stages of clinical trials. If these clinical trials are delayed or cancelled or are otherwise not successful, this could have a significant impact onthe perception that our products can help accelerate basic genomics research, diagnostic testing and related applications such as drug discovery and development efforts. A WAVE System sells for between $60,000 to $100,000 depending on its features and accessories. For many potential customers, who are often constrained by limited research budgets, this will be a large capital outlay. Additionally,revenues we generate from the salescycle is often three to six months long due to the need to educate potential customers as to the benefits and useofour 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 athese products.The sale
will result. Due to the lengthy sales cycle required, our revenues could be difficult to forecast. 8OUR 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 payment terms in order to make a sale. Our typical accounts receivable terms are 30 to 60 days. Longer collection periods may have a negative impact on our liquidity. As of March 31, 2000, our accounts receivable equaled $5.1 million. Balances subject to extended terms were approximately $179,000, of which approximately $68,000 was due more than one year from March 31, 2000. WE MAY NEED TO RAISE ADDITIONAL FUNDING WHICH MAY NOT BE AVAILABLE. To date, we have financed our operations primarily from the net proceeds of a $10,000,000 private offering of common stock, a $12,000,000 issuance of convertible notes and borrowings under our $5 million bank line of credit. 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 acceptanceof our products andtechnologies; -business operations in international markets subjects us to additional risks.During the
levellast three fiscal years, our international sales have been approximately 55-65% of our net sales. As a result, a major portion of our revenues and expenses are subject to risks associated with international sales andmarketing expenses; - expendituresoperations. These risks include:payment cycles inconnection 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 capitalforeign markets are typically longer than in thefuture through bank financingsU.S., and capital spending budgets for research agencies can vary over time with foreign governments;changes in foreign currency exchange rates can make our products more costly and operating expenses higher in local currencies since our foreign sales and operating expenses are typically paid for in U.S. Dollars, British Pounds orstrategic investments. Additional financing may not be availablethe Euro; andthe potential for changes in U.S. and foreign laws or regulations that result in additional import or export restrictions, higher tariffs or other taxes, more burdensome licensing requirements or similar impediments tous whenour ability to sell products and services profitably in these markets.Our WAVE System includes hardware components and instrumentation manufactured by a single supplier and if we
need it, or, if available, we cannot assure that we will beare no longer able to obtainsuch financing on terms favorablethese components and instrumentation our ability tous ormanufacture ourstockholders. 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 ABILITY TO MANUFACTURE OUR PRODUCTS COULD BE IMPAIRED.products could be impaired.We
currentlyrely on a single supplier, HitachiInstruments, Inc.,High Technologies America, to provide the basic instrument used in our WAVESystem.Systems. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. Hitachi is replacing its current instrument line with a new instrument line. While we presently plan to convert our technology and applications to this new instrument line, such conversion may not be successful and, therefore, we may incur additional costs for the custom manufacturing of the current instrument line. 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 manufacture our products could be impaired, which could limit our future revenues.9OUR CHROMATOGRAPHIC COLUMNS, A CORE COMPONENT OF THE WAVE SYSTEM, ARE MANUFACTURED AT A SINGLE FACILITY WHICH IS LOCATED IN AN EARTHQUAKE-PRONE AREA. AllWe may not have adequate personnel to execute our business plan.
In order to reduce our operating costs, we have significantly reduced the number of employees, including reductions in our
proprietary DNASep columns are manufactured atresearch and development staff and ourmanufacturing 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 for any significant period of time, it could limit our future revenues. 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 marketingresourcespersonnel. In addition, we may lose other key management, scientific, technical, sales andmore 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 customersmanufacturing personnel from time to time. It mayhave more familiarity or experience. In orderbe very difficult toeffectively 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 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 beforereplace personnel if theycan be made commercially available and, therefore, we could experience significant delaysare needed in thedevelopmentfuture, andmanufacturethe loss of key personnel could harm ourproducts. Even after new products are made commercially available, unforeseen technical difficulties could arise, requiring additional expenditures by us to correct such difficultiesbusiness andpossibly resulting in further delays.operating results. Wecannot 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 wecannot assure you that ourWAVE Systememployee reductions will notbe made obsolete by more effective or less expensive technologies. Because of rapid technological change, we may be requiredimpair our ability toexpend greater amounts in the development ofcontinue to develop new productswhichand refine existing products inturn will requireorder to remain competitive. In addition, these reductions could prevent us from successfully marketing our products and developing our customer base.Our markets are very competitive.
As described above, we compete with many other companies in both our Biosystems and Nucleic Acids operating segments. Many of these competing companies have greater
revenuesresources than we do or may enjoy other competitive advantages. This may allow them torecoup such expenditures. We cannot assure you that we will be able to make the necessary enhancementsmore effectively market their products to ourtechnologycustomers or potential customers, to develop products that make our products obsolete or tocompete successfully with new technologies that may emerge. WE RECENTLY SOLD THE ASSETS RELATED TO OUR NON-LIFE SCIENCES INSTRUMENT PRODUCT LINE WHICH HAVE HISTORICALLY GENERATED MOST OF OUR REVENUES AND EARNINGS. In addition to our DNA separationproduce andanalysissell productswe 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 decided to focus our resources on our new automated DNA separation and analysis products and technologies and have recently sold the assets related to our non-life sciences product line.less expensively than us. As a resultwe will no longer generate revenues from the saleof theseproducts. The future growthcompetitive factors, demand for and pricing of ourcompany will be entirely dependent on the sale of our WAVE System and associated DNA separationproducts andtechnologies. You should keep this fact in mind when reviewingservices could be negatively affected.Our patents may not protect us from others using our
financial statements. 10Because of the change intechnology that could harm ourproduct 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 recently sold the assets related to our non-life sciences instrument product line. The agreement for the sale of these assets provided that we will retain accounts receivable equaling approximately $1.8 million that arose from sales of these products prior to March 31, 2000. We may 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. Ourbusiness and competitiveposition 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 for our products. 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.position.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. 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. 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. 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 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
theysuch measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.While we 11require employees, academic collaboratorsWe are dependent upon our licensed technologies and
consultantsmay need toenter into confidentiality and/or intellectual property assignments where appropriate, any ofobtain additional licenses in thefollowing could still occur: - proprietary information could be disclosed or others may gain accessfuture tosuch information; - others may independently develop substantially equivalent proprietary informationoffer our products andtechniques; - we may not have adequate remedies for any breach; or - we may not be able to meaningfully protect our trade secrets. WE ARE DEPENDENT UPON OUR LICENSED TECHNOLOGIES AND MAY NEED TO OBTAIN ADDITIONAL LICENSES IN THE FUTURE TO OFFER OUR PRODUCTS AND REMAIN COMPETITIVE.remain competitive.We have
acquired orlicensed key components of our technologies from third parties. If these agreements were to terminate prematurelyor if wedue to our breach of the terms ofanythese licenses or we otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell a substantial portion of our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.THE PROTECTION OF INTELLECTUAL PROPERTY IN FOREIGN COUNTRIES IS UNCERTAIN. WeThe patent underlying our nonexclusive license to manufacture standard nucleic acid building blocks expired as of March 15, 2005. The expiration of this patent could result in additional manufacturers entering the market for these products. Some of these manufacturers may have
sold approximately 50%lower cost structures or other competitive advantages which may reduce our market share and/or our operating margins related to these products.The protection of intellectual property in foreign countries is uncertain.
A significant percentage of our
WAVE Systemssales are 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 ourcompetitors'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.Our products could infringe on the intellectual property rights of others.
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 haveOur failure 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 uscomply with any applicable government regulations or otherwise respond topay 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 relatedclaims relating tolitigationimproper handling, storage orinterference proceedings initiated or threatened against us could cause our stock price to decline. WE DEPEND ON ATTRACTING AND RETAINING KEY EMPLOYEES. We are highly dependent on the principal membersdisposal ofour management staff and research and development group, including Collin J. D'Silva, our Chief Executive Officer and a co-founder, Douglas T. Gjerde, Ph.D., our Chief Scientific Officer and a co-founder, and William P. Rasmussen, our Chief Financial Officer. We have entered into employment agreements with Mr. D'Silva, Dr. Gjerde and Mr. Rasmussen, but not with all of our other key employees. The loss of services of any of these 12individuals could seriously harm our product development and commercialization efforts for our new life sciences products. 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 assurancehazardous chemicals that wewill be able to continue to attract and retain such personnel. Failure to attract and retain key personnel could reduce our ability to continue development of our DNA separation and analysis technology and to successfully market our products. 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 growthuse mayplace 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 couldadversely affect ourability to pursue business opportunities and expand 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.results of operations.Our research and development and manufacturing activities involve the controlled use of hazardous materials and
chemicals, including acetonitrile.chemicals. We are subject to federal, state, local andlocalinternational laws and regulations governing the use, storage, handling and disposal of hazardous materials and 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 cannotassure 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.Risks Relating To This Offering and Ownership of Our
directors, executive officersCommon StockThe price for our common stock is volatile and
principal stockholders and their affiliates beneficially own approximately 77% ofmay drop.The trading price for our common stock has fluctuated significantly over recent years. The volatility in the
outstanding equity securities, and after the offering will beneficially own approximately 58%price of ouroutstandingstock is attributable to a number of factors, not all of which relate to our operating results and financial position. Nevertheless, continued volatility in the market price for our stock should be expected and we cannot assure you that the price of our stock will not decrease in the future. Fluctuations or further declines in the price of our stock may affect our ability to sell shares of our stock and to raise capital through future equitysecurities. Accordingly, they collectively will have a significant influencefinancing.If we are unable to maintain our Nasdaq listing, your ability to trade shares of our common stock could suffer.
In order for our common stock to remain listed on the Nasdaq National Market (“Nasdaq”), we must meet the minimum listing requirements for continued listing, including, among other requirements, minimum bid price and market value of public float requirements. If our common stock is delisted from the Nasdaq, transactions in
determiningour common stock would likely be conducted only in theoutcomeover-the counter market, or potentially on regional exchanges, which could negatively impact the trading volume and price ofany corporate transactionour common stock, and investors may find it more difficult to purchase orother matter submitteddispose of, or to obtain accurate quotations as to thestockholders for approval, including mergers, acquisitions, consolidationsmarket value of, our common stock. In addition, if our common stock were not listed on the Nasdaq and thesale of all or substantially alltrading price of ourassets,common stock remains below $5.00 per share, trading in our common stock would also be subject to certain rules that require additional disclosures by broker-dealers in connection with any trades involving a “penny stock.” In such event, the additional burdens imposed on broker-dealers to effect transactions in our common stock could further limit the market liquidity of our common stock and the ability of investors to trade our common stock.We may issue a substantial amount of our common stock to holders of options and warrants and this could reduce the market price for our stock.
We also
the powerhad obligations toprevent or cause a change in control.issue 13,603,592 shares of common stock under outstanding stock options and warrants. Theinterestsissuance of thesestockholdersadditional shares of common stock maydiffer from the interests of the other stockholders. 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 inbe dilutive to ourcertificate of incorporationcurrent shareholders andbylaws 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 13change of control or change in management is delayed or prevented,could negatively impact the market price of our commonstock could decline. THERE MAY NOT BE AN ACTIVE LIQUID TRADING MARKET FOR OUR COMMON STOCK. Prior to this offering, there will have been no public market for our commonstock.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. Please see "Underwriting" for more information regarding our arrangements with the underwriters and the factors considered in setting the initial offering price. OUR STOCK PRICE COULD BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN VALUE, WHICH IN TURN COULD AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL TO FUND THE COMMERCIALIZATION OF OUR PRODUCTS. The trading price of our common stock could be highly volatile and subject to large fluctuations in price in response to various factors, many of which will be beyond our control. These factors include: - actual or anticipated variations in quarterly operating results; - announcements of technological innovations by us or our competitors; - new products or services introduced or announced by us or our competitors; - changes in financial estimates by securities analysts; - conditions or trends in the biotechnology, pharmaceutical and genomics industries; - announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; - additions or departures of key personnel; or - sales of our stock. In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, has recently experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of biotechnology and life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources. WE HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK AND DO NOT INTEND TO DO SO FOR THE FORSEEABLE FUTURE. Unlike many public companies, 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. Investors seeking dividends or other current distributions should not invest in our common stock. See "Dividend Policy." THE SALE OF A SUBSTANTIAL NUMBER OF OUR COMMON SHARES AFTER THIS OFFERING MAY RESULT IN A DECLINE IN OUR SHARE PRICE. The market price of our common shares could decline as a result of salesSales of substantial amounts of our common stock in the public market
aftercould adversely affect theclosingmarket price ofthis offering or the perception that substantial 14sales 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 thatour common stock.At November 29, 2005, we
deem appropriate. After this offering, we willhaveoutstanding 17,325,00049,172,079 shares of common stockassumingoutstanding. All but 13,972,384 shares held by affiliates of theexercise of warrants to acquire 300,000 shares of common stock thatCompany are freely tradable without restriction or further registration under theholder intends to exercise priorSecurities Act. Shares held by affiliates may also be sold subject only to theclosingrequirements ofthis offering. This number includesRule 144 under the4,000,000Securities Act. The sale of these sharesof common stock that we are selling in this offering and which may be resoldin the public markets has potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares being placed into the marketimmediately. A totalexceed the market’s ability to absorb the stock. Such an event could place further downward pressure on the price of11,343,000our common stock. This presents an opportunity for short sellers to contribute to the further decline oftheseour stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shareswillthereby contributing to sales of stock in the market.The price you pay for shares offered by the selling stockholders may be
subjecthigher than the prices paid by other people acquiring such shares.Selling stockholders may sell shares under this Prospectus from time to
lock-up agreements and will become availabletime either at prices then prevailing in the market or at other prices they negotiate with buyers. Accordingly, the price you pay forsale 180 days after this offering. The remaining 5,982,000 shares will become available for sale at various times following the date of this offering. The number of outstanding shares does not includeshares of our common stockthatyou purchase from a selling stockholder may be higher than the prices paid by other people acquiring such shares.We will
be issued uponnot receive additional proceeds from theconversionsale ofour $12.0the Shares offered by this Prospectus. However, we have already received net proceeds (after transaction costs of $1.18 million) of $13.90 millionconvertible notesin conjunction with the 2005 Private Placement. These proceeds were partially used to repay all outstanding principal and accrued interest onsuch notes at an assumed conversion priceour Laurus Loans including fees to facilitate the private placement and prepayment penalties to Laurus in the sum of$5.00 per share and$0.82 million. The remaining proceeds of $5.35 million will be used for future working capital needs. We also received proceeds of $2.05 million in conjunction with the private placement that we closed in the fourth quarter of 2003. Additionally, we may receive approximately $10.49 million upon the exercise of warrantsto purchase 152,450 shares at $5.00 per share.for the remaining 8,062,577 Sharesissued upon conversion of our convertible notes will alsothat may besubject to 180-day lock-up agreements.offered hereby. Theholdersnet proceeds we receive from any exercise of these warrants, if any, will be used by us primarily for working capital purposes.PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed for trading on the Nasdaq under the symbol TBIO. The following table sets forth the high and low closing prices for our common stock during each of the quarters of 2003 and 2004 and through November 29, 2005
High Low Year Ended December 31, 2003
First Quarter
$ 4.22 $ 1.40 Second Quarter
$ 2.43 $ 0.93 Third Quarter
$ 2.14 $ 1.03 Fourth Quarter
$ 2.98 $ 1.45 Year Ended December 31, 2004
First Quarter
$ 3.23 $ 1.96 Second Quarter
$ 1.87 $ 1.24 Third Quarter
$ 1.58 $ 1.07 Fourth Quarter
$ 1.52 $ 1.06 Year Ending December 31, 2005
First Quarter
$ 1.11 $ 0.53 Second Quarter
$ 0.90 $ 0.45 Third Quarter
$ 1.24 $ 0.70 Fourth Quarter (through November 29, 2005)
$ 1.02 $ 0.80 At November 29, 2005, there are
not subject to lock-up agreements. The purchaser of our non-life sciences assets financed the purchase price for these assets by delivering to us a $2.0 million promissory note and borrowing approximately $4.6 million from a bank. We have agreed with the bank that we will acquire the notes evidencing these loans from the bank upon closing of this offering. A total of 1,200,00049,172,079 shares of our common stockhas been pledged by the sole stockholderoutstanding and approximately 3,475 holders ofthe purchaser of our non-life sciences assets in order to secure the payment of principal and interest under each of these notes. We anticipate that we will exercise our right to cause these shares to be sold in order to pay principal and interest on the notes when due, subject to a lock-up agreement relating to these shares. See "Related Party Transactions." See "Shares Eligible for Future Sale" 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. 15USE OF PROCEEDS We expect to receive net proceeds of $46.9 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 $1.5 million. If the underwriters exercise their over-allotment option in full, we will receive net proceeds of this offering of approximately $54.1 million. We intend to use approximately $2.5 million of the net proceeds of this offering for reduction in our outstanding debt and up to approximately $5.0 million for capital expenditures in fiscal 2000. Additionally, we will use approximately $4.6 million to acquire notes evidencing loans made by a bank to the purchaser of our non-life sciences instrument product line. See "Related Party Transactions". We intend to use the remaining net proceeds from this offering for other general working capital needs, including research and development and sales and marketing expenses relating to our life sciences products. 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 POLICYrecord.We have never declared or paid any cash dividends on our
capitalcommon stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Wecurrentlyexpect 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 ourboardBoard ofdirectors.Directors. Theboard'sBoard’s ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, theboardBoard may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors.16CAPITALIZATIONSELECTED CONSOLIDATED FINANCIAL DATA
The following
table describes our capitalization as of March 31, 2000: - 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; 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 and the issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that the holder intends to exercise prior to the closing of this offering, as if each had happened as of March 31, 2000. Youselected consolidated financial data should be readthis tabletogether withthe 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“Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” and"Useour consolidated financial statements and related notes included elsewhere in this Prospectus. The selected consolidated balance sheet data at December 31, 2004 and 2003 and the selected consolidated statements ofProceeds."
AS OF MARCH 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS)Long-term obligations, less current portion................. $ 35 $ 35 $ 35 Convertible notes payable(1)................................ 12,747 12,747 12,747 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, 13,025,000 shares issued and outstanding, actual; 13,025,000 shares issued and outstanding pro forma; and 17,325,000 shares issued and outstanding pro forma as adjusted(2).................. 130 130 173 Additional paid-in capital.................................. 11,724 11,724 60,041 Other capital items......................................... (627) (627) (627) Accumulated deficit......................................... (15,842) (15,093) (15,093) -------- -------- -------- Total stockholders' equity (deficit)...................... (4,615) (3,866) 44,494 -------- -------- -------- Total capitalization...................................... $ 8,167 $ 8,916 $ 57,276 ======== ======== ========- ------------------------ (1) Weoperations data for each year ended December 31, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements that are included elsewhere in this Prospectus. The selected consolidated balance sheet data at December 31, 2002, 2001 and 2000 and theright to causeselected consolidated statements of operations data for each year ended December 31, 2001 and 2000 have been derived from our audited consolidated financial statements that are not included in this Prospectus. The selected consolidated balance sheet data at September 30, 2005 and theconvertible notesselected consolidated statements of operations data for the nine months ended September 30, 2005 and 2004 are derived from our unaudited condensed consolidated financial statements included in this Prospectus. The unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements. Historical results are not necessarily indicative of the results to beconverted into common stock whenexpected in thesum of (a) the average trading price of our stock over 20 consecutive trading days and (b) all accrued interest on the notes (when converted to an amountfuture. Dollar amounts, except per shareusing the conversion price) equals $13.72 per share. See "Description of Capital Stock--Convertible Notes". The conversion price is equal to the lower of $5.00 or 50% of the public offering price for this offering. We intend to convert the notes at the earliest possible date after completion of the offering. Assuming the conversion of $12.0 million aggregate principal amount of our convertible notes plus accrued interest at an assumed conversion price of $5.00 per share and the exercise of the warrants to purchase 300,000 shares of our common stock at $5.00 per share that the holder intends to exercise prior to the closing of this offering each occurred as of March 31, 2000, our pro forma shares issued and outstanding and stockholders' equity prior to the effect of the sale of the 4,000,000 shares of common stock offered by usdata, are presented inthis offering would be 16,053,200 and $10,380,000, respectively. Assuming the conversion of the convertible notes 17occurred as of March 31, 2000, our pro forma as adjusted shares issued and outstanding and stockholders' equity after this offering and the issuance of 300,000 shares upon the exercise of the warrants would be 20,053,200 and $57,240,000, respectively. (2) On April 25, 2000, we amended our certificate of incorporation to increasethousands.
Nine Months Ended September 30, Year Ended December 31, 2005 2004 2004 2003 2002 2001(1) 2000(1) Statement of Operations Data:
Net sales
$ 23,711 $ 25,834 $ 33,789 $ 33,866 $ 37,554 $ 38,467 $ 25,883 Cost of good sold
13,609 18,484 24,596 24,315 19,569 17,198 12,800 Gross profit
10,102 7,350 9,193 9,551 17,985 21,269 13,083 Selling, general and administrative
10,023 12,866 17,499 17,324 24,199 21,636 14,908 Research and development
1,696 5,344 6,685 9,305 12,201 9,372 7,652 Restructuring charges(2)
— — 3,570 738 3,282 — — Impairment charges(3)
247 11,964 11,965 4,772 — — — Gain on sale of facility(4)
— — (1,466 ) — — — — Gain on sale of product line
— — — — — — (784 ) Operating expenses
11,966 30,174 38,253 32,139 39,682 31,008 21,776 Other income (expense)(5)
(1,888 ) (4,704 ) (5,406 ) (305 ) 437 2,362 212 Loss before income taxes
(3,752 ) (27,528 ) (34,466 ) (22,893 ) (21,260 ) (7,377 ) (8,481 ) Income tax (benefit) expense
27 (94 ) (94 ) 65 105 24 180 Net loss
$ (3,779 ) $ (27,434 ) $ (34,372 ) $ (22,958 ) $ (21,365 ) $ (7,401 ) $ (8,661 ) Basic and diluted loss per share
$ (0.12 ) $ (0.95 ) $ (1.19 ) $ (0.94 ) $ (0.91 ) $ (0.33 ) $ (0.52 ) Basic and diluted weighted average shares outstanding
32,837 28,951 29,066 24,484 23,583 22,560 16,630
As of
September 30,
2005As of December 31, 2004 2003 2002 2001 2000 Balance Sheet Data:
Total assets(6)
$ 31,789 $ 37,458 $ 57,306 $ 74,035 $ 89,286 $ 77,863 Borrowings under credit line
6,935 6,514 2,142 — — — Current portion of long-term debt
675 825 1,693 63 — — Long-term debt, less current portion
1,226 2,199 — 1,499 — — Total stockholders’ equity
15,577 16,535 45,058 61,515 82,104 73,966
(1) In May 2001, we acquired Annovis, Inc., a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and services for the life science industry, for a total number of authorized shares of common stock to 60,000,000. 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 June 1, 2000, we have issued options topurchase3,690,550 shares of common stock at an exercise price ranging from $5.00 to $13.00 per share, except that options to acquire shares of common stock with an aggregate fixed cost of $75,000 issued to one of our non-employee directors may be exercised at a price equal to the lower of $5.00 per share for 15,000 shares or 50% of the public offering price for this offering. We may issue options to acquire up to 2,309,450 additional shares of our common stock under this plan; - 2,728,200 shares of common stock that would have been issued as of March 31, 2000 upon the assumed conversion our $12.0 million aggregate principal amount convertible notes, plus accrued interest thereon, at $5.00 per share. - an undetermined number of additional shares we would have to issue upon conversion of our $12.0 million aggregate principal amount convertible notes if the public offering price for this offering is less than $10.00 per share. The actual number of shares that we will issue upon conversion of these convertible notes will be determined by dividing the amount of principal and interest on the notes being converted into common stock by the conversion price of the convertible notes. The conversion price is equal to the lower of $5.00 or 50% of the public offering price for this offering; and - an undetermined number of additional shares we are obligated to issue to the holders of 2,000,000 shares of our common stock that were issued by us in a private placement if the public offering price for this offering is less than $10.00 per share. The number of additional shares that we will have to issue to these common stockholders will be determined by multiplying 2,000,000 times the difference between $10.00 and the actual public offering price and dividing the product by the actual public offering price. 18DILUTION Our pro forma net tangible book value as of March 31, 2000, reflecting the sale of the assets related to our non-life sciences instrument product line, was approximately $(6.0) million, or approximately $(0.46) 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 and the assumed issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that the holder intends to exercise prior to the closing of this offering, our pro forma as adjusted net tangible book value at March 31, 2000 would have been approximately $42.4 million, or $2.45 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.79 per share to existing stockholders and an immediate dilution of $10.55 per share to new investors. The following table illustrates this dilution on a per share basis:
Assumed initial public offeringpriceper share............. $13.00 Actual net tangible book value per share asofMarch 31, 2000, before this offeringapproximately $16,910. Annovis’ results of operations have been included in the accompanying financial statements beginning on May 1, 2001. Additionally, our consolidated financial statements include the results from our non-life sciences product line which was sold effective April 1, 2000.
(2) Restructuring plans were implemented in 2002 and pro forma adjustments.... $(0.66) Increase per share attributable2004 to reduce and align our expenses with current business prospects. The plans included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. As a result, restructuring charges were recorded and are included in operating expenses. See Note N to the accompanying consolidated financial statements.
(3) Impairment charges relate primarily to the impairment of goodwill, and in 2004, also include a charge of $2,100 related to the impairment of property and equipment. See Note C to the accompanying consolidated financial statements.
(4) Gain on sale of facility relates to the sale of assets relatedour specialty olignucleotide manufacturing facility in Boulder, Colorado during the fourth quarter of 2004. See note M to the accompanying consolidated financial statements.
(5) Other income (expense) for all years presented primarily includes interest expense and in 2004 it includes a loss on debt extinguishment of $2,859 resulting from certain modifications to our non-life sciences instrument product line(1)................................................. 0.20 ------ Pro forma net tangible book value per shareLaurus Loans that were treated asof March 31, 2000................................................ (0.46) Increase per share attributableextinguishments for financial reporting purposes. See Note E to theassumed exerciseaccompanying consolidated financial statements.
(6) The reduction in total assets from December 31, 2003 to December 31, 2004 related primarily to impairment charges of warrants................................................ 0.12 Pro forma as adjusted increase$11,965 innet tangible book value attributableour Nucleic Acids operating segment (see Notes C and K tothis offering........................... 2.79 ------ Pro forma as adjusted net tangible book value per share after this offering....................................... 2.45 ------ Dilution per sharethe accompanying consolidated financial statements) and the sale of our specialty oligonucleotide manufacturing facility in Boulder, Colorado (see Note M tonew investors......................... $10.55 ======the accompanying consolidated financial statements). The reduction in total assets from December 31, 2002 to December 31, 2003 related primarily to operating losses that were funded by reductions in cash and cash equivalents and short term investments.- ------------------------ (1) The increase per share is attributable to the sale of $1.8 million of intangible assets and the expected net gain of approximately $748,000 from this transaction.The following table
summarizes,reflects our capitalization as of September 30, 2005 ona pro formaan actual and as adjusted basis as if the 2005 Private Placement and simultaneous repayment ofMarch 31, 2000,thetotal numberLaurus Loans had occurred on September 30, 2005.
As of September 30, Actual As Adjusted Credit Line(1)
$ 6,935 $ — Current portion of Term Note(1)
675 — Term Note, less current portion(1)
1,226 — Stockholders’ equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, none outstanding
— — Common stock, $0.01 par value, 60,000,000 shares authorized, 34,246,336 and 49,172,079 shares outstanding, respectively(2)
348 497 Additional paid-in capital(1) (2)
125,058 138,803 Accumulated other comprehensive income
1,051 1,051 Accumulated deficit(3)
(110,880 ) (111,131 ) Total stockholders’ equity
15,577 29,220 Total capitalization
$ 24,413 $ 29,220
(1) Net proceeds from the 2005 Private Placement (after transaction costs of $1,180) totaled $13,895 and were used in part to prepay all indebtedness and prepayment fees to Laurus. The remaining proceeds will be used for the future working capital needs of the Company. Transaction costs included fees to Oppenheimer of $1,055 and other transaction specific costs of approximately $125.
(2) Subsequent to September 30, 2005, we issued 14,925,743 shares in conjunction with the 2005 Private Placement. At November 29, 2005, we have 13,603,592 potentially dilutive securities consisting of 5,541,015 options issued under our stock option plan and warrants representing 8,062,577 shares.
(3) The as-adjusted presentation assumes that net premiums related to the Laurus Loans totaling $573 at September 30, 2005 will result in a gain upon prepayment of these loans. This gain will be offset by fees to Laurus of $500 to facilitate the private placement and prepayment penalties of $324. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of
sharesour financial condition and results ofcommon stock purchased from us, the total consideration paidoperations should be read together with our consolidated financial statements, unaudited condensed consolidated financial statements andthe average price per share paid by existing stockholders and to be paid by the new investorsrelated notes included elsewhere in thisoffering at an assumed initial public offering priceProspectus. This discussion contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of$13.00 per share, before deducting estimated underwriting discountsvarious factors, including those set forth under “Risk Factors,” “Information Regarding Forward-Looking Statements” andoffering expenses.
SHARES PURCHASED -------------------------- TOTAL CONSIDERATION PRO FORMA AS ---------------------- AVERAGE PRICE ADJUSTED NUMBER PERCENT AMOUNT PERCENT PER SHARE --------------- -------- ----------- -------- -------------Existing stockholders............... 13,325,000 76.9% $11,916,978 18.6% $0.89 New investors....................... 4,000,000 23.1 52,000,000 81.4 13.00 ---------- ----- ----------- ----- Total........................... 17,325,000 100.0% $63,916,978 100.0% ========== ===== =========== =====Ifelsewhere in this Prospectus.The following discussion also gives effect to the
underwriters exercise their over-allotment option in full: - the number of shares of common stock held by existing stockholders will decrease to approximately 74.3% of the total number of sharesrestatement of ourcommon stock outstanding; and 19- the numberstatements ofshares held by new investors will increase to 4,600,000 shares, or approximately 25.7% of the total number of our common stock outstanding. If all outstanding options and warrants having an exercise price less than the offering price had been exercised as of March 31, 2000, the dilutive effect to new investors prior to the over-allotment would decrease to $10.08 per share and: - the number of shares held by existing stockholders would increase to 16,922,000 or 80.9% and the amount of consideration paid by existing stockholders would increase to $30.6 million or 37.0%; and - the number of shares held by new investors would decrease to approximately 19.1% of the total number of our common stock outstanding and the consideration paid by new investors would decrease to 63.0% of total consideration. If all outstanding options and warrants having an exercise price less than the offering price had been exercised and the $12.0 million aggregate principal amount of our convertible notes plus accrued interest had been converted at March 31, 2000, the dilutive effect to new investors prior to the over-allotment would decrease to $9.88 per share and: - the number of shares held by existing stockholders would increase to 19,650,200 or 83.1% and the amount of consideration paid by existing stockholders would increase to $43.4 million or 45.5%; and - the number of shares held by new investors would decrease to approximately 16.9% of the total number of our common stock outstanding and the consideration paid by new investors would decrease to 54.5% of total consideration. See "Capitalization," "Management-Stock Option and Other Compensation Plans" and "Description of Capital Stock." 20SELECTED FINANCIAL DATA The statement of operations datacash flows for the years ended December 31,1997, 19982004 and1999 and2003, as discussed in Note P to thebalance sheet data as of December 31, 1998 and 1999 are derived from our historicalconsolidated financial statementsand notes thereto included elsewhere in this prospectus, which have been audited by Deloitte & Touche LLP, independent auditors. The statement of operations datafor the years ended December 31,19952004, 2003 and19962002.Overview
The Company develops, manufactures and sells innovative products for the analysis, synthesis and purification of nucleic acids through two operating segments, BioSystems and Nucleic Acids.
The BioSystems operating segment develops, assembles, manufactures and markets versatile products and provides analytical services to the medical research, clinical and pharmaceutical markets for use in genetic variation analysis. Net sales from this operating segment are categorized as bioinstruments, bioconsumables and discovery services.
Bioinstruments. The flagship product of the BioSystems operating segment is the WAVE system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of 1,269 WAVE systems as of September 30, 2005. Additionally, this operating segment utilizes its sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.Bioconsumables. The installed WAVE base generates a demand for consumables that are required for the system’s continued operation. These products are developed, manufactured and sold by this operating segment. In addition, the BioSystems operating segment manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of HPLC separation columns.Discovery Services. The BioSystems operating segment provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.The Nucleic Acids operating segment develops, manufactures and markets chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world. These products are produced primarily in this operating segment’s only facility, in Glasgow, Scotland. Prior to November 11, 2004, this operating
segment also manufactured synthesized segments of nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, the assets associated with this facility were sold to an unaffiliated third party. As a result, the Nucleic Acids operating segment no longer manufactures and sells these specialized oligonucleotides.
Results of Operations
Nine Months Ended September 30, 2005 and 2004
Dollars in thousands
2005 2004 Change %
Change
Net Sales
Bioinstruments
$ 11,343 $ 10,766 $ 577 5 % Bioconsumables
6,977 6,286 691 11 % Discovery Services
2,159 1,398 761 54 % Total BioSystems Business Unit
20,479 18,450 2,029 11 % Chemical Building Blocks
3,232 5,588 (2,356 ) (42 )% Specialty Oligonucleotides and Services
— 1,796 (1,796 ) (100 )% Total Synthetic Nucleic Acids Business Unit
3,232 7,384 (4,152 ) (56 )% Total Net Sales
23,711 25,834 (2,123 ) (8 )% Cost of Goods Sold
Bioinstruments
5,396 4,401 995 23 % Bioconsumables
3,334 2,981 353 12 % Discovery Services
1,744 1,041 703 68 % Total BioSystems Business Unit
10,474 8,423 2,051 24 % Chemical Building Blocks
3,135 5,452 (2,317 ) (43 )% Specialty Oligonucleotides and Services
— 4,609 (4,609 ) (100 )% Total Synthetic Nucleic Acids Business Unit
3,135 10,061 (6,926 ) 69 % Total Cost of Goods Sold
13,609 18,484 (4,875 ) (26 )% Selling, General and Administrative Expenses
10,023 12,866 (2,843 ) (22 )% Research and Development Expenses
1,696 5,344 (3,648 ) (68 )% Impairment Charges
247 11,964 (11,717 ) (98 )% Other Income (Expense)
(1,888 ) (4,704 ) (2,816 ) (60 )% Net Sales. Net sales for the nine months ended September 30, 2005 decreased $2.12 million or 8% from the same period of 2004 as a result of a $4.15 million or 56% decrease in net sales from our Nucleic Acids operating segment offset by a $2.03 million or 11% increase in net sales in our BioSystems operating segment.
The increase in net sales in our BioSystems operating segment resulted from an increase of $0.58 million or 5% from bioinstruments, $0.69 million or 11% from bioconsumables, and $0.76 million or 54% from discovery services. WAVE Systems sold totaled 76 during the nine months ended September 30, 2005 compared to 85 during the same period of 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately 1,269 units at September 30, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in discovery services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with a large pharmaceutical company to support their clinical development of oncology therapeutics. During the nine months ended September 30, 2005, discovery services sales to this customer totaled $2.01 million and represented 10% of net sales within the BioSystems operating segment and 9% of total consolidated net sales. We have no long-term agreement
with customer; therefore, sales will fluctuate and may be zero. Future revenues from our BioSystems operating segment would be substantially reduced if this customer’s need for our products declined.
Nucleic Acids operating segment sales decreased by $4.15 million or 56% during the nine months ended September 30, 2005 compared to the same period of 2004 as a result of fewer chemical building block sales to Geron and the
balance sheet data assale ofDecember 31, 1995, 1996our specialty oligonucleotides facility in Boulder, Colorado. Net sales to Geron during the nine months ended September 30, 2005 totaled $1.73 million compared to $3.59 million during the same period of 2004. Net sales to Geron during the nine months ended September 30, 2005 represented 54% of net sales in our Nucleic Acids operating segment and1997 are derived7% of total consolidated net sales. Net sales to Geron during the nine months ended September 30, 2004, represented 49% of net sales within our Nucleic Acids operating segment and 14% of total consolidated net sales. We have no long-term agreement with Geron; therefore, sales will fluctuate and may be zero. Future revenue from ouraudited historical consolidated financial statements which are notNucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined. As a result of the sale of our facility in Boulder, Colorado, net sales of specialty oligonucleotides decreased by $1.80 million. We no longer manufacture or sell oligonucleotides.Costs of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs and supplies) associated with our Discovery Services operations. Depreciation expense included in
this prospectus. The statementcosts ofoperations data forgoods sold totaled $2.23 million and $2.22 million during thethreenine months endedMarch 31, 1999September 30, 2005 and20002004, respectively.Costs of goods sold during the nine months ended September 30, 2005 decreased $4.88 million or 26% from the same period of 2004 as a result of a $6.93 million or 69% decrease in our Nucleic Acids operating segment offset by a $2.05 million or 24% increase in our BioSystems operating segment. The overall decrease was primarily attributable to the sale of our oligonucleotide facility and from termination of associated personnel and the
balance sheet data aselimination ofMarch 31, 2000 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of our management, the unaudited consolidated financial statements reflect all adjustments (consisting of only normal and recurring accruals) necessary for a fair presentation of such information. The following selected financial data should be readfacilities related costs in conjunction with ourconsolidated financial statements2004 Restructuring Plan.Gross profit was $10.10 million or 43% of total net sales during the nine months ended September 30, 2005 compared to $7.35 million and 28% during the
related notes thereto appearing elsewheresame period of 2004. A summary of gross profit by operating segment follows (dollars inthis prospectusthousands):
Nine Months Ended September 30, 2005 2004 Gross
Profit
Percent of
RevenueGross
Profit/(Loss)Percent of
RevenueBioSystems operating segment
$ 10,005 49 % $ 10,027 54 % Nucleic Acids operating segment
97 3 % (2,677 ) (36 )% $ 10,102 43 % $ 7,350 28 % The decrease in BioSystems operating segment gross profit as a percent of revenue to 49% from 54% for the nine months ended September 30, 2005 and
the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------- 1995(1) 1996(1) 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA)STATEMENT OF OPERATIONS DATA: Net sales........................... $7,933 $12,535 $11,577 $18,935 $23,035 $ 5,227 $ 6,944 Cost of good sold................... 3,516 6,760 6,336 9,590 12,090 2,703 3,831 ------ ------- ------- ------- ------- ------- ------- Gross profit........................ 4,417 5,775 5,241 9,345 10,945 2,524 3,113 General and administrative expenses.......................... 715 2,092 2,444 2,795 3,772 1,346 1,755 Marketing and sales expenses........ 1,327 2,659 3,968 5,365 7,760 1,563 2,493 Research and development expenses... 1,518 1,385 2,047 3,159 6,297 1,135 1,894 ------ ------- ------- ------- ------- ------- ------- Operating expenses.................. 3,560 6,136 8,459 11,319 17,829 4,044 6,142 Income (loss) before income taxes... 728 (644) (3,646) (2,506) (8,082) (1,613) (3,498) Net income (loss)................... $ 494 $ (415) $(2,410) $(1,576) $(9,827) $ (978) $(3,498) ====== ======= ======= ======= ======= ======= ======= Basic and diluted net income (loss) per share......................... $ 0.05 $ (0.04) $ (0.22) $ (0.13) $ (0.76) $ (0.08) $ (0.27) ====== ======= ======= ======= ======= ======= ======= Basic and diluted weighted average shares outstanding(2)............. 10,000 11,000 11,145 12,279 13,000 13,000 13,008 ====== ======= ======= ======= ======= ======= =======
AS OF AS OF DECEMBER 31, MARCH 31, ---------------------------------------------------- --------- 1995(1) 1996(1) 1997 1998 1999 2000 -------- -------- -------- -------- -------- --------- (IN THOUSANDS)BALANCE SHEET DATA: Total assets............................ $5,774 $9,527 $10,010 $14,736 $19,964 $18,830 Long-term debt, less current portion.... 626 1,597 1,128 695 12,538 12,781 Total stockholders' equity (deficit).... 2,429 2,114 991 6,649 (2,099) (4,615)- ------------------------ (1) Financial information prior2004, respectively, is largely attributable toJuly 1, 1997 is that of our predecessor corporation, CETAC Holding Company, Inc. and its subsidiaries or predecessors. (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. 21MANAGEMENT'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 Before July 1, 1997, we manufactured and sold instruments and other products usedchanges in thenon-life sciences instrumentation industry through our predecessor company, CETAC Holding Company, Inc. and its subsidiaries. On July 1, 1997, we merged these companies into Transgenomic, Inc., a new Delaware corporation, for the purposecomposition ofdeveloping, manufacturing and selling our new life sciences product line in addition to continuing to manufacture and market our existing non-life sciences products. In 1999, we decided to focus our resources on our life sciences product line. Accordingly, we recently sold the assets related to our non-life sciences instrument products. These assets consisted of inventory, property, plant and equipment, patents, other intellectual property rights and a lease deposit, with an aggregate book value, net of $125,000 of accrued liabilities, of approximately $4.7 million as of March 31, 2000. For the year ended December 31, 1999,products sold. Generally, sales ofnon-life science instrumentWAVEs and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services have been less than expected due to the continuing build out of capacity and expansion of product offerings. Our Nucleic Acids operating segment continues to have excess capacity in its Glasgow, Scotland manufacturing facility that will adversely impact costs of goods sold and gross profit until demand for our Nucleic Acids building block productsequaled approximately $8.8increase.Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $10.02 million
and accounted for approximately 38%during the nine months ended September 30, 2005 compared to $12.87 million during the same period ofour total revenues. Financial information for periods ending before July 1, 1997 is that2004, a decrease ofCETAC Holding Company, Inc. and its subsidiaries. Revenues for the life sciences products are generated from the sale of our principal product, the WAVE System, and associated consumable products and reagents. Through March 31, 2000, we have sold over 250 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$2.85 million or 22%. As a percentage of revenue, selling, general and administrative expenses totaled 42% and 50% during the nine months ended September 30, 2005 and 2004, respectively. This decrease resulted primarily from termination of associated personnel and the elimination of facilities related costs in conjunction with the 2004 Restructuring Plan. Foreign currency transaction adjustments increased operating expenses by approximately $0.24 million during the nine months ended September 30, 2005 compared to the same period of 2004 when foreign currency transaction adjustments reduced operating expenses by approximately $0.14 million. Depreciation expense included in selling, general and administrative expenses totaled $0.50 million and $0.74 million during the nine months ended September 30, 2004 and 2004, respectively.Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $1.70 million during the nine months ended September 30, 2005 compared to $5.34 million during the same period of 2004, a decrease of $3.65 million or 68%. The decrease related primarily to the 2004 Restructuring Plan, which resulted in the elimination of substantially all research and development efforts associated with our
net sales. The following graph displays sales of WAVE System units during each calendar quarter from July 1, 1997 through March 31, 2000: EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DATE UNITS SOLDQ3 97 3 Q4 97 2 Q1 98 4 Q2 98 17 Q3 98 21 Q4 98 30 Q1 99 24 Q2 99 32 Q3 99 38 Q4 99 39 Q1 00 46During our second quarter, through June 9, 2000, we have sold 42 WAVE Systems. Since our decision to focus on our life sciences products, we have incurred significant losses, and as of March 31, 2000, we had an accumulated deficit of $15.8 million. Our losses have resulted principally from costs incurredNucleic Acids operating segment. Depreciation expense included in research and developmentmarketingexpenses included $0.42 million andsales,$0.75 million during the nine months ended September 30, 2005 andfrom general2004, respectively.As a percentage of revenue, research and
22administrative costs associated with our operations.development expenses totaled 7% and 21% of revenue during the nine months ended September 30, 2005 and 2004, respectively. We expect to continue toincur substantialinvest up to 10% of our revenues in research and developmentmarketing and sales, and general and administrative costs. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 AND 1999 NET SALES. Net sales increased 33%, from $5.2 million for the three months ended March 31, 1999 to $6.9 million for the three months ended March 31, 2000. Sales of our life sciences products increased 76%, from $2.7 million in 1999 to $4.8 million in 2000. Total revenues from sales of WAVE Systems increased 80%, from $2.0 million to $3.6 million in 2000. WAVE System unit sales increased 92%, from 24 in 1999 to 46 in 2000. Life sciences consumables sales increased 62%, from $732,000 in 1999 to $1.2 million in 2000. Sales of our non-life sciences instruments products decreased 14%, from $2.5 million in 1999 to $2.2 million in 2000. This decrease was the result of reduced demand for these products related to an industry-wide consolidation among customers for these products and the negative effect of a reorganization of our dealer and distributor network. COST OF GOODS SOLD. Cost of goods sold increased from $2.7 million in 1999 to $3.8 million in 2000, representing 52% of net sales in 1999, as compared to 55% in 2000. Because WAVE Systems accounted for a larger percentage of our net sales in 2000, cost of goods sold as a percent of net sales increased due to higher material costsactivities primarily associated withthe WAVE System. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 30%, from $1.3 million in 1999 to $1.8 million in 2000. This increase is the result of higher personnel and personnel-related expenses offset by lower consulting fees. The increase in personnel and personnel related expense is due to the expansion ofourstaff and increased compensation expenses recorded related to the issuance of stock options. General and administrative personnel increased 20% from 25 in 1999 to 30 in 2000. Stock option-related compensation expense was $710,000 in 2000 versus no stock option-related compensation expense in 1999. The decrease in consulting fees is due to a one-time advisory services fee of $550,000 we paid in 1999 in connection with consulting and financial advisory services associated with the development of our strategic business plan and related intermediate and long-term financial strategies. We anticipate general and administrative expenses to increase over the next several years to support our growing business activities and costs associated withBioSystems operatinga public company. MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 60%, from $1.6 million in 1999 to $2.5 million in 2000. This increase is the result of our continuing efforts to build a direct marketing and sales staff for our entry into the life sciences market. Marketing and sales personnel increased 33% from 58 in 1999 to 77 in 2000. Of this increase in personnel, nine were in the United States, six in Europe and four in Japan. Compensation, benefits, hiring expenses and other direct personnel costs accounted for 60% of the total increase. The remaining increase is attributable to higher indirect personnel expenses associated with increased marketing and sales activities. We expect these expenses to increase over the next several years as we expand our marketing and sales efforts. RESEARCH AND DEVELOPMENT EXPENSES.segment. Research and developmentexpenses increased 67%, from $1.1 million in 1999 to $1.9 million in 2000. These expenses represented 22% of net sales in 1999 versus 27% of net sales in 2000. Research and development expenses consist of salaries and related personnelcostsof researchers and software developers, material costs for prototypes and test units, legal expenses related to intellectual property research activities, testing and enhancement of our products, and amortization of patents and intellectual property. We expense our research and development costsare expensed in the year in which they are incurred.Impairment Charges.During the nine months ended September 30, 2005, we determined that certain international patent pursuits were no longer consistent with our strategic plan. Accordingly, we recorded an impairment charge of $0.25 million related to the abandonment of such pursuits.
During the second quarter of 2004, our Board of Directors directed us to explore strategic alternatives for the Nucleic Acids operating segment. The process included significant due diligence by us, our advisors and prospective independent buyers and other interested parties. Based upon information obtained through this process, we determined that it was more likely than not that the value of the assets associated with this business was impaired. We engaged an external valuation firm to assist us in conducting an interim period impairment test that resulted in us recording a non-cash charge of $11.96 million related to these assets during the nine months ended September 30, 2004. The charge consisted of $9.87 million related to the impairment of goodwill and $2.10 million related to the impairment of property and equipment.
Other Income (Expense). Other expense during the nine months ended September 30, 2005 of $1.89 million consisted of interest expense of $1.92 million and other income of $0.03 million. Other expense during the nine months ended September 30, 2004 consisted of interest expense of $1.68 million, loss on debt extinguishment of $2.86 million and other expense of $0.16 million, which consisted primarily of net investment losses associated with sales of Geron stock.
Interest expense consisted of the following (in thousands):
Nine Months Ended September 30, 2005 2004 Interest paid or accrued on outstanding debt
$ 477 $ 388 Amortization of debt premiums
(816 ) — Amortization of debt discounts – warrants
24 — Amortization of debt discount – beneficial conversion feature
725 809 Valuation charge associated with March 2005 conversions
1,365 — Other
144 487 $ 1,919 $ 1,684 The increase in interest paid or accrued on outstanding debt resulted from higher average debt balances and interest rates. Gross debt (before related premiums and discounts) totaled $8.26 million at September 30, 2005 with an interest rate of 8.75% compared to $8.50 million at December 31, 2004 with an interest rate of 7.25%. During the nine months ended September 30, 2005 and 2004, we had average debt of $8.03 million and $7.81 million, respectively. The high and low borrowings under our Credit Line during the nine months ended September 30, 2005 were $6.90 million and $4.75 million, respectively.
On March 18, 2005, the Company agreed to allow Laurus to convert $1.88 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock at $0.52 per share. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of the Company’s common stock the day before each of these
expensesconversions was $0.58 per share. No other provisions of our Credit Line or Term Note were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge of $1.37 million related to the fair value of incremental shares received by Laurus.Loss on debt extinguishment totaled $2.86 million during the nine months ended September 30, 2004. As described in Note E to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million represents a premium, which will be reflected as a reduction of interest expense over the life of the new debt.
Income Tax Expense.Income tax recorded during the nine months ended September 30, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions, offset by refunds received.
Due to the Company’s cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company did not provided for an income tax benefit during the nine months ended September 30, 2005 or 2004 based on management’s determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate taxable income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. As of
September 30, 2005, the Company’s deferred tax assets were offset by a valuation allowance of approximately $41.2 million.
Years Ended December 31, 2004, 2003 and 2002
Dollar Change Percent Change 2004 2003 2002 2003 to
20042002 to
20032003 to
20042002 to
2003Net Sales
Bioinstruments
$ 14,385 $ 17,916 $ 19,098 $ (3,531 ) $ (1,182 ) (20 )% (6 )% Bioconsumables
8,838 7,260 5,137 1,578 2,123 22 % 41 % Discovery Services
2,020 868 — 1,152 868 133 % — Total BioSystems operating segment
25,243 26,044 24,235 (801 ) 1,809 (3 )% 7 % Chemical Building Blocks
6,488 6,631 13,319 (143 ) (6,688 ) (2 )% (50 )% Specialty Oligonucleotides
2,058 1,191 — 867 1,191 73 % — Total Nucleic Acids operating segment
8,546 7,822 13,319 724 (5,497 ) 9 % (41 )% Total Net Sales
33,789 33,866 37,554 (77 ) (3,688 ) (1 )% (10 )% Cost of Goods Sold
Bioinstruments
6,382 7,343 7,650 (961 ) (307 ) (13 )% (4 )% Bioconsumables
4,012 3,475 2,284 537 1,191 15 % 52 % Discovery Services
1,603 557 — 1,046 557 188 % — Total BioSystems operating segment
11,997 11,375 9,934 622 1,441 5 % 15 % Chemical Building Blocks
7,165 6,937 9,635 228 (2,698 ) 3 % (28 )% Specialty Oligonucleotides
5,434 6,003 — (569 ) 6,003 (9 )% — Total Nucleic Acids operating segment
12,599 12,940 9,635 (341 ) 3,305 (3 )% 34 % Total Cost of Goods Sold
24,596 24,315 19,569 281 4,746 (1 )% 24 % Selling, General and Administrative Expenses
17,499 17,324 24,199 175 (6,875 ) 1 % (28 )% Research and Development Expenses
6,685 9,305 12,201 (2,620 ) (2,896 ) (28 )% (24 )% Restructuring Charges
3,570 738 3,282 2,832 (2,544 ) 384 % (78 )% Impairment Charges
11,965 4,772 — 5,726 4,772 120 % — Gain on sale of facility
1,466 — — 1,466 — — — Other Income (Expense)
(5,406 ) (305 ) 437 5,102 742 1673 % 170 % Net Sales. Net sales during 2004 decreased $0.08 million or 1% from 2003 as a result of a $0.80 million or 3% decrease in sales in our BioSystems operating segment offset by a $0.72 million or 9% increase in sales in our Nucleic Acids operating segment.
The decrease in sales in our BioSystems operating segment resulted from a decrease of $3.58 million or 20% from bioinstruments that was partially offset by increases in sales of bioconsumables of $1.58 million or 22% and Discovery Services of $1.15 million or 133%. The decrease of bioinstrument sales was primarily the result of a decline in the number of WAVE Systems sold from 122 in 2003 to 107 in 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately 1,200 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in Discovery Services revenue during 2004 was primarily attributable to
anthe discovery services agreements that we entered into with pharmaceutical companies to support their clinical development of oncology therapeutics. We plan to continue to seek opportunities to provide genetic variation discovery and analysis services to pharmaceutical and other customers and believe that these services provide us a significant opportunity to expand revenues in the future.Nucleic Acids operating segment sales increased by $0.72 million or 9% in 2004 compared to 2003 as a result of a substantial increase in sales of specialty oligonucleotides produced by our facility in
Boulder, Colorado as raw materials in DNA-based drug candidates. As a result of the sale of this facility in November 2004, we will no longer manufacture or sell oligonucleotides. Sales of our chemical building block products produced in our Glasgow, Scotland facility were essentially the same in 2004 as in 2003. During 2004, sales of chemical building blocks to Geron Corporation totaled $4.15 million and represented 12% of total consolidated net sales, 49% of total net sales within our Nucleic Acids operating segment and 61% of chemical building blocks revenue. We do not have long-term sales commitments from Geron Corporation and, accordingly, the amount we sell them is subject to change. Revenues from our Nucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined or if it decided to obtain these products from other suppliers.
Costs of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs and supplies) associated with our Discovery Services product line. Depreciation expense included in costs of goods sold totaled $2.10 million and $1.74 million in 2004 and 2003, respectively.
Costs of goods sold during 2004 decreased $0.28 million or 1% from 2003 as a result of a $0.62 million or 5% increase in our
staff.BioSystems operating segment offset by a $0.34 million or 3% decrease in our Nucleic Acids operating segment. The overall decrease is consistent with the decrease in net sales.Gross profit was $9.19 million or 27% of total net sales during 2004 compared to $9.55 million and 28% during 2003. A summary of margins by operating segment follows (dollars in thousands):
2004 2003 Dollars Percent Dollar Percent BioSystems operating segment
$ 13,246 52 % $ 14,669 56 % Nucleic Acids operating segment
(4,053 ) (47 )% (5,118 ) (65 )% $ 9,193 27 % $ 9,551 28 % We expect gross profits from our BioSystems operating segment to be within historic ranges of 50% to 60%. As a result of the sale of our Boulder, Colorado facility and the restructuring plan implemented in November 2004, we anticipate that our cost of goods sold will be significantly improved. However, our Nucleic Acids operating segment continues to have excess capacity in its Glasgow, Scotland manufacturing facility that will adversely impact costs of goods sold and margins until demand for our Nucleic Acids building block products increase.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $17.50 million in 2004 compared to $17.32 million in 2003, an increase of $0.18 million or 1%. This increase related to a $1.26 million increase in selling expenses offset by a $1.09 million reduction in general and administrative expenses. As a percentage of revenue, selling, general and administrative expenses totaled just over 51% in both 2004 and 2003. Depreciation expense include in selling, general and administrative expenses totaled $1.02 million and $1.28 million in 2004 and 2003, respectively.
Research and Development Expenses. Research and development
personnel increased 20%, from 49 in 1999 to 59 in 2000. Compensation, benefits, hiringexpensesand other directprimarily include personnel costs,plussupplies, and facility costs. These costs totaled $6.69 million in 2004 compared to $9.31 million in 2003, a decrease ofcontracted services, accounted for 50%$2.62 million or 28%. As a percentage ofthe total increase. The remaining increase is attributable to the costs associated with the expanded 23activities of the staff. We expectrevenue, research and developmentspendingexpenses totaled 20% and 27% of revenue in 2004 and 2003, respectively. These decreases related to our focus on expense control, the sale of our Boulder, Colorado facility and the restructuring plan implemented in November 2004. Depreciation expense included in research and developmentexpenses included $0.88 million and $0.89 million in 2004 and 2003, respectively. We expect to continue to invest up to 10% of our revenues in research and development activities primarily associated with our BioSystems operating segment. Research and development costs are expensed in the year in which they are incurred.
Restructuring Charges. On November 13, 2004, our Board of Directors approved a restructuring plan designed to refocus on the BioSystems operating segment and to better align the Company’s cost structure with anticipated revenues. The plan (which is incremental to the sale of the specialty oligonucleotide manufacturing facility in Boulder, Colorado) included a workforce reduction of approximately 60 positions and the closure of two domestic research and development facilities associated with our Nucleic Acids operating segment and two European field offices. Additionally, we eliminated approximately 10 positions at its chemical building blocks manufacturing facility in Glasgow, Scotland. In conjunction with these changes, we incurred a charge of $3.57 million during the quarter ending December 31, 2004 consisting of severance benefits of $1.41 million, future rents on closed facilities (net of projected sublease rents) of $1.24 million, the write-off of property and equipment specifically attributable to closed facilities of $0.74 million and other costs of $0.18 million. We had accrued expenses associated with this restructuring plan of $1.91 million at December 31, 2004 of which $1.49 million is expect to be paid in 2005.
Impairment Charges.During the second quarter of 2004, our Board of Directors directed us to explore strategic alternatives for the Nucleic Acids operating segment. The process included significant due diligence by us, our advisors and prospective independent buyers and other interested parties. Based upon information obtained through this process, we determined that it was more likely than not that the value of the assets associated with this business were impaired. We engaged an external valuation firm to assist us in conducting an interim period impairment test that resulted in us recording a non-cash charge of $11.97 million related to these assets during the three months ended June 30, 2004. The charge consisted of $9.87 million related to the impairment of goodwill and $2.10 million related to the impairment of property and equipment.
Gain on Sale of Facility. On November 11, 2004, we sold the assets associated with our specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3.00 million in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2.38 million. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2.70 million. In conjunction with this transaction, we recorded a gain on sale of $1.47 million in the fourth quarter of 2004.
Other Income (Expense). Other expense during 2004 of $5.41 million consisted of interest expense of $2.38 million, loss on debt extinguishment of $2.86 million, and other net expense of $0.16 million which consisted primarily of net investment losses associated with available-for-sales securities (Geron stock). Other expense during 2003 of $0.31 million consisted of interest income of $0.20 million, interest expense of $0.31 million and other net expenses of $0.20 million.
The increase
significantlyin interest expense resulted from higher average debt balances and interest rates. Gross debt totaled $8.95 million at December 31, 2004 compared to $4.69 million at December 31, 2003. Our Credit Line and Term Note had average balances during 2004 of $5.69 million and $2.73 million, respectively, with weighted average interest rates of 6.39% and 6.48%, respectively. The high and low borrowings under our Credit Line during 2004 were $7.23 million and $2.63 million, respectively. Interest expense in 2004 and 2003 includes amortization of related premiums and discounts of $1.64 million and $0, respectively.Loss on debt extinguishment totaled $2.86 million during 2004. As described in Note E to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements is greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million represents a premium, which will be reflected as a reduction of interest expense over the
next several years as we expandlife of the new debt.Income Tax Expense. Income tax expense relates solely to our
development efforts. OTHER EXPENSES. Other expenses, which consist of net interest expense, increased from $93,000operations in1999certain foreign countries and certain states. In addition to$469,000 in 2000. The increase is related to additional interest expense on our placement of $12 million of convertible notes in March 1999. INCOME TAXES. Theincome taxbenefitexpense in1999 was $635,000, while in 2000 nothese jurisdictions, we do not record any income taxbenefit was providedbenefits due to our cumulative losses in recent years, expected losses in future years andan inabilitythe uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. Our deferred tax assets as of December 31, 2004 were $38.29 million and were entirely offset by a valuation allowance. As of December 31,1999 and March 31, 2000,2004, we haddeferred tax assetsfederal net operating loss carryforwards of approximately$180,000.$91.47 million. Our net operating loss carryforwards will expire at various dates from 2008 through 2024, if not utilized. We also had state income tax loss carryforwards of $37.62 million at December 31, 2004. These carryforwards will also expire at various dates beginning in 2005 if not utilized.Years Ended December 31, 2003 and 2002
NetSales. Net sales decreased in 2003, as compared to 2002, due to a significant decline in demand for our Nucleic Acids products. Sales in our Nucleic Acids operating segment decreased due to a significant decline in demand for our chemical building block products. These products are used by our biopharmaceutical and pharmaceutical customers as raw materials in DNA based drug candidates. The
net deferred tax asset at March 31, 2000 has beendecrease in demand is largely attributable to the timing of completion and/or failure of Phase III clinical trials by certain of our large customers. This decrease in demand for DNA building blocks in 2003 was partially offset bya valuation allowancesales of$5.8 million due tooligonucleotides generated by ourcumulative lossesstart-up manufacturing facility inrecent years, expected lossesBoulder, Colorado.Sales in
future years and inability to utilize any additional losses as carrybacks. YEARS ENDED DECEMBER 31, 1999 AND 1998 NET SALES. Net salesour BioSystems operating segment increased22%, from $18.9 million for the year ended 1998 to $23.0 million for the year ended 1999. Sales from our life sciences products increased 91%, from $7.4 millionin1998 to $14.2 in 1999. Total revenues2003. Revenues from sales of WAVE systems and related services were relatively flat with 2002. However, bioconsumable product sales strength resulted from increased WAVE related consumable usage as the installed base of WAVE Systems has increased107%, from $5.4 millionand as researchers begin to use them more extensively in1998place of other methods of DNA analysis. Also contributing to$11.2 millionthe increase were revenues generated by new product sales including our Optimase product line that was launched in1999. WAVE System unit sales increased 85% from 72 in 1998 to 135 in 1999. Life science consumables sales increased 50%, from $2.0 million in 1998 to $3.0 million in 1999. In 1999, we acquired another manufacturer of life science consumables2002 and beganincluding salesto see increased usage in 2003. Sales ofthese products in our revenues. These sales, along withWAVE systems declined slightly from 2002 to 2003 offset by an increase in related services revenues. The slight decline in systems sales was mainly due to continued low sales volumes to our North American customer base. Increased services revenue was attributable to our focus on providing genetic variation discovery and analysis services to our pharmaceutical base of$662,000 in salescustomers.Cost of
our WAVE Systems consumables, account for the increase in total life science consumables sales. Sales of our non-life sciences instruments decreased 24%, from $11.5 million in 1998 to $8.8 million in 1999. This decrease was a result of reduced demand for these products related to an industry-wide consolidation among customers for these products and the negative effect of a reorganization of our dealer and distributor network. COST OF GOODS SOLD.GoodsSold. Cost of goods sold increasedfrom $9.6 millionin19982003 over 2002 despite the decline in our revenues. This increase was anticipated and was attributable mainly to$12.1 millionexcess manufacturing capacity in1999 due to increased sales. Costour Nucleic Acids operating segment. The BioSystems operating segment cost of goods sold as apercentage of sales declined year over year but remained
relatively constant from 1998within historical ranges at approximately 43%. The margins in our Nucleic Acids operating segment were negatively impacted by higher manufacturing costs and excess capacity due largely to1999, increasing from 51%our plant expansion efforts in1998 to 52% in 1999. GENERAL AND ADMINISTRATIVE EXPENSES.Glasgow, Scotland and Boulder, Colorado.Selling, General and
administrative expenses increased 35%, from $2.8 million in 1998 to $3.8 million in 1999. This increase is the result of increased wages and salaries, personnel-related expenses and increased consulting fees. General and administrative personnel increased from 22 in 1998 to 30 in 1999, or 36%. Compensation, benefits, hiring expenses and other direct personnel costs accounted for 28% of the total increase. Additionally, we paid a one-time advisory services fee of $550,000, or 55% of the total increase, in 1999 in connection with consulting and financial advisory services associated with the development of our strategic business plan and related intermediate and long-term financial strategies. We anticipateAdministrative Expenses. Selling, general and administrative expenses decreased significantly from 2002 tocontinue to increase over the next several years to support2003 as a result of ourgrowing businessrestructuring activities andcosts associated with operating a public company. MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 45%, from $5.4 million in 1998 to $7.8 million in 1999. This increase is the result of continuing to build our direct sales and marketing staff in the United States for our entry into the life sciences market. We also opened an office in Japan and expanded our life sciences sales efforts in Europe. Sales and marketing personnel increased 43%, from 47 in 1998 to 67 in 1999. Of this increase in personnel, 8 were in the United States, 9 in Europe and 3 in Japan. Compensation, benefits, hiring expenses and other direct personnel costs 24accounted for 42%focus on expense control. Nearly half of the totalincrease. The remaining increase is attributable to higher indirectdecrease was in personnelexpenses associated with marketingandsales activities. We expect thesepersonnel related expensesto continue to increase over the next several yearsas weexpandsignificantly reduced ourmarketingemployee headcount. Additionally, reductions in outside services, advertising, sales promotions, depreciation andsales efforts. RESEARCH AND DEVELOPMENT EXPENSES.travel expenses accounted for approximately 30% of the total decrease.Research and Development Expenses. Research and development expenses
increased 99%, from $3.2decreased significantly as a result of our restructuring activities and focus on expense control. Over 60% of the total decrease was in personnel and personnel related expenses as we significantly reduced our employee headcount. Additionally, significant reductions in outside services, supplies, depreciation and travel expenses were realized. During 2003 there were no capitalized software costs, whereas in the prior year we capitalized approximately $1.13 millionin 1998 to $6.3 million in 1999. These expenses represented 17%ofnet sales in 1998, versus 27% of net sales in 1999.development costs. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property. We expense our research and development costs in the year in which they areincurred.incurred with the exception of certain capitalized software development costs.Restructuring Charges. During the fourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The
increaseplan was developed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. We continued to execute the plan during the first half of 2003 resulting inthese expensesthe additional charges recorded in 2003. These charges consisted of mainly employee severance costs and the write-off of a note receivable related to the abandonment of a product development collaboration. The note receivable write-off wasattributable to an 84% increase in researcha non-cash charge of $0.35 million.Goodwill Impairment Charge. Statement of Financial Accounting Standard (SFAS) No. 142,Goodwill and
development personnel, from 31 in 1998 to 57 in 1999. Compensation, benefits, hiring expensesOther Intangible Assets, establishes guidelines for accounting for goodwill and otherdirect personnel costs accountedintangible assets and provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be evaluated for62% of the total increase.impairment annually. Theremaining increase is attributableCompany engaged an external valuation firm tothe costs associatedassist with theexpanded activitiescompletion of its annual impairment test during theresearch and development staff. We expect research and development spending to increase significantly over the next several years asfourth quarter of 2003. As a result of this test weexpand our research and product development efforts. OTHER EXPENSES. Other expenses, which consisted mainlyrecorded a non-cash goodwill impairment charge ofnet interest expense, increased 125%, from $532,000 in 1998 to $1.2$4.77 millionin 1999. This increase wasrelated tointerest expense onourplacement of $12.0 million of convertible notes in March 1999. INCOME TAXES.nucleic acids segment.Income Taxes. The
income tax benefit in 1998 was $930,000, while in 1999 incomeCompany’s tax expensewas $1.7 million. A valuation reserve of $4.5 million wasrelates to its operations in certain foreign countries and certain states. No tax benefits are being recordedin 1999due to our cumulative losses in recent years, expected losses in future years andan inabilitythe uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provideavaluationreserveallowances against deferred tax assets. To the extent we begin to generate income in future years anddetermineit is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. Our deferred tax assets as of December 31, 2003 were $30.60 million and were entirely offset by a valuation allowance. As of December 31,1999,2003, we had federal net operatingloss carryforwards of approximately
$11.6$78.50 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$3.0 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$28.70 millionand $4.7 million, respectively. The net deferred tax assetat December 31,1999 has been offset by a valuation allowance of $4.5 million due to our cumulative losses in recent years, expected losses in future years2003.Liquidity and
an inability to utilize any additional losses as carrybacks. The net deferred tax assets were $2.0 millionCapital ResourcesOur working capital positions at September 30, 2005 and
$180,000 as ofDecember 31,1998 and 1999, respectively. Deferred tax assets relate2004 were as follows (in thousands):
September 30,
2005
December 31,
2004
Change Current assets(1)
$ 16,399 $ 17,908 $ (1,509 ) Current liabilities
14,986 18,724 (3,738 ) Working Capital
$ 1,413 $ (816 ) $ 2,229
(1) Current assets include cash and cash equivalents of $1,361 and $1,002 at September 30, 2005 and December 31, 2004, respectively. The improvement in our working capital position during the first nine months of 2005 was due 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 salesconversions ofour WAVE System and related consumable products. WAVE System unit sales increased from five in 1997 to 72 in 1998. Sales of life sciences consumable products were $1.9 million in 1997 and $2.0 million in 1998. Sales of non-life sciences instrument products increased 22%, from $9.4 million in 1997 to $11.5 million in 1998. This increase was 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 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 due to the fact 25that sales of WAVE Systems accounted for a greater percentage of our total sales in 1998 than they did in 1997. The amount of in-house manufacturing costs incurred by us to produce WAVE Systems is less than the in-house manufacturing costs we incur to produce our non-life sciences instruments. The lower in-house manufacturing costs for the WAVE System are partially offset by the higher material costs associated with the WAVE System. The decrease was also due to the allocation of fixed manufacturing costs over a larger revenue base. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 14%, from $2.4 million in 1997 to $2.8 million in 1998. This increase is the result of increased bad debt expenses. In total, other general and administrative expenses remained consistent with the prior year. The increase in bad debt expenses was related to the write-off of one uncollectible account receivable in Europe. MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 35%, from $4.0 million in 1997 to $5.4 million in 1998. This increase is the result of building a direct sales and marketing staff in the United States for our entry into the life sciences market. Sales and marketing personnel increased 24% from 38 in 1997 to 47 in 1998. Compensation, benefits, hiring expenses and other direct personnel costs accounted for 54% of the total increase. The remaining increase is attributable to higher indirect personnel expenses associated with marketing and sales activities. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 54%, from $2.0 million in 1997 to $3.2 million in 1998. The increase in these expenses was attributable to an increase in our research and development staff and increased research and development activities. Compensation, benefits, hiring expenses and other direct personnel costs accounted for 50% of the total increase. The remaining increase is related to the increased activities of both internal staff and out-sourced staff. OTHER EXPENSES. Other expenses, which consisted mainly of net interest expense, increased 24%, from $427,000 in 1997 to $532,000 in 1998. This increase was due to the payment of interest on $1.5$2.58 million ofmezzanine short-term financing obtained at the end of 1997. This short-term financing was repaid in 1998. INCOME TAXES. The income tax benefit for 1997 was $1.2 million, while the benefit for 1998 was $930,000. 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. At December 31, 1998, the Company's management had determined that it was more likely than not that the deferred tax asset of $1.95 million would be realized through expected profits in future years. 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 $15.8 million as of March 31, 2000. We have financedborrowings under ouroperations primarily through the private placements of common stock, the issuance of 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. During the three months ended March 31, 2000, we sold 25,000 shares of common stock to one of our directors at $10.00 per share for proceeds of $250,000. In addition, we have been notified that the holder of warrants to purchase 300,000 shares of common stock intends to exercise these warrants at or before the closing of this offering which will provide an additional $1.5 million in cash. As of December 31, 1999 and March 31, 2000, we had approximately $150,000 and $140,000, respectively, in cash and cash equivalents. 26On May 19, 2000 we sold the assets related to our non-life sciences instrument product line to a company controlled by Stephen F. Dwyer, a director and a principal stockholder of ours, for a total adjusted purchase price of $5.65 million plus reimbursement by the buyer of approximately $400,000 of expenses paid by us since March 31, 2000 in connection with this product line. Approximately $4,000,000 was paid in cash at the closing of the sale and $2,000,000 was paid with an interest-bearing promissory note due on December 30, 2000. The note bears interest at the rate of 8.75% per annum. The purchaser financed the cash portion of the purchase price for these assets plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. We have agreed with the bank that we will acquire the notes evidencing these loans from it upon closing of this offering by paying to the bank an amount equal to the entire principal balance of the notes plus accrued and unpaid interest. If this offering is not completed, we are under no obligation to acquire these notes. The acquired notes will mature on December 30, 2000 and will bear interest at a rate of 8.75% per annum. A total of 1,200,000Laurus Loans into shares of our commonstock owned by Mr. Dwyerstock. We had $0.91 million available under our Credit Line at September 30, 2005. On October 31, 2005, we received proceeds from the 2005 Private Placement of $13.90 million after transaction costs of $1.18 million. These proceeds were partially used to repay all outstanding principal and accrued interest on our Laurus Loans including fees to facilitate the 2005 Private Placement and prepayment penalties to Laurus in the sum of $0.82 million. As a result, our Laurus Loans have been cancelled and are no longer available to us. The remaining proceeds of $5.35 million will bepledgedused for future working capital needs.The following shows the effects of the 2005 Private Placement and simultaneous repayment of the Laurus Loans on our September 30, 2005 consolidated balance sheet data as if these transactions had occurred on September 30, 2005 (in thousands).
September 30, 2005 Actual As Adjusted Cash and cash equivalents
$ 1,361 $ 6,669 Credit Line
$ 6,935 $ — Current portion of Term Note
$ 675 $ — Term Note, less current portion
$ 1,226 $ — Total stockholder’s equity(1)
$ 15,577 $ 29,220
(1) At November 29, 2005, we have 49,172,079 shares outstanding and 13,603,592 potentially dilutive securities consisting of 5,541,015 options issued under our stock option plan and warrants representing 8,062,577 shares. While we believe that existing sources of liquidity are sufficient to
us as security formeet expected cash needs through 2006, we have experienced recurring net losses and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To thenotes and will be held in an escrow account. We anticipateextent necessary, we believe that wewill exercisecan manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of ourright to cause these shares to be soldbusiness plan. Ultimately, we must achieve sufficient revenues in order topay principalgenerate positive net earnings andinterest oncash flows from operations.Analysis of Cash Flows
Nine Months Ended September 30, 2005 and 2004
Net Change in Cash and Cash Equivalents.Cash and cash equivalents increased $0.36 million during the
notes when due, subject to Mr. Dwyer's 180-day lock-up agreement. See "Shares Eligible for Future Sale." The asset purchase agreement also provided that we will retain all accounts receivable outstandingnine months ended September 30, 2005 as a result ofMarch 31, 2000 relating to this product line. Our accounts receivablenet cash fromthe product line were approximately $1.8investing activities and financing activities of $0.24 millionat March 31, 2000. We may experience difficultyand $2.31 million, respectively, offset by net cash used incollecting the remaining accounts receivable due to the lack of a continuing relationship with customers. For additional information regarding the sale, see "Related Party Transactions" below. Ouroperating activitiesresultedof $1.98 million, and changes innet outflowsforeign currency exchange rates of$2.6$0.21 million.Cash Flows from Operating Activities. Cash flows used in operating activities totaled $1.98 million
in 1997, $3.4 million in 1998 and $8.7 million in 1999 and $2.5 million forduring thethreenine months endedMarch 31, 1999, respectively.September 30, 2005 compared to $8.71 million during the same period of 2004. Theoperatinguse in 2005 related primarily to a net loss of $3.78 million offset by non-cash charges of $4.83 million. Non-cash charges consisted primarily of depreciation and amortization and certain financing costs. Working capital and other adjustments decreased cashoutflows for these periods resulted from significant investments in research and development, and sales and marketing, which resulted in operating losses. Net cash providedflows from operating activitieswas $93,000, forby $3.03 million. We spent $1.54 million during thethreenine months endedMarch 31, 2000. The operating cash flow for this period was a result of increases in receivable collections and payable balances offsetting our operating losses. We have a long sales cycle dueSeptember 30, 2005 related to theneed2004 Restructuring Plan. We had accrued expenses associated with this plan of $0.37 million at September 30, 2005. This balance relates primarily toeducate potential customers priorfuture rents on closed facilities (net of projected sublease rents) of which $0.03 million is expected to be paid during thepurchaseremainder of 2005 and $0.34 million in 2006 and thereafter.Cash Flows from Investing Activities. Cash flows provided by investing activities totaled $0.24 million during the
WAVE System andnine months ended September 30, 2005 compared tocommunicate 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. Additionally, we may provide extended terms of payment in order to attract new customers. Accounts receivable balances subject to extended terms were approximately $59,000 as of December 31, 1998, $216,000 as of December 31, 1999 and $179,000 as of March 31, 2000. Balances due more than one year from the balance sheet date were approximately $0, $77,000 and $68,000, respectively. Netcash flows used in investing activities of $1.54 million during the same period of 2004. The principal source of cash flows from investing activities in 2005 were sales of available for sale securities (Geron stock) of $0.62 million that were offset by purchases of $0.55 million of property and equipment primarily associated with the build out of our Glasgow, Scotland manufacturing facility that is substantially complete.Cash Flows from Financing Activities. Cash flows from financing activities totaled $2.31 million during the nine months ended September 30, 2005 compared to $7.19 million during 2004. The principal source of cash flows from financing activities in 2005 was
$470,000net draws on our Credit Line that were offset by payments on our Term Note. There are no scheduled principal payments for the remainder of 2005 on our Term Note.Years Ended December 31, 2004 and 2003
Net Change in Cash and Cash Equivalents.Cash and cash equivalents decreased $0.24 million during the year ended December 31,
1997,2004 as net cash used in operating activities of $12.75 million offset by net cash from investing activities and financing activities of $6.03 million and $6.00 million, respectively and changes in foreign currency exchange rates of $0.48 million.Cash Flows Used in Operating Activities. Cash flows used in operating activities totaled $12.75 million during 2004 compared to $13.02 million during 2003. The use in 2004 related primarily to a net loss of $34.37 million offset by non-cash charges of $21.80 million. Non-cash charges consisted of
depreciation and amortization, certain restructuring charges, impairment charges, certain financing costs and loss on debt extinguishment. Working capital and other adjustments decreased cash flows from operating activities by $0.18 million.
Cash Flows from Investing Activities. Cash flows from investing activities totaled $6.03 million during 2004 compared to cash flows used in investing activities of
$1.5$2.95 million during 2003. The investing cash flows generated in19982004 were from the sale of available for sale securities received from Geron for goods and$3.5 millionservices and the sale of our specialty oligoneucleotide manufacturing facility and reductions in1999. These year-to-year increasesother assets that weredue to increasedoffset by purchases of property andequipmentequipment.Cash Flows from Financing Activities. Cash flows from financing activities totaled $6.00 million during 2004 compared to $7.30 million during 2003. The cash from financing activities in 2004 relate primarily to net draws on our Credit Line and proceeds from the Term Note that were offset by payments of long-term debt.
Obligations and Commitments
Our ongoing capital commitments consist of debt service requirements and obligations under capital leases. The following table sets forth our contractual obligations as of December 31, 2004 along with cash payments due in each period indicated (in thousands):
Payments Due by Period 2005 2006 2007 2008 2009 and
ThereafterCredit Line(1)
$ 5,948 $ — $ — $ — $ — Term Note(1)
850 900 850 — — Operating lease payments(2)
1,958 1,382 486 187 372 Total contractual obligations
$ 8,756 $ 2,282 $ 1,336 $ 187 $ 372 The following table sets forth our contractual obligations as of September 30, 2005 along with cash payments due in each period indicated (in thousands):
Payments Due by Period Total 2005 2006 2007 2008 2009 and
thereafterCredit Line(1)
$ 6,588 $ 6,588 $ — $ — $ — $ — Term Note(1)
1,675 — 875 800 — — Operating lease payments(2)
2,584 359 1,233 443 189 360 Purchase obligations
872 248 370 254 — — Total contractual obligations
$ 11,719 $ 7,195 $ 2,478 $ 1,497 $ 189 $ 360
(1) Interest payments under the Laurus Loans are not included in these tables. Historically, interest on these loans has been paid monthly based on outstanding debt and prevailing interest rates. In conjunction with the private placement that closed on October 31, 2005, we repaid the Term Note and Credit Line. As of November 29, 2005, we have no significant indebtedness that requires scheduled principal and interest payments. After giving effect to the repayment of the Credit Line and Term Note, total contractual obligations total $3,456 and are payable as follows: $607 in 2005, $1,603 in 2006, $697 in 2007, $189 in 2008 and $360 in 2009 and thereafter.
(2) These are gross lease commitments. Certain facilities underlying these commitments are sublet to independent third parties. As of December 31, 2004, annual rents from these tenants were expected to total $320, $170 and $20 in 2005, 2006 and thereafter, respectively. As of September 30, 2005, annual rents from these subtenants were expected to total $40, $172, and $16 in for the remainder of 2005, 2006 and thereafter, respectively. At September 30, 2005 and December 31, 2004, we had firm commitments totaling $0.88 million and $0.80 million, respectively, to purchase components used in our WAVE Systems.
Off Balance Sheet Arrangements
At September 30, 2005 and December 31, 2004, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies
Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The following are certain critical accounting policies that may involve the use of judgment or estimates.
Allowance for Doubtful Account. Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following.
The age of the accounts receivable,Customer credit history,Customer financial information,Reasons for non-payment, andOur knowledge of the customer.If our customers’ financial condition were to deteriorate, resulting in a change in their ability to make payment, additional allowances may be required.
Inventories. Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process. Inventories include chemical building blocks for synthetic nucleic acids (know as phosphoramadites) and the
purchaseraw materials to produce phosphoramadites. We periodically evaluate our inventory oftechnology rightsphosphoramadites to determine whether they continue to meet quality and other specifications and over what time period such products are expected to be sold. Product that does not meet quality and other specifications can generally be re-worked to enhance purity. Costs to purify such product and related yield losses are expensed as incurred. Product that is not expected toour non-life sciences product lines. Purchasesbe sold within 12 months is classified as a long-term other assets.Depreciation and Amortization of
computer, production and research and development equipment accounted for 96%Long-Lived Assets. Our long-lived assets consist primarily of property and equipment,additionspatents, intellectual property and capitalized software development costs. We believe the useful lives we assigned to these assets are reasonable. If our assumptions about these assets change as a result of events or circumstances and we believe the assets may have declined in1998value we may record impairment charges resulting in an increase to operating expenses. Property and74%equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives ofadditions in 1999. Duringtheyear ended 1999, we acquired technology rightsrelated assets ranging froman affiliated company3 tointellectual15 years. We capitalize 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 on the date the patent is issued. Intellectual property, which isusedpurchased technology, is recorded at cost and is amortized over its estimated useful life.Impairment of Long-Lived Assets. We evaluate goodwill for impairment on an annual basis. We assess the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in our
non-life sciences product line. This technology was purchased for netestimate of future undiscounted and discounted cash flows to determine recoverability of$888,000. Net cash usedthese assets. If our assumptions about these assets were to change as a result of events or circumstances, we may be required to record an impairment loss.Revenue Recognition. Revenue on the sales of products is recognized in
investing activities decreased from $596,000accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for thethree months ended March 31, 1999right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to$412,000be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument.Recently Issued Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the
three months ended March 31, 2000. The decrease was due to our purchaseenterprise or (b) liabilities that are based on the fair value ofKramel Biotech International, Limited for $187,000 duringthefirst quarter of 1999. Net cash providedenterprise’s equity instruments or that may be settled byfinancing activities was $3.2 million for the year ended December 31, 1997, compared to $4.6 million in 1998 and $12.2 million in 1999. The increase in 1999 was due tothe issuance ofconvertible notes which netted $11.4 millionsuch equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 andnet other borrowingsgenerally requires that such transactions be accounted for using a fair-value-based method. We expect to adopt this standard on January 1, 2006. We are assessing the final impact of$760,000. The increase in 271998 was duethis standard on our financial position, results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.On November 24, 2004, the
saleFASB issued SFAS No. 151, “Inventory Costs – an amendment ofcommon stock with net proceeds of $7.3 million which was partially offset by a reduction in notes payable of $2.7 million. In 1997 we received $1.7 million net proceedsARB No. 43”. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from thesalecost ofstock. Weinventory and expensed when incurred. It alsoincreased notes payable in 1997 by a net $1.9 million. Net cash provided by financing activities was $8.7 million and $285,000 for the three months ended March 31, 1999 and 2000, respectively. The decrease was duerequires that allocation of fixed production overhead tothe issuance of convertible notes in the first quarter of 1999, which was partially offset by a reduction in bank borrowings during that period. At December 31, 1998 and 1999 and March 31, 2000, we had outstanding borrowings under our revolving credit facility with First National Bank of Omaha in the amounts of approximately $3.2 million, $4.3 million and $4.5 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 interestbe based on theprime lending rate and interest is payable monthly. The interest rate at December 31, 1998 and 1999 and March 31, 2000 was 7.75%, 8.50%, 9.00%, respectively. This facility expires July 31, 2000. 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 which must be complied with on a quarterly basis, 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 agreementnormal capacity of thelender. As of December 31, 1999, we were not in compliance with covenants under our revolving credit facility relating to tangible net worth, debt to tangible net worth, minimum working capital and the amount of fixed assets purchased or leased by us. We were not in compliance with these covenants (excluding the covenant relating to tangible net worth) at March 31, 2000. The bank issued waivers of these covenant violations as of December 31, 1999 and March 31, 2000. In May 2000, we repaid $1.8 million of our revolving credit facility and the remaining outstanding balance of approximately $460,000 of our installment notes payable with the proceeds we received from the sale of our non-life sciences instruments assets. Our capital expenditures budget for 2000 is approximately $5.0 million. Capital expendituresproduction facilities. SFAS No. 151 will be effective for thecurrent yearCompany on January 1, 2006. We areexpected to relate to facility and equipment improvements related toassessing the final impact of this standard on ourlife sciences business. Our capital requirements depend on a numberfinancial position, results offactors, including the leveloperations or cash flows.Impact of
our research and development activities, market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. Research and development expenses are budgeted at approximately $6.5 million for 2000. 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 the sale of our non-life sciences instrument assets, our existing credit lines, 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 next 12 months. We believe that these cash sources together with the proceeds from this offering will be sufficient to fund our operations through fiscal year 2003. 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 INFLATIONInflationWe do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.
28RECENT ACCOUNTING PRONOUNCEMENTS In June 1998,Foreign Currency Rate Fluctuations
During 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 forlast three 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 willour international sales haveon 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%represented approximately 50-65% of our net sales. These saleshave been to customers in the United States. While we do sellof products inmanyforeign countriesmostare mainly completed in either British Pounds Sterling or the Euro. Additionally, we have two wholly owned subsidiaries, Transgenomic, LTD., and Cruachem, LTD., whose operating currency is British Pounds Sterling and the Euro. Results oftheseoperations for the Company’s foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. As a result we are subject to exchange rate risk. The operational expenses of our foreignsubsidiaries help to reduce the currency exposure we have based on our sales
are madedenominated inU.S. dollars. Therefore,foreign currencies by converting foreign currencies directly into goods and services. As such, we feel do not have a material exposure to foreign currency ratefluctuations. 29BUSINESS OVERVIEW We provide innovative tools for DNA separationfluctuations at this time.Quantitative and
analysisQualitative Disclosures About Market RiskOur Laurus Loans carried a variable interest rate of 2% over the prime rate or a minimum of 6%, and therefore, expose us to
researchers seeking to discover and understand variationsinterest rate risk. Based on the outstanding balance of these loans at December 31, 2004 of $8.50 million, a 1% increase in thehuman genetic codeprime rate would increase our interest expense by approximately $0.09 million annually. We repaid the entire principal balance of the Laurus Loans on October 31, 2005 with the proceeds from the 2005 Private Placement. As a result, the Laurus Loans have been cancelled and are no longer available to us. Accordingly, we no longer have any borrowings which subject us to material interest rate risk.Company Overview
We develop, manufacture and sells innovative products for the
relationshipanalysis, synthesis and purification ofthese variations to disease. Priornucleic acids through two operating segments, BioSystems and Nucleic Acids.The BioSystems operating segment develops, assembles, manufactures and markets versatile products and provides analytical services to the
formationmedical research, clinical and pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in the United States and throughout much ofTransgenomic, Inc., we conducted our business operationsWestern Europe. For the rest of the world, products and services are sold throughan Iowa corporation knownmore than 25 dealers and distributors located in those local markets. Net sales from this operating segment are categorized asCETAC Holding Company, Inc.bioinstruments, bioconsumables and discovery services.Bioinstruments. The flagship product of the BioSystems operating segment is the WAVE system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of 1,269 WAVE systems as of September 30, 2005. Additionally, this operating segment utilizes itsvarious subsidiaries. CETAC Holding Company, Inc. designed,sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.Bioconsumables. The installed WAVE base generates a demand for consumables that are required for the system’s continued operation. These products are developed, manufactured and soldseveral different typesby this operating segment. In addition, the BioSystems operating segment manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range ofnon-life sciences instrumentsHPLC separation columns.Discovery Services. The BioSystems operating segment provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska thatprepare samplesoperates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development ofmaterial so that they may be more easily analyzed by,targeted therapeutics; andefficiently introduced into(2) molecular-based testingapparatus. Wefor hematology, oncology and certain inherited diseases for physicians and third-party laboratories.The Nucleic Acids operating segment develops, manufactures and markets chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world. These products are produced primarily in this operating segment’s only facility in Glasgow, Scotland. Prior to November 11, 2004, this operating segment also manufactured synthesized segments of nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, the assets associated with this facility were sold to an unaffiliated, third party. As a result, the Nucleic Acids operating segment no longer manufactures and
sold chromatographysells these specialized oligonucleotides. A substantial portion of this operating segment’s revenues during 2005 and 2004 have been derived from one customer.Business Strategy
Since inception, our business strategy has been to provide products and services to biomedical researchers, medical institutions, diagnostic and pharmaceutical companies that are
used in a variety of testing applications, such as food analysis and environmental testing. On July 1, 1997, we consolidated these companies into a new Delaware corporation known as Transgenomic, Inc., that was formedtied todevelop, manufacture and market our new DNA separation and analysis products in addition to continuing the non-life sciences business of CETAC Holding Company, Inc. and its subsidiaries. In 1999, we acquired, through our subsidiary in the United Kingdom, substantially all of the assets of Kramel Biotech International, Limited, a manufacturer of laboratory consumables usedadvancementsin the field of
molecular biology. Our business plan is to focus on the genomics segment of the life sciences industry and the development, marketing and support of our proprietary technology for the automated separation and analysis of DNA. Therefore, we entered into an agreement to sell the assets associated with our non-life sciences instrument product line in May 2000, and expect to close this sale prior to the closing of this offering. INDUSTRY BACKGROUND DNA AND GENOMICS-BASED RESEARCHgenetics. Thehuman body is composed of billions of cells each containing deoxyribonucleic acid, or DNA, which encodes the basic instructions for cellular function. The complete set of DNA is called the genome, or genetic code. The human genome is composed of 23 pairs of chromosomes which are further divided into over 100,000 smaller regions called genes. Genes are usedmovement in thecell as the template for the productionfield ofproteins,genomics, andit is these proteins that direct cell function that are ultimately reflected in the individual traits of the person. Eachrelated market opportunities, has shifted from geneis made up of four different chemicals known as nucleotide bases which are commonly designated by the first letter of their chemical names, or G, C, A and T. The entire human genome contains approximately 3 billion of these nucleotides arranged in order along the two complimentary strands of the DNA molecule. The order of the nucleotides along these strands is known as the DNA sequence, and it is this sequence that determines the function of the genes. Therefore, any variation in the DNA sequence of a particular gene may result in a change in the cell function controlled by that gene. These changes, known as genetic mutations or polymorphisms, therefore, are often the cause of disease or make an individual more susceptible 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. During the last ten years, an intense effort has been underway to determine the sequence of genes in the entire human genome and this basic research is expected to be completed in the next few years. Both the U.S.-government sponsored Human Genome Project and private researchers have been involved in this effort which has provided an immense amount of sequencing information for human DNA. While these efforts will provide a basic blueprint of the human genome, they have necessarily been centered on determining the DNA sequence of a limited number of individuals. Therefore, this fundamental sequencing data will not, by itself, provide much information about the function of genes and their relationship to disease. This information will only be developed through the intense study of genetic variation. Accordingly, 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. 30IMPORTANCE 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 and is called a single nucleotide polymorphism, or SNP. Other types of genetic mutation include the insertion or deletion of several nucleotides and translocation or repetition of nucleotides. 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 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 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. Therefore, the need to discover new genetic variations will be ongoing as the variety of human diseases are studied and their correlation with different populations or groups of individuals is analyzed. In order to do this on the scale that likely will be required, researchers will need technologies that provide faster sample analysis, greater accuracy and reliability and lower costs than technologies that they have historically used. It will be especially important that the technology used by these researchers be able to detect all types of mutations, including SNPs, insertions and deletions, translocations and repetitions, whether the existence of the mutation is known or unknown. It is this need that we believe creates a market opportunity for our WAVE System and its ability to detect genetic mutations quickly, accurately and inexpensively. CURRENT TECHNOLOGIES FOR MUTATION ANALYSIS Current widely-used DNA mutation analysis technologies were originally developed primarily for collecting DNA sequence information and not for thediscoveryof 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 technologies for DNA 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, 31from 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 indicates 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 TECHNOLOGIES Although these technologies are well accepted and established, none is ideally suitedto the analysis ofsequence 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 be done manually. As a result, the analysis of a single sample can often take many hours. In addition, there is no real-time monitoring of the process and this can cause problems. For example, if an insufficient sample were used for the analysis, a researcher would only become aware after several wasted hours of experimentation. - CAPILLARY ELECTROPHORESIS. Capillary electrophoresis can automate the gel electrophoresis process. However, it is difficultvariations in gene sequences. Researchers are beginning tocontrol the conditions needed to determine genetic variation. Capillary electrophoresis also requires the attachment of detection-enhancing fluorescent molecules to the DNA. Fluorescent reagents are relatively expensive and their use requires further manipulation of the DNA molecules prior to analysis, thereby increasing the amount of time per sample spent by a researcher. In addition, the small quantities of DNA separated by capillary electrophoresis are usually not sufficient for sequencing of the DNA or cloning applications. - MASS SPECTROMETRY. Mass spectrometry is only a detection method. It does not incorporate any separation capability, which is essential for analysis of multiple DNA molecules needed for mutation detection, as well as for purification. In addition, this method cannot directly analyze large DNA fragments or double-stranded DNA due to its inflexibility and fundamental limitations. - CHIP ARRAY. Because this technology relies on sample DNA binding to a DNA strand with a known sequence attached to the chip, it is capable of detecting only known mutations matching the sequence on the chip. In addition, the binding process is unreliable when many mutations are to be detected in the sample. These disadvantages limit the usefulness of these other techniques for the efficient discovery of unknown genetic variation. While some types of gel electrophoresis and capillary electrophoresis can be used to determine the sequence of nucleotides on a gene fragment and thereby detect unknown mutations, they are expensive and labor-intensive because the researcher must identify and compare the sequence of the large number of nucleotides making up both the sample gene and the standard gene without knowing if a mutation exists or where the mutation may be. Insertions, deletions, translocations and repetitions are very difficult to detect using any of these technologies. THE TRANSGENOMIC SOLUTION We believe our WAVE System, which incorporates our proprietary DNASep technology and associated software, chemical reagents and other consumable products, 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. The WAVE System enables a researcher to detect the presence of a mutation without the need to determine the DNA sequence of the gene being studied, allowing the screening of a large number of samples to identify mutations without the need to indiscriminately sequence all of the samples. Only those 32samples which are determined to contain a mutation require further sequencing work in order to determine the precise change in the DNA sequence. Therefore, the use of the WAVE System can result in a significant savings of time and cost. We believe key benefits of the WAVE System include the following: - HIGH SPEED. DNA separation and analysis using our WAVE System can be performed faster than current methods, depending on the type of research being conducted. 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. Based on published reports, 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 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 because it does not depend on knowing the DNA sequence in order to detect the mutation. Other than sequencing, most genotyping methods require prior knowledge of the location of the mutation. Compared to sequencing, which requires the researcher to determine and compare the sequence of a large number of nucleotides making up both the sample gene and the standard gene 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 understandlink variations in thehuman genetic code, or genome, in ordergene sequences toacceleratedisorders andimprove drug development and diagnostics. Key elementsdiseases. Accordingly, a principal component of our strategyare 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. 33The investment in genomics research is large and growing, and the corresponding need to analyze genetic variationshasled 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 institutionsbeen to establishtheour WAVE System as the industry standardfor mutation analysis. We believe we arein thefirst to bring high performance DNASep micro-bead technology to thegenetic research market andhave sold instrumentstokey genomics researchers to gain validation of our technology, which has resulted in the publication of over 60 articles in numerous scientific journals discussingdevelop additional markets for the WAVESystem. A key componentSystem such as diagnostics. Through an expanding base ofour 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,installed systems, we expect to increase thenumber of technical support representatives and application scientists. - INCREASE CONSUMABLE SALES. We expect that our expanding base of installed WAVE Systems will result in recurringsales ofour 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. Our WAVE System may be used for purposes other than genetic mutation discovery research. These other potential uses represent additional market opportunities that we intend to pursue. For example, a number of companies produce short single-strand DNA fragments, known as oligonucleotides, with a known sequence and sell them to genetic researchers who use them in research and other applications. When synthesizing oligonucleotides, it is important that the single-stranded DNA fragments do not contain fragments with unwanted DNA sequences. The WAVE System's ability to separate and purify DNA fragments could be used by the synthesizers of oligonucleotides to produce a more consistently pure product. We believe that this will become an important new market for the WAVE System. Another potential new market for the WAVE System will be the genetic screening market. This market consists primarily of hospitals and other medical facilities that could use the WAVE System to screen tissue or blood samples for mutations known to be related to genetic disease. We believe that the ability of the WAVE System to screen genetic mutations quickly, accurately and economically can make it a useful tool for this market. It will allow researchers to use the validated technology used for the original mutation discovery work to screen for mutations in a larger population. We are in the process of designing specific software and hardware improvements to adapt the WAVE System specifically for these new market opportunities. We expect these improvements to be available within the next 24 months. - BUILD A SUBSTANTIAL INTELLECTUAL PROPERTY ESTATE. We pursue an intellectual property strategy of licensing patents and pursuing patent protection for our inventions. We currently hold 16 U.S. patents and two foreign patents. In addition, we hold exclusive licenses to one U.S. patent, 16 foreign patent applications and one non-exclusive license to another U.S. patent. We also have pending applications for 26 U.S. patents and 31 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. 34OUR TECHNOLOGY AND PRODUCTS Our WAVE System is a versatile system that can be used for mutation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. Because of this versatility, the WAVE System can essentially replace the use of traditional gel electrophoresis in the molecular biology laboratory. Our patented technology uses a process known as high performance liquid chromatography to separate DNA material so that genetic variation may be identified and analyzed. In this process, DNA is injected into a special tube or column containing microscopic polymer beads. These micro-beads have special surface chemistries that cause the DNA molecules to attach to the surface of the beads. A chemical reagent is then pumped through the column under carefully controlled pressure and temperature conditions causing the DNA molecules to be selectively released from the beads so that they can be separated and measured. Our proprietary software controls the entire process by computer and produces the results of the operation in an easy-to-read chart format. Once the DNA sample is loaded into the instrument and necessary data is entered into the software, the process requires virtually no additional input from the researcher. By using our patented DNASep columns and specifically-formulated reagents that we have developed for various research applications, the researcher is able to achieve a consistent high-quality result. 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 instrument control, experiment design, data collection, data analysis, and reporting) [DIAGRAM OF COMPONENTS OF WAVE SYSTEM] 35The basic operation of the WAVE System is described below: DNA SAMPLE PREPARATION. A sample of the DNA fragment of interest 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 multi-well plate along with chemicals or reagents. A targeted DNA sequence is then copied by repeated cycles of heating and cooling in order to produce enough of the targeted sequence so that it can be detected. This replication process is known as polymerase chain reaction, or PCR, amplification. After the sample has been amplified, the sample DNA fragment may be mixed with "normal" DNA fragments that have a known sequence of nucleotides. The sample is then heated to cause the two strands of the DNA molecules in both the sample DNA and the normal DNA to separate from each other. The mixture is then cooled so that the strands reattach to each other. Because they are mixed together, the single-strand DNA from the sample DNA and the normal DNA will, in some cases, recombine with each other. If the sample DNA has a sequence of nucleotides that differs from the normal DNA, some of the recombined strands will not completely match and, therefore, will not bind completely. As a result, both the mismatched, or heteroduplex, DNA fragments and the correctly matched, or homoduplex, DNA fragments will be present. On the other hand, if the sample DNA has the same sequence of nucleotides as the normal DNA, all of the recombined strands will match and bind completely and only homoduplex DNA fragments will be present. WAVE SYSTEM SAMPLE INTRODUCTION AND SEPARATION PROCESS. A sample plate containing DNA 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 mode of operation, 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: - NON-DENATURING MODE. This mode uses relatively low temperature so that no melting, or denaturing, of the double-strand DNA occurs. This allows double-stranded DNA fragments to be separated by the number of nucleotides making up the fragment, with the shorter DNA fragments being first released from the column and increasingly longer fragments of DNA being 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 also use this mode. 36- PARTIAL-DENATURING MODE. The partial-denaturing mode is used for detecting genetic variation. In this mode, the WAVE System uses temperatures ranging from 50 DEG.C to 65 DEG.C to partially melt, or denature, the double-strand DNA. Because mismatched, or heteroduplex, DNA fragments will melt at a slightly lower temperature than homoduplex DNA fragments, they will be released first from the DNASep column, followed by the release of the homoduplex DNA fragments. If there was no sequence mutation in the sample DNA, only homoduplex fragments will be present, all of which will be released from the DNASep column at the same time. As the release of the DNA fragments is detected, it will be depicted by the WAVEMaker software as a single peak on a graph. However, if there was a sequence mutation in the sample DNA, both homoduplex and heteroduplex DNA fragments will be present. Because homoduplex and heteroduplex DNA fragments will release from the DNASep column at different times, these distinct release times will result in a second peak on the graph. - FULL-DENATURING MODE. The full-denaturing mode is used for the analysis of single-strand DNA and RNA (special molecules that transmit genetic information inside of a cell) where it is necessary to reduce the interaction of the two complementary strands of DNA with each other. In this mode, temperatures in excess of 70 DEG.C are used to separate single-strand DNA or RNA molecules 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. In this process, special fluorescent molecules, or tags, are attached to specific points in the DNA being analyzed. This makes it possible to detect fluorescently labeled DNA fragments from extremely low sample concentrations or from samples with low PCR amplification. 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 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. 37The 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 The WAVE System requires the use of various consumable products which we manufacture and sell separately. As more WAVE Systems are sold, we expect that these consumable products will become an increasingly significant source of revenue for us. The principalconsumable products used with theWAVE SystemWAVE.We have also historically sought to position ourselves as a partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics, thereby allowing us to participate in future successes of products derived from the expanding knowledge of genomics. While we continue to believe that the long-term prospects for this business segment are favorable, we concluded that near-term revenues from this segment would generate neither positive cash flows nor profits from operations. Consequently, in the
DNASep columns andsecond quarter of 2004, our Board of Directors directed management to explore strategic alternatives for our Nucleic Acids operating segment, including thechemical reagents that are used to carry the DNA samples though the WAVE System. Other consumables include filters and other replacement partspossible sale of one or both of theWAVE System. The DNASep columns are essentially small metal tubesfacilities in Glasgow, Scotland and Boulder, Colorado. On November 11, 2004, we sold the assets associated with our specialty oligonucleotide manufacturing facility in Boulder, Colorado. We continue to operate our facility in Glasgow, Scotland whichare packed with microscopic polymer beads, eachprimarily produces chemical building blocks used in the synthesis ofwhich is approximately two microns in diameter. A micron is one millionth of a meter. The surface ofnucleic acids. However, we have taken steps to consolidate thesemicro-beads has a special chemical makeup that causes DNA moleculesoperations and toadhere to them. The columns come in two sizes which are used depending on the amount of DNA being analyzed or purified. The smaller standard column sells for approximately $1,200 and the larger column sells for approximately $2,400. The WAVE System comes with one standard DNASep column which has a recommended warranted life of approximately 4,000 test cycles. Our experience to date indicates that the average customer uses between two and six columns per instrument per year. We also sell the chemical reagents used with the WAVE System. In general, these reagents are special fluids that are pumped through the columnsreduce costs in order tocause DNA moleculesbetter align operating expenses with anticipated revenues.Our business strategy going forward is to
release their 38chemical bondsachieve revenue growth in our BioSystems operating segment and tothe micro-beads under the correct conditions. Although mostbetter align our cost structure with anticipated revenues in both ofthese reagents are similarour operating segments.Sales and Marketing
We have sold our products to
those that can be obtained from various suppliers, we have developed formulascustomers in over 30 countries. We use a direct sales and support staff forthese reagents that have been specially developed to be usedsales in theWAVE System. By using these WAVE Optimized reagents, we believe that researchers are more likely to achieve consistent high quality results with their WAVE Systems. 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 We continue to maintain an active program of research and development and expect to spend approximately $6.5 million on these efforts in 2000. Our research and development activities include the improvement of the DNA separation media used in our columns and the refinement of the hardware and software components of the WAVE System. In addition, we are working to understand different aspects of the chemistry of molecular biology testing and to use this knowledge to develop new molecular biology tests. Our research and development work is focused on developing additional functionality in the WAVE System that will allow us to sell into market segments other than the genetic mutation discovery market. For example, we are working on software and hardware advances that will tailor the WAVE System specifically for the analysis and purification of single-strand DNA. Short single-strand DNA, known as oligonucleotides, are used to target a known sequence of DNA in a gene. A number of companies produce oligonucleotides with a known sequence and sell them to genetic researchers who use them for PCR amplification, sequencing or other research applications and to medical facilities for diagnostic testing. When synthesizing oligonucleotides on a commercial scale, it is important to exclude fragments with unwanted DNA sequences. Our research efforts are focused on determining the quality of single-strand DNA needed for each application and on developing the appropriate instrumentation modifications, software and separation protocols for each. We expect to have WAVE Systems available for this market within 24 months. We are also developing improved methods and procedures to enable hospitals and other medical facilities to use the WAVE System to screen tissue or blood samples for mutations known to be related to genetic disease. We believe the WAVE System will be an attractive tool for this group of users because it will allow them to use the same validated methodology used to discover a mutation and its link to disease to screen for that mutation in a large population. We are working to make the screening process faster and more automated through the development of new software and improved separation media and instrumentation. We also expect to have these improvements available in the next 24 months. SALES AND MARKETING We currently sell our WAVE Systems and related consumables in major geographical markets. We target theU.S.,theU.K. and most countries in WesternEurope with a direct sales staff of 18 persons.Europe. For the rest of the world, wealsosell our productstothrough dealers and distributors located in those local markets. We have over 25 dealers and distributors. We also maintain regionally-based technical support staffs and applications scientists to support our sales and marketing activities throughout the U.S., EuropeandJapan. See Note O, "SalesEurope.Operating segment and
Product Information," to ourgeographic information is included in the consolidated financial statementsfor a summary of our net sales by geographic area and product group. 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 geneticistsincluded elsewhere inacademic and commercial research institutions. 39CUSTOMERS As of March 31, 2000, we have sold over 250 WAVE Systems to customers in 20 countries.this Prospectus.Customers
that have purchased at least one WAVE SystemCustomers include numerous
core laboratory facilities and a number of otherleading academic and medical institutions in the U.S. andabroad, including Harvard University, Stanford University, Baylor College of Medicine, 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 and Institut Gustave Roussy. Customersabroad. In addition, our customers also include a number of large, established U.S. and foreign pharmaceutical, biotech andbiotech companies including SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck &commercial companies.During the nine months ended September 30, 2005, sales to a large pharmaceutical company totaled $2.0 million and represented 10% of net sales within the BioSystems operating segment and 9% of total consolidated net sales. Sales to this customer are governed by a non-binding master services agreement dated August 22, 2002. Sales to this customer are governed by a non-binding master services agreement dated August 22, 2002. Accordingly, the amount of sales to this customer is subject to change.
During the nine months ended September 30, 2005, sales to Geron Corporation (“Geron”) totaled $1.7 million and represented 54% of net sales within the Nucleic Acids operating segment and 7% of total consolidated net sales. During 2004, sales to Geron Corporation totaled $4.15 million and represented
49% of total net sales within our Nucleic Acids operating segment and 12% of total consolidated net sales Sales to Geron are governed by a supply agreement under which Geron may pay the Company
Novartisfor goods andEli Lilly and Company.services with shares of Geron common stock. The supply agreement does not require Geron to purchase any minimum quantity of our products. Accordingly, the amount of nucleic acid products we sell to Geron is subject to change. Revenues from our Nucleic Acids business would be substantially reduced if Geron’s need for our products declined or if it decided to obtain these products from other suppliers.No
singleother customeraccountedaccounts for more than3%10% of total consolidated or operating segment net sales.Research and Development
We maintain an active program of research and development and expect to continue to incur significant expense for these activities going forward. Our research and development activities include the improvement of the DNA separation media used in our
salesWAVE System, the refinement of the hardware and software components of the WAVE System, the creation of unique enzymes and WAVE-Optimized® enzymes, and, to a lesser extent, the improvement of chemical and biochemical reaction techniques for synthetic nucleic acids.For the nine months ended September 30, 2005 and for the year ended December 31, 2004, our research and development expenses were $1.70 million and $6.69 million, respectively. This represents a substantial reduction from our prior levels of expenditures that were $9.31 million and $12.20 million for the years ended December 31, 2003 and 2002, respectively. We expect to continue to invest in
1999. MANUFACTURINGresearch and development activities at levels that are relatively consistent with those experienced during 2005; however, we may also curtail such activities as required.Manufacturing
We manufacture
all of our consumablebioconsumable products including ourproprietary DNASepseparation columns, liquid reagents, enzymes andliquid reagents.nucleic acid products. The major components of our WAVE systems are manufactured for us by a third party. Wealso incorporateintegrate our ownmodifications into the basic liquid chromatography instrument that we use in our WAVE System.hardware and software with these third party manufactured components. Our manufacturing facilities for our WAVE® systems and bioconsumables are located in Omaha, Nebraska, San Jose, California,Omaha, Nebraska,andCrewe,Cramlington, England. The nature of our instruments and bioconsumables business does not generally lend itself to tracking and reporting sales backlog.Our phosphoramidites and related synthetic nucleic acid products are manufactured in our Glasgow, Scotland facility. Inventory for these products consists primarily of chemical building blocks for synthetic nucleic acids (know as phosphoramadites) and the raw materials to produce phosphoramadites. As of September 30, 2005 and December 31, 2004, we have classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products. We
obtain the basic liquid chromatography instrument forperiodically evaluate ourWAVE System from Hitachi Instruments, Inc. This relationship allows usinventory of phosphoramadites touse Hitachi's significant manufacturing capabilitydetermine whether they continue to meetpotential 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 rightquality and other specifications and over what time period such products are expected tomarket any co-developed products for DNA analysisbe sold. Product that does not meet quality andpurification 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 termother specifications can generally be re-worked to enhance purity. Costs to purify such product andwe 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 Werelated yield losses arenot a party, nor are any of our assets or properties subject, to any material legal proceedings. INTELLECTUAL PROPERTYexpensed as incurred.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 designedpresently own rights toprovide us with freedom to operate and facilitate commercialization of our current and future products. We currently own 16 issued patents in the United States and have 26 pending applications, of which we have received notices of allowances for five. We also own two foreignmore than 80 issued patents andhave 31 foreign patent30 pending applicationspending. We hold an exclusive license for components ofin both theDNA separation technology used in ourU.S. and abroad. Our BioSystems operating segment products, comprising the WAVE® Systemunder 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. We also hold licenses to 16 foreign patent applications. 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 systemsand relatedprocessesconsumables, are
40coveredprotected byU.S. Patents 5,772,889, 5,997,742, 5,972,222, 6,017,457, 6,024,878patents and6,056,877, along within-licensed technologies that expire in various periods beginning in 2013 through 2022. Intellectual property related to our Synthetic Nucleic Acid business unit, other than production trade secrets, is almost entirely in-licensed. A number of these in-licensed patents have recently, or will soon, expire. As acorresponding foreign patent application pending. Additional patent applications for the DNA compatible column and system are pendingresult, we expect price competition in theU.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. 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 priorNucleic Acids operating segment toJune 8, 1995, and 20 years from the application filing date or earlier claimed priority dateintensify in thecase 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 patentsnext year. We willexpire between 2009 and 2017. Our success depends to a significant degree upon our ability to develop proprietary products and technologies. We intend tocontinue to file patent applications and seek new licenses aswewarranted to protect and develop newproducts 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 areastechnologies of interest tous. As a result, there can be no assurance that patents will issue from anyour customer base in the coming years.Competition
The markets in which our Biosystems operating segment operates are highly competitive and characterized by rapidly changing technological advances. A number of our
patent applicationscompetitors possess substantial resources and are able to develop and offer a much greater breadth of products and/or services, coupled with significant marketing and distribution capabilities. We compete principally on the basis of uniquely enabling technical advantages in specific but significant market segments.Competition for our WAVE Systems arises primarily from
applications licensed to us. In viewDNA sequencing and genotyping technologies. Competitors in these areas include Applied Biosystems, Beckman Coulter, Amersham (now part ofthese factors, our intellectual property positions bearGE Healthcare), Affymetrix, Agilent Technologies, Nanogen, Illumina, Sequenom, Pyrosequencing (now part of Biotage AB), Varian, and others. Competition for somedegree of uncertainty. We also rely in part on trade-secret protectionof ourintellectual property.non-WAVE consumable products comes from numerous well-diversified life sciences reagents providers, including, among others, Invitrogen, Qiagen, Roche, Stratagene, and Promega. Our discovery services product line faces competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genaissance Pharmaceuticals, GeneLogic, Agencourt, SeqWright, Gentris, and Perlagen. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, and Specialty Laboratories, also offer related laboratory services in support of clinical trials. Finally, additional competition arises from academic core laboratory facilities.Competition is also intense in the markets in which our Nucleic Acids operating segment functions, and increasingly driven by price. Transgenomic competes on the basis of its ability to develop and manufacture synthetic nucleic acid building blocks used to make DNA and RNA oligonucleotides. Competitors include Proligo, Degussa, Pierce Nucleic Acid Technologies, and Applied Byosystems. In addition, competition is expected in the future from new overseas entrants focusing on low cost production.
Employees
As of September 30, 2005, December 31, 2004 and December 31, 2003, we had employees focused in the following areas of our operation:
September 30,
2005December 31,
2004December 31,
2003BioSysytems Operating Segment
Manufacturing
51 52 54 Sales, Marketing and Administration
67 75 90 Research and Development
10 19 31 128 146 175 Nucleic Acids Operating Segment
Manufacturing
16 20 45 Sales, Marketing and Administration
8 6 8 Research and Development
0 6 16 24 32 69 152 178 244 We
attempt to protectsupplement ourtrade secrets by entering into confidentiality agreements with third parties, employeesworkforce through the use of independent contractors and consultants. As of September 30, 2005 and December 31, 2004, we have engaged independent contractors or consultants who provide services to us approximately equivalent to five and four full-time employees, respectively.Our employees were employed in the following geographical locations.
September 30,
2005December 31,
2004December 31,
2003United States
91 106 166 Europe (other than the United Kingdom)
23 22 20 United Kingdom
43 50 58 157 178 244 Properties
We own one facility in Glasgow, Scotland and
consultants also sign agreements requiring that they assign to us their interestslease 14 facilities throughout the world under non-cancelable leases with various terms. The following table summarizes occupied locations. Annual rent amounts presented inpatents 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, throughthemisuse 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 wetable aretaking 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 resolvedreflected infavor of or against us or our licensors, we may face costly litigation and diversion of management's attention and resources.thousands.
Location
Function
Square
FootageAnnual
RentLease Term
ExpiresOwned
Glasgow, Scotland
Phosphoramidite Manufacturing 44,212 N/A N/A Leased and Occupied
Omaha, Nebraska
WAVE® and Consumable Manufacturing 25,000 $ 130 June 2007 San Jose, California
Consumable Manufacturing 14,360 $ 139 October 2010 Cramlington, England
Consumable Manufacturing 8,500 $ 53 March 2006 Omaha, Nebraska
Multi Functional(1) 18,265 $ 187 July 2007 Paris, France
Multi Functional(1) 4,843 $ 109 January 2014 Gaithersburg, Maryland
Multi Functional(1) 6,560 $ 114 May 2006 Cambridge, Massachusetts
Multi Functional(1) 2,500 $ 70 January 2007 Leased and Not Occupied (2)
Multi Functional(1) 55,759 $ 505 2005 – 2007
(1) Multi Functional facilities include functions related to manufacturing, services, sales and marketing, research and development and/or administration.
(2) Leased and not occupied facilities represent six facilities with gross annual rents of $0.82 million. A number of these facilities are sublet to independent third parties. Annual rents from these subtenants are expected to total $0.32 million in 2005. We are pursuing sublet tenants for remaining vacated space. As a result of
such disputes,restructuring initiatives initiated in 2004 and 2002, a significant amount of leased space is unoccupied. In certain cases, wemayhave sublet this space todevelop costly non-infringing technology or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptablethird parties.Legal Proceedings
We are subject 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 41Laboratories, 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 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 June 1, 2000, we had 174 full-time employees. Of these 174 employees, 43 hold Ph.D.s. The following sets forth thea number ofpersons employed inclaims of various amounts, which arise out of theprincipal areasnormal course of business. In ouroperation:
Manufacturing............................................... 29 Sales and Marketing......................................... 61 Research and Development.................................... 52 Administration.............................................. 32Our future success dependsopinion, the disposition of pending claims will not have a material adverse effect on ourcontinuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense. Due to the limited numberfinancial position, results ofpeople available with the necessary technical skills, we can give no assurance that we can retainoperations orattract 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 existing lease for the Omaha, Nebraska facility was assigned to, and assumedcash flows.Our executive officers are appointed annually by the
purchaser. We recently entered intoBoard of Directors at the first meeting following the annual stockholders’ meeting. Other officers are appointed by the Board of Directors from time to time. Each officer holds office until anew seven-year lease agreement for a new, 17,400 square-foot headquarterssuccessor has been duly appointed andadministrative office in Omaha, Nebraska which will commence on August 1, 2000. The first year lease payment for this property will be $178,350 and will escalate by 2% per year. 42MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERSqualified or until the death, resignation or removal of such officer. Our executive officers anddirectors, positions held by them andtheir ages areas follows:listed below followed by a brief biography.
NAME AGE POSITION - ---- -------- --------Name
Age Position
Collin J.
D'Silva......................... 43D’Silva48 Chairman of the Board, Chief Executive Officer and Director William P. Rasmussen...................... 48Michael A. Summers
41 Chief Financial Officer Mitchell L. Murphy
49 Vice President, Secretary and Treasurer Douglas T. Gjerde, Ph.D................... 47 Chief Scientific Officer and Director John E. Doyle............................. 56 Executive Vice President of Operations 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.............................. 45 Director Gregory J. Duman.......................... 44 Director Roland J. Santoni......................... 58 DirectorCOLLINCollin J.
D'SILVA.D’Silva.Mr.D'SilvaD’Silva has served as our Chairman of the Board and Chief Executive Officer since 1997 and is also a Director. Mr.D'Silva,D’Silva, a co-founder of Transgenomic, has worked forTransgenomicthe Company and its predecessors since 1988.Prior to that time,Mr.D'SilvaD’Silva was employed by AT&T from1980.1980 to 1988. 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'SilvaD’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.WILLIAM P. RASMUSSEN. Mr. RasmussenMichael A. Summers.Mr. Summers joined
us on October 1, 1998Transgenomic, Inc. in August 2004 andcurrentlyserves asourChief Financial Officer. Mr. Summers was employed with C&A Industries, Inc. from 2003 to 2004 where as General Manager he was responsible for the operations of various divisions that provided human capital management and consulting services. From 2001 to 2003, he was Executive Vice President and Chief Financial Officerand Treasurer. Priorfor Nexterna, Inc., a wholly-owned technology subsidiary of the Union Pacific Corporation. From 2000 tojoining us, Mr. Rasmussen2001, he was the ChiefFinancial Officer at I-Mark Systems from 1996 until it was purchased in 1997. I-Mark Systems designed integrated computer voting solutions and was a successor corporation of ADD Consulting Inc., which provided computer staffing professionals to numerous industries. Mr. Rasmussen served as Chief Financial Officer of ADD Consulting Inc. from 1994 until joining I-Mark Systems in 1996. Mr. Rasmussen owned a travel management company from 1986 until 1998, and he provided consulting services to numerous software and telecommunication companies from 1984 through 1994. Mr. Rasmussen's previous experience also includes serving as Controller and PrincipleAccounting Officer forApplied Communications, Inc. from 1979 until 1984. Applied Communications, Inc.Able Telcom Holding Corp.,now known as Transaction Systems Architects, Inc., isasoftware provider for transaction processing systems. 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 Researchpublicly-owned project management andEngineering, 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.construction company. Prior tojoining Transgenomic, he was with Supelco Inc. for 202000, Mr. Summers held various positions including eight yearsservingasChief Executive Officer when it was a Sigma-Aldrich company; Business Unit Vice 43President 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. KRAIG MCKEE. Mr. McKee has served as our Vice President of Salesan auditor for theUnited States since July 1999. Prior to joining us, he was the Sales DirectorOmaha, Nebraska office of Deloitte & Touche, LLP. Mr. Summers graduated from1997 to 1999 for Bayer Diagnostics. FromCreighton University in 1987through 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 attorneywithan 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 inchemical engineering from the University of Tennessee and a MFCC degree in psychology from Santa Clara University.business administration with an accounting major. He is amember of the California Bar and is active in numerous professional organizations. MITCHELLCertified Public Accountant.Mitchell L.
MURPHY.Murphy.Mr. Murphy joined us in 1992. His current duties include the overall corporate administrationof our financeandaccounting functions.shareholder relations. Prior to joining Transgenomic, he held accounting and financial management positions for 15 years with companies involved in manufacturing, steel distribution and rebarfabrication for 15 years.fabrication. 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 letterBoard of
intent to acquire the assets associated with our non-life sciences instrument product line,Directors and CommitteesOur entire Board of Directors consists of seven positions of 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, Mr. Saxena 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 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. 44GREGORY J. DUMAN. Mr. Duman has been a director since March 2000. Mr. Duman is the Chief Financial Officer of Artios, Inc. (formerly ECOM Worldwide, Inc.), a transaction processing services company, which he joined in 2000. Prior to that, he was Executive Vice President of Transaction Systems Architects, Inc. ("TSA"). He joined TSA in 1983 as Director of Administration. He became Controller in 1985 and Vice President and Chief Financial Officer in 1991, serving until February 2000. From 1979 to 1983, he worked for Arthur Andersen & Co. as a certified public accountant. Mr. Duman is a director of TSA and Digital Courier Technologies, Inc. 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 fromsix are occupied. TheWharton 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 OurBoard of Directors iscomprised of seven directors and isdivided into threeclasses. Directors ofclasses with directors in each classare electedserving fortermsa term 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.Thecurrentterms of office of the current Class I, Class II and Class III directors willendexpire in 2007, 2008 and 2006, respectively.The following table sets forth information about our directors. The Board of Directors has determined that Messrs. Saxena, Sloma, Sklar and Santoni are independent directors of the Company under the listing standards adopted by the Nasdaq Stock Market. All directors have held the positions with the companies (or their predecessors) set forth under “Principal Occupation” for at least five years, unless otherwise indicated.
Name
Age Principal Occupation
Director
SinceTerm To
ExpireGregory T. Sloma 54 Executive Vice President and Chief Financial Officer of SpeedNet Services, Inc. (1) 2004 2008 Jeffrey L. Sklar, M.D., Ph.D. 57 Professor of Pathology, Yale University School of Medicine(2) 1997 2008 Gregory J. Duman 50 President of Prism Technologies LLC(3) 2000 2006 Roland J. Santoni 64 Vice President of West Development, Inc. (4) 2000 2006 Collin J. D’Silva 48 President and Chief Executive Officer of the Company(5) 1997 2007 Parag Saxena
50 Chief Executive Officer of INVESCO Private Capital, Inc. 1999 2007
(1) Mr. Sloma is also a director of West Corporation. From 1996 to 2003, Mr. Sloma served in several capacities including President, Chief Operating Officer, Chief Executive Officer, and Vice Chairman and Director of Mergers & Acquisitions for DTN Corporation. In September 2003, DTN Corporation filed a pre-packaged Chapter 11 reorganization petition in bankruptcy. DTN Corporation emerged from bankruptcy on October 31, 2003.
(2) From 1989 to 2003, Dr. Sklar was Professor of Pathology, Harvard Medical School.
(3) From 2001 to 2003, Mr. Duman was Executive Vice President and Chief Financial Officer of the Company. From 2000 to 2001, Mr. Duman was Chief Financial Officer of Artios, Inc. From 1983 to 2000, Mr. Duman served in several capacities including Controller, Chief Financial Officer and Executive Vice President of Transaction Systems Architects, Inc.
(4) From 1977 to 2003, Mr. Santoni was Professor of Law at Creighton University. In addition, from 1978 to 2003, he served Of Counsel with the law firm of Erickson & Sederstrom, P.C.
(5) Mr. D’Silva is also a director of Bruker Biosciences Corporation, formerly known as Bruker Daltonics, Inc. The Board of Directors has established and assigned certain responsibilities to an Audit Committee and a Compensation Committee. We do not have a standing nominating committee. The Board determined that due to the relatively small size of the Board, and due to the policy on director nominations, which is described below, it was not necessary to form a separate committee to evaluate director nominations. Under the director nomination policy, director candidates are identified primarily through suggestions made by directors, management and stockholders of the Company. We have implemented no material changes to the procedures by which stockholders may recommend nominees for the Board of Directors. The Board of Directors will consider director nominees recommended by stockholders that are submitted in writing to the Secretary of the Company in a timely manner and which provide necessary biographical and business experience information regarding the nominee. All candidates for director will be evaluated based on their independence, character, judgment, diversity of experience, financial or business acumen, ability to represent and act on behalf of all stockholders, and
the needs of the Board. In general, the Board expects to nominate incumbent directors who express an interest in continuing to serve on the Board. The independent directors of the Company review and consider all candidates to serve as a director of the Company who are properly suggested by directors, management and stockholders of the Company, and the Board of Directors selects its nominees to serve as a director of the Company from among those candidates who are recommended to the Board of Directors by a majority of the independent directors of the Company.
Audit Committee. The Audit Committee’s primary duties and responsibilities include monitoring the integrity of our financial statements, monitoring the independence and performance of our external auditors, and monitoring our compliance with applicable legal and regulatory requirements. The functions of the Audit Committee also include reviewing periodically with independent auditors the performance of the services for which they are engaged, including reviewing the scope of the annual
stockholders meetings heldaudit and its results, reviewing with management and the auditors the adequacy of our internal accounting controls, reviewing with management and the auditors the financial results prior to the filing of quarterly and annual reports, and reviewing fees charged by our independent auditors. Our independent auditors report directly and are accountable solely to the Audit Committee. The Audit Committee has the sole authority to hire and fire the independent auditors and is responsible for the oversight of the performance of their duties, including ensuring the independence of the independent auditors. The Audit Committee also approves in2001, 2002advance the retention of, and2003, respectively. BOARD COMMITTEESall fees to be paid to, the independent auditors. Theauditrendering of any auditing services and all non-auditing services by the independent auditors is subject to the approval in advance of the Audit Committee. The Audit Committee operates under a written charter which is available on our website at www.transgenomic.com. The Audit Committee is required to be composed of directors who are independent of the Company under the rules of the Securities and Exchange Commission and under the listing standards of the Nasdaq Stock Market. The current members of the Audit Committee are directors Santoni, Saxena and Sloma. The Board of Directors has determined that Mr. Sloma qualifies as an “audit committee financial expert” under the rules of the Securities and Exchange Commission.Compensation Committee.The Compensation Committee reviews and approves our compensation policy, changes in salary levels and bonus payments to our executive officers and other management and determines the timing and terms of awards made pursuant to our stock option plan. The Compensation Committee consists of
Messrs. Duman,directors Sklar, Santoni and Saxena, each of whomis an independent director. The audit committee reviews the services providedhas been determined byour 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 tothe Board of Directorsregarding compensation matters and administers our employee stock option plan. See "Stock Option and Otherto be independent under the listing standards of the Nasdaq Stock Market.Compensation
Plans" below. DIRECTOR COMPENSATIONof DirectorsDirectors who are also our officers or affiliates 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.
Non-employeeIndependent 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 by45teleconference, as well as reimbursement for out-of-pocket expenses related to attendance at board and committee meetings. Independent directors serving on any committee of the Board of Directors are paid an additional annual retainer of $2,500, except that the additional retainer paid to independent directors serving on the Audit Committee is $5,000. Our non-employee and non-affiliated directors are issued options to purchase 15,000 shares of common stock under our
1997 Stock Option Planstock option plan upon initial appointment to theboard. TheseBoard. For options granted prior to March 28, 2003, such options vest at the rate of 20% per year of service on theboard.Board. Additional grantswill bewere made from time to time so that each non-employee directorholdswould hold 15,000 unvested options at any time. Effective March 28, 2003, the options granted to a non-employee and non-affiliated director uponinitial appointment to the Board vest at the rate of 33 1/3% per year of service on the Board. Additional grants of options to purchase 5,000 shares of common stock will be made on a date reasonably close to each anniversary of such director’s appointment to the Board to be determined by the Compensation Committee in its sole discretion, with such options vesting on the third anniversary of the grant. All options granted to non-employee directors have exercise prices that represented or exceeded the fair market value of our stock on the grant date. Exercise prices on outstanding options granted to our non-employee directors range from
the lesser of $5.00 per share or 50% of the price that we issue common stock in this offering$2.37 to $13.00 per share.COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of ourCompensation Committee Interlocks and Insider Participation
There are no Compensation Committee interlocks and no insider participation in compensation
committee serves as a memberdecisions that are required to be reported under the rules and regulations of theboardSecurities Exchange Act ofdirectors or compensation committee1934.Compensation of
any other company that has one or more executive officers serving as a member of our board of directors or compensation committee. EXECUTIVE COMPENSATIONExecutive OfficersThe following table sets forth information regarding the
totalannual and long-term compensationwepaidduring the year ended December 31, 1999by us to our Chief Executive Officer,andournext four most highly compensatedtwo other executive officerswhose salaryandbonusthree former executive officers for1999 exceeded $100,000. Also included isservices rendered during thecompensationthree years ended December 31, 2004.SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards Payouts (a)
Name and Principal Position
(b)
Year
(c)
Salary
($)
(d)
Bonus
($)
(e)
Other Annual
Compensation(1)
($)
(f)
Restricted
Stock
Award(s)
($)
(g)
Securities
Underlying
Options/
SARs
(#)
(h)
LTIP
Payouts(2)
($)
(i)
All Other
Compensation(3)
($)
Collin J. D’Silva
President and Chief
Executive Officer
2004
2003
2002140,568
142,308
200,000—
—
——
—
——
—
——
—
——
—
—15,311
5,927
6,113Michael A. Summers(4)
Chief Financial
Officer
2004
2003
200254,578
—
——
—
——
—
——
—
——
—
——
—
—1,135
—
—Mitchell L. Murphy
Vice President,
Secretary and Treasurer
2004
2003
2002135,544
120,000
100,538—
—
——
—
——
—
——
50,000
——
—
—14,468
5,986
8,412Keith A. Johnson(5)
Former Vice President,
General Counsel
2004
2003
2002135,392
135,000
112,673—
—
——
—
——
—
—25,000
65,000
35,000—
—
—10,890
4,776
35,036John L. Allbery(6)
Former Executive Vice
President
2004
2003
2002129,693
200,000
200,000—
—
——
—
——
—
——
50,000
——
—
—3,893
6,444
17,473Michael J. Draper(7)
Former Chief Financial
Officer
2004
2003
200259,928
122,731
102,951—
—
——
—
——
—
——
75,000
7,500—
—
—938
6,873
5,481
(1) No disclosure is required in this column pursuant to applicable Securities and Exchange Commission regulations, as the aggregate value of items covered by this column does not exceed the lesser of $50,000 or 10% of the annual salary and bonus shown for each respective executive officer named.
(2) We do not have a long-term incentive plan as defined in Item 402 of Regulation S-K under the Securities Exchange Act of 1934, as amended.
(3) These amounts consist of accrued vacation to be taken in the future or paid in cash upon termination of employment, 401(k) Company matching contributions, reimbursed moving expenses and auto allowances, as applicable.
(4) Mr. Summers joined the Company and assumed the role of Chief Financial Officer on July 31, 2004.
(5) Mr. Johnson was appointed Vice President, General Counsel by the Board of Directors effective April 4, 2002 and resigned effective May 1, 2005.
(6) Mr. Allbery was appointed Executive Vice President by the Board of Directors effective May 23, 2001. He resigned from the Company on July 23, 2004.
(7) Mr. Draper resigned as Chief Financial Officer effective March 31, 2004. Options/SAR Grants in Last Fiscal Year
The Compensation Committee may grant either qualified or non-qualified stock options to the officers and employees of
anthe Company and nonqualified stock options to nonemployee directors and advisors under our stock option plan. The following table shows the options granted during 2004 to a former executive officerwho resigned priorof the Company whose compensation is reported in the Summary Compensation Table.
(b)
Number of
Securities
Underlying
Options/SARs
Granted
(#)(1)
(c)
%
of Total
Options/SARs
Granted to
Employees in
Fiscal Year
(d)
Exercise or
Base Price
($/Sh)
(e)
Expiration
Date
Potential Realized Value
at Assumed Annual
Rates of Stock Price
Appreciation for Option
Term(2)(a)
Name
(f)
5%($)
(g)
10%($)
Keith A. Johnson
25,000 6.9 % $ 1.32 5/21/2014 $ 21,000 $ 53,000
(1) The exercise price of all options granted to executive officers during fiscal 2004 is equal to the fair market value of our common stock on the date of grant. Each option expires ten years from the date of grant. No stock appreciation rights (SARs) may be granted under our stock option plan.
(2) The dollar amounts set forth under these columns are the result of calculations of assumed appreciation in the price of our common stock at these annual rates from the respective dates of the grant to the respective expiration dates of the options. These assumptions are not intended to forecast future price appreciation of our common stock. The market price of our common stock may increase or decrease in value over the time period set forth above. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth certain information concerning the number of exercised and unexercised options and the value of such options at the end of 2004 held by the
year. Theseexecutive officersare referred to as the namedand three former executive officerselsewhereof the Company whose compensation is reported in theprospectus. SUMMARY COMPENSATION TABLE(1)Summary Compensation Table.
ANNUAL COMPENSATION ---------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(2) - --------------------------- -------- -------- ------------ ---------------(a)
Name
(b)
Shares Acquired
on Exercise(#)
(c)
Value Realized
($)(1)
(d)
Number of
Securities
Underlying
Unexercised
Options/SARs at
Year End(#)
Exercisable/
Unexercisable
(e)
Value of
Unexercised
In-the-Money
Options/SARs at
YearEnd($)(1)
Exercisable/
Unexercisable
Collin J.
D'Silva................................... $132,440 $D’Silva— — 0 $6,129 $21,587 Chief Executive Officer William Walker...................................... 201,466/ 01,889 5,631 Vice President$0 / $0 Michael A. Summers
— — 0 / 0 $0 / $0 Mitchell L. Murphy
— — 146,000 / 4,000 $0 / $0 Keith A. Johnson
— — 72,917 / 87,083 $0 / $0 John L. Allbery
— — 0 / 0 $0 / $0 Michael J. Draper
— — 61,253 / 0 $0 / $0
(1) Based on the difference between the closing sale price 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 Researchthe Common Stock on the exercise date or December 31, 2004 andDevelopment(3) 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(4)the related option exercise price.- ------------------------ (1) No long termEquity Compensation Plan Information
The following equity compensation
was awardedplan information summarizes plans and securities approved and not approved by security holders as of December 31, 2004:
Plan category
(a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))Equity compensation plans approved by security holders
5,088,037 $ 5.09 867,727 Equity compensation plans not approved by security holders
— — — Total
5,088,037 $ 5.09 867,727 Long-Term Incentive Plans and Other Matters
We do not maintain a long-term incentive plan or
paid topension plan (as defined in Item 402 of SEC Regulation S-K) for our executive officers and have not repriced anynamedoptions or SARs for any executive officer during1999. (2) Consists of accrued vacation to be taken inthefuture or paid in cash upon termination of employment. (3) Dr. Zander resigned as an executive officer on March 24, 2000. (4) 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 "Stocklast fiscal year.Stock Option and Other Compensation
Plans")PlansStock Option Plan.Our Fourth Amended and
may participate in other employee benefit plans and programs, such as health insurance plans, that we offer to our other employees. 46OPTION 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 planRestated 1997 Stock Option Plan allows us to grant options to our employees, directors and advisors, whichgivegives 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 committeeThe Compensation Committee of our Board of Directors administers our stock option plan and it has the sole authority to set the number, exercise price, term and vesting provisions of the options granted under theplan.plan, except that any award made to a director serving on the Compensation Committee must be ratified by a majority of the entire Board of Directors. Under the terms of the plan, the exercise price of an incentive stock option, as defined under the Internal Revenue Code of 1986, as amended, 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. ThecommitteeCompensation 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"The committee establishes these “vesting” provisionsare establishedon an individualbasis by the committee.basis. ThecommitteeCompensation 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 of6,000,0007,000,000 shares may be granted under the plan.As of June 1, 2000, we have issuedOutstanding options for3,690,550a total of 5,541,015 shares of our commonstock. Allstock are outstanding at the Record Date, ofthese options have an exercise price ranging from $5.00 to $13.00 per share, except that options to acquire shares of common stock with an aggregate fixed cost of $75,000 issued to Jeffrey Sklar, Ph.D., a non-employee director,which 4,396,281 may be exercised atthe lower of $5.00this time. Outstanding options have exercise prices ranging from $1.00 to $13.00 pershare for 15,000 shares or 50% of the price of our common stock in this offering. See "Director Compensation" above.share.Under the terms of our stock option plan, any options not vested will become immediately vested if the option holder dies, becomes permanently disabled or
retires any options not vested at such time will become immediately vested.retires. If an option holder voluntarily resigns, any options not vested as of the date of resignation will terminate and all rights will cease,unlessas determined by thecompensation committee determines otherwise.Compensation Committee and documented in the option grant documents. In the event an optionholder'sholder’s employment, board membership or status as an advisor is terminated for cause, the optionholder'sholder’s right to exercise an option, whether or not vested, will immediately terminate and all rights will cease, unless thecompensation committeeCompensation Committee determines otherwise.EMPLOYEE SAVINGS PLAN.Employee Savings Plan. We have
alsoestablished 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. Duringtheeach of three years ended December 31,1997, 1998 and 1999,2004, we contributed$92,733, $117,923 and $174,973approximately $0.5 million to the savings plan on behalf of our employees.LIMITATION OF DIRECTORS AND OFFICERS LIABILITYEmployee Stock Purchase Plan. Our
certificate of incorporation provides that no director will be liable for monetary damages for breachSecond Amended and Restated 2001 Employee Stock Purchase Plan (the “Stock Purchase Plan”) has been structured to qualify as an “employee stock purchase plan” under Section 423 of thedirector's fiduciary duty toInternal Revenue Code of 1986, as amended. Additionally, thecompany or its stockholders, except for liability arising from: - breachStock Purchase Plan authorizes the Compensation Committee of thedirector's dutyBoard ofloyaltyDirectors to adopt sub-plans designed to achieve desired tax and other objectives in locations outside thecompany or its stockholders; - acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; - improper distributionsUnited States. Up tostockholders and improper redemptions of stock; and - transactions from which the director derived an improper personal benefit. 47This provision500,000 shares of ourcertificatecommon stock may be issued during the term ofincorporation does not eliminatethedirectors' fiduciary duties, andStock Purchase Plan that is defined as December 1, 2001 through November 30, 2006. Employees are able to voluntarily participate inappropriate circumstances, equitable remedies includingthe Stock Purchase Plan through payroll deductions. Such deductions accumulate during the participationperiods, defined as three month periods. On the first business day of each participation period, each participant is deemed to have been granted 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 andoption to purchaseinsurancecommon stock at 85% of its fair market value as measured by the closing price of the stock onbehalfeither the first or last business day ofany person we are required or permitted to indemnify. We have obtained directors and officers liability insurance coverage which covers, among other things, liabilities arising undertheSecurities Act. EMPLOYMENT AGREEMENTSparticipation period, whichever is lower. The number of shares purchased is based upon the participant’s elected withholding amount. At the end of each participation period such option is automatically exercised.Employment Agreements
We have entered into employment agreements with our Chief Executive Officer, Collin J.
D'Silva,D’Silva and our Chief Financial Officer,William P. Rasmussen, our Chief Scientific Officer, Douglas T. Gjerde Ph.D. and our Vice-President of Intellectual Property, William R. Walker.Michael A. Summers. The employment agreements with Messrs. D’Silva and Summers requireourthese executives to devote their full time to our business activities, provided that they may serve as directors of or consultants to other companies that do not compete with us and for nonprofit corporations, civic organizations, professional groups and similar entities.OurThese executives are not allowed to compete with us during the term of their employment and foraone year after they are no longer our employee. Each agreement contains provisions under whichourthese executive officers have agreed to maintain the confidentiality of information concerning us and which prohibits them from disclosing confidential information about our business to people outside of thecompanyCompany, except for proper business purposes.Each of theThe employment
agreementsagreement with Mr.D'Silva and Dr. GjerdeD’Silva has a term of 22 months expiring December 2006. The employment agreement with Mr. Summers has an initial term offourthree yearsandexpiring July 2007. Each of these agreements may be extended unless we orMr. D'Silva or Dr. Gjerde,the employee, as the case may be, give notice of an intention not to renew.The employment agreement with Mr. Walker has an initial term of two years and will automatically renew for an additional two-year period unless Mr. Walker or we give notice of an intention not to renew. The employment agreement with Mr. Rasmussen has an initial term of one year.If one ofourthese officers 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 basesalary for an amount equal to twelve months' salary, except for Mr. Walker who will be entitled to severance pay in an amount equal to his then current base salary plusannual salary.PRINCIPAL AND SELLING STOCKHOLDERS
Principal Shareholders
This table shows the
amount of the previous year's bonus, provided that such severance payment does not exceed 299% of his current salary. In addition, if Mr. Walker dies or becomes permanently disabled, he will receive an amount equal to six months of salary. 48PRINCIPAL STOCKHOLDERS The following table provides information concerningbeneficial ownership of our common stockas of June 1, 2000, by: - each ofby our directors, for our current executive officers who are namedexecutive officers; - each of our directors; -in the Summary Compensation Table, by all of ourdirectors andcurrent executive officers and directors as agroup;group, and-by eachstockholder thatperson weknowbelieve beneficially owns more than 5% of our outstanding common stock on or about the date of this Prospectus. Each stockholder named in this table has sole voting and investment power over the shares he beneficially owns and all such shares are owned directly by the stockholder unless otherwise indicated. Stock ownership information of persons other than our executive officers and directors is based on available information, including but not limited to, Schedules 13D, 13F or 13G filed with the Securities and Exchange Commission.
Name
Number of Shares
Beneficially OwnedPercent
of Class (1)Directors and Executive Officers
Collin J. D’Silva, Director, President and Chief Executive Officer
4,739,488 (2) 9.6 % Michael A. Summers, Chief Financial Officer
116,667 (3) * Mitchell L. Murphy, Vice President, Secretary and Treasurer
168,667 (4) * Gregory J. Duman, Director
240,400 (5) * Jeffrey L. Sklar, M.D., Ph.D., Director
24,000 (6) * Roland J. Santoni, Director
25,000 (7) * Parag Saxena, Director
0 (8) * Gregory T. Sloma, Director
10,000 (9) * All directors and executive officers as a group (8 persons)
5,324,222 (10) 10.8 % Other Stockholders/Beneficial Owners
Kopp Investment Advisors, Inc.
9,595,430 (11) 19.5 % David M. Knott
5,024,867 (12) 9.9 % Mazama Capital Management, LLC
3,792,948 (13) 7.7 % LB I Group Inc.
3,960,396 (14) 8.1 % Michael A. Roth and Brian J. Stark
2,722,772 (15) 5.5 % Perceptive Life Sciences Master Fund, Ltd.
2,772,277 (16) 5.6 %
* Represents less than 1% of the outstanding Common Stock of the Company.
(1) Applicable percentage ownership is based on 49,172,079 shares of common stock outstanding as of November 29, 2005, together with securities presently exercisable or convertible into shares of common stock and securities that the holder, as of November 29, 2005, had the right to exercise or convert into shares of common stock within sixty (60) days. Securities that are exercisable or convertible as described above are deemed to be outstanding and beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Consists of 2,771,538 shares owned by Mr. D’Silva, 1,400,000 shares owned by the Arthur P. D’Silva Trust, of which Collin J. D’Silva is the sole trustee, 484,616 shares owned by D’Silva, LLC, of which Mr. D’Silva is the managing member and vested options to purchase 83,334 shares at $1.03 per share. Mr. D’Silva also holds unvested options to purchase an additional 166,666 shares at $1.03 per share.
(3) Consists of vested options to purchase 66,667 shares at $1.09 per share and 50,000 shares at $1.03 per share. Mr. Summers also holds unvested options to purchase an additional 33,333 shares at $1.09 per share and 100,000 shares at $1.03 per share.
(4) Consists of 4,000 shares owned by Mr. Murphy and vested options to purchase 50,000 shares at $5.00 per share, 10,000 shares at $11.94 per share, 2,500 shares at $9.91 per share, 8,000 shares at $6.38 per share, 27,500 shares at $6.24 per share, 50,000 shares at $1.92 per share and 16,667 shares at $1.03 per share. Mr. Murphy also holds unvested options to purchase an additional 2,000 shares at $6.38 per share and 33,333 shares at $1.03 per share.
(5) Consists of 25,400 shares owned by Mr. Duman and vested options to purchase 15,000 shares at $10.00 per share and 200,000 shares at $6.00 per share. Mr. Duman also holds unvested options to purchase an additional 5,000 shares at $2.57 per share.
(6) Consists of vested options to purchase 15,000 shares at $5.00 per share and 9,000 shares at $13.00 per share. Dr. Sklar also holds unvested options to purchase an additional 3,000 shares at $6.38 per share, 6,000 shares at $6.16 per share, 5,000 shares at $2.57 per share and 5,000 shares at $1.09 per share.
(7) Consists of 2,500 shares owned by Mr. Santoni and vested options to purchase 17,500 shares at $10.00 per share and 5,000 shares at $2.57 per share. Mr. Santoni also holds unvested options to purchase an additional 3,000 shares at $6.16 per share, 3,000 shares at $6.00 per share and 5,000 shares at $2.57 per share.
(8) Mr. Saxena holds unvested options to purchase 15,000 shares at $1.09 per share.
(9) Consists of vested options to purchase 10,000 shares at $2.57 per share. Mr. Sloma also holds unvested options to purchase an additional 5,000 shares at $2.57 per share.
(10) Includes vested options to acquire 636,168 shares of common stock.
(11) The address of Kopp Investment Advisors, Inc. is 7701 France Avenue South, Suite 500, Edina, Minnesota 55435.
(12) Consists of 3,960,396 shares of common stock held in the names of Knott Partners, L.P.; Matterhorn Offshore Fund Ltd; Common Fund Hedged Equity Company; Shoshone Partners, L.P.; Anno, L.P.; and Good Steward Trading Company (collectively, the “Knott Companies”) and warrants to purchase an additional 1,064,471 shares at $1.20 per share. These shares are beneficially owned by David M. Knott and Dorset Management Corporation. The address of David M. Knott and Dorset Management Group is 485 Underhill Boulevard, Suite 205, Syosset, New York 11791. In addition to the foregoing shares and warrants, the Knott Companies hold warrants to purchase an additional 519,687 shares at $1.20 per share. These warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(13) The address of Mazama Capital Management, LLC is One Southwest Columbia Street, Suite 1500, Portland Oregon 97258.
(14) Consists of 3,960,396 shares of common stock held in the name of LB I Group Inc. Lehman Brothers Holdings Inc. beneficially owns these shares along with Lehman Brothers Inc. and LB I Group Inc. The address of each of these beneficial owners is 745 Seventh Avenue, New York, New York 10019. In addition to these shares, LB I Group Inc. holds warrants to purchase an additional 1,584,158 shares at $1.20 per share. These warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 4.9% and 9.9% of the Company’s common stock.
(15) Consists of 2,722,772 shares of common stock held in the name of SF Capital Partners Ltd. The named individuals are the managing members of Stark Offshore Management, LLC, which is the investment manager of SF Capital Partners Ltd. and has sole voting and dispositive power over the shares. The named individuals have disclaimed beneficial ownership of the shares. The address for the named individuals is 3600 South Lake Drive, St. Francis, Wisconsin 53235. In addition to these shares, SF Capital Partners Ltd. holds warrants to purchase an additional 1,089,109 shares at $1.20 per share. These warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 4.9% and 9.9% of the Company’s common stock.
(16) Consists of 1,980,198 shares owned by Perceptive Life Sciences Master Fund, Ltd. and warrants to purchase an additional 792,079 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock. The address of Perceptive Life Sciences Master Fund, Ltd. is c/o Perceptive Advisors, 7284 W. Palmetto Park Road, Suite 306, Boca Raton, Florida 33433. Selling Stockholders
The shares offered by this Prospectus may be sold from time to time by the selling stockholders named in the following table. The number of shares these selling stockholders are offering under this Prospectus will be adjusted to reflect any additional shares of common stock which may become issuable to the selling stockholders by reason of any stock dividend, stock split or other similar transaction effected without the receipt of consideration and which results in an increase in the number of our outstanding shares of common stock or which otherwise increases the number of shares issuable upon conversion of the loan proceeds or upon the exercise of the warrants under which such shares may by issued.
The following table
assumesalso sets forth theexercisetotal number ofwarrants for 300,000shares of our common stock beneficially owned by each of the selling stockholders and the percentage of our total outstanding shares of common stock thatwill be issued at $5.00 per share immediately prior to completion of this offering. See "Description of Capital Stock--Warrants." Basedeach selling stockholder beneficially owns. Percentage ownership is based oninformation 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)................................. 4,906,154 36.8% 28.3% William P. Rasmussen(2).............................. 65,000 * * Douglas T. Gjerde, Ph.D.(3).......................... 2,500,000 16.9 13.3 John E. Doyle(4)..................................... 45,000 * * Kraig McKee(5)....................................... -- * * William Walker(6).................................... 25,000 * * Mitchell L. Murphy(7)................................ 14,000 * * Stephen F. Dwyer(8).................................. 2,986,000 22.4 17.2 Jeffrey Sklar, M.D., Ph.D.(9)........................ 9,000 * * Gregory Duman(10).................................... 25,000 * * Roland J. Santoni(11)................................ -- * * Parag Saxena......................................... -- * * All executive officers and directors as a group (12 persons)....................................... 10,575,154 70.7 55.8 OTHER STOCKHOLDERS Arthur P. D'Silva(12)................................ 1,093,846 8.2 6.3 INVESCO Private Capital, Inc.(13).................... 2,455,380 15.6 12.4- ------------------------ * 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 and 484,616 shares owned by D'Silva, LLC of which Mr. D'Silva is the managing member. (2) Includes vested options to purchase 20,000 shares at $5.00 per share and 25,000 shares at $13.00 per share. Mr. Rasmussen holds unvested options to purchase an additional 30,000 shares at $5.00 per share and 25,000 shares at $13.00 per share. (3) Includes an option to purchase 1,500,000 shares at $5.00 per share. (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. 49(5) Mr. McKee holds unvested options to purchase 20,000 shares at $5.00 per share. (6) 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. (7) 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. (8) Includes 500,000 shares owned by Nancy A. Dwyer, Mr. Dwyer's wife. (9) Dr. Sklar holds options to acquire shares of common stock with an aggregate fixed cost of $75,000 which may be exercised at the lesser of (a) $5.00 per share for 15,000 shares or (b) 50% of the initial public offering price, of which 66.67%, or 9,000 shares, as of this date, are vested and exercisable. Dr. Sklar holds unvested options to buy 6,000 additional shares, as of this date, at such price. In addition, Dr. Sklar holds unvested options to purchase 9,000 shares at $13.00 per share. (10) 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. (11) Mr. Santoni holds unvested options to purchase 17,500 shares at $10.00 per share. (12) Includes 783,000 shares owned by the Cecilia F. D'Silva Residuary Trust, of which Arthur P. D'Silva is co-trustee. 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. (13) Consists of shares of common stock that would be issued upon conversion of $10,800,000 principal amount of convertible notes and accrued interest at an assumed conversion price of $5.00 per share. These convertible notes are held by entities affiliated with INVESCO Private Capital, Inc. which disclaims beneficial ownership ofthe shares of our common stock outstanding on or about the date of this Prospectus plus the shares thatwillmay be issuedupon conversion of these notes. The address of INVESCO Private Capital, Inc. is 1166 Avenueto certain of theAmericas, New York, New York 10036. 50RELATED PARTY TRANSACTIONS On May 19, 2000, weselling stockholders and which may be soldthe assets related to our non-life sciences instrument product line to SD Acquisition Inc., a company controlled by Stephen F. Dwyer, a director and a principal stockholderunder this Prospectus. The estimate ofours. These assets consisted of inventory, property, plant and equipment, patents, other intellectual property rights and a lease deposit, with an aggregate book value, net of $125,000 of accrued liabilities, of approximately $4.7 million as of March 31, 2000. These assets were sold for a total adjusted purchase price of $5.65 million plus reimbursementshares owned after this offering assumes that all shares offered by thebuyerProspectus are sold. These estimates may prove to be inaccurate because the selling stockholders may offer all or some ofapproximately $400,000their shares and because there are no agreements, arrangements or understandings with respect to the sale ofexpenses paid by us since March 31, 2000 in connection with this product line. Approximately $4,000,000 was paid in cash at the closing and $2,000,000 was paid with an interest-bearing promissory note due on December 30, 2000. The note bears interest at a rate of 8.75% per annum. The purchaser financed the cash portionany of thepurchase price for these assets plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. We have agreed with the bank that weshares.
Shares Beneficially Owned
Prior to the OfferingShares Beneficially Owned
After the OfferingName
Number Percentage(1) Shares
to be SoldNumber Percentage Laurus Master Fund, Ltd.(2)
1,075,000 2.1 % 1,075,000 0 * TN Capital Equities, Ltd.(3)
61,484 * 61,484 0 * Kopp Emerging Growth Fund(4)
9,595,430 19.5 % 2,050,000 7,545,430 15.3 % Oppenheimer & Co. Inc.(5)
932,859 1.9 % 932,859 0 * LB I Group Inc.(6)
3,960,396 8.1 % 5,544,554 0 * Knott Partners, L.P.(7), (8)
1,990,800 4.0 % 1,990,800 0 * Matterhorn Offshore Fund Ltd.(7), (9)
2,181,754 4.4 % 2,181,754 0 * Common Fund Hedged Equity Company(7),(10)
249,200 * 249,200 0 * Shoshone Partners, L.P.(7), (11)
989,800 2.0 % 989,800 0 * Anno, L.P.(7), (12)
62,300 * 62,300 0 * Good Steward Trading Company(7), (13)
70,700 * 70,700 0 * SF Capital Partners Ltd.(14)
2,722,772 5.5 % 3,811,881 0 * Perceptive Life Sciences Master Fund, Ltd.(15)
2,772,277 5.6 % 2,772,277 0 * Iroquois Master Fund Ltd.(16)
1,732,674 3.5 % 1,732,674 0 * Saffron Capital Int’l Fund Ltd.(17)
693,070 1.4 % 693,070 0 * RAQ, LLC(18)
346,535 * 346,535 0 * Omicron Master Trust(19)
346,535 * 346,535 0 * Endeavor Asset Management, L.P.(20)
103,960 * 103,960 0 *
* less than 1%
(1) Applicable percentage ownership is based on 49,172,079 shares of common stock outstanding as of November 29, 2005, together with securities presently exercisable or convertible into shares of common stock and securities that the holder, as of November 29, 2005, had the right to exercise or convert into shares of common stock within sixty (60) days. Securities that are exercisable or convertible as described above are deemed to be outstanding and beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Shares to be sold consist 1,075,000 shares issuable upon the exercise of warrants. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 4.99% of the Company’s common stock. However, Laurus may elect to waive the 4.99% limitation with 75 days notice.
(3) All shares to be sold and beneficially owned represent shares issuable upon the exercise of warrants. TN Capital Equities, Ltd. (“TerraNova”) served as broker for the agreements entered into between the Company and Laurus. Warrants were issued to TerraNova as partial compensation for their services as broker.
(4) Kopp Investment Advisors, LLC acts as the advisor to Kopp Emerging Growth Fund. Voting and dispositive power over the shares held by Kopp Emerging Growth Fund are exercised by a portfolio management committee of Kopp Investment Advisors, LLC presently consisting of LeRoy Kopp, Sally Anderson and Steven Crowley.
(5) All shares to be sold and beneficially owned represent shares issuable upon the exercise of warrants. Oppenheimer & Co. Inc. (“Oppenheimer”) served as placement agent for the private placement of securities to various institutional investors which closed on October 31, 2005. Warrants were issued to Oppenheimer as partial compensation for their services as placement agent.
(6) Lehman Brothers Holdings Inc., Lehman Brothers Inc. and LB I Group Inc. have voting and dispositive power over these shares. Shares beneficially owned consist of 3,960,396 shares of common stock held in the name of LB I Group Inc. Shares to be sold also include warrants to purchase an additional 1,584,158 shares at $1.20 per share. These warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 4.9% and 9.9% of the Company’s common stock.
(7) David M. Knott and Dorset Management Group have sole or shared voting and dispositive power over these shares and warrants.
(8) Shares owned and to be sold consist of 1,422,000 shares of common stock and warrants to purchase an additional 586,800 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(9) Shares owned and to be sold consist of 1,558,396 shares of common stock and warrants to purchase an additional 623,358 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(10) Shares owned and to be sold consist of 178,000 shares of common stock and warrants to purchase an additional 71,200 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(11) Shares owned and to be sold consist of 707,000 shares of common stock and warrants to purchase an additional 282,800 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(12) Shares owned and to be sold consist of 44,500 shares of common stock and warrants to purchase an additional 17,800 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(13) Shares owned and to be sold consist of 50,500 shares of common stock and warrants to purchase an additional 20,200 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(14) Michael A. Roth and Brian J. Stark, as managing members of Stark Offshore Management, LLC, which is the investment manager of SF Capital Partners Ltd., have sole voting and dispositive power over these shares. Shares beneficially owned consist of 2,722,772 shares of common stock held in the name of SF Capital Partners Ltd. Shares to be sold also include warrants to purchase an additional 1,584,158 shares at $1.20 per share. These warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 4.9% and 9.9% of the Company’s common stock.
(15) Consists of 1,980,198 shares owned by Perceptive Life Sciences Master Fund, Ltd. and warrants to purchase an additional 792,079 shares at $1.20 per share. The warrants are subject to a conversion cap which precludes the holder thereof from exercising such warrants to the extent that such owner would beneficially own in excess of 9.9% of the Company’s common stock.
(16) Shares owned and to be sold consist of 1,237,624 shares of common stock and warrants to purchase an additional 495,050 shares at $1.20 per share.
(17) Shares owned and to be sold consist of 495,050 shares of common stock and warrants to purchase an additional 198,020 shares at $1.20 per share.
(18) Shares owned and to be sold consist of 247,525 shares of common stock and warrants to purchase an additional 99,010 shares at $1.20 per share.
(19) Shares owned and to be sold consist of 247,525 shares of common stock and warrants to purchase an additional 99,010 shares at $1.20 per share.
(20) Shares owned and to be sold consist of 74,257 shares of common stock and warrants to purchase an additional 29,703 shares at $1.20 per share. Each selling stockholder acquired, or will acquire, the
notes evidencing these loans from it upon closing of this offering by paying to the bank an amount equal to the entire principal balance of the loans plus accrued and unpaid interest. If this offering is not completed, we are under no obligation to acquire these notes. The acquired notes will mature on December 30, 2000 and will bear interest at a rate of 8.75% per annum. Mr. Dwyer has agreed to pledge 1,200,000 shares of common stock owned by him to us in order to secure payment of principal and interest on the notes. All of these shares will be held in an escrow account as security for the notes. We anticipate that we will exercise our right to cause theseshares to be soldon Mr. Dwyer's behalf in order to pay principal and interest on the notes when due, subject to Mr. Dwyer's 180-day lock-up agreement. Since early 1999, we have had discussions with potential purchasers of the assets relating to our non-life sciences product line, each of which was unaffiliated with us. In some cases, our management approached companies that we identified as potential purchasers of these assets based on the nature of their existing businesses. In other cases, these discussions were unsolicited. Based on our knowledge of the industry, our management believes that we contacted the most likely buyers of these assets. As a result, we did not engage any business brokers or finders, nor did we use any advertising to locate a buyer for these assets. These discussions resulted in a single offer, other than Mr. Dwyer's. This offer specified a total purchase price of $4,000,000 and would have required us to assume employee severance and other windup costs. Since this was an arm's-length offer, we believe that it represented a fair market valuation of these assets. In addition, we considered the book value of these assets to be a reasonable approximation of their fair market value. Therefore, we did not obtain an independent appraisal of these assets. The purchase price and other terms of the transaction were determined through negotiation between us and Mr. Dwyer and was approvedbyour disinterested directors. We will continue to sublease office space in our current building from SD Acquisition Inc. until our new headquarters facility is ready for occupancy. We expect to acquire peripheral components of our WAVE System,suchas the autosampler, from SD Acquisition Inc., although we have no agreement to do so. All components will be acquired at market prices. We may purchase any or all of these components from other suppliers. Mr. Dwyer will act as a consultant to us for a one-year period. We will pay Mr. Dwyer a retainer of $70,000 for serving in this capacity. On February 10, 2000, we borrowed $204,190 from Stephen F. Dwyer. We delivered an unsecured promissory note for this loan which bears interest at a rate of 9.75% per annum and is payable on August 10, 2000. 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 Partnersselling stockholder in thedevelopmentordinary course ofminiature solid-state optical 51spectrometry technologybusiness and, at the time of acquisition of such shares, no selling stockholder had any agreement or understanding, directly or indirectly, towhich 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. While we believe the terms of this transaction represent the fair value of the acquired technology, neither we nor CT Partners obtained an independent valuation of the technology or took any other steps to determine what an unaffiliated party would have paid for this 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. Parag Saxena, one of our directors, is the managing partner of INVESCO Private Capital, Inc., the general partner of five limited partnerships that purchased a total of $10,000,000 of our convertible notes on March 23, 1999. Two other affiliates of INVESCO Private Capital, Inc. hold $800,000 of our convertible notes. Under the terms of an Investor Rights Agreement, dated March 23, 1999, among us, Collin J. D'Silva and the holders of our convertible notes, Mr. D'Silva has agreed to vote his shares for the election of one person designated by the note holders to our board of directors. Mr. Saxena has been elected to our board of directors pursuant to this agreement. Upon completion of this offering, the Investor Rights Agreement will terminate and Mr. D'Silva will be under no further obligation to vote in this manner.distribute such shares.DESCRIPTION OF CAPITAL STOCK
GENERALGeneral
We can issue up to
60,000,000100,000,000 shares of our common stock and 15,000,000 shares of our preferred stock.ThereAt November 29, 2005, there arecurrently 13,025,00049,172,079 shares of our common stock outstanding.This number will increase to 13,325,000 assuming 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 STOCKCommon 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 preferredstock holdersstockholders have beensatisfied;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 thecompany.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.
52PREFERRED STOCKPreferred 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.the Company. 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, weWarrants
At November 29, 2005, warrants representing 8,062,577 common shares are outstanding at exercise prices ranging from $1.18 to $3.27 per share. These warrants have
issued 452,450 warrantsterms expiring from 2007 topurchase 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 2003.2010. 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.OPTIONS AsAdditionally, the warrants held by Laurus Master Fund, Ltd. contain a provision for the adjustment ofJune 1, 2000,the exercise price and the aggregate number of shares that may be issued upon the exercise of the warrant in the event that wehave issued options to purchase 3,690,550issue shares of our common stock atana price per share which is less than the exercise priceranging from $5.00 to $13.00 per share, except thatin effect at the time of such issuance.Options
At November 29, 2005, options to
acquirepurchase 5,541,015 sharesof common stock with an aggregate fixed cost of $75,000 issued to one of our non-employee directors may be exercised at the lower of $5.00 per share for 15,000 shares or 50% of the priceof our common stockin this offering.are outstanding at exercise prices ranging from $1.00 to $13.00 per share. Additional options to acquire2,309,450705,216 shares of common stock may be issued in the future under our Stock Option Plan.CONVERTIBLE NOTES In March 1999, we issued $12,000,000Anti-takeover Provisions of
our convertible notes to a group of investors. The convertible notes will be dueDelaware Law andpayable 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 a merger, a sale of all assets, change of control or a liquidation of the company were to occur prior to the completion of this offering, the note holders will have the right to convert their notes into stock. 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 53amount 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 (calculated on a per share basis using the number of shares then issuable upon conversion) equal or exceed $13.72 per share. The following is an example of this calculation:
EXAMPLE 1 EXAMPLE 2 --------- ---------Assumed average trading price over 20 days: $13.25 $13.00 - assumed total interest on notes: $1,641,000 - assumed number of shares to be issued upon note conversion: 2,728,200 Assumed interest per share: $ .60 $ .60 ------ ------ Total $13.85 $13.60 ------In the first example, we would have the right to cause the notes to be converted into common stock. We would not have this right in the second example. 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. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS DELAWARE LAW.Charter ProvisionsDelaware 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'sstockholder’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 thoseshares 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 -
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.54Section 203 defines
"business combination"“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.Charter Provisions
Our
SecondThird Amended and Restated 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"“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. Fifth, our certificate of incorporation prohibits a business combination with an interested stockholder without the approval of the holders of 75% of all voting shares and the vote of a majority of the voting shares held by disinterested stockholders, unless it has been approved by a majority of the disinterested directors. Finally, our bylaws establish procedures, including advance notice procedures, with regard to the nomination of candidates for election as directors and stockholder proposals. 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, Minnesota, N.A., (which will becomeTransfer Agent and Registrar
Wells Fargo Bank Minnesota,
National Association in July 2000)N.A. has been appointed as the transfer agent and registrar for our common stock.NATIONAL MARKET LISTING We have applied for listingNational Market Listing
Our common stock is listed on the Nasdaq Stock Market’s National Market under the symbol TBIO.
The selling stockholders and any of their pledges, assignees, donees selling shares received from such selling stockholders as a gift, and successors-in-interest may, from time to time, sell any or all of their shares of our common stock on any stock exchange, market or trading facility on which the
Nasdaq Stock Market's National Market under the symbol TBIO. SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Sales of substantial amounts of our common stockshares are traded or inthe 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, 17,325,000 shares of our common stock willprivate transactions. These sales may beoutstanding, assuming the exercise of warrants to acquire 300,000 shares of common stock that will expireatthe closing of this offering and 55also assuming that the underwriters do not exercise the over-allotment option. Of these shares, allfixed or negotiated prices. The selling stockholders may use any one or more of the4,000,000following methods when selling shares:ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;block trades in which the broker-dealer will attempt to sell the sharessoldas agent but may position and resell a portion of the block as principal to facilitate the transaction;purchases byusa broker-dealer as principal and resale by the broker-dealer for its account;an exchange distribution inthis offering will be freely tradable without restriction or further registrationaccordance with the rules of the applicable exchange;privately negotiated transactions;broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;a combination of any such methods of sale; andany other method permitted pursuant to applicable law.The selling stockholders may also sell shares under
the Securities Act, unless these shares are purchased by "affiliates" as that term is defined inRule 144 under the SecuritiesAct.Act of 1933, as amended, if available, rather than under this Prospectus.Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The
remaining 13,325,000 shares of common stock are "restricted securities" as that termselling stockholders do not expect these commissions and discounts to exceed what isdefined in Rule 144 under the Securities Act. We may also issue up to 2,858,438 shares of common stock upon the conversion of our convertible notes and accrued interest thereon. These shares, if issued, will also be restricted securities. Restricted securities may be soldcustomary in thepublic 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. We have agreed to register sharestypes ofour common stock and warrants for resale by some of ourtransactions involved.The selling stockholders and
warrant holders. See "Registration Rights and Stock Plans," below. The following table indicates approximately when the 13,325,000 shares of our common stockany broker-dealers or agents that arenot being soldinvolved inthis offering but which may be outstanding when this offering is complete will be eligible for sale inselling thepublic market: ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
At effective date........................................... 1,511,500 Before 90 days after the effective date..................... 310,000 At 90 days after the effective date......................... 160,500 At 180 days after the effective date........................ 11,343,000As described under "Lock-Up Agreements" below, 11,343,000 of these restricted shares are subject to lock-up agreements and may not be sold for 180 days after the date of this prospectus without the consent of Chase Securities Inc. Most of these shares will remain subject to volume and other resale restrictions under Rule 144 after that date because they are owned by our affiliates. The holders of our convertible notes have also signed 180-day lock-up agreements relating to shares of our common stock that will be issued upon conversion of those notes. 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 173,250 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. 56RULE 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 the holding period and other restrictions contained in Rule 144. LOCK-UP AGREEMENTS Our directors, officers and some of our existing stockholders owning collectively 11,343,000 shares of our common stock (including the person entitled to obtain 300,000 shares of common stock upon the exercise of a warrant that will expire upon completion of this offering) plus the persons entitled to obtain stock upon the 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, except for transfers to members of their immediate families or entities they control. Transfers or dispositions can be made prior to the end of the 180-day period with the prior written consent of Chase Securities Inc. or its successors. REGISTRATION RIGHTS AND STOCK PLANS Concurrently with this offering, we are registering an additional 152,450 shares of our common stock and warrants to purchase 152,450 shares of our common stock. These shares and warrants are being registered by us at the request of the holders thereof. We issued these warrants to the placement agents engaged by us in connection with a private offering of our common stock in 1997 and 1998. The 152,450 shares that we will issue to these placement agents upon the exercise of their warrants are not included in the 17,325,000 shares that are assumed to be outstanding after the completion of this offering because we do not know if they will be exercised by their holders and we do not have the right to compel their exercise. These warrants have an exercise price equal to $5.00 per share. Registration of the shares and warrants described above is expected to become effective at the same time as the registration statement filed by us in connection with this offering. Once registered, the warrants to purchase 152,450 shares of our common stock, and the shares issuable upon the exercise of these warrants, if any, will be freely tradable in the public market. We have also agreed to register up to 2,858,438 shares of common stock at the request of the holders of our convertible notes (which is the maximum number of shares into which the notes may be converted) and 300,000 shares that will be issued upon exercise of a warrant. Because this warrant will expire if not exercised prior to the closing of this offering, and the holder has indicated that he intends to exercise the warrant, the 300,000 shares issuable upon exercise of this warrant are included in the 17,325,000 shares that are assumed to be outstanding after completion of this offering. The shares issuable upon conversion of the notes are not included in the 17,325,000 shares that are assumed to be outstanding after the offering because we do not know if the notes will be converted and we do not have the right to compel a conversion of the notes in all cases. All shares issuable upon conversion of the convertible notes and upon exercise of this warrant are subject to 180-day lock-up agreements described above. See "Lock-Up Agreements." It is anticipated that the registration of these shares will be effective prior to the expiration of the 180-day lock-up period so that these shares will be freely tradable in the public market at that time. As described under "Related Party Transactions," we have sold the assets of our non-life sciences instrument product line to a company controlled by Stephen F. Dwyer. At the closing of this sale, we received approximately $4.0 million in cash and a promissory note for $2.0 million. The purchaser financed the cash portion of the purchase price for these assets plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. We have agreed with the bank that we will acquire the notes evidencing these loans from them upon closing of this offering by paying them an amount equal to the entire principal balance of the notes plus accrued and unpaid interest. Mr. Dwyer has agreed to pledge 1,200,000 of his shares of our common stock to us in order to secure the payment of principal and interest 57under each of these notes. We anticipate that we will exercise our right to cause these shares to be sold in order to pay principal and interest on the notes when due, subject to Mr. Dwyer's 180-day lock-up agreement. The number of shares actually sold will depend on the prevailing price of our stock at the time of the sale or sales. In that regard, we intend to register these 1,200,000 shares under the Securities Act and to list these shares on the NASDAQ Stock Market. Other holders of a total of 2,000,000 shares of our common stock sold in a private offering by us in 1997 and 1998 also have the right to require us to register their shares for resale under the Securities Act. None of these stockholders has requested registration of their common stock at this time. Any such stockholder who requests registration will be subject to the lock-up agreements described above. 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 June 1, 2000, options to purchase 3,690,550 shares of common stock were issued and outstanding, 2,230,000 of which are currently vested. 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. 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 commonshares may beaffected 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. 58For purposes of this discussion, dividends and gain on the sale, exchange or other disposition of common stock will be considereddeemed 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 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 may be denied to foreigners receiving income derived through a partnership, or otherwise fiscally transparent entity. 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. 59GAIN 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 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. 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,"“underwriters” within the meaning of theInternal 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 ownedSecurities Act in connection with such sales. In such event, any commissions received by such broker-dealers ortreated 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 purposesagents andmay 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. 60Currently, 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 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 may require information reportingany profit on thepayment unless the broker maintains documentary evidence that the holder is a non-U.S. holder. 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. 61UNDERWRITING 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 normal conditions, such as the absence of any material adverse change in our business and the receipt of 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........................................ $ 0.91 $ 0.91 Total............................................ $3,640,000 $4,186,000We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $1,500,000. 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 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 other dealers. After the initial public offeringresale of the sharesthe offering price and other selling termspurchased by them may bechangeddeemed to be underwriting commissions or discounts under the Securities Act.We are required to pay all fees and expenses incident to the registration of the shares, including certain fees and disbursements of counsel to the selling stockholders. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
To the extent required, we will amend or supplement this Prospectus to disclose material arrangements regarding the plan of distribution.
To comply with the securities laws of certain jurisdictions, registered or licensed brokers or dealers may need to offer or sell the shares offered by this Prospectus. The applicable rules and
regulations under the
underwriters. The representatives have informed us that the underwriters do not intend to confirm discretionary salesSecurities Exchange Act ofmore than 5%1934, as amended, may limit any person engaged in a distribution of the shares of common stockofferedcovered by this Prospectus inthis offering. We have grantedits ability tothe underwriter an option, exercisable no later than 30 days after the date of this prospectus,engage in market activities with respect topurchase upsuch shares. A selling stockholder, for example, will be subject to600,000 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, eachapplicable provisions of theunderwriters 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. 62We have agreed to indemnify the underwriters for misrepresentations and omissions made by us in connection with this Offering, including liabilities under the SecuritiesExchange Act andfor liability relating tothedirected salerules and regulations under it, which provisions may limit the timing ofstock to our directors, officers, employees, business associatespurchases andrelated persons described below. We have also agreed to contribute to payments the underwriters may be required to make in respect of these liabilities. Our executive officers, directors and stockholders who will own in the aggregate 11,343,000 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 disposesales of any shares of common stockor 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.by that selling stockholder.The
holders of our convertible notes have also signed 180-day lock-up agreements relating to shares of our common stock that will be issued upon conversion of their notes. 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. 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 63owned 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. 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 Theconsolidated financial statements as of December 31,19982004 and19992003 and for each of the three years in the period ended December 31,19992004 included in thisprospectusProspectus have been audited by Deloitte & Touche LLP, an independentauditors,registered public accounting firm, as stated in their report (which report expresses an unqualified opinion and includes explanatory paragraphs relating to an extension of the waiver of the borrowing base limit through March 31, 2006 and the restatement of the Company’s consolidated statements of cash flows for the years ended December 31, 2004 and 2003), appearing herein andarehave been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.64The validity of the common stock offered by this Prospectus has been passed upon for us by Kutak Rock LLP, Omaha, Nebraska.
WHERE YOU CAN FIND MORE INFORMATION
We
have filedfile annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commissiona registration statement on Form S-1 under(the “SEC”). You may read and copy theSecurities 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. The exhibits to the registration statement include the full text of contracts, agreements and other documents described in this prospectus. You should refer to these exhibits when reading the descriptions of these documents contained in this prospectus. The registration statement and the exhibits and schedules thereto may be inspected without chargematerials we file at thepublic reference facilities maintained by the Commission inSEC’s Public Reference Room1024, 450 Fifthat 100 F Street,N.W.N.E., Washington, D.C. 20549,andas well as at thefollowingSEC’s regionaloffices of the Commission: Seven World Trade Center, Room 1400, New York, New York 10048 andoffice at Citicorp Center, 500 West Madison Street,SuiteRoom 1400, Chicago, Illinois60661. Copies of such materials can be obtained from the Public Reference Section of60661-2511. Please call the Commission at450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at prescribed rates. The public may obtain1-800-SEC-0330 for further information on the operation of the Public ReferenceRoom by callingRooms. Our SEC filings are also available to theSEC at 1-800-SEC-0330. In addition, we are required to file electronic versions of these documents withpublic from theCommission throughSEC’s World Wide Web site on theCommission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains an internet siteInternet at http://www.sec.gov thatwww.sec.gov. This site contains reports, proxy and information statements and other information regardingregistrantsissuers that file electronically with theCommission.SEC.We
intendmake reports filed by us with the SEC available free of charge on our website as soon as reasonably practical after these reports are filed. We maintain a site on the World Wide Web at www.transgenomic.com. The information contained in our website is not part of this Prospectus and you should not rely on it in deciding whether tofurnish toinvest in ourstockholders 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. 65common stock. TRANSGENOMIC INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------Page No. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of September 30, 2005
F-1 F-2 F-3 Notes to Unaudited Condensed Consolidated Financial
Statements:StatementsF-4 CONSOLIDATED FINANCIAL STATEMENTS
F-14 F-15 F-16 F-17 F-18 F-19 F-1UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEETS AS OF DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
DECEMBER 31, MARCH 31, 1999 2000 ------------- -----------ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 153,336 $ 142,870 Accounts receivable, net.................................. 6,199,059 5,083,542 Inventories............................................... 3,918,866 2,318,751 Prepaid expenses and other current assets................. 527,461 677,379 Refundable income taxes................................... 96,000 96,000 Net assets held for sale.................................. -- 4,711,540 ----------- ----------- Total current assets.................................... 10,894,722 13,030,082 PROPERTY AND EQUIPMENT, NET................................. 2,581,139 3,103,511 DEMONSTRATION INVENTORY..................................... 2,124,159 276,318 OTHER ASSETS................................................ 4,363,490 2,419,869 ----------- ----------- $19,963,510 $18,829,780 =========== =========== LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) CURRENT LIABILITIES Notes payable-bank........................................ $ 4,340,000 $ 4,490,000 Current portion of notes payable-other.................... 579,724 547,188 Accounts payable.......................................... 2,827,186 3,944,069 Accrued compensation...................................... 666,219 445,371 Other accrued expenses.................................... 1,111,871 1,236,278 ----------- ----------- Total current liabilities............................... 9,525,000 10,662,906 NOTES PAYABLE-OTHER, LESS CURRENT MATURITIES................ 116,958 34,609 CONVERTIBLE NOTES PAYABLE................................... 12,421,010 12,746,844 COMMITMENTS AND CONTINGENCIES 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 and 13,025,000 shares issued and outstanding in 1999 and 2000........................................ 130,000 130,250 Additional paid-in capital................................ 10,231,595 11,723,578 Unearned compensation..................................... (112,500) (645,074) Accumulated deficit....................................... (12,344,075) (15,841,984) Accumulated other comprehensive (loss) income............. (4,478) 18,651 ----------- ----------- Total stockholders' equity (deficit).................... (2,099,458) (4,614,579) ----------- ----------- $19,963,510 $18,829,780 =========== ===========SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-2SHEET As of September 30, 2005
(Dollars in thousands except per share data)
September 30,
2005ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$ 1,361 Short-term investments
1,556 Accounts receivable (net of allowances for bad debts of $896)
8,729 Inventories
4,101 Prepaid expenses and other current assets
652 Total current assets
16,399 PROPERTY AND EQUIPMENT:
Land and buildings
2,221 Equipment
18,066 Furniture and fixtures
5,833 26,120 Less: accumulated depreciation
15,509 10,611 GOODWILL
638 OTHER ASSETS
4,141 $ 31,789 LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
$ 2,463 Accrued expenses
4,383 Accrued compensation
530 Line of credit
6,935 Current portion of long-term debt
675 Total current liabilities
14,986 Long-term debt
1,226 Total liabilities
16,212 COMMITMENTS AND CONTINGENCIES (Note F)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding
— Common stock, $.01 par value, 60,000,000 shares authorized, 34,246,336 shares outstanding
348 Additional paid-in capital
125,058 Accumulated other comprehensive income
1,051 Accumulated deficit
(110,880 ) Total stockholders’ equity
15,577 $ 31,789 See notes to consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
1999 2000 ----------- -----------NET SALES................................................... $ 5,227,462 $ 6,943,749 COST OF GOODS SOLD.......................................... 2,703,607 3,830,519 ----------- ----------- Gross profit............................................ 2,523,855 3,113,230 OPERATING EXPENSES General and administrative................................ 1,346,453 1,754,741 Marketing and sales....................................... 1,562,168 2,493,849 Research and development.................................. 1,134,963 1,893,581 ----------- ----------- 4,043,584 6,142,171 ----------- ----------- LOSS FROM OPERATIONS........................................ (1,519,729) (3,028,941) OTHER INCOME (EXPENSE) Interest expense, net..................................... (92,917) (468,968) ----------- ----------- LOSS BEFORE INCOME TAXES.................................... (1,612,646) (3,497,909) INCOME TAX EXPENSE (BENEFIT)................................ (634,588) -- ----------- ----------- NET LOSS.................................................... $ (978,058) $(3,497,909) =========== =========== BASIC AND DILUTED LOSS PER SHARE............................ $ (0.08) $ (0.27) =========== =========== BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING....... 13,000,000 13,007,692 =========== ===========SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-3Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
Nine Months Ended
September 30,2005 2004 Net sales
$ 23,711 $ 25,834 Cost of goods sold
13,609 18,484 Gross profit
10,102 7,350 Operating expenses:
Selling, general and administrative
10,023 12,866 Research and development
1,696 5,344 Impairment charges (Notes C and D)
247 11,964 11,966 30,174 Income (Loss) from operations
(1,864 ) (22,824 ) Other income (expense):
Interest expense (Note E)
(1,919 ) (1,684 ) Loss on debt extinguishment
— (2,859 ) Other income (expense), net
31 (161 ) (1,888 ) (4,704 ) Income(loss) before income taxes
(3,752 ) (27,528 ) Current income tax expense (benefit)
27 (94 ) Net income (loss)
$ (3,779 ) $ (27,434 ) Basic and diluted weighted average shares outstanding
32,837,078 28,951,230 Net income (loss) per common share—basic and diluted
$ (0.12 ) $ (0.95 ) See notes to consolidated financial statements.
TRANSGENOMIC INC.
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
ACCUMULATED RETAINED OTHER ADDITIONAL EARNINGS COMPREHENSIVE COMMON PAID-IN NOTE UNEARNED (ACCUMULATED INCOME STOCK CAPITAL RECEIVABLE COMPENSATION DEFICIT) (LOSS) TOTAL -------- ----------- ----------- ------------ ------------ ------------- -----------BALANCE, JANUARY 1, 1999....... $130,000 $10,119,095 $(1,085,931) $ -- $ (2,517,189) $ 3,134 $ 6,649,109 Net loss..................... -- -- -- -- (978,058) (978,058) (978,058) Other comprehensive income (loss): Foreign currency translation adjustment... -- -- -- -- -- (2,139) (2,139) ----------- Comprehensive income (loss)................. -- -- -- -- -- (980,197) -- Note receivable from related party...................... -- -- (14,610) -- -- -- (14,610) -------- ----------- ----------- --------- ------------ ----------- ----------- BALANCE, MARCH 31, 1999........ $130,000 $10,119,095 $(1,100,541) $ -- $ (3,495,247) $ 995 $ 5,654,302 ======== =========== =========== ========= ============ =========== =========== BALANCE, JANUARY 1, 2000....... $130,000 $10,231,595 -- $(112,500) $(12,344,075) $ (4,478) $(2,099,458) Net loss..................... -- -- -- -- (3,497,909) (3,497,909) (3,497,909) Other comprehensive income (loss): Foreign currency translation adjustment... -- -- -- -- -- 23,129 23,129 ----------- Comprehensive income (loss)................. -- -- -- -- -- (3,474,780) -- ----------- Issuance of 59,500 employee stock options.............. -- 297,500 -- (297,500) -- -- -- Issuance of 128,000 nonemployee stock options for services............... -- 371,133 -- (270,991) -- -- 100,142 Acceleration of vesting on 71,700 stock options....... -- 573,600 -- -- -- -- 573,600 Amortization of unearned compensation............... -- -- -- 35,917 -- -- 35,917 Sale of 25,000 common shares..................... 250 249,750 -- -- -- -- 250,000 -------- ----------- ----------- --------- ------------ ----------- ----------- BALANCE, MARCH 31, 2000........ $130,250 $11,723,578 $ -- $(645,074) $(15,841,984) $ 18,651 $(4,614,579) ======== =========== =========== ========= ============ =========== ===========SEE NOTES TOUNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS. F-4TRANSGENOMIC INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
1999 2000 ------------ -----------CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (978,058) $(3,497,909) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization........................... 189,857 453,917 Deferred income taxes................................... (639,886) -- Gain (loss) on sale of assets........................... (10,532) 4,200 Accrued interest and redemption premium................. -- 280,000 Non cash compensation expense........................... -- 709,659 Amortization of deferred financing costs................ -- 45,834 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable................................... (193,903) 1,115,517 Inventories........................................... (1,003,572) (12,964) Prepaid expenses and other current assets............. 5,419 (149,918) Refundable income taxes............................... -- -- Accounts payable...................................... 95,199 1,116,883 Accrued expenses...................................... 20,082 27,762 ------------ ----------- Net cash flows from operating activities............ (2,515,394) 92,981 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (211,805) (341,424) Proceeds from asset sales................................. 11,000 4,200 Increase in other assets.................................. (207,931) (74,467) Purchase of business, net of cash acquired................ (187,294) -- ------------ ----------- Net cash flows from investing activities............ (596,030) (411,691) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock and common stock warrants........ -- 250,000 Net change in note payable-bank........................... (2,675,000) 150,000 Proceeds from notes payable-other......................... -- 204,000 Payments on notes payable-other........................... (104,589) (318,885) Proceeds from convertible notes payable................... 12,000,000 -- Deferred financing costs.................................. (526,944) -- Increase in related party receivables..................... (14,610) -- ------------ ----------- Net cash flows from financing activities............ 8,678,857 285,115 EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH.... (2,137) 23,129 ------------ ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 5,565,296 (10,466) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 187,455 153,336 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 5,752,751 $ 142,870 ============ ===========SEENine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
Nine Months Ended
September 30,2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$ (3,779 ) $ (27,434 ) Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization
3,294 3,607 Impairment charges
247 11,964 Loss on debt extinguishment
— 2,859 Non-cash financing costs
1,298 759 (Gain)/Loss on sale of securities
(9 ) 370 Other
2 12 Changes in operating assets and liabilities:
Accounts receivable
(626 ) (2,469 ) Inventories
960 819 Prepaid expenses and other current assets
650 (69 ) Accounts payable
(912 ) 100 Accrued expenses
(3,101 ) 774 Net cash flows from operating activities
(1,976 ) (8,708 ) CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities and sale of available for sale securities
617 2,768 Purchase of property and equipment
(554 ) (1,250 ) Proceeds from sales of property and equipment
139 — Change in other assets
34 26 Net cash flows from investing activities
236 1,544 CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on line of credit
15,367 19,691 Payments on line of credit
(12,848 ) (13,594 ) Proceeds from long-term debt
— 2,750 Payments on long-term debt
(178 ) (1,729 ) Issuance of common stock, net of expenses
(35 ) 67 Net cash flows from financing activities
2,306 7,185 EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH
(207 ) (137 ) NET CHANGE IN CASH AND CASH EQUIVALENTS
359 (116 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
1,002 1,241 CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 1,361 $ 1,125 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest
$ 491 $ 390 Income taxes, net
27 (94 ) Non-cash transactions:
Available for sale securities received for goods and services
2,099 3,137 Conversions of debt to equity
2,535 2,000 See notes to consolidated financial statements.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS. F-5TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTSTHREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Transgenomic, Inc. and Subsidiaries (the
"Company"“Company”)included hereinhave been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally acceptedaccounting principlesin the United States of America have beencondensed oromitted pursuant to such rules and regulations. In the opinion of management of the Company, all adjustments (consisting of only normal and recurringaccruals)items) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented.The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year.
Although the Company believes that the disclosures are adequate to make the information presented not misleading,
it is suggested thatthese financial statements should be read in conjunction with theDecember 31, 1999consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 that are included elsewhereherein. B. INVENTORIES At December 31, 1999in this Registration Statement.As discussed in Note L, the Company completed a private placement of additional common stock and
March 31, 2000 inventories consistwarrants subsequent to September 30, 2005 which allowed it to repay outstanding indebtedness to Laurus Master Funds Ltd. (“Laurus”) and provided $5,374 in additional working capital. While the Company’s management believes that existing sources of liquidity are sufficient to meet expected cash needs through 2006, the Company has experienced recurring net losses and has historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the extent necessary, the Company’s management believes that they can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of thefollowing:
1999 2000 ---------- ----------Finished goods....................................... $ 157,216 $1,032,867 Raw materials and work in process.................... 2,786,958 1,067,626 Demonstration inventory.............................. 3,098,851 494,576 ---------- ---------- 6,043,025 2,595,069 Less long-term demonstration inventory............... (2,124,159) (276,318) ---------- ---------- $3,918,866 $2,318,751 ========== ==========During the three months ended March 31, 2000,Company’s business plan. Ultimately, the Companyreclassified demonstration inventorymust achieve sufficient revenues in order to generate positive net earnings and cash flows from operations.Business Description
The Company develops, manufactures and sells innovative products for the analysis, synthesis and purification of
$975,198nucleic acids through two operating segments, BioSystems and Nucleic Acids.The BioSystems operating segment develops, assembles, manufactures and markets versatile products and provides analytical services to
propertythe medical research, clinical andequipment. C. NOTE PAYABLE On February 10, 2000pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in theCompany borrowed $204,190United States and throughout much of Western Europe. For the rest of the world, products and services are sold through more than 25 dealers and distributors located in those local markets. Net sales from this operating segment are categorized as bioinstruments, bioconsumables and Discovery Services.Bioinstruments. The flagship product of the BioSystems operating segment is the WAVE system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was adirectorworld-wide installed base of 1,241 WAVE systems as of September 30, 2005. Additionally, this operating segment utilizes its sales andprincipal stockholder.distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.Bioconsumables. Thepromissory note has an interest rateinstalled WAVE base generates a demand for consumables that are required for the system’s continued operation. These products are developed, manufactured and sold by this operating segment. In addition, the BioSystems operating segment manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of9.75% per annumHPLC separation columns.Discovery Services. The BioSystems operating segment provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and ispayable on August 10, 2000.certified under the Clinical Laboratory Improvement Amendment. TheCompany must comply with restrictive covenants in connection with its note payable-bankservices provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certaininstallment notes payable to a separate bank. As of March 31, 2000, the Company was not in compliance with covenants associated with its note payable-bank, but subsequently received a waiver from the bankinherited diseases forthe covenant violations as of March 31, 2000, which is effective until June 30, 2000. In May 2000, the Company repaid $1.8 million of the note payable-bankphysicians andthe remaining outstanding balance of approximately $460,000 of its installment notes payable with the proceeds it received from the sale of the non-life sciences instruments assets. F-6third-party laboratories. TRANSGENOMIC, INC.
AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (CONTINUED) (UNAUDITED) D. STOCKHOLDERS' EQUITY AND STOCK OPTIONS STOCKHOLDERS' EQUITY On March– (Continued)Nine Months Ended September 30,
2000, the Company's stockholders approved an increase2005 and 2004(Dollars in
the number of authorized common shares to 60,000,000. In the first quarter of fiscal 2000, the Company issued 25,000 common shares at $10.00thousands except per share data)The Nucleic Acids operating segment develops, manufactures and markets chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical, oligonucleotide synthesis companies and research institutions throughout the world. These products are produced primarily in this operating segment’s only facility in Glasgow, Scotland. Prior to November 11, 2004, this operating segment also manufactured synthesized segments of large-scale, GMP nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, the assets associated with this facility were sold to an
individual who was subsequently electedunaffiliated, third party. As a result, the Nucleic Acids operating segment no longer manufactures and sells these specialized oligonucleotides. A substantial portion of this operating segment’s revenues during 2005 and 2004 have been derived from one customer.Principles of Consolidation.
The condensed consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of consolidated financial statements 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. In particular, estimates of the valuation of long-term inventory are subject to considerable estimation error due to the
Company's Boardinherent uncertainty in projecting sales ofDirectors. STOCK OPTIONS On March 30, 2000,this product over a period of years. In addition, estimates and assumptions associated with theCompany's stockholders approved an amendment to the 1997 Stock Option Plan to increase the numberdetermination ofshares for which common stock options can be granted to 6,000,000. During the first quarter of fiscal 2000, the Company granted 364,000 options, including 59,500 options with exercise prices at $5.00 per share and recorded $297,500 in unearned compensation in connection with these grants representing the difference between the exercise price of the options granted and the deemedfair value of certain assets and related impairments, and the determination of goodwill impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these financial statements.Cash and Cash Equivalents.
For purposes of reporting cash flows, cash and cash equivalents include cash and temporary investments with original maturities at acquisition of three months or less.
Accounts Receivable.
Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts.
September 30, 2005 2004 Beginning balance
$ 1,051 $ 549 Charges to income
— 46 Deductions from reserves
155 15 Ending balance
$ 896 $ 580 Revenue Recognition.
Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At September 30, 2005, deferred revenue associated with the Company’s service contracts was approximately $1,600 and is included in “accrued expenses” in the accompanying unaudited consolidated balance sheets.
TRANSGENOMIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
During the nine months ended September 30, 2004, the Company recognized approximately $646 of product sales under bill-and-hold arrangements. Under these arrangements, the customer had accepted title and risk of ownership to the product, but had requested that the Company store the product on behalf of the customer, in a rented freezer, until the nine months ended September 30, 2004. There were no sales under bill-and-hold arrangements recognized during the nine months ended September 30, 2005.
Stock Based Compensation.
The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of
grant. These amounts, along with $112,500 of unearned compensation recorded at December 31, 1999, are being amortized by charges to operationsgrant over thevesting periods of the individualstockoptionsoption exercise price. Stock option grants to non-employees are accounted for using thestraight-line method. Such amortization expense amounted to approximately $16,000 for the three months ended March 31, 2000. In connection with the sale of the Company's non-life sciences instrument product line, the Company accelerated the vesting of 71,700 options, which would have otherwise been forfeited. Compensation expense of $573,600 was recorded for these options for the three months ended March 31, 2000, representing the difference between the exercise price of the options and the deemedfair valueof the common stock at the date the vesting was accelerated. In addition, 218,700 options were forfeited as a result of the sale. The Company granted 128,000 options to non-employees under consulting and other service agreements during the first quarter of fiscal 2000. The Company recorded $100,000 of compensation expense and $271,000 of unearned compensation associated with these grants, which is amortized over the respective service periods using the graded vesting method, which is an acceleratedmethod ofamortization. These expense amounts were calculatedaccounting in accordance with SFAS No. 123,Accounting for Stock-Based Compensation, using the Black-Scholesoption pricing model with the following assumptions: no common stock dividends, risk-free interest rates of 6.30% to 6.57%, volatility of 35%, and an expected option life of 1 to 5 years. Such amortization expense amounted to approximately $20,000 for the three months ended March 31, 2000. F-7TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (CONTINUED) (UNAUDITED) D. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)model.The following table
summarizes activity underillustrates the1997 Stock Option Plan duringeffect on net loss and loss per share if thethree months ended March 31, 2000.Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation.
WEIGHTED AVERAGE NUMBER OF OPTIONS EXERCISE PRICE ----------------- ----------------Balance at December 31, 1999................. 3,537,750 $ 5.00 Granted.................................... 364,000 10.53 Canceled................................... (293,200) 5.00 --------- ------ Balance at March 31, 2000.................... 3,608,550 $ 5.56 ========= ====== Exercisable at March 31, 2000................ 2,100,350 =========
September 30, 2005 2004 Net Income (Loss):
As reported
$ (3,779 ) $ (27,434 ) Less pro forma stock-based employee compensation expense determined under fair value method, net of related tax
(504 ) (764 ) Pro forma
$ (4,283 ) $ (28,198 ) Basic and Diluted Income (Loss) Per Share:
As reported
$ (0.12 ) $ (0.95 ) Pro forma
$ (0.13 ) $ (0.97 ) The weighted average fair value of options granted
induring thefirst quarter of fiscal 2000nine months ended September 30, 2005 and 2004 was$4.88. At March 31, 2000, the weighted average remaining contractual life of options outstanding was 9.12 years.$0.63 per share and $1.34 per share, respectively. 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 grantedinduring thefirst quarter of fiscal 2000, respectively:nine months ended September 30, 2005 and 2004: no common stock dividends; risk-free interest ratesranging from 6.30%of 4.14% to6.57%, 35% volatility;4.79%; 95% volatility in 2005 and 85% in 2004; and an expected option liferangingof 3 years. At September 30, 2005, the weighted average remaining contractual life of options outstanding was 5.5 years.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
1 to 6.5 years. Pro formachanges in currency exchange rates are included in the determination of net income (loss). Foreign currency transaction adjustments increased operating expenses by approximately $237 during the nine months ended September 30, 2005 andincomereduced operating expenses by approximately $135 during the nine months ended September 30, 2004.Earnings or Loss Per Share.
Basic earnings or loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings or loss per share includes shares issuable upon exercise of outstanding stock options and warrants or conversion of convertible notes, where dilutive. For all periods presented, basic and diluted weighted average shares outstanding and loss per share are identical, since all potentially dilutive securities are antidilutive. Potentially dilutive securities consist of stock options and warrants representing 5,541,015 and 1,159,421 shares of common stock, respectively, at September 30, 2005,. Additionally, the Company’s gross indebtedness to Laurus totaling $8,263 at September 30, 2005 is convertible into the Company’s
TRANSGENOMIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
common stock at $1.00 per share, which was the closing price of the Company’s common stock on September 30, 2005. As described in Note L, this indebtedness was repaid subsequent to September 30, 2005.
Recently Issued Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payment”. SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company expects to adopt this standard on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.
On November 24, 2004, the FASB issued SFAS No. 151, “Inventory Costs” – an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for the
threeCompany on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows.B. INVENTORIES
Inventories consisted of the following at September 30, 2005.
BioSystems Nucleic
AcidsTotal Finished Goods
$ 2,155 $ 1,529 $ 3,684 Raw materials and work in process
516 2,393 2,909 Demonstration inventory
123 — 123 2,794 3,922 6,716 Less inventory classified as a long-term asset
— 2,615 2,615 Net Inventory
$ 2,794 $ 1,307 $ 4,101 The Nucleic Acids operating segment inventory at September 30, 2005 consisted primarily of chemical building blocks for synthetic nucleic acids (know as phosphoramadites) and the raw materials to produce phosphoramadites which are used and produced at the Company’s facility in Glasgow, Scotland. As of September 30, 2005, the Company has classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products.
The Company periodically evaluates its inventory of phosphoramadites to determine whether they continue to meet quality and other specifications and over what time period such products are expected to be sold. Product that does not meet quality and other specifications can generally be re-worked to enhance purity. Costs to purify such product and related yield losses are expensed as incurred.
C. GOODWILL
Goodwill totaled $638 at September 30, 2005 and related entirely to the BioSystems. The following summarizes goodwill adjustments for the nine months ended September 30, 2005 and 2004.
Nine Months
Ended
September 30,2005 2004 Beginning balance
$ 638 $ 10,503 Adjustments
— (9,865 ) Ending balance
$ 638 $ 638 TRANSGENOMIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
The Company recorded a charge of $9,865 during the nine months ended September 30, 2004 related to the impairment of goodwill associated with the Nucleic Acids operating segment. The amount of the impairment charges was based, in part, on an independent valuation performed by an unaffiliated valuation firm. The charge resulted from an interim period impairment test performed during the second quarter of 2004.
The interim period impairment test became necessary after the Company’s Board of Directors directed management during the second quarter of 2004 to explore strategic alternatives for the Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.
The Company also recorded a charge of $2,100 during the nine months ended September 30, 2004 related to the impairment of property and equipment associated with the Nucleic Acids operating segment.
D. OTHER ASSETS
Finite lived intangible assets and other assets consisted of the following at September 30, 2005.
Cost Accumulated
AmortizationNet
Book
ValueFinite Lived Intangible Assets
Capitalized software
$ 2,132 $ 1,978 $ 154 Intellectual property
765 518 247 Patents
651 114 537 3,548 2,610 938 Other Assets
Long Term Inventory
2,615 — 2,615 Deferred Financing Costs
576 326 250 Other
543 205 338 3,734 531 3,203 Total
$ 7,282 $ 3,141 $ 4,141 During the nine months ended September 30, 2005, management determined that certain international patent pursuits were no longer consistent with the Company’s strategic plan. Accordingly, the Company recorded an impairment charge of $247 related to the abandonment of such pursuits.
Amortization expense for intangible assets was $717 and $728 for the nine months ended September 30, 2005 and 2004, respectively. Amortization expense for intangible assets is expected to be approximately $297 for the remainder of 2005, $342 in 2006, $331 in 2007, $62 in 2008, $134 in 2009, $134 in 2010 and $26 in 2011.
E. DEBT
Debt consisted of the following at September 30, 2005.
Credit Line (“Credit Line”) with Laurus
Gross amount due (accruing interest at 2% above prime or 8.75% at September 30, 2005, due December 2006)
$ 6,588 Debt premium
435 Debt discount—warrants
(61 ) Debt discount—beneficial conversion premium
(27 ) $ 6,935 Long-Term Debt with Laurus (“Term Note”)
Convertible debt (accruing interest at 2% above prime or 8.75% at September 30, 2005, due February 2007)
$ 1,675 Debt premium
226 Less current portion
(675 ) $ 1,226 TRANSGENOMIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
Funds available under the Credit Line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1,000 related to inventory balances.
On August 31, 2004, Laurus agreed to extend a then existing borrowing base waiver, defer certain payments due under the Term Note and reduce the interest rate on both of the Laurus Loans to 0% for any day the closing sale price of the Company’s common stock is at or above $1.75 per share. In return, the Company lowered the conversion price on each of the Laurus Loans to $1.00 per share and issued a warrant to Laurus covering an additional 400,000 common shares at an exercise price of $1.25 per share. The closing price of the Company’s common stock on August 31, 2004 was $1.20 per share.
The August 31, 2004 Laurus modifications were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements is greater than 10%. As such, the Company recorded a loss on extinguishment of debt of $2,859 at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7,427 and (ii) the fair value of the new debt instrument of $10,287 plus the fair value of the new warrants of $111. The difference between the fair value of the new debt of $10,287 and the face value of the debt of $8,572 represents a premium, which will be reflected as a reduction of interest expense over the life of the new debt.
On March 18, 2005, Laurus agreed to further extend the waiver of the borrowing base until March 31,
2000, assuming compensation2006. In connection with this extension, the Company agreed to allow Laurus to convert $1,879 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock at $0.52 per share. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of the Company’s common stock the day before each of these conversions was $0.58 per share. No other provisions of the Company’s Credit Line or Term Note (collectively, the “Laurus Loans”) were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions, the Company accelerated amortization of $409 of related debt premiums and discounts and recorded a charge of $1,365 related to the fair value of incremental shares received by Laurus.Interest expense consisted of the following for the
Stock Option Plan had been determinednine months ended September 30:
2005 2004 Interest paid or accrued on outstanding debt
$ 477 $ 388 Amortization of debt premiums
(816 ) — Amortization of debt discounts – warrants
24 — Amortization of debt discount – beneficial conversion feature
725 809 Fair value of incremental shares received by Laurus
1,365 — Deferred Financing Costs
144 487 $ 1,919 $ 1,684 As of September 30, 2005 principal repayments under
SFAS 123, isthe Term Note are scheduled as follows:
Net Loss: As reported............................................... $(3,497,909) Pro forma................................................. $(3,732,895) Basic and diluted loss per share: As reported............................................... $ (0.27) Pro forma................................................. $ (0.29)E.$0 for the remainder of 2005, $875 in 2006, and $800 in 2007. As describe in Note L, the Company repaid the entire principal balance and terminated the Laurus Loans subsequent to September 30, 2005 with the proceeds from the private placement. Accordingly, the Company no longer has any borrowings which require scheduled principal and interest payments.TRANSGENOMIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
F. COMMITMENTS AND CONTINGENCIES
The Company is subject to a number of claims of various amounts, which arise out of the normal course of business. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company leases certain equipment, vehicles and operating facilities. The Company’s leases related to its operating facilities currently expire on various dates through 2010. At September 30, 2005, the future minimum lease payments required under non-cancelable lease provisions were approximately $359 for the remainder of 2005, $1,233 in 2006, $443 in 2007, $189 in 2008, $193 in 2009, and $167 in 2010. Rent expense related to all operating leases was approximately $968 and $1,689 for the nine months ended September 30, 2005 and 2004, respectively.
At September 30, 2005, the Company had firm commitments totaling $872 to purchase components used in WAVE Systems.
G. INCOME TAXES
Income tax recorded during the nine months ended September 30, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions offset by refunds received.
Due to the
Company'sCompany’s cumulative losses,in recent years,expected losses in future years and inability to utilize any additional losses as carrybacks, the Company has not provided for an income tax benefit during thethreenine months endedMarch 31, 2000,September 30, 2005 or 2004 based onmanagement'smanagement’s determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate taxable income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. As of September 30, 2005, the Company’s deferred tax assets were offset by a valuation allowance of approximately $41,227.H. STOCKHOLDERS’ EQUITY
The following shows changes to the components of stockholders’ equity during the nine months ended September 30, 2005.
Common Stock Additional
Paid in
CapitalAccumulated
DeficitAccumulated
Other
Comprehensive
Income (Loss)Total Outstanding
SharesPar
ValueBalance, January 1, 2005
29,330,874 $ 299 $ 120,798 $ (107,101 ) $ 2,539 $ 16,535 Net loss
— — — (3,779 ) (3,779 ) (3,779 ) Other comprehensive income (loss), net of tax of zero:
Foreign currency translation adjustment
— — — — (1,553 ) (1,553 ) Unrealized gain on available for sale securities
— — — — 65 65 Comprehensive loss
— — — — (5,267 ) Beneficial conversion premium
— — 399 — — 399 Issuance of shares upon conversion of Laurus Loans
4,900,000 48 2,487 — — 2,535 Fair value of incremental shares issued
— — 1,365 — — 1,365 Issuance of shares for employee stock purchase plan
15,462 1 9 — — 10 Balance, September 30, 2005
34,246,336 $ 348 $ 125,058 $ (110,880 ) $ 1,051 $ 15,577 During the
threenine months endedMarch 31, 1999,September 30, 2005, the Companyhad provided a deferred tax benefit based on management's determination that it was more likely than not that such benefits would be realized through expected future profits. F-8issued zero and 4,900,000 shares, respectively, of common stock in conjunction with conversions under the Laurus Loans. TRANSGENOMIC, INC.
AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999– (Continued)Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
Date Price Shares
IssuedProceeds Facility Applied
ToJanuary 2005 $ 1.00 50,000 $ 50 Term Note Principal March 2005 $ 0.52 3,600,000 1,835 Credit Line Principal March 2005 $ 0.52 1,250,000 650 Term Note Principal 4,900,000 $ 2,535 I. STOCK OPTIONS
The following table summarizes activity under the 1997 Stock Option Plan during the nine months ended September 30, 2005.
Number of
OptionsWeighted
Average
Exercise PriceBalance at January 1, 2005
5,088,037 $ 5.09 Granted
1,123,500 $ 1.04 Cancelled
(670,522 ) $ 4.21 Balance at September 30, 2005
5,541,015 $ 4.37 Exercisable at September 30, 2005
4,396,281 $ 5.11 The following table summarizes information about options outstanding as of September 30, 2005:
Options Outstanding Options Exercisable Range of Exercise Prices
Number
OutstandingWeighted-
Average
Remaining
Contractual
LifeWeighted-
Average
Exercise
PriceNumber
ExercisableWeighted-
Average
Exercise
Price(in years) $ 1.00—$ 1.30
1,360,167 9.2 $ 1.08 558,384 $ 1.12 $ 1.31—$ 2.60
798,167 7.6 $ 1.91 510,682 $ 1.92 $ 2.61—$ 3.90
35,000 7.1 $ 2.90 23,334 $ 2.90 $ 3.91—$ 5.20
2,074,700 2.3 $ 5.00 2,074,700 $ 5.00 $ 5.21—$ 6.50
692,750 5.6 $ 6.15 662,150 $ 6.15 $ 6.51—$ 9.10
10,000 5.6 $ 9.00 10,000 $ 9.00 $ 9.11—$10.40
300,500 5.3 $ 9.88 296,500 $ 9.88 $10.41—$13.00
269,731 4.6 $ 12.80 260,531 $ 12.83 5,541,015 5.5 $ 4.37 4,396,281 $ 5.11 J. OPERATING SEGMENT AND
2000 (CONTINUED) (UNAUDITED) F. SUBSEQUENT EVENTS On May 19, 2000,GEOGRAPHIC INFORMATIONOperations for the
Company soldBioSystems and Nucleic Acids operating segments are evaluated based upon specific identification of revenues and expenses associated with theassets relatedbusiness activities resulting in a segment operating income. Expenses that cannot be directly identified toits non-life sciences instrument product linean operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company’s balance sheet are made at the corporate level and, accordingly, operating segment balance sheet information is not reviewed by operating decision makers.The following table sets forth net sales and operating income (loss) by segment.
Nine Months Ended
September 30,2005 2004 Net Sales
BioSystems
$ 20,479 $ 18,450 Nucleic Acids
3,232 7,384 Total
$ 23,711 $ 25,834 Income (Loss) from Operations
BioSystems
$ 2,227 $ (1,309 ) Nucleic Acids
(630 ) (17,073 ) Corporate
(3,461 ) (4,442 ) Total
$ (1,864 ) $ (22,824 ) TRANSGENOMIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
During the nine months ended September 30, 2005, sales to a large pharmaceutical company
controlledtotaled $2,009 and represented 10% of net sales within the Company’s BioSystems operating segment and 9% of total consolidated net sales. Sales to this customer are governed by adirectornon-binding master services agreement dated August 22, 2002.During the nine months ended September 30, 2005, sales to Geron Corporation (“Geron”) totaled $1,729 and
principal stockholderrepresented 54%, of net sales within the Company’s Nucleic Acids operating segment 7% total net consolidated sales. Sales to Geron are governed by a non-binding supply agreement dated June 15, 2002, as amended. Under the supply agreement and related addendums, Geron has historically paid the Company foragoods and services with its common stock. The terms of each addendum generally provide that Geron pre-pay 50% of the totaladjusted purchasesales price of$5.65 million plus reimbursementgoods sold under the addendum upon execution of the addendum and the remaining 50% upon acceptance of the related goods and services. Geron shares received by thebuyerCompany are restricted for resale until they are registered with the Securities and Exchange Commission. The Company assumes all market risk related to the value ofapproximately $400,000 of expensesthese securities and any selling costs are paid by the Company. Once registered, it has been the Company’s intent and practice to sell such securities as soon as practical.The following is a summary of Geron shares received and sold during the nine months ended September 30, 2005 and 2004.
Date Received
Shares
Product Sales Price
Date Sold
Net
Proceeds
Gain (Loss)
January 2004 85,855 $959 February 2004 $ 932 $(27) March 2004 33,662 $289 July 2004 $ 263 $(26) April 2005 101,801 $608 May 2005 $ 617 $ 9 August 2005 151,550 $1,491 October 2005 $1,534 $ 43 K. RESTRUCTURING PLAN
The Company had accrued expenses associated with its 2004 restructuring plan of $368 at September 30, 2005 that relates primarily to future rents on closed facilities (net of projected sublease rents) of which $27 is expected to be paid during the remainder of 2005 and $341 in
connection with this product line since March2006 and thereafter.L. SUBSEQUENT EVENT
On October 31,
2000. Approximately $4,000,0002005, the Company closed on a private placement of securities to institutional investors. The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share (the “Offering”). The aggregate purchase price for the securities sold in the private placement waspaid in cash and $2,000,000 was paid with an interest-bearing promissory note due on December 30, 2000. The note bears interest at 8.75%. The purchaser financed the cash portion$1.01 per share ofthe purchase price plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. The Company has agreedcommon stock initially being sold (the “Purchase Price”) or $15,075. In conjunction with thebank that it will acquireprivate placement, thenotes evidencing these loans fromCompany issued a warrant to Oppenheimer & Co., Inc. (“Oppenheimer”) to purchase 932,859 shares at $1.20 per share as part of their placement fee for thebank uponprivate placement.Contemporaneously with the closing of the
Company's initial public offering by payingprivate placement, the Company repaid all outstanding principal and accrued interest on the Laurus Loans, including fees to facilitate the private placement and prepayment penalties to Laurus in the sum of $824. As a result, the Credit Line with Laurus has been cancelled and is no longer available to thebank an amount equalCompany.TRANSGENOMIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands except per share data)
The Company is required to register all shares of common stock sold in the
entire principal balanceOffering and issuable upon exercise of thenotes plus accrued and unpaid interest. If the offering is not completed, the Company is under no obligation to acquire these notes.warrants. Thedirector and principal stockholder of the Company has agreed to pledge 1,200,000 shares of the Company'scommon stockowned by him as security for the acquired notes. All ofissued to theseshares will be held in an escrow account as security for the notes. The Company anticipates that it will exercise its right to cause the shares toinstitutional investors may be sold inorderthe secondary market at any time once such registration is effective. Failure topay principal and interest onregister these shares in a timely manner will subject theacquired notes when due, subjectCompany toa 180-day lock-up agreement. The acquired notes will mature on December 30, 2000 and will bear interest at a rateliquidated damages of8.75% per annum. The net assets held for sale are as follows:
AS OF MARCH 31, 2000 --------------------Inventories............................................... $2,485,722 Property, net............................................. 510,410 Other assets.............................................. 1,839,611 Accrued liabilities....................................... (124,203) ---------- Net assets held for sale.................................. $4,711,540 ==========The Company's unaudited pro forma results of operations for the three months ended March 31, 1999 and 2000 assuming the sale1.5% of thenon-life sciences instrument product line occurred as ofaggregate purchase price per month for each successive 30-day period, calculated on a pro rata basis for any partial 30-day period.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
beginning of the periods presented are as follows:
1999 2000 ----------- -----------Net Sales........................................... $ 2,716,631 $ 4,773,074 Net Loss............................................ $(1,337,836) (2,827,483) Basic and diluted loss per share.................... (0.10) (0.22)In April 2000, the Company signed a 7-year lease for an office facility which will commence on August 1, 2000. The first-year lease payment for this property will be $178,350 and, thereafter, will escalate by 2% per year. F-9INDEPENDENT AUDITORS' REPORTBoard of Directors and Stockholders ofTransgenomic, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the
Company)“Company”) as of December 31,19982004 and19992003, and the related consolidated statements of operations,stockholders'stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31,1999.2004. These financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion onthesethe financial statements based on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includesstatements, 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 ofat December 31,19982004 and1999,2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31,19992004, in conformity with accounting principles generally accepted in the United States of America./s/As discussed in Note O, during the first quarter of 2005, the Company obtained an extension of the waiver of the borrowing base limit through March 31, 2006.
As discussed in Note P, the Company restated its consolidated statements of cash flows for the years ended December 31, 2004 and 2003.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 7, 2000 F-10April 14, 2005 (May 25, 2005, as to the effects of the restatement discussed in Note P)
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBERAs 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............................................... 3,363,971 3,918,866 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.................................... 8,417,771 10,894,722 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 DEMONSTRATION INVENTORY..................................... 819,538 2,124,159 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-112004 and 2003 (Dollars in thousands except per share data)
2004 2003 ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$ 1,002 $ 1,241 Accounts receivable (net of allowances for bad debts of $1,051 and $549)
10,197 10,877 Inventories
5,366 10,584 Prepaid expenses and other current assets
1,343 1,676 Total current assets
17,908 24,378 PROPERTY AND EQUIPMENT:
Land and buildings
2,427 2,239 Equipment
19,263 20,362 Furniture and fixtures
5,781 9,054 27,471 31,655 Less: accumulated depreciation
13,946 12,951 13,525 18,704 GOODWILL
638 10,503 OTHER ASSETS
5,387 3,721 $ 37,458 $ 57,306 LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
$ 3,431 $ 3,580 Other accrued expenses
7,318 3,874 Accrued compensation
636 959 Line of credit
6,514 2,142 Current portion of long-term debt
825 1,693 Total current liabilities
18,724 12,248 Long-term debt
2,199 — Total liabilities
20,923 12,248 COMMITMENTS AND CONTINGENCIES (Note F)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding
— — Common stock, $.01 par value, 60,000,000 shares authorized, 29,330,874 and 28,119,122 shares outstanding in 2004 and 2003, respectively
299 286 Additional paid-in capital
120,798 115,904 Accumulated other comprehensive income
2,539 1,597 Accumulated deficit
(107,101 ) (72,729 ) Total stockholders’ equity
16,535 45,058 $ 37,458 $ 57,306 See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBERYears 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-122004, 2003 and 2002 (Dollars in thousands except per share data)
2004 2003 2002 NET SALES
$ 33,789 $ 33,866 $ 37,554 COST OF GOODS SOLD
24,596 24,315 19,569 Gross profit
9,193 9,551 17,985 OPERATING EXPENSES:
Selling, general and administrative
17,499 17,324 24,199 Research and development
6,685 9,305 12,201 Restructuring charges (Note N)
3,570 738 3,282 Impairment charges (Note C)
11,965 4,772 — Gain on sale of facility (Note M)
(1,466 ) — — 38,253 32,139 39,682 LOSS FROM OPERATIONS
(29,060 ) (22,588 ) (21,697 ) OTHER INCOME (EXPENSE):
Interest expense
(2,383 ) (315 ) (62 ) Loss on debt extinguishment
(2,859 ) — — Other—net
(164 ) 10 499 (5,406 ) (305 ) 437 LOSS BEFORE INCOME TAXES
(34,466 ) (22,893 ) (21,260 ) CURRENT INCOME TAX EXPENSE (BENEFIT)
(94 ) 65 105 NET LOSS
$ (34,372 ) $ (22,958 ) $ (21,365 ) BASIC AND DILUTED LOSS PER SHARE
$ (1.19 ) $ (0.94 ) $ (0.91 ) BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
29,006,241 24,483,861 23,582,687 See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS'STOCKHOLDERS’ EQUITY (DEFICIT)YEARS ENDED DECEMBERYears 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-132004, 2003 and 2002 (Dollars in thousands except per share data)
Common Stock Additional
Paid in
CapitalUnearned
CompensationAccumulated
DeficitAccumulated
Other
Comprehensive
Income (Loss)Treasury
StockTotal Outstanding
SharesPar
ValueBalance, January 1, 2002
23,606,003 $ 239 $ 113,260 $ (158 ) $ (28,406 ) $ (81 ) $ (2,750 ) $ 82,104 Net loss
— — — — (21,365 ) (21,365 ) — (21,365 ) Other comprehensive income (loss):
Foreign currency translation adjustment
— — — — — 493 — 493 Unrealized gain on available for sale securities
— — — — — (34 ) — (34 ) Comprehensive loss
— — — — — (20,906 ) — Issuance and exercise of stock options or warrants
81,900 1 460 (51 ) — 410 Issuance of shares for employee stock purchase plan
56,842 — 214 — — — — 214 Deferred compensation
— — — 131 — — — 131 Purchase of treasury stock
(232,700 ) — — — — — (438 ) (438 ) Balance, December 31, 2002
23,512,045 240 113,934 (78 ) (49,771 ) 378 (3,188 ) 61,515 Net loss
— — — (22,958 ) (22,958 ) — (22,958 ) Other comprehensive income (loss):
— Foreign currency translation adjustment
— — — — — 1,219 — 1,219 Comprehensive loss
— — — — — (21,739 ) — Issuance of stock options and warrants
— — 386 — — — — 386 Beneficial Conversion Premium
— — 480 — — — — 480 Issuance of shares
4,500,000 45 969 — — — 3,188 4,202 Issuance of shares for employee stock purchase plan
107,077 1 135 — — — — 136 Amortization of unearned compensation
78 — — — 78 Balance, December 31, 2003
28,119,122 286 115,904 — (72,729 ) 1,597 — 45,058 Net loss
— — — — (34,372 ) (34,372 ) (34,372 ) Other comprehensive income (loss):
Foreign currency translation adjustment
— — — — — 942 — 942 Comprehensive loss
— — — — — (33,430 ) — Issuance of stock options and warrants
— — 189 — — — — 189 Beneficial Conversion Premium
— — 2,420 — — — — 2,420 Issuance of shares
1,134,850 12 2,198 — — — — 2,210 Issuance of shares for employee stock purchase plan
76,902 1 87 — — — — 88 Balance, December 31, 2004
29,330,874 $ 299 $ 120,798 $ — $ (107,101 ) $ 2,539 $ — $ 16,535 See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBERYears 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 assets............. 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-142004, 2003 and 2002 (Dollars in thousands except per share data)
2004
(as restated, see
Note P)
2003
(as restated, see
Note P)2002 CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$ (34,372 ) $ (22,958 ) $ (21,365 ) Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization
4,625 4,597 3,993 Non-cash restructuring charges (Note N)
2,027 364 1,698 Impairment charges (Note C)
11,965 4,772 — Gain on sale of facility (Note M)
(1,466 ) — — Non-cash financing costs
1,642 — — Loss on debt extinguishment
2,859 — — (Gain)/Loss on sale of securities
128 (64 ) — Other
18 93 131 Changes in operating assets and liabilities, net of acquisitions:
Purchase of trading securities
— (1,566 ) — Proceeds from sale of trading securities
— 1,519 — Accounts receivable
(3,334 ) 342 794 Inventories
2,611 2,887 (5,767 ) Prepaid expenses and other current assets
(130 ) 334 527 Accounts payable
(268 ) (1,509 ) 2,249 Accrued expenses
941 (1,828 ) (204 ) Net cash flows from operating activities
(12,754 ) (13,017 ) (17,944 ) CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities and sale of available for sale securities
4,269 4,000 39,355 Purchases of available for sale securities
— — (19,088 ) Purchase of property and equipment
(1,758 ) (6,413 ) (11,468 ) Change in other assets
522 (543 ) (2,871 ) Proceeds from sale of specialty oligonuceotide manufacturing facility (Note M)
3,000 — — Proceeds from asset sales
— 9 — Net cash flows from investing activities
6,033 (2,947 ) 5,928 CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit
4,956 2,992 — Proceeds from long-term debt
2,750 — 1,559 Payments on long-term debt
(1,779 ) (35 ) — Issuance of common stock, net of expenses
71 4,338 624 Purchase of treasury stock
— — (438 ) Net cash flows from financing activities
5,998 7,295 1,745 EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH
484 175 393 NET CHANGE IN CASH AND CASH EQUIVALENTS
(239 ) (8,494 ) (9,878 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
1,241 9,735 19,613 CASH AND CASH EQUIVALENTS AT END OF YEAR
$ 1,002 $ 1,241 $ 9,735 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest
$ 560 $ 314 $ 30 Income taxes, net
(94 ) 70 120 Non-cash transactions:
Available for sale securities acquired for goods and services
4,397 277 — Conversions of debt to equity
2,226 — — See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBERYears Ended December 31,
1997, 1998 AND 19992004, 2003 and 2002(Dollars in thousands except per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION.Business Description.
Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the
"Company"“Company”) provide innovativeresearch toolsproducts and services for the synthesis, purification and analysis of nucleic acids. The Company’s products and services include automated instrument systems, associated consumables, nucleic acid chemical building blocks, nucleic acid synthesis products, novel chemistry development for nucleic acids, and genetic variation discovery services. The Company develops, assembles, manufactures and markets its products and services to the life sciencesindustry. These tools enable researchersindustry todiscoverbe used in research focused on molecular genetics of humans andunderstand variationother organisms. Such research could lead to development of new diagnostics and therapeutics. The Company’s business plan is to participate in thehuman genetic code, or genome,value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents and services to those entities engaged inorder to acceleratebasic biomedical research andimprove drugthe development of diagnostics anddiagnostics.therapeutic agents.The Company
also manufacturesoperates in two reportable segments, BioSystems anddesigns sample preparationNucleic Acids. The BioSystems operating segment generates revenue from the sale of automated instrument systems andmonitoring instruments, which are primarily used with various typesassociated consumable products and services. The Nucleic Acids operating segment generates revenue from the sale ofopticalnucleic acid-based products andmass spectrometers to analyze the chemical makeup of samples.services.The Company markets and sells these
platformsproducts primarilythroughoutthrough a direct sales and support group in North America and Europe and through a network of distributors in the PacificRim. PRINCIPLES OF CONSOLIDATION.Rim and other international markets. These sales efforts are directed from the Company headquarters in Omaha, Nebraska and through a series of sales and support offices strategically located throughout the United States, Europe and Japan.The Company has experienced recurring net losses and had an accumulated deficit of $107,101 at December 31, 2004. Based on the Company’s 2005 operating plan, management believes its existing sources of liquidity will be sufficient to meet its cash needs during 2005. If necessary, the Company’s management believes they can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions during 2005 would likely delay implementation of the Company’s business plan. Additionally, management may pursue additional financing alternatives. Ultimately, the Company must achieve sufficient revenue levels to support its cost structure.
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.subsidiaries. Allmaterialintercompany balances and transactions have beeneliminated. On July 1, 1997 the Company merged with CETAC Holding Company, Inc.eliminated ina 1000 to 1 stock exchange. Beforeconsolidation.Cash 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 its products 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 also sells its products to distributors in its major European and Pacific Rim markets. 3) ORIGINAL EQUIPMENT MANUFACTURERS (OEM)-The Company sells its sample preparation and monitoring instruments to 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.Cash Equivalents.For purposes of reporting cash flows, cash and cash equivalents include cash and temporary investments with original maturities at acquisition of three months or less.
F-15Short Term Investments.
The Company classifies all of its short-term investments with maturities at acquisition of greater than three months as available for sale securities. Such short-term investments consist primarily of United States government and federal agency securities, corporate commercial paper and corporate debt that are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other comprehensive income in stockholders’ equity. Realized gains and losses on short term investments are included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company’s intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available for sale and are classified as current assets.
During 2003 and 2004, the Company accepted common stock from one of its customers (Geron Corporation) as payment for goods and services. These shares were classified as available-for-sale securities. Net losses on these securities of $128 during 2004 and net gains of $111 during 2003 were reflected as other expense on the consolidated statement of operations. Proceeds from the sales of these available for sale securities were reflected within net cash flows from investing activities.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER– (Continued)Years Ended December 31,
1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE.2004, 2003 and 2002(Dollars in thousands except per share data)
Accounts Receivable.
Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts during each of
$561,645 and $160,593 in 1998 and 1999, respectively. Paymentthe three years ended December 31, 2004:
Beginning
BalanceAdditional
Charges
to IncomeDeductions
from
ReserveEnding
BalanceYear Ended December 31, 2004
$ 549 $ 534 $ 32 $ 1,051 Year Ended December 31, 2003
$ 450 $ 174 $ 75 $ 549 Year Ended December 31, 2002
$ 213 $ 418 $ 181 $ 450 While payment terms are generally
are30or 60 days. Thedays, the Company has also provided extended payment terms of up tosome of its customers. Accounts receivable balances subject to extended terms were approximately $59,000 as of December 31, 1998 and $216,000 as of December 31, 1999. Balances due more than one year from the balance sheet date were approximately $0 and $77,000, respectively. INVENTORIES.90 days in certain cases.Inventories.
Inventories are stated at the lower of cost
(first-in, first-out method)or market.The Company has certainCost is computed using standard costs for finished goodsinventory it provides as demonstration units to potential customersand average or latest actual cost forevaluation, as well as to certain universitiesraw materials andoriginal equipment manufacturers for testingwork in process.Property and
demonstration. All demonstration units are held for resale and included in inventory at the lower of cost or market. Demonstration inventory that is greater than one year old and remains held for resale is reclassified from current assets to long-term assets and carried at the lower of cost or market. If the instrument is not purchased by the customer or institution, it is retrieved, and, if necessary, reconditioned for sale. Demonstration inventory is evaluated for impairment based on its physical condition and technological status. No impairment loss has been recognized to date. At the time these instruments no longer are held for resale and will be used for in-house testing and analysis, they are transferred from inventory to property at the lower of cost or market and depreciated. Demonstration equipment included in property and equipment is used for research and development and training. PROPERTY AND EQUIPMENT.Equipment.Property and equipment are carried at cost. Depreciation
and amortization areis computed by the straight-lineand accelerated methodsmethod over the estimated useful lives of the related assets as follows:
Buildings
15 years Leasehold improvements
3 to 7 years
Furniture and
fixtures......................................fixtures5 to 7 years
Production
equipment........................................equipment5 to 7 years
Computer
equipment.......................................... 5 years Research and development equipment..........................equipment3 to 5 years
Demonstration equipment.....................................Research and development equipment
3 to 5 years
Demonstration equipment
3 to 5 years
GOODWILL.Depreciation of property and equipment totaled $4,009, $3,983 and $3,993 in 2004, 2003 and 2002, respectively.
Goodwill
arising from the excessand other Intangible AssetsThe Company adopted Statement of
cost overFinancial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets,beginning on January 1, 2002. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment annually. Impairment occurs when the fair value ofnet assets at dates of acquisitionthe asset isbeing amortized usingless than its carrying amount. If impaired, thestraight-line method over 15 years. IMPAIRMENT OF LONG-LIVED ASSETS. The Company assesses the recoverability of long-lived assets held for use, including certainasset’s carrying value is reduced to its fair value. Identifiable intangible assets with definite lives are amortized over their estimated useful lives andgoodwill, whenevertested for impairment as events or changes in circumstances indicatethatthe carrying amount ofanthe asset maynotberecoverable. In such cases, if the sum of the expected cash flows (undiscounted and without interest) resulting from the use of the asset are less thanimpaired. Impairment occurs when the carryingamount, an impairment loss F-16TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)value isrecognized based on the difference between the carrying amountnot recoverable and the fair value of theassets. No impairmentasset is less than the carrying value.The Company has not amortized goodwill for any period presented. Accordingly, there are no differences between reported net loss
has been recognizedand loss per share related todate. OTHER ASSETS.goodwill amortization.Other Assets.
Other assets include long-term inventory, patents, intellectual property, deferred financing costs and capitalized software
and intellectual property.development costs. 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 itsTRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
economic life, generally 17 years, beginning on the date the patent is issued. The Company
develops software as an integral component of its instruments. The Company capitalizescapitalized software development costswhich include purchased software and direct labor, after technological feasibilityfor products offered for sale in accordance with SFAS No. 86,Accounting for thesoftware has been established. AfterCosts of Computer Software to be Sold, Leased or Otherwise Marketed. This Standard allows for thesoftware is ready for general release, the Company ceasescapitalization of certain development costs once a softwaredevelopment costs. The software is amortized over the estimated life of theproductgenerally three years. Intellectual property, which is purchased technology, is recorded at costhas reached technological feasibility. Development costs capitalized totaled $0 in 2004 andis amortized over its estimated useful life of between 52003 and10 years. DEFERRED FINANCING COSTS. Deferred financing costs are amortized over the term of the related financing using the effective interest method. STOCK BASED COMPENSATION.$1,127 in 2002.Stock Based Compensation.
The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of thedeemedfair market value of theCompany'sCompany’s common stock at the date of grant over the stock option exercise price. Stock option grants tononemployeesnon-employees are accounted for using the fair value method of accounting in accordance withStatement of Financial Accounting StandardsSFAS No. 123,ACCOUNTING FOR STOCK-BASED COMPENSATIONAccounting for Stock-Based Compensation, using the Black-Scholesmodelmodel.The following table illustrates the effect on net loss and
volatility factors for comparable public companies. UNEARNED COMPENSATION. Unearned compensation representsloss per share if theunamortized difference betweenCompany had applied theoption exercise price and the deemedfairmarketvalue recognition provisions ofthe Company's commonSFAS No. 123 to stockat 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.based employee compensation.
2004 2003 2002 Net Loss:
As reported
$ (34,372 ) $ (22,958 ) $ (21,365 ) Pro forma
$ (35,432 ) $ (24,794 ) (23,274 ) Basic and diluted loss per share:
As reported
(1.19 ) (0.94 ) (0.91 ) Pro forma
(1.22 ) (1.01 ) (0.99 ) Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax
basesbasis of assets and liabilities at each balance sheet date usingenactedtax rates expected to be in effect in the year the differences are expected to reverse.F-17TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION. SalesDeferred tax assets are reduced by a valuation allowance to the extent that it is unlikely they will be realized.Revenue Recognition.
Revenue on the sales of products
are recordedis recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product.The Company'sOur sales terms do not provide for the right of return unless the product is damaged or defective.Installation and training revenues areRevenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized whenearned. RESEARCH AND DEVELOPMENT.the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At December 31, 2004 and 2003, deferred revenue, mainly associated with the Company’s service contracts, included on the Company’s balance sheet was approximately $1,478 and $1,792 respectively.Research and Development.
Research and development costs are charged to expense when incurred.
TRANSLATION OF FOREIGN CURRENCY.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'stockholders’ equity and are included in other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates areTRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
included in the determination of net income.
For the periods presented, foreignForeign currency transaction adjustmentswere not significant. COMPREHENSIVE INCOME.decreased net loss approximately $328 in 2004 and $1,089 in 2003 and 2002.Comprehensive Income.
Accumulated other comprehensive income
for all periods presented consistsat December 31, 2004 and 2003 consisted ofnet income andforeign currency translationadjustments.adjustments, net of applicable tax of $0. For all previous periods presented, accumulated other comprehensive income consists of foreign currency translation adjustments and unrealized gains or losses on available for sale investments, net of applicable tax of $0. 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.Fair Value of Financial Instruments.
The
estimated fair valuecarrying amount of the Company’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The Company derives the fair value of its short-termand long-term notes payable approximate the carrying values.investments based on quoted market prices. The carrying value ofreceivableslong-term debt andaccounts payable approximatethe line of credit approximates fair value basedon their short-term nature. The estimated fair value amountsupon existing interest rates available to the Company forshort-term and long-term debt were determined using rates that are currently available for issuances of debt withsimilarterms and maturities. EARNINGS PER SHARE.debt.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 or conversion of convertible notes, where dilutive. Potentially dilutive securities totaling 13,484,072, 7,671,771 and 5,158,672 in 2004, 2003 and 2002, respectively, have been excluded from the computation of diluted earnings per share as they have an antidilutive effect due to the
Company'sCompany’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. F-18TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING PRONOUNCEMENTS. In June 1998,Recently Issued Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) 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, revised123R, Share-Based Payment. SFAS No.123R addresses the accounting forsoftware development costs. SOP 98-1share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company expects to adopt this standard on January 1, 2006. The Company is currently assessing thecapitalization of certain costs related to internal use software once certain criteria have been met. The adoptionfinal impact of thisstatement did not have astandard on its financial position, results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.On November 24, 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material
impact(spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overheads to the costs of conversion be based on theCompany'snormal capacity of the production facilities. SFAS No. 151 will be effective at the beginning of 2006. The Company is currently assessing the final impact of this standard on its financialstatements. USE OF ESTIMATES.position, results of operations or cash flows.Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted
accounting principlesin the United States of America 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.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 approximately $135,000 in 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. Kramel's results of operations have been included in the accompanying statements of operations subsequent to the date of acquisition. F-19INVENTORIES TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER– (Continued)Years Ended December 31,
1997, 1998 AND 1999 (CONTINUED)2004, 2003 and 2002(Dollars in thousands except per share data)
Inventories consisted of the following at December 31:
Biosystems
Operating
SegmentNucleic Acids
Operating
SegmentTotal 2004 2003 2004 2003 2004 2003 Finished goods
$ 2,637 $ 2,875 $ 2,380 $ 2,247 $ 5,017 $ 5,122 Raw materials and work in process
780 1,223 2,275 3,851 3,055 5,074 Demonstration inventory
153 388 — — 153 388 3,570 4,486 4,655 6,098 8,225 10,584 Less inventory classified as a long-term asset
— — 2,859 — 2,859 — Net Inventory
$ 3,570 $ 4,486 $ 1,796 $ 6,098 $ 5,366 $ 10,584 The Nucleic Acids operating segment inventory at December 31, 2004 and 2003 consisted primarily of phosphoramadites and the raw materials to produce phosphoramadites which are used and produced at the Company’s facility in Glasgow, Scotland. As of December 31, 2004, the Company has classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products.
The Company periodically evaluates its inventory of chemical building blocks to determine whether they continue to meet quality and other specifications and over what time period such products are expected to be sold. Product that does not meet quality and other specifications can generally be re-worked to enhance purity. Costs to purify such product and related yield losses are expensed as incurred.
C.
INVENTORIESGOODWILLAt December 31,
19982004 and1999 inventories2003, goodwill by operating segment consist of the following:
1998 1999 ---------- ----------Finished goods....................................... $ 257,173 $ 157,216 Raw materials and work in process.................... 2,295,336 2,786,958 Demonstration inventory.............................. 1,631,000 3,098,851 ---------- ---------- 4,183,509 6,043,025 Less long-term demonstration inventory............... (819,538) (2,124,159) ---------- ---------- $3,363,971 $3,918,866 ========== ==========During 1997, 1998
Biosystems
Operating
SegmentNucleic Acids
Operating
SegmentTotal Net balance December 31, 2002
$ 638 $ 14,637 $ 15,275 Goodwill impairment charge
— (4,772 ) (4,772 ) Net balance December 31, 2003
638 9,865 10,503 Goodwill impairment charge
— (9,865 ) (9,865 ) Net Balance December 31, 2004
$ 638 $ 0 $ 638 The Company recorded charges of $9,865 and
1999,$4,772 during 2004 and 2003, respectively, related to the impairment of goodwill associated with the Nucleic Acids operating segment. In each case, the amount of the impairment charge was based, in part, on independent valuations performed by the same unaffiliated valuation firm. The 2003 charge resulted from the Company’s annual impairment test that was performed in the fourth quarter of 2003. The 2004 charge resulted from an interim period impairment test performed during the second quarter of 2004.The interim period impairment test became necessary after the Company’s Board of Directors directed management during the second quarter of 2004 to explore strategic alternatives for the Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.
The Company
reclassified demonstration inventoryalso recorded a charge of$22,914, $9,096 and $41,090, respectively,$2,100 during the second quarter of 2004 related to the impairment of property andequipment.equipment associated with the Nucleic Acids operating segment.D. OTHER ASSETS
At December 31,
19982004 and1999,2003, finite lived intangible assets and other assetsconsistconsisted 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 ========== ======== ========== ========== ========== ==========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 that the Company must comply with on a quarterly basis. Such covenants include 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 for the covenant violations as of December 31, 1999, which is effective until March 31, 2000. The financial covenants for which the Company was not in compliance were as follows: to maintain no less than $8.25 million of tangible net worth; to maintain a maximum debt to tangible net worth ratio of not more than 1.2 to 1; to maintain a minimum working capital of $4.25 million; and to F-20TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER– (Continued)Years Ended December 31,
1997, 1998 AND 1999 (CONTINUED)2004, 2003 and 2002(Dollars in thousands except per share data)
2004 2003 Cost Accumulated
ReserveNet
Book
ValueCost Accumulated
ReserveNet
Book
ValueCapitalized software
$ 2,132 $ 1,468 $ 664 $ 2,132 $ 758 $ 1,374 Intellectual property
765 476 289 765 165 600 Patents
1,071 194 877 1,035 170 865 Deferred Financing Costs
576 183 393 409 — 409 Long Term Inventory
4,797 1,938 2,859 — — — Other
452 147 305 656 183 473 Total
$ 9,793 $ 4,406 $ 5,387 $ 4,997 $ 1,276 $ 3,721 Amortization expense for intangible assets was $1,197, $825 and $150 during 2004, 2003 and 2002, respectively. Amortization expense for intangible assets is expected to be approximately $1,009 in 2005, $342 in 2006, $320 in 2007, $62 in 2008 and $130 in 2009.
E.
NOTE PAYABLE-BANK (CONTINUED) restrictDEBTDebt consisted of the
purchasefollowing at December 31:
2004 2003 Credit Line
Gross amount due (2% above prime, due December 2006)
$ 5,948 $ 2,992 Debt premium
1,004 — Debt discount – warrants
(85 ) (370 ) Debt discount – beneficial conversion premium
(353 ) (480 ) $ 6,514 $ 2,142 Long-Term Debt
Convertible debt (2% above prime, due February 2007)
$ 2,550 $ — Debt Premium
474 — Mortgage debt
— 1,693 Less current portion
(825 ) (1,693 ) $ 2,199 $ — In December 2003, the Company entered into a $7,500 line of credit (the “Credit Line”) with Laurus Master Fund, Ltd. (“Laurus”). The term of the Credit Line is three years carrying an interest rate of 2.0% over the prime rate or
leasea minimum offixed assets to an amount that does not exceed the depreciation taken in the Company's fiscal year. F. NOTES PAYABLE-OTHER Notes payable-other6.0% (7.25% at December 31,1998 and 1999 consists2004). Funds available under the Credit Line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1,000 related to inventory balances. The Credit Line is secured by most of thefollowing:
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 maturitiesCompany’s assets. Prior to amendments to the Credit Line discussed below, payment ofnotes payable-otherinterest and principal could, under certain circumstances, be made with shares of the Company’s common stock at a fixed conversion price of $2.20 per share. Conversion of this debt to common stock may be made at the election of Laurus or the Company. The Company could elect to convert only if its shares trade at a price exceeding $2.42 per share for ten consecutive trading days, and such conversion is further subject to trading volume limitations and a limitation on the total beneficial ownership by Laurus of the Company’s common stock. Upon entering into the Credit Line, the Company issued warrants to Laurus to acquire 550,000 shares of the Company’s common stock at an exercise price exceeding the average trading price of the Company’s common stock over the ten trading days prior to the date of the warrant. The amount available under the Credit Line at December 31,1999 consist2004 and 2003 was $1,552 and $4,508, respectively.In February 2004, the Company entered into a separate $2,750 convertible note with Laurus (the “Term Note”). The Term Note carries an interest rate of 2.0% over the prime rate or a minimum of 6.0% (7.25% at December 31, 2004) and has a term of 3 years. Prior to amendments to the Term Note discussed below, the principal and interest on the Term Note could be converted into common stock of the
following:
YEAR ENDING DECEMBER 31, 2000........................................................ $579,724 2001........................................................ 116,958 -------- $696,682 ========In connection with certain installment notes payable toCompany at abank,fixed conversion price of $2.61 per share. Upon entering the Term Note, the Companymust comply with certain restrictive covenants on an annual basis. Asissued warrants to Laurus to acquire 125,000 shares ofDecember 31, 1999,its common stock. Borrowings under theCompany was not in compliance with these covenants. However, a waiver was obtained fromTerm Note were primarily used to retire thebank for the covenant violations as of December 31, 1999, which is effective until December 31, 2000. The financial covenants for which the Company was not in compliance were as follows: to make no payments to subsidiaries; to maintain debt service coverage, defined as net profit plus depreciation, of at least $470,000; and to not incur an operating loss. 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 F-21mortgage TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER– (Continued)Years Ended December 31,
1997, 1998 AND 1999 (CONTINUED) G. CONVERTIBLE NOTES PAYABLE (CONTINUED)2004, 2003 and 2002(Dollars in thousands except per share data)
debt on the
notes compounds at 6% per annum until maturity orCompany’s Glasgow facility. Remaining borrowings of approximately $750 were used to complete the build-out of the Glasgow facility, complete the consolidation the Company’s Glasgow operations into the new facility and provide funds for operations.Certain features of the Credit Line and Term Note (collectively, the “Laurus Loans”) require the Company to separately account for the value of certain amounts related to the warrants issued and the conversion feature of the Laurus Loans. Specifically, Emerging Issues Task Force (“EITF”) No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, requires the Company to separately value the warrants issued and the “beneficial conversion premium” related to the Laurus Loans. Any borrowings under the Credit Line may result in additional beneficial conversion premiums. The values of the warrants and the beneficial conversion premium have been recorded on the balance sheet as a
Designated Offering (as defined) ("Offering")debt discount andeitheran increase to additional paid in capital. The debt discount recorded for these items will bepayable in cash upon repaymentamortized as expense to the income statement over the terms of thenote atLaurus Loans orafteras thematurity date,warrants are exercised orif elected uponthecompletion of an Offering all accrued and unpaid interest shall bedebt is converted into common stock thereby increasing the effective interest rate on the Laurus Loans. In January and February 2004, Laurus exercised its conversion rights on the Credit Line and converted $2,000 of amounts outstanding on the Credit Line into approximately 910,000 shares of commonstock. The interest after an Offering shall be reduced to 3.6%, and shall become due for the remainderstock of thetermCompany. In connection with this conversion, the Company accelerated the amortization of approximately $480 of the beneficial conversion premium.In February 2004, Laurus waived the borrowing base limitation on the Credit Line, thereby making the full $7,500 facility available to the Company regardless of the available collateral. On August 31, 2004, Laurus agreed to extend the borrowing base waiver on the Credit Line through
the maturity date at the time of an Offering. The holder shall have the right to convert the principal amountsMarch 19, 2005. In addition, Laurus deferred certain payments due underthese notes into sharesthe Term Note and reduced the interest rate on both of theCompany'sLaurus Loans to 0% for any day the closing sale price of the Company’s common stock is atany time. Ifor above $1.75 per share. In return, the Companycompletes an Offering prior to September 25, 2000,lowered the conversion priceshall be either the lesser of $5.00 per share or 50%on each of theper 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 priceLaurus Loans tothe 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$1.00 per share and issued a warrant to Laurus covering an additional 400,000 common sharesif any, will be issued to reduceat an exercise price of $1.25 per share. The closing price of theconversion price toCompany’s common stock on August 31, 2004 was $1.20 per share.The August 31, 2004 Laurus modifications were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements is greater than 10%. As such,
lesser amount. If prior to consummation of an Offering,the Companyenters intorecorded amerger, consolidation,loss on extinguishment of debt of $2,859 at August 31, 2004 reflecting thesaledifference between (i) the recorded amount ofsubstantially alldebt, net ofits assets, changerelated discounts, ofcontrol, or$7,427 and (ii) thedissolutionfair value of theCompany or other event causing final liquidation,new debt instrument of $10,287 plus theholdersfair value of thenotes shall havenew warrants of $111. The difference between theright to elect to either receive payment in full of all principalfair value of thenotesnew debt of $10,287 andaccrued 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% ofthe face value of thenotes,debt of $8,572 represents a premium, whichis being recognized ratablywill be reflected as a reduction of interest expense over the life of thenotes. Thenew debt.Prospectively, draws on the Credit Line may result in beneficial conversion charges to the extent the price of the Company’s common stock exceeds the conversion price on the day of the draw. Such beneficial charges will be amortized as expense to the income statement during the period the draw remains outstanding or up to the point the debt is converted into common stock thereby increasing the effective interest rate
includingon theredemption premium,Credit Line.Principal repayments under the Term Note are scheduled as follows: $850 in 2005, $900 in 2006, and $800 in 2007.
Amortization of debt premiums and discounts totaled $1,644 during 2004 and $0 in each 2003 and 2002 and is reflected as interest expense in the accompanying statement of operations.
During 2002, Cruachem Ltd., a wholly owned subsidiary of the Company, entered into a mortgage loan with The Royal Bank of Scotland. The original principal amount of the loan was
9.3%£1.0 million. Principal and interest were payable in quarterly installments. The loan carried a 15-year term and a fixed annual interest rate of 6.77%. Security for this loan was the Company’s 45,000 square foot manufacturing facility located in Glasgow, Scotland. The loan carried certain financial and non-financial covenants that included a minimum net cash flow requirement. The net book value of the facility was approximately $2,000 at December 31,1999.2003. During February 2004, the Company repaid the principal balance of the mortgage loan and therefore, the Company included the entire outstanding principal balance of this loan at December 31, 2003 within current liabilities.F. COMMITMENTS AND CONTINGENCIES
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 whichhas been named as a defendant in a lawsuit filed in Spain by a prospective distributor who claims that the Companyis in compliance. At December 1999,breached a promise to grant theconvertible notes payable balance is comprisedplaintiff a distributorship for certain of thefollowing:
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-22Company’s products in a specific geographic area TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER– (Continued)Years Ended December 31,
1997, 1998 AND 1999 (CONTINUED) H. LEASE COMMITMENTS2004, 2003 and 2002(Dollars in thousands except per share data)
in Europe. The plaintiff is seeking monetary relief of approximately $500. The Company believes the lawsuit is without merit and intends to vigorously defend this matter.
The Company is subject to a number of other claims of various amounts, which arise out of the normal course of business. In the opinion of management, the disposition of all claims currently pending will not have a material adverse effect on the Company’s financial position, results of operations or cash flows, after considering amounts already reflected in the consolidated financial statements.
The Company leases certain equipment, vehicles and operating facilities. The
Company'sCompany’s leases related to its operating facilities currently expire on various datesranging from 1999through2006. However, one lease allows for cancellation at either 36 or 48 months upon 60 days advanced written notice.2010. At December 31,1999,2004, the future minimum lease payments required undernoncancellablenon-cancellable lease provisions are approximately$830,000$1,958 in2000; $591,0002005, $1,382 in2001; $304,0002006, $486 in2002; $148,0002007, $187 in2003; $128,0002008, $191 in2004;2009, anda total of approximately $188,000$181 inrental payments for the years 2005 through 2006.2010. Rent expense related to all operating leases for the years ended December 31,1997, 19982004, 2003 and19992002 was approximately$441,000, $655,000$2,007, $2,487 and$984,000,$2,266, respectively.I.At December 31, 2004, the Company had firm commitments totaling $798 to a vendor to purchase components used in WAVE Systems.
G. INCOME TAXES
Loss before income taxes consists of the following:
Years ended December 31, 2004 2003 2002 United States
$ (30,467 ) $ (19,809 ) $ (19,640 ) International
(3,999 ) (3,084 ) (1,620 ) $ (34,466 ) $ (22,893 ) $ (21,260 ) The
Company'sCompany’s provision for income taxes for the years ended December 31,1997, 19982004, 2003 and19992002 differs from the amounts determined by applying the statutory Federal income tax rate toincomeloss 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 =========== ========= ===========
2004 2003 2002 Benefit at Federal Rate
$ (11,718 ) $ (7,784 ) $ (7,228 ) Increase (decrease) resulting from:
State income taxes—net of federal benefit
(595 ) (485 ) (518 ) Foreign subsidiary tax rate difference
493 427 224 Research and development tax credit
(141 ) (250 ) (188 ) Impairment charges
3,569 — — Other—net
78 82 137 Valuation allowance
8,220 8,075 7,678 Total income tax expense (benefit)
$ (94 ) $ 65 $ 105 The
Company'sCompany’s deferred income tax asset at December 31,19982004 and19992003 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 ========== ==========
2004 2003 Net operating loss carryforward
$ 35,587 $ 29,292 Research and development credit carryforwards
1,328 1,188 Deferred revenue
708 400 Accrued vacation
81 134 Other
583 (422 ) 38,287 30,592 Less valuation allowance
(38,287 ) (30,592 ) $ — $ — TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
At December 31,
1999,2004, the Companyhashad total used federal tax net operating loss carryforwards of $91,474 of which $1,770 expire in 2008, $3,698 expire in 2009, $2,970 expire in 2010, $943 expire in 2011, $3,425 expire in 2012, $1,838 expire in 2018, $8,182 expire in 2019, $9,662 expire in 2020, $8,228 expire in 2021, $16,862 expire in 2022; $16,173 expire in 2023 and $17,723 expire in 2024. Of these federal net operating loss carryforwards, $11,820 were obtained in the acquisition of Annovis, Inc. and may be subject to certain restrictions. At December 31, 2004, the Company had unused state 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 expire in F-23TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) I. INCOME TAXES (CONTINUED) 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$37,619 that expire at various times between20102005 and2019. The Company's management believes2024. At December 31, 2004, the Company had unused research and development credit carryforwards of $1,328 thatit 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.expire at various times between 2008 and 2024. A valuation allowance has been providedin 1999for the remaining deferred tax assets, due to theCompany'sCompany’s cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.At December 31, 1998, the Company's management had determined that it was more likely than not that the deferred tax asset of $1,953,000 would be realized through expected profits in future years. J.H. EMPLOYEE BENEFIT PLAN
The Company maintains an employee 401(k) retirement savings plan
whichthat allows for voluntary contributions into designated investment funds by eligible employees. The Company matches theemployees'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 thePlan'sPlan’s participants. Company contributions were$92,733, $117,923 and $174,973approximately $500 for each of the three years ended December 31,1997, 1998 and 1999, respectively. K. STOCKHOLDERS'2004.I. STOCKHOLDERS’ EQUITY
PRIVATE PLACEMENTPreferred Stock.
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'sCompany’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;F-24TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) K. STOCKHOLDERS' EQUITY (CONTINUED)(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. 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.Common Stock.
During 2004, the Company issued 1,134,850 shares of common stock in conjunction with conversions under the Laurus Loans.
Date Price Shares
IssuedNet
Proceeds
Facility Applied To January 2004 $ 2.20 650,000 $ 1,422 Credit Line Principal February 2004 $ 2.20 259,091 570 Credit Line Principal December 2004 $ 1.00 150,000 146 Term Note Principal December 2004 $ 1.00 75,759 72 Term Note Interest 1,134,850 $ 2,210 In
March 2000,September 2003, theCompany's BoardCompany issued 1,780,000 shares ofDirectorsits common stock and in November 2003, the Company issued 2,720,000 shares of its common stock in privately-negotiated sales. These shares were sold pursuant to the terms of a Securities Purchase Agreement, dated August 27, 2003. The sale of these shares was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) as a sale not involving a public offering. These shares have been registered for resale under the Securities Act. The net proceeds to the Company, after payment of transaction fees and other expenses of the offering, were approximately $4,202.TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
In May 2001, Company shareholders approved
an increasethe adoption of the Transgenomic, Inc. 2001 Employee Stock Purchase Plan that was subsequently implemented in November 2001. Substantially all of the Company’s U.S. employees are eligible to participate in the Plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. Such deductions are accumulated during a defined participation period at the end of which each participant is deemed to have been granted an option to purchase shares of stock from the Company at 85% of the fair market value of the Company stock as measured by the closing price of the stock on either the first or last business day of the participation period, whichever is lower. The number ofauthorized commonsharesto 60,000,000, subject topurchased under theapprovaloption is based upon the participants elected withholding amount. At the end of theCompany's stockholders. L.participation period such option is automatically exercised. This plan is structured to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. During 2004, 2003 and 2002 there were 76,902, 107,077 and 56,842 shares issued under this plan, respectively.Common Stock Warrants.
The following is a summary of the 1,159,421 common stock warrants outstanding at December 31, 2004. No warrants expired or were exercised during 2004.
Warrant Holder
Issue
YearExpiration
YearUnderlying
SharesExercise
PriceLaurus Master Fund, Ltd.(1)
2003 2010 200,000 $ 2.25 Laurus Master Fund, Ltd.(1)
2003 2010 200,000 $ 2.44 Laurus Master Fund, Ltd.(1)
2003 2010 150,000 $ 2.32 Laurus Master Fund, Ltd.(1)
2004 2011 125,000 $ 3.11 Laurus Master Fund, Ltd.(1)
2004 2011 400,000 $ 1.25 TN Capital Equities, Ltd.(1)
2003 2008 45,918 $ 2.94 TN Capital Equities, Ltd.(1)
2004 2009 15,566 $ 3.18 GE Capital(2)
2002 2007 13,762 $ 3.27 GE Capital(2)
2003 2008 9,175 $ 3.27
(1) These warrants were issued in conjunction with the Laurus Loans and subsequent modifications. Refer to Note E.
(2) These warrants were issued in conjunction with operating leases with GE Capital. While the leases have since been terminated, the warrants are still outstanding. J. STOCK OPTIONS
AND WARRANTSThe
Company adopted theCompany’s 1997 Stock Option Plan,in June of 1997 which was lastas amendedand restated on October 14, 1998. The Company's 1997 Stock(the “Stock OptionPlan (the "Stock Option Plan"Plan”), allows the Company to grant both incentive stock options and nonqualified stock options to acquire shares of theCompany'sCompany’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 is4,000,000.7,000,000. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors (the"Committee"“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 either 20% per year over afivefive-year period or 33 1/3% per year over a three-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-25TRANSGENOMIC, 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,
1999:2004:
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 =========
Number of
OptionsWeighted
Average
Exercise
PriceBalance at January 1, 2002
5,133,831 6.90 Granted
632,000 5.09 Exercised
(81,900 ) 5.01 Forfeited
(539,021 ) 7.69 Balance at December 31, 2002:
5,144,910 6.62 Granted
1,282,000 1.64 Exercised
— — Forfeited
(733,994 ) 7.25 Balance at December 31, 2003:
5,692,916 6.62 Granted
360,000 1.70 Exercised
— — Forfeited
(964,879 ) 5.24 Balance at December 31, 2004:
5,088,037 $ 5.09 Exercisable at December 31, 2004
4,214,214 $ 5.55 TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
The weighted average fair value per share of options granted in
1997, 19982004, 2003 and19992002 was$1.34, $1.02$0.40, $0.93 and$1.00,$2.92, 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 shares of common stock with an aggregate fixed cost of $75,000 to a member of the Company's Board of Directors at an exercise price which is the lower of (a) $5.00 per share for 15,000 shares or (b) 50% of the price per share at which the Company offers common stock in an initial public offering, of which 66.67% of the 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 OpinionAPB 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 using the straight-line method over the vesting periods of the individual stock options.During December 1999,Stock-based compensation expense recorded by the Company
recordedrepresents amortization of unearned compensationof $112,500 forrelated to options granted to employees with an exercisepricesprice less than the deemed fair market value at the date ofgrant. F-26TRANSGENOMIC, 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 incomegrant andincome per share is required by Statement of Financial Accounting Standard No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS No. 123) assumingoptions granted to non-employees. During 2004, 2003 and 2002, the Companyaccounted for its employee stock options using the fair value method.recorded compensation expense of $0, $93 and $131, respectively. Thefair value of each stock option granted is estimated at the date of grantexpense amounts were calculated using the Black-Scholes optionpricing 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 would equal 10% of gross revenues received by the Company from the licensed technology, payable F-27TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) M. RELATED PARTY TRANSACTIONS (CONTINUED) 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-Scholespricing model with the following assumptions: no common stock dividends,risk freerisk-free interestrate of 5.71%rates ranging from 3.10% to 6.53%; volatility ranging from 35% to 85%; and an expected option life of12 months; and no volatility. These warrants were completely amortized1 to 7.5 years.The following table summarizes information about options outstanding as of December 31,
1998. N. COMMITMENTS2004:
Options Outstanding Options Exercisable Range of Exercise Prices
Number
OutstandingWeighted-
Average
Remaining
Contractual
LifeWeighted-
Average
Exercise
PriceNumber
ExercisableWeighted-
Average
Exercise
Price(in years) $ 1.00—$ 1.30
408,335 6.8 $ 1.30 155,011 $ 1.30 $ 1.31—$ 2.60
1,009,167 7.9 $ 1.89 551,850 $ 1.90 $ 2.61—$ 3.90
50,002 5.5 $ 2.90 38,336 $ 2.90 $ 3.91—$ 5.20
2,142,200 3.0 $ 5.00 2,142,200 $ 5.00 $ 5.21—$ 6.50
768,182 6.1 $ 6.16 692,633 $ 6.15 $ 6.51—$ 9.10
10,000 6.4 $ 9.00 10,000 $ 9.00 $ 9.11—$10.40
396,420 5.6 $ 9.88 358,253 $ 9.88 $10.41—$13.00
303,731 5.2 $ 12.80 265,931 $ 12.81 5,088,037 5.1 $ 5.09 4,214,214 $ 5.55 K. OPERATING SEGMENT AND
CONTINGENCIESGEOGRAPHIC INFORMATIONThe Company operates in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company’s Balance Sheet are made at the corporate level and, accordingly, operating segment Balance Sheet information 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 onetypically reviewed by operatingsegment. Accordingly, management of the Company evaluates performance and determines the allocation F-28decision makers. TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER– (Continued)Years Ended December 31,
1997, 1998 AND 1999 (CONTINUED) O. SALES AND PRODUCT INFORMATION (CONTINUED)2004, 2003 and 2002(Dollars in thousands except per share data)
The BioSystems operating segment generates revenue from the sale of
resources on an entity-wide basis. Thereautomated instrument systems and associated consumable products and services. This segments products are based upon two of the Company’s three core competencies, separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE system, related bioconsumables and research services.The Nucleic Acids operating segment generates revenue from the sale of products and services based upon all three of the Company’s core competencies, nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segments main products are nucleic acid building blocks or “phosphoramidites”, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.
The following is information for net sales and operating income by segment.
2004 2003 2002 Net Sales
BioSystems
$ 25,243 $ 26,044 $ 24,235 Nucleic Acids
8,546 7,822 13,319 Total
$ 33,789 $ 33,866 $ 37,554 Loss from operations
BioSystems
$ (2,294 ) $ (2,786 ) $ (9,417 ) Nucleic Acids
(17,623 ) (12,440 ) (1,004 ) Corporate
(9,143 ) (7,362 ) (11,276 ) Total
$ (29,060 ) $ (22,588 ) $ (21,697 ) During 2004, sales to Geron Corporation totaled $4,151 and represented 49% of net sales within our Nucleic Acids operating segment and 12% of total consolidated net sales. During 2003 and 2002 no
material long-livedsingle customer accounted for more than 10% of operating segment or consolidated net sales.The following is information for fixed assets
held outside the United States.and fixed asset additions by segment. Fixed assets are tracked by location and department and thus can be identified to operating segments even though specific segment Balance Sheets are not produced.
2004 2003 Fixed Assets
BioSystems
$ 2,695 $ 3,412 Nucleic Acids
10,150 13,991 Corporate
680 1,301 Total
$ 13,525 $ 18,704 Fixed Asset Additions
BioSystems
$ 901 $ 1,000 Nucleic Acids
848 5,393 Corporate
9 20 Total
$ 1,758 $ 6,413 The following is supplemental information for net sales by geographic area.
2004 2003 2002 Sales by Geographic Area:
United States
$ 13,580 $ 12,251 $ 16,805 Europe
15,392 15,955 16,011 Pacific Rim
2,794 3,335 4,129 Other
2,023 2,325 609 Total
$ 33,789 $ 33,866 $ 37,554 Long-lived assets by geographic area as of December 31 are as follows:
2004 2003 United States
$ 7,754 $ 20,935 Europe
7,564 9,705 Pacific Rim
11 32 Total
$ 15,329 $ 30,672 TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Years Ended December 31, 2004, 2003 and
product group:
1997 1998 1999 ----------- ----------- -----------Sales by Geographic Area: United States........................ $ 6,435,359 $10,214,962 $10,001,539 Europe............................... 3,009,936 6,248,695 9,286,394 Pacific Rim.......................... 1,620,735 1,704,190 2,992,099 Other................................ 510,647 767,593 754,922 ----------- ----------- ----------- 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 Reduction of equity and increase in other accrued expenses for redemption of preferred stock and preferred stock dividends.......... $52,161 -- --Q. ALLOWANCE FOR DOUBTFUL ACCOUNTS2002(Dollars in thousands except per share data)
L. QUARTERLY RESULTS (UNAUDITED)
The following
is a summarytable contains selected unaudited consolidated statements ofactivityoperations data forthe allowanceeach quarter fordoubtful acounts duringfiscal years 2004 and 2003.
2004 1st
Quarter2nd
Quarter3rd
Quarter4th
QuarterTotal Net Sales
$ 8,629 $ 9,011 $ 8,194 $ 7,955 $ 33,789 Gross Profit
$ 2,861 $ 3,153 $ 1,337 $ 1,842 $ 9,193 Net loss
$ (3,859 ) $ (15,132 ) $ (8,442 ) $ (6,939 ) $ (34,372 ) Basic & Diluted Loss Per Share
$ (0.13 ) $ (0.52 ) $ (0.29 ) $ (0.24 ) $ (1.19 ) Basic and Diluted Weighted Average Shares Outstanding
28,728 29,053 29,078 29,338 29,006
2003 1st
Quarter2nd
Quarter3rd
Quarter4th
QuarterTotal Net Sales
$ 9,505 $ 8,481 $ 7,537 $ 8,343 $ 33,866 Gross Profit
$ 3,691 $ 2,556 $ 775 $ 2,529 $ 9,551 Net loss
$ (3,596 ) $ (4,670 ) $ (6,097 ) $ (8,595 ) $ (22,958 ) Basic & Diluted Loss Per Share
$ (0.15 ) $ (0.20 ) $ (0.25 ) $ (0.32 ) $ (0.94 ) Basic and Diluted Weighted Average Shares Outstanding
23,519 23,540 24,177 26,723 24,484 Earnings per share are computed independently for 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) 160,593R. SUBSEQUENT EVENTSquarters presented. Therefore, the sum of the quarterly per share losses may not equal the annual loss per share.M. SALE OF SPECIALTY OLIGONUCLEOTIDE MANUFACTURING FACILITY
On
March 7, 2000,November 11, 2004, the Companysignedsold the assets associated with its specialty oligonucleotides manufacturing facility in Boulder, Colorado to alettersubsidiary ofintent forEyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3,000 in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2,377. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2,700. In conjunction with this transaction, we recorded a gain on sale of $1,466 in the fourth quarter of 2004.N. RESTRUCTURING PLANS
On November 13, 2004, the Company’s Board of Directors approved a restructuring plan designed to refocus on the BioSystems operating segment and to better align the Company’s cost structure with anticipated revenues. The plan (which is incremental to the sale of the
assetsspecialty oligonucleotide manufacturing facility in Boulder, Colorado facility) included a workforce reduction of approximately 60 positions and the closure of two domestic research and development facilities associated with our Nucleic Acids operating segment and two European field offices. Additionally, the Company eliminated approximately 10 positions at itsnon-life sciences instrument product linechemical building blocks manufacturing facility in Glasgow, Scotland. In conjunction with these changes, the Company incurred a charge of $3,570 during the quarter ending December 31, 2004 consisting of severance benefits of $1,406, future rents on closed facilities (net of projected sublease rents) of $1,241, the write-off property and equipment specifically attributable to closed facilities of $740 and other costs of $183. The Company had accrued expenses associated with this restructuring plan of $1,909 at December 31, 2004 of which $1,486 is expected to be paid 2005 and $423 in 2006.TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
During the fourth quarter of 2002 management formulated and executed a
directorsignificant portion of a restructuring plan. The plan was developed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. Specifically, in the fourth quarter of 2002 the Company notified approximately 60 employees of their termination, notified landlords of our intent to close four facilities and reduce our space commitment under lease at two other facilities, terminated certain consulting and collaboration agreements and abandoned certain patents. As a result of the plan $3,282 in restructuring charges were recorded and are included in operating expenses. These charges consisted of approximately $775 of employee severance costs, $1,200 in office closure related costs, $400 of collaboration and other agreement termination charges and $900 in write-offs of abandoned intellectual property. Approximately 45% of the total charges were for non-cash items. Additional restructuring charges totaling $741 were incurred in the first half of 2003. The Companyfor $6,000,000,had accrued expenses associated with these restructuring activities ofwhich $5,000,000 will be paid in cash$0 at December 31, 2004 and$1,000,000 will be paid with an interest-bearing promissory note due$227 at December 31, 2003.O. SUBSEQUENT EVENTS
On March 18, 2005, Laurus agreed to further extend the borrowing base waiver on the Credit Line until 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-29UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma statement of operations for the three months ended March 31, 2000 and the year ended December 31, 1999 reflects the sale of assets related to our non-life sciences instrument product line on May 19, 2000 as if the sale had occurred on January 1, 1999. The following unaudited pro forma balance sheet reflects the sale as if it had been completed on March 31, 2000. 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 financial data are intended for informational purposes only and are not intended to be indicative of our results of operations or financial position had this transaction 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-30TRANSGENOMIC, INC. UNAUDITED PRO FORMA BALANCE SHEET MARCH 31, 2000
ADJUSTMENTS FOR SALE OF NON-LIFE SCIENCES INSTRUMENT THE PRODUCT THE COMPANY LINE COMPANY (1) (2A) PRO FORMA ------------ ----------- ------------ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 142,870 $3,640,000 $ 3,782,870 Accounts receivable, net.................................. 5,083,542 -- 5,083,542 Note receivable........................................... -- 2,000,000 2,000,000 Inventories............................................... 2,318,751 -- 2,318,751 Prepaid expenses and other current assets................. 677,379 -- 677,379 Net assets held for sale.................................. 4,711,540 (4,711,540) -- Refundable income taxes................................... 96,000 -- 96,000 ------------ ---------- ------------ Total current assets.................................... 13,030,082 928,460 13,958,542 PROPERTY AND EQUIPMENT, Net................................. 3,103,511 -- 3,103,511 DEMONSTRATION INVENTORY..................................... 276,318 -- 276,318 OTHER ASSETS................................................ 2,419,869 (180,000) 2,239,869 ------------ ---------- ------------ $ 18,829,780 $ 748,460 $ 19,578,240 ============ ========== ============ LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) CURRENT LIABILITIES Notes payable-bank........................................ $ 4,490,000 $ -- $ 4,490,000 Current portion of notes payable-other.................... 547,188 -- 547,188 Accounts payable.......................................... 3,944,069 -- 3,944,069 Accrued compensation...................................... 445,371 -- 445,371 Other accrued expenses.................................... 1,236,278 -- 1,236,278 ------------ ---------- ------------ Total current liabilities............................... 10,662,906 -- 10,662,906 NOTES PAYABLE-other, less current maturities................ 34,609 -- 34,609 CONVERTIBLE NOTES PAYABLE................................... 12,746,844 -- 12,746,844 STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock........................................... -- -- -- Common stock.............................................. 130,250 -- 130,250 Additional paid-in capital................................ 11,723,578 -- 11,723,578 Unearned compensation..................................... (645,074) -- (645,074) Accumulated deficit....................................... (15,841,984) 748,460 (15,093,524) Accumulated other comprehensive loss...................... 18,651 -- 18,651 ------------ ---------- ------------ Total stockholders' equity (deficit).................... (4,614,579) 748,460 (3,866,119) ------------ ---------- ------------ $ 18,829,780 $ 748,460 $ 19,578,240 ============ ========== ============SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION. F-31TRANSGENOMIC, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
ADJUSTMENTS FOR SALE OF NON-LIFE SCIENCES THE INSTRUMENT THE COMPANY PRODUCT COMPANY (1) LINE PRO FORMA ----------- ----------- ------------NET SALES................................................. $ 6,943,749 $2,170,675 (3a) $ 4,773,074 COST OF GOODS SOLD........................................ 3,830,519 1,432,956 (3a,b) 2,397,563 ----------- ---------- ------------ Gross profit.......................................... 3,113,230 737,719 2,375,511 OPERATING EXPENSES General and administrative.............................. 1,754,741 660,439 (3b,c) 1,094,302 Marketing and sales..................................... 2,493,849 328,484 (3b) 2,165,365 Research and development................................ 1,893,581 419,222 (3b) 1,474,359 ----------- ---------- ------------ 6,142,171 1,408,145 4,734,026 ----------- ---------- ------------ LOSS FROM OPERATIONS...................................... (3,028,941) (670,426) (2,358,515) OTHER INCOME (EXPENSE) Interest expense, net................................... (468,968) -- (468,968) ----------- ---------- ------------ LOSS BEFORE INCOME TAXES.................................. (3,497,909) (670,426) (2,827,483) INCOME TAX EXPENSE........................................ -- -- -- ----------- ---------- ------------ NET LOSS.................................................. $(3,497,909) $ (670,426) $ (2,827,483) =========== ========== ============ BASIC AND DILUTED LOSS PER SHARE.......................... $ (0.27) $ (0.22) =========== ============ BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING..... 13,007,692 13,007,692 =========== ============SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION. F-32TRANSGENOMIC, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
ADJUSTMENTS FOR SALE OF NON-LIFE SCIENCES THE INSTRUMENT THE COMPANY PRODUCT COMPANY (1) LINE PRO FORMA ----------- ----------- ------------NET SALES................................................. $23,034,954 $8,794,165 (3a) $ 14,240,789 COST OF GOODS SOLD........................................ 12,090,036 4,924,757 (3a,b) 7,165,279 ----------- ---------- ------------ Gross profit.......................................... 10,944,918 3,869,408 7,075,510 OPERATING EXPENSES General and administrative.............................. 3,771,663 236,808 (3b,c) 3,534,855 Marketing and sales..................................... 7,759,997 1,610,369 (3b) 6,149,628 Research and development................................ 6,296,859 1,728,827 (3b) 4,568,032 ----------- ---------- ------------ 17,828,519 3,576,004 14,252,515 ----------- ---------- ------------ LOSS FROM OPERATIONS...................................... (6,883,601) 293,404 (7,177,005) OTHER INCOME (EXPENSE) Interest expense, net................................... (1,198,378) -- (1,198,378) Other, net.............................................. 366 -- 366 ----------- ---------- ------------ (1,198,012) -- (1,198,012) ----------- ---------- ------------ LOSS BEFORE INCOME TAXES.................................. (8,081,613) 293,404 (8,375,017) INCOME TAX EXPENSE........................................ 1,745,273 -- 1,745,273 ----------- ---------- ------------ NET LOSS.................................................. $(9,826,886) $ 293,404 $(10,120,290) =========== ========== ============ BASIC AND DILUTED LOSS PER SHARE.......................... $ (0.76) $ (0.78) =========== ============ BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING..... 13,000,000 13,000,000 =========== ============SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION. F-33NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION On May 19, 2000, we sold the assets related to our non-life sciences instrument product line to a company controlled by Stephen F. Dwyer, a director and a principal stockholder of ours, for a total adjusted purchase price of $5.65 million plus reimbursement by the buyer of expenses paid by us since March 31, 2000 in2006. In connection with thisproduct line. Approximately $4,000,000 was paid in cash atwaiver, theclosing and $2,000,000 was paid with an interest-bearing promissory note due on December 30, 2000. The note bears interest at 8.75% per annum. The purchaser financed the cash portionCompany agreed to allow Laurus to convert $1,872 of thepurchase price plus initial working capital needs with borrowingsoutstanding principal balance under the Credit Line into 3,600,000 shares ofapproximately $4.6 million obtained from a bank. We haveits common stock. In addition, on March 24, 2005 the Company agreedwithto allow Laurus to convert $650 of thebank that we will acquire the notes evidencing these loans from the bank upon closing of our initial public offering by paying to the bank an amount equal to the entireoutstanding principal balance of thenotes plus accrued and unpaid interest. If the offering is not completed, we are under no obligation to acquire these notes. Mr. Dwyer has agreed to pledge 1,200,000Term Note into 1,250,000 shares ofourcommonstock ownedstock. As a result, the Company increased the amount available under the Credit Line byhim as security for the acquired notes. All of these shares will be held in an escrow account as security for the notes. We anticipate that we will exercise our right to cause the shares to be sold in order to pay$1,872 and eliminated substantially all remaining 2005 scheduled principaland interestpayments on theacquired notes when due, subjectTerm Loan.P. RESTATEMENT OF STATEMENTS OF CONSOLIDATED CASH FLOWS
Subsequent to
a 180-day lock-up agreement. The acquired notes will mature on December 30, 2000 and will bear interest at a ratethe issuance of8.75% per annum. The unaudited pro forma statement of operationsthe Company’s financial statements for the year ended December 31,1999 and2004, thethree months ended March 31, 2000 reflects this sale, as ifCompany’s management determined that it hadoccurred on January 1, 1999.incorrectly included the amortization of software development costs within net cash flows from investing activities rather than within net cash flows from operating activities. Theunaudited pro forma balance sheet reflects thisCompany’s management also determined that restricted common stock accepted as payment for goods and services from one of the Company’s customers and subsequently sold was incorrectly classified within the consolidated statements of cash flows. It is the Company’s policy to account for restricted common stock received in settlement of a customer’s accounts receivable as available for sale securities. The sale of such securities should be reflected in the consolidated statements of cash flows asif itan investing activity. Available for sale securities acquired for goods and services should be reflected as non-cash transactions.As a result, the Company’s consolidated statements of cash flows for the fiscal years ended December 31, 2004 and 2003 have been restated from the amounts previously reported to correct these errors. This restatement had
been completed on March 31, 2000. The unaudited pro forma financial data are basedno impact on thefollowing: 1. Our March 31, 2000 historicalstatements of consolidatedfinancial statements. 2. The pro forma balance sheet adjustments are as follows: a. The adjustments to reflect the sale of assets relating to our non-life sciences instrument product line as follows:
Inventories........................................... $2,485,722 Property, net......................................... 510,410 Other assets.......................................... 1,839,611 Accrued liabilities................................... (124,203) ---------- Net assets sold....................................... 4,711,540 Purchase Price: Cash................................................ 4,000,000 Less estimated working capital adjustments.......... (360,000) Note Receivable..................................... 2,000,000 5,640,000 ---------- --------- Preliminary gain on sale............................ 928,460 Utilization of deferred tax benefit................. (180,000) --------- Net adjustment to equity.............................. $ 748,460 =========3. The pro forma statement of operations adjustmentscash flows for thesale of the assets relating to our 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 for thefiscal year ended December 31,1999 is based on an allocation of each department's expenses based2002. In addition, this restatement had no impact on theratioCompany’s consolidated balance sheets or consolidated statements ofactual life-sciences and non-life sciences individual employees' wages for each departmentoperations. The impact of this restatement on the consolidated statements of cash flows is as follows: (dollars inproportion to such department's total wages. Our management believes such method is reasonable.thousands):
2004 As
Previously
Reported2004
As
Restated2003 As
Previously
Reported2003
As
RestatedDepreciation and amortization
$ 4,009 $ 4,625 $ 3,981 $ 4,597 Trading securities acquired in settlement of accounts receivable
(4,397 ) — (1,843 ) — Proceeds from sales of trading securities
4,269 — 1,907 1,519 Purchase of trading securities
— — — (1,566 ) Accounts receivable
1,063 (3,334 ) 619 342 Net cash flows from operating activities
(9,101 ) (12,754 ) (13,245 ) (13,017 ) Proceeds from the maturities and sale of available for sale securities
— 4,269 3,612 4,000 Change in other assets
1,138 522 73 (543 ) Net cash flows from investing activities
2,380 6,033 (2,719 ) (2,947 ) 25,038,320 Shares
TRANSGENOMIC, INC.
COMMON STOCK
PROSPECTUS
, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution The
elimination forfollowing table indicates thethree months ended March 31, 2000 is based on actual department expenses. F-34c. An increase in general and administrativeexpenses toreflect $200,000 and $50,000 of anticipated increased rental costs for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively, which willbeincurred by us as a result of the sale of the assets relating to our non-life sciences instrument product line. We will be required to relocate to a separate facility subsequent to the sale. A decrease in general and administrative costs to eliminate $573,600 of non-recurring compensation costsincurred in connection with theaccelerationoffering described in this Registration Statement, other than the underwriting discounts and commissions, all ofvestingwhich will be paid by the Company. All amounts are estimates, other than the SEC registration fee.
Securities and Exchange Commission filing fee
$ 2,371 Legal fees and expenses
10,000 Accounting fees and expenses
15,000 Printing and engraving
1,500 Miscellaneous expenses
1,129 Total
$ 30,000
Item 14. Indemnification of Directors and Officers Section 145 of
employee optionsthe 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, the Registrant’s Third 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 the Registrant 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 Third Amended and 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, the Registrant’s Third Amended and Restated Certificate of Incorporation and its Bylaws provide that (1) the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, (2) the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law, (3) the Registrant is 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 Third Amended and Restated Certificate of Incorporation and Bylaws are not exclusive.
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;
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(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 Section 174 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.
The Company maintains a director and officer insurance policy which insures the directors and officers of the Company against damages, judgments, settlements and costs incurred by reason of certain wrongful acts committed by such persons in their capacities as directors and officers.
Item 15. Recent Sales of Unregistered Securities On October 31, 2005, we issued to a group of unaffiliated institutional investors 14,925,743 shares of our common stock, together with warrants to purchase an additional 5,970,297 shares of the Registrant’s common stock. The warrants carry an exercise price of $1.20 per share, are not callable and expire in 5 years. The shares and warrants were issued pursuant to the terms of certain Securities Purchase Agreements which were authorized and approved by our shareholders at a special meeting of the shareholders held on October 26, 2005. The aggregate proceeds from the sale were $15.08 million. We paid the placement agent a commission and expenses consisting of cash in the amount of $1.08 million. Additionally, we issued to the placement agent a warrant to purchase 932,859 shares of our common stock at an exercise price of $1.20 per share.
The offer and sale of these securities was exempt from the registration requirements of the
assets relatingSecurities Act of 1933, as amended (the “Act”) under Section 4(2) of the Act and Rule 506 of Regulation D.On September 9, 2003, we issued 1,780,000 shares of our common stock and, on November 13, 2003, we issued 2,720,000 shares of our common stock in privately-negotiated sales to certain unaffiliated institutional investors. The sale of these shares was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) as a sale not involving a public offering. These shares were sold pursuant to the terms of a Securities Purchase Agreement, dated August 27, 2003. The net proceeds to us, after payment of a 5% sales commission to Fahnestock & Co. Inc., who acted as our
non-life sciences instruments product line. These adjustmentsplacement agent for theyear ended December 31, 1999sale, and other expenses of thethree months ended March 31, 2000 are reflected as follows:offering, were approximately $4.24 million.
1999 2000 --------- --------EliminationItem 16. Exhibits.
2.1 Agreement and Plan of the non-life sciences instruments product line's generalMerger, dated as of April 30, 2001, by andadministrative expenses... $ 436,808 $136,839 Eliminationamong Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.1 to Registrant’s Report on Form 8-K filed on May 31, 2001)2.2 Addendum to Agreement and Plan of non-recurring compensation expenses..... -- 573,600 Anticipated increased rental costs..................... (200,000) (50,000) --------- -------- Net reduction in generalMerger, dated as of May 18, 2001, by andadministrative expenses... $ 236,808 $660,439 ========= ========d. No tax adjustment has been made due to our current net operating loss position. F-35- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 16: EXHIBITS AND FINANCIAL STATEMENTS; SCHEDULES (a) Exhibits.
1among Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.2 to Registrant’s Report on Formof Underwriting Agreement* 28-K filed on May 31, 2001)II-2
2.3 Asset Purchase Agreement, dated May 16, 2000as of November 8, 2004, by and betweentheRegistrant andSD AcquisitionEyetech Boulder Inc.*(incorporated by reference to Exhibit 2.3 to Registrant’s Annual Report on Form 10-K filed on April 15, 2005)3.1 SecondThird Amended and Restated Certificate of Incorporation of the Registrant*Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005)3.2 Bylaws of the Registrant* 4Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)4.1 Form of Certificate of the Registrant'sRegistrant’s CommonStock* 5Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)5.1 Opinion of Kutak Rock LLP*LLP10.1 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 SecondFourth Amended and Restated 1997 Stock Option Plan of the Registrant* 10.7Registrant (incorporated by reference to Exhibit 10.1 to Registrant’s Annual Report on Form 10-K filed on April 15, 2005)10.2 1999 UK Approved Stock Option Sub Plan of the Registrant* 10.8Registrant (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)10.3 Employee Stock Purchase Plan of the Registrant (incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-8 (Registration No. 333-71866) filed on October 19, 2001) 10.4 Employment Agreement, dated April 1, 2000, by and between the Registrant and ColinCollin J.D'Silva*D’Silva (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)10.5 Amendment No. 1 to the Employment Agreement, effective March 1, 2000, by and between Transgenomic, Inc. and Collin D’Silva (incorporated by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q filed on May 17, 2004) 10.6 Employment Agreement, effective July 31, 2004, by and between Transgenomic, Inc. and Michael A. Summers (incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004) 10.7 Employment Agreement, dated April 1, 2000,January 22, 2002, between the Registrant andWilliam P. Rasmussen* 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* 10.14 License Agreement, dated September 1, 1994, between the Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated MarchKeith A. Johnson (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on May 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.* 10.19 Waiver Letter of First National Bank of Omaha dated March 7, 2000* 10.20 Business Property Lease, dated April 20, 2000, between the Registrant and Todd Smith* 10.21 First Amendment to Amended and Restated Loan Agreement, dated May 15, 2000, between the Registrant and First National Bank of Omaha* 10.22 Waiver Letter of First National Bank of Omaha dated May 15, 2000* 10.23 Takeout Agreement, dated May 19, 2000, between Registrant and Nebraska State Bank* 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*- ------------------------ * Previously filed. + 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-1SIGNATURES Pursuant to the requirements of the Securities Act of 1933, we have duly caused Amendment No. 3 to 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 27th day of June 2000.
TRANSGENOMIC, INC. By: /s/ COLLIN J. D'SILVA ----------------------------------------- Collin J. D'Silva CHAIRMAN AND CHIEF EXECUTIVE OFFICERPursuant to the requirements of the Securities Act of 1933, Amendment No. 3 to this Registration Statement has been signed by the following persons in the capacities indicated as of the 27th day of June 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/ WILLIAM P. RASMUSSEN ------------------------------------------- Chief Financial Officer (Principal Financial William P. Rasmussen 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 /s/ PARAG SAXENA* ------------------------------------------- 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-2EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------------------- -----------1 Form of Underwriting Agreement* 2 Asset Purchase Agreement, dated May 16, 2000 between the Registrant and SD Acquisition Inc.* 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant* 3.2 Bylaws of the Registrant* 4 Form of Certificate of the Registrant'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*2002)10.8 Employment Agreement, dated April 1, 2000, between the Registrant and Colin J. D'Silva* 10.9 Employment Agreement, dated April 1, 2000, between the Registrant and William P. Rasmussen* 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* 10.14License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997+* 10.151997 (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)II-3
10.9 License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University+* 10.16University (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)10.10 License Agreement, dated December 1, 1989, between Cruachem Holdings Ltd. (a wholly-owned subsidiary of the Registrant) and Millipore Corporation (incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002) 10.11 Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Ltd. (a wholly-owned subsidiary of the Registrant) and Applied Biosystems, Inc. (incorporated by reference to Exhibit 10.14 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002) 10.12 Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2002) 10.13 License Amendment Agreement, dated June 2, 2003, by and between Geron Corporation and the Registrant (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2003) 10.14 Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments*+ 10.17 LeaseInstruments (incorporated by reference to Exhibit 10.16 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)10.15 Form of Securities Purchase Agreement dated November 2, 1998,by and between the Registrant andWestlake Development Company, Inc.* 10.18 Leasevarious counterparties, dated August 27, 2003 (incorporated by reference to Exhibit 10 to the Registrant’s Report on Form 8-K filed on August 29, 2003)10.16 Securities Purchase Agreement dated May 15, 1996, between Interaction Chromatography Inc.by andWestlake Development Co., Inc.* 10.19 Waiver Letter of First National Bank of Omaha dated March 7, 2000* 10.20 Business Property Lease, dated April 20, 2000,between the Registrant andTodd Smith* 10.21 FirstGeron Corporation, dated June 2, 2003 (incorporated by reference to Exhibit 10.0 to Amendment No. 3 tothe AmendedRegistration Statement on Form S-3 (Registration No. 333-108319) as filed on October 14, 2003)10.17 Security Agreement by and Restated Loan Agreement, dated May 15, 2000,between the Registrant andFirst National BankLaurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 ofOmaha* 10.22 Waiver Letter of First National Bank of Omaha dated May 15, 2000* 10.23 Takeoutthe Registrant (Registration No. 333-111442) filed on December 22, 2003)10.18 Amendment to Security Agreement dated May 19, 2000,and Related Documents by and between the Registrant andNebraska State Bank* 21 SubsidiariesLaurus Master Fund, Ltd., dated August 31, 2002 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)10.19 Secured Revolving Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant*Registrant (Registration No. 333-111442) filed on December 22, 2003)10.20 Secured Convertible Minimum Borrowing Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003) II-4
10.21 Secured Convertible Minimum Borrowing Note Series B by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003, as amended on April 15, 2004 (incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-114661) filed on April 21, 2004) 10.22 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003) 10.23 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003) 10.24 Common Stock Purchase Warrant by and between the Registrant and TN Capital Equities, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003) 10.25 Securities Purchase Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004) 10.26 Amendment to Securities Purchase Agreement and Related Document by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004) 10.27 Secured Convertible Term Note by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004) 10.28 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004) 10.29 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004) 10.30 Common Stock Purchase Warrants by and between the Registrant and TN Capital Equities, Ltd., dated March 1, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004) II-5
10.31 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004) 10.32 Engagement Agreement by and between the Registrant and Goldsmith, Agio, Helms Securities, Inc., dated March 19, 2004, as amended August 12, 2004 (incorporated by reference to Exhibit 10.10 to Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004) 10.33 Form of Securities Purchase Agreement by and between the Registrant and various counterparties dated September 22, 2005 (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005) 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Kutak Rock LLP (included in Exhibit 5)*5.1)24 Powers of Attorney* 27 Financial Data Schedule*Attorney (included on page II-8 hereto)- ------------------------ * Previously filed. + Certain confidential portions
Item 17. Undertakings We undertake:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) to include any Prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after the effective date of this
Exhibit were omittedregistration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement;(iii) to include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement (notwithstanding the foregoing, any increase or decrease in volume of securities (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” in this registration statement); provided, however, that the undertakings set forth in paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement.
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(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of
redactingaportionpost-effective amendment any of thetext. This Exhibit has been filed separately withsecurities being registered which remain unsold at theSecretarytermination of theCommission withoffering.(4) That, for purposes of determining any liability under the
redacted textSecurities Act of 1933, each filing of the Registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.(5) 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
Registrant's Application Requesting Confidential Treatment under Rule 406provisions referred to in Item 15 (other than the insurance policies referred to therein), or otherwise, the Registrant has been advised that in the opinion of the SecuritiesAct.and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 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 against the Registrant by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Omaha, Nebraska, on the November 28, 2005.
TRANSGENOMIC, INC.
By: /s/ COLLIN J. D’SILVA Collin J. D’Silva, President and Chief Executive Officer POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, whose signatures appear below, hereby constitute and appoint Collin J. D’Silva and Michael Summers, or either of them, as their true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for them and in their name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as full and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Date: November 28, 2005
By: /s/ COLLIN J. D’SILVA Collin J. D’Silva, President, Chief Executive Officer and Director (Principal Executive Officer) Date: November 28, 2005
By: /s/ MICHAEL A. SUMMERS Michael A. Summers Chief Financial Officer (Principal Financial Officer) Date: November 28, 2005
By: /s/ GREGORY J. DUMAN Gregory J. Duman, Director Date: November 28, 2005
By: /s/ JEFFREY SKLAR Jeffrey Sklar, Director Date: November 28, 2005
By: /s/ ROLAND J. SANTONI Roland J. Santoni, Director Date: November 28, 2005
By: /s/ PARAG SAXENA Parag Saxena, Director Date: November 28, 2005
By: /s/ GREGORY SLOMA Gregory Sloma, Director II-8